Nicholls v. The Queen – Loss on a Promissory Note Payable by a Trust Not an Allowable Business Investment Loss

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The underlying facts of Nicholls v. The Queen[1] (June, 24, 2013) are very simple:

[9]            The appellant testified that he transferred 244,711 shares of Mpact Immedia, a Canadian public corporation, to the Nicholls (Children) Family Trust (the “Trust”) in 1997. According to the appellant, he received from the Trust as consideration for the transferred shares, a promissory note (for an amount corresponding to $354,830.

[10]        The appellant alleged that the Trust became insolvent in 1998, which prompted him to claim a loss for the promissory note on the basis that it became a bad debt in that year.

The appellant claimed an allowable business investment loss (“ABIL”) in his 1998 return (which for some unexplained reason was not filed until 2006).  The Minister accepted the late-filed return and issued a nil assessment and rejected the taxpayer’s claim for an ABIL.  The taxpayer does not appear to have filed a notice of objection to the nil assessment and seems to have engaged in correspondence with CRA in which he was advised that in order to determine th2 status of his ABIL claim he would have to apply for a loss determination.  He did that and on February 1, 2010 the Minister advised that both the capital loss and ABIL for 1998 had been determined to be NIL.  The taxpayer filed a notice of objection to the loss determination on February 9, 2010 and, as the Minister had not responded within 90 days, appealed to the Tax Court on May 17, 2010.  In the Minister’s Reply to the Notice of Appeal, the Minister acknowledged that the appellant was entitled to claim a capital loss of $354,830 for the 1998 taxation year but denied the appellant’s ABIL claim.  Thus the sole remaining issue on this appeal was whether the appellant’s loss on the promissory note he received from the Nicholls (Children) Family Trust was an ABIL.

The court made short work of the taxpayer’s claim:

[11]        It is clear from the evidence that the appellant did not have an ABIL in 1998. Paragraph 39(1)(c) of the Income Tax Act specifies, inter alia, that an ABIL can only be claimed if a taxpayer incurs a loss in connection with the disposition either of shares of the capital stock of a small business corporation or of debt owing to the taxpayer by a Canadian-controlled private corporation. The appellant claimed the capital loss in respect of the Trust’s promissory note.

III.            Conclusion

[12]        The respondent requests costs on the grounds that she was the successful party in this appeal. I disagree. The loss determination against which the appellant lodged his appeal was incorrect. The respondent acknowledged that the appellant was entitled to claim a capital loss of $354,830. For this reason, the appeal is allowed in part and the matter is referred back to the Minister for redetermination on the basis that the appellant incurred a capital loss of $354,830 for his 1998 taxation year. There will be no award of costs.

The decision on the merits is perfectly clear.  On the issue of costs the decision appears to be quite fair.  The taxpayer was forced to go to court to establish his significant capital loss.  Even if he was unsuccessful in establishing his entitlement to an ABIL the Minister’s bid for an award of costs seems a bit of a reach.

[1] 2013 TCC 166.