Date: 19991103
Docket: T-1054-93
BETWEEN:
REGINALD D. RICHARDSON
Plaintiff
- and -
HER MAJESTY THE QUEEN
Defendant
REASONS FOR JUDGMENT
EVANS J.:
[1] In his income tax returns for 1986 and 1987 Reginald D. Richardson claimed as deductions from his income for those years the sums of $34,249 and $36,651. He had advanced these amounts in 1985 and 1986 as interest-free loans to Richcrest Holding and Development Ltd., of which he was the sole proprietor and employee, and, along with family members, a director.
[2] The loans had been made in order to finance research and development being undertaken by the company into a process for producing synthetic oil from heavy oil and tar sands, and to meet the expenses that it had incurred in making patent applications for the process.
[3] Revenue Canada disallowed the deductions on the ground that, since the loans were not "an outlay or expense" "made or incurred by the taxpayer for the purpose of gaining or producing income from the business", they were not deductible from his income under paragraph 18(1)(a) of the Income Tax Act .
[4] Revenue Canada took the position that the loans constituted "capital outlay or loss", and were thus not deductible by virtue of paragraph 18(1)(b). This was because Mr. Richardson was not in the business of lending money, and the loans were not an adventure or concern in the nature of trade.
[5] Submissions were made to Revenue Canada officials on behalf of Mr. Richardson by counsel in which it was contended that the loans should be treated as a non-capital business loss. They relied in particular on the Supreme Court of Canada"s decision in M.N.R. v. Freud 68 DTC 5279.
[6] Mr. Richardson appealed to the Tax Court of Canada against the disallowance of the loans. Mr. Richardson represented himself before the Tax Court, as he did before me, but he relied on the legal submissions that had been prepared on his behalf by counsel when the matter was still with Revenue Canada.
[7] In his reasons for decision rendered on January 18, 1993, and amended on April 15, 1993, Brulé J.T.C.C. dismissed the appeal on the ground that the appellant had not demonstrated that he had suffered any loss as a result of advancing loans to Richcrest. Irrespective of the characterisation of the loans for tax purposes, he held, they could only be deducted from the appellant"s income if they could appropriately have been regarded as bad debts, which they could not
[8] In his appeal to this Court from that decision Mr. Richardson relied primarily on the written documentation that was before the Tax Court, including the submissions prepared on his behalf by counsel for the purpose of the internal review of Revenue Canada"s disallowance of the deductions, and the summary of his case that the appellant had submitted to Brulé J.T.C.C. after his appeal had been heard.
[9] He also gave oral evidence on his own behalf, in which he explained that he had incorporated Richcrest in 1977, after taking early retirement from the position of senior Vice- President of Canada General Electric. He intended to conduct his post-retirement careers through the company: business consulting, researching and developing a process for synthetic oil and other energy-related projects, developing a computer system for options trading and writing on economic issues.
[10] Mr. Richardson testified that after the consulting contracts came to an end, and his partner in Richcrest and its associated ventures went his own way, the company could only support the costs of the energy research and development, and the associated patent applications, if Mr. Richardson paid its bills in return for promissory notes. Nonetheless, he decided to keep the company going, in part because of its book-keeping system.
[11] In addition to the loans that he made to Richcrest in 1985 and 1986, which are the subject of this appeal, Mr. Richardson advanced further funds to the company for the same purpose until 1990, at which point the total indebtedness of Richcrest on notes and loans payable was shown in the financial statements accompanying the company"s tax return for that year as $177,504.98. Mr. Richardson said that this represented loans that he had made to the company in each year from 1986. Some of the loans advanced before 1987 had been repaid.
[12] He further testified that, given the recession in the mid-1980s, the fall in the price of oil and the drying up of consulting contracts, he did not think in 1986 that Richcrest would have any sources of income from which it could repay the loans which he consequently regarded as uncollectible. Mr. Richardson is recorded in the minutes of the directors" meeting held on June 21, 1986 as expressing this view. However, in his testimony he also said that he had continued to expect oil prices to rise within a reasonable period of time, which would enable Richcrest to sell or license the synthetic oil process and repay the loans.
