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canadian tax journal / revue fiscale canadienne (2010) vol. 58, no 2, 229 - 76

229

Substantiating an ABIL Deduction: An Analysis of the Key Elements

Maureen Donnelly and Allister Young*

P R É C I S

Depuis plus de 25 ans, les contribuables canadiens contestent en appel les nouvelles cotisations établies en matière de perte déductible au titre d’un placement d’entreprise (PDTPE). La PDTPE est considérée comme l’une des matières du droit fiscal où les contestations et les litiges abondent et sur lequel l’incertitude pèse. Les contribuables qui font appel échouent deux fois plus souvent qu’ils ne réussissent. En 2001, le jugement rendu par la Cour canadienne de l’impôt dans l’affaire Gamus a permis d’y apporter quelques explications. En faisant allusion au nombre de dispositions techniques complexes qui entrent en ligne de compte lorsque les contribuables déduisent une PDTPE, le juge Bowman a relevé quatre éléments qui doivent converger pour que l’appelant obtienne gain de cause. Le présent article expose les résultats de l’analyse par les auteurs de ces quatre éléments essentiels dans les 240 affaires judiciaires rapportées qui forment la jurisprudence au Canada en matière de PDTPE. Pour chacun de ces éléments, une liste de questions supplémentaires est fournie pour aider les contribuables et leur conseiller à préparer leur dossier dans une affaire portant sur la PDTPE, ainsi qu’une revue des nombreuses affaires pertinentes. Deux autres outils sont offerts en annexe à l’article : un tableau qui présente les jugements de l’étude en fonction de la question abordée et de l’issue de l’instance ainsi qu’un organigramme qui illustre les questions qui, selon chaque situation de fait particulière, pourront nécessiter une réponse adéquate dans l’éventualité d’une contestation en matière de PDTPE. Même si le présent article n’offre aucune solution miracle ni aucune formule scientifique pour garantir la réussite des contribuables, les auteurs souhaitent tout de même aider les contribuables et leurs conseillers à réduire l’incertitude entourant cette matière complexe du contentieux fiscal.

A B S T R A C T

For more than 25 years, Canadian taxpayers have been appealing reassessments of allowable business investment loss (ABIL) deductions. The ABIL is considered to be one of the most widely contested and frequently litigated areas in tax law, and one infused with uncertainty. Taxpayers’ appeals fail almost twice as often as they succeed. In 2001, some light was shed when the Tax Court of Canada issued its decision in the Gamus case.

* OftheFacultyofBusiness,BrockUniversity,St.Catharines,ON(e-mail:[email protected]@brocku.ca).TheauthorsaregratefulforthecommentsprovidedbyAlanMacnaughtonandananonymousreviewer.

230 n canadian tax journal / revue fiscale canadienne (2010) vol. 58, no 2

Referring to the number of complex technical provisions that come into play when taxpayers claim an ABIL, Bowman j identified four elements that must converge if the appellant is to succeed. The purpose of this article is to present the results of the authors’ review of the 240 reported court cases that comprise Canada’s jurisprudence on abils in the context of the four essential elements. For each of these four elements, a further checklist of questions is provided to assist taxpayers and their advisers in preparing an ABIL case, along with a discussion of many of the relevant cases. An appendix to the article offers two additional tools: a table summarizing the cases by issue as well as by outcome, and a flowchart mapping the sequence of questions that, depending on the specific fact situation, may need to be answered when responding to an abil challenge. While there is no magic bullet or scientific formula that will guarantee taxpayers success, it is hoped that this article will be useful to taxpayers and their advisers in reducing the uncertainty in this complex area of tax litigation.

KEYWORDS: APPEALS n BUSINESS TRANSACTIONS n DEBTS n LOSSES n PURPOSE n TAX DEDUCTION

C O N T E N T S

Introduction 231Key Question 1: Did the Taxpayer Invest in Shares or Debt of a Corporation? 233

1. Was There an Investment in the Nature of Shares or Debt? 2352. Was the Investment Made by the Taxpayer (or by Some Other Person)? 2373. Was the Investment Made in a Corporation? 237

Key Question 2: Has the Debt Been Established To Be Bad? 2391. Did the Taxpayer Consider the Relevant Factors? 2412. Can the Taxpayer’s Determination Be Shown To Be Honest and Reasonable? 2413. Was the Determination Made by the Taxpayer Himself or Herself? 2434. Was the Determination Based on Past and Present Experience

(as Opposed to Future Possibilities)? 2445. Was the Taxpayer Required To Take Further Steps To Collect,

and If Yes, Were Those Steps Taken? 2446. Is There a Non-Arm’s-Length Relationship Between the Parties? 245

Key Question 3: Was the Property Issued by a “Small Business Corporation”? 2451. Can the Taxpayer Succeed When Corporate Documentation Contradicts

His or Her Stated Intention? 2482. In Determining the Principal Purpose of the Business, Whose Intention

Is Relevant? 2523. What Is the Relevant Time Period for the Determination of Principal Purpose? 2544. Was the Corporation Carrying On an Active Business? 255

Key Question 4: Was the Property Acquired for the Purpose of Earning Income? 2591. Where the Transaction Is in the Nature of Financial Assistance to a

Family Member’s Business, What Evidence Will the Courts Accept with Regard to Its Purpose? 260

2. Can the Taxpayer Establish Sufficient Nexus Between Himself or Herself and the Income? 264

Faint Hope 265Original Purpose 268Expectation Versus Right 269

Conclusion 272

substantiating an abil deduction n 231

INTRO DUC TIO N

Inthe2001caseofGamus v. The Queen,1theissuebeforetheTaxCourtofCanadawaswhethertheappellanthadsustainedanallowablebusinessinvestmentloss(ABIL)in1992.SheclaimedthatshehadsustainedabusinessinvestmentlossinrespectofaloanthatsheandherhusbandhadmadetoBIMPEnterprisesLtd.(“BEL”).Inar-rivingatadecisionintheappellant’sfavour,BowmanJnotedthecomplexityoftheABILprovisions2andsetoutalistoffouressentialcriteriaforasuccessfulABILclaim:

[AnABIL]involvesasomewhatcomplexinteractionofparagraphs3(d),38(c),39(1)(c),section50,subparagraph40(2)(g)(ii)andthedefinitionof“smallbusinesscorporation”insection248.

Here,fourelementsmustconvergeiftheappellantistosucceed:(a) BELmusthavebeenindebtedtotheappellantin1992(b) thedebtmusthavebecomeabaddebtinthatyear...(c) BELmusthavebeenasmallbusinesscorporation...(d) thedebtmusthavebeenacquiredforthepurposeofgainingorproducingin-

comefromabusinessorproperty.3

At theCanadianTaxFoundation’s2006annual conference,EdwinKroftwasaskedtocommentoncurrenttrendsandthehottopicsoftheday.Inhisremarks,helistedABILsasonetopicthatwouldcontinuetodominatethetaxlandscapeintermsofboththehighvolumeofcasesandthehighdegreeofuncertainty:“The

Appendix Classification of ABIL Cases and Flowchart for Evaluating ABIL Claims 272Business Versus Capital 273Quantum 274Arm’s Length 275Election 275Taxation Year-End 275

1 [2001]3CTC2342,atparagraph2(TCC).

2 Unlessotherwisestated,statutoryreferencesinthisarticlearetotheIncomeTaxAct,RSC1985,c.1(5thSupp.),asamended(hereinreferredtoas“theAct”).Thedetailsoftherelevantprovisionsareaddressedbelowinthetextaswellasintheflowchartincludedintheappendix.Ingeneralterms,theyprovideasfollows:paragraph39(1)(c)definesataxpayer’s“businessinvestmentloss”forataxationyearasbasicallyalossarisingfromthedispositionofsharesordebtofasmallbusinesscorporation(SBC);subsection248(1)definesa“smallbusinesscorporation”tobeaCanadian-controlledprivatecorporationwhoseassetsareusedprincipallyinanactivebusinesscarriedonprimarilyinCanada;subsection50(1)appliestosuchdispositionswhentheyoccuratnon-arm’s-length;andsubparagraph40(2)(g)(ii)requiresthetaxpayertodemonstratethattheshareordebtwasacquiredforthepurposeofearningincome.Wheretheforegoingconditionsaremet,50percentofthelossamountbecomesanABILunderparagraph38(c).

Finally,paragraph3(d)permitsanABILtobedeductedalongwithotherlossesfromnon-capitalsourcesagainstallsourcesofdivisionBincome.

3 Supranote1,atparagraphs10-11.NotethatinGamus,theABILclaimwasbasedonabaddebt;therefore,thefourcriteriarelateonlytobaddebtcases.


ABILcaseskeepbeingheardbytheTaxCourt.Taxpayerssometimeswinandsome-timeslose.”4ThepurposeofthisarticleistoprovidetaxpayersandtheiradviserswithtoolstoassisttheminpreparinganABILcase.Tothatend,wehaveconductedareviewofthe240reportedcourtcasesthatcompriseCanada’sjurisprudenceonABILs.Inthebodyofthearticle,wepresentasummaryandanalysisofthecaselawusing Bowman J’s four-element test. After amending his wording, reproducedabove,toremovefact-specificreferencestotheGamuscase,wehaverecastthetestintheformoffourkeyquestions:

1. Didthetaxpayerinvestinsharesordebtofacorporation? 2. If the investment is debt, and not owed to a corporation with which the

debtorcorporationdoesnotdealatarm’slength,hasthedebtbeenestab-lishedtobebadasrequiredunderparagraph50(1)(a)?Iftheinvestmentisashare,hasthesharebecomeworthlessinthecircumstancesreferredtoinpara-graph50(1)(b),orhasitbeensoldatalossinanarm’s-lengthtransaction?

3. Wastheproperty(shareordebt)issuedbyasmallbusinesscorporationasdefinedinpartXVIIoftheAct?

4. Wasthepropertyacquiredbythetaxpayerforthepurposeofearningincomeasrequiredundersubparagraph40(2)(g)(ii)?

Foreachofthesefourquestions,weprovideafurtherseriesofsubquestionstoassisttaxpayersandtheiradvisersinrespondingtoanABILchallenge,alongwithadiscussionofmanyoftherelevantcases.Byourcount,over70percentofthecaseshadoneofBowmanJ’sfourelementsastheprimaryissue.(Thetaxpayerwassuc-cessfulin37percentofthe240cases.)GiventhecomplexityofthelegislationandthereportedpropensityofthetaxauthoritiestoscrutinizeABILclaims,5muchhasbeenwrittenonthetopic.6Inthisarticle,wehopetoaddtotheABILliteratureintwobasicways:first,toprovideacomprehensiveguidetotheABILjurisprudenceby

4 JohanneD’Auray,EdwinG.Kroft,andRogerE.Taylor,“CurrentCases,”inReport of Proceedings of the Fifty-Eighth Tax Conference,2006ConferenceReport(Toronto:CanadianTaxFoundation,2007),7:1-21,at7:16.

5 AccordingtoBrianPosthumus,“[a]necdotalevidencesuggeststhatmostindividualtaxreturnsfiledwithanABILdeductionareflaggedforpre-assessmentreview.Thevolumeofcaselawonthesubjectsuggeststhattheseclaimsarewidelycontestedandthoroughlyexamined.”BrianPosthumus,“TaxLossPlanningfortheOwnerManager—AnUpdateonClaimingAllowableBusinessInvestmentLosses,”in2008 Prairie Provinces Tax Conference(Toronto:CanadianTaxFoundation,2008),tab12,at2.

6 See,forexample,MaxWederandCarolynMacDonald,“AllowableBusinessInvestmentLosses:WhatToDoWhentheCRACalls,”in2009 British Columbia Tax Conference(Toronto:CanadianTaxFoundation,2009),tab7;DavidP.Webb,“BusinessInvestmentLosses,”in1993 Ontario Tax Conference(Toronto:CanadianTaxFoundation,1993),tab4A;JeffreyA.Nightingale,“SelectedSmallBusinessIssues,”in2002 Ontario Tax Conference(Toronto:CanadianTaxFoundation,2002),tab2;DavidW.Middleton,“TheDeductibilityofGuaranteePayments,”in1991 Ontario Tax Conference(Toronto:CanadianTaxFoundation,1991),tab2B;andPosthumus,supranote5.


summarizingalltherelevantcasestodate;and,second,toorganizethatjurispru-dencebyissue.Mostimportantly,wehopetoreducetheuncertaintyfacedbyABILclaimantsandtheiradviserswhenreassessed;thisarticlemaybearesourceforiden-tifyingpreviouscaseswithsimilarfactsandissues,thosecasesinwhichthetaxpayersucceeded,andthereasonsforthedecisionsinthetaxpayer’sfavour.

AnappendixtothearticleofferstwoadditionaltoolsforABILclaimantsandtheiradvisers:atablesummarizingthe240ABILcasesbyissueandbyoutcome;7and,todeconstructthe“complexinteraction”(toquoteBowmanJ)ofthenumerousprovi-sionsthatmakeuptheABILrules,aflowchartmappingthesequenceofquestionsthat—depending on the specific fact situation—may need to be answered whenrespondingtoanABILchallenge.

ThetransactionthatformsthebasisforanABILclaimbeginswhenanindividualadvancesfundsinexchangeforsharesordebtissuedbyacorporationthatisasmallbusinesscorporation(SBC).(ThedefinitionofanSBCwillbediscussedinalatersectionofthearticle.)Inalargenumberofcases,theABILclaimischallengedbe-cause,intheopinionofthetaxauthority,thetaxpayerhasfailedtoestablishoneormoreofthebasicelementsofthetransaction—

1. the“WHAT”of the transaction—that is, thenatureof the investmentasbeingeithersharesordebt;or

2. the“WHO”ofthetransaction—thatis,eithera. thatthedebt/sharewasheld,asalleged,bythetaxpayer(asopposedto

someotherperson),orb. thatthedebt/sharewasissued,asalleged,bythecorporation(asopposed

tosomeotherperson).

We will examine each of these elements in turn, beginning with our first keyquestion.

K E Y QUE S TIO N 1: DID THE TA X PAY ER IN V E S T IN SH A RE S O R DEBT O F A CO RP O R ATIO N?

Inanumberofcases,thetaxpayerisgenerallyunabletoprovidesufficientevidenceofthebasicfactsituationuponwhichtheABILclaimisfounded.Forexample:

n InKornelow v. MNR,althoughthetaxpayerpresentedmorethanadozendocu-mentsasexhibits,showingborrowings,guarantees,repayments,andmortgagesbetweenhimself,hiswife,hismother-in-law,andacorporation,“therewasnosatisfactorysubstantiation”ofhisclaimthatthecorporation“waslegallyindebtedtohimandthisindebtednessgaveriseto”theABIL.8

7 Weexplainintheappendixhowtheclassificationprocesswascarriedout.Thefulllistofthe240casesandtheclassificationgiventoeachisavailablefromeithertheauthorsortheCanadianTaxFoundationlibrary.

8 91DTC431,at433(TCC).


n InKatzenstein v. Canada,Mr.Katzenstein, appearingas agent forhiswife,offered“noexplanationastohowthebusinessinvestmentlossfigureswerearrivedat.”9

n IntheunfortunatecaseofChiarelli et al. v. R,althoughMs.Chiarelliwasrepre-sentedbyanagentwhowas“anaccountant,entrepreneurandformerauditorwithSpecialInvestigations,RevenueCanada,”thecourtfoundtheevidence“imprecise”ornotsupportedbycleardocumentation.10

n TheappellantinThibeault v. The Queenneededthecourt“tosubstituteforthefactsaninterpretationnotconsistentwithreality”andagainoffered“mereoralstatementsunsupportedbyanydocuments.”11

n Thetaxpayer inMcIntosh v. Ralsofailedasaresultofwoefully inadequateevidence:

ThereissimplynothingheretosupportthatthecorporationwasorcouldbeperceivedtobeindebtedtotheAppellantinanywaythatwouldsubstantiateabaddebt....

IfataxpayerisinvolvedinbusinessactivitiesandexpectstomakecertainclaimsundertheIncome Tax Act,hemustcometocourtpreparedtoprovide,atminimum,theessentialdocumentationforthecourttogivehimtheclaim.12

n InPeters v. MNR,“theAppellant’sevidence,suchasitisinthismatter,lacksanysubstantiationwhatsoeverandisincredible.”13

n Finally,inAllegritti v. R,thecourtdeniedtheABILclaimonthebasisthattheappellantshadonly“vaguememories”of the transactionbecause theirac-countanthad“workeditout.”14

9 [1993]1CTC2645,at2646(TCC).

10 [2001]3CTC2039,at2040(TCC).

11 2005DTC720,atparagraphs41and42(TCC).

12 [2003]3CTC2423,atparagraphs17and19(TCC).

