The Queen v. E. V. Keith Enterprises Ltd., 76 DTC 6018, [1976] CTC 21 (FCTD)

Mahoney, J:—The issue is the disallowance of the deduction by the defendant from its taxable income for its 1969 taxation year of $15,000 claimed as a bad debt. The defendant was successful in its contention before the Tax Review Board.

The defendant ts an Alberta company controlled at all material times by Ellis V Keith and members of his immediate family. It invested in various other companies active in house building, land development and the building materials and supply businesses and actively participated in the management of the companies in which it had its investments. It is regrettable that, for medical reasons, Ellis V Keith was not able to testify at the trial since it is apparent that the loan in issue was made on his sole authority and that he neither consulted with nor informed the only witness, Bernard Eels, the Defendant’s Treasurer and Accountant, of his intentions in having the defendant make the loan.

The defendant’s position is that the loan in issue, was made in the ordinary course of its business. While it was not a licensed money lender, it had from 1953 on, lent money to firms and individuals with whom it had done business. I regard the evidence as to investments in chartered bank term deposits and a $100,000 investment in what would appear to be a note or debenture of Kinross Mortgage Corp made on and after January 30, 1970 as irrelevant. By then the defendant had disposed of a major portion of its previous investments, had substantial sums of cash surplus to its active business needs and had, in fact, changed the nature of its business activities from those carried on in late 1968. Exhibit D-7 shows, in chronological order, the loans made by the defendant during the years prior to 1970.

EV KEITH ENTERPRISES LIMITED

HISTORY OF MISCELLANEOUS LOANS RECEIVABLE

Rate of

interest

1953	Van Isle Moulding	18,500.00	6%
1955 Pervis Sales Ltd		55,000.00	6%
1955 Wilder Bros		5,000.00	6%
1958 Treasury Bill		199,594.00	2.76%
1959 G L Woolf		3,000.00	6%
1959 C E Connop		27,550.00	6%
1959 C F McColloch		24,779.44	8%
1959 GE Going		27,847.75	6%
1959 L C Boulton		143,300.00	6%
1959 W J McNabb		16,550.00	6%
1959 Lees Bros		3,500.00	6%
1960 D Fleming		1,900.00	6%
1960 R MacDonald		2,700.00	, 6%
1960	V Morrison	2,700.00	6%
1960 DE Tait		2,700.00	6%
1960 N Trouth		2,700.00	6%
1960 G E Going		13,795.25	6%
1962 Celwood Industries Ltd		100,000.00	6%
1962 Celwood Industries Ltd		132,193.71	6%
1964 Perimeter Investments Ltd		100,000.00	6%
1963 Krygler Holdings Ltd		20,000.00	6%
1964 G McBride		30,000.00	6% Vi
1964 Perimeter Investments Ltd		40,000.00	6%
			6%
1964 Perimeter Investments Ltd		70,000.00	6%
1964	G A Jupp	4,000.00	6%
1965 St Claire		27,500.00	6%
1965 J T Black		11,500.00	6%
1967 E Gray		23,000.00	6%
1967 W Quilley		21,591.17
			6%
		1,130,901.32

The first three loans were accommodations to firms supplying materials to the house building operation. Van Isle supplied mouldings; Pervis supplied windows and Wilder Bros supplied lumber. The Treasury Bill was a term investment of surplus funds. With the following exceptions, all the rest of the loans receivable represent the deferred balance of the purchase price of assets sold by the defendant or by one of the other companies in which it had an investment. For example, the two large loans to Celwood Industries Ltd represent respectively deferred balances on the price of a factory and the plant machinery of a business that manufactured cupboards for Keith Construction. Lees Bros purchased cattle from Keith and the many small loans made in 1959 and 1960 are deferred balances on cottage lots and cabins built at a Keith development near Calgary. Perimeter Investments was a company in which the defendant held a substantial equity. McBride was a lumber and building supply dealer doing business with the house building operation. Eels knew nothing of the St Claire loan. Gray and Quilley were professional golfers; the loans to them were to finance the stock in trade for a pro shop at a private golf course which the defendant developed in connection with a residential sub-division in which it was interested.

On or about October 23, 1968 Eels, on Keith’s order, prepared and delivered to Keith, the defendant’s cheque for $15,000. The cheque was payable to Allyn James. Allyn James is Keith’s nephew, the son of Mrs Keith’s brother. Shortly thereafter Keith handed Eels a promissory note, dated October 23, 1968, for $15,000 at 6%, payable to the defendant. The note was in fact signed by ED James, father of Allyn James and brother of Mrs Keith. It was not signed by Allyn James. Be that as it may, it is undisputed that the $15,000 was advanced to Allyn James by the defendant and was not repaid by him.

Allyn James was, at the time, himself engaged in the house building business, through a company known as Heritage Homes. Neither Keith personally nor the defendant had any financial interest in Heritage Homes. Heritage Homes may already have been in serious financial difficulties when the loan was made. If not, it soon was. Allyn James’ bankruptcy was repeatedly referred to in evidence; however, it appears that he did not become bankrupt in the sense of either making an assignment or having a receiving order issued against him under the Bankruptcy Act, RSC 1970, c B-3. Rather the term seems to have been used as a synonym for insolvent.

The money was used by Allyn James to repay a debt to Keith Construction, a company actively engaged in house building controlled by the defendant but having some shareholders unrelated to the Keith family. James, through Heritage Homes, had business dealings with Keith Construction and there is no suggestion that the debt was anything but a trade account between them.

Eels was unaware of the efforts, if any, made to collect the debt. Allyn James’ financial situation were not discussed with Keith: it was an embarrassing family matter which the staff was not about to raise with him and which he did not choose to raise with them. The loan, made October 23, 1968, was written off as a bad debt at the defendant’s fiscal year end, February 28, 1969.

The only issue, as defined by the pleadings, is whether or not the loan was made in the ordinary course of the defendant’s business. The defendant had established over the years a pattern of both loaning money and carrying deferred balances to accommodate persons and companies doing business with the operating entities through which its construction and other activities were carried on. It had, on previous occasions, given the accommodation to the individual principals of the actual business connection. Examples are the Wilder Bros and McBride loans. The interest received was included in the defendant’s income.

The loan was, in law, within the power of the defendant to make in pursuance of the objects set forth in its Memorandum of Association. The situation here is not unlike that encountered in MNR v Kelvingrove Investments Ltd, [1974] CTC 450; 74. DTC 6357. While this loan may have been an unwise one to make in the circumstances and the decision to make it may have been influenced by the fact that James was Keith’s nephew by marriage, it remains that the loan was of a class that the defendant had the power to make and had established, over the years, a pattern of making in the ordinary course of its business, and that Allyn James, notwithstanding the relationship, was within the class of persons to whom such financial accommodation had been regularly extended.

The appeal is therefore dismissed with costs.