http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/110220/index.do
Delle Donne v. The Queen (June 16, 2015 – 2015 TCC 150, Owen J.).
Précis: The appellant was a retired dentist who invested his funds at high rates of return with a corporation (“SA”) owned by his brother-in-law, Mr. Amato. That corporation in turn invested the funds with another corporation (“EMB”) controlled by an unrelated individual, Mr. Mander. In 2009 Mr. Mander committed suicide and it came out in the press that he was running a Ponzi scheme. Both SA and EMB were insolvent and the appellant had lost all, or virtually all, of his investment.
[29] Mr. Amato identified a document titled “Statement of Affairs (Business Proposal)” dated April 23, 2010 and signed by Mr. Amato (Exhibit A-2). On the first page of the Statement of Affairs, the total liabilities of SA are stated to be $17,318,303.35 and the total assets are stated to be $288,200, for a shortfall of $17,030,103.35.
In early 2010 SA issued a T5 to the appellant showing that he had earned $137,500 in interest income in 2009. His accountant filed his tax return (enclosing the T5 and other correspondence) but did not include the amount in income because of the insolvency of SA.
CRA assessed the appellant to include the $137,500 in 2009. The Crown’s position at trial was the appellant was not entitled to a deduction under either subparagraph 20(1)(l)(i) (doubtful debts) or subparagraph 20(1)(p)(i) (bad debts) for a variety of reasons:
[52] Counsel for the Respondent submits that under the terms of the three loan agreements the Appellant was required to formally demand payment of the Interest using the form in Schedule “G” to the agreement and that, since the Appellant did not demand payment of the Interest in 2009, there could be no bad debt at the end of 2009.
[53] Counsel argues that the Appellant was aware in December 2009 that Mr. Mander had had a heart attack. However, at that time the Interest was not owed by Mr. Mander or by his corporation, EMB. The debt was owed to the Appellant by SA. The ability of SA to pay the Interest was not clear, as reflected in the letters from SA’s lawyers in March and April 2010 regarding the prospects for recovery.
[54] Counsel further submits that the Interest was not included in the Appellant’s income in 2009 because it was not reported on his T1 income tax return. As the Interest was not included in income, no amount could be claimed under subparagraph 20(1)(l)(i) or 20(1)(p)(i) of the ITA. The proper approach would have been to include the amount as income on the return and then claim an offsetting deduction under one of those two provisions.
The Court brushed aside these arguments and allowed the appeal, with costs.
Decision: Justice Owen showed enormous patience in his scholarly treatment of the Crown’s three lines of argument:
[76] Although not relevant to the analysis of the Appellant’s judgment on the filing-due date, events subsequent to April 30, 2010 only serve to confirm that the money lent by SA to EMB was fraudulently appropriated by Mr. Mander and that SA could not have paid any of its debts at the end of 2009 as the money it had lent to EMB had been stolen.
[77] The final requirement that must be satisfied is that the amount claimed must be reasonable. Given that it was apparent by April 30, 2010 that SA and the Appellant were very likely the victims of a Ponzi scheme that held out the illusory promise of high interest rates, that the whereabouts of the principal lent to EMB was unknown and that the prospects for recovery of the principal invested were uncertain, it was reasonable for the Appellant to claim a deduction under subparagraph 20(1)(l)(i) equal to the full amount of the Interest. As stated in Coppley Noyes & Randall, supra (at page 5297):
If there is a reasonable doubt that an account is not collectible, the degree of doubt is expressed as a proportion of the total debt taken as a reserve. In that sense the amount included in a reserve with respect to any given account is an estimate of the
risk that the account will not ultimately be paid.
[78] Here, the Appellant had reasonably concluded that there was little, if any, prospect of recovering the principal lent to SA and no prospect of recovering the Interest. Accordingly, a deduction under subparagraph 20(1)(l)(i) of the ITA equal to the full amount of the Interest was reasonable.
…
[87] As stated above in the context of the analysis of subparagraph 20(1)(l)(i) of the ITA, SA’s financial condition did not deteriorate after 2009. The facts that came to light after 2009 and before the Appellant’s filing-due date revealed that SA did not have the ability to pay the Interest at the end of 2009 because Mr. Mander had stolen the funds EMB had borrowed from SA using the promise of a 25% annual return.
[88] In the unusual circumstances of this case, I am of the view that the only reasonable conclusion for the Appellant to reach on April 30, 2010 was that the Interest, which was owed by SA to the Appellant at the end of 2009, was a bad debt at the end of 2009. Consequently, the Appellant was entitled to claim under subparagraph 20(1)(p)(i) of the ITA a deduction in the amount of the Interest in computing his income for the 2009 taxation year.
…
92] Here, the Appellant is using the appeal process to claim a deduction under subparagraph 20(1)(l)(i) or 20(1)(p)(i) of the ITA that was implicitly reflected in his filing position as explained in the letter accompanying his 2009 T1 income tax return. If, as stated in Imperial Oil Limited, a taxpayer can use the appeal process to claim a deduction not initially claimed, then it must be that the Appellant can use the appeal process to clarify a filing position that was identified in general terms when he filed the return.
As a result the appeal was allowed, with costs:
[93] For the foregoing reasons, the Appeal is allowed with costs to the Appellant and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to deduct $137,500.00 under subparagraph 20(1)(p)(i) of the ITA in computing his income for the 2009 taxation year.
Comment: What is astonishing about this case is that the Crown brought it to trial. The debtor, SA, had roughly $300,000 in assets left in 2009 leaving it underwater by some $17,000,000. On what possible legal analysis would Mr. Delle Donne’s claim for interest in 2009 not be either doubtful or bad?
Justice Owen showed extraordinary patience in dealing with the Crown’s illogical and seemingly petty arguments in a thorough and scholarly manner. A less patient judge would possibly, and with considerable justification, have awarded costs against the Crown on a solicitor-client basis.