Cullen, J.:—This is an appeal from a reassessment of tax for the plaintiff's 1981, 1982, 1983 and 1984 taxation years. In the reassessment the Minister of National Revenue disallowed the amounts claimed by the plaintiff for the deduction of a reserve for doubtful debts in the 1982, 1983 and 1984 taxation years and denied the deduction of non-capital losses arising in the plaintiff's 1982 and 1983 taxation years in computing the plaintiff's taxable income in its 1981 taxation year. (During the hearing counsel for the plaintiff advised that, with respect to the issue of a limitation period, they were only challenging the reassessment of the 1981 taxation year, claiming it to be statute-barred.)
Background
The plaintiff is a Saskatchewan corporation, carrying on a business of manufacturing farm equipment which is sold through a dealer distribution system. The plaintiff's operation is not limited to Saskatchewan but extends throughout Canada and the world, including the U.K., the U.S.A., Switzerland, France, the Netherlands and Australia. This is a most successful business enterprise and looking only, for example, at Exhibit P-3 we note that sales in 1981 were in excess of $17 million and in 1982 in excess of $15 million. The gross margins after allowing for cost of goods sold exceeded $7 million in 1981 and $6 million in 1982. The statement of retained earnings in Exhibit P-3 show $5,294,200 in 1981 and $,4,714,400 in 1982.
The plaintiff is also authorized under its Memorandum of Association to carry out the following activities:
— to invest and deal with the monies of the Company not immediately required in such a manner as from time to time may be determined;
— to take over, manage and dispose of in any manner whatsoever, any
business or undertaking in which the Company, may be interested or in the securities of which it may have invested its funds or with which it may have business relations;
— to buy or otherwise acquire and hold, sell and deal in real property and
personal property of all kinds and rights, in particular lands, . . . business or industrial concerns and undertakings, mortgages or charges on personal property, . . . securities . . . book debts.....
Terry Summach (Terry S.) and his immediate family own fifty per cent of Flexi-Coil’s shares and his uncle, Ken Summach (Ken S.) and his immediate family own the other fifty per cent. Terry S. runs the plaintiff's day-to-day business operations.
Robert Murray Design Images Ltd. (RMDI) is a B.C. corporation formed for the purpose of importing "state of the art" silk plants from the orient and marketing them in Canada on a wholesale basis. The initial common shareholders of RMDI were Lloyd and Sharon Mineer with 56 shares (26 per cent), three other RMDI employees with 53 shares (26 per cent), and Summach Management, a company owned by Terry S., with 91 shares (45.5 per cent).
Later I will be going into more detail with respect to the formation of RMDI but for now I need only point out that Terry S. realized late in the day that the financial requirements of RMDI were beyond the resources of Summach Management Ltd. After seeking and securing Ken S.'s approval the plaintiff advanced RMDI substantial working capital and in return acquired 67 per cent of RMDI's outstanding shares for a nominal amount. The plaintiff purchased the 91 shares held by Summach Management Ltd. and subscribed 43 shares from the treasury. At the same time two employees sold their 43 shares back to RMDI. Throughout its 1982 taxation year the plaintiff advanced funds to RMDI and also guaranteed certain loans made by the Royal Bank of Canada (Royal Bank) to RMDI. However, in 1982 RMDI's projected sales did not come to fruition and when the plaintiff prepared its year-end financial statements for September 30, 1982, it wrote down loans to RMDI for financial statement purposes of $1,435,200.
In its 1982 income tax return the plaintiff deducted a reserve for doubtful debts, per paragraph 20(1)(l) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") in the amount of $1,435,200, which resulted in a claimed non-capital loss of $1,379,395 for its 1982 taxation year. On April 22, 1983 the Minister of National Revenue issued a notification that no tax was payable in respect of the plaintiff's 1982 taxation year. As a result of having incurred this capital loss the plaintiff also claimed a deduction of $1,379,395 as a non-capital loss under paragraph 111(1)(a) in computing its taxable income for its 1981 taxation year by filing prescribed form (T2A) on March 30, 1983. By Notice of Reassessment, dated January 27, 1984, the Minister of National Revenue allowed the non-capital loss carry-back from the 1982 taxation year and reassessed the plaintiff's tax liability accordingly. (The original assessment was dated June 28, 1982.)
