Date: 20000531
Docket: 98-1188-IT-G
BETWEEN:
SOLOMON YUNGER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bonner, J.T.C.C.
[1] The Appellant appeals from assessments of income tax for
the 1991, 1992 and 1993 taxation years. There are two issues
under appeal:
(a) Deductibility of $7,086.00 in 1991 and $34,729.00 in 1992
under subparagraph 20(1)(p)(ii) of the Income Tax
Act ("Act");
(b) Deductibility of $20,100.00 in 1992 and $36,000.00 in
1993, being amounts which the Appellant pleaded were paid to
Yuncorp Holdings Limited ("Yuncorp") for services in
respect of the management of rental properties in which the
Appellant had an interest.
[2] Paragraph 20(1)(p) of the Act provides:
20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in
computing a taxpayer's income for a taxation year from a
business or property, there may be deducted such of the following
amounts as are wholly applicable to that source or such part of
the following amounts as may reasonably be regarded as applicable
thereto:
. . .
(p) the aggregate of
. . .
(ii) all amounts each of which is that part of the amortized
cost to the taxpayer at the end of the year of a loan or lending
asset made or acquired in the ordinary course of business by a
taxpayer who was an insurer or whose ordinary business included
the lending of money established by him to have become
uncollectable in the year.
It was the position of the Respondent that the Appellant did
not meet two of the requirements of this provision because, (a)
the loans giving rise to the losses were not made in the ordinary
course of business by the Appellant, and (b) the Appellant did
not have an ordinary business which included the lending of
money. The losses, according to the Respondent, were losses of
capital.
[3] The management fees are alleged to have been paid to
Yuncorp, a corporation whose shareholders were the
Appellant's wife and children. The position of the Respondent
with respect to the management fees is that the outlay was not
reasonable in the circumstances and was therefore prohibited by
section 67 of the Act which reads:
67. In computing income, no deduction shall be made in respect
of an outlay or expense in respect of which any amount is
otherwise deductible under this Act, except to the extent that
the outlay or expense was reasonable in the circumstances.
Although the Reply to the Notice of Appeal is not clear on the
point, both parties approached the case on the basis that, in
addition to the section 67 question, the issues included
whether paragraph 18(1)(a) of the Act is
satisfied viz., whether the payments were made for the
purpose of gaining or producing income from a business of the
Appellant.
[4] I will deal first with the bad debt issue. It was common
ground that the Appellant incurred bad debt expenses as
follows:
(a) in 1991 a loss of $7,086.00 in respect of the transaction
known as the Beeton mortgage; and
(b) a 1992 loss of $34,728.00 in respect of a transaction
known as the Aurora mortgage.
[5] The Appellant is married to Lily Yunger and has a daughter
and two sons, Samuel Yunger and David Yunger. The
family is close-knit. The Appellant's principal occupation
has been in the jewellery business but he has also been active
for more than 40 years in buying, selling and investing in real
estate. As the result of this activity he became familiar with
the use of mortgages in the financing of real estate
transactions.
[6] It was the thesis of the Appellant that in or about 1990
the Yunger family heard that friends were earning profits by
lending money on the security of mortgages arranged through
Samuel Sochaczewski, a lawyer with a busy real estate practice.
The Yunger family, led by the Appellant, took steps to engage in
this type of lending. Mr. Sochaczewski was contacted by the
Appellant or his son Samuel and told of the family's interest
in mortgage investments. As a result Mr. Sochaczewski began
to call either the Appellant or Samuel Yunger when trying to
arrange a mortgage loan to a client. Mr. Sochaczewski
furnished particulars of the borrower, the security, the amount
of the loan and proposed terms. Usually the Appellant would take
time to discuss the proposal with family members and would then
call Mr. Sochaczewski to indicate either general acceptance
or rejection of the proposal. I say general acceptance because
normally a demand was made for a higher rate of interest than
originally offered. All or almost all of the loans involved a
bonus to the lender. Typically the mortgages were seconds or
lower in priority.
