(m)-(p)

As a result of CRA’s seizure of half of his dental equipment and his business computers, the taxpayer’s administrative assistant (Mrs. Hokhold) had difficulties processing dental insurance claims in a timely and accurate fashion, and difficulty following up on unpaid balances. Some services could not be collected because the insurance forms were not submitted within the 12-month time limit. These problems resulted in the taxpayer not receiving the revenues that he reported in his returns for 2005 to 2008. At the end of May 2008, following continued financial difficulties, the taxpayer’s practice was closed, following which records were hastily stored and since misplaced.

For the taxpayer’s 2008 taxation year, he claimed $126,214.19 as the difference between the revenue reported on his tax returns for his 2005 to 2008 taxation years for work that he performed and billed to patients or their insurers, and the amount thereof that he was able to collect. The issue in this appeal was whether the taxpayer was entitled to a deduction for bad debts for his 2008 taxation year pursuant to paragraph 20(1)(p).

Before denying the taxpayer’s claim under s. 20(1)(p)(i) for bad debts, Paris stated (at para 43):

In order to succeed in a claim under subparagraph 20(1)(p)(i), a taxpayer is required to show the existence of a debt. … The taxpayer must show that the debt in issue was included in his income for the year the deduction is claimed or for a preceding taxation year. The taxpayer must also show that the debt became a bad debt in the taxation year in which it is claimed (Clackett v. The Queen, 2007 TCC 499).

He then stated (at paras 52, 53, 54, 57):

The calculations made by Mrs. Hokhold … do not identify any particular debts owing. She has simply aggregated what she believes to have been the total receipts of the practice annually over a four year period and deducted that amount from the total revenue reported by the Appellant in order to compute the bad debt claim. … The word “debt” … has been judicially defined … as “a sum payable in respect of a liquidated money demand, recoverable by action”: Diewold v. Diewold, [1941] S.C.R. 35. To my mind, in order to have a liquidated money demand, recoverable by action, it would be necessary to know who the debtor was and the amount of the debt.

Furthermore, while the question of when a debt has become uncollectible is for the taxpayer to determine, I cannot see how the Appellant in this case could have made such a determination without knowing who his debtors were or what amount they owed him.

…[T]here is simply no way of assessing the accuracy of the amount claimed in the absence of the business records from the Appellant’s practice. …

Even if the Appellant had proved the existence of the debts, I would have been unable to conclude what part, if any, of those debts went bad in 2008. … Paragraph 20(1)(p) … only allows for a deduction in the year during which the debt goes bad. …

The taxpayer made a loan, bearing interest at 25%, to a corporation ("SA") owned by his brother-in-law, which in turn lent the funds, at the same rate of interest, to an arm's length Canadian-resident corporation ("EMB"), which received those funds as part of a Ponzi scheme. The principal of EMB committed suicide on 17 March 2010, related media accounts suggested a Ponzi scheme, and on 6 April 2010, SA filed an insolvency notice.

The T5 for 2009 issued to the taxpayer by SA showed all the interest for 2009. He did not include it in his return (apparently filed in April 2010), and attached an explanatory letter stating that the interest was "never earned, payable nor collectible" and the 25 March 2010 report of the EMB receiver.

The Minister assessed inter alia on the basis that, as the 2009 interest had not been included in the taxpayer's return, no deduction could be claimed under s. 20(1)(l) or (p) and that, in any event, the debt for the interest was not doubtful as of 31 December 2009.

Owen J found that the taxpayer was entitled to rely on either para. (l) or (p) to deduct the entire amount. Contrary to the Minister's focus on available information as of 31 December 2009, "instead, the taxpayer may rely on information that comes into existence after the end of the year, but before the filing-due date, to fulfill his … obligation to report…" (para. 69). After noting (at para. 81) that "the decision in Flexi-Coil indicates that a debt is a bad debt when the taxpayer determines that the debt is uncollectible and, in making this determination, has acted reasonably and in a pragmatic, business-like manner, applying the proper factors," Owen J stated (at para. 85) that "the information available to the Appellant as at April 30, 2010 indicated that as of December 31, 2009 SA had no resources to pay its debts other than what it might collect from EMB under the receivership … [and] it would have been perfectly reasonable for the Appellant to conclude that only a portion of the principal owed was likely to be recovered and that the Interest was illusory and would not be recovered."

