Date: 20000320
Docket: A-437-98
Ottawa, Ontario, Monday, the 20th day of March, 2000
CORAM: THE CHIEF JUSTICE,
STRAYER, J.A.,
ROTHSTEIN, J.A.
BETWEEN:
GRANT LANGDON
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
Heard at Vancouver, British Columbia, Thursday, March 9th, 2000
Judgment delivered at Ottawa, Ontario, on Monday, March 20th, 2000
REASONS FOR JUDGMENT BY: STRAYER J.A.
CONCURRED IN BY: THE CHIEF JUSTICE
ROTHSTEIN J.A.
Date: 20000320
Docket: A-437-98
CORAM: THE CHIEF JUSTICE
STRAYER, J.A.,
ROTHSTEIN, J.A.
BETWEEN:
GRANT LANGDON
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
STRAYER, J.A.
[1] This is an appeal from a decision of the Tax Court of Canada of May 20, 1998. The only issue remaining for consideration by this Court is the determination of the learned Tax Court judge that the appellant was not entitled to deduct the amount of $132,146.00 as a doubtful debt in respect of his 1991 taxation year, allegedly owing from the sale by him of what is described as the "MacKenzie property".
[2] The following evidence was before the Tax Court in respect of this particular issue. The MacKenzie property is a business building in the town of MacKenzie, British Columbia. Through various intercorporate transactions not germane to the issue before us, the appellant became owner or beneficial owner of the property in February, 1988. He considered it to be inventory in his business of buying and selling properties. On December 12, 1989, he sold it through more intercorporate transactions to a Walter Andereggen for $725,000.00. The purchase and sale agreement called for a down payment, interest on the unpaid balance, monthly payments starting January, 1990 and ending in November 1994, a balloon payment in December 1990, and a final lump payment in December 1994, all to pay off the outstanding principal and interest. Some payments were made in respect of interest in 1990.
[3] The appellant did not report the gross or net income from the sale of the MacKenzie property in 1989. Thereafter it gradually became apparent to him that the purchaser was not going to be able to pay the full price of the building so, in reporting his income in respect of 1991, he claimed a reserve for a doubtful debt in the amount of $132,146.00. According to the appellant"s evidence at trial1, he based this amount on what he estimated to be the reduced value of the security on the money owing, namely value of the building. He considered the purchaser"s personal covenant to pay the full price to be worthless.
[4] The Minister disallowed this reserve for a bad debt. His assumption for doing so, as stated in the reply to the notice of appeal in the Tax Court2,was that the appellant had not established this amount as owed to him as a bad debt. At trial the Minister also argued that the appellant could not rely on subparagraph 20(1)(l)(i) of the Income Tax Act as a basis for deduction of a doubtful debt as this amount had never been included as part of the appellant"s reported income as required under paragraph 12(1)(b) of the Act .
[5] The learned Tax Court judge dismissed the appellant"s appeal from this assessment on the grounds that the appellant had not included the bad debt in the income reported for 1991 or any earlier year, nor had he shown any "objective basis" for fixing the amount of the bad debt at $132,146.00.
ANALYSIS
[6] I am of the view that this appeal must be dismissed.