[7] About half of the proposals made by Mr. Sochaczewski
to the Yungers resulted in loans. The Appellant and his son
Samuel considered expanding the lending activity by contacting
two other lawyers believed to be sources of potential mortgage
loans. However they did not proceed to lend money through these
individuals. As well, some consideration was given to expanding
the activity by entering into the personal finance business, but
this initiative was not pursued.
[8] Mr. Sochaczewski gave evidence. He had prepared a
written list of seven mortgage transactions involving the Yunger
family, all of which were made through him. All were for a term
of one year. At least five of the seven called for instalments of
interest only during the term. Yuncorp was named as mortgagee in
two of the seven. Individual members of the Yunger family other
than the Appellant were named as mortgagees in the remaining
five. At least two other loans originated with
Mr. Sochaczewski. They were the Beeton and Aurora
mortgages.
[9] There is no evidence that the Appellant had a direct
financial interest as lender in any of the seven transactions
just referred to. The Appellant stated that he had given to
Leah Yunger the money loaned by her in one case. His
explanation was that he "might have" given the money
and put it in her name, either for tax or other reasons. He
insisted that he was "involved" in the transactions, at
least in that way.
[10] All three transactions in which the Appellant did have a
direct interest went bad. The losses incurred in two of them are
in issue. The Aurora mortgage was in the amount of $103,000.00
and bore interest at 10% per annum. The interest adjustment date
was April 13, 1991. The mortgage was due on September 13,
1992. The chargees named on the face of the document are
Sol Yunger, trustee,[1] as to a 47% interest, David Yunger, as to a 20%
interest and David Good, trustee, as to a 33% interest. The
mortgage went into default. The value of the property subject to
the mortgage declined. Pursuant to a settlement reached among the
parties to the mortgage, part only of the principal and interest
was paid to the lenders.
[11] The 1991 loss arose from the Beeton mortgage. It secured
a loan of $160,000.00 made in May of 1990. The mortgage fell due
in November of 1990. Interest only was payable in monthly
instalments during the term of the mortgage. The mortgage bore
interest at 19% per annum. The mortgagee named in the charge was
Samuel Sochaczewski in trust. The evidence indicated that it
was Mr. Sochaczewski's practice to hold mortgages in
trust to facilitate the collection and distribution of payments
when more than one client was lender. The Appellant indicated in
his evidence that in the case of the Beeton mortgage the family
did not know at the outset who was going to make the investment.
He stated that in this case he "took the whole
thing".
[12] There was one other transaction in which the Appellant
loaned money. In 1990 the sum of $200,000.00 was loaned to 820126
Ontario Inc., a company owned by Rex Heslop. The Appellant
knew Mr. Heslop as a customer of the family jewellery store.
The term of the loan was six months and the interest rate was
15%. Some arrangement was made between Mr. Heslop or the
corporation on the one hand and the Yunger family on the other
for a bonus in the form of the right to buy lots in a subdivision
being developed by 820126. The chargees named in the mortgage
document were David and Samuel Yunger. It appears that
nothing was recovered.
[13] In my view, when considering the question whether the
Appellant was a taxpayer whose ordinary business included the
lending of money, it is necessary to focus on the lending
transactions in which the Appellant was involved as lender.
Although it is clear on the evidence that various members of the
family participated as lenders in at least 10 transactions, the
evidence indicates that the Appellant was involved as lender in
only three of them. I do not view the Appellant's advances to
members of the family to enable them to make loans to others as
evidence that the Appellant carried on the requisite ordinary
business. There was no evidence that the Appellant and family
members as a group carried on a lending business in common. The
Appellant did not report interest income from mortgage loans
except in relation to the two transactions in issue. It is clear
that the Appellant advised members of the family with respect to
the loans made by them and indeed that he was influential. That,
however, is not evidence that the Appellant carried on the
business of a money lender.