During late 1982 and early 1983, RMDI's business deteriorated further and it was left with an excessive amount of unsold inventory. In May 1983 the plaintiff placed RMDI in receivership. After reviewing RMDI's business the Receiver ceased RMDI's operation and liquidated the stockpiled inventory. At this point there was little chance of RMDI repaying its loan to the plaintiff. In 1983, for financial statement purposes, the plaintiff took a further write-down of its loans to RMDI in the amount of $1,658,609. This amount included $300,000 as an estimated amount the plaintiff would have been required to pay on behalf of RMDI to the Royal Bank and $134 for its shares in RMDI.
In its 1983 income tax return the plaintiff deducted a reserve for doubtful debts in the amount of $1,658,609 (the above-noted write-down) which resulted in a non-capital loss in the amount of $1,319,256 for the plaintiff's 1983 taxation year. As a result of having incurred this non-capital loss in its 1983 taxation year, the plaintiff claimed a deduction of $1,319,256 as a non-capital loss in computing its taxable income for the 1981 taxation year by filing prescribed form T2A, amending its 1981 return, on March 30, 1984. By notice of reassessment dated May 28, 1985, the Minister of National Revenue allowed the non-capital loss carried back from the 1982 taxation year and reassessed the plaintiff's 1981 income tax return accordingly. Also, the plaintiff was advised that no tax was payable in respect of its 1982 taxation year.
In its 1984 taxation year the plaintiff was required to advance funds on behalf of RMDI to the Royal Bank pursuant to its loan guarantee. As a result, the plaintiff wrote off the sum of $109,047 as an administrative expense for both financial statement purposes and income tax purposes.
By notices of reassessment, dated February 15, 1989, the Minister of National Revenue disallowed the plaintiff's claims for the deduction of a reserve for doubtful debts in its 1982, 1983 and 1984 taxation years by the amounts claimed in those years and denied the deduction of the non-capital losses arising in the plaintiff's 1982 and 1983 taxation years in computing its taxable income in its 1981 taxation year.
By notices of objection dated May 15, 1989 and July 26, 1989, the plaintiff objected to the reassessments relating to its 1982, 1983, and 1984 taxation years and relating to its 1981 taxation year respectively.
By notice of confirmation dated October 6, 1989, the Minister of National Revenue confirmed the reassessments relating to the plaintiff's 1982, 1983 and 1984 taxation years and by notice of confirmation confirmed the reassessment relating to the plaintiff's 1981 taxation year.
Plaintiff's position
The plaintiff submits that the reassessment by the Minister of National Revenue, dated February 15, 1989, as it applies to taxation year 1981 was issued beyond the time limitation set forth in subsection 152(4) of the Act and is therefore invalid.
In the pleadings it is the plaintiff's position that it had as part of its business the establishment and pursuit of new corporate ventures. The loans to RMDI were an integral part of the business of the plaintiff. Therefore, the plaintiff's losses in respect of RMDI were properly deducted under section 9 and paragraph 18(1)(a) of the Act.
The plaintiff is of the view that by making loans to its subsidiary companies, it has earned substantially more income from the sale of its manufactured products than would otherwise have been the case. In addition to the loans to its subsidiaries, the plaintiff made loans to individuals and corporations and it is the plaintiff's contention that most of these loans relate in one way or another to the business activities of the plaintiff, thereby enhancing its overall business activities and income-earning potential.
The plaintiff maintains that it was entitled to a deduction in respect of its loans to RMDI pursuant to either paragraph 20(1)(I) or 20(1)(p) as the plaintiff's ordinary business included the lending of money and each loan it made to RMDI was made in the ordinary course of its business of lending money.
The plaintiff further maintains that when it determined that the loans to RMDI became either doubtful or bad debts it was entitled to the deduction claimed in the 1982, 1983 and 1984 taxation years and as such it was entitled to deduct the non-capital losses which arose in the 1982 and 1983 taxation years in computing its taxable income in its 1981 taxation year.
I have been careful to add at the beginning of the plaintiff's position that it is the position as taken in the pleadings. Counsel for the defendant maintained, "the argument that my friend advanced is outside of those pleadings, in my submission, and indeed the positions taken by the plaintiff in the statement of claim have been largely, if not totally, abandoned by my friend in the course of his argument". I shall deal with this matter later.
