A-162-74
The Queen (Appellant)
v.
Pollock Sokoloff Holdings Corp. (Respondent)
Court of Appeal, Jackett C.J., Le Dain J. and
Hyde D.J.—Montreal, April 13, 1976.
Income tax—Moneys not collected under loans by parent
company—Transfer of loans by parent to subsidiary—Validity
of transfer as against Minister—Right of transferee to deduc
tion of bad debt—Income Tax Act, R.S.C. 1952, c. 148, s.
11(1)(e),(1).
Loans were made to C from 1962 to 1965 by M. H.
Corporation, through, S, an officer and director of that com
pany, and of its subsidiary, the respondent. Transactions
respecting the loans were carried out by S between C and M.
H. Corporation or respondent, interchangeably. Interest was
paid on the loans until 1966. In 1967, the loans were trans
ferred by M. H. Corporation to respondent at their full book
value of $50,000. Respondent claimed deductions for the 1968
taxation year of $30,000, written off as a bad debt under
section 11 of the Income Tax Act. The Minister disallowed the
deduction on the ground that section 11 was inapplicable and
that the loss should have been treated as a capital one under
section 12(1)(b). Respondent's appeal was allowed by the Tax
Review Board. On appeal by the Minister to the Trial Division
[[1974] 2 F.C. 169], it was held that the Minister had no right
to intervene to set aside such a sale of debts for want of
formality when the parties concerned admitted its occurrence
and the debtor knew of it. Respondent came within the mean
ing of section 11(1)(e) and (/), even though loans were not
extensive in proportion to total activities. And, even though M.
H. Corporation, which initiated the loans was not in the
ordinary business of lending money, they were transferred to
respondent, part of whose business was the lending of money.
The Minister appealed this decision.
Held, allowing the appeal, the judgments of the Trial Divi
sion and Tax Review Board are set aside and the assessment
should be restored. No case has been made out for deducting
the amount in question in computing the profit for the year in
accordance with ordinary business and commercial principles.
The amount represents a diminution in the value of property
that had been transferred to the respondent as part of an
exchange of assets with a related company; the resulting loss
did not arise out of current operations of respondent's business.
Section 11(1)(e) does not authorize respondent to deduct a
reserve in respect of such debts because they did not arise from
"loans made" by respondent. While section 11(1)(e)(ii) is not
worded as explicitly as it might have been, it extends only to
granting a "reserve" in respect of debts arising from loans
made by the taxpayer whose income is being computed; they
must have been made by the taxpayer part of whose ordinary
business must have been the lending of money. Unless the
ordinary business of the taxpayer was "the lending of money",
respondent cannot succeed. The evidence does not support such
a finding.
APPEAL.
COUNSEL:
T. B. Smith, Q.C., and H. Richard for
appellant.
M. Vineberg for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Phillips & Vineberg, Montreal, for respond
ent.
The following are the reasons for judgment
delivered orally in English by
JACKETT C.J.: This is an appeal from a decision
of the Trial Division dismissing with costs an
appeal by the appellant from a decision of the Tax
Review Board allowing an appeal by the respond
ent from its assessment under Part I of the Income
Tax Act for the 1968 taxation year.
The sole question in issue is whether the taxpay
er was entitled to a deduction in computing its
income for that taxation year, by virtue of section
11(1)(e) of the Income Tax Act, of $30,000 in
respect of an indebtedness of $50,000. 2
As I have concluded that the appeal must be
allowed, I must indicate how I differ from the
conclusions of the lower courts.
In the first place, in my view, no case has been
made out for deducting the amount in question in
computing the profit for the year in accordance
with ordinary business and commercial principles.
[1974] 2 F.C. 169.
2 While the notice of appeal refers to the amount in question
as "a bad debt", it refers to section 11(1)(e) and describes the
reserve as "$30,000 of the principal amount loaned". The lower
courts held it was deductible under section 11(1)(J) as a "bad"
debt. In this Court, it is common ground that it is deductible, if
it is deductible, as a "reserve" for doubtful debts under section
11(1)(e).
That amount does not, in my view, represent a cost
of the respondent's business on current account. In
effect, it represents a diminution in the value of
property that had been transferred to the respond
ent as part of an exchange of assets with a related
company, which exchange was effected with the
sole objective of improving the tax position under
provincial tax laws. The resulting loss did not, in
my view, arise out of current operations of the
respondent's business.
The remaining question is whether the amount
in question is deductible under section 11(1)(e) of
the Income Tax Act, which reads as follows:
11. (1) Notwithstanding paragraphs (a),(b) and (h) of sub
section (1) of section 12, the following amounts may be deduct
ed in computing the income of a taxpayer for a taxation year:
(e) a reasonable amount as a reserve for
(i) doubtful debts that have been included in computing
the income of a taxpayer for that year or a previous year,
and
(ii) doubtful debts arising from loans made in the ordinary
course of business by a taxpayer part of whose ordinary
business was the lending of money;
The relevant facts, in so far as they must be
considered for my conclusion, are that
(a) the related company made the loans in
question,
(b) the related company subsequently trans
ferred the resulting debts to the respondent
while they were still worth their face value, and
(c) subsequently, the debts became of doubtful
value.
In my view, section 11(1) (e) does not authorize
the respondent to make a deduction of a reserve in
respect of such debts because they did not arise
from "loans made" by the respondent. The sub
mission of counsel for the respondent that, in the
context of section 11(1)(e), the words "made by a
taxpayer" include loans made by a third party and
subsequently transferred to a taxpayer does not
require, in my view, any answer except that the
word "made" used in relation to the word "loans"
does not have any such sense. This is even clearer,
in my view, when the French version of the provi
sion is read with the English version. The submis-
siot of counsel that the use in section 11(1)(e)(ii)
of the expression "a taxpayer" instead of "the
taxpayer" extends the operation of the provision to
permit the deduction of a "reserve" for "doubtful
debts" arising from loans made by "a taxpayer"
other than the taxpayer whose income is being
computed is, superficially, more persuasive. How
ever, while section 11(1)(e)(ii) is not worded as
explicitly as it might have been, I have concluded
that it extends only to granting a "reserve" in
respect of debts arising from loans made by the
taxpayer whose income is being computed. In
other words they must have been made by the
taxpayer part of whose ordinary business must
have been the lending of money. In any event, even
if the words were open to the other interpretation,
the respondent cannot succeed in this submission
unless the ordinary business of the lender was "the
lending of money" and, in my view, in this case,
the evidence would not support such a finding of
fact.
I am of the view that the appeal should be
allowed, that the judgments of the Tax Review
Board and the Trial Division should be set aside,
that the assessment appealed against should be
restored and that the respondent should pay the
costs of the appellant in the Trial Division as well
as in this Court.
* * *
LE DAIN J. concurred.
* * *
HYDE D.J. concurred.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.