13 93DTC422,at424(TCC).SeealsothedecisionoftheTaxCourtofCanadainAbrametz v. R,[2007]5CTC2157,atparagraph15:“Evenallowingforthebreakdowningoodrecordskeeping[sic]thatmayariseinthecircumstancesofafailingbusiness,itstrikesoneasoddthattheAppellantiswithoutthecorporate,bankingorlegalrecordstosubstantiatehisclaim.”TheFederalCourtofAppealdisagreed:“[T]heTaxCourtJudgereachedthatconclusion‘bywayofinference,’havingregardtothe‘weaknessoftheAppellant’stestimony’andtheabsenceofseeminglysimplelegaldocumentationtosubstantiatethetransferofthoseshares.Whileitisundoubtedlytruethattheappellant’stestimonywasconsiderablylessthancrystalclear,therecordcontainssignificantevidence,inadditiontotheappellant’stestimony,thatpointstotheconclusionthattheappellanttransferredhissharesofPlacidtoMr.Paulhus.”Abrametz v. Canada,2009FCA111,atparagraph41.(NotethatAbrametz’sappealforanABILwasdeniedowingtohisfailuretoprovidesufficientevidencetosubstantiatetheinvesteecorporationasanSBC.)AlsoseeIsaman v. The Queen,2003DTC994,atparagraph5(TCC):“[N]odocumentaryorotherevidenceexiststosupporthisassertion.”

14 [1997]2CTC2114,atparagraph9(TCC).AlsounsuccessfulonsimilargroundswerethetaxpayersinBurkart et al. v. The Queen,98DTC1328(TCC),andKaupas v. R,[2004]1CTC3025(TCC).


In all of these cases, the court lacked sufficient evidence to determine whattransaction(s)(ifany)tookplacethatcouldformthefoundationforanABILclaim.Thereareanumberofothercases inwhichtheevidencewastherebut ledtoaconclusionthatwasinconsistentwiththeclaim.Thesecasestendtofallintothreetypesofscenarios,givingrisetothree,morespecific,subquestions:

1. Wasthereaninvestmentinthenatureofsharesordebt? 2. Wastheinvestmentmadebythetaxpayer(orbysomeotherperson)? 3. Wastheinvestmentmadeinacorporation?

1. Was There an Investment in the Nature of Shares or Debt?

AnumberofABILclaimsarechallengedonthegroundsthatwhatthetaxpayerre-ceivedinreturnforfundsadvancedtoaqualifyingcorporation—the“WHAT”ofthetransaction—waspropertyotherthantherequiredsharesordebt:

n Bhaganididnothavesharesordebt—hehadajudgmentagainsthim.15

n McHalehadguaranteedadebtbutnotactuallypaidanythingatthetimeinquestion.16

n Monacohadpurchasedrightsnotshares.17

n Barker’sconsiderationwasachoseinaction(areleasefromaguarantee).18

n Dastousagreedtoforgoprofessionalfees.19

InGrant et al. v. The Queen,thecourtfoundthatthetaxpayerhad

clearlyputsomemoneyintotheprojectbutitisunclearhow.Certainlyitwasnotbywayofaloantoorsubscriptionforsharesofanyofthecorporateentitiesthatseemedtobefloatingaround.20

Again,thereistherecurringthemeofinadequatedocumentation.InBullas v. The Queen,theFederalCourtofAppealagreedthatMr.Bullas“wasunabletoproduceadequaterecordsorotherevidence”ofhisinvestment.21

PoorrecordkeepingdoesnotnecessarilyresultindenialofanABILclaim,buthowhopefulshouldataxpayerbeinthisregard?Consider,forexample,Chandan v.

15 Bhagani v. R,[2004]4CTC2367(TCC).

16 McHale v. MNR,92DTC1781(TCC).

17 Monaco v. R,[2000]2CTC2277(TCC).

18 Barker v. R,[2002]3CTC2055(TCC).

19 Dastous v. R,[2004]3CTC2264(TCC).SeealsoSandner et al. v. MNR,93DTC901(TCC),wherethetaxpayermistakenlybelievedthathehadincurredindebtedness“tantamounttopayment”onaloanguaranteewhenthebankregisteredajudgmentagainsthisland.

20 (2000),54DTC1985,atparagraph32(TCC).

21 2002DTC7043,atparagraph1(TCC).


The Queen.22Despite“abysmal”recordkeeping,sobad“thattheappellantdidnotknowwhattheformofhisinvestmentwas,”23thecourtwasconvincedthat

losseswereobviouslyincurred.Thisisnotacasewherethereisdoubtastowhetheranymoneywasinvested.24

Thetaxpayer,abusdriverbyoccupation,succeededlargelybecausehecouldproducethird-partydocumentstosupporthistestimony,becausehisstorywas“plausible”enoughtoestablishaprimafaciecase,and,mostsignificantly,becausetheCrownpresentednocontradictoryevidence.WoodsJclarifiedthecourt’sapproachregard-ingtheissueofrecords:

Counselalsoreferredtodecisionsthatemphasizetheimportanceofrecord-keeping....Ataxpayerisrequired...tokeepappropriaterecordssothattheincometaxreturnscanbeverifiedandataxpayerwhofailstokeepadequaterecordsmayhavetheirclaimsdisallowed.Aclaimforadeductionisnotnecessarilytobedenied,however,becausethetaxpayerfailedtokeepadequaterecords.Therequirementisthataprima faciecasebeestablishedand,inmyview,thatiswhattheappellanthassucceededindoing.25

Bowman J subsequentlyaffirmed this approach inBenjamin v. The Queen andofferedanevenmorehopefulpicturefortaxpayerscomingbeforethecourtwithinadequaterecordswherecredibleoraltestimony(eveninconsistenttestimony)ispresented:

Here,theappellantinadditiontohisowntestimonycalledtheothertwoshareholderswhobothtestifiedthattheappellantloaned$50,000tothecompany.Theywerecred-iblewitnesses and I accept their testimony.Counsel for the respondentpointed tosome inconsistencies in their testimony.Onesaid that the$50,000waspaid to thecompanyinonelumpsum,theappellantsaidhepaiditintwoandthethirdwasun-certain.Itisnotsurprisingthattheremightbesomelapsesofmemoryaftertenyears.Farfromdetractingfromtheappellant’stestimonythesediscrepanciesenhanceit.Itprovesthatthethreedidnotgettogetherandconcoctaconsistencyinthedetailsoftheirstory.Iamnotpreparedtoattributetothesewitnessessuchadegreeofingenuitythattheyconcoctedinconsistenciestomaketheirstorylookcredible.26

22 2005TCC685.

23 Ibid.,atparagraph8.


25 Ibid.,atparagraph34.Ontheissueoftaxpayeronus,seealsoGregory v. R,[1999]1CTC2279,atparagraph6(TCC):“CounselfortheRespondentarguedthattheappealshouldbedismissedbecausetheAppellanthadnotprovenwithaprecisepapertrail....Counseliscorrect...butsomecredencemustbegiventotheverybelievableswornanduncontradictedevidenceoftheAppellanthimselfplusthecorroboratingdocuments.WhiletheonusofproofisontheAppellant,itisonlyacivilonus.IamsatisfiedthattheAppellantdischargedtheonusonhimandshiftedtheonustotheRespondent.”



2. Was the Investment Made by the Taxpayer (or by Some Other Person)?

Althoughtheformoftheinvestmentmaybeestablishedasdebtorshares,thestum-blingblock in the casemaybe establishing the “WHO”of the transaction—inparticular,establishing the identityof the investoras the taxpayer.Often, familymembersorotherrelatedpersonsareinvolved.InWierbicki v. The Queen,27forex-ample,anothercasewheremanyoftherequiredelementswereunsupported,someoftheindebtednessappearedmorelikelytobeowedtothetaxpayer’swifeandotheramountstohismother-in-law.ThetaxpayersinBeaulac v. The Queen28andYiouroukis v. The Queen29were foundtobeassertingclaimsbasedon loans thatweremorelikelytakenoutbytheirspouses.In817254 v. The Queen,theidentitiesofthebor-rowerandthelenderwerefoundnottobeasclaimed.30Bycontrast,considerAir Rock Drilling Co. Ltd. et al. v. The Queen.31Eventhoughtheappellantwasfoundnottobeinfactashareholderofthedebtorcorporation(“CPI”),andtherecordkeepingwas“sloppyandinaccurate,”thecourtallowedtheclaimonthebasisthat“AirRockwasanindirectbutequitableshareholderofCPI.”32

3. Was the Investment Made in a Corporation?

Theother“WHO”ofthetransaction—theidentityoftheinvestee—isoftenthebasis foranABILchallenge.Taxpayersmostoftenlosethesecaseswhentheyarefoundtohaveadvancedfundstootherindividualspersonallyinthehonestbeliefthatthefundswillthenfindtheirwayintostartuporstrugglingbusinesscorpora-tions.33InBrand v. The Queen,34althoughthetaxpayerhadadvancedfundstohissonanddaughter,credibletestimonyandsupportingdocumentaryevidenceledtothefindingthatthechildrenhadinfactreceivedtheloansintrustfortheircorpora-tions.This“intrust”argumentfailedinMackay v. The Queen,35wheredocumentary

27 2000DTC6243(FCA).

28 2000DTC2218(TCC). 29 99DTC333(TCC). 30 98DTC1192(TCC).Thecourtdescribedthetestimonyofthesoleshareholderas

“reprehensible,scandalousandoutrageous”(at1196). 31 99DTC617(TCC). 32 Ibid.,atparagraph51.PerhapsthisdecisioncanbebestexplainedbythefactthatbothAir

Rockanditsowners(theappellantindividuals)wereallatarm’slengthwithCPI. 33 See,forexample,Marceau v. The Queen,2005DTC446(TCC);Wieler v. R,[2001]3CTC

2142(TCC);St. Martin v. R,[1998]4CTC2656(TCC);McDonald v. The Queen,98DTC2223(TCC);Shoeman v. The Queen,2004DTC2500(TCC);Crane v. The Queen,99DTC3521(TCC);andStern v. The Queen,2004DTC3260(TCC).

34 2005DTC1249(TCC). 35 2006DTC3653(TCC).InTurcotte v. R,[2000]2CTC2369(TCC),thetaxpayerwasableto

produceevidencethattheindividualintowhosehandsthefundswerepaidwasactingasamandataryforthecorporation,notwithstandinganotarizedloancontractshowingthisindividual,andnotthecorporation,astheborrowingparty.Thecourtdoubtedtheauthenticityofthis“irregular”document.


evidence contradicted the appellant’s testimony as to what she believed she waspurchasing.

Alternatively,thebarriertotheclaimmaybethattherecipiententityisinsomeotherlegalform,asinMarkovzki v. The Queen36(atrust),Jones v. R37(ajointventure),andSmilovici v. R38(apartnership).InYau v. R,39ontheotherhand,thetaxpayerwasreassessed,likeSmilovici,onthebasisthathehadadvancedfundstoapartnershipatatimewhenthecorporationdidnotexist.UnlikeSmilovici,Yauwonhisappealbecausehehadcorroboratingdocumentaryevidence:hehadsuedtorecoverthedebt,andthejudgmentnamednotonlythepartnersbutalsothesubjectcorpora-tion.InEynan v. R, thetaxpayer“statedthatsheinvested$40,000 inhorseswithSilverUnicornInc.”40Moreaccurately,sheboughtpartialownershipinthehorsesdirectly,andnotsharesinthecorporation.

ThedecisionsinHuneault v. R41and,fiveyearslater,Chambly Radios Communi-cations Cellulaires v. The Queen42provideaninterestingcomparisonwheretwocaseswithsimilarfactsproduceoppositeoutcomes.Inbothcases,theministerconsideredthattheappellanthadloanedfundstoanindividualwithwhomtheappellanthadabusinessrelationship,andnottoacorporation.InHuneault,theappellantmadea loantoaMr.Gauthier,whowasthesoleshareholderofastrugglingbusiness,JanréLtée.Althoughthecourtunderstoodthemotivationfortheformofthetrans-action,precedentseemedtorequirethattheformofthetransactiondeterminetheoutcome:

AsJanréLtéewasonthepointofbankruptcyitishighlylikelythattheappellantandMr.GauthierdeliberatelyagreedtomakealoantoMr.Gauthierdirectlysothelattercouldcontrolwherethemoneywent.Iftheloanhadbeenmadetothecompanydir-ectly,inviewofthefactthattherewasalreadyapetitionpendingtoappointaninterimreceiver,Mr.Gauthierwouldhavelostcontrolofit.

Further,intaxmattersformtakesonsomeimportance.InthisconnectionIwouldrefertotheFederalCourtofAppealjudgmentinFriedberg v. R(1991),92D.T.C.6031(Fed.C.A.),at6032:

Intaxlaw,formmatters.Ameresubjectiveintention,hereaselsewhereinthetaxfield,isnotbyitselfsufficienttoalterthecharacterizationofatransactionfortaxpurposes.Ifataxpayerarrangeshisaffairsincertainformalways,enor-moustaxadvantagescanbeobtained,eventhoughthemainreasonforthesearrangementsmaybetosavetax(seeThe Queen v. Irving Oil91DTC5106,per

36 98DTC2040(TCC).

37 [1996]2CTC2246(TCC).

38 [2006]1CTC2578(TCC).

39 [2005]3CTC2124(TCC).

40 [2001]2CTC2140,atparagraph3(TCC)(emphasisadded).

41 [1998]3CTC2788(TCC).

42 2003TCC3957.


Mahoney,J.A.).Ifataxpayerfailstotakethecorrectformalsteps,however,thetaxmayhavetobepaid.43

SimilarlyinChambly,thefundswereadvancednottothecorporationbutdelib-erately to its individualowner, so that theycouldbeused topayemployeesandavoidseizurealongwiththeothercorporateassets.AlthoughtheCrownarguedthatthetransactionhadtobe“understoodinitsliteralsenseandnotinlightoftheintentionbehindit,”TardifJ,allowingtheappeal,explained:

Iagreewiththiscontention,althoughIdonotbelievethatitwarrantssucharigidinterpretation.

Thecontextandallofthecircumstancesmustnotbeoverlookedinassessingthenatureofatransaction.Anoverlyconservativeandrigidapproachcouldoftenparalyzetheordinarycourseofbusiness.Itwouldthenbenecessarytocallonexpertsinordertodraftalladministrativedocuments.44

K E Y QUE S TIO N 2: H A S THE DEBT BEEN E S TA BLISHED TO BE B A D?

TheFederalCourtofAppealhaditsfirstopportunitytodeterminewhetheradebthasbecomebadintheABILcontextinits2003hearingofRich v. The Queen.45TheministerhaddisallowedanABILclaimedbyLarryRich,anaccountant(infact,afellowoftheaccountingprofession),inhis1995taxreturn.ThelossrelatedtoadebtowedtoRichbyacorporationknownasDMS,ofwhichheowned25percentandofwhichhis son (whoalsoowned25percent)was themanager.46Rich senior (thetaxpayerinthecase)consideredthedebttobebad,largelyonthebasisofanex-change of letters: he wrote to DMS asking when he might expect repayment, towhichhissonresponded,probablynever.TheTaxCourtofCanadadisagreedwiththetaxpayer’spositionthatthedebtwasthenestablishedtobeabaddebtandcon-cludedthatheshouldhavemadea“concreteeffort”tocollect.47Richappealed.

Inamajoritydecision,theFederalCourtofAppealfoundinfavourofthetax-payer.Writingforthemajority,RothsteinJsetoutalistofsevenfactorsthatinthecourt’sopinion“usuallyshouldbetakenintoaccountindeterminingwhetheradebthasbecomebad.”48Thislistoffactorshasbeenheavilyrelieduponinmanycases.Itincludes:

43 Huneault,supranote41,atparagraphs29-30.

44 Supranote42,atparagraphs29-30.

45 2003DTC5115(FCA).

46 Theson’sfather-in-lawownedtheother50percent.

47 Rich v. R,[2002]1CTC2224,atparagraph29(TCC).Therewasalsoanissueofpurposeundersubparagraph40(2)(g)(ii),discussedinalatersectionofthisarticle.

48 Supranote45,atparagraph13.


1. thehistoryandageofthedebt;2. thefinancialpositionofthedebtor,itsrevenuesandexpenses,whetheritisearn-

ingincomeorincurringlosses,itscashflowanditsassets,liabilitiesandliquidity;3. changesintotalsalesascomparedwithprioryears;4. thedebtor’scash,accountsreceivableandothercurrentassetsattherelevant

timeandascomparedwithprioryears;5. thedebtor’saccountspayableandothercurrentliabilitiesattherelevanttime

andascomparedwithprioryears;6. thegeneralbusinessconditionsinthecountry,thecommunityofthedebtor,

andinthedebtor’slineofbusiness;and7. thepastexperienceofthetaxpayerwithwritingoffbaddebts.49

Interestingly,thecourtbaseditsapproachonjurisprudencethatwasahalf-centuryoldandpredatedtheABILlegislationby25years.The1953caseofNo. 81 v. MNR50laidoutfactorsforthedeterminationofdoubtfulaccountsforaccountingpurposes;thislistoffactorswasthenusedinthe1956caseofHogan v. MNR51indeterminingwhendebtsbecomebadforthepurposesofwriteoffastaxdeductions.52ThissamelisthasnowcometoconstitutetheacidtestforABILbaddebts.

