Paragraph 20(1)(m) - Reserve in respect of certain goods and services
Cases
Westcoast Petroleum Ltd. v. The Queen, 89 DTC 5153 (FCTD)
The taxpayer could not deduct a reserve in respect of revenues which it had collected in excess of the approved rate, and which therefore ultimately would give rise to a lowering of its permitted tariff, or a lower increase in its tariff. "The fact that Westcoast may use the excess profits to lower the rate on future performance of its services to the same or different customers is not identical to receiving the entire sum of surplus money for an as yet unperformed service in one year and then performing the service in the following year."
Dixie Lee (Maritimes) Ltd. v. The Queen, 88 DTC 6108 (FCTD), aff'd 91 DTC 5518 (FCA)
In consideration of the payment to the taxpayer of franchise fees the taxpayer granted to the franchisee the right to use the taxpayer's name and materials for a term of 10 years and agreed to provide promotional and consulting services. McNair, J. held "that the plaintiff's practice of deferring the recognition of franchise fee revenue by straight line apportionment over the ten year period is inappropriate and improper in the circumstances by reason that the services required of the franchisor under the franchise agreements were substantially performed within three weeks of the initial openings and that any ongoing obligations thereafter were clearly referable to the predominant activity of selling equipment and supplies and the enhancement and future expansion of the franchise chain."
Burrard Yarrows Corp. v. The Queen, 86 DTC 6459, [1986] 2 CTC 313 (FCTD), aff'd sub nomine Versatile Pacific Shipyards Inc. v. The Queen, 88 DTC 6352 (FCA)
S 20(1)(m) only provides a reserve in respect of amounts which would be considered to be unearned in the absence of s. 12(1)(a).
Sears Canada Inc. v. The Queen, 86 DTC 6304, [1986] 2 CTC 80 (FCTD), aff'd 89 DTC 5039 (FCA)
A reserve which otherwise would be non-deductible because of s. 18(1)(e) may be deducted if it complies with s. 20(1)(m). "The paragraph allows for the deduction for reserves which are contingent both as to amount and liability so long as the amounts are reasonable."
Dominion Stores Ltd. v. MNR, 66 DTC 5111, [1966] CTC 97 (Ex Ct)
The taxpayer issued trading stamps to the value of 1.5% of the price paid for merchandise at its retail food stores. When a customer had accumulated sufficient stamps, he could exchange them for "free gifts" of articles of the taxpayer listed in a catalogue.
The Crown unsuccessfully argued that no amount was received by the taxpayer for the trading stamps for purposes of s. 85B(1)(a)(i) of the pre-1972 Act (now s. 12(1)(a)(i)) with the result that no reserve could be claimed under s. 85B(1)(c). Cattanach J. stated (p. 5116):
"When two articles are sold together for one price without a price being put upon each separately, it does not follow that one article was free and that the price is attributable exclusively to the other article."
See Also
Doteasy Technology Inc. v. The Queen, 2009 DTC 1019, 2009 TCC 324
Prepaid service fees received by an internet website hosting and domain name registration company were eligible for the s. 20(1)(m) reserve notwithstanding that in most circumstances the customers of the company were not entitled to receive a refund if they later cancelled or otherwise did not receive the services. V.A. Miller, J. applied (at para. 33) the finding in the Ellis Vision case that "the paragraph 20(1)(m) reserve was available even though the amount might be included in income under section 9 [rather than s. 12(1)(a)] so long as it was described in paragraph 12(1)(a)", and described a statement to the contrary effect in the Burrard Yarrows case as "obiter and ... incorrect".
Ellis Vision Inc. v. The Queen, 2004 DTC 2024, 2003 TCC 912
The taxpayer produced documentary programs for broadcast television and granted broadcasters the exclusive right to show the programs for the term of the licence in each broadcaster's marketplace (as defined in terms of geography and the type of broadcasting). In finding that the taxpayer was entitled to a reserve under s. 20(1)(m) in respect of licence fees received by it so as to be able to amortize the recognition of income from the agreements over the terms of the licence agreements, Rip J. indicated that the reference in s. 20(1)(m) to amounts "described" in s. 12(1)(a) was not restricted to amounts that were included in income "by virtue of" s. 12(1)(a) but also referred to amounts that were included in income under s. 9(1) and could also be included in income by virtue of s. 12(1)(a); and indicated that the right to production licensed to a broadcaster was a "chattel" given that the French version referred to "biens meubles", i.e., moveable property. The amounts received by the taxpayer also could be considered to be on account of services that, in the main, were not rendered before the end of the year given that the taxpayer was required to protect the licensee's exclusive use of production in the specified territory during the term of the licence.
Blue Mountain Resorts Ltd. v. The Queen, 2002 DTC 1886 (TCC)
Before the commencement of its taxation year on November 1, the taxpayer, which operated ski and tennis facilities in Collingwood, Ontario, sold season passes that could be used after November 7.
The taxpayer was entitled to the full reserve under s. 20(1)(m), on the basis that the sums were received under a contract for the provision of future services, namely, the use of the tennis and ski facilities.
