MNR v. Kelvingrove Investments Ltd., 74 DTC 6357, [1974] CTC 450 (FCTD)

Cattanach, J:—This is an appeal by the Minister of National Revenue from a decision of the Tax Review Board dated April 10, 1972 whereby an appeal by the respondent herein from its assessments to income tax for its 1966 and 1967 taxation years ending September 30 was allowed.

The respondent is a private joint stock company incorporated pursuant to the laws of the Province of Ontario by letters patent dated July 19, 1956 for the objects expressed therein paramount amongst which are paragraphs (a) and (b) which read as follows:

(a) to purchase or otherwise acquire and to hold for investment purposes real and personal property of every nature;

(b) to purchase or otherwise acquire and to hold for investment purposes rights and assets of and bonds, debentures, debenture stock, shares of all classes and securities of any form or type issued by any individual, corporation or company, public or private, incorporated or unincorporated;

There are three other paragraphs setting out further objects all of which are ancillary to the objects set forth in paragraphs (a) and (b) quoted above in addition to which the company is vested with the incidental powers set forth in The Corporations Act of Ontario.

There were five shareholders in the respondent, Thomas Alfred Talbot, who owned all of the outstanding voting preference shares which vested control of the respondent in him, William Talbot and Alfred Talbot, sons of Thomas Talbot who each owned one-fourth of the issued and outstanding common shares and, if my recollection of the evidence is correct, a daughter of Thomas Talbot and her husband who each also owned one-fourth of the common shares.

Thomas Talbot had owned a group of four-plexes which were sold and transferred by him to the respondent upon its incorporation. This group of four-plexes constituted the respondent’s revenue-producing asset by way of rentals.

On April 30, 1965 the respondent sold the four-plexes to Manufacturers Life Insurance Company for which it received $842,382.29 in cash.

Accordingly the respondent had this amount of cash in its treasury with which to pursue the objects for which it was incorporated.

In the remainder of its 1965 taxation year the respondent bought gold futures from the Canadian imperial Bank of Commerce (hereinafter sometimes referred to as the Bank) in the approximate amount of $115,000 which were subsequently sold at a loss; it loaned $650,000 to Kinross Mortgage Corporation, which was a vehicle of the Bank, on the security of a promissory note due a year later and bearing interest at the rate of 5%; it traded in stocks and bonds to the extent of $113,500; and it purchased deposit receipts from the Bank.

A deposit receipt is basicaliy a loan to the bank in exchange for a deposit certificate for a specified short term at a higher rate of interest than the bank pays on savings deposits with the privilege to the depositor to withdraw the amount before expiry of the agreed term but in that event at a lesser rate of interest than if the money had been left on deposit for the whole term. In short a deposit receipt is a very secure and readily liquid asset paying a modest, but not inconsequential, rate of interest commensurate with the risk.

In the respondent’s 1966 tax financial year the note from Kinross Mortgage Corporation became due and was paid. The respondent promptly placed the principal of $650,000 which it received on a swap deposit with the Bank. A swap deposit is similar to a deposit receipt with the difference that the depositor is not extended the privilege of withdrawal at a lesser rate of interest but the money must be left on deposit for the entire term agreed upon.

On March 31, 1966 the respondent purchased an apartment building at a cost of $581,303, obviously the funds for this transaction came from the matured swap transaction. The apartment proved unprofitable so that on July 31, 1966, four months after its acquisition, the respondent sold the building for $341,230, which represents a substantial loss.

The proceeds of that sale to the extent of $300,000 were placed on a deposit receipt with the Bank.

In the period between April 30, 1965 and July 30, 1967 the respondent arranged for 29 deposit receipts from the Bank in varying amounts ranging between a maximum deposit receipt of $700,000 and a minimum deposit of $25,000.

During that period the respondent also arranged for two swap deposits one in the amount of $650,000 and a second in the same amount.

In that period the respondent also purchased goid futures in the amount of $114,858 which were sold at a loss. It purchased an apart- ment which was sold at a loss, as well as trading in stocks and like securities to the extent of $113,000.

In addition, during that period, the respondent made three loans to Kinross Mortgage Corporation taking promissory notes therefor. The first such loan was made on May 31, 1965 in the amount of $650,000 with interest at the rate of 5% per annum. That loan matured in one year. The second loan was made on October 4, 1966 in the amount of $300,000 with interest at 5 5/8% per annum and became due on October 5, 1967, that is, the loan was for one year. The third loan was made on July 12, 1967 in the amount of $100,000 also with interest at 5 5/8% and became due on October 11, 1967, that is approximately 15 months later.