Inaddition,theCourtofAppealinRichlaidoutanumberofotherconsiderationsthatweseeappliedrepeatedlyinABILcasesinvolvingthebaddebtdetermination.Onthebasisofourreviewofthecaselawonthisissue,wesuggestthefollowingsetofquestionsasachecklisttoassisttaxpayersandtheiradvisersinmeetingthebur-denofestablishingabaddebtforthepurposesofsubsection50(1)oftheABILrules:

1. Didthetaxpayerconsidertherelevantfactors? 2. Canthetaxpayer’sdeterminationbeshowntobehonestandreasonable? 3. Wasthedeterminationmadebythetaxpayerhimselforherself ? 4. Wasthedeterminationbasedonpastandpresentexperience(asopposedto

futurepossibilities)? 5. Wasthetaxpayerrequiredtotakefurtherstepstocollect,andifyes,were

thosestepstaken? 6. Isthereanon-arm’s-lengthrelationshipbetweentheparties?

Letusconsidereachquestioninturnasithasbeenreflectedinthejurisprudenceonthispoint.

49 Ibid.

50 8TaxABC82.

51 56DTC183(TAB).

52 Currentlyparagraph20(1)(p)deductions.


1. Did the Taxpayer Consider the Relevant Factors?

AlthoughRothsteinJcautionedthatthelistoffactors“isnotexhaustiveand,indif-ferent circumstances,one factoror anothermaybemore important,”53 it seemsquiteclearthatacompletefailuretoaddressanyofthefactorsmaywellbefataltothetaxpayer’scase.Indismissingthetaxpayer’sappealinBarrie v. The Queen,theTaxCourtobserved,“NotoneofthefactorssummarizedbyRothsteinJA,inRich v. CanadawasseriouslyconsideredbyMr.Barrie.”54

2. Can the Taxpayer’s Determination Be Shown To Be Honest and Reasonable?

LiketheruleondoubtfulaccountssetoutinHogan,thereis“nonecessitythatadebtbeabsolutelyirrecoverable”55aslongasthetaxpayeracted“honestlyandrea-sonably”inmakingthebaddebtdetermination.56Injudgingthereasonablenessofthetaxpayer’sdetermination,thecasesrefertothestandardofa“prudentbusiness-man,”57a“pragmaticbusinessman,”58ora“goodfaithobjectiveassessment.”59Thetaxpayer’spositiononthereasonablenessofhisorherdeterminationwillbebut-tressedif“solid,competent,professionalaccountingrecords”canbepresentedinevidence.60

Thosetaxpayerswhocontinuetoadvancefundstoadeadbeatdebtormayhavedifficultyestablishingthemselvesbeforethecourtaseitherreasonableorprudent.Moreoftenthannot,continuingtolendmoneyundersuchcircumstancesdealsafatalblowtothecase.InGiahinejad v. R,forexample,thecourtseemedtobegoingaboveandbeyondinhelpingthetaxpayertoprovehercase,butwasunabletoig-noreher“totalfailuretoshowthatthedebtwentbad.”61


54 2004DTC2176,atparagraph37(TCC).SeealsoLitowitz v. The Queen,2005DTC1469(TCC).

55 Berretti v. MNR,86DTC1719,at1722(TCC).

56 Theissueofwhetherthetaxpayerhadanhonestandreasonablebeliefintheuncollectibilityofthedebtisaddressedin,forexample,Kyriazakos v. The Queen,2007DTC373(TCC);Deck et al. v. The Queen,2002DTC1371(TCC);andAnjalie Enterprises Ltd. v. The Queen,95DTC216(TCC).

57 Flexi-Coil Ltd. v. The Queen,96DTC6350(FCA);Netolitzky v. The Queen,2006DTC2953(TCC).

58 Campbell v. The Queen,2000DTC2528(TCC);Roy c. R,[2004]2CTC2519(TCC);Orlando v. The Queen,99DTC1201(TCC).

59 AsinNetolitzky,supranote57.

60 Rich,supranote47,atparagraph22(TCC).SeealsoCackirovski v. R,[2003]2CTC2155(TCC),ontheneedforrecords.However,recallBenjamin v. The Queen,supranote26,wherethelackofrecordswasnotfataltothetaxpayer’scase.

61 [2002]1CTC2141,atparagraph10(TCC).Certainlyataxpayerwho“lent”moneyneverexpectingtogetitbackisdoomed;see,forexample,Kronstal v. R,[1998]4CTC2844(TCC).


ReferringtotheAppellantnotbeingabletorecovertheloansin1997,ontheevidencebeforeme,IcouldnotpossiblyfindthatthesedebtsowingtotheAppellantbythenumberedcompanywerebaddebtsatanytimein1997.EvenonDecember1,1997,theAppellantissuedachequetothecompany...andthenagainonDecember28,sheissuedanevenbiggercheque....Shewasstillinvestingmoneyinthiscompanyinthelastmonthoftheyearand,indeed,inthelastthreeorfourdaysoftheyear.Icannotfind,therefore,thatthecompanywasinsolventorunabletopayherloanswhenshewasstilllendingmoneyattheendoftheyear.Onthatbasisalone,theAppellant’sap-pealcannotsucceed.62

Thejurisprudenceonthisquestionincludesanumberofcaseswheretheminis-teracknowledgedthatanABILhadbeenincurredbythetaxpayerasaresultofadebtgonebadbutcontestedthetaxpayer’sviewastowhen—thatis,inwhichtaxa-tionyear—thesubjectdebtinfactwentbad.63Earl v. MNR64involvedanABILclaimforthe1984taxationyear.Thetaxpayerarguedthathedidnotknowofthedemiseofthedebtorcorporationbecausehehadbeenseriouslyillforseveralyears.Thecourt relied heavily on the right of the taxpayer himself to make the necessarydetermination:

Barringclearevidence to thecontrary, theyearselectedbyanAppellantas that inwhichheand he aloneaccordingtotheAct,establishedthatadebtbecamebad,shouldbetheoneacceptedbytheMinister.65

Onceagain,however,thetaxpayer’spositionmustbeshowntobereasonableinthecircumstancesandconsistentwiththeevidence.InGilhooly v. MNR,66theABILwasclaimedinthetaxationyearinwhichthedebtorcorporationwasdissolved;theministerreassesseditasanABILoftheimmediatelyprecedingtaxationyear,whichwastheyearofthetaxpayer’spersonalbankruptcy.Thetaxpayer’sfailuretoshowtheloanreceivableasanassetwasarguedasevidencethatithadbeenestablishedbyhimtohavebecomeabaddebtinthatyear.TaylorJagreedonthebasisthatthetaxpayer’spositionwasunreasonable:“[T]herationaleuponwhichMr.Gilhoolybasedhiscontention...completelyescapesme.”67Similarly,inRichardson v. MNR,theappellantclaimedthedebtsasbeingbad,butinthecourt’sview,“hisactionsandwordsbeliedthisbothinhisevidenceandwrittenargument.”68

62 Giahinejad,supranote61,atparagraph8.

63 Inadditiontothecasesdiscussedbelow,seeÉ. Lavoie v. Canada,[1994]1CTC2294(TCC),andLee v. MNR,90DTC1738(TCC).

64 89DTC221(TCC).

65 Ibid.,atparagraph10(emphasisadded).

66 87DTC4(TCC).

67 Ibid.,at6.Othercaseswheretheminister’sdeterminationwonoutasmorereasonableoverthatofthetaxpayerincludeMacKenzie & Fiemann Ltd. v. MNR,[1989]2CTC2133(TCC),andMacMillan v. R,98DTC3465(TCC).

68 93DTC258,at260(TCC).


Insomeinstances,itappearsthatthetaxpayersoughttoclaimanABILonadebtthataroseinastatute-barredyear.InDuncan v. MNR,69thebusinesswasfoundtohaveinfactceasedoperationin1973,beforetheenactmentoftheABILlegislation.InTardif v. The Queen,70theministersuccessfullyarguedthatthelosshadoccurredinayearwithalowercapitalgain/lossinclusionratethantheoneclaimedinthetaxpayer’sfilings.

3. Was the Determination Made by the Taxpayer Himself or Herself?

Itseemsclearthatthetaxpayerisnotobligedtoseekthird-partyadvice.InNetolitzky v. The Queen,whentheCrownarguedthatthetaxpayer“oughttohaveobtainedanindependentassessmentoftheamountofthelossandofthecompany’spotentialresalevalue,”thecourtdisagreed,referringtosuchanexpectationas“anunwar-rantedexpansionofthedutyimposedonthetaxpayer”bythelegislation.71

Whileitissettledthatthetaxauthoritycannotsubstituteitsownjudgmentforthat of the taxpayer,72 there is some apparent confusion around the question ofwhetherthestandardforthedeterminationtobereasonableisasubjectiveoranobjectivetest.AccordingtotheFederalCourtofAppealinRich,“theCourtisnottosecond-guessthebusinessacumenoftaxpayers.”73ThatstatementconfirmsthejudgmentoftheTaxCourtinDeck et al. v. The Queen,wherethecourtheldthat“thedeterminationofwhenadebtbecomesabaddebt isasubjectiveonetobemadebythe[creditor]”74asthepartymostfamiliarwithallthefacts.However,thisisnotonallfourswiththemorerecentcaseofKyriazakos v. The Queen,75wherethecourtforgavethetaxpayer’sfailuretoconductarevieworinanywayinvestigatethedebtor’sfinancesbecauseifshehad,shewouldhaveseenthatthefinancialsitu-ation was hopeless. The court’s description of its reasoning is rather enigmatic:“[Thetaxpayer]actedreasonablybasedonwhatshedidnotknow”!76ConsideralsoLitowitz v. The Queen,wherethestandardisambiguouslyexpressedas“areasonableperson,suchasMr.Litowitz.”77

69 86DTC1549(TCC).

70 2006DTC2895(TCC).Theissuewaswhetherthegone-baddatefellin1999orDecember2000.

71 Netolitzky,supranote57,atparagraph13.

72 See,forexample,thewordsofBowmanJinLitowitz,supranote54,atparagraph4:“Theremustbeanelementofcommonsenseandreasonablenessbutsomedeferencemustbepaidtothebusinessman’sjudgement.”


74 Deck,supranote56,atparagraph13.Thecasereportreads“debtor”;however,itisobviousthattheintendedreferencewas“thecreditor.”

75 Supranote56.


77 Litowitz,supranote54,atparagraph10.


4. Was the Determination Based on Past and Present Experience (as Opposed to Future Possibilities)?

Forthemostpart,“possiblerecoveryinthefutureisnotper seabar”tothetaxpayer’scase.78InMonaghan v. The Queen,79forexample,thecourtacceptedtheappellant’sdeterminationthatthedebthadbecomebadasofDecember31,1986eventhough,sixmonthslater,alargeinjectionofcapitalandachangeinleadershiphadturnedthe company into a successful profit-making business once again. On the otherhand,theFederalCourtofAppealinRichdidallowthat

[i]fthereissomeevidenceofaneventthatwillprobablyoccurinthefuturethatwouldsuggest that thedebt iscollectibleonthehappeningof theevent, the futureeventshouldbeconsidered.[However,if]futureconsiderationsareonlyspeculative,theywouldnotbematerialinanassessmentofwhetherapastduedebtiscollectible.80

5. Was the Taxpayer Required To Take Further Steps To Collect, and If Yes, Were Those Steps Taken?

Generally,thetaxpayerisrequiredtotakestepsinpursuitofcollectiononlywhencollectionisreasonablypossible.ThisistheprinciplesetoutbytheFederalCourtofAppealinRich.Othercasesmayusesomewhatdifferentvocabularytoexpressbasicallythatsametest—forexample,“Thereisalimittohowmuchthetaxpayerisexpectedtodo.”81Bycontrast,theTaxCourtin2002hadexpressedtheopinionthatthetaxpayerdidindeedneedtoexhaustallmeansofcollection,82and,accord-ingtothecourtinDeck,“adebtisonlybadwhenithasbeenproveduncollectible.”83More recently, in Kyriazakos, the court provided the following “continuum-of-hope”approachontheissueofwhenfurtherstepsarerequired:

If...thesituationisfoundtobehopeless,thennostepsatallarerequired.Attheotherendofthespectrum,ifthereview,conductedreasonablyandhonestly,suggestsconsiderablehopeforrepayment,Iwouldsuggestsomevigorouspursuitofcollectionshouldbeexpectedbeforewritingoffthedebt.Thegreyareaofcourseiswherethereviewleadstoaconclusionthathopeofcollectionliessomewherebetweenfutileandlikely.Insuchcases,IgleanfromprinciplesinRichthatthecreditor,whilecertainlynotexhaustingallremedies,shouldmakesomeeffortatcollectionbeforebeingabletosay,thedebtisbad.84

78 Berretti,supranote55,at1722.Onthisprinciple,seealsoLitowitz,supranote54,andHoule v. MNR,90DTC1247(TCC).

79 95DTC920(TCC).


81 Netolitzky,supranote57,atparagraph15.

82 Campbell,supranote58.

83 Deck,supranote56,atparagraph13(emphasisadded).

84 Kyriazakos,supranote56,atparagraph14.


Thetaxpayer’sdilemmais,ofcourse,howmucheffortisenough?InKeating v. The Queen,85forexample,theministercontendedthattheappellanttooknostepstorecoverherdebt.Thecourtagreedbutfoundherlackofefforttobereasonableinthecircumstances:

[T]heAppellanthadnoobligationtotakestepstocollectwhenfacedwiththeimmin-entthreatofforeclosureproceedingsagainstherhome....

IbelievethataccordingtotheprinciplesinRich,thepredominantconsiderationisstilltheabilityofthedebtortorepaythedebtinwholeorinpart.ThereisnothinginthefactswhichwouldindicatethatVisualSynergycouldhavepaidanyportionofthatdebtin1998oratanytimethereafter.86

6. Is There a Non-Arm’s-Length Relationship Between the Parties?

Theburdenofestablishingthereasonablenessofthebaddebtdeterminationmaybemademoreonerousinthecontextofanon-arm’s-lengthrelationship.Howmuchmoreonerousisunclear.RecallthatinRichthetaxpayerhadadvancedfundstokeepafloatwhatwasessentiallyhisson’sbusiness,ownedbythetaxpayerhimself,hisson,andhis son’s father-in-law.TheTaxCourtnoted in its judgment the suggestionthat,innon-arm’s-lengthcircumstances,thecourtmaybewelladvisedtobe“doublyvigilant.”87Themajoritydecisionof theFederalCourtofAppealalsosuggestedthatanon-arm’s-lengthrelationshipmay justify“closer scrutiny.”Further,whileEvansJdissentedfromthemajoritydecision,heagreedthatcaseswithrelatedpar-ties,inparticularfamilymembers,requireacloserlook:

Itisadmirablethatparentshelptheirchildrentobecomeestablishedintheircareers.However,whenparentsaskothertaxpayerstosharetheburdenofassistingachild’sstrugglingbusinessbydeductingfromtheirownincomepartofaloanasabaddebt,theycanexpectthetaxauthoritiesandthecourtstoexaminetheclaimwithcare.88

K E Y QUE S TIO N 3: WA S THE PRO PERT Y ISSUED BY A “ SM A LL BUSINE SS CO RP O R ATIO N ” ?

Paragraph39(1)(c)requiresthatthepropertyuponwhichthebusinessinvestmentlossisclaimedbeeither“ashareofthecapitalstockofasmallbusinesscorporation”89or

85 2005DTC743(TCC).

86 Ibid.,atparagraphs15-16.

87 Supranote47,atparagraph21;seealsoTaylor,infranote164.TheTaxCourtinRichexpresseditsreservationsaboutapplyingsuchastringentstandardinthecircumstancesofthecasebeforethecourt(paragraph22).Theissueofinvestmentsinthebusinessesoffamilymemberswillbediscussedatlengthinalatersectionofthearticleinthecontextofthesubparagraph40(2)(g)(ii)purposerequirement.