Respecting the Minister's claim that "the Appellant should have recorded the Interest as income and then claimed the deduction" (para. 89), Owen J noted (at para. 89) that the Minister "was not able to identify exactly how the deduction … is claimed on the return," that "although the letter did not make specific reference to paragraph 20(1)(l) or 20(1)(p), it did state that the Interest was not … collectible … [representing] the essential characteristic of a bad debt" (para. 90) and "in any event … it is well established that it is open to a taxpayer to amend his return through the appeal process [citing Imperial Oil, 2003 FCA 289, at para. 10]" (para. 91).

See summary under s. 20(1)(l).

A review of a law firm's accounts in 2005 revealed that accounts had been rendered in 2002, 2003 and 2004 which were uncollectible and which had not been written off. The appellant partners filed revised tax returns for the 2002 to 2004 taxation years in 2007, in which they claimed related bad debt deductions for those years, with the Minister apparently disallowing those deductions in resulting 2007 reassessments and in further varied reassessments made in 2012.

After quoting a statement in Clackett v. The Queen, 2007 TCC 499, at para. 6, that "the onus is on the taxpayer to establish…that it became bad in the taxation year," Bocock J found that as the bad debt deductions were not identified until after the years in which they arose, they were not deductible, stating (at para. 33):

This mis-match of the creation of the accounts receivable and the much delayed application of the decision regarding their related uncollectible status ... would represent retroactive tax planning.

The firm also made disbursements relating to client matters (e.g. title searches, filing clerks, sheriff's office), but had inadvertently failed to bill some clients for those amounts. After finding (at para. 40) that the amounts were never recorded in the accounts as receivables and in concluding that they were currently deductible, Bocock J stated (at para. 45):

[N]o timely determination of uncollectible status is required since such expenses never existed as accounts receivable. ... [S]uch outlays were incurred for the purpose of gaining professional income... .

The taxpayer, which sold substantial quantities of its products to a U.K. corporation with which it was not dealing at arm's length on favourable credit terms, was able to take a deduction for the substantial receivables owing to it by the U.K. company when the U.K. company's business failed and it was wound up. Hershfield J. found that it was contrary to normal interpretative principles to recharacterize the trade receivables owing to the taxpayer by the U.K. company as advances of capital and noted (at p. 1445) that various "cases established that a trade receivable remains such until specific actions are taken to change its nature".

The value of services provided by employees of the taxpayer to assist a sister company represented revenues notwithstanding that the amounts (which ultimately proved uncollectible) were inappropriately deducted from the taxpayer's wage expense for the year rather than recorded as revenue.

The taxpayer withdrew as partner from a professional firm at the end of its 1992 fiscal year. In preferring (subject to an adjustment made by the Court) the taxpayer's method of computing a bad debt deduction from the income of the partnership for that period to that made by the two remaining partners, Rip T.C.J. noted that the two remaining partners did not give much thought or consideration to whether a debt was good, doubtful or bad and did not consider a debt to be bad if the client was still a client of the firm and was not yet bankrupt; whereas the taxpayer made a very conscious and deliberate attempt to determine which of the partnership's debts were good, doubtful or bad.

In its return for its 1982 taxation year, the taxpayer had taken a deduction under s. 20(1)(p) for a debt owing to it and in 1988 its accountants advised Revenue Canada that it had erred, and wished to deduct the loss in its 1983 taxation year. Lamarre TCJ. referred (at p. 218) to the decision in Picadilly Hotels Ltd. v. The Queen, 78 DTC 6445 as establishing the proposition that "the question of when a debt is to be considered uncollectible is a matter of the taxpayer's own judgment as a prudent businessman" and went on to find (at p. 219) that the taxpayer "did not discharge its burden of proving that the debt was not uncollectible in the year 1982 on the balance of probabilities".

Before going on to find that a loss realized by a shareholder of a corporation on a disposition part-way through the year to another shareholder of accounts receivable owing to it by the corporation was deductible by it under section 9, Kempo J. stated (p. 2026):

"... there is no logic driving paragraph 20(1)(p) to mean that a loss on a bad debt is deductible as a business loss only if it is held to the creditor's year-end but is not deductible as a business loss if it was sold during the year in an arm's length transaction for some consideration ... . Accordingly, paragraph 20(1)(p) does not preclude the deduction sought for the loss."

The consideration received by the taxpayer on the sale of a theatre, which gave rise to recapture of depreciation to it, included the assignment to it of a debt owing by the purchaser. Because this debt became uncollectible in the year, it was deductible under s. 6(f) of the pre-1972 Act.