Defendant's position
The statement of defence indicates that the reassessment of the plaintiff's 1981 taxation year was issued with due dispatch and within the time limitations and in accordance with the provisions of subsection 153(4) of the Act and is therefore valid.
The defendant is of the view that the plaintiff is in the business of manufacturing farm equipment and that the plaintiff is not in the business of lending money. The loans the plaintiff made to its subsidiaries or individuals were trade receivables on the sale of products. Therefore, the amounts claimed by the plaintiff as doubtful debts in the 1982 and 1983 taxation years cannot be deducted under paragraph 20(1)(p) of the Act because the plaintiff's ordinary business during the relevant period was not the lending of money.
The defendant's position is that RMDI is a subsidiary of the plaintiff; that the business operations of RMDI have no relation to the plaintiff's business; that the loans advanced to RMDI were to finance the growth of RMDI and to increase the value of the shares the plaintiff held in RMDI and that the plaintiff's loans to RMDI were non-bearing interest loans and did not contain any repayment terms. As such, if the plaintiff is determined to be in the business of lending money, the loans were not made in the ordinary course of business. Further, it is also the defendant's submission that the loans to RMDI were not made for the purpose of gaining or producing income from a business or property and therefore prohibited under paragraph 18(1)(a) of the Act. The defendant maintains that the plaintiff's investment in RMDI was on account of capital and that the plaintiff's guarantee for RMDI of $109,047 was an outlay or payment on account of capital.
The defendant also submits that there were no non-capital losses for the 1982, 1983 and 1984 taxation years that were deductible in computing taxable income in respect of the plaintiff's 1981 taxation year, pursuant to the provisions of paragraphs 111(1)(a) and 111(8)(b) of the Act.
Issues
The issues raised in this case relate to: the validity of the notice of reassessment dated February 15, 1989 in respect of the plaintiff's 1981 taxation year and the deductibility of the losses relating to the loans made by the plaintiff to RMDI, either under section 9 and paragraph 18(1)(a) of the Act or under paragraph 20(1)(I) or 20(1)(p) of the Act.
Pleadings
“Ambush”, the word used by counsel for the defendant, is probably inappropriate in the circumstances here but certainly there was a not too subtle shift from the wording in the pleadings to the emphasis on adventure in the nature of trade at trial. I would agree with counsel for the defendant who states at pages 35-37 of the transcript:
... the rules of pleading have been developed over the course of a great number of years of litigation and have moved further and further away from allowing parties to raise at trial issues that have not been pleaded, to present evidence that cannot be anticipated, or to in other ways ambush the other part.
My friend is able to argue that it perhaps supports an adventure in the nature of trade, but no amendment was moved up to and including the close of my friend's case, and indeed up to and including the close of my friend's argument
My Lord, on that basis I would submit that the Court would not be looking at an adventure in the nature of trade argument and would then be restricted to the issues as raised in the pleadings, and for the reasons that I outlined in dealing with paragraph 40, that allegation in the pleadings has simply not been supported by the evidence.
Defence counsel's argument was most persuasive, especially considering the fact that I had read the pleadings in the record and did not read in the fact that the plaintiff would be emphasizing or even referring to an adventure in the nature of a trade. However, defence counsel had open to him the opportunity, as stressed by counsel for the plaintiff: (page 170 of transcript):
If my friend thought that the pleadings were vague, I believe the rules do provide for a request for specifics, and that was not done in this case. What was done in this case was there was an examination for discovery held, and at that examination for discovery Mr. Terry Summach was examined for discovery and questioned extensively with respect to this particular transaction. And in regards to—in reply to a question Mr. Summach is reported from the transcript of the examination for discovery to have said the following:
Well, you know, I guess I don't know, like if it was all that complex it was, you know, it was probably an issue of let's get Flexi-Coil involved in this thing and finance the thing and turn it into something of value and then, you know, probably dump it. Because you know, like I say, we are in the farm machinery business and this seemed like a nice opportunity to turn some cash.
