Canada v. Diversified Holdings Ltd.
A-309-94
Strayer J.A.
18/3/97
12 pp.
Appeal from Tax Court decision setting aside Minister's disallowance of $239,328 loss carry-forward in respect of respondent's 1986 taxation year-Also, cross-appeal to set aside Minister's determination percentage of operating costs of respondent's K-2 Ranch not deductible as representing living expenses of company's owner-Respondent Diversified Holdings Ltd. (D.H.) purchased all shares of 860 Holdings, Ltd. (860)-Central Trust Co. (CTC) purchased mortgaged land for $400,000, which sum paid to 860-Title of land transferred by 860 to Central Trust Co. which, in return, inter alia, for payment of $400,000 passed by 860 to 173235 B.C. Ltd. (173235) (wholly owned by owner of D.H.), plus real payment provided by D.H. of $50,000, transferred mortgage to 173235-Latter company discharged mortgage, thus giving CTC clear title to land but retaining for itself debt said to be $1,128,110 previously owing to CTC and now to it, although no longer secured by mortgage-No terms of payment or interest prescribed in respect of debt, and at time of trial, nothing had been paid-Subsequently, 860 amalgamated with D.H. and amalgamated company thus successor debtor of 860's debt to 173235-D.H.'s total costs of acquiring 860's losses amounted to $152,400-In 1982 tax returns, 860 had asserted $239,328 non-capital loss which D.H. claimed in its 1986 tax return-Minister disallowed non-capital loss carried forward on basis when mortgage discharged by 173235, debt of 860 had been settled or extinguished within meaning of Income Tax Act, s. 80(1) so as to eliminate any non-capital losses based on such debt-Tax Court allowed appeal, finding debt continued despite discharge of mortgage as mortgage represented only security, and thus debt owing in 1986 by amalgamated D.H. to 173235, assignee of debt; 173235 did not act as agent for D.H. in becoming creditor of 860 and successor-debtor, amalgamated D.H.; and 860's business had not ended prior to 1986 so as to prevent amalgamated D.H. from continuing business in 1986-Appeal and cross-appeal dismissed-(1) 860's debt not "settled" or "extinguished" within meaning of Act, s. 80(1)-While for all practical purposes, debt no longer existing, as creditor and debtor same person, debt has not disappeared legally-For debt to be settled or extinguished within meaning of Act, s. 80(1), legally binding termination in form required, absent herein-Object and spririt of Act, s. 80(1) do not include de facto settlement of debts-No allegation of sham or artificial reduction of income within Act, s. 245-(2) No error in Tax Court Judge's finding 173235 not acting as agent or nominee for D.H. in taking assignment of 860's debt so as to make D.H. both debtor and creditor-(3) D.H. carrying on in 1986 business in which 860 incurred original loss-Deduction of non-capital loss allowed for particular taxation year if corporation taken over carrying on in that year same business it carried on in taxation year preceding takeover in which losses incurred-Although 860's business had ceased two months before takeover, open to Tax Court Judge to conclude, on facts, period not enough to demonstrate end of business nor to establish business could not be carried on with reasonable expectation of profit-Furthermore, in s. 111(5)(a), "and" at end of clause (A) must be read disjunctively-Clauses (A) and (B) refer to two possible situations: (A) refers to deductibility of such loss in same taxation year in which control acquired; (B) refers to deductibility of loss in any other ensuing taxation year-Case herein concerned with application of 111(5)(a)(B), business carried on in 1986-No allegation D.H. not carrying on real estate development business in 1986-Crossappeal dismissed for reasons in Hartwig v. Canada (A-313-94): Tax Court Judge correct in holding portion of expenditure of D.H. in respect of K-2 Ranch conferred taxable shareholder's benefit on owner and that such expenses not deductible from D.H.'s income as not incurred to earn income-Income Tax Act, S.C. 1970-71-72, c. 63, s. 111(5)(a) (as am. by S.C. 1985, c. 45, s. 57).