Atlantic Thermal Star v. R. - TCC: Deductions for a bad debt and goodwill denied, costs denied

Atlantic Thermal Star v. R. - TCC:  Deductions for a bad debt and goodwill denied, costs denied

http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/144655/index.do

Atlantic Thermal Star Limited v. The Queen  (May 31, 2016 – 2016 TCC 135, Lafleur J.).

Précis:   The taxpayer claimed a bad debt deduction in 2008 ($14,919) and a CEE deduction in 2010 ($4,996).  It also claimed costs on the basis of alleged delay by the Minister.  The taxpayer’s principal (Mr. Backman) did not testify;  its case was put in entirely by its accountant.  The Court rejected the appeal essentially on the basis that there was no evidence to demolish the Minister’s pleaded assumptions.  Moreover there was no order as to costs (this was an informal procedure appeal).

Decision:   The bad debt deduction for 2008 was rejected on the basis of a lack of evidence:

[33]        No evidence was presented to me at the hearing pertaining to the method followed by Mr. Backman as to the determination of a bad debt. The Appellant presented insufficient evidence for me to apply the factors described in Rich. All I was told by Mr. Rudolph is that Mr. Backman, in making that determination, acted in good faith and as a reasonable person.

[34]        Because of this lack of evidence, it is clear that the Appellant did not discharge its initial burden of proof to make out a prima facie case showing the inaccuracy of the assumption made by the Minister in that respect. The initial burden was on the Appellant to demolish the assumption made by the Minister that the debts in the amount of $14,919 were not bad debts within the meaning of paragraph 20(1)(p) of the ITA. Consequently, the burden of proof did not shift onto the Minister.

[35]        It is not, therefore, necessary for me to consider the second requirement pertaining to a deduction under paragraph 20(1)(p) of the ITA, namely that the amount had to have been included in the computation of the Appellant’s income in the year or a preceding taxation year.

[36]        I therefore conclude that the Appellant has not discharged its burden of proof to show that it is entitled to a deduction for bad debt expenses in the amount of $14,919 for the 2008 taxation year under paragraph 20(1)(p) of the ITA.

The CEE claim for 2010 found the same fate:

[46]        In this regard, the Appellant filed Exhibit A–7 (the “Deloitte Letter”). The Deloitte letter states the method of calculation of the amount of the goodwill followed at the time Mr. Backman acquired his partner’s interest in the partnership; that determination was made on January 1, 2005, and Deloitte concluded that the amount of the goodwill was $105,864 at that time. The Deloitte Letter also contains the following paragraph: “On September 30, 2006, Mr. Backman transferred the business to a newly incorporated company on a tax-deferred basis pursuant to section 85 of the Income Tax Act. With respect to the goodwill, an amount equal to 4/3 of the CEC (cumulative eligible capital) balance of $77,398 was elected as the proceeds of disposition”. Furthermore, as stated above, no one from Deloitte testified at the hearing as to the fair market value of the goodwill as of September 30, 2006.

[47]        I am of the view that the Appellant has not made out a prima facie case with the Deloitte Letter as to the value of the goodwill as of September 30, 2006 being something other than nil; the Appellant has not demolished the Minister’s assumption in this regard.

Finally, the appellant’s claim for costs was also rejected:

[62]        I do not see any factors in this appeal that would convince me to exercise my discretion so as to award costs to the Appellant. Furthermore, I can see no exceptional circumstances in the conduct of CRA officials prior to the filing of the Notice of Appeal. No evidence was provided by the Appellant as to any disbursements incurred, the state of Mr. Backman’s health or any exceptional stress that was occasioned by the conduct of the CRA. This may be in part because Mr. Backman did not appear at the hearing.

As a result the appeal was dismissed, without costs (this was an informal procedure appeal).