89 Subparagraph39(1)(c)(iii).


“adebtowingtothetaxpayerbyaCanadian-controlledprivatecorporation...thatis...asmallbusinesscorporation.”90Thedefinitionofa“smallbusinesscorpora-tion,”containedinsubsection248(1),isthusakeyelementofanABILclaim.Agreatmanycasesinvolvethegovernment’schallengeofanABILdeductiononthegroundthattheissuingentitywasnotanSBCbydefinition—thatis,wasnotaCanadian-controlledprivatecorporation(CCPC)whoseassetsareusedprincipallyinanactivebusinesscarriedonprimarilyinCanada.91

Acomprehensivetreatmentoftheconceptandjurisprudenceofcorporatecontrolisbeyondthescopeofthisarticle;however,thereareseveralABILcaseswherethetaxpayer’sclaimwaschallengedonthegroundthatthecorporationinwhichtheshareswereheldorbywhichthedebtwasowedwasnotaCCPCasdefinedinsubsection125(7).InRandhawa et al. v. The Queen,92thescantevidenceprofferedindicatedthatfundshadbeenadvancedinUSdollarstoaUScorporation(andwereinfactbeingrepaidbyaninmateinaUSprison).InBilodeau v. R,theissuewaswhetherthecor-porationwasprivatewhentwopubliccorporationsactingtogetherheldthevotingpower to elect theboardofdirectors.93Survivance (La) c. R94had an interestingoutcome,arguablyinconsistentwithlegislativeintent.Theappellant,apubliccor-poration,soldsharesinitssubsidiarytoaprivatecorporationandclaimedanABILbasedonthefactthat,pursuanttosubsection256(9),thesubsidiarywasdeemedtobeownedbytheCCPCatthebeginningofthedayofthesharesale,withtheeffectthatthedispositionoccurredatatimewhenthesubsidiarywascontrolledbyaCCPCandnotbyapubliccorporation.TheFederalCourtofAppealagreedandcouldfindnoexpressprovisiontothecontrary.95

Taxpayerswhomaybeabletosubstantiatethataninvestmentwasinfactmadecannotalwaysverifythenatureoractivitiesofthecorporationinwhichtheinvest-mentwaslost.Longerich v. The Queen96providesanexample.Thetaxpayer,actingonhisownbehalf,submittedthat“althoughhedidnothavesharesinthesecompanies

90 Clause39(1)(c)(iv)(A).

91 Wecategorized43casesunderthisissue.

92 2001DTC382(TCC).SeealsoLabell v. R,[2000]4CTC2495(TCC),andRobertson v. The Queen,2002DTC3834(TCC).

93 [2000]1CTC2888(TCC).Acasewithsimilarfactsarisingtodaywouldbesubjecttoparagraph(b)ofthedefinitionof“Canadian-controlledprivatecorporation”insubsection125(7).ThisprovisionreversestheruleinSilicon Graphics Limited v. The Queen,2002DTC7112(FCA).SeealsoStriefel v. R,[1999]3CTC2684(TCC),wherethecorporation,previouslyanSBC,hadbeenacquiredbyapubliccompanytwoyearsbeforetheABIL-claimyear.

94 [2007]1CTC189(FCA).

95 Ibid.,atparagraph62:“[S]ubsection256(9)statesaruleofgeneralapplicationastothetimeatwhichcontrolisacquired,andthisruleappliesforthepurposesoftheActunlessitisexpresslyoverridden.Ihavefoundnoprovisionthatwouldshieldtheappellantfromtheapplicationofthisrule.”

96 2004DTC2980(TCC).


theamountsheadvancedrepresentedadebteventhoughtherewasnoloandocu-mentationandno interestpayable.”97Hemade the investment“believing itwasmadewiththetwoCanadiancorporations. . .andthattheyweresmallbusinesscorporations.”98Infact,thefundswerebeingfunnelledtoaHongKongcorporationandclearlycouldnotbetracedtoaninvestmentinanactivebusinessinCanada.ThetaxpayerthenwentontoarguethatsincethetwoCanadiancorporationshadlostthemonieshehadadvancedtothem,theywereinfactcarryingonanactivebusinessinCanada—thatis,thebusinessofdefraudingtheirinvestors.AlthoughthisargumentfailedforthetaxpayerinLongerich,itisnotwithoutsubstance,asshownbythe2004decisioninJohnston v. The Queen.99TheFederalCourtofAppealwasunabletoconcludethattheTaxCourthaderredinacceptingtheappellant’ssub-missionthatthecorporation“wasintheactivebusinessofdefrauding,”usinganelaboratepyramidschemewithover200participants.Theillegalnatureofthebusi-nessdidnothindertheinvestor’sABILclaim:

Thefactthatsuchactivitieswerecriminaldoesnotpreventthemfrombeingcharacter-izedasa“business”forincometaxpurposes.DuringtheperiodinquestionWSLhademployees,premises,warehousesandinventoryandwasengagedinbuyingandsellingmerchandise.Italsohadmoney,albeitadvancesfrompersonsenteringjointventures.Theseassetswereusedtoperpetratefraudonthosepersons.Iconclude,therefore,thatWSLwasusingitsassetsinthebusinessofenticinganddefraudingco-venturers.100

Asnotedabove,theassetsofanSBCmustbeusedprincipallyinanactivebusi-nesscarriedonprimarilyinCanada.Accordingly,theFederalCourtofAppealinFillion v. Canada101hadnotroubledismissingtheABILclaimofataxpayerwhohadbought sharesof a companyallof the assetsofwhichwere located inMali andwhichcarriedonallofitsactivitiesthere.

An“activebusiness”isdefined,inpart,tobe“anybusinesscarriedonbyatax-payerresidentinCanada...otherthanaspecifiedinvestmentbusiness”;a“specifiedinvestmentbusiness” (SIB) isdefined tobe abusiness the “principalpurpose”ofwhichistoderiveincomefromproperty.102MostofthejurisprudenceintheSBCcategoryinvolvestheclaimbytheministerthattheissuingcorporation,althoughaCCPC,wasinfactanSIB.Theassessmentmosttypicallyallegesthatthecorporation’sprincipalpurposewastoproduceincomefromproperty;mostoftenthetaxpayer’s


98 Ibid.

99 2000DTC1864(TCC).

100 Ibid.,atparagraph62.SeealsoLangille v. The Queen,2009DTC1103(TCC),wherethetaxpayer,anotherindividualdefraudedbyWSL,wasalsosuccessfulonthesameissue.

101 58DTC6579(FCA).

102 Seesubsection248(1),thedefinitionof“activebusiness,”andsubsection125(7),thedefinitionof“specifiedinvestmentbusiness.”


responseisthatthecorporation’sprincipalpurposewasinsteadeithertoearnincomefromabusinessortobuyandresellpropertytoproducecapitalgain.Inarecentcaseonthisissue,Glynn v. R,103theappellanthadinheritedahouse,whichshethentransferredtoapreviouslydormantcorporation(“TOI”).Whenthetaxpayer’sstatedintention of using the house as a bed and breakfast failed to materialize,104 TOIrentedthehouseoutinstead.Afterfiveyearsofrentalincomeasitssolesourceofrevenue,TOIsoldthehouseandceasedoperating.TheappellantclaimedanABILofapproximately$36,000.Thecourt’sanalysisfocusedontheprincipalpurposeofthecorporationandbeganbystatingthatthetestfordeterminingprincipalpurpose“isgenerally considered as being what the corporation actually does and what itssourceofincomeis.”105Inthediscussionthatfollows,wewillexaminetheextenttowhichthisstatementaccuratelyexpressestheapproachtakeninthecaselaw.ThecourtinGlynnseemstobesayingthatwherethecorporationengagesinactivitythatgenerallyproduces incomefromproperty,andthatactivity in factproducesincomefromproperty,thecorporationwillbecarryingonaSIBandnobusinessinvestmentlosswillbeallowed.Whilethiswouldbeaharshtest,itwouldalsobeaneasyonetoapply.

InlightoftheSBCrequirementsandtherelatedcaselaw,adviserswillneedtoconsiderthefollowingquestions:

1. Canthetaxpayersucceedwhencorporatedocumentationcontradictshisorherstatedintention?

2. In determining the principal purpose of the business, whose intention isrelevant?

3. Whatistherelevanttimeperiodforthedeterminationofprincipalpurpose? 4. Wasthecorporationcarryingonanactivebusiness?

1. Can the Taxpayer Succeed When Corporate Documentation Contradicts His or Her Stated Intention?

Havingreviewedtheprecedentcaselaw,itseemstousthattheprincipalpurposetestisnotasharsh,norisitnearlyaseasytoexpressortoapply,assuggestedbythecourtinGlynn.The1992judgmentinEd Sinclair Construction & Supplies Ltd. et al. v. MNR106addressedtheissueofabusiness’sprincipalpurposeinapplyingtheSIBdefinitionunderthesmallbusinessdeductionprovisions.Whenaskedtoweighthe taxpayer’s testimonyagainst thehardevidenceof thecorporation’sactivities,BowmanJcitedwithapprovaltheapproachtakeninanearlierTaxCourtdecision:

103 [2007]3CTC2172(TCC).

104 Thechangeinintentionwasattributedto“achangeinparentalresponsibilitiesfortheappellantandherspouse.”Ibid.,atparagraph5.


106 92DTC1163(TCC).


Indeterminingthe“principalpurpose”ofabusinesscarriedonbyacorporationthestatedobjectofthepersonwhocarriesitonisnotnecessarilytheonly,oreventhemostimportant,criterion.Ofcriticalimportanceiswhatthecorporationinfactdoesandwhatitssourcesofincomeare.107

Thecorporation’sfinancialstatementsrevealedthat“ineachyear,mortgagesre-ceivableandrentalpropertiesmadeupwelloverfiftypercentofthevalueofthecompany’sassets”and“theprincipalportionoftherevenuesoftheAppellantwasderivedfromrentalsandinterest”;accordingly,BowmanJconcludedthat“theprin-cipalpurposeofthebusinessofProsperousInvestments...wastoderiveincomefromproperty.”108

InGascoigne v. R,109 thecourtdidnotacceptthetaxpayer’stestimonythatthemainintentionofthecorporation,Triwest,wastosellpropertiesandthattheprop-ertieswererentedoutonlytosubsidizetheoperationuntilsalescouldbemade.Instead, the court found the contradicting documentation more persuasive: thepropertiesweretreatedforaccountingpurposesasfixedassets;rentalincomewasgenerated;disposalswerereportedascapitalgains;and,onthetaxreturn,Triwest’sbusinesswasspecifiedas“rentals.”Thedocumentedevidencespokemoreloudlyofthecorporation’sprincipalpurposethanthetaxpayer’sassertions.

TheintentionofTriwestasmanifestedbytheactionsofthedirectingminds,includingtheappellant,mustbeassessedonthebasisofeventsastheyunfoldedandbyresortingtowhatthecorporationdid,includinglookingatthemannerofreportingincometotheMinisteronaconsistentbasisandhowaccountingwasdoneforinternalpurposes.110

InGill et al. v. MNR,111thetaxpayersinvestedinacorporation,Homebank,whichconstructeda17-unit stripmallwith the intentionof selling itonce itwas fullyleased.Homebankwentintoreceivershipsoonafterlistingthepropertyforsale.Theinvestmentwent“bad”fiveyearsafterthelandhadbeenpurchasedandthreeyearsafterconstructionhadbeencompleted.Onceagain,thecourtallowedthefi-nancialresultsandfinancialstatementstostandasevidenceforthecorporation’sprincipalpurposeandtotrumpthetaxpayers’testimonyastowhytheyenteredintotheinvestment.

TheonlyincomeearnedbyHomebankwastherentalincomefromthetenantsintheshoppingplaza,interestsontherentaldepositsandamanagementfee....Further-more,thefinancialstatementsofHomebanklistedthepropertyasafixedcapitalassetandtheaccording[sic]depreciation(amortization)wasdeducted.112

107 Ibid.,at1165,referringtoBen Barbary Co. v. MNR,[1989]1CTC2364(TCC).108 Sinclair Construction,supranote106,at1166.109 1996CarswellNat2839.110 Ibid.,atparagraph24.111 98DTC2048(TCC).112 Ibid.,atparagraph30.


Similarly,inCapogreco v. R,113therealityoftheresultssimplyovershadowedthetaxpayer’sclaimofanactivebusiness.Thetaxpayerarguedthat“itnotonlyhadrentalincomebutthatitalsointendedtoobtainothercompaniesandotherbusi-nessestooccupythepremises.”114CounselfortheministerreliedonGill,andthecourtagreed.

Theonlyincomeearnedbythecorporationtherewasrentalincome,andtheprincipalpurposeofthecorporationwastoderiveincomefromproperty.Thesamecanbesaidofthecaseatbar....

[T]heCompanyinquestioninthiscaseleasedabuildingandtheonlysourceofincomewasrentalincome.Itwascarryingona“specifiedinvestmentbusiness”andnotanactivebusiness.115

Ontheotherhand,anumberoftaxpayershavebeenabletosuccessfullycontra-dicttherealityoftheirresults.InGeropoulos v. R,116thetaxpayerwasa25percentshareholderinacorporation(Woodstock)thatwasincorporatedtopursueashoppingmalldevelopment.Whentheprojectfailedtomaterializeowingtotherejectionofarezoningapplication,Woodstockwasrenderedinsolvent.ThetaxpayerclaimedanABILforfundshehadloanedtothecorporation.Thegovernmentrejectedthe“activebusiness”designationonthebasisthat,althoughthepartiestookstepstoputabusinessinplace,“nobusinessassuchmaterialized.”ThecourtreadilyacceptedtestimonyofWoodstock’s“desire”andwhatitwasorwasnot“lookingfor,”eventhoughtherewascontradictorydocumentaryevidence,andconcluded:

WhileitisafactthattheCo-Ownersagreementspeaksofholdingtheprojectforin-vestmentpurposes,Butcher’stestimony,whichIaccept,clearlynegatesthatintentionvis-à-visWoodstock.117

ItmightbearguedthattheresultinGeropouloscanbedistinguishedfrommanyoftheothercasesonthispoint,onthebasisthattheWoodstockpropertyneverproducedanyrentalincome.Consider,then,thecaseofFautley v. R.118Thetaxpayer,Fautley, transferredhishome tohis corporation,FautleyTowersLtd., and thenenteredintoanagreementtogiveaMr.Peelanoptiontobuy.Peelcouldnotraisethemoneytobuy,soinsteadhecontinuedtooccupythehomeandpayrent.Theminister’spositionwassimplyput:therewasnoactivebusiness,and“theearningofrentsfromtheProperty[was]anindicatorthattheCompanywasoperatinga

113 [2001]4CTC2326(TCC).


115 Ibid.,atparagraphs36and38.

116 [1998]3CTC2384(TCC).

117 Ibid.,atparagraph21.ButcherwasanotherWoodstockshareholder.

118 [2002]3CTC2098(TCC).


specifiedinvestmentbusiness.”119Thiscouldbeasimplecaseofestablishingprincipalpurpose,aswesawinthecasesdiscussedabove,onthebasisof“whatthecorporationactuallydoesandwhatitssourceofincomeis.”120Infact,thecourtwaspersuadedbythetaxpayer’stestimonythat

therentreceiptsweremerelypartofthedealwithPeelandthemainthrustofthatagreement was to sell the Property and moreover that the overall activities of theCompanyweretodeveloppropertiesandnottoholdsameforrental.121

Inresponsetothetaxpayer’sappealinBarrette c. La Reine,122theCrownreliedonthecourttoagainconstructtheinvesteecorporation’sprincipalpurposefromwhatthecorporationdidandwhatitssourceofincomewas.Essentially,theCrown’spositionwasthat,becausetheonlyincomedeclaredbythecorporation(Diese)wasrentalincome,thecorporationwasengagedinaSIB.However,thecourtwasnotinclinedtoagree.Despitethedocumentedevidence—thecorporation’ssoleassetwasthebuildingsshownonthefinancialstatementsascapitalproperty,capitalcostallow-ancewasclaimed,andthecompany’saccountantstatedonthetaxreturnthatDiesewasengagedintherentalofproperty—andeventhoughthecourtfoundthedetailsofattemptstosellthepropertyforaprofittobe“somewhatvague,”123theCrown’sfailuretospeaktothe“trueintentionofthetaxpayer”wasfataltoitscase.Instead,thecourtembracedthepositionofoneofthefourequalshareholders,whowasbyoccupationarealestateagentandwhosubmittedherownversionofthefinancialstatements.ArchambaultJconcluded:

IampersuadedthatiftheaccountanthadbeenproperlyapprisedofthetrueintentionofDiese,hewouldnothavedescribeditsprincipalactivityashedid.Hewouldnothaveenteredthebuildinginthestatementasacapitalasset,andhewouldnothaveclaimedacapitalcostallowance.Itismyopinionthatthefinancialstatementpreparedbythejointshareholderwholocatedthebuilding,negotiateditspurchase,andplayedaleadershiproleinDiesehasamoresignificantprobativevaluethanthesimplede-scriptionmadebytheaccountantinthefinancialstatements.124

Unfortunately,theaboveanalysisfailstoprovideadefinitiveanswertotheques-tionweposed at thebeginningof this section. It appears that the taxpayer cansucceedwhencorporatedocumentationcontradictshisorherstatedintention—but,thenagain,maybenot.Thebest-casescenarioariseswhenthetaxpayer,the


120 Glynn,supranote103,atparagraph13.


122 2004TCC437.




paperwork,and theobjective indicatorsaremutuallycorroborativeofabusinessintention,astheywere,forexample,inBelzile v. The Queen.125Thetaxpayerandanunnamedpartytogetherownedthreeseparatecorporations;theoneinquestionwasreferredtoas“9005.”Inthemid-1990s,eachofthethreecorporationsbuiltamulti-unitapartmentbuilding.Twoofthecorporationssoldtheirbuildingsrightaway;however,9005wasunabletosellits8-unitbuildingand,accordingtothetaxpayer,renteditoutinthemeantimeto“stemthelosses.”Thisfactsituationisreminis-centofGascoigneandhisinvestmentinTriwest,discussedabove.126However,inBelzile,thebuildingwaslistedasinventory(notafixedasset),andthecorporationidentified itsactivityas“construction.”The9005corporationwasheld tobeanactivebusiness.

