Fisher v. R. – TCC: Taxpayer Did Not Prove Debt Had Become Bad

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Fisher v. The Queen[1] (July 11, 2013) is a decision of the Tax Court dealing with an alleged bad debt.  The background to the case was a bit convoluted:

[1]            This is an appeal from reassessments of Ms. Fisher’s 2003 and 2004 taxation years. The issue before the Court is whether Ms. Fisher is entitled to a capital loss of $239,236.19 in either her 2003 or 2004 taxation year in relation to a project to purchase and redevelop a regional shopping mall near Niagara Falls, New York. The project was ultimately abandoned and money which Ms. Fisher had provided was lost.

[2]            In her 2003 tax return, which she filed in 2006, Ms. Fisher claimed a business loss of $239,236.19 in respect of the project. She also sought to carry forward for the unused portion of the loss to her 2004 taxation year. The request for the loss led to an audit of her 2000 to 2004 taxation years by the Canada Revenue Agency (“CRA”). The audit resulted in a denial of her claim for the business loss and the loss carry forward. She was also reassessed for other matters that were subsequently reversed at the objection level.

[3]            In her original Notice of Appeal, Ms. Fisher claimed that she was entitled to a capital loss of $170,500 in her 2003 and 2004 taxation years in respect of the project, and requested a carry back of the allowable capital loss to her 2002 taxation year to offset a capital gain she realized in that year.

[4]            At the hearing, Ms. Fisher was represented by counsel and was permitted to amend her Notice of Appeal to increase the amount of the loss claimed to $239,236.19, and to advance the additional claim that the loss was a business investment loss within the meaning of paragraph 39(1)(c) of the Income Tax Act (“the Act”) in either 2003 or 2004. At the conclusion of the evidence, counsel for Ms. Fisher abandoned the business investment loss argument, presumably because it was clear the corporation in which Ms. Fisher alleges she invested the money was a U.S. corporation.

At the end of the day the only questions were:

1.                   Did advances the taxpayer made to Niagara Falls Entertainment and Attraction Limited become uncollectible in either 2003 or 2004, therefore permitting her to carry back a capital loss to her 2002 taxation year?

2.                  What was the amount of the advances made.

The Tax Court judge answered the first question as follows:

[42]        Since Ms. Fisher continued to provide funds for the project at least until the end of February 2004, I find that she did not establish that the debt was bad by December 31, 2003. On the evidence before me, I also find that Ms. Fisher has not established that the portion of the debt guaranteed by Hurst became bad by the end of 2004. Whether or not Niagara could repay the debt at that time, which I will consider later in these reasons, Ms. Fisher has not shown that she took any steps to collect from Hurst on the promissory notes he gave her or even to assess whether she could collect from him. I infer from the fact that Hurst had Ms. Fisher sign the Termination Agreement in September 2006 that Hurst was concerned about his exposure on the promissory notes and this suggests to me that it was likely Ms. Hurst could have recovered something from Hurst at that time. In any event, she did not investigate Hurst’s financial position and presented no evidence at the hearing relating to his ability to pay.

On the second question, he found that the taxpayer had only proven advances totalling $170,500 (para. 33).

This case is completely fact driven.  It does however reiterate the criteria laid down by Justice Rothstein in Rich which have has become the accepted test for determining whether a debt has become bad:

[41]        In Rich v The Queen 2003 FCA 38, one of the issues before the Federal Court of Appeal was when a debt owing to the taxpayer had become bad. At paragraphs 12 to 15 of that decision, Rothstein J.A. wrote:

[12 ]     The assessment of whether a debt is bad is one based upon the facts at a particular point in time, i.e. December 31, 1995. The Income Tax Act does not prescribe factors to be considered in assessing the collectibility of a debt. However, Tax Appeal Board judgments in Hogan v. The Minister of National Revenue, 56 D.T.C. 183 and No. 81 v. The Minister of National Revenue, 53 D.T.C. 98, suggest some of the factors to be taken into account. After the creditor personally considers the relevant factors, the question is whether the creditor honestly and reasonably determined the debt to be bad.

[13]      I would summarize factors that I think usually should be taken into account in determining whether a debt has become bad as:

1.         the history and age of the debt;

2.         the financial position of the debtor, its revenues and expenses, whether it is earning income or incurring losses, its cash flow and its assets, liabilities and liquidity;

3.         changes in total sales as compared with prior years;

4.         the debtor’s cash, accounts receivable and other current assets at the relevant time and as compared with prior years;

5.         the debtor’s accounts payable and other current liabilities at the relevant time and as compared with prior years;

6.         the general business conditions in the country, the community of the debtor, and in the debtor’s line of business; and

7.         the past experience of the taxpayer with writing off bad debts.

This list is not exhaustive and, in different circumstances, one factor or another may be more important.

[14]      While future prospects of the debtor company may be relevant in some cases, the predominant considerations would normally be past and present. If there is some evidence of an event that will probably occur in the future that would suggest that the debt is collectible on the happening of the event, the future event should be considered. If future considerations are only speculative, they would not be material in an assessment of whether a past due debt is collectible.

[15]      Nor is it necessary for a creditor to exhaust all possible recourses of collection. All that is required is an honest and reasonable assessment. Indeed, should a bad debt subsequently be collected in whole or in part, the amount collected is taken into income in the year it is received.

[1] 2013 TCC 216.