October 07, 2011

Anjalie Enterprises Ltd., (Appellant) v. Her Majesty the Queen (Respondent)

95 DTC 216
Tax Court of Canada
June 30, 1994

(Court File No. 93-945(IT)G.)

Non-capital loss carryovers — Corporate taxpayer reporting a deductible loss for 1982 in respect of a second mortgage held by it — Six years later, taxpayer alleging that said loss ought to have been deductible in computing its income for 1983, thus entitling it to a non-capital loss carryover in respect thereof for 1989 — Whether taxpayer so entitled to change its position in hindsight — Income Tax Act, S.C. 1970-71-72, c. 63, ss. 20(1)(p), 87(2.1) and 111(1)(a).

On November 6, 1981, the corporate taxpayer’s predecessor, A Ltd., instituted foreclosure proceedings in respect of a second mortgage held by it and, on July 12, 1982, the Supreme Court of British Columbia granted an order nisi of Foreclosure. No offer to purchase was forthcoming during the redemption period. The first mortgage on the property in issue was in excess of its fair market value and there were other creditors ahead of A Ltd. as well. In the opinion of its accountants, therefore, it was not economically viable for A Ltd. to repossess the property and Revenue Canada was told this in a letter in 1992. As a result, in computing its income for 1982, A Ltd. claimed a deduction for a bad debt in respect of the second mortgage, part of which it carried back to its 1981 taxation year. On April 22, 1988, however, A Ltd.’s accountant advised Revenue Canada that it had erred in claiming the loss (resulting from the said bad debt) in computing its income for 1982 and that it should have been claimed in computing its income for 1983. On December 31, 1988, A Ltd. amalgamated with a second corporation to form the taxpayer. The latter deducted the loss (by way of non-capital loss carryover) in computing its income for its 1989 taxation year. The Minister denied such deduction, alleging that the original loss had been incurred during A Ltd.’s 1982 taxation year and, therefore, could not be deducted in computing the taxpayer’s income for its 1989 taxation year, since 1989 was past the (then) five-year carryforward period for 1982 losses. The taxpayer appealed to the Tax Court of Canada.

Held: The taxpayer’s appeal was dismissed. A Ltd. had used its business judgment at the end of 1982, declaring a loss on the bad debt in question in computing its income for 1982. Six years later, therefore, it could not be heard to change its business judgment, in order to benefit from the changes in the Income Tax Act. The Act was changed in 1982 so as to permit the carryback of non-capital losses for three years instead of one and the carryforward thereof for seven years instead of five. Nor was it relevant that A Ltd. had continued to seek recovery of the amount outstanding under the second mortgage until 1984, or that the order nisi of Foreclosure had not been granted until after its 1982 taxation year had ended. Indeed, in Berretti v. M.N.R. (86 DTC 1719), the Tax Court of Canada concluded that there is no requirement that a debt be absolutely irrecoverable in the future for there to be a determination of irrecoverability at any present moment in time. For these reasons, the taxpayer was not entitled to the deduction for 1989 which it had claimed. The Minister’s assessment was affirmed accordingly.