TheappellanttestifiedinastraightforwardandhonestmannerandIaccepthisversionofthefacts.Thiswasnothisfirstbusinessofthiskind,anditisclearfrom9005’sarti-clesthatitseconomicactivitywasconstruction,asitwaswiththeothercorporationsthattheappellantestablishedearlier.9005’sfinancialstatement...statesthatthecor-poration’sinventoryconsistedofarentalbuildingintendedforresale.While9005’sincomewas fromrentalsofproperty, thecorporationexperiencedonly losses.Theincome,andtheadvancesmadebytheappellant,merelyservedtokeepeverythinginorderuntilthesaleofthebuilding,whichspecialcircumstancesmadedifficult.9005neverchangedvocationsandtheintentionwasalwaystosellthebuilding.127

2. In Determining the Principal Purpose of the Business, Whose Intention Is Relevant?

Returningtothe2007Glynndecision,weseethecourtapplyinganoft-citedpas-sagefromthe1990caseofMayon Investments Inc. et al. v. MNR.128AlthoughMayonwasnotanABILcase,itrequiredaninterpretationofthe“principalpurpose”testundertheSIBdefinitionforthepurposesofthesmallbusinessdeduction.AccordingtoBruléJ,“theprincipalpurposeofwhichistoderiveincomefromproperty”inrespectofthebusinessofacorporationmeansthat

thesourceofrevenue,thenatureoftheassetsheldandthe purpose of the corporationaretoderiveincomefromproperty.129

Isthepurposeofthecorporationindeedthesameasthepurposeofitsbusiness?Andareeitherorbothofthesethesameastheintentionofthetaxpayer?Althoughtheanswerisunclear,perhapsthereisamethodtobedetectedinthecasesonthis

125 2006DTC2540(TCC).

126 Seesupranote109andtherelatedtext.


128 91DTC364(TCC).

129 Ibid.,at369(emphasisadded).


issue.Generally,wherethetaxpayeriseitherthesoleshareholder,oneofasmallgroupofrelatedshareholders,130orthe“directingmind”oftheinvesteecorporation,nodistinctionisseentoexistasbetweentheintentionofthetaxpayer,thecorpora-tion,and/orthecorporation’sbusiness.Compare,forexample,thecasesofGascoigneandGill,bothdiscussedabove.InGascoigne,thetaxpayer,acharteredaccountant,wasoneofthreeshareholdersinTriwest.Thecourthadnotroublereceivinghisevidenceregarding“the intentionofTriwestasmanifestedby theactionsof thedirectingmindsincludingtheappellant.”131Similarly,inGeropoulos,wheretheap-pellantwasoneofthreeshareholdersinWoodstock(andanothershareholderwashisbrother),thecourtspokeoftheintentionsoftheappellantandthoseofWood-stockasbeingoneandthesame.132Theapproachwasarguably takenfurther inBelzile,wherethetaxpayer(alawyer)ownedtheinvesteecorporation,9005,withoneotherperson,withwhomhealsoownedtwoothercorporations.Thecourt’sanalysisinarrivingatthe“principalpurpose”of9005appearedtoincludeconsider-ationoftheactivitiesoftheothertwoassociatedcorporations.133

Incontrast,considerGill.134Theappellants(“SG”and“IG”)werenotrelatedtothe investee corporation (“Homebank”). Together they owned 16 percent ofHomebank;thecontrollinginterestwasheldbyaMr.andMrs.Benet.AlthoughtheBenetswerenotbeforethecourt,BruléJconsiderednotonlytheirintentionsre-gardingHomebank,butalso,“asanaside,”evidenceoftheirbusinessactivities:

[I]tisthe“principalpurpose”ofthebusinessandnotnecessarilythe“principalpur-pose”of the individual taxpayer thatmustbeconsidered indeterminingwhetheracorporationisa“specifiedinvestmentbusiness.”SGandIGhada16%interestintheoperations of Homebank. Mr. Benet and his wife held the controlling interest of52%....Anyinquiryintothe“principalpurpose”ofthecorporationwouldhavetoconsidertheintentionofMr.andMrs.Benet.Mr.Benetwasthedriving forcebehindhisowncorporation,Sampuran,aswell asHomebank.The“principalpurpose”ofHomebank,asanentireentity,mustbeconsidered.TheMinisterdidnotmakeanyinquiriesintotheintentionofMr.BenetwithrespecttoHomebank.TheCourtbe-lievesthattheprofitmadeonSampuran’ssaleofapreviousshoppingdevelopmentisrelevanttothecaseathand.135

PerhapsthemostdifficultcasetoreconcileonthispointisBarrette.136Theap-pellants,BarretteandBerard,bothbuildinginspectors,eachownedone-quarterof

130 Inthiscontext,themeaningof“related”isnotnecessarilyasdefinedintheAct.



133 Supranote125,atparagraphs16-20.

134 Supranote111.


136 Supranote122.


thecorporationknownasDiese.Anadditionalone-quarterwasownedbyBerard’ssister-in-law,Beaudry,arealestateagent.ThecourteasilyequatedtheprincipalpurposeofDiesewiththeintentionsofBarretteandBerard:

Itisimportant...todeterminetheprincipalpurpose,which,obviously,dependsonthe true intention of the taxpayer.137

ThecourtthenturnedtoBeaudry,againnotapartytotheaction,todeterminetheprincipalpurposeofDiese’sbusiness.

Giventheirprofessionalexperienceasbuildinginspectors,theAppellantsdidnothavetheknowledgerequiredforspeculation,nordidtheyhavetheknowledgerequiredforcommercialleasing.TheyreliedonMs.Beaudry,whowastheveritableinstigatorofthisprojectandthepersonwhodirectedit,atleastattheoutset.HerintentionissignificantforthepurposeofdeterminingtheintentofDieseinthepursuitofthisproject.138

3. What Is the Relevant Time Period for the Determination of Principal Purpose?

Establishing the relevant timeperiod for theprincipalpurposedetermination isrelativelystraightforward.Asageneral rule, thecasesconsiderboththeoriginalpurposeofthebusinessandthatmanifestedinthetaxationyearsatissue,assug-gestedinInterpretation BulletinIT-73R6:

Theprincipalpurposeofacorporation’sbusinessmust be determined annuallyafterallthefactsrelatingtothatbusinesscarriedonbythatcorporationinthatyearhavebeenconsideredandanalyzed.Includedinthisevaluationshouldbesuchthingsas:

(a) the purpose for which the business was originally commenced;(b) thehistoryandevolutionofitsoperations,includingchanges in its mode of oper-

ation and purpose of existence;and(c) themannerinwhichthebusinessisconducted.139

In both Gascoigne and Glynn, the principal purpose of the corporation hadchangedover time; inneither casedid thiswork to the taxpayer’s advantage. InBelzile,thecourtfoundthat

9005neverintendedtoderiverentalincomeonceitcompletedthebuildinginques-tion,and...thisfactremainedtruethroughouttheyearsinwhich9005ownedthebuilding,includingtheyearinissue.Therewasnochangeofdirection.140



139 IT-73R6,“TheSmallBusinessDeduction,”March25,2002,paragraph14(emphasisadded),quotedinBelzile,supranote125.

140 Belzile,supranote125,atparagraph18.


4. Was the Corporation Carrying On an Active Business?

Oftenthetaxpayerisfacedwiththeargumentthatthecorporation’sbusinessisnotbeingcarriedon,eitherbecauseitnevercommencedorbecauseithadalreadyceased.Foranexampleoftheformer,considerBoulanger et al. v. The Queen.141Thetaxpayers,BoulangerandDufour,claimedanABILrelatingtoamortgageextendedtoanum-beredcompany,referredtoas“170663.”Thecorporationhadacquiredthreelotsoflandtoconstructanautomotivebusiness.Anoverallplanwasdeveloped,abuildingpermitobtained,surveysprepared,andmeetingsheldwithengineersandarchitectswhopreparedplans for abuilding;however,whenbankfinancingwasdenied, aportion(almosthalf )ofthelandwassoldofftoaconstructioncompany,leavingtheundevelopedlandandthereceivablefromtheconstructioncompanyas170663’sonlyassets.Inlightofthissequenceofevents,thequestionforthecourtwaswhetherthecorporationhadstartedthebusiness,andifso,whetherthatbusinesswasactive.

TheTaxCourtconfirmedtheminister’sassessmentonthebasisthat

expensesrelatingtopreliminarystagesinestablishingabusinessthatdoesnotexistdonotgiverisetoabusinesslossifthosestepsdonotgobeyondtheprojectstage....Thepurposeofall[thecorporation’s]...activitieswastoestablishthestructureofthebusinessitself,whichultimatelyneversawthelightofday.142

Inconsideringthetaxpayers’appeal,theFederalCourtofAppealreliedheavilyonthewordsofDesjardins J inthe2001Hudondecisionandherdescriptionoftheproblem:

[A]toneendofthespectrumtherearebusinesseswhichhavenotbegunoperationsandattheothertherearedormantbusinesses,whileinbetweentherearemanyactiv-ities“whicharesignsthatacompanyisoperatingandwhichshouldfallwithinthespectrumoftheconceptofcarryingonbusiness,eventhough,forexample,theactivitiesare carried on for the purpose of reaching an agreement which eventually is notreachedoreventhoughtheydonotresultintheearningofincome.”143

Thecourt foundthat theappellants’proposedbusiness lackedanorganizationalstructureandotherkeyindiciaofanactivebusinesswereabsent—employees,marketresearch,cost-benefitanalysis,andtheability“toconductanymajortransactionwithrespecttothetypeofbusinessitwassupposedtocarryon.”144Thefactthattherewasnoincomefromtheallegedlyactivebusinesswasdescribedasrelevantbutnotinitselfdeterminative.145

141 2003DTC1277(TCC).

142 Ibid.,atparagraphs23and24.

143 Boulanger et al. v. The Queen,2004DTC6192,atparagraph5(FCA),quotingfromHudon et al. v. The Queen,2001DTC5630,atparagraph62(FCA).

144 Boulanger,supranote143,atparagraph6.



ThetaxpayerinO’Neill v. The Queen146sufferedasimilarfatein2000.TheTaxCourtconcludedthat“themoneywasspentingoodfaithwiththehopeandexpect-ationthatsomewheredowntheroadtheAppellantandhispartnerwouldbeinapositiontocommencethebusinessandtoearnaprofitfromit,butthatmomenthadnotyetarrived.”147O’Neillandhispartnerco-ownedacorporation(“C&C”)andhadpurchasedanaircraftwiththeplantostartupahuntinglodgebusiness.Theplanewouldbeusedtoflypatronsinandoutoftheremoteproperty.Althoughtheappellantalreadyhadoccupancyrightstothelandandhadbuiltacabinonit,keyindiciawereabsentwhenthecompany’sonlyasset,theplane,wasdestroyedinacrash.Therewasnowrittenplan,nocompanybankaccount,nobusinesslicence(infact,noknowledgeofthelicencerequirements),nomarketresearch,nodrawingsfortheplannedexpansionoftheexistingcabin,norevenuefromitsoccupancy,andnostaff.Tothesubmissionthatthepurchaseoftheaircraftputtheappellantandhispartnerinbusiness,thecourtresponded:

TheCourtdoesnotaccepttheargumentofcounselfortheAppellantthatatthetimetheBeaveraircraftwaslost,theAppellanthadreachedsuchastageofdevelopmentinitsenterprisethatitcouldhavebeenreferredtoasa“business”byanyreasonabledef-initionofthattermascontemplatedbytheAct.Itisnotananswertothisdeficiencytosaythatthisbusinesswaslikeanyotherandthatitstartedslowly,inanunsophisti-catedmannerandatapaceatwhichthedeveloperscouldaffordwithoutborrowinglargesumsofmoney.Thequestionasalwaysis,wasthereabusinessattherelevanttime?Inthecaseatbar,wasthereaplan?Didtheyhavetherequisiteequipment?Didtheyhavetherequisitelicence?Weretheypreparedandabletocarryonthebusinessofoutfittingatthetimethattheplanewaslost?TheCourtmustfindconclusivelythattheywerenot.148

At the other end of the spectrum are those cases where, in the tax assessor’sopinion,thebusinessthatwasbeingcarriedonhasceased.Consider,forexample,Proulx-Drouin v. The Queen.149In1990,thetaxpayeractedasguarantorforadebtowedbyherhusband’sconstructioncompany(“Société”)andpledgedherhomeascollateral.SociétéhadbeenformedtorenovateandexpandacommercialpropertyontheTrans-CanadaHighway inorder tomeet therequirementsofanexistingtenant.ThetenantwentbankruptandSociétéwasnotgettingpaid.By1996,Sociétéwasindefaultontheloan.Thetaxpayerwascalledonherguarantee,Sociétéwasdissolved,andthehomewassold.Onher1997taxreturn,thetaxpayerclaimedanABILinrespectofherlossontheguarantee.Forherclaimtosucceed,theapplica-tionofsubsection39(12)requiredthatthecorporationwhosedebtwasguaranteedwasanSBC“atanytimeinthe12monthsbeforethetimeanamountfirstbecame

146 2000DTC2631(TCC).



149 Proulx-Drouin v. The Queen,2005DTC487(TCC).


payablebythetaxpayer.”Onthefacts,theTaxCourtdeterminedthattherelevanttimeperiodwasthe12monthsprecedingMarch5,1996(thedatethatthebankfilednoticeof itsclaimagainstProulx-DrouinasSociété’sguarantor).150Proulx-Drouin’s husband testified that in 1995, although Société no longer carried onconstructionactivities (whichhad long since ceased), the companycontinued tocarryonanactivebusiness,providingmanagementservicestotworelatedcorpor-ations owned by him, his wife, and other family members. However, the courtfoundthatthedocumentaryevidencedidnotsubstantiatehisclaim:

ThereisnodisinterestedevidenceofSociétécarryingonabusinessafter1995.De-positsofchequesintoabankaccountarenotproofofthecarryingonofabusiness,inparticularwhenthemakerofthecheque,thepayeeofthechequeandthepersoninwhoseaccountthechequeisdepositeddonotdealwitheachotheratarm’slength.TothisareaddedthefactsthatSociété’sfinancialstatementsandincometaxreturnfor1995shownogrossoranyincomeandnotaxreturnhasbeenfiledforanytaxationyearafter1995.151

Anotherfatalfactorthatindicatesthecessationofactivebusinessistheabsenceofbusinessassets.InYaworowski v. R,152theappellantandhiswifehadoperatedamotelbusinesslocatedonahighway,butbytheyearinquestion(1996),thehigh-wayhadbeenrerouted,thecompanyhadbecomedormant,andtheappellant’sonlyinvestmentconsistedofexpensesheincurredinmaintainingthemotelproperty,inwhichhethenlived.TheTaxCourtfoundthat

[t]he evidence is quite clear that the Appellant’s operation does not constitute thecarryingonofanactivebusiness.Thecorporationhadceasedbusinessbefore1990.Therewerenosalesreportedinthefinancialstatementforthatyear.Therewasnoopeninginventoryandnopurchases.In1992,thetaxpayerhimself,astheprepareroftheincometaxreturnforthecorporation,describeditasinactive.In1995,thecorpor-ationwasdissolved.Theevidenceisquiteclearthatnoneoftheremainingassetswereused inabusiness,but ratherwerebeingusedpersonallyby theAppellantandhisfamily.153

InCraig v. R,154theassetsofthetaxpayer’scorporationhadbeenseizedbyitslandlord.Althoughthetaxpayerhadretainedlawyerstodefeattheseizureandwascontinuingtolookforalternatepremises,theTaxCourtheldthatthiswasnotsuf-ficienttoconstitutecarryingonanactivebusiness:

150 Ibid.,atparagraph30.Foranotherexampleoftheapplicationofthe12-monthruleinsubsection39(12),seeArmstrong v. R,97DTC3263(TCC).