Mr. Fisher accepted the determination made by the taxpayer of a bad debt allowance in connection with the transfer of his retail fur business to a corporation controlled by him. After noting that the factors which may be taken into consideration by a taxpayer in claiming a bad debts deduction are the aging and history of the account, the financial position of the client, the past experience of the taxpayer with the writing-off of his bad debts, general business conditions, and increases or decreases in total sales and accounts receivable at the end of the year, Mr. Fisher stated (p. 193):

"For the purposes of the Income Tax Act, therefore, a bad debt may be designated as the whole or a portion of a debt which the creditor, after having personally considered the relevant factors mentioned above insofar as they are applicable to each particular debt, honestly and reasonably determines to be uncollectible at the end of the fiscal year when the determination is required to be made, notwithstanding that subsequent events may transpire under which the debt, or any portion of it, may in fact be collected."

Respecting a taxpayer who reported a bad debt deduction net of a $170,000 fee that had been rendered by him, Bocock J stated (at paras. 6, 8, 10)

Mr. Groscki testified that he did “effectively” report the $170,000 fee. He “pre-deducted” it against the otherwise deducted bad debts in the same taxation year, 2003. According to Mr. Groscki, the actual bad debt expense incurred was, in aggregate, $217,959.00, but was recorded as $47,959.00: $217,959.00 less the $170,000 fee.

… Professional fees are income and bad debts are expenses. To suggest the statutory methodology of completing each line may be ignored, provided the “effective result” of net income or taxable income is the same, makes the reporting of income non-compliant, misleading and absurd. …

…In short, Mr. Groscki must report the $170,000 fee as professional fees or as some other source of income in the usual method he is legally, logically and practically required to do.

However, Bocock J went on to find that, in any event a bad debt deduction had not been established, stating (at paras 12 and 14):

The only documentary evidence of the bad debts produced by Mr. Groscki on appeal to CRA (in March 2007) and as evidence at trial was an accounts receivable listing for the entire business with terse, single word, hand notations regarding uncollectibility or doubt as to collection (the “A/R list”). Aside from that, no single, distinct client account receivable for which Mr. Groscki claimed a bad debt expense was otherwise reflected by documentary evidence adduced before the Court.

…Absent … specific evidence regarding the analysis and determination of one single 2003 bad debt claimed, the provisions of the Act have not been fulfilled and no bad debt expense may be deducted in 2003: Delle Donne v. HMQ, 2015 TCC 150 at paragraphs 81 and 82; Clackett v. HMQ, 2007 TCC 499 at paragraph 6.

Beginning in 2006, the two married taxpayers (Susan and Barry) used their retirement funds and borrowed money to make advances to two real estate developers (on a pooled basis along with other investors through an intermediary corporation referred to as “ACI”) at interest rates 10% to 19% higher than prevailing borrowing rates. Following the 2008 financial crisis, each of the advances was in default and an almost total loss was sustained.

In finding that the taxpayers were not entitled to s. 20(1)(p)(ii) deduction, Bocock J first found, after referring (at para 38) to “[t]he presence of recurring interest, specific balance due dates, mortgage security and the fulsome rights of enforcement,” that the advances qualified as loans or lending assets. However, in going on to find that they were not engaged in a money-lending business, he noted (at para 54):

a) The initial inconsistent approach and characterization of the advances by Susan as property investments earning income in the early and operative years of the business. …

c) The usual activities of a money lending business of this nature were not consistently present. There was no negotiation of financial terms with the borrowers, no revision of legal documentation reflecting the appellants’ direction and discernment and the lending opportunities were offered by a single third party and, at that, only on a take it or leave it basis; …

d) … ACI … acted as the primary party engaged in the relevant trade or undertaking and was not a mere agent or bare trustee facilitating the operation of Susan and Barry’s money lending business. …

e) Had the loans not ultimately defaulted, the Appellant was willing and did continue to advance funds solely for the purpose of earning interest, rather than turning the loans over for a profit in the nature of a business. …

The taxpayer, a mining company, bought over $9 million of shares in, and made over $8 million in loans to, an exploration company. The taxpayer subsequently extinguished all but $1 million of the debt in a settlement agreement, claiming the $7 million write-down as an income loss. D'Arcy J. found that the share purchase and loan were both made for the sole purpose of securing enduring benefits in the form of interest and increased share value. Therefore, the loan was a capital investment and the subsequent loss could not be deducted from income.