Although the contract stipulated that the taxpayer did not provide refunds or credits for any reason. Baubier T.C.J. noted (at p. 1889) that:
"Ultimately, in law, if those services could not be provided in the future, the contract would be frustrated and the fee would be refundable by the Appellant."
Deputy Minister of Revenue for Quebec v. Le Compagnie Meloche Inc., 2002 DTC 7169 (Que. CA)
The taxpayer, which was involved in the business of picking up and burying waste from various sites, was found to be obligated under environmental regulations to take on the costs, during the 30 years following the closing of any particular waste site, of burning biological gases, disposing of contaminated waters and restoring the soil. Accordingly, the portion of the fees it received for its services that were referable to post-closing activities could be excluded from its income.
Redhead Equipment Ltd. v. The Queen, 2001 DTC 429, Docket: 90-159-IT (TCC)
As part of a warranty program provided by the manufacturer of graders, the taxpayer, which was a distributor, was required to inspect graders sold by it under the program twice per year for five years. Amounts paid by the manufacturer to the taxpayer only covered part of the cost of this inspection program.
The portion of the proceeds received on sale of graders that the taxpayer estimated represented the additional cost to it of the inspection program was eligible for a reserve on the basis claimed by the taxpayer, i.e., 4/5 of $5,000 per grader at the end of its first year - notwithstanding that in the subsequent year the taxpayer adjusted the reserve downward based on a review of its auditors that found the initial reserve to exceed actual costs.
Gagnon v. The Queen, 99 DTC 845, Docket: 97-3058-IT-G (TCC)
Bowman TCJ. accepted an agreement of both parties to have a lump sum received by the taxpayer (the proprietor of a software development proprietorship) recognized over a period of five years pursuant to ss.12(1)(a) and 20(1)(m).
I.B. Pedersen Ltd. v. The Queen, 94 DTC 1085 (TCC)
The taxpayer, which operated a waste landfilled site, was unable to establish that fees it received from a municipality for a municipal waste that was dumped there were, in part, consideration for remedial work that the taxpayer would become obligated to perform following the closure of the site. Accordingly, no reserve was available.
Administrative Policy
20 August 2015 T.I. 2015-0588871E5 - Taxation of insurance contract commission income
S. 32(1) permits an insurance agent or broker to deduct a reserve from unearned commissions otherwise included in income under s. 12(1)(a) respecting insurance contracts (other than life insurance contracts) equal to the lesser of a pro rata portion of the commission based on remaining term of the contracts and the amount which otherwise would have been computed under s. 20(1)(m). CRA considered that the s. 20(1)(m) branch of the reserve "must be an amount described in paragraph 12(1)(a)…that relates to a binding obligation to provide specific types of client support services after the end of the year," so that "services that might be required in relation to claims under the policies (for example, claims adjusting) would not be eligible since they normally would be contingent amounts…[under] paragraph 18(1)(e)." See summary under s. 32(1)(b).
10 October 2014 APFF Roundtable Q. , 2014-0538131C6 F
Where a taxpayer makes In-App sales of life or experience points to gamers, is there an inclusion under s. 12(1)(a) and a deduction under s. 20(1)(m)? CRA responded (TaxInterpretations translation):
]T]he taxpayer would cash the amount immediately and the client would receive the supplementary life or experience points from the time the payment was made. The taxpayer would have no further obligation respecting this sale. Having said that, it could be that the client does not use the points immediately or that they are utilized over the course of the current game. However, that does not cause the product not to have been delivered or the service not to have been rendered. Therefore…if there is need to determine a reserve for the amounts received, it would be nil.
2005 APFF Roundtable Q. 26, 2005-0141171C6
The reserve is not available with respect to a prepaid amount received under a services contract where the taxpayer is entitled to retain the prepayment in any event, regardless whether or not goods or services are in fact provided.
27 September 2004 T.I. 2003-004824
Respecting whether the CRA would accept a reserve being deducted under s. 20(1)(m) in a situation similar to that considered in Deputy Minister of Revenue for Quebec v. Le Compagnie Meloche Inc., 2002 DTC 7169, the Directorate indicated that:
"A reserve under paragraph 20(1)(m) of the Act may only be claimed in the situation where a taxpayer has received an amount in respect of the future reclamation costs which it is obligated to incur, such amount is included in the taxpayer's income by virtue of paragraph 12(1)(a) of the Act and the portion of the fee attributable to such future reclamation costs is specifically identifiable .... Where, however, the amount received is included in the taxpayer's income by virtue of subsection 9(1) of the Act as having been earned, no amount may be claimed under paragraph 20(1)(m) for such amounts."
Income Tax Technical News, No. 30, 21 May 2004
Although, as a general rule the inclusion/deduction mechanism provided under ss.12(1)(a), 12(1)(e) and 20(1)(m) should apply to amounts received in a year by a taxpayer in the course of a business in respect of services not rendered or goods not delivered before the end of the year or that otherwise may be regarded as not having been earned in the year, in some circumstances a full inclusion (without reserve) under s. 9(1) may be more appropriate, for example, where the taxpayer has substantially performed all its obligations, or where the taxpayer would be allowed to retain the prepayment even if it did not perform.
