Bell v. The Queen, 92 DTC 6064, [1992] 1 CTC 35 (FCTD)

Pinard, J.:—This is an appeal by the plaintiff from the judgment of the Tax Court of Canada dated January 13, 1990, dismissing plaintiff’s appeal from an income tax assessment for his 1986 taxation year.

The proceeding in this Court is a trial de novo. The following facts were agreed to in writing by the parties:

1. The plaintiff is and at all material times was a resident of Canada.

2. The plaintiff acquired shares in the capital of RDB Enterprises Ltd. (the "Company") prior to 1984, and held those shares at all material times thereafter.

3. From time to time up to and including the end of 1984 the plaintiff advanced funds to the Company by way of shareholder's loan (the "Loan").

4. In 1984 the Company accrued $46,949.71 in interest (the "interest amount”) on the Loan.

5. The material assets of the Company in 1984 were investments in two racquet sports complexes, Courts West and Quadra Court House (the "Quadra"). Courts West was a limited partnership. Quadra was owned by Vancouver Island Racquets Ltd., of which the Company was a shareholder.

6. In the summer of 1984 the Federal Business and Development Bank (the "FBDB"), holding a mortgage on the property of Courts West, appointed a receiver to manage the affairs of Courts West.

7. On December 21, 1984, the plaintiff made a personal assignment in bankruptcy under the provisions of the Bankruptcy Act, R.S.C. 1985, c. B-3. Attached as Exhibit "A" is a copy of the plaintiff's statement of affairs [1] .

8. On April 10, 1985, the trustee in bankruptcy (the "Trustee") filed an income tax return (the "Pre-Ban kruptcy Return") pursuant to section 128 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act') (the "Tax Act") in respect of the plaintiff's taxation year ended December 20, 1984.

9. The Trustee included in the taxpayer's income in the Pre-Bankruptcy Return $46,949.71 in respect of the interest amount, and claimed an allowable business investment loss (the"ABIL") of $47,509.54, being one-half of the principal and the interest amount in respect of the Loan, and claimed a refund of income tax of $6,589.44.

10. The schedule submitted in support of the ABIL stated, "The Company's sole assets are its investments in two racquetball clubs. One has been placed in receivership and the other listed for sale. At the current listed price, proceeds from the sale would be insufficient to return the Company's investment."

11. By notice of assessment dated October 2, 1985, the Minister of National Revenue (the"Minister") denied the deduction of the ABIL and determined a balance of unpaid taxes owing by the plaintiff of $14,103.73 in respect of the plaintiffs taxation year ended December 20, 1984.

12. On October 17, 1985, an absolute order of discharge was entered with respect to the plaintiffs assignment in bankruptcy.

13. By letter dated September 12, 1986, the Trustee informed the plaintiff that the Minister had denied the ABIL on the pre-bankruptcy return and that the Trustee's attempts to have the denial reversed had not been successful.

14. In his return for the 1986 taxation year (the "1986 return"), filed in April 1987, the plaintiff, in computing his income, claimed a deduction of $46,949.71 in respect of the interest amount pursuant to subparagraph 20(1)(l)(i) of the Tax Act.

15. By notice of reassessment dated November 30, 1987, the Minister denied the plaintiffs subparagraph 20(1)(l)(i) deduction in respect of the interest amount claimed on the 1986 return, in which the Minister stated that doubtful account disallowed as it occurred prior to bankruptcy.

16. The plaintiff objected to the notice of reassessment with respect to the 1986 return within the time prescribed by the Tax Act, which objection was not allowed by the Minister.

17. By notification of confirmation dated September 16, 1988, the Minister stated that “all of [the plaintiff's] debts and receivables are considered to have been discharged as at December 20, 1984, the date of bankruptcy; therefore no deduction is allowable in the year, within the meaning of [sub]paragraph 20(1)[(l)](i) of the Act, in respect of amounts included in your income for any period prior to the date of bankruptcy”.

18. The plaintiff filed an appeal to the Tax Court of Canada within the time frame prescribed by the Tax Act with respect to the 1986 return, which appeal was dismissed by judgment of the Tax Court of Canada dated January 13, 1990.

