Executive summary: Key legal and evidentiary issues

• HGPC, a former law firm, claimed a $37,283.11 "bad debt" HST deduction under subsection 231(1) of the Excise Tax Act for its Q2 2017 reporting period, which the Minister disallowed.

• Insufficient collection efforts were demonstrated, as the appellant failed to individually identify or pursue each of the "at least fifty" receivables on a debt-by-debt basis.

• No write-off entries were made in the appellant's books of account, a mandatory precondition under subsection 231(1), despite the appellant never having approached the Law Society of Ontario for access to its books held under trusteeship.

• Outstanding net HST of $53,999.33 for Q3 and Q4 2013 had not been remitted by the June 30, 2017 deadline, breaching subsection 231(1.1) remittance conditions.

• The founding lawyer's absconding with more than $3 million in trust funds in November 2013 triggered LSO trusteeship, complicating the firm's access to its own accounting records.

• The Tax Court of Canada dismissed the appeal on all three grounds, without costs as not sought by the Respondent, reinforcing the strict compliance requirements of the Excise Tax Act.

Background and the founding lawyer's misconduct

Heydary Green Professional Corporation (HGPC) was a former law firm in Ontario with four member lawyers, including Michael Cochrane and a lawyer named Green. In late November 2013, the lawyer who had founded HGPC and several related firms absconded with trust funds of more than $3 million. This triggered the Law Society of Ontario (LSO) to place the firm under trusteeship. At that time, HGPC had 137 outstanding receivables amounting to $539,559.94, including HST of $62,843.63. Those receivables all had been rendered in 2013.

The bad debt claim and the Minister's assessment

Following the trusteeship, Cochrane and Green undertook collection efforts on the outstanding accounts. Over time, Mr. Cochrane determined that at least fifty of the receivables, amounting to $324,076.26 including HST of $37,283.11, could not be recovered. He determined that it would be "impractical and fruitless" to attempt to recover the remaining receivables through the courts, due to procedures which Ontario lawyers must follow to collect their accounts. HGPC subsequently filed a GST/HST return for the April 1, 2017 to June 30, 2017 reporting period, claiming a bad debt formulaic adjustment (deduction) of $37,283.11 to net tax payable under subsection 231(1) of the Excise Tax Act. On October 23, 2018, the Minister of National Revenue assessed the reporting period and disallowed the claimed deduction. The appellant objected, but on January 31, 2020 the Minister confirmed the assessment, leading HGPC to appeal to the Tax Court of Canada.

The Minister's three grounds for disallowance

The Respondent's position rested on three separate grounds. First, the appellant did not make sufficient collection efforts to justify styling its unpaid invoices for legal services as bad debts under subsection 231(1). Second, the appellant did not write off in its books of account any unpaid invoices for legal services per subsection 231(1). Third, the appellant did not remit all net HST reported for its two quarterly reporting periods ending September 30, 2013 and December 31, 2013, per subsection 231(1.1), when the alleged bad debts had first been rendered.

The Court's analysis on whether the debts were "bad"

Justice Russell examined whether the appellant had established that its unpaid receivables genuinely constituted bad debts. Drawing on prior jurisprudence, including Davies v. R. and Ministic Air Ltd. v. R., the Court noted that a debt becomes "bad" when, despite reasonable steps having been taken to collect, the debt remains uncollected, and that debts must be considered and found to be uncollectible on an individual basis. The Court found that HGPC had not individually identified or discussed its debts on an individual basis. Mr. Cochrane referred to the debts of the appellant as being "at least fifty" in number, which the Court noted suggested he was unaware of specifically how many of its debts the appellant had been caused to label as "bad." The sample materials put in evidence as to collection efforts consisted only of four emails seeking payments and two statements of claim regarding the "at least fifty" accounts receivable labelled "bad." The Court concluded that the appellant had not reasonably described how the accounts receivable debts were individually and significantly pursued by collection efforts, as Ministic Air requires, leaving no evidentiary basis to find them "bad."

The Court's analysis on the write-off requirement

Subsection 231(1) requires that each bad debt be written off in the supplier's books of account as a precondition to claiming the deduction. HGPC argued that it could not do this as its books of account had been turned over under trusteeship to the LSO. Justice Russell found no evidence that such writing off occurred. The Court noted there was no evidence of the appellant simply approaching the LSO about this statutory requirement, and expressed doubt that the LSO would not have responded cooperatively and positively to a request for temporary — and if necessary monitored — access to its books of account to make the required entries. The Court also observed that the appellant had a positive relationship with the LSO while under trusteeship, as indicated by written statements of the LSO at conclusion of the trusteeship. The appellant's alternative argument — that its own accounts receivable related documentation should be considered as "equivalent" to its books of account — was rejected as inconsistent with the subsection 231(1) wording, where the actual "books of account" did exist, albeit temporarily under LSO trusteeship. In any event, the appellant put no actual such documentation in evidence.

The Court's analysis on the remittance condition

Under subsection 231(1.1), a reporting entity is not entitled to deduct an amount under subsection 231(1) unless the tax collectible for that supply was included in the net tax reported for the reporting period when the tax became collectible, and all net tax remittable as reported in that return is remitted. The invoices underlying the bad debt claim had been rendered in Q3 and Q4 of 2013, with total HST owing of $53,999.33 for those periods. The HST deduction due to bad debts was claimed June 30, 2017. By that date, this amount nor any portion thereof had been remitted. Citing Vivaconcept International Inc. v. R. and Ministic Air, the Court confirmed that the positive amount of net tax must be paid to the Minister before the deduction claim is made, and that paying net tax subsequent to the time at which the deduction claim is filed does not satisfy the requirement. The affidavit of Sopheak Ly and the admissions in cross-examination of Mr. Cochrane and accountant Mr. K. Ruprai confirmed that no remittance by June 30, 2017 occurred.

Ruling and outcome

Having found that the appellant failed on all three grounds — insufficient evidence that the debts were bad, no write-off in the books of account, and failure to remit the prerequisite net tax before claiming the deduction — Justice Bruce Russell dismissed HGPC's appeal of the assessment of the appellant's April 1 to June 30, 2017 reporting period raised October 23, 2018. The appeal was dismissed without costs, as costs were not sought by the Respondent, His Majesty the King. The $37,283.11 bad debt deduction claimed by HGPC was denied in its entirety. No exact monetary amount was awarded to either party beyond the confirmation of the original assessment disallowing the deduction.