The taxpayer, a mining company made $8,250,000 in loans to an exploration company. The debt including accrued interest amounted to $8,590.684 when the taxpayer when all but $1,000,000 of the debt was extinguished in a settlement agreement, with the balance of $1,000,000 being paid by the expoloration company. The taxpayer claimed the $7,559,684 write-down as an income loss. The Court denied the income loss in the main, on the basis that the loss was capital in nature.
The trial judge upheld the Minister's decision to limit the taxpayer's loss under s. 20(1)(p)(i) to $183,336, being the amount of the accumulated interest in the Minister's assumptions. The taxpayer's further claim of $156,888 in interest was denied.
The Court of Appeal granted the taxpayer's appeal in respect of the additional $156,888 amount. The taxpayer's witness testified that the taxpayer had included $263,000, of interest in its retained earnings. The Court was satisfied that the witness's testimony, which the trial judge had stated was credible, was enough to demolish the Minister's assumptions regarding accumulated interest. The burden then fell the Minister to prove the assumptions, which was not done.
The taxpayer had also made out a prima facie case that none of the $1,000,000 settlement amount was allocated to the interest payments (which would not be bad debts to the extent of such allocation).