In addition to their partial agreed statement of facts, the parties also filed, by consent, different documents pertaining to the plaintiffs bankruptcy, the "proposed purchase of Quadra Court House" and the financial statements of RDB Enterprises Ltd. for the years 1984, 1985 and 1986. Finally, the plaintiff and his son, a chartered accountant, both testified at trial.

Essentially, the plaintiff submits that:

(a) he was entitled in computing his income for 1986 to deduct $46,949.71 pursuant to subparagraph 20(1)(l)(i) of the Income Tax Act because the interest amount of $46,949.71 was a doubtful debt in 1986 and had been included in computing his income in a preceding year;

(b) the entire amount of $46,949.71 deducted by the plaintiff was reasonable in the circumstances; and

(c) neither the principal of the loan nor the interest amount directly or indirectly resulted in a loss to the taxpayer within the meaning of subparagraph 128(2)(f)(iii) or paragraph (g) before the end of his 1985 taxation year.

The defendant, on the other hand, basically argues that the Minister of National Revenue correctly disallowed the plaintiff's claim for a bad debt deduction in respect of the interest owing on a shareholder loan by him to the company because no such debt was owing to the plaintiff after his discharge from bankruptcy in October 1985.

It is clear, from the evidence, that the shareholder loan in question was not declared as an asset, by the taxpayer, when the latter made a personal assignment in bankruptcy on December 21, 1984. At trial, the plaintiff explained that the loan was not listed as an asset in his sworn statement of affairs made pursuant to section 128 of the Bankruptcy Act then in force, because he considered the loan as uncollectible". This conduct of the plaintiff can only be interpreted as sufficient to fulfil the terms of paragraph 50(1)(a) of the Income Tax Act which reads:

50. (1) Debts established to be bad debts and shares of bankrupt corporation.— For the purposes of this subdivision, where

(a) a debt owing to a taxpayer at the end of a taxation year (other than a debt owing to him in respect of the disposition of personal use property) is established by him to have become a bad debt in the year,

the taxpayer shall be deemed to have disposed of the debt or the share, as the case may be, at the end of the year and to have reacquired it immediately thereafter at a cost equal to nil.

This is the same conclusion as that reached by the Tax Court of Canada in the decision which is the subject of the present appeal. Subparagraph 20(1)(l)(i) [2] which is relied upon by the plaintiff permits only the taxpayer to deduct losses or possible losses from accounts which have not yet been established to be bad debts as set out in paragraph 20(1)(p). [3] The reserve for doubtful debts need not be taken in any particular year. However, a deduction for bad debts must be taken in the year that the debt becomes bad. Therefore, the plaintiff, in his 1986 return, could not claim, as he did, a deduction of $46,949.71 pursuant to subparagraph 20(1)(l)(i) of the Income Tax Act in respect of the accrued interest on the loan because it had become a doubtful debt.

In any event, even assuming that both the loan and the accrued interest had been disclosed in the above-mentioned plaintiff's statement of affairs sworn on December 20, 1984, it is clear that such loan and accrued interest were "property" within the meaning of sections 2 and 67 of the Bankruptcy Act. Consequently, by virtue of section 71 of that Act [4] , such property then vested in the trustee in bankruptcy, and the plaintiff bankrupt no longer had the power to dispose of or otherwise deal with the property, even after his discharge, unless it was returned to him pursuant to subsection 40(1) of the same Act [5] . Indeed, the granting of a discharge to the bankrupt releases the latter from certain obligations that does not re-vest the property in him, nor does it give him the power to dispose of or to otherwise deal with it (see Re Lifshen (1977), 78 D.L.R. (3d) 444; aff’d 25 C.B.R. (N.S.) 232 (Sask. C.A.)). Here, there is no evidence that the" property” was returned to the plaintiff; therefore, he had no right to claim the deduction of $46,949.71 from his income for his 1986 taxation year.

For the above reasons, the action is dismissed with costs.

Appeal dismissed.