[14] The Appellant testified that he borrowed the money
required to make the loans. The borrowing of money with a view to
re-lending it at a higher rate of interest is an activity which
is distinctly different from the investment of one's savings
in mortgage loans.[2] The former activity is strong evidence of the
existence of a money lending business. However, I am not
convinced that this is what the Appellant did. The Appellant did
not produce any documentation supporting his claim that he
borrowed money for the purpose of re-lending it nor did he seek
any tax deduction for an interest cost associated with any such
borrowing.
[15] One of the factors which differentiates between loans
made as simple investments of capital and loans made in the
course of the business of a money lender is continuity. In
Newton v. Pyke (1908), 25 T.L.R. 127, at page 128,
Walton J. stated:
Whether a man was carrying on business as a money lender must
be, as was pointed out in Litchfield v. Dreyfus, a
question of fact in each case. It seems impossible to lay down
any definition or description which would be of much assistance,
but I feel that it is not enough merely to shew that a man has on
several occasions lent money at remunerative rates of interest;
there must be a certain degree of system and continuity about the
transactions.
The need for system and continuity is emphasized in paragraph
20(1)(p) which requires not only that the taxpayer's
ordinary business include the lending of money but also that the
loan in question be made in the ordinary course of that business.
When considering the application of paragraph 20(1)(p) the
Court must give effect to the repeated use of the adjective
"ordinary". The activity involved in the making of the
Appellant's three loans is, in my view, so restricted in
scope as to be insufficient to establish that the Appellant's
ordinary business included the lending of money.
[16] I turn next to the management fee issue. The Appellant
owned a 20% interest in a commercial rental property known as
Woolwich-Norfolk. He and his wife collectively owned a 22%
interest in an industrial rental property known as Northline. The
management fees in issue which were said to be paid or payable by
the Appellant to Yuncorp are supposed to have been consideration
for services rendered by the Appellant as employee of Yuncorp
which services were said to relate to the management of the two
properties. Each of the two properties was operated by a property
manager on behalf of the co-owners as a group. The
Appellant's services were in addition to those of the
property manager. It is not clear exactly what contribution to
the operation of the properties was made by the Appellant acting
as an employee of Yuncorp. He said that he was driven to Guelph
one day a month to visit one of the properties and that he put in
12-hour days in this connection. He said that in total he spent
250 hours in rendering management services. The evidence of time
spent and of the nature of the services rendered was vague and
unsatisfactory. No contemporary record was produced.
[17] The Appellant produced an agreement made "as
of" the first day of August 1988 between the himself and his
wife on the one hand and Yuncorp on the other. By that agreement
the two retained Yuncorp to provide "certain key managerial
and administrative services as (the Appellant and his wife) may
require from time to time in the course of carrying on . . .
business with respect to (their) investment in Northline Building
and Woolwich-Norfolk . . .". That agreement called for the
Appellant and his wife to pay Yuncorp an amount equal to 10% of
the gross expenses of the head office of Yuncorp in respect of
such services. The parties further agreed to review and determine
the fee for subsequent years. It is far from clear that the
payments in issue were made pursuant to this contract. The words
"as of" generally signify timing that has been
arbitrarily assigned to an event. There is no evidence indicating
when this contract was formed. That might have happened before
the Appellant rendered the services in question but, equally, it
might not. There is no evidence whatever that this agreement in
any way governed the quantum of the payments in issue. There is
no evidence that the payments were in any way commensurate with
the value of the services said to have been provided. I cannot
find that Yuncorp was paid pursuant to a bona fide
arrangement made with a view to earning income from
Woolwich-Norfolk and Northline. The deduction is therefore
prohibited by paragraph 18(1)(a) of the Act.
Further, absent any rational connection between the expenditure
on the fees and the process of earning income from investments in
the two properties, section 67 also applies to prohibit the
deductions. The appeals will therefore be dismissed with
costs.
Signed at Ottawa, Canada, this 31st day of May 2000.
"Michael J. Bonner"
J.T.C.C.
Email this Content