Queenswood Land Associates Ltd. v. Canada
A-182-97
Noël J.A.
17/12/99
19 pp.
Forgiveness of debt-Appeal from T.C.C.'s judgment dismissing in part appeal from reassessment with respect to 1986, 1987, 1988 taxation years whereby MNR determined forgiveness of debt owed by company (R-104) acquired by appellant and then amalgamated with it gave rise to taxable income in hands of appellant to extent of amount forgiven-Appeal turns on characterization of forgiveness of debt for income tax purposes-At time of acquisition by appellant, R-104's liability under loan agreement stood at $11,185,095 including interest accrued in approximate amount of $6,450,000-On day appellant acquired R-104, lender agreed to release R-104 from obligation to pay any amount of indebtedness in excess of $3,384,990 and R-104 gave lender option to acquire its land inventory for price equal to fair market value ($2,155,000) which option was exercised same day-As result of disposition of its land inventory, R-104 incurred business loss of $9,442,196, i.e. difference between cost of land sold ($10,950,696) and its portion of proceeds from sale ($1,508,500)-Appellant acquired all issued shares of R-104 for price of $10 same day and two companies amalgamated two days later-At December 1986, R-104's interest in land had cost for income tax purposes of $10,950,696-In tax return for 1986, appellant declared loss of $9,942,196 from sale of land-Unused portion of losses carried forward and deducted against income in 1987 and 1988 taxation years-Minister issued reassessment adding debt forgiven of $8,303,261 to income for 1986 on basis debt forgiven such as to give rise to income of commensu-rate amount in hands of benefactor of forgiveness-Application of ITA, s. 80-Appeal allowed-Case law to effect where forgiveness of amount owed by business pertains to "trade debt", or debt so intimately connected with trade of business as not to be segregable from it, will usually form part of profit of business-Where, however, forgiveness pertains to debt distinct and removed from trading operations of business, will normally not impact on its profits for year-In case appearing to be on all fours with present one (Molstad Development Company Limited v. The Queen (1997), 97 DTC 913 (T.C.C.) (presently under appeal to F.C.A.)), T.C.J. expressed view question as to whether forgiveness of debt on revenue or capital account depending on whether debt itself on revenue or capital account-T.C.J. concluded repayment of loan by borrower would not have affected its profit in year of payment; neither should forgiveness of part of loan affect its profit; partial forgiveness of debt amounted to no more than saving to borrower and saving of money not to be included in taxpayer's income-Forgiveness herein arose in course of normal borrower-lender relationship-Loans herein used to provide appellant with working capital necessary to conduct land development operations-Debt herein on capital account and consequently, forgiveness had no impact on appellant's profit for year-Income Tax Act, S.C. 1970-71-72, c. 63, s. 80 (as am. by S.C. 1980-81-82-83, c. 140, s. 43(1); 1983-84, c. 1, s. 35(1); 1985, c, 45, s. 37; 1987, c. 46, s. 27(1))