Taxpayer was not party to franchise agreement and therefore had no rights or entitlements under it

Tax - Income tax - Capital gains and losses

Taxpayer owned restaurant and years later, restaurant was renamed following amalgamation of several corporations, including taxpayer. Franchise agreements for these restaurants were with SFI Inc., and SFI Inc. entered into ten-year franchise agreement with A Ltd.. A Ltd. was not able to fund costs and expenses under franchise agreement and took out two large loans. Terms and conditions of second loan were set out in letter of offer and accepted by franchise holding corporation. “Borrower” of second loan included taxpayer, and security agreement and debenture in favour of taxpayer and others was executed. Shortly after agreements were made, bankruptcy order was issued against A Ltd.. Taxpayer was reassessed by Minister and denied allowable business investment loss (ABIL) as well as carry-back and carry-forward of non-capital loss resulting from ABIL. Taxpayer appealed. Appeal dismissed. Taxpayer was not party to franchise agreement and therefore had no rights or entitlements under franchise agreement. Bankruptcy of A Ltd. did not in and of itself create indebtedness owed to taxpayer by A Ltd., as no amount in respect of principal amount of second loan would be included in indebtedness until payment was made by creditor to bank in respect of principal amount. Unfortunately for taxpayer, evidence was that taxpayer had paid no amount in respect of principal amount of second loan to bank or any other person for benefit of A Ltd.. Under letter of offer, obligation of taxpayer with respect to principal amount of second loan was obligation of taxpayer to bank and did not constitute cost of debt owed by A Ltd. to taxpayer. Accordingly, appeal was dismissed.

Moose Factory Restaurant Properties Ltd. v. The Queen (2019), 2019 CarswellNat 3715, 2019 TCC 156, John R. Owen J. (T.C.C. [General Procedure]).

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