Date: 20000324
Docket: 98-2067-IT-G
BETWEEN:
SANTOKH SINGH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bonner, J.T.C.C.
[1] This is an appeal from an assessment of income tax for the
appellant's 1993 taxation year. By the assessment in issue,
the Minister of National Revenue ("Minister")
disallowed the deduction of $150,000 claimed by the appellant
under subparagraph 20(1)(p)(ii) of the Income Tax
Act. The deduction was claimed in respect of a loan of
$225,000 made by the appellant to Sergio Pancella in July of
1992.
[2] Subparagraph 20(1)(p)(ii) reads:
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;
[3] The central issues were whether the loan was made in the
ordinary course of business and whether the appellant's
ordinary business included the lending of money as required by
paragraph 20(1)(p). It was the position of the respondent
that the appellant did not carry on the business of a
money-lender at all.
[4] The only person who testified at the hearing of the appeal
was the appellant. I formed the opinion that he was a credible
witness.
[5] His evidence established that his money-lending activities
commenced in 1988. He made four loans:
(a) a loan in 1988 to Amrik Walia of $8,500;
(b) a loan in 1992 to Sergio Pancella of $225,000;
(c) a loan in 1993 to 659327 Ontario Inc. of $100,000;
(d) a loan in 1993 to Michael Gerrior of $16,000.
The money-lending activities were unsuccessful. In 1993, the
appellant stopped lending because of defaults on the loans which
he had made.
[6] The appellant is a licensed professional engineer. He
works as a general contracting project manager through
corporations which he controls and which employ him. The
money-lending activities described in evidence were not conducted
on a large scale nor were they elaborately organized. The
appellant did not utilize a separate telephone line for purposes
of the activity. He did not have business cards or letterhead
printed. None of this was necessary in order to attract potential
borrowers and to deal with loans made to them.
[7] The 1988 loan was made to enable Amrik Walia to discharge
an encumbrance against a property which Walia was buying. The
appellant's personal bank account was the source of the money
loaned. The loan bore interest at 12% per annum and was evidenced
by a promissory note. The appellant decided not to take security
due to the small amount and the short term of the loan. The
borrower defaulted. The appellant sued and obtained judgment but
was unable to collect.
[8] The Pancella loan was made in July of 1992 to assist the
borrower to buy real property in Petrolia, Ontario. The loan bore
interest at 12% per annum and was due and payable on March 31,
1993. It was evidenced by promissory note. The appellant took no
security for the loan at the time of the advance. The appellant
raised all but $20,000 of the amount loaned by borrowing against
his lines of credit at financial institutions. He raised the
$20,000 by borrowing from an acquaintance. The interest cost in
the aggregate of the money borrowed by the appellant was 9.45%.
The appellant and Pancella discussed the latter's financial
position in December of 1992. The appellant learned that Pancella
was experiencing difficulty in selling the Petrolia property.
This gave rise to concerns about collectibility which led the
appellant to arrange for the immediate repayment by Pancella of
$75,000. As well, the appellant took an assignment of a mortgage
owned by a Pancella family member as security for the repayment
of the $150,000 balance of the original loan. Later the security
evaporated when a prior encumbrancer sold the property under a
power of sale. It is the refusal of the Minister to allow a
deduction in respect of this bad debt that has given rise to this
appeal.
[9] In the third transaction the borrower was 659327 Ontario
Inc. operating under the name of Nu-West Businesses &
Properties. The appellant advanced $50,000 to this firm of March
2, 1993 and a further $50,000 on April 5, 1993. Interest at
the rate of 12% per annum was payable monthly. The loan fell due
on March 31, 1994. It was evidenced by promissory note. The loan
was made to enable the borrower to pay municipal taxes on real
property which the borrower owned. Once again the money which the
appellant loaned was raised by borrowing against the
appellant's line of bank credit. The borrower paid interest
to the appellant from the outset until March of 1994 when default
occurred. The principal was repaid in March of 1997.
[10] The fourth and final loan was made by the appellant in
August of 1993 to Michael Gerrior, a used car salesman who
needed $16,000 to cover the cost of shipping cars to Europe. The
appellant borrowed part of the money required to make the loan on
one Visa Card and the remainder on another credit card. The
borrower defaulted. The appellant took legal action against the
borrower but has been unable to collect.
[11] The appellant must establish that his ordinary business
included the lending of money and that the Pancella loan was made
in the ordinary course of business.
[12] In Morflot Freightliners Limited v. The Queen,[1] at 5185
Strayer J. (as he then was) noted that "... in cases of
this nature ... one must try to characterize a situation from a
practical business point of view ...". As I see it, when the
facts are viewed in this manner it is clear that the appellant in
making the loans entered into the business of lending money. He
evaluated the lending opportunities and considered both the
potential gain for himself and the ability of the borrowers to
repay. He obtained security when possible. The loans appear to
have been made at ordinary commercial rates of interest. The
loans though few in number, were not remarkable for any feature
which distinguished them from the operations of an ordinary
commercial money-lender. The 1992 and 1993 loans were not
investments of the appellant's own capital. Rather, they were
made with money borrowed at an interest cost expected to be lower
than the interest earned. In short, the appellant expected to
earn money on the spread between the two rates and thus to mimic
the operations of other commercial lenders. Neither the fact that
the operation eventually failed nor the fact that it was
short-lived can support a conclusion that the operation was not
an ordinary commercial venture. The use of borrowed money to make
the last three loans negates any suggestion that the loans were
simple investments of accumulated capital. A business is
nonetheless a business because it is in its initial stages. The
appellant therefore meets the first branch of the paragraph
20(1)(p) test.
[13] In my opinion, the Pancella loan was made in the ordinary
course of business. The terms of the loan were not affected by
any circumstance which might take it out of the ordinary course.
The subsequent transactions are relevant to show a course of
conduct.[2] The
appellant therefore meets the second branch of the
paragraph 20(1)(p) test.
[14] There was no suggestion that the Pancella debt did not
become uncollectable in 1993. For the foregoing reasons, the
appeal will be allowed, with costs, and the assessment referred
back to the Minister for reassessment on the basis that the
appellant is entitled to the deduction in issue.
Signed at Ottawa, Canada, this 24th day of March 2000.
"M.J. Bonner"
J.T.C.C.
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