The taxpayer made a loan, bearing interest at 25%, to a corporation ("SA") owned by his brother-in-law, which in turn lent the funds, at the same rate of interest, to an arm's length Canadian-resident corporation ("EMB"), which received those funds as part of a Ponzi scheme. The principal of EMB committed suicide on 17 March 2010, media accounts suggested a Ponzi scheme, and on 6 April 2010, SA filed notice of intention to make a proposal under the Bankruptcy and Insolvency Act.
The T5 for 2009 issued to the taxpayer by SA showed all the interest for 2009. He did not include it in his return (apparently filed in April 2010), and attached an explanatory letter stating that the interest was "never earned, payable nor collectible" and the 25 March 2010 report of the EMB receiver.
The Minister assessed inter alia on the basis that, as the 2009 interest had not been included in the taxpayer's return, no deduction could be claimed under s. 20(1)(l) or (p) and that, in any event, the debt for the interest was not doubtful as of 31 December 2009.
Owen J found that the taxpayer was entitled to rely on either para. (l) or (p) to deduct the entire amount. Contrary to the Minister's focus on available information as of 31 December 2009, "instead, the taxpayer may rely on information that comes into existence after the end of the year, but before the filing-due date, to fulfill his…obligation to report…" (para. 69), so that "the taxpayer must determine whether or not the debt was doubtful at the end of the taxation year, taking into account all information available up to the filing-due date for that year" (para. 70).
Respecting the Minister's submission (at para. 59) "that, because no written demand to pay the Interest was made by the Appellant, there can be no doubtful or bad debt," Owen J noted that this failure merely meant that the interest was added to the principal amount instead, which is to say that it was still owed to the taxpayer, and stated (at para. 60):
Although the precise meaning of the word "debt" may be the subject of some debate, it certainly encompasses a contractual obligation to pay an ascertainable sum such as the Interest, regardless of whether or not a demand for payment had been made by the Appellant.
Finally, there is no requirement that the taxpayer specifically report an amount from a doubtful or an uncertain debt as income in his return in order for it to be "included in computing the taxpayer's income." Owen J stated (at para. 64):
The fact that the Appellant reported the Interest in a manner that did not record it as income on a line of his 2009 T1 income tax return does not alter the fact that the interest was included in his income for 2009 by virtue of the application of the provisions of the ITA to the facts. This general principle was identified … in … Simard-Beaudry … as …:
…[T]he taxpayer’s liability results from the Act and not from the assessment.
See summary under s. 20(1)(p)(i).