20 November 2003 T.I. 2003-003354 -
A former partner who carries on the partnership of the business as a sole proprietor as described in s. 98(5) may claim a reserve under s. 20(1)(m) (or s. 20(1)(n)) in respect of its proportionate share of the partnership's final year income inclusion under s. 12(1)(e) which relates to the partnership's preceding year reserve under s. 20(1)(m) (or (n)) provided the sole proprietor was responsible for the related obligations which gave rise to the partnership's reserve under s. 20(1)(m)).
1994 APFF Round Table, Q. 4
A taxpayer "may deduct under paragraph 20(1)(m) of the Act a reserve amount less than the maximum allowable".
92 C.R. - Q.39
Where, in addition to annual membership fees, a one-time initial fee is paid to a recreational club by a new member, in order for the club to claim a reserve it must establish that it was under some definite restriction as to the disposition, use, or enjoyment of the funds, for example, a commitment to refund a proportionate amount of the fee in the event that the member leaves within a certain time.
10 October 1991 T.I. (Tax Window, No. 11, p. 22, ¶1516)
Discussion of application of reserve to a retailer who sells goods for a selling price that is receivable in 36 monthly instalments.
4 September 1991 Memorandum (Tax Window, No. 9, p. 20, ¶1440)
Where a health club or recreation club charges an up-front lifetime membership fee to a new member, the club will not be entitled to a reserve in respect of the fee unless there is a restriction in the entitlement of the club with respect to the disposition, use or enjoyment of the funds. A reserve may be available if the club is obliged to refund part of the fee if the member leaves or the club ceases to operate within a certain time period.
24 July 1991 T.I. (Tax Window, No. 7, p. 17, ¶1370)
The exclusion for containers which are bottles in s. 20(1)(m)(iv) applies to returnable bottles used in the business of supplying bottled water, even though s. 20(1)(m)(iv) was enacted before there was a bottled water industry.
29 January 1990 T.I. (June 1990 Access Letter, ¶1250)
The portion of an up-front fee received by a bank in consideration for a granting in interest rate cap is included in its income under s. 12(1)(a)(i) and is deductible under s. 20(1)(m)(ii).
1 December 1989 T.I. (May 1990 Access Letter, ¶1209)
Where on a sale of land inventory part of the proceeds are received (and included under s. 12(1)(a)) as a prepayment for the identifiable cost of future services to be provided by the taxpayer, the reserve generally will be available.
89 C.P.T.J. - Q11
Where on the purchase of a gas property, the purchaser assumes the "take-or-pay" liability in respect of the property of the vendor and no s. 20(24) election is made, the purchaser will not be entitled to an s. 20(1)(m) reserve because no amount was included in the purchaser's income under s. 12(1)(a).
89 C.M.TC - Q.2
prepaid rent received by a landlord is included under s. 12(1)(a) and amortized under s. 20(1)(m)(ii), if it represents income from a business, and is dealt with under s. 9 in accordance with accepted commercial practice, if it represents income from property. [C.R: 9 - "Timing"]
Paragraph 20(1)(n) - Reserve for unpaid amounts
Cases
Wollfsky v. The Queen, 2001 DTC 5316 (FCA)
Noël J.A. found that ss.85B(1)(b) and (d) (the statutory predecessors of ss.12(1)(b) and 20(1)(n), were "essential components of a single enactment" (p. 5320). Accordingly, where an inclusion in income under s. 85B(1)(b) took place on the basis that there was an element of profit in an amount receivable that was not yet due, the deduction under paragraph (d) could not be denied on the basis that there was no element of profit in the deferred amount.
Wolofsky v. The Queen, 2000 DTC 6302 (FCTD)
The taxpayers, who had sold their interest in a property for consideration that included their covenant to continue paying all balances owing on mortgages secured on the property, were not entitled to claim a reserve with respect to amounts still owing in respect to those mortgages at the end of their 1971 taxation year given that the purchaser had, in turn, sold the same property to another purchaser who had assumed such mortgages.
Regina Shoppers Mall Ltd. v. The Queen, 90 DTC 6427 (FCTD)
The taxpayer filed its 1979 and 1980 tax returns on the basis that it was entitled to claim a capital gains reserve under s. 40(1)(a) in respect of a disposition made by it in 1976. In separate litigation, the gain on the 1976 disposition was held to be on income account. However, the Minister had neglected to reassess the taxpayer's 1979 return within the four-year limitation period. Consequently, with respect to the 1980 taxation of the taxpayer which had been reassessed on a timely basis, the taxpayer could not be required to compute his income on the basis that an s. 20(1)(n) reserve had been claimed in 1979. "It is patently obvious and indeed an uncontested fact that the plaintiff did not deduct any amount as an income reserve under subparagraph [20(1)(n)] for the taxation year 1979 ... The reassessment for 1980 is defective in that it purports to include that 1979 income reserve." (p. 6431)
Ennisclare Corp. v. The Queen, 83 DTC 5018, [1982] CTC 428 (FCTD), aff'd 84 DTC 6262, [1984] CTC 286 (FCA)
The formula set out below was used by the Court in calculating the reserve for a condominium developer, who typically sold units for a selling price comprising 3 elements: assumption for a pro rata amount of a first mortgage granted by the developer prior to construction of the project; cash; and a balance secured by second mortgage in favour of the developer.
