Principal Issues: a) Can the CRA explain why subparagraph 20(1)(p)(i) should be interpreted in a different way than paragraph 50(1)a) regarding the words « bad debts », namely on whether part of the debt can be considered a « bad debt »?
b) Can the CRA explain why the wording of subsection 50(1) does not allow a taxpayer to make an election for part of a bad debt considering the answer provided in the 1994 round table?
c) Would it not be possible to dispose part of a bad debt at a nil cost?
Position: a) Each transaction for a particular account is considered as part of the debt.
b) If a debt under section 50(1)a) is partially settled and the creditor establishes that the balance is unrecoverable, the election under 50(1) will be permitted for the unrecoverable part.
c) Please refer to (a) and (b).
Reasons: a) 20(1)p)(i), IT-442, Hogan v. MRN, 56 DTC 183
b) 50(1), IT-159R3
c) See (a) and (b)
APFF Federal Roundtable 11 October 2013
APFF Conference 2013
Question 10
Partial bad debt deduction
The Act refers to the concept of "bad debt" in various provisions, including in subparagraph 20(1)(p)(i) (bad debt deduction in computing income) and paragraph 50(1)(a) (election to recognize a bad debt), which are two provisions in which the Act uses almost identical language with respect to the "bad debt".
The term "bad debt" is not defined in the Act. A reading of various Interpretation Bulletins indicates that the CRA's interpretation of the concept of "bad debt" is different for the two provisions cited above.
Thus, in paragraph 5 of Interpretation Bulletin IT-442R, Bad Debts and Reserves for Doubtful Debts, the CRA stated respecting eligibility of a bad debt for deduction under paragraph 20(1)(p):
“Where it is considered that a part of a debt is collectible and a part is not, a portion only of the debt may be viewed as a bad debt.”
In paragraph 10 of Interpretation Bulletin IT-159R3, Capital Debts Established to be Bad Debts, the CRA stated this with respect to section 50 and a bad debt:
A debt is considered bad for the purpose of section 50 only when the whole amount is uncollectible or when a portion of it has been settled and the remainder is uncollectible. Otherwise, where a portion of a debt can be considered uncollectible, this portion is not considered to be bad for the purpose of section 50 even though accounting practice may require a write-down to realizable value.
By reading the two pieces of legislation (in both French and English), we are unable to distinguish any difference in the wording of these texts that justify such a difference in interpretation. Furthermore, court decisions on this concept appear to show that there is no difference between these two pieces of legislation (footnote 1).
The Supreme Court of Canada in the Zeolkowski decision (footnote 2) stated this with respect to the interpretation of the same expression in the same statute: "Giving the same words the same meaning throughout a statute is a basic principle of statutory interpretation”.
Finally, at the 1994 APFF Federal Roundtable, the CRA responded to this question with respect to the eligibility of part of a debt obligation for the subsection 50(1) election:
Nothing in the wording of subsection 50(1) permits us to consider that a portion of a debt obligation may be considered as a bad debt. This interpretation rests on the deemed acquisition of the debt obligation at cost of nil appearing to be possible only in a situation where, at the end of a particular taxation year, the original debt has no discernable value. It appears to us that for a portion of a debt to be considered a bad debt, subsection 50(1) would need to be more specific in this regard.
Questions to the CRA
(a) Can the CRA clarify how the wording of subparagraph 20(1)(p)(i) justifies a different interpretation of the wording of paragraph 50(1)(a) with respect to the concept of "bad debt", particularly with respect to the eligibility of a portion of the debt as "bad debt"?
(b) Can the CRA clarify how the wording of subsection 50(1) does not allow a taxpayer to make the election with respect to a portion of a debt that is recognized as uncollectible, in light of the answer given at the 1994 APFF Conference Roundtable?
(c) Would it not suffice in this regard for there simply to be a disposition of a portion of the uncollectible debt at a cost of nil?
CRA response to Question 10(a)
By virtue of subparagraph 20(1)(p)(i), a taxpayer may claim a deduction in respect of a debt that has become uncollectible in a taxation year. The amount of the debt must have been previously included in computing the taxpayer's income in the current or a preceding taxation year. By virtue of subsection 50(1), a taxpayer may claim a capital loss deduction for a debt that has become uncollectible.
The term "bad debt" is not defined in the Act. The question under both provisions of whether a debt is uncollectible is one of fact. The taxpayer must establish the reasons lending to the belief that the debt is not reasonably collectible as well as detailing the means of collection to which recourse was made.
Subparagraph 20(1)(p)(i) deals specifically with debts included in income such as accounts receivable, customer accounts or credit sales. Interpretation Bulletin IT-442R, supra, states that where it is considered that a part of a debt is collectible and a part is not, a portion only of the debt may be viewed as a bad debt.
In Hogan v. MNR, 56 DTC 183 (Tax Appeal Board), the taxpayer operated a fur coat store and had a business practice of providing financing to his customers. One of his clients had purchased a first coat and then, after a certain delay, purchased a second one. In both cases, the customer used the merchant's financing. Once the second coat was purchased, she returned the first coat and stopped making payments with respect to the first coat. After taking steps to recover the amounts owed, the merchant had to conclude that the amounts owed represented an uncollectible debt. The judge was in agreement that one part of the claim may be unrecoverable and the other not, depending on the circumstances.
In our view, and in light of the decision in Hogan, supra, a debt due to a taxpayer under subparagraph 20(1)(p)(i) could refer to amounts owed by a taxpayer's customer. In other words, the concept of debts in subparagraph 20(1)(p)(i) can refer to each account receivable of the taxpayer. Thus, following a diligent examination of the facts, certain of the amounts due by a customer can become uncollectible and these represent the portion of the debt which has become uncollectible.
CRA response to Question 10(b)
As previously discussed, by virtue of subsection 50(1), a taxpayer may claim a deduction as a capital loss for a debt that has become uncollectible. Where a taxpayer has a capital debt and there are various factors leading to the conclusion that the debt is uncollectible, the taxpayer may make an election under subsection 50(1) in respect of the debt.
Interpretation Bulletin IT-159R3 sets out the CRA's position with respect to capital debts. A debt can be eligible for the election under subsection 50(1) if it is uncollectible in its entirety at the end of a taxation year. Note that if a debt described in paragraph 50(1)(a) is settled in part and the creditor establishes that the balance owing is uncollectible, an election under subsection 50(1) could be made with respect to the uncollectible portion.
CRA response to Question 10(c)
See previous explanations.
Sophie Lambert
957-2121
2013-049567
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 See Hogan, 56 DTC 183 (TAB), Wesco Property Developments, 89 DTC 590 (TCCI) and Houle, 90 DTC 1247 (TCC).
2 [1989] 1 SCC 1378 (SCC)