[7] With respect to the first issue, as to whether a bad debt can be deducted although no relevant income has been reported in association with the same amount said to be owed to a taxpayer, the relevant provisions of the Income Tax Act are as follows:
12. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:
* * * *
12. (1) Sont à inclure dans le calcul du revenu tiré par un contribuable d"une entreprise ou d"un bien, au cours d"une année d"imposition, les sommes appropriées suivantes:
* * * *
| (b) any amount receivable by the taxpayer in respect of property sold or services rendered in the course of a business in the year, notwithstanding that amount or any part thereof is not due until a subsequent year .... |
| [the remaining is not applicable to this taxpayer] |
* * * *
| b) toute somme à recevoir par le contribuable au titre de la vente de biens ou de la fourniture de services au cours de l"année, dans le cadre de l"exploitation d"une entreprise, bien que la somme ou une partie de la somme puisse n"être due que dans une année postérieure, ..... [la balance du texte ne s"applique pas à cet individu] |
* * * *
20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer"s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:
* * * *
20. (1) Nonobstant les dispositions des alinéas 28(1)a), b) et h), lors du calcul du revenu tiré par un contribuable d"une entreprise ou d"un bien pour une année d"imposition, peuvent être déduites celles des sommes suivantes qui se rapportent entièrement à cette source de revenus ou la partie des sommes suivantes qui peut raisonnablement être considérée comme s"y rapportant :
* * * *
| (l) a reasonable amount in respect of doubtful debts that have been included in computing the income of the taxpayer for that year or a preceding year; |
| l) Un montant raisonnable au titre des créances douteuses incluses dans le calcul du revenu du contribuable pour l"année ou pour une année d"imposition antérieure, |
[8] In my view, the Tax Court judge was correct in holding that no reserve for bad debts could be deducted from the appellant"s income for 1991 because he had not included in his reported income for 1991 or any preceding year the amounts to which he says he was entitled under the contract of sale of the MacKenzie property. The appellant argues that subsection 12(1) in its opening words only requires that the forms of income listed in that subsection be "included in computing" income, and that this only requires that they be taken into account in calculating net income but need not be reported on a tax return. In essence, the appellant is arguing that the requirement to compute income in accordance with section 12 of the Income Tax Act does not imply that such computation need be provided to the Minister. However, subsection 150(1) of the Income Tax Act at all material times provided in part.
150 (1) A return of income for each taxation year in the case of a corporation (other than a corporation that was a registered charity throughout the year) and in the case of an individual, for each taxation year for which tax is payable or would be payable if this Part were read without reference to sections 127.2 and 127.3, in which the individual has a taxable capital gain or has disposed of a capital property, or for which a payment has been received by the individual under section 164.1, shall, without notice or demand therefor, be filed with the Minister in prescribed form and containing prescribed information, ....
150(1) Il doit être produit auprès du ministre, sans , sans avis ni mise en demeure, une déclaration de revenu selon le formulaire prescrit, contenant les renseignements prescrits, pour chaque année d'imposition dans le cas d'une corporation - à l"exception d"une corporation qui a été, tout au long de l"année, un organisme de charité enregistré - et, dans le cas d'un particulier, pour chaque année d'imposition pour laquelle un impôt est payable - ou le serait s"il n"était pas tenu compte des articles 127.2 et 127.3 de la présente partie - ou dans laquelle le particulier a un gain en capital imposable ou a disposé d'un bien en immobilisation ou encore pour laquelle il a reçu un versement en application de l"article 164.1 : ...
The appellant had taxable income in 1989 and filed a return but without providing the information required as to gross income from the sale of the MacKenzie property. Clearly, it was not the intention of Parliament that taxpayers make undisclosed computations of their income. There is an obvious link between the requirement to compute and the requirement to report. Indeed, the obligation to report is in a prescribed form identifying required information. The form requires that both gross and net income be reported. It therefore follows that sources which must be taken into account in "computing" income must in these circumstances be reported.
[9] With particular reference to the scheme of the sections in question here, it is clear from paragraph 12(1)(b) that amounts receivable from the sale of property must be included in the computation of income on an accrual basis unless one of the exceptions applies permitting a cash basis. It is not argued here that any such exception applies. Consistently with this, paragraph 20(1)(l) allows for the deduction of doubtful debts "that have been included in computing the income of the taxpayer ...." (emphasis added). Such a condition would be almost meaningless if the words "included in computing" did not require the reporting of such income in a current or previous return. That is, the Minister must be able to track back to a particular source of income if a deduction for doubtful debts is to be accepted in respect of that source.
[10] Although the appellant contends that he did take into account both the amounts owing to him and his losses from the sale of the MacKenzie property in calculating his income for 1989, he reported neither on his return because the net proceeds were nil. In his view, the requirement that any such income be "included in computing" income under paragraph 12(1)(b ) did not require reporting of that income. However, he apparently recognized that in order to claim a deduction under subsection 20(1) for purposes of computing income it was necessary to report the reserve for a doubtful debt. The inconsistency of this position demonstrates the need for computing and reporting both gross and net income under these subsections.