The loan which gives rise to the controversy in this appeal was made by the respondent on September 30, 1966 to Talpark Motors Limited (hereinafter referred to as Tai park) in the amount of $60,000 on the security of a promissory note, I assume that the note was payable on demand, with interest at the rate of 5% per annum payable monthly.

Two of the shareholders of the respondent, William Talbot and Alfred Talbot, had purchased Talpark and had become the holders of all the issued and outstanding shares in that company.

I compute the monthly interest payments to be $250.

Talpark paid that interest for six months, from November 1966 to April 1967 in the total amount of $1,500, but made no further payments of interest from that latter month forward.

Talpark was in the business of a retail automobile sales agency. Apparently the Talbot brothers had no experience in this highly competitive business and in April 1967 Talpark was in dire financial straits. Obviously it was insolvent because it could not and did not meet its obligations to the respondent.

In an attempt to salvage what they could from Talpark the Talbot brothers sold the company. It was a condition of the sale that the purchasers would not assume the liability of Talpark to the respondent under the promissory note for $60,000.

The respondent, in turn, sought to salvage what it could from this loan and accordingly accepted payments of principal in the months July, August and September 1967 in the respective amounts of $18,000, $500 and $3,034, a total of $26,034 and thereupon cancelled the note. As a consequence the respondent incurred a loss in the amount of $33,966.

This loss exceeded the respondent’s income for its 1967 taxation year and the respondent applied the excess of the loss over income to its income in its 1966 taxation year in accordance with paragraph 27(1)(e) and subsection 46(5) of the Income Tax Act.

In assessing the respondent as he did for its 1966 and 1967 taxation years the Minister disallowed the deduction of the loss claimed by the respondent on the ground that the loan was not made by the respondent in the ordinary course of the business of the taxpayer for the purposes of gaining or producing income therefrom but rather was an investment and as such was an outlay on account of capital and the deduction of the loss incurred is precluded by the provisions of paragraph 12(1)(b) of the Income Tax Act.

It was also contended on behalf of the Minister that the respondent is not entitled to deduct its loss pursuant to the provisions of paragraph 11 (1)(f) of the Income Tax Act because the respondent was not in the business of lending money.

It is axiomatic that cases of the nature of this appeal must be considered on the basis of the facts peculiar to them.

The sole raison d'être of a company is to have a business and to carry it on. If a particular transaction falls within the objects for which a company was incorporated then prima facie a profit or loss resulting is a profit or loss from the business of the company. The question to be determined is what did the company do and whether what it did was a business.

The respondent was incorporated for the purpose of acquiring and holding real and personal property for the purposes of investment. In short it was authorized to conduct the business of investing. That lacks the desirable degree of precision but in common parlance it must mean that the respondent was in the business of laying out its assets in property, without limitation as to what kind of property, from which a return could be expected.

At its inception the only asset the respondent possessed was a group of four-plexes from which it derived rental income. It sold those four- plexes and possessed in lieu thereof $842,382 in cash. It is only logical that the respondent should lay that money out in such “investments” as would yield a return. It did so. It purchased and sold gold futures, it purchased and sold stocks, it laid its money out in deposit and swap receipts yielding interest, and it loaned its money on four occasions on the security of promissory notes yielding interest including the loan to Taipark here in issue.

In my view these transactions are within the objects for which the respondent [was] incorporated and as such constitute the business in which the respondent was engaged.

That being so the profits arising from those transactions are the integral part of the respondent’s profit-making activities and are profits from its business. Conversely since the profits derived from those transactions are profits from the respondent’s business then any loss which arises from those transactions is a loss from the current profit making activities of that business and must also be taken into account in computing the overall profit from that business. While paragraph 12(1)(b) prohibits any deduction of “loss... of capital” in computing profit from a business neither paragraph 12(1 )(a) nor paragraph 12(1)(b) prohibits the deduction of other losses incurred in the operation of a business.

While the loan to Talpark may have been an injudicious loan for the respondent to have made and may have been actuated by the fact that the shareholders of Talpark were also shareholders in the respondent, nevertheless the loan was, for the reasons I have expressed, an integral part of ihe respondent’s business, and the decision to make that loan was within the discretion of the respondent in the conduct of its business.

In view of the conclusion I have reached it is not necessary for me to consider whether the respondent was a “moneylender” or not and whether it is subject or not to the provisions of paragraph 11 (1)(f).

The appeal is therefore dismissed and the respondent is entitled to its taxable costs.

Because the respondent has been successful and the costs follow the event it is not necessary for me to consider subsection 178(2) of the Income Tax Act now in force which provides that, if the amount in controversy is less than $2,500 and if the Minister is the appellant from a decision of the Tax Review Board, the Minister shall bear the costs.