In Heron Bay Investments Ltd. v. The Queen, the Tax Court considered whether a $3.77 million non-recourse demand loan made in 1994 by Heron Bay to another corporate group member met the criteria for deductibility under the Income Tax Act (Canada) as either a doubtful debt or a bad debt in Heron Bay's 1995 taxation year. The loan was used by the borrower as a deposit to purchase two real estate development properties. The Court concluded that Heron Bay acted as a "banker" for the group and therefore satisfied the statutory requirement that its ordinary business include the lending of money. However, in the Court's view, the loan was not typical of the loans usually made by Heron Bay due to its non-recourse nature and, therefore, the loan was not made in the ordinary course of Heron Bay's lending business as required under the statutory provisions. Heron Bay also failed to meet the statutory reasonableness test for a doubtful debt claim as the loan had not been outstanding for long, and Heron Bay was unable to establish that there were changes in circumstances that caused it to doubt the collectibility of the debt. The Court also rejected Heron Bay's alternate claim for a bad debt deduction on the basis that there was no evidence that the debt had become uncollectible.
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