[11] It should be noted that this is not a case of a taxpayer filing an amendment to a return where that is allowed or where the Minister, in a reassessment, recognized and acknowledged a previously unreported transaction.3 Nor is this a case in which the Tax Court Judge made a factual finding that the unreported transaction was indeed taken into account in the taxpayer"s computation of his income for that year. I should not be taken as purporting to determine the outcome in such cases.
[12] With respect to the second issue as to whether the appellant had demonstrated that the sum of $132, 146.00 was the amount of a doubtful debt in 1991, the appellant raises two objections to the Tax Court decision. He argues that the Tax Court judge applied the wrong legal test, and also that he ignored relevant evidence. I regret to say that the reasons for judgment of the Tax Court on this point are far from clear. Admittedly the learned judge was faced in this case with a multiplicity of issues and a tangled set of facts. However, while the evidence and arguments of counsel are set out at length, the judge"s own conclusions on the law and facts in the matter of the reserve in question are limited to the following:
| It is clear from the evidence of the Appellant that there was no objective basis for the calculation of this amount and counsel admitted in rebuttal that this was merely the amount that the Appellant calculated as the real value of this asset that remained and that his evidence should be accepted. The Court accepts both arguments of counsel for the Respondent in that regard. |
[13] The appellant says that this indicates that the learned judge misdirected himself in requiring an "objective basis" for calculating the amount. I am unable to say that the judge erred in law: subparagraph 20(1)(l )(i) allows as a deduction "a reasonable amount in respect of doubtful debts" (emphasis added). The term "reasonable" indicates, in my view, that the amount claimed must be demonstrated by the surrounding circumstances to be sound and this test can be described adequately, if elliptically, as an "objective basis".
[14] I agree with the appellant, however, that the trial judge as far as we can tell did not have regard to the appellant"s evidence as to the reasonability of the amount he claimed. The appellant testified as to the failing state of the purchaser"s business and his financial position which made it almost certain that the purchaser could not pay the full price. He also testified as to the deterioration in value of the property and referred to credible information such as the reduction in its assessed value for tax purposes. On its face this evidence, most of it based on sources external to the appellant, appears to provide a reasonable and objective basis for the calculation of the doubtful debt through the reduction in value of the only asset available for recovery of the purchase money. In the face of this evidence the Tax Court simply said, as quoted above, "that there was no objective basis for the calculation". We believe this amounts to a reviewable error of fact. In the circumstances, however, as we have confirmed the finding that no such deduction can be claimed as there was no reporting of the original sale price of the property, the outcome remains the same.
DISPOSITION
[15] The appeal will therefore be dismissed with respect to the deduction of $132,146.00 as a doubtful debt in 1991.
[16] There were, however, two other grounds of appeal where the respondent has agreed with the appellant as follows. The Tax Court judge held that the appellant had twice deducted the same expense of $5,113.00 in respect to his 1988 taxation year. The respondent now agrees with the appellant that there was no evidence on this point and that it was not an issue in dispute; nor was it the subject of any reassessment by the Minister. The appeal should therefore be allowed on this issue, by consent.
[17] The Tax Court also held that penalties should be imposed under subsection 163(2) on the appellant for failure to report certain amounts of income in respect of the sale of his personal residence, such failure amounting to "gross negligence". The respondent now agrees with the appellant that the evidence could not support such a finding and that no such penalty should be imposed. The appeal should be allowed in this respect as well, by consent.
[18] The respondent should be awarded costs of the appeal.
"Barry Strayer"
J.A.
March 20, 2000
Ottawa, Ontario
I agree
"J. Richard"
C.J.
I agree
"Marshall Rothstein"
__________________3 Cf. 92735 Canada Ltd. v. Her Majesty the Queen [1999] 2 C.T.C. 2662 (T.C.C.).