Smith v. Canada
A-204-86
Mahoney J.A.
21/7/93
12 pp.
Indirect payments-Appeal from trial judgment ([1986] 1 C.T.C. 418) arising out of assessment of 1980 income tax return -- Appellant co-owner of Ford dealership, Holiday 77 -- When partner decided to withdraw, appellant incorporating Holiday 80 to buy most of Holiday 77's assets -- Appeal concerned with four transactions: (1) unexplained $3,063.33 payment by Holiday 80 to Ford Credit Canada (FCC); (2) $14,000 deposit to Holiday 77's account for purchase of leased car, when Holiday 80 paid liability to FCC; (3) payment of $7,450 to FCC by Holiday 80 relating to car sold by Holiday 77; (4) $9,000 proceeds of sale of car by Holiday 80 deposited to Holiday 77's account -- Appellant also seeking to deduct bad debt consisting of $49,000 loan to obtain Bulk Sales Act waivers from creditors to Holiday 77 if aforementioned amounts included in income -- Income Tax Act, s. 56(2) providing payment or transfer of property made pursuant to direction of taxpayer to some other person for benefit of taxpayer or as benefit taxpayer desired to have conferred on other person shall be included in computing taxpayer's income -- Appellant taxpayer, Holiday 77 other person upon whom benefit conferred, Holiday 80 source of benefit -- In addition to four conditions required to engage s. 56(2) set out in Fraser Companies, Limited. v. Minister of National Revenue (1981), 81 DTC 5051, Winter v. Canada, [1991] 1 F.C. 585 (C.A.) (rendered after trial judgment) added precondition that payee must not be subject to tax on benefit received -- Appellant not entitled to any of payments made to or for benefit of Holiday 77 -- Payments subject to tax in Holiday 77's hands -- S. 56(2) wrongly invoked -- Some proof required of initial expectation Holiday 77 would be able to repay loan to qualify as loan potentially amenable to deductibility as bad debt -- Court inferred loan uncollectible when made -- Whether any amounts attributable under s. 56(2) irrelevant to whether bad debt properly claimed -- As issue defined by pleadings, and none of above amounts properly included in income, entitlement to $49,000 as bad debt moot -- Income Tax Act, S.C. 1970-71-72, c. 63, ss. 40(2)(g), 50(1)(a) (as am. by S.C. 1977-78, c. 42, s. 4), 56(2).