151 Proulx-Drouin,supranote149,atparagraph32.

152 [2000]3CTC2665(TCC).


154 [2003]2CTC2033(TCC).


WhenonlytheseactivitiesarecarriedonhowcanonesaythatallorsubstantiallyallofthefairmarketvalueoftheassetswereusedprincipallyinanactivebusinesscarriedonprimarilyinCanada.Thereferenceistoassetsbeingusedandinthepresentcasebecauseoftheseizureitwasimpossibletousetheassetsinthebusiness.155

ComparethedecisioninVogel v. The Queen.156VogelclaimedanABILonhis1988taxreturn;however,theministerconsideredthecorporationtobeinactiveonthebasisthatithadnoreportedincomeandnosignificantexpenses.Thetaxpayer’spos-itionwasthatthecorporation,atraderincommodities,was“insuspense,”waitingforthepriceofoiltoincrease.Notwithstandingthetaxpayer’sfilingofa“DeclarationofNon-OperatingStatus”withtheAlbertagovernmentin1986,theTaxCourtagreed:

For1987and1988noincomewasproduced.TheevidenceshowstheCompany,albeit“insuspense,”wasstillactive.Therewereassets,liabilitiesandcontractstopursue.Further,duringthisperiodoftimesomeminimalexpenseswereincurredastheCom-panytriedtonegotiatecontractsonalocalbasisinAlberta.TheCompanyasan“activebusiness”didnotceaseuntil[theCompanywasstruckfromtheCorporateRegistryon]October31,1988.ThefinaldatewasconfirmedbyaletterfromtheVicePresidentoftheCompanytotheAppellantdatedNovember30,1988.Thus,uptoNovember30,1988,theCompanywasa“smallbusinesscorporation”asallorsubstantiallyalloftheassetswereusedinan“activebusiness”carriedoninCanada.157

Furtherontheissueofcessationofbusiness,theministerlostthecaseagainstthe taxpayer inKlein v. The Queen.158Kleinowned100percentofacorporation(“Jasag”),whichowedhimapproximately$1,000andinpartnershipwithwhichheoperatedamotelandcarwash.Whenthepartnershipmetwithfinancialdifficultiesin1995,asecuredcreditorappointedareceiver-manager.Klein’seffortstoeitherremedythedefaultorfindapurchaserwereunsuccessfulandthebusinessmetwithforeclosure.TheministertookthepositionthatJasag’sassetsceasedtobeusedinanactivebusinessuponthereceiver-manager’sappointmentandthatJasagceasedtobeanSBCatthattime,disqualifyingKleinfromanABILclaimfor1996—theyearinwhichtheforeclosuretookeffectandKleinwasdeemedtohavedisposedofhisdebt.TheTaxCourtdisagreedonthefollowingbasis:

[T]heinterimreceiver-managerwasappointedtoreplacethemanageremployedbythepartnersandtoreceiveanddisburseallfundsreceivedfromtheMotel75’soper-ations.Inmyview,thisiscertainlyanindicationthattheMotel75’soperationswerestillbeingactivelycarriedonandthatthereceiver-managerwastheretooperatethebusinessinlieuoftheformermanagerappointedbythepartners.159


156 96DTC1321(TCC).

157 Ibid.,at1323-24.

158 2001DTC443(TCC).



InTurner v. The Queen,160theappellant,appearingonhisownbehalf,managedtoconvincetheFederalCourtofAppeal that theTaxCourthaderred inrulingagainsthimontheissueoftheyearinwhichhisbusinesslossarose.TheCourtofAppealfoundthat

[t]hetaxpayermadeanelectioninhis1994taxationreturntoclaimthelossbecausethatwastheyearinwhichhiscompany,Turn-AirLtd.,waswoundup.TheMinister’spositionisbasedonthefallacythatsimplybecausethatcompanyceasedtocarryonbusinessin1984,afteritslicencetooperatewasrevokedbyfederalauthorities,...thatwastheyearinwhichthelossshouldhavebeenclaimed....Whileitistruethatthetaxpayer’scompanyceasedtocarryonbusinessin1984,itisalsotruethatitslicencewasrestoredin1985andthatthelawsuitbroughtbythetaxpayerandTurn-Airagainstthefederalauthoritiesrelatingtotheallegedwrongfulrevocationofthelicencewasnotsettleduntil1994,theyearinwhichTurn-Airwaswoundup.161

K E Y QUE S TIO N 4: WA S THE PRO PERT Y ACQUIRED FO R THE PURP OSE O F E A RNING INCOME?

Therequirementregardingthepurposeoftheinvestmentcontainedinsubpara-graph40(2)(g)(ii)hasbeendescribedas“theprovision thatpresents thegreatestthreattohavingalossdeniedformosttaxpayers.”162Specifically,thetaxpayermustbeabletodemonstratethatthepropertywasacquiredforthepurposeofearningincome.Inthemajorityofthecaseswherethisrequirementisthebasisforthechal-lenge, theABILclaimarises froma loanorguaranteeadvanced toacorporationownedbythespouseorchildoftheABIL-claimingtaxpayer.Inothercases,thechal-lengearisesincircumstanceswherethereisaquestionastotheconnectionbetweenthetaxpayermakingtheABILclaimandtheincome-earningpotentialoftheinvest-ment.Accordingly,therearetwoquestionsonourchecklistfortheapplicationofsubparagraph40(2)(g)(ii):

1. Where the transaction is in the nature of financial assistance to a familymember’sbusiness,whatevidencewillthecourtsacceptwithregardtoitspurpose?

2. Canthetaxpayerestablishsufficientnexusbetweenhimselforherselfandtheincome?

160 2000DTC6442(FCA).

161 Ibid.,atparagraph2.NotethattheTurnercaseturnedontheapplicationofsubparagraph50(1)(b)(iii)andnotonthedefinitionof“activebusiness”inrespectofanSBC.Withrespecttoparagraph50(1)(b),seealsoJacques St.-Onge Inc. v. The Queen,2003DTC153(TCC)(windup);Single et al. v. MNR,84DTC1611(TCC)(bankruptcy);Johnson v. The Queen,2005DTC628(TCC)(insolvency);andT. Ryan v. Canada,[1994]2CTC2271(TCC)(insolvency).

162 Webb,supranote6,at26.


1. Where the Transaction Is in the Nature of Financial Assistance to a Family Member’s Business, What Evidence Will the Courts Accept with Regard to Its Purpose?

InMcKissock v. R,BowieJreferredtothe

cleardistinctionbetweenthose[cases]inwhichthetaxpayerentersintoatransactiontoassistanotherfamilymember,andthoseinwhichthepurposeofthetransactionistoproducefinancialgainorrewardforthetaxpayerhimself.163

Infact,areviewofthecaselawsuggeststhatthedistinctionmaybelessthanclear.It is arguable that any loanorguarantee advanced to a corporationownedby ataxpayer’sspouseorchildisalwaysmotivated,atleastinpart,bythedesiretocometotheiraid;butwhencanthestatutorypurposetestbemetnotwithstandingthepresenceofthatothermotive?Taxpayersarecautionedtobe“doublyvigilant”incircumstanceswheretheyaremorelikelytobe,instead,“benignlynegligent.”164

Letusexaminesomeofthespousalcases.Inthecasesinthiscategory,thetax-payerfailedapproximatelytwiceasoftenasnot.Manyofthetaxpayerswhoadvancefunds,ormakegoodonloanguarantees,forthebenefitofaspouse’sbusiness,claimthat their actionsproducefinancial rewards for themselves as “indirectbenefici-aries,”165eitherbecauseofincreasedfamilyprosperity,166throughtheapplicationoftheattributionrules167orthroughtheoperationofanallegedspousaltrust.168Theseargumentsgenerallyfailunlessthetaxpayercanproducedocumentaryevidenceofaformallegalrelationshipinthenatureofatrust,agency,orsubrogation.Thein-directexpectationofbenefitingasafamilymemberisnotsufficient.169

InO’Blenes v. MNR,wherethetaxpayerguaranteedaloantoacompanybywhichherhusbandwasemployedandofwhichheownedone-thirdoftheshares(othersharesbeingownedbyrelatedpersons),thecourtdismissedherappealonthebasisthat

163 [1997]1CTC2182,at2186(TCC).

164 SeeTaylor v. R,[1996]3CTC2942,at2945(TCC):“Whenan‘investmentstrategy’ispursuedatatimewhenthesituationistingedwith‘non-arm’slength’circumstances,thepartiesmustbedoublyvigilant,andnotbenignlynegligentinunderstanding,recordinganddealingwiththeeventswhichtranspire,toensurethattherecordwillstanduptoexaminationinsupportofanylaterclaimsmadeundertheIncome Tax Act.Iamwellawarethatsuchastandardgoesagainstthenormalfamilialrelationship,butitiscrucialwhenthingsdonotturnoutashopedfor.”

165 See,forexample,Lepp v. R,[2000]2CTC2418(TCC).

166 Forexample,Oliva v. R,[2001]3CTC2670(TCC).

167 Forexample,Elliott v. The Queen,2005DTC149(TCC).

168 Forexample,Gill v. R,[2001]4CTC2019(TCC).

169 InMiller v. R,[2004]3CTC2519,atparagraph8(TCC),“theappellantshoweddefiniteinterestinthesuccessofhisspouse’snewbusiness.Thisinvolvedactsandsupportivebehaviourinrespectofhisspouse’sinitiative.Itinnowayinvolvedabusinessdecisionforthepurposeofdirectlyreceivingincomeordividends.”


[the]indirectadvantagetheAppellantwouldderiveinprovidingfinancialassistancetoacompanywhichinturnwouldprocureadirectfinancialbenefittoherhusbandisdefinitelytooremote.170

ConsideralsoElliott v. The Queen171andBuhler v. R.172InElliott,theappellantwasowed$94,000byherhusband’sconstructioncompany.Shewasnotashareholder.Thefundswereoftwokinds:adirectinterest-freeloanofapproximately$54,000;andindebtednessintheamountof$40,000,whichwasincurredwhentheappellantvoluntarilytookoveranddischargedthecompany’s12percentbankdebtbybor-rowingat5percentagainstthefamilyhome.Althoughbothadvancesadmittedlyweremade“for[theappellant’s]husbandtocontinuetomakea living”173andtoallowthefamilytoearnincome,onlythesecondamountwasallowedowingtoitsobjectivelegalnature.Becausetheappellantpaidoffthebank,she“stoodintheshoesofthebankwhodidadvancethemoneyforthepurposeofearningincome.”174

InBuhler, theappellanthadadvanced, inexchangeforanon-interest-bearingdemandnote,$105,000toacorporationinwhichherchefhusbandheldaone-thirdinterest.Inaddition,shepaidmorethan$10,000tohonourhispersonalguaranteetothebank.TheTaxCourtacceptedtheappellant’stestimonyandthewrittensworndeclarationbytheappellantandherhusbandthat,atallrelevanttimes,thehusbandwasthebaretrusteeforhiswife,whowas,atalltimes,thebeneficialowneroftheshares.DespitethefactthatthedocumentationhadbeenpreparedonlyafterthereassessmentoftheABILclaim,itwassufficienttoestablishtheappellant’spurposeas“assistingtheCorporationtobeprofitableandonedaytoreceivedividends.”175

Incontrast,thespousaltrustargumentfailedinOliva176andGill177forlackofdocumentaryevidence.Gillhad“nopapertrail”;178Olivaoffered“nofoundationwhatever”forthesuggestionthatthehusbandwastrusteeofhiswifeinrespectofanyincometobeexpected.179AstheTaxCourtemphasizedinLowery,spouses,likeothertaxpayers,mustdemonstrate

thehallmarksofacommercialorbusinesstransaction....Itisnotsufficienttomakeageneralallegationthattheappellantanticipatedsomeparticipationintheprofits...atsomeunstatedtimeinthefutureandonthatbasistoarguethatsomeconsiderationfortheguaranteeexisted.180

170 90DTC1068,at1072(TCC).171 Supranote167.172 [2003]3CTC2784(TCC).173 Supranote167,atparagraph19.174 Ibid.,atparagraph26.175 Supranote172,atparagraph8.176 Supranote166.177 Supranote168.178 Ibid.,atparagraph2.179 Supranote166,atparagraph11.180 Lowery v. MNR,86DTC1649,atparagraph20(TCC).


InService v. The Queen,theappellant’sinjectionoffundsintohiswife’stwocor-porationswas“notaviablelendingarrangement”andlackeda“legalcontractualrelationship incorporating principal repayment terms and periodic interest pay-ments.”181InBertrand c. La Reine,182theappellantofferedevidenceofconsiderationforfundsadvancedtohiswife’scompanyintheformofanoptionforhimtopur-chaseshares;however,

n theoptionwasneverexercised(andinfactcouldnotbebecauseitrequiredhimtobeanemployee,whichheneverwas);

n nointerestwaschargedorpaid;n anoption,inanyevent,iscapitalnotincome;andn therewasnodocumentaryevidenceoftheoptionor,infact,ofdebtowedby

thecorporations.

“Consequently, [theappellant]couldnotexpectanypossiblegains fromthetwocompanies.”183

ThesuccessofthetaxpayerinKlassen v. R184mayseematoddswiththeotherspousalcases.Theappellant, throughabank loanandamortgageonhishome,advancedfundstohiswife’scorporation,believingittobe“agoodbusiness”thatjust“neededalargercashflow.”185ThebankloansofficerassuredKlassenthatthebusinesswassound.Klassentestifiedthatinexchangeforthefunds,hewasprom-isedsalary,shares,anddividendsfromthecorporation;however,hisexpectationswerewithoutreasonablebasisbecause,asitturnedout,thecompanywasnotsound.Despitethelackofanydocumentaryevidenceofacontractualagreementoranyreasonableexpectation toreceivefinancialgainor reward,Klassenwas found tohave“formedtheintentionandhadthepurposeforgainingandproducingincomefromthemakingoftheloan.”186Thecourt’sleaptothisconclusionmaybemoreattributabletothetaxpayer’shavingbeendeceivednotonlybyhiswife,butalsobythebankofficer,uponwhosemisrepresentationsherelied,tohisdetriment.

Likespouses,parentswhoareABILclaimantsareoftenchallengedinrespectoffundsadvancedtotheirchildren’sbusinesses.Usuallythosechallengessucceedbe-causethesegesturesofsupportbyaparenttoachildlackthehallmarksofabusinesstransaction,andthereisinsufficientfinancialgainforthetaxpayerparent.Thefol-lowingexamplesillustratethevariousgroundsforrejectingthetaxpayer’sclaiminsuchcases:


182 2004TCC435.


184 [1997]3CTC2497.

185 Ibid.,atparagraph12(TCC).



n Thetaxpayertestifiedthatsheexpected12percentinterest,butshereceivednopaymentsandhadnodocumentation.187

n Thetaxpayertookinsufficientstepstofollowuponherinvestment.188

n Thetaxpayercouldproducenoevidenceofthenoteorofanyconsideration.189

n The taxpayer’s arrangementswithhis sonwerenot commercial innature;therewasno“documentaryevidenceinthewayofschedules,statementsortimetableswhichpurportedtoshowanypossibleincomewhichmightaccrueto theAppellant.”190Hisexpectationof “somereturn”was“nothingmorethanawishorhope.”191

n Eitherthefinancialrecordsofthedebtorcorporationshowednosuchliabil-ity,192ortherewerenorecords.193

n The“lackofprecisetermsordocumentationastopreconditionsorcondi-tionsagreedto,priorto,oratthesigningoftheguarantee”wasfataltothetaxpayer’sclaim.194

n Aninterest-freeloanwithnorepaymenttermswas“onlyanexpectation,notasoundbusinessarrangementcapableofqualifyingtheloan,asrequiredbythestatute.”195

n Thetaxpayerhadawrittenpromissorynotethatboreinterest,andshehadobtainedlegaladvice;however,thenoterepresentedonlyreimbursementofheroutlayswithnogain.196

Thedecisionsinthreeparent-childcases—Corriveau v. The Queen,197McKissock,198andStrecker v. The Queen199—provideaninterestingcontrast.Inallthreecases,thefather(thetaxpayer)playedanactiveroleinhisson’sbusiness.Inthefirsttwo,thetax-payer’sABILclaimsurvivedthechallenge;inthethird,itdidnot.InCorriveau,thefatherinitiatedtheideaforthebusinessandhadsignificantinvolvementinitsaffairs.Hisloantothebusinessappearedonthefinancialstatements,andcorporatedocu-mentsevidencedinterestpayabletohimat12percent.Althoughacknowledgingthat

187 Blanco Estate v. The Queen,98DTC1678(TCC).

188 Ibid.,andThomassin c. R,[2003]4CTC2685(TCC).

189 Shkolny v. R,[1996]3CTC2532(TCC).

190 Curtis v. The Queen,2004DTC2445,atparagraph65(TCC).


192 Rondeau v. The Queen,2004DTC3026(TCC).

193 Taylor,supranote164;Shkolny,supranote189.

194 Nadalin v. MNR,91DTC1451,at1453(TCC).

195 Botkin v. MNR,89DTC398,at400(TCC).

196 Casselman v. MNR,83DTC522(TCC).

197 99DTC344.