It was noted that in situations where existing mortgages are assumed by the purchaser, the denominator is often reduced by the amount of mortgages taken out on the project and later assumed by the purchaser (provided that none of these assumed mortgages has been placed on the property subsequent to the completion of the project so as to reduce the vendor's existing equity in the property). The denominator in the formula, however, was modified to reflect the fact that the amount of the first mortgage assumed by the purchasers exceeded the construction cost of the project. (It was further noted in the Federal Court of Appeal that the very use of the work "reasonable" in the section indicated that the rigid application of an inflexible formula was being eschewed.)
Schlamp v. The Queen, 82 DTC 6274, [1982] CTC 304 (FCTD)
S.20(1)(n) was found to be available where a portion of the sale price of land was payable on "or before" a day in the subsequent taxation year.
Abed Estate v. The Queen, 82 DTC 6099, [1982] CTC 115 (FCA)
The taxpayer, who had been held to have realized taxable profits from the sale in 1959 and 1960 of two parcels of land and who had not filed tax returns for those years, was reassessed for the 1960-1964 taxation years on the basis of a reserve for deferred proceeds having been deducted for the 1959 and 1960 taxation years pursuant to what was then s. 85B(1)(d). It was found that the taxpayer, who submitted at trial for the first time that he had not elected to take advantage of the reserve provisions of s. 85B, had had the opportunity to take advantage of those provisions. "After he had been assessed as if he had elected to take advantage of those provisions, nothing prevented him from expressing his disagreement with that assumption." In addition, since 1959 apparently had not been assessed, no part of that profit could be included in his income for the subsequent years. [C.R.: 20(1)(a) - Revising Claims]
Choice Realty Corp. v. The Queen, 78 DTC 6415, [1978] CTC 613 (FCTD)
The taxpayers treated a gain on the sale of an apartment building in 1969 as a capital gain. The question of a reserve under s. 85B(1)(d) (now, s. 20(1)(n)) ws not raised in thei9r Notices of Objection, but in their Statements of Claim they requested a reserve in the event that the gains were on income account. After finding that the gains were capital gains, Walsh, J. indicated in obiter dicta that a reserve under s. 85B(1)(d) would not have been available to the taxpayers if their gains had been on income account as the subsequent taxation years (for which the reserve would have flowed into income) had since become statute-barred, the taxpayers had ot set up a rserve "and it would appear very belated for them to seek to file amended returns now" (p. 6424)..
The Queen v. Esskay Farms Ltd., 76 DTC 6010, [1976] CTC 24 (FCTD)
The taxpayer, wished to sell land to the City of Calgary in consideration for two annual instalments in order to defer a portion of the gain to its second taxation year, but was informed that the City was precluded by statute from purchasing land over a period of years. As a result: the taxpayer sold the land to a trust company for the same purchase price, but payable in two instalments with the second instalment bearing interest at 7.5% per annum, and with a clause in the purchase agreement that the trust company could elect within 60 days of the date of the agreement of sale to void the agreement; and the trust company sold the land to the City for the same purchase price, paid in cash. Title was transferred directly from the taxpayer to the City.
Before concluding that the transactions were effective to defer the realization of a portion of the gain on the sale by the taxpayer, Cattanach J. found that the trust company was not acting as agent for the taxpayer (because the agreement contemplated that the Trust Company was acting on its own behalf), that the transactions were not a sham.
Home Provisioners (Manitoba) Ltd. v. MNR, 58 DTC 1183 (Ex Ct)
The taxpayer, which sold refrigerators under conditional sales contracts requiring a 10% down payment and the balance payable in 24 monthly instalments, assigned the contracts to a finance company, with the finance company holding back 5% to 10% of the purchase price, and with the taxpayer guaranteeing the payment to the finance company of the instalments.
In finding that the taxpayer had sold the contracts to the finance company, rather than receiving a loan from the finance company, Thurlow J. noted that the assignments to the finance company used the word "sale", and that the taxpayer had no right to get back the refrigerator by refunding to the finance company the money previously received. Accordingly, the reserve under paragraph 85B(1)(d) was not available (except in the amount already allowed by the Minister in respect of the finance company holdbacks).
See Also
Odyssey Industries Inc. v. The Queen, 96 DTC 498 (TCC)
Recapture of depreciation realized by the taxpayer did not qualify as "profit" for purposes of s. 20(1)(n), with the result that the taxpayer was not entitled to any deduction under that provision.
