Brown v. Canada
T-2712-91
Rouleau J.
15/1/96
7 pp.
Appeal from Tax Court decision holding Income Tax Act, s. 40(2)(g)(ii) applying to plaintiff's 1986 taxation year- Appellant one-third owner of farm equipment dealership, real estate company-Dealership required to move closer to farm clientele-Acquiring land in 1981-When dealership's bank refused to get involved in further financing in relation to acquisition of land, real estate company incorporated to hold land, build building, lease both back to dealership- Real estate company's bank insisting appellant, other shareholders provide personal guarantees for loan-Dealership agreeing to make all payments on any mortgage placed on property-Dealership going into receivership and shareholders, including appellant, loaning money without interest to real estate company to pay interest on bank loan-Appellant lending corporation $20,821 by way of shareholder loans-Deducting $10,410.50 from 1986 income as allowable business investment loss-Minister disallowing deduction on ground loss not in respect of disposition of debt or other right to receive amount acquired for purpose of gaining or producing income-Pursuant to s. 40(2)(g)(ii), taxpayer not permitted to deduct capital loss in respect of disposition of debt or other right to receive amount, unless debt acquired for purpose of gaining or producing income from business or property or acquired as consideration for disposition of capital property in arm's length transaction-Purpose of dealership, associated real estate company to gain, produce active business income-Expected real estate company to make profit through original advances made by dealership as well as reduction in principal through mortgage payments, until principal fully paid off-Thereafter company would make rental income-Monies advanced by plaintiff to real estate company to make interest payments on loan from bank for purpose of producing income-As shareholder of real estate company, plaintiff directly linked to its income producing potential-Clear nexus between taxpayer, potential future income to be earned from acquired debt-S. 40(2)(g)(ii) not applicable- That taxpayer's objective not met due to economic conditions not altering conclusion-Appeal allowed-Income Tax Act, S.C. 1970-71-72, c. 63, s. 40(2)(g)(ii).