198 Supranote163.

199 95DTC3(TCC).


thecollectibilityofthe interestwas“veryremoteanduncertain,”200andthatthetaxpayerhad“anotherpurpose,probablyjustasimportant[asassuringthesuccessofthebusiness,namely]...tosethissonupinbusiness,”thefactthatthearrange-mentwas“characteristicofacommercialundertaking”supportedtheexistenceoftherequisitesubparagraph40(2)(g)(ii)income-producingpurpose.201InMcKissock,evidenceofthefather’sbusinessrelationshipwithhisson’scompanywas“vagueintheextreme”;202however,hewasreceiving$80,000ayearforconsultingservicesprovidedtothebusiness.Thisprovidedadequate,ifindirect,considerationfortheloanguarantee.Thecourtconcluded:

IacceptthatpartofMr.McKissock’sevidenceinwhichhestatedthathispurposeingivingthisloanguaranteewastoassistWater-Shedthroughitsfinancialdifficultiesandhelpittostayinbusiness,andtherebyprotectwhatwashismajorsourceofin-come,namelytheconsultingfeespaidtohim,throughAssociates,byWater-Shed.Itiswellestablishedthatthebusinesspurposetestwhichsubparagraph40(2)(g)(ii)imposesmaybesatisfiedbysomethinglessdirectthanconsiderationfortheloanorguaranteeinvolved.203

InStrecker, the father contributed tohis son’sbusiness in anumberofways:heservedasadirector,hadsigningauthorityatthebank,suppliedthetelephone,tools,andtruck,andworkedtherepart-time.UnlikeMcKissock,however,hereceivednoremuneration.Thecourtfoundthatthepresenceof“someevidence...thatper-haps[he]...mightreceivesharesinthefuture”wastoo“vague”aplantoconstituteconsiderationforthefundsadvanced.204

Whenwemoveawayfromloansbyspousesandparents,weseethetaxpayer’schancesofsuccessriseinothercasesinvolvinganABILchallengeundersubpara-graph40(2)(g)(ii).Thesecasesrelatetothesecondquestiononourchecklist.

2. Can the Taxpayer Establish Sufficient Nexus Between Himself or Herself and the Income?

ThemainfocusinthesecondgroupofcasesonABILclaimschallengedundersub-paragraph40(2)(g)(ii)tendstobeontheapplicationoftheprincipleestablishedinThe Queen v. Byram205—thatis,theexistenceofthenecessarylinkage,or“nexus,”betweentheincomeandthetaxpayer.Thatprinciplewasconsidered,forexample,inToews v. The Queen,wherethetaxpayerhadloanedmoneyinterest-freetoacorporationheldbyafamilytrustandthecorporationhadthenloanedthefundsinterest-freetoastartupboat-buildingbusiness:

200 Supranote197,atparagraph41.201 Ibid.,atparagraph39.202 Supranote163,at2185.203 Ibid.204 Supranote199,at4.205 99DTC5117(FCA).


CertainlytheAppellantdidnotstandtoearninterestontheloan;however,hereliesontheprincipleestablishedbythedecisionoftheFederalCourtofAppealinByram v. The Queen.Inthatcase,thetaxpayerhadmadeloanstoanoperatingcompanyinwhichheowned shares, both directly and also indirectly through another company whosesharesheownedandwhichownedsharesoftheoperatingcompany.Theloanswereallmadeonaninterest-freebasis.Whentheoperatingcompanyfailedandwasunabletorepayanyoftheloans,heclaimedanABILbaseduponboththedirectandthein-directloans.HesuccessfullyarguedbeforetheFederalCourtofAppealthatbothsetsofloanssatisfiedtherequirementofsubparagraph40(2)(g)(ii)oftheActthattheybemadeforthepurposeofgainingorproducingincome.ThatCourtheldthatcom-mercialrealityrequiredittorecognizethatthetaxpayercouldanticipatethatifthebusinessof theoperatingcompanyweresuccessfulhecouldexpect toreceivedivi-dendsasaresult,notjustfromthesharesthatheownedintheoperatingcompany,butalsofromthesharesoftheholdingcompany.Allthatwasrequiredtoqualifytheloansashavingbeenmadeforthepurposeofgainingorproducingincomewassomelinkagebetweentheincomeandthetaxpayer.206

InByram,theFederalCourtofAppealemphasizedthat

[t]hedeterminationofwhetherthereissufficientconnectionbetweenthetaxpayerandtheincomeearningpotentialofthedebtorwillbedecidedonacasebycasebasisde-pendingontheparticularcircumstancesinvolved.207

A review of the ABIL cases should divulge which “particular circumstances” willworkinthetaxpayer’sfavour.(InToews,aswewillsee,theydidnot.)Overall,thetaxpayerseemstobesuccessfulinaboutone-halfofthesecases.Wehaveroughlydividedthe“nexus”casesintothreesubgroupsbasedonthecourt’sreasonsforallow-ingordenyingthetaxpayer’sclaim:fainthope;originalpurpose;andexpectationversusright.

Faint HopeInDaniels v. The Queen,208theappellant,Daniels,andhisbrotherPhilliphadbor-rowed$8million“ona jointandseveralbasis” fromthebankand invested it in12percentdebenturesofamortgagebusiness(“Shoppers”),andthenpledgedthedebentures as security to the bank. When Shoppers went into receivership fouryears later, thebankcalled for repaymentof the remaining$5.25millionowed.Danielspaidthefullamountand,inanattempttorecoverhisbrother’sportion,tookanassignmentofPhillip’s then-worthlessdebenture.WhenthetaxassessordeniedDaniels’sclaimfora$4millionbusinessinvestmentloss,heappealedontwogrounds.TheTaxCourtrespondedtohisfirstargumentasfollows:



208 2007DTC883(TCC).


TheAppellant’sprincipalargumentisthatImustaccepttheuncontradictedtestimonyoftheAppellantthathehadinmindthattheownershipofPhillip’sDebenturemight one day have value.Thatthatmayonlyhavebeenafaint hope...cannotdissuademeofacceptinghisincomeproducingpurpose.209

In counter-argument, the Crown characterized the appellant’s assertions as toounrealisticandself-interestedtobecredible:

TheRespondentchallengestheAppellant’stestimonythathethoughtPhillip’sDe-benturemighthavevalueoneday andargues that releasinghisbrother fromhisindebtednessandacquiringanadmittedlyworthlessDebentureisnotconsistentwithareasonableobjectiveconclusionthattheDebenturewasacquiredforthepurposeofgainingorproducingincome.210

AlthoughDanielssucceededonthebasisofhisalternativeargument,211thecourttooktheopportunitytoaffirmthepositionthata“fainthope”of futurevalue isenoughtosatisfytheincome-earningpurposerequirement.HershfieldJtookhisdirectionfromtheCourtofAppealinRich:212

RecallingthatthepurposeoftheABIListoencourageinvestmentinsmallCanadianbusinesses,itislittlewondertomethataCourtwouldacceptafainthopeassufficienttomeettherequisitepurposetest.Whenafamilybusinessexperiencesfinancialdif-ficulty,theobjectiverationalityofrescuemotivesmightalwaysbequestionablewithhindsight.Considerable tolerance seemsessential. InmyviewRich stands for suchprinciple.213

WhereasthecourtinDanielsreliedonthestatutorypurpose,the2003decisioninTaylor v. Rdescribedthetaxpayer’sinvestmentbehaviourasbeingconsistentnotonlywiththetextandpurposeofsubparagraph40(2)(g)(ii),butalsowith“currentcorporatereality.”214MostofTaylor’sclaimarosefromabankloanformoniesad-vanced to a corporation for the purpose of keeping it afloat. Repayment of theprincipalandtheobligationtopayinterestwerecontingentuponthecorporationbecomingprofitable;itneverdid.Fundsadvancedinthefallof1998wereclaimedasanABILfor1999.Thecourtobserved:

Frequently,shareholdersmakesuchloansonaninterest-freebasisanticipatingdividendstoflowfromtheactivitiesfinancedbytheloan.ToadoptthepositionoftheMinister



211 Thiswillbediscussedbelowundertheheading“OriginalPurpose.”

212 Supranote47.


214 [2004]1CTC2193(TCC).


wouldrequirethatthisCourtignorethisreality.Itwouldalsobecontrarytothecom-mentsoftheSupremeCourtofCanadainStubart. . . .CommercialrealityistobeconsideredbytheCourtsininterpretingtaxprovisionslikesubparagraph40(2)(g)(ii)solongasitisconsistentwiththetextandpurposeoftheprovision.215

The1992decisioninSteckel v. Rprovidesanotherexampleofthecourt’sreluctancetosecond-guessthetaxpayer’sactionseventhough,inthatcase,“[thetaxpayer’s]wholeinvolvementin[thecorporation]...wasadisasterfromthedayheacquired[it].”216EvenwhenSteckelpurchasedtheshares,thecompanydidnothavetheassetshethoughtithad,anditwasaconstantcashdrainfromthattimeuntilitsinsol-vency.AlthoughitcouldeasilybearguedthatSteckellackedeventhefaintestofhope,thecourtallowedanABIL,givingthe“purpose”issuelittleweight.

ThereisnoquestionthattheAppellantacquired[thecorporation]—andapersondoesnotnormallyacquireacompanyinordertoseeitfail—andinjectedhisowncapitalinto it and tried to nurse it into a healthy state so it would continue to carry onbusiness....

Thereisrealevidence,tome,thatabusinessmanlostmoneyattemptingtooperateaCanadiancontrolledprivatecorporation.217

Threeyearslater,inMorrison v. The Queen,218thetaxpayerclaimedanABILbasedonadvancesmadetoaninactivecompanythathehadpreviouslyoperatedasafamilyinsuranceagency.(Hewas,however,continuingtocarryon,withhiswife,aninsur-anceagencybusinessunderanewentitytowhichtheassetsoftheearlierbusinesshadbeentransferred.)Asconsiderationforthefundsadvanced,Morrisonhadre-ceivedanassignmentofthecompany’saccountsreceivable—itsonlyremainingasset.Fortwoyears,hemadenoattempttocollectonthereceivablesandthentookanABILassoonashedeterminedthat“theywereofnovaluewhatsoever.”219Hisappealwasdismissed:noteventhefaintestofhopeexistedfortheearningofincome.

InBender v. R,220 the taxpayers lostmoneythat theyhadpaid tosatisfy theirobligationasdirectorstoremitgoodsandservicestaxandwithholdingowedonemployees’wagesafterthecorporationbecameinsolvent.TheirABILclaimsweredenied.221


216 92DTC1904,at1905(TCC).

217 Ibid.,at1907and1908.

218 95DTC269(TCC).

219 Ibid.,at272.

220 [2002]4CTC2523(TCC).

221 SeealsothedecisioninGilbert v. The Queen,2009TCC102.Theappellants,ahusbandandwife,weresoleshareholdersofasoftwoodlumbercompanythatwentbankruptasaresultoftherecentUStradeembargo.Theappellantspersonallypaidthecompany’screditorsbeforefilingforbankruptcy.TheirABILclaimfailedbecausethey“freelyelected...topaycreditors


Original PurposeInrespectofthecasesdiscussedabove,isitaquestionoffindingthepointwherefainthope(foundtobepresentinDaniels,forexample)dissolvesintonohope(asinMorrison, for example), orof interpreting legislativepurpose and/or the currentcommercialreality;oristhereanothertestatwork?

RememberDaniels,whoacquiredadebenturethatwas“admittedlyworthless”butwhoseargumentclungtothe“fainthope”ofincome?Heactuallywonhiscaseonhissecondgroundforappeal.

TheAppellant’salternativeargumentisthatthetimetoconsiderthepurposeofac-quiringPhillip’sDebentureisnotthetimeofacquisitionoftheworthlesssubrogateddebt,butratherthetimetoconsiderpurposeshouldbedeterminedbylookingtotheeventthateventuallygaverisetotheacquisition.ItistheAppellant’spositionthathisseizureofPhillip’sDebentureisadirectresultofthe income earning purpose that motiv-ated him to effectively guarantee Phillip’s debt and invest in Shoppers Trust Co originally.222

This“morecommerciallyrealisticinterpretation”ofsubparagraph40(2)(g)(ii)wasaffirmedbyBowmanJinThe Cadillac Fairview Corporation Limited v. The Queen223andappliedagainbyhim,tothetaxpayer’sdisadvantage,inPoirier v. The Queen.224Poirierwascompelledtopersonallypayoutstandingremittancesforprovincialsalestaxandworker’scompensationowedbyhisrestaurantcompanyafteritceasedoperations.BowmanJheld:

Inmanycasesifaguarantorisobligedtomakegoodunderaguaranteeitisbecausethe principal debtor is unable to pay the obligation. From this, it follows that theguarantor’srightofsubrogationagainsttheprincipaldebtoris,atthetimeofacquisi-tion,likelytobe,inmanyinstances,worthlessorvirtuallyworthless.Anarrowand

ofSécovacInc....withoutduressorcoercionandwithouthopeofanyprofitorincome.Suchapaymentcanandistobecharacterizedasapaymentofconveniencewithapurposeandobjectivesthathaveabsolutelynothingtodowiththeconditionsrequiredtobedeemedabusinessinvestmentloss”(atparagraph40).

222 Daniels,supranote208,atparagraph19(emphasisadded).

223 97DTC405,at407(TCC).SeealsoBrown v. The Queen,96DTC6091(FCTD)(pre-Cadillac Fairview),wherethetaxpayersucceededonthesameprincipleeventhoughhecontinuedtomakepaymentsonthedebtoftherealestateholdingcompanyforfiveyearsafterthebankruptcyoftheoperatingcompany.“Asashareholderoftherealestatecompany,theplaintiffwasdirectlylinkedtoitsincomeproducingpotential.Underthesecircumstances,thereexistsaclearnexusbetweenthetaxpayerandthepotentialfutureincometobeearnedfromtheacquireddebt”(at6094).

224 2000DTC2463(TCC).SeealsothestraightforwardstatementofMcArthurJinGordon v. The Queen,96DTC1554,at1558(TCC):“CommonsenseandcommercialrealityleadstotheobviousconclusionthattheappropriatetimetoconsiderwhethertheAppellanthadanincomeearningpurposewasatthetimethattheguaranteewasgiven,andnotatthetimetheguaranteeddebtwasinfactpaid.”Onthatbasis,Gordonwassuccessful,aswasthetaxpayerinFernandez v. MNR,91DTC182(TCC),whohadpledgedpropertyassecuritywhenthecorporationwasactiveandwasforcedtosellitwhen“therewasnobusinessleft”(at183).


mechanicalreadingofsubparagraph40(2)(g)(ii)wouldleadonetoconcludethatonthepaymentof theguaranteedamounttheguarantor’sacquisitionof theworthlesssubrogateddebtcouldnotpossiblyhaveasitspurposethegainingorproducingofincomefromabusinessorproperty.Suchaninterpretationinmyviewlackscommer-cialsense.Afunctionalandmorecommerciallyrealisticinterpretationwouldsubsumeinthepurposeoftheacquisitionofthesubrogateddebtthe purpose for which the guar-antee was originally given.225

Expectation Versus RightInfindingtheappropriatenexusbetweentheincomeandthetaxpayer—thatis,howremoteistooremote?—thecasesoftendistinguishbetweenthetaxpayer’srighttoreceive incomeasopposed to themereexpectation.According toByram, “[i]t isequallyclearthattheanticipationofdividendincomecannotbetooremote.”226

InAlessandro v. The Queen,227theappellanthaddejurecontrolofthecorporation.Althoughherhusbandhaddefactocontrol,theincome-earningpurposerequirementwassatisfiedbyherlegalrighttocausethecorporationtopaydividends.RelyingonRich(earningincomewasoneofthepurposesoftheloan,althoughnotnecessarilytheprimarypurpose)andByram(thetaxpayermaydeductthelossifabletodem-onstrateasufficientnexusbetweenhimselforherselfandthedividendincome),theTaxCourtconcluded:

[F]rom1993on,whentheloansbegantobemade,Mrs.Alessandrowastheshare-holder who controlled, directly and indirectly, all three corporations. Even if herhusbanddirectedherhowtoact,itwasMrs.Alessandrowhohadtherighttoelectthedirectorsofall threecorporations.At theendof theday, shecouldcauseOPHLtodeclareandpaydividendstoAHL,ifAHLcontrolledOPHL,orABC,ifABCcontrolledOPHL.Inturn,shecouldcauseAHLorABCtopaydividendstoherself.WhilethereisadegreeofremotenessbetweenMrs.AlessandroandOPHLthereisaclearnexusbe-tweenheranddividendincome.228

BothBurns et al. v. The Queen229andJoncas v. The Queen230illustratethatthe“in-come”referredtoinByramneednotnecessarilybedividends.InJoncas,thetaxpayerloanedmoneytoacooperative;inexchangehebenefitedfromreducedcosts.WhentheCrownarguedthat“therelationshipbetweenloansandincomemustbemoreimmediate,”231theTaxCourtdisagreed:

225 Poirier,supranote224,atparagraph9(emphasisadded).


227 2007TCC411.