Leonard Reeves Inc. v. MNR, 91 DTC 425 (TCC)
The taxpayer's Notice of Objection, when properly construed, objected against the deduction of a reserve by the Minister for the taxpayer's 1984 taxation year, and the inclusion of an amount in its income under s. 12(1)(e) for its 1985 taxation year. Accordingly, because the deduction of a reserve under s. 20(1)(n) was in the discretion of the taxpayer, and the taxpayer had not acquiesced in the deduction of a reserve by the Minister, there was no basis for including the amount in the taxpayer's 1985 income.
Lloyds & Scottish Finance Ltd. v. Cyril Lord Carpets Sales Ltd., [1992] B.C.L.C. 609 (HL)
A "block discounting" master agreement was found to establish that the taxpayer was assigning by way of sale to the respondent the amounts receivable by it under hire purchase contracts, rather than making assignments by way of charge, notwithstanding that in practice the arrangement worked in essentially the same manner as if the respondent were advancing to the appellant 80% of the receivables less the agreed discount. Lord Wilberforce stated (at p. 616):
"In block discounting 'transactions', the purchaser is acquiring an asset (viz a book debt) which he did not create, as to the validity of which he has no knowledge, which he is not going to collect, and of any default in whose realisation he may be ignorant. He naturally requires a certain margin, a reserve, or as is sometimes said, security to ensure, so far as possible, that he will get what he has bargained for. But it is a fallacy... to argue from this towards a conclusion that the transaction as a whole is one of security or charge. There are many contracts, of sale, or for building work, or otherwise, where some security is required by one party that the other will fulfil his promise. But this does not alter the nature of the contract ... ."
Administrative Policy
2 December 2014 Folio S4-F7-C1
1.95 A person entitled to a reserve under paragraph 20(1)(n), subparagraph 40(1)(a)(iii) or subparagraph 44(1)(e)(iii) in respect of an amount not yet due from a predecessor corporation will not become disentitled to the reserve by virtue of the amount becoming an obligation of the new corporation on the amalgamation.
93 C.P.T.J. - Q.18
No reserve under s. 20(1)(n) is available for an amount not yet due from the disposition of a Canadian resource property except, in limited circumstances, where the property was inventory.
25 July 1991 T.I. (Tax Window, No. 7, p. 10, ¶1372)
Where an undivided interest in all partnership property, including every receivable, is distributed to the partners in an s. 98(3) winding-up, each partner will be permitted to deduct a reserve under s. 20(1)(n) in respect of that partner's interest in the receivables. The deduction may be claimed in the year the partnership ceases to exist and in any subsequent year to the extent that the partnership would have been entitled to the deduction had it not ceased to exist.
21 September 1990 Memorandum (Tax Window, Prelim. No. 1, p. 7, ¶1003)
Soft costs relating to a particular property should be ignored in computing the profit on the sale of the property.
6 March 1990 T.I. (August 1990 Access Letter, ¶1368)
Semble that where a taxpayer sells inventory for a purchase price that is due in three years' time, and then transfers the amount owing to another corporation in exchange for a promissory note payable five years later, the reserve under s. 20(1)(n) will not be jeopardized.
84 C.R. - Q.17
Where the facts are similar, RC will not challenge the method of reserve calculation accepted in Ennisclare.
Paragraph 20(1)(p) - Bad debts
Subparagraph 20(1)(p)(i)
Cases
Newmont Canada Corporation v. The Queen, 2012 DTC 5138 [at 7292], 2012 FCA 214
The taxpayer, a mining company made $8,250,000 in loans to an exploration company. The debt including accrued interest amounted to $8,590.684 when the taxpayer when all but $1,000,000 of the debt was extinguished in a settlement agreement, with the balance of $1,000,000 being paid by the expoloration company. The taxpayer claimed the $7,559,684 write-down as an income loss. The Court denied the income loss in the main, on the basis that the loss was capital in nature.
The trial judge upheld the Minister's decision to limit the taxpayer's loss under s. 20(1)(p)(i) to $183,336, being the amount of the accumulated interest in the Minister's assumptions. The taxpayer's further claim of $156,888 in interest was denied.
The Court of Appeal granted the taxpayer's appeal in respect of the additional $156,888 amount. The taxpayer's witness testified that the taxpayer had included $263,000, of interest in its retained earnings. The Court was satisfied that the witness's testimony, which the trial judge had stated was credible, was enough to demolish the Minister's assumptions regarding accumulated interest. The burden then fell the Minister to prove the assumptions, which was not done.
The taxpayer had also made out a prima facie case that none of the $1,000,000 settlement amount was allocated to the interest payments (which would not be bad debts to the extent of such allocation).
Mills v. The Queen, 2010 DTC 1301 [at 4078], 2010 TCC 443, aff'd 2011 DTC 5124, 2011 FCA 219
The taxpayer exchanged shares for a promissory note. Under s. 84.1(1)(b), the receipt of the promissory note resulted in a deemed dividend. The issuer of the note defaulted. Sheridan J. cited Terrador Investments (99 DTC 5358) for the proposition that, once the note was deemed to be a dividend paid to the taxpayer, it was no longer a "debt owing." Therefore, the default could not give rise to a bad debt deduction under s. 20(1)(p)
Global Communications Ltd. v. The Queen, 98 DTC 6649 (FCTD)
The taxpayer was required by the arm's-length purchaser of a subsidiary ("Tee Vee U.S.") to release debts owing by Tee Vee U.S. to the taxpayer. This loss was deductible given that approximately 20% of the assets of the taxpayer (which carried on an entertainment and communications business) were tied up in advances made to third party production companies, subsidiaries, and employees, and that the advances made to Tee Vee U.S. (which were not evidenced by securities) were based on a view that the taxpayer would gain a benefit.
