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, related media accounts suggested a Ponzi scheme, and on 6 April 2010, SA filed an insolvency notice.
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). After noting (at para. 81) that "the decision in Flexi-Coil indicates that a debt is a bad debt when the taxpayer determines that the debt is uncollectible and, in making this determination, has acted reasonably and in a pragmatic, business-like manner, applying the proper factors," Owen J stated (at para. 85) that "the information available to the Appellant as at April 30, 2010 indicated that as of December 31, 2009 SA had no resources to pay its debts other than what it might collect from EMB under the receivership … [and] it would have been perfectly reasonable for the Appellant to conclude that only a portion of the principal owed was likely to be recovered and that the Interest was illusory and would not be recovered."
Respecting the Minister's claim that "the Appellant should have recorded the Interest as income and then claimed the deduction" (para. 89), Owen J noted (at para. 89) that the Minister "was not able to identify exactly how the deduction … is claimed on the return," that "although the letter did not make specific reference to paragraph 20(1)(l) or 20(1)(p), it did state that the Interest was not … collectible … [representing] the essential characteristic of a bad debt" (para. 90) and "in any event … it is well established that it is open to a taxpayer to amend his return through the appeal process [citing Imperial Oil, 2003 FCA 289, at para. 10]" (para. 91).
See summary under s. 20(1)(l).