229 94DTC1370(TCC).

230 2004DTC2315(TCC).



Thepurposesforwhichtheappellantmadetheloanswerebusinesspurposes.Theloanswerenotmadeforphilanthropicorfamilypurposes.HispurposeinmakingtheloanstotheCooperativewastofacilitateandpromotethecommercialactivitiesofhisbusinessesandthustoincreasehisownincome.Ithereforeconcludethatthedebtwasacquiredbytheappellantforthepurposeofearningincomefromhisbusi-nesseswithinthemeaningofsubparagraph40(2)(g)(ii)oftheAct.232

IntheearlierBurnscase,thegainaccruingtotheindividualtaxpayersfromtheirloanstotheirbrother’sfarmimplementcompany(“WFC”)wasabenefitexpectedtoaccrue to their business operations (“BFL”) as opposed to them personally. TheCrownarguedthatthebenefitwastooremotetosatisfythesubparagraph40(2)(g)(ii)requirement.Here,too,theTaxCourtdisagreed:

BecauseofthearrangementbetweenBFLandWFC,enteredintoaspartoftheconditionsunderwhichtheappellantsmadetheloans,bywhichBFLcouldpurchasemachinery,partsandequipmentfromWFCatgreatlyreducedcost,theannualprofitofthecompany,withoutmore,wouldbeincreasedbytheamountofthesavingsandcouldbepassedontoeachappellant.233

Althoughadmittingthat“thebenefitto[thetaxpayers]hadtotravelacircuitous,albeitnottortuousrouteinordertocomehometoroost,”thecourtfoundthesuf-ficientnexus:

[T]hemakingoftheloanstoWFCdidinfactresultinreducedcostsofoperationtoBFL...whichthey...controlled....Assuch,theywereabletousetheirmoneyinawaythatwouldleadtotheproductionofincome,althoughnotinamannerthatwascapableofbeingplacedintoaneat,tidy,labelledpigeonhole.234

Incontrast,considerthefollowingcaseswherethetaxpayerfailedtoestablishtherighttoincome.

InMarquis v. R,235thetaxpayerhadguaranteedapersonalbankloanforafriendwhohadusedtheborrowedfundstobuyshares.TheTaxCourtdeniedthetax-payer’sclaimofalossonthebasisthat

[t]herewasnodirectconnectionbetweentheguaranteeandtheacquisitionofshares.If thecompany issuingtheshareshadbeensuccessfulandprosperous thebenefits,profitsorappreciationwouldessentiallyhavegonetotheholderoftheshares,and


233 Supranote229,at1379.

234 Ibid.,at1379-80.

235 [1999]1CTC2653(TCC).


wouldinnowayhaveaccruedtothepersonwhoessentiallyhadphysicalcustodyorcontrolofthem.236

InVincelli v. The Queen,237thetaxpayer,Vincelli,wasoneoftwoshareholdersin a corporation (“Fur”). The other shareholder, Mercille, was dating a widow,Mrs.Langis,whowas interested inhiding assets from the estateofher late ex-husband (becauseof a risk thathiswillmightbecontested).MercillepersuadedLangistolendhim,throughhercorporation,thesumof$220,000,whichhethenloanedtoFur.WhenLangisaccusedbothVincelliandMercilleofdefraudingherofthemoney,Vincellirepaid$175,000,whichsheacceptedinfullsatisfactionofthedebt.Hethenclaimedtobeentitledbysubrogationtoclaimthe$175,000fromMercille.Absentevidenceofanyliendedroit,theTaxCourtfoundthatVincelli’smoral obligation to repay a loan for which he had no legal obligation was notenoughtosupporthisclaim.

InEllis v. MNR,thetaxpayerhadguaranteedaloantoacorporation,20percentofwhichwasownedbyacorporationthathecontrolled(theother80percentbeingownedbyindependentinvestors).TheTaxCourtfoundthatthetaxpayer’s“pros-pectofreceivingdividendswasonly a possibility of benefit.”238

Finally,inToews,referredtoabove,thetaxpayerhadadvancedfundstoaholdingcompany(“Manitoba”),whichhadeventuallymadetheirwaytoanoperatingcom-pany(“Apollo”).AllofthesharesofManitobawereownedbytheToewsFamilyTrust,ofwhichEdwardwasoneoffourbeneficiariesandoneoffourtrustees.Thetruststructurewasfataltohiscase.Thecourtexplaineditsreasonsasfollows:

TheAppellantsaysthatthenecessarynexusexistsinthepresentcase.Profitsgeneratedbytheoperatingcompanywouldproducedividendspayabletotheholdingcompany.AstheTrustownedallthesharesoftheholdingcompany,it inturnwouldreceivedividendincomefromtheholdingcompany,andtheAppellantcouldanticipatere-ceivingdistributionsfromtheTrust.

Inmyview,thiscasedoesnotcomewithintheByramprinciple.ThetermsoftheTrustaresuchthathoweverprofitabletheoperatingcompanymightbe,theincomemayneveraccruetothebenefitoftheAppellant.Heisonlyoneoffourtrustees,andonlyoneoffourbeneficiariesoftheTrust.Itwasopentothetrusteestopayanypartor all of the incomeof theTrust to anybeneficiary, to the exclusionof all others.There isanexusbetweenanyprofitsofApolloandtheTrust,butthatnexusstopsshortoftheAppellant....[T]he Appellant may have had some expectation of receiving some of the profits of the company, had there been any, but he certainly had no right to them.239


237 98DTC1235(TCC).

238 88DTC1070,at1074(TCC)(emphasisinoriginal).

239 Supranote206,atparagraphs6-7(emphasisadded).


CO NCLUSIO N

TheentitlementtoanABIL—saidtobeoneofthetop10litigatedtaxissues240—hasbeensomewhatdemystifiedbyBowmanJ’slistoffouressentialelementsassetoutinGamus.241However, ABILclaimscontinue tobeanareaof frequentchallengewhere thereassessed taxpayeroftenhasapoorprospectof success.Wehaveat-temptedinthisarticletofleshoutthefourelementsbyprovidingaframeworkfortheABILjurisprudence,whichwehopewillhelptoreduceuncertainty.Ofcourse,uncertaintycannotbeeliminated,norcananyonepresumetodraftaformulaforsuccess;ultimately,eachcasewillturnonitsparticularfacts.Atasymposiumheldin2003,AlbanGaron,thenchiefjusticeoftheTaxCourtofCanada,remindedtheaudiencethat“advocacyisnotascience,whichmaybedefinedwithprecisionandwhoseresultsmaybereplicatedbyrepeatingcertainsetformulas.”242Ontheotherhand,ourreviewoftheABILcaselawhasrevealedcertainrecurringthemes—adequa-cyofrecordkeeping,credibilityofthetaxpayer,andtheavailabilityofcorroborativethird-party testimony—confirming Garon’s assertion that “in advocacy, prepara-tion,preparation,andpreparationisaveryimportantelement.”243

A PPENDI X CL A SSIFIC ATIO N O F A BIL C A SE S A ND FLOWCH A RT FO R E VA LUATING A BIL CL A IM S

Table1summarizesthe240ABILcasesbyissueandbyoutcome.244ThetophalfofthetablepresentsthosecaseswheretheprimaryissuewasoneofthefourelementsidentifiedbyBowmanJinGamus;245theseformthebasisofthemainbodyofourarticle,reformulatedasfourkeyquestions.Thissetofcasesrepresentsmorethan70percentoftheABILjurisprudence,uptoApril2009.

Inaddition,weidentifiedfiveotherissues,asdescribedbelow.

240 ElizabethA.Junkin,“CurrentCases,”in2003 British Columbia Tax Conference(Toronto:CanadianTaxFoundation,2003),tab5,at9.

241 Supranote1.Thelistisreproducedinthetextaboveatnote3.

242 “TaxCourtofCanada20thAnniversarySymposium”(2005)vol.53,no.1Canadian Tax Journal135-75,at153.

243 Ibid.

244 Ourlistof240caseswasderivedfromsearchingandcross-referencingthreedatabasesources:Carswell’sTaxPartner(Toronto:Carswell),Knotia(Toronto:Ernst&Young),andCanLII(http://www.canlii.org).

245 AnumberofthecaseshadmorethanoneABILelementatissue;inthoseinstances,weusedourownjudgmentinidentifyingthe“primary”issue.Wereadandclassifiedallofthecasesindependently,andwhereourchoicesdiverged,wedeterminedtheclassificationthroughdiscussion.


TABLE 1 Summary of Allowable Business Investment Loss Cases by Issue and Outcome

Issue Allowed Dismissed Total

Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 34 47Baddebt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 16 38Smallbusinesscorporation. . . . . . . . . . . . . . . . . . 13 30 43Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 27 43

Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 107 171Otherissues

Businessversuscapital . . . . . . . . . . . . . . . . . . . 6 13 19Quantum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 18 32Arm’slength . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7 8Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 5 5Taxationyear-end . . . . . . . . . . . . . . . . . . . . . . 3 2 5

Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 45 69

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 152 240

Business Versus Capital

Theflowchartthatfollows(figure1)showsathresholdquestion:“Wasthedispos-itionofthepropertyonaccountofcapital?”Nineteencasesdealtwiththisquestion.NoneofthesecasesinvolvedataxpayerclaiminganABIL.Instead,ineachofthecases,thetaxpayerclaimedabusinessloss,andtheministerrecharacterizedthedis-positionasbeingonaccountofcapitalandreassessedthelossasanABIL.Thecasesaddressedthetaxpayer’sappealofthereassessment.

Althoughtheissueofincomeversuscapitaliswellbeyondthescopeofourarticle,thefollowingpassagefromthedecisionoftheFederalCourtofAppealinEaston et al. v. The Queen et al.summarizesthecourts’approach:

Asageneralproposition,itissafetoconcludethatanadvanceoroutlaymadebyashareholdertooronbehalfofthecorporationwillbetreatedasaloanextendedforthepurposeofprovidingthatcorporationwithworkingcapital.Intheeventtheloanisnotrepaidthelossisdeemedtobeofacapitalnature....Therearetworecognizedexceptionstothegeneralpropositionthatlossesofthenaturedescribedaboveareoncapitalaccount.First,thetaxpayermaybeabletoestablishthattheloanwasmadeintheordinarycourseofthetaxpayer’sbusiness....

Thesecondexceptionis...[w]hereataxpayerholdssharesinacorporationasatradingassetandnotasaninvestmentthenanylossarisingfromanincidentaloutlay,includingpaymentonaguarantee,willbeonincomeaccount.246

Overwhelmingly, the cases on this issue turned on the application of these twoexceptions.

246 97DTC5464,at5468(FCA).


Quantum

Inalargenumberofcases,althoughthetaxpayerhasestablishedentitlementtoabusinessinvestmentloss,thefinalquestionistheamountoftheloss.Moreoftenthannot,taxpayerscannotsatisfactorilysubstantiatetheclaimedamount.Recurringthemesareadequacyofrecordkeeping,credibilityofthetaxpayer,andtheavail-abilityofcorroborativethird-partytestimony.

Consider,forexample,Gasser v. MNR247andLeger v. The Queen.248InGasser,theappealfailed;inLeger,itwasallowed.InGasser,thecourtexpresseditsfrustrationatbeing“askedtochooseanamountfromamenuofamounts.”249Gasser’scredibil-itywasnotenoughtocarryhiscaseintheabsenceofanythingtosupportit:

TheCourtdoesnotdoubttheAppellant’scredibilitybutwithoutmorehecannotsuc-ceed.Hehasnotevenbeenabletoestablishtheamountowedtohim.Hesimplydidnotknow,orcouldnotrememberwhatwasowed,orhowitwasevidenced....[T]heAppellanthasnotdischargedtheonus.250

InLeger,thebusinessinvestmentlosswasdeniedbythetaxauthority“because[it]didnothaveinhandatthetimethecompletegeneralledgerandthefinalizedfinancialstatementsofthecorporationforits1994fiscalyear,”251andthedocumen-tationtosupporttheclaimwasthereforeinadequate.Thecourtwasabletofindadequateevidenceelsewhere.

Iamsatisfiedthattheappellanthasestablishedonabalanceofprobabilitiesthathedidinfactadvancetheamountsatissuetothecorporation.Cancelledcheques,depositslips,thecorporation’sdepositbook,theshareholder’sadvanceaccountledger,theinternalaccountant’spreliminaryfigures,thenon-finalizedfinancialstatements,theletterfromMauriceLeger,andalltheotherdocumentsprovidedinevidence,combinedwiththetestimonyoftheappellantandhisaccountant,Mr.Ogle,aresatisfactoryenough,inmyview,toshowthattheappellanthadthefundstomakeadvancestothecorpora-tion,didinfactmakesuchadvances,andtreatedthoseadvancesasloans,loanswhich,intheend,wereneverrepaid.252

247 91DTC170(TCC).

248 2004DTC3491(TCC).

249 Supranote247,at172.

250 Ibid.




Arm’s Length

ThelevelofcomplexityencounteredbyanABILclaimantissignificantlyincreasedwhenthepropertyisdisposedoftoapersonwithwhomthetaxpayerdoesnotdealatarm’slength.Inthatcase,subsection50(1)applies.Ascanbeseenintheaccom-panyingflowchart,thatprovisionimposesamoreonerousburden.Eightcasesdealtwiththeissueofwhetherthedispositionoccurredatarm’slength.

Election

Infivecases,thetaxpayer’sABILclaimwassuccessfullychallengedonthebasisthattheelectionundersubsection50(1)hadnotbeenproperlyfiled.Forexample, inArnold v. The Queen,counselforthetaxpayerarguedthatthefilingofanoticeofobjectionshouldbeconstruedbytheministerasequivalenttothefilingofanelec-tion,butthecourtdisagreed.253

Taxation Year-End

Subsection50(1)requiresthatthepropertyuponwhichtheABILclaimisbasedwasheldbythetaxpayerattheendoftherelevanttaxationyear—basically,aquestionoffact.Thiswasthemainissueinfivecases.

253 2002DTC1395(TCC).InthewordsofMillerJ,atparagraph18,“[t]hisistakingmorelibertieswiththeplainwordinginthesectionthanIampreparedtotake.”


No

FIGURE 1 Flowchart for Supporting an ABIL Claim Under Paragraph 38(c)

Clause 50(1)(b)(iii)(D) At TYE, can the demise of the corporation be reasonably foreseen?

Clause 50(1)(b)(iii)(C) At TYE, is the fair market value of the share nil?

Clause 50(1)(b)(iii)(B) At TYE, has the corporation ceased to carry on business?

Clause 50(1)(b)(iii)(A) At TYE, is the corporation insolvent?

Paragraph 50(1)(b) Share?

Subsection 50(1) Held at taxation year-end (TYE)?

STA

RT

: W

as th

e di

spos

ition

of t

he p

rope

rty

on a

ccou

nt o

f cap

ital?

STOP

STOP

STOP

Paragraph 50(1)(a) Bad debt?

Subparagraph 50(1)(b)(ii) Has the corporation been wound up?

Has

the

quan

tum

of t

he b

usin

ess

inve

stm

ent b

een

esta

blis

hed

by th

e ta

xpay

er?

Par

agra

ph 3

8(c)

Allo

wab

le b

usin

ess

inve

stm

ent l

oss

(ded

uctib

le a

t 50%

)

Yes

Yes

Yes

Yes

No

No

Yes

Subparagraph 50(1)(b)(i) Is the corporation bankrupt?

Yes

No

No

No

STOP

Yes

YesNo

STOP

Yes

Yes No

Yes

No

No

Yes

Subparagraph 39(1)(c)(ii) Arm’s-length disposition?

Subparagraph 39(1)(c)(iv) Debt?

No

Subparagraph 39(1)(c)(iii), clause 39(1)(c)(iv)(A) Shares or debt issued by a small business corporation (subsection 248(1))?

Yes

No

STOP

No

YesSubparagraph 40(2)(g)(ii) Was the share acquired for the purpose of earning income?

No Yes

STOP

Clause 39(1)(c)(iv)(B) Is the debtor corporation bankrupt?

Yes

Clause 39(1)(c)(iv)(C) Has the debtor corporation been wound up?

Subparagraph 40(2)(g)(ii) Was the debt acquired for the purpose of earning income?

No

Yes

Yes

No

No

Yes

Subs

ecti

on 5

0(1)

Ele

ctio

n?

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