D'Arcy J. also rejected the taxpayer's contention that it could deduct the loss as a bad debt under s. 20(1)(p)(ii), because it was not in the business of lending money. He stated at para. 170:

In summary, Hemlo Gold was not in the business of lending money, rather any loans it made were incidental to its gold-mining business. Carrying on a business of lending money was not one of the ways Hemlo Gold, as an ordinary part of its business, earned its income.

Two loans made by the taxpayer were incidental to his ordinary business, which was dealing in real estate. His ordinary business did not include the lending of money. Accordingly, loan losses were non-deductible.

The taxpayer, a practising lawyer, was not permitted a deduction under s. 20(1)(p)(ii) in respect of losses sustained by her on loans made to two corporations of which she was a direct or indirect minority shareholder given that her business was the profession of law and she made no effort nor was she inclined to lend money to other persons.

A second mortgage loan, and bonds issued to the taxpayer by a condominium building development, were found to be loans made in the course of carrying on a business (which was that of lending money) rather than earning income from property given that he had made 17 loans totalling $571,000 in the decade ending with the loans in question, there was a "continuity or system" in his lending activities in the sense that he kept track of interest payment due dates and outstanding balances, the loans were not remarkable for any feature that distinguished them from those made by a commercial money lender, and he mimicked the operations of other commercial lenders in that funds lent by him had been borrowed by him at a lower rate so that he was earning a spread and in taking security.

After noting that in MRT, ESG and Rockmore, 75 DTC 5224, aff'd 76 DTC 6156 "Walsh J. considered that each of the taxpayers were making loans to high-risk borrowers, investigated potential borrowers carefully, and negotiated extensively over terms, indicating that an active business of moneylending was being carried on" (para. 40), Rip J stated (at para. 42):

All three corporations operated on a very small scale, with Rockmore, for example, holding only three loans in 1972. Despite this, and despite the fact that none of the taxpayers undertook any advertising, the Courts held that not only were the taxpayers engaged in a business of lending money, they were engaged in an active business of lending money.

The taxpayer ("241467"), which previously had engaged exclusively in a leasing business, was found to be engaged in a financing business that included the lending of money in light of the fact that of 24 identified transactions (including non-interest-bearing loans to the shareholder or relatives, which Bonner J regarded (at para. 7, as "falling outside the scope of business"), approximately 16 were interest-bearing loans made over a four-year period including various loans to finance trucking businesses. (After noting (at para. 8) the "distinction ... to be drawn between an indebtedness which arises as a result of the deferral of payment of the whole or part of a sale price and an indebtedness which arises as a result of the loan of money," he found that the deferred balance of the purchase price of sales were not loans, with reference to another two of the 24 transactions.)

Bonner J stated (at para. 18):

241467 entered into lease and loan transactions repeatedly with a view to earning income in the form of lease payments or interest. The financing business was its ordinary business and the lending of money was part of that activity. ...Moreover the presumption arising from incorporation must be taken into account...[even for] corporations formed under some statutes...not list[ing] their corporate objects.

A loan made by the taxpayer to a corporation ("161") to enable 161 to purchase a restaurant company ("606") was made in the ordinary course of that business notwithstanding that the taxpayer also subscribed for 86% of the shares of 161 ("The acquisition by a lender of control over the borrower is a sensible arrangement particularly where the lender is advancing virtually all of the borrower's capital ..." (para. 22).) However, a subsequent loan made by the taxpayer to 606 in order to enable 606 to pay rent, taxes and other accumulated debts was not in the ordinary course of its lending business since, at the time the money was advanced, there was little hope of repayment, and less hope of ever receiving interest.

Although members of the taxpayer's family participated as lenders in at least 10 mortgage loan transactions, the taxpayer was involved as lender in only three of them (all of which went bad) Bonner TCJ. found (at p. 2156), after noting that "one of the factors which differentiates between loans made as simple investments of capital and loans made in the course of the business of a money lender is continuity" that:

"the activity involved in the making of the appellant's three loans is, in my view, so restricted in scope as to be insufficient to establish that the appellant's ordinary business included the lending of money."

The corporate group of which the taxpayer was a member operated a cash pooling arrangement with a bank (styled a "Mirror Netting Agreement" or "MNA"). By virtue of this arrangement, positive cash balances of the taxpayer (which engaged in a warehousing business) were swept into a pooling account, with the effect that a total of $2,306,163 was advanced by the taxpayer to a group company ("CWI") which was in financial difficulty.

