Q7. Deductibility of Expenses Incurred by a Receiver
Control of a corporation was in the hands of a receiver for a number of years during which time the receiver liquidated the corporation's assets and incurred significant expenditures, including receiver's fees, legal fees, storage fees and building costs. The receiver did not carry on the business of the corporation at any time. Control of the corporation was eventually returned to its shareholders and the business was restarted. In computing the income of the corporation from the business for the years when it was controlled by the receiver would the expenditures incurred by the receiver during that period be deductible?
Department's Position
With respect to the deductibility of business expenses, subsection 18(1)(a) of the Act prohibits the deduction of certain outlays or expenses in computing a taxpayer's income from a business except to the extent that they are incurred for the purpose of gaining or producing income from the business. In the situation described, we would consider the purpose test as not having been met since the business of the corporation was discontinued during the relevant period. Accordingly, such expenditures incurred by the receiver are not deductible in computing the income of the corporation from a business. It is a question of fact whether a receiver continues to carry on a corporation's business in the course of liquidating its assets, or whether certain expenditures are incurred for the purpose of gaining or producing income from a business.