Tax Court Cases
25. It is Sufficient to Make a S. 50(1) Election by Claiming an ABIL - Dhaliwal
One of the biggest problems with taxpayers who loan their "small business corporation" funds to get it started, when things go sideways, no one remembers to file a S.50(1) election. In fact, there isn't a place on a tax return to make that election so when you efile it actually isn't possible. This TCC decision of Dhaliwal (2012 TCC 84) the court dealt with this issue and determined that it was sufficient to communicate the election on an efiled return by simply claiming an ABIL. In this case the taxpayer was an employee of a company, the principals of which asked him to make a loan to allegedly address short-term cash-flow problems in the company. A short time later the company went out of business and its principals had filed for bankruptcy.
The employee/taxpayer received a nominal payout from the insolvency proceedings and had exhausted all collection channels. In 2008, the taxpayer e-filed his 2007 tax return and completed an ABIL claim of $154,329.15. CRA disallowed his claim on a number of grounds including that it was a non-arm's length loan, there was inadequate evidence that Mainland was a "qualifying small business corporation", the loan did not go bad in 2007, and that taxpayer did not elect to have s. 50(1) of the Tax Act apply.
At the hearing CRA conceded all of the necessary factual elements of the ABIL but continued to argue that no election had been made by the taxpayer to have s. 50(1) apply. The TCC concluded that, as there was no prescribed form for filing the election and no election choice was available when e-filing, it is sufficient to communicate an election by providing in tax return that taxpayer wants to be allowed an ABIL for a particular debt in that year. A perfectly sensible result for an election that was only necessary to addresss amendments made to the debt foregiveness rules in the 1990s. We will watch to see if CRA accepts this perfectly reasonable interpretation or instead waste more taxpayers' money appealing this decision.