Harrowston Corp. v. The Queen, 96 DTC 6544 (FCA)
The taxpayer's entitlement under s. 215(6) in respect of non-resident withholding tax that it had failed to deduct from interest payments made to a non-resident holder of its debt, and which was unrecoverable from the non-resident and a non-resident assignee, did not qualify as a deductible bad debt because, if the amount had been recovered, it would not have had the character of income.
Flexi-Coil Ltd. v. The Queen, 96 DTC 6350 (FCA)
Before affirming that the Tax Court Judge did not commit an identifiable error in concluding on the basis of a review of financial statements of two subsidiaries of the taxpayer that the taxpayer had not acted reasonably in writing off bad debts in an amount in excess of that allowed by the Minister, MacGuigan J.A. stated (at p. 6351) that the Tax Court Judge correctly started "from the position that the courts should be vigilant in ensuring that a related creditor acted properly in determining that some debts had become uncollectible" and that, here, the taxpayer who was "the creditor in the non-arm's length relationship here, is not only omniscient about its subsidiaries' affairs, but also omnipotent".
Sutherland v. The Queen, 91 DTC 5318 (FCTD)
The taxpayer was able to establish that he did not intend the amounts of unpaid management fees owing to him by a company in which he had an interest to be loans by him to the company, and that the amounts were unpaid because of the company's financial difficulties. Accordingly, the amounts owing to him represented unpaid amounts which had been included in his income, rather than separate loans.
Saskatchewan Co-Operative Credit Society Ltd. v. The Queen, 84 DTC 6225, [1984] CTC 628 (FCTD), aff'd 85 DTC 5599 [1986] 1 CTC 53 (FCA)
It was stated, obiter, that if a "loss is in the nature of a bad debt which does not come within the particular requirements of paragraph 20(1)(p), it may still be deducted from income if it otherwise meets the requirements of the Act as a loss incurred in the course of earning income."
Harlequin Enterprises Ltd. v. The Queen, 77 DTC 5164, [1977] CTC 208 (FCA)
The taxpayer was unable to deduct a reserve for the return of paperbacks which it had previously sold to a distributor on the basis of s. 11(1)(e)(i), there having been no history of uncollectible accounts between the taxpayer and the distributor.
Associated Investors of Canada Ltd. v. MNR, 67 DTC 5096 (Ex. Ct.)
The taxpayer, which was in the business of selling investment certificates to the public, made advances to its commission salesmen that were paid off when commissions were earned. Between 1954 and 1960, the excess of advances made to a sales manager over the commissions earned by him amounted to over $85,000, of which $25,000 was written off by the taxpayer in each of its 1960 and 1961 taxation years.
After finding that such write-offs were deductible for purposes of the Act on ordinary principles, Jackett P. went on to find that s. 11(1)(f) of the pre-1972 Act did not prohibit such a deduction (noting that the opposite interpretation would result in a bond dealer not being able to deduct losses arising from a bond issuer becoming insolvent) and went on to state in a footnote, that s. 11(1)(f) could not be applied in this case because the provision provides only to the deduction for the whole of a debt that becomes bad, rather than for partial write-offs.
Frontenac Shoe Ltée v. MNR, 63 DTC 1129 (Ex Ct)
The taxpayer paid certain bills of a company owned by the brother of its shareholder, and approximately four years later claimed these amounts as bad debts. The deduction was denied, apparently on the basis that the year of deduction was subsequent to the time that the amounts became bad debts.
See Also
Donne v. The Queen, 2015 TCC 150
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).
Francis & Associates v. The Queen, 2014 DTC 1146 [at 3468], 2014 TCC 137
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... .
Supercom Canada Ltd. v. The Queen, 2005 DTC 1438, 2005 TCC 589
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".
Williams Gold Refining Co. of Canada Ltd. v. The Queen, 2000 DTC 1829, Docket: 96-4709-IT-G (TCC)
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.
Anjalie Enterprises Ltd. v. The Queen, 95 DTC 216 (TCC)
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".
E.C.E. Group Ltd. v. MNR, 92 DTC 2019 (TCC)
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."
Roy v. MNR, 58 DTC 676 (TAB)
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.
Hogan v. MNR, 56 DTC 183, 15 Tax ABC 1
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."
