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Dhaliwal — TCC Finds ABIL Election Requirement Met by E-Filer - by Steve Carreiro and Ashid Dharsi 

Canadian Tax Adviser


April 03, 2012


Steve Carreiro
GVA, Enterprise Tax


Ashid Dharsi
GVA, Enterprise Tax


In Samipal Dhaliwal v. The Queen (2012 TCC 84), the Tax Court of Canada (TCC) ruled that, by claiming an allowable business investment loss (ABIL) in his electronically filed 2007 tax return, the taxpayer effectively "elected" to have the deemed disposition rules in subsection 50(1) apply to a bad debt of over $154,000. The TCC noted that it was surprised that this case had to be resolved by the court, and that it appeared that the CRA still had not amended its electronic tax return program to properly administer this provision of the Act. In particular, the TCC expressed its concern that the CRA was taking a backwards step by putting up barriers to facilitating electronic filing of personal tax returns.

Legislative background
Subsection 50(1) deems a disposition of a debt where it is established that a debt has become a bad debt in the year and the taxpayer elects to have the subsection apply in his or her "return of income" for that year. A loss from such a deemed disposition may be eligible as a business investment loss under paragraph 39(1)(c), 50% of which is deductible (i.e., treated as a allowable business investment loss (ABIL)).


The taxpayer (Mr. D) loaned $156,000 to his employer (Opco) over a period of several months in 2005 to assist with Opco's short-term cash flow problems. These problems resulted because suppliers to specific jobs needed to be paid before its customers' progress payments were due. Opco was supposed to promptly repay Mr. D's loans when it received its customers' payments.


Mr. D became concerned about whether Opco would repay the loans after learning that a supplier was not paid, despite having loaned Opco money for this specific purpose. Mr. D retained a lawyer and formalized the loans by having Opco and its two principals (Mr. B and Mr. C) sign an interest-bearing promissory note on August 18, 2005.


Opco eventually declared bankruptcy, and did not repay Mr. D's promissory note. In 2006, Mr. D made a claim against Mr. B. (No claim was made against Mr. C as he was considered to have no ability to pay Mr. D any funds.) As a result of the claim against Mr. B, Mr. D ultimately received under $2,000 in February 2007.


Mr. D electronically filed his 2007 tax return, which included a claim of over $154,000 as a business investment loss (or a $77,000 ABIL) in April 2008. The CRA denied Mr. D's ABIL because Opco had not filed its tax returns, and therefore the CRA could not determine if Opco was a qualifying small business corporation.


Mr. D filed a T1 Adjustment Request and asked the CRA to allow the ABIL in his 2007 tax return, as suggested by the CRA. However, the CRA also denied this request, for the same reason, in January 2009.


Mr. D then filed a Notice of Objection to object to the denied T1 Adjustment Request, based on the CRA's guidance. The CRA confirmed its assessment and denied the Notice of Objection, noting the following additional reasons for denying Mr. D's request:


  • The loan appeared to be non-arm's length
  • The loan became bad in 2005 (not 2007), and therefore required a subsection 50(1) deemed disposition election to have been filed in Mr. D's 2005 tax return
  • The loan was to Mr. B, not Opco
  • A late-filed election for 2005 could be filed provided that Mr. D paid a late-filing penalty of approximately $5,000 with the late-filed election.


Mr. D appealed the CRA's decision to the TCC.


Before the case went to trial, the CRA noted for the first time (in its Reply to Mr. D's Notice of Appeal to the TCC) that, even if Mr. D's debt became bad in 2007, he did not elect in his 2007 return, as required by subsection 50(1).


At the beginning of the trial, the CRA conceded that Mr. D's loan to Opco was made on an arm's-length basis to a qualifying small business corporation to earn income. Therefore, the sole issue to be decided was whether the taxpayer elected to have subsection 50(1) apply to his Opco loan in his electronically filed 2007 tax return.


TCC decision
The TCC noted there is no prescribed form, and no CRA recommended form, to use to make a subsection 50(1) election. In addition, there is no space in a tax return to indicate a taxpayer's wish to apply subsection 50(1). While a taxpayer can attach a letter indicating this wish to his or her paper-filed tax return, this is not an option for a taxpayer that files electronically.


The TCC stated that "if an election making a specific reference to subsection 50(1) is required, but no such choice is available in the CRA's electronic tax returns, this would mean that subsection 50(1) is only available to paper-filers or that the CRA is derelict in its duties in administering the Income Tax Act".


The TCC's comments suggest that the CRA requested that the TCC deny Mr. D's appeal as he did not file a subsection 50(1) election with his 2007 tax return, or mail a written election to the CRA separately from his e-filed 2007 tax return. The TCC viewed both of these arguments as contrary to the statutory requirement that the election be "in" the return, not "with" the tax return.


Alternatively, the CRA argued that an e-filer is not allowed to make a subsection 50(1) election based on the current wording of the provision. The TCC viewed this as a "backward step", and noted its surprise that the CRA would be "asking for barriers to electronic filing".


The TCC stated that "it is clear from the legislative history that the purpose of the election was to allow taxpayers choice in order to avoid the unintended application of the new debt forgiveness rules in certain circumstances, and not to ensure the Minister was given any needed additional information or paperwork". Consistent with previous cases, the TCC ruled that, generally, a taxpayer can sufficiently communicate a subsection 50(1) election by clearly reporting an ABIL on a particular debt or shares disposed of in that year in his or her tax return, whether paper filed or electronically filed.


The TCC commented that it was "disappointing" that the CRA needed the TCC to resolve this issue, when "all it needs to do is program its electronic tax return differently". The TCC considered this case to be "a questionable use of public resources" and expressed its concern that "four years later...the CRA still appears not to have addressed how it would like to administer the Act in this regard".


The TCC allowed Mr. D's appeal with costs.


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