[13] It is largely a question of fact whether a loan is a "bad debt" for the purpose of paragraph 50(1)(a) of the Income Tax Act , or otherwise can be treated by the taxpayer as a loss that can be deducted from income. The case law is helpful in indicating factors that have been taken into account in making this factual determination. I was referred, in particular, to Berretti v. M.N.R. 86 DTC 1719 (T.C.C.); Hogan v. M.N.R. 56 DTC 183 (I.T.A.B.); No. 409 v. M.N.R. 57 DTC 126 (I.T.A.B.); Guy v. R. [1998] 2 C.T.C. 2755 (T.C.C.).
[14] For example, it is relevant to consider the length of time between the making of the loan and the taxpayer"s determination that it was not collectible. In this case, the taxpayer treated the loans as bad debts in the year after they were advanced. There was no evidence that the taxpayer had written off the debts prior to an assignment that he purported to make in 1990. The debts continued to appear in the financial statements of Richcrest until 1990.
[15] In addition, the taxpayer continued to operate the company until 1990. In his appeal to the Tax Court Mr. Richardson had testified that the company was still operating in 1992, although I accept his evidence before me that that was an error on his part. Further, in the years 1987 to1989, after he had decided that the debts with which we are concerned here were uncollectible, he lent to Richcrest an additional $60,000 or so to finance its research and development activities.
[16] On the other hand, it is also clear that the relevant question is whether the taxpayer, not an official of Revenue Canada, honestly and reasonably regarded the debt as uncollectible. Moreover, a loan does not have to be absolutely irrecoverable in order to constitute a loss or a bad debt. It may be sufficient that it was unlikely to be repaid within the fiscal year when the determination was required to be made. Nor does the borrower have to be insolvent.
[17] In my opinion, the taxpayer has not established on the evidence that he honestly and reasonably believed in 1986 and 1987 that the loans were not collectible. As Brulé J.T.C.C. observed, Mr Richardson"s "actions and words belied this both in his evidence and written argument."
[18] At the end of the day, Mr Richardson"s argument was that the Court should pierce the corporate veil and treat Richcrest and its sole proprietor as one. I see no reason in this case for so doing. Having elected to pursue his business interests through a corporate structure, and having enjoyed its advantages when he was earning consulting income, Mr. Richardson must live with the consequences of his decision to continue to conduct through Richcrest, without remuneration, the research and development to which he is obviously still passionately committed. While he might have been better advised to undertake this work in his own name, as he stated that he has been doing since 1990, the fact of the matter is that this is not what he did.
[19] Finally, I should refer to the concern expressed by Mr. Richardson at the end of the hearing. It was that, as a non-lawyer representing himself who had only received the Minister"s book of authorities at the hearing, he was not able to make an effective reply to counsel"s submissions.
[20] However, in light of the written submissions, including the "bad debt" point, that had been made earlier by counsel on Mr. Richardson"s behalf prior to his appeal, and in light of the factual nature of the issue on which I have disposed of this appeal, I am satisfied that Mr. Richardson has had the full and fair hearing to which he is entitled as a self-represented lay litigant in this Court.
[21] For these reasons the appeal is dismissed. The parties have 14 days from the date of this judgment to make written submissions on costs.
"John M. Evans"
J.F.C.C.
Toronto, Ontario
November 3, 1999
FEDERAL COURT OF CANADA
Names of Counsel and Solicitors of Record
| COURT NO: T-1054-93 |
| STYLE OF CAUSE: REGINALD D. RICHARDSON |
- and -
HER MAJESTY THE QUEEN
| DATE OF HEARING: TUESDAY, NOVEMBER 2, 1999 |
| PLACE OF HEARING: TORONTO, ONTARIO |
| REASONS FOR JUDGMENT: EVANS J. |
| DATED: WEDNESDAY, NOVEMBER 3, 1999 |
APPEARANCES: Mr. Reginald D. Richardson
For the Plaintiff in Person
Mr. Francesco Calabrese
For the Defendant
SOLICITORS OF RECORD: Reginald D. Richardson
| 57 Widdicombe Hill Blvd. |
| Apt. 1504 |
Weston, Ontario
| M4R 1Y4 |
| For the Plaintiff in Person |
Morris Rosenberg
Deputy Attorney General
of Canada
For the Defendant
FEDERAL COURT OF CANADA
Date: 19991103
Docket: T-1054-93
Between:
| REGINALD D. RICHARDSON |
Plaintiff
- and -
HER MAJESTY THE QUEEN
Defendant
REASONS FOR JUDGMENT