Administrative Policy
8 December 2014 Folio S3-F9-C1
1.43 A taxpayer may claim a deduction for a bad debt pursuant to paragraph 20(1)(p) in the year the fraud is discovered to the extent that investment income purportedly earned from a scheme, that was not considered to have been received or withdrawn by the taxpayer, was previously included in the taxpayer's income. Generally, the year the fraud is discovered is considered to be the year during which the Crown lays charges against the perpetrator of the fraud. …
11 October 2013 APFF Roundtable Q. , 2013-0495671C6 F
When asked how CRA's position - that a debt must be unrecoverable in its entirety before it could qualify as a bad debt under s. 50(1) - could be reconciled with CRA's position that a partly bad debt could be deducted under s. 20(1)(p), CRA stated (TaxInterpretations translation):
[T]he concept of debts in subparagraph 20(1)(p)(i) can refer to each account receivable of the taxpayer. Thus…certain of the amounts due by a client can become irrecoverable and these represent the portion of the debt which has become irrecoverable.
On the other hand:
A debt can be eligible for the election under subsection 50(1) if it is irrecoverable in its entirety at the end of a taxation year.
14 December 1993 Memorandum 931814 (C.T.O. "Bad Debt Reduction for Part of a Loan")
Review of jurisprudence respecting whether a deduction may be taken under s. 20(1)(p) in respect of a partial debt write-down.
17 August 1992, T.I. 921353 (April 1993 Access Letter, p. 135, ¶C20-1141)
In order for the forgiveness of accrued interest owing by a non-arm's length person to be effective, there must be an amendment to the original agreement. A unilateral forgiveness in a non-arm's length situation will not suffice. Where the forgiveness has legal effect, it is effective only from the date of the amendment. The fact that interest which formerly was receivable has been waived or forgiven does not mean that the interest was a bad debt. Sincere efforts must have been made to collect the receivable.
ATR-6 (22 Jan. 86)
on a restructuring of a corporation in financial difficulty ("Y Ltd.") which owes to X Ltd. a trade receivable which was included in X Ltd.'s income in a previous taxation year, X Ltd. converts the trade receivable into common shares of Y Ltd. X Ltd. is entitled to a deduction under s. 20(1)(p) equal to the difference between the amount of the trade receivable and the fair market value of the common shares of Y Ltd. If X Ltd. should dispose of any of those common shares for less than the pro rata amount of the trade receivable from which they were converted, X Ltd. would not be entitled to claim an amount under s. 20(1)(p) because the amount would no longer relate to the trade receivable.
IT-442R "Bad Debts and Reserves for Doubtful Debts"
Articles
Tetreault, "Canadian Tax Aspects of Asset Securitization", 1992 Conference Report, p. 23:16.
Novek, "Deductibility of Financing Expenses", 1992 Corporate Management Tax Conference, c.3.
Frankovic, "Taxing Times: Foreclosures, Default Sales, Debt Forgiveness, Doubtful and Bad Debts", 1991 Canadian Tax Journal, p. 889.
Subparagraph 20(1)(p)(ii)
Cases
725685 Alberta Ltd. v. The Queen, 2009 DTC 6027, 2009 FCA 194
The Tax Court Judge did not make any palpable and overriding error when he found that the taxpayer, which was in the business of oilfield and pipeline inspection, and which made no loans in the years in question, and in the subsequent taxation year made only a small number of loans, did not have an ordinary business that included money lending.
Loman Warehousing Ltd. v. The Queen, 2000 DTC 6610, Docket: A-368-99 (FCA), aff'g 99 DTC 1113, Docket: 98-201-IT-G (TCC) infra
Noël JA, before rejecting the taxpayer's submission that the post-1993 version of s. 20(1)(p)(ii) contemplated a taxpayer whose ordinary business included the lending of money, and not the business of the lending of money, noted a concession of taxpayer's counsel that the taxpayer's sole business was that of warehousing and that it was not in the business of lending money, and then stated (in f.n. 2):
[T]his apparent concession is surprising as the business of lending money under the Act extends not only to one who lends money to all who qualify in the conventional sense (see Litchfield v. Dreyfus [1906] 1 KB 584 at 589) but would also include one who lends money on a regular and continuous basis over time to a limited group of borrowers for an arm's length consideration (see in particular the extended meaning of the word "business" in par. 248(1)).
Bosa Bros. Construction Ltd. v. The Queen, 96 DTC 6193 (FCTD)
The construction and development of properties was found to be the taxpayer's ordinary business and, accordingly, interest-free advances made by it to its U.S. subsidiary did not qualify under s. 20(1)(p)(ii).
The Queen v. Doral Investment Corp., 79 DTC 5316, [1979] CTC 398 (FCTD)
A company whose business consisted of providing management services, and which previously had made only three loans over a 10-year period, could not be said to have made a non-interest bearing loan as part of a business of lending money.
Chaffey v. M.N.R., 78 DTC 6176, [1978] CTC 253 (FCA)
Although certain companies in which two partners ("Chaffey" and "Taylor") were shareholders carried on a large mortgage business and Chaffey and Taylor made advances to them for that purpose, loans made by Chaffey and Taylor to other companies including a company in a tourist attraction business ("Canadia") were not made in the ordinary course of a money-lending business, and losses that were suffered on advances to Canadian were non-deductible. Le Dain J stated (at p. 6179):
[S]hareholders' advances do not constitute the business of lending money; they are simply a particular form by which capital is put into a company.The loans made by the partnership did not have as their principal object the accommodation of persons in return for income in the form of interest; they were merely a device for the financing of projects through which profit was to be made by other means.
