http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/110469/index.do 
Hill Fai Investments Ltd. v. The Queen (June 30, 2015 – 2015 TCC 167, Lamarre ACJ).
Précis: The taxpayer claimed to have incurred a capital loss on a bad debt of $382,219.31 in its taxation year ended September 30, 2006. The loss in turn impacted on its taxation years ended September 30 in each of 2005, 2007 and 2008.
The Court held that the evidence did not support the existence of the bad debt. The Court also rejected the taxpayerʼs argument that since the original alleged loan transactions took place in 1994 it was not required under subsection 230 of the
Income Tax Act to keep records of the loan for more than 6 years, i.e., not beyond 2000.
As a result the appeal was dismissed with costs.
Decision: The appeal arose out of the taxpayer having claimed a bad debt in 2006:
[1] These are appeals against reassessments made by the Minister of National Revenue (Minister) disallowing the deduction of a capital loss in the amount of $382,219.31 claimed by the appellant for the year ended September 30, 2006, which in turn had an impact on the appellant's tax liability for the taxation years ended September 30, 2005, September 30, 2006, September 30, 2007 and September 30, 2008 (see paragraphs 4 and 7 of the Amended Reply).
[2] In the calculation of its taxable income for the year ended September 30, 2006, the appellant claimed to have disposed of a receivable having an adjusted cost base of $382,219.31 for proceeds of disposition equal to zero, resulting in a loss in the amount of $382,219.31 (Amended Reply, paragraph 12 (i)).
[3] The appellant's records indicated that the receivable consisted of the following loans and advances the appellant claims to have made to Chun Fai Holdings Ltd. (Chun Fai), an affiliated corporation:
a. Chun Fai Holdings – Land $ 110,000.00
b. Chun Fai Holdings – Security 3,766.88
c. Chun Fai Holdings – Interest 236,455.25
d. Chun Fai Holdings – General 31,997.18[2]
Total $ 382,219.31
[4] Hill Fai says the debts became bad debts in its 2006 taxation year, thus allowing it to dispose of the debts pursuant to subsection 50(1) of the Income Tax Act (ITA) and claim the capital losses under paragraph 39(1)(b) of the ITA.
[Footnote omitted]
The Crown took the postion that the debts never existed or, if they did, they were not deductible since they were not acquired for the purpose of gaining or producing income from a business or property:
[5] The respondent is of the view that the appellant did not dispose of a debt within the meaning of subsection 50(1) of the ITA and therefore cannot claim the capital losses. She disputes that the debts even existed, and if they did exist, that they could properly be said to have become bad. Alternatively, the respondent argues that if Hill Fai did dispose of a debt within the meaning of subsection 50(1), Hill Fai did not acquire the debt for the purpose of gaining or producing income from a business or property, and therefore Hill Fai’s loss from the disposition of the debt is nil pursuant to paragraph 40(2)(g) of the ITA.
After an extensive review of the evidence the Court concluded that it did not support the existence of the alleged debts:
[56] Mr. Tayub Abdul, an auditor with the CRA who eventually took over the Hill Fai file, testified that there was never any source documentation to support the debts recorded in the financial statements. Mr. Abdul acknowledged in cross-examination that there have been times when he has allowed a claim for deductions without source documentation because the claim is reasonable. But he added that Hill Fai’s claims were not reasonable because there was no continuity in the financial statements. I agree with that assessment. The financial statements provided as evidence never seemed to be in alignment, and there was no other documentation presented to support the specific debts that led to Hill Fai’s claim for capital losses. Therefore, Hill Fai has failed to prove that Chun Fai owed it debts totalling $382,219.31.
The taxpayer argued that since the alleged loans were made in 1994 the duty to keep records for 6 years under section 130 of the Act expired in 2000. The Court rejected this line of argument:
[65] In Tibilla v The Queen, it was held that the six-year period starts running not on the date the event took place, but rather on the date the taxpayer made his claim. In Tibilla, the taxpayer bought and renovated a rental property in 2002. The taxpayer sold the property in 2007 and was audited for capital gains in 2010. The taxpayer argued that the six-year period during which he was required to keep the supporting documents for the renovation expenses started running in 2002. That interpretation was held to be incorrect and the Court ruled that the six year period started running on the date the expenses were claimed. In that case, the expenses had been claimed in 2007 for the purpose of reducing the capital gain on the sale of the rental property. The Court's interpretation was based on the context of subsection 230(4):
The reference to the expiration of six years from the end of the last taxation year to which the books and records relate is to be read in context. Here, I am of the view that, even though the expenses were incurred in 2002, the last taxation year to which the vouchers relate is the year in which the appellant claimed the expenses in order to reduce his capital gain, which he realized in 2007. Therefore, the vouchers could not be destroyed before the later of the expiration of six years after 2007 (subsection 230(4)) and the date on which his appeal is finally disposed of (subsection 230(6)).
[66] Applied to these appeals, the ruling in Tibilla means that the relevant tax event occurred in 2006 when Hill Fai claimed the $382,219.31 in capital losses. Under subsection 230(4), Hill Fai was therefore required to keep the relevant records for six years starting from the end of its 2006 taxation year.
[67] Moreover, pursuant to subsection 230(6), Hill Fai was required to keep the relevant records until this appeal is finally disposed of. Hill Fai therefore has no basis under the ITA for claiming that it was not required to keep the relevant records.
[Footnotes omitted]
As a result the appeal was dismissed with costs.