Bowman J. accepted that amounts that became owing to the taxpayer by CWI under the MNA qualified as loans, and stated (at para. 22) that "where an advance is made on the understanding of both parties that there is an obligation to repay it either on demand or at some predetermined date it becomes a loan." Before concluding that the taxpayer was not entitled to a deduction under the post-1993 version of s. 20(1)(p)(ii) as it was not in the business of lending money, he stated (at para. 25):

The ordinary business of the appellant is warehousing, not lending money to other companies in the group. …[T]he word "ordinary"…implies that the business of lending money be one of the ways in which the company as an ordinary part of its business operations earns its income…[and] that the lending of money be identifiable as a business. …[T]he MNA… is an incident of its business. The appellant's argument equates the words "whose ordinary business includes the lending of money" to the words "in whose business the lending of money is an incident." I do not think the two expressions cover the same territory.

The taxpayer was a professional engineer working as a project manager through corporations controlled by him and employing him. Over the course of six years, he made four loans. In finding that the taxpayer was in the business of lending money, so that bad debt losses could be deducted under the pre-1994 version of s. 20(1)(p)(ii), Bonner J stated (at para. 12):

He evaluated the lending opportunities and considered both the potential gain for himself and the ability of the borrowers to repay. He obtained security when possible. The loans appear to have been made at ordinary commercial rates of interest. The loans though few in number, were not remarkable for any feature which distinguished them from the operations of an ordinary commercial money-lender. …[T]he appellant expected to earn money on the spread between the two rates and thus to mimic the operations of other commercial lenders.

A company with a land development business had a money lending business which consisted of loans to land development joint ventures, tenants, commercial paper purchases and vendor take-back mortgages, was able to recognize the total loss sustained by it on loans it made to three companies owned by the children of the taxpayer's sole shareholder when land development ventures of the three companies failed.

A corporation engaged in the land development business frequently made loans or advances to groups or entities involved in purchasing, subdividing, servicing, managing and selling lands. Advances which the corporation made to two arm's length land development companies were made in the course of such activities, and the ensuing bad debt losses were deductible.

Before stating (at para. 5) that "the late payment by Pacific Mobile to American Biltrite was not only normal in the context of their business relationship, but was also standard for their particular industry," the Court stated (at para. 3):.

"It is not wise to attempt to give a comprehensive definition of the term 'ordinary course of business' for all transactions. Rather, it is best to consider the circumstances of each case and to take into account the type of business carried on between the debtor and creditor."

The taxpayer, which was a real estate development company and which also made loans to various corporations in which it took a controlling equity interest, was able to deduct reserves for doubtful accounts and bad debts in respect of loans to two particular companies. Mr. Taylor stated (at p. 1845) that "he was not persuaded by the proposition that loans from a parent to a subsidiary cannot constitute a business or a part of a business ..." After indicating (at p. 1835) that he was satisfied that if amounts deducted under s. 20(1)(p) were not indeed bad debts, then they qualified for deduction under s. 20(1)(l), he then stated:

"under s. 20(1)(p) of the Act, it is necessary for the taxpayer to establish that the amount at issue is a 'bad debt' - in simple language uncollectible. It has gone beyond any reasonable hope of recovery and is effectively worthless (not merely doubtful) as an asset."

In rejecting a submission that the Orban (54 DTC 148) line of cases established that "to be a 'money-lender' there must be (1) evidence of more than three loans over a period of three years, and (2) evidence of notification to the public of the availability of loans," Mr. Taylor noted (at p. 1841) that no section of the Act required a public proclamation, and that "the question of minimal lending activity was dealt with in The Queen v Pollock Sokoloff Holdings Corp, at…74 DTC 6326" where the Federal Court stated (as quoted by Mr. Taylor at p. 1841) "It is not necessary that the number of loans made by a company or the amount of them be great in proportion to its total business activities for it to be possible to say that part of its business is the lending of money."

He also stated (at p. 1843):

Since making a loan is the lending of money, it would seem to me that a loan made in the "ordinary course of business" would identify that transaction as part of the "ordinary business" of the taxpayer. For a loan to fall short of those parameters, it would need to be extraordinary or extracurricular in some distinct fashion and clearly different from the day-to-day operation of the business as an entity. It would appear as an aberration or an abnormality of some kind.