The Queen v. Pollock Sokoloff Holdings Corp., 76 DTC 6181, [1976] CTC 349 (FCA)
An affiliate of the taxpayer made interest-bearing loans to an arm's length individual and, later, as a result of changes in the Quebec taxing statutes, assigned the loans to the taxpayer for their face value. The principal business of the taxpayer was investing in shares, bonds and real estate, although approximately 0.8% of its assets consisted of $116,211 of mortgages and notes receivables.
The reserve under paragraph 20(1)(l) (and (p)) was not available to the taxpayer because the loan had not been made by it. S.20(1)(l)(ii) "extends only to granting a 'reserve' in respect of debts arising from loans made by the taxpayer whose income is being computed." In addition, the "ordinary business" of the taxpayer was not the lending of money.
The Queen v. E. V. Keith Enterprises Ltd., 76 DTC 6018, [1976] CTC 21 (FCTD)
The taxpayer, which had invested in various companies involved in the land development and construction business and was actively involved in their management, over 10 years previously (in 1953 to 1955) had made three loans (in amounts of $18,500, $55,000 and $5,000) at 6% interest to accommodate the supply of materials to building companies, and since then had made a further 25 "loans" (representing unpaid purchase price for asset sales made by it or companies in which it was invested), also generally bearing interest at 6%.
A $15,000 loan which it made in 1968 to a nephew of its controlling shareholder (pursuant to a promissory note bearing interest at 15%), the proceeds of which were used by him to pay off a trade account owing to one of the investee companies, was held (at p. 6018) to be "of a class that the Defendant had the power to make and had established, over the years, a pattern of making in the ordinary course of its business."
The Queen v. Lavigueur, 73 DTC 5538, [1973] CTC 773 (FCTD)
Although the taxpayer frequently loaned money, either on an interest free basis to tenants or on a short-term basis at a rate of interest that did not exceed his cost of funds, money-lending was not part of his ordinary business because no profit could be yielded to him by those loans.
Rossmor Auto Supply Ltd. v. MNR, 62 DTC 1080 (Ex. Ct.)
The taxpayer made an interest-bearing loan of $50,000 to customers in consideration inter alia for their agreement to purchase all their tires and tubes from the taxpayer. Four years later, the taxpayer wrote off the uncollected balance of $28,846 of the loan in its accounts.
In finding that the amount of the write-off was not deductible under s. 11(1)(f) of the 1952 Act, Thorson P. noted that the taxpayer had always considered the amount owing to it by the customers as a capital asset, and that the lending of money was not part of its ordinary business.
See Also
Newmont Canada Corporation v. The Queen, 2011 DTC 1117 [at 628], 2011 TCC 148, aff'd 2012 DTC 5138 [at 7292], 2012 FCA 214 supra
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.
Zaenker v. The Queen, 2007 DTC 1365, 2007 TCC 440
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.
Martin v. The Queen, 2007 DTC 1284, 2007 TCC 339
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.
Langhammer v. The Queen, 2001 DTC 45, Docket: 98-9306-IT-G (TCC)
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.
576315 Alberta Ltd v. The Queen, 2001 DTC 776, Docket: 1999-1962-IT-G (TCC)
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.
Yunger v. The Queen, 2000 DTC 2153, Docket: 98-1188-IT-G (TCC)
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."
Loman Warehousing Ltd. v. The Queen, 99 DTC 1113, Docket: 98-201-IT-G (TCC), aff'd 2000 DTC 6610 (FCA) supra
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.
Singh v. The Queen, 2000 DTC 2031, Docket: 98-2067-IT-G
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.
Whitland Construction Co. Ltd. v. The Queen, 99 DTC 33, Docket: 96-4184-IT-G (TCC),
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.
Wesco Property Developments Ltd. v. MNR, 89 DTC 590 (TCC)
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.
Robitaille v. American Biltrite (Canada) Ltd., [1985] 1 S.C.R. 290
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."
Highfield Corp. v. MNR, 82 DTC 1835 (TRB)
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.
Administrative Policy
6 March 1995 Memorandum (C.T.O. "Money Lending Business")
Detailed discussion of the meaning of the phrase "whose ordinary business included the lending of money", including a discussion of jurisprudence and articles.
7 April 1993 Memorandum (Tax Window, No. 31, p. 6, ¶2513)
A standard distress preferred share ruling is that provided the debt arose from one or more loans made by the specified financial institution in the course of its money-lending business, the debt reacquired by the institution will be considered to have been acquired by it in the ordinary course of its business of lending money for the purposes of ss.20(1)(l) and (p).
7 August 1992, T.I. 920376 (May 1993 Access Letter, p. 192, ¶C20-1145)
S.20(1)(p)(ii) will apply to a moneylender that is in the process of winding-up in respect of loans or lending assets that become doubtful or are established to be uncollectible in the period before it is wound up but after it has ceased to solicit new business.