I would have preferred clearer pleadings given the fact that all of the evidence is known to the plaintiff, whereas the defendant must base its case on assumptions made and must really answer the allegations in the statement of claim. On balance, however, the defendant must seek information if pleading seems vague and here the pleading of section 9 should have alerted the defendant along with the evidence at the examination for discovery. For the edification of the plaintiff I came within a whisker of allowing the defendant's position.
Validity of the notice of reassessment in respect of the plaintiff's 1981 taxation year
Section 152 of the Act, among other things, provides the Minister of National Revenue with the authority to make assessments of tax, interest and penalties and sets statutory time limits on assessments, reassessments and additional assessments by the Minister of National Revenue. As this section has been amended a number of times since 1982, I think it would be useful to set out the various subsections and the relevant amendments made within the time period applicable to this appeal.
Subsection 152(4) prescribes the time period in which the Minister of National Revenue may reassess tax. In 1982 the limitation period for reassessment under subsection 152(4) was four years from the date of mailing an original notice of assessment unless there was misrepresentation or other fault, or a waiver by the taxpayer. At that time, subsection 152(4) read in part as follows:
152. (4) The Minister may at any time assess tax, interest or penalties under this Part or notify any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may
(b) within 4 years from the day referred to in subparagraph (a)(ii), [i.e., the day of mailing of a notice of an original assessment or a notification that tax is payable for a taxation year] in any other case,
reassess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require.
In 1983 the four-year limitation period was extended to seven years. At that time the subsection read in part as follows:
152. (4) The Minister may at any time assess tax, interest or penalties under this Part, or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may
(a) . . .
(b) within 7 years from the day referred to in subparagraph (a)(ii), if (i) an assessment or reassessment of the tax of the taxpayer was required pursuant to subsection (6) or would have been required if the taxpayer had claimed an amount by filing the prescribed form referred to in that subsection on or before the day referred to therein, or (ii) . . . and
(c) within 4 years from the day referred to in subparagraph (a)(ii), in any other case,
reassess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require, except that a reassessment, an additional assessment or assessments may be made under paragraph (b) after 4 years from the day referred to in subparagraph (a)(ii) only to the extent that it may reasonably be regarded as relating to the assessment or reassessment referred to in that paragraph.
The time for extending the period of loss carryback under subsection 111(1) to a previous taxation year was also extended from one year to three years. Therefore, in 1982 the period allowed for carryback losses in respect of the plaintiff's 1981 taxation year was one year. Subsection 111(1) as amended by S.C. 1983-84, c. 1, subsection 54(1) and applicable with respect to the computation of taxable income for the 1983 and subsequent taxation years is set out in part below:
111. (1) For the purposes of computing the taxable income of a taxpayer for a taxation year, there may be deducted such portion as he may claim of
(a) his non-capital losses for the taxation year immediately preceding and the 3 taxation years immediately following the year
Further, subsection 152(6) referred to in subsection 152(4) as amended, outlines the procedure whereby a taxpayer may request and obtain carryback to earlier taxation years of certain deductions and credits, including loss carrybacks under section 111. Prior to April 19, 1983, and including 1982, the subsection 152(6) carryback provision was limited to loss carrybacks under section 111. The subsection as amended by the S.C. 1983-84, c. 1, subsection 84(4) is reproduced in part below:
152. (6) Where a taxpayer has filed the return of income required by section 150 for a taxation year and an amount is subsequently claimed by him or on his behalf for the year as
(c) a deduction under . . . section 111 in respect of a loss for a subsequent taxation year
by filing with the Minister, on or before the day on or before which the taxpayer is, would be if a tax under this Part were payable by him for that subsequent taxation year, required by section 150 to file a return of income for that subsequent taxation year, a prescribed form amending the return, the Minister shall reassess the taxpayer's tax for any relevant taxation year (other than a taxation year preceding the particular taxation year) in order to take into account the deduction claimed.
Subsection 84(6), S.C. 1983-84, c. 1, amending these sections states that:
(6) Subsections (3) and (4) are applicable after April 19, 1983, except that where the subsequent taxation year referred to in subsection 152(6) of the said Act, as enacted by subsection (4), is a taxation year ending after 1982, the prescribed form referred to in subsection 152(6) may be filed for the subsequent taxation year at any time on or before the later of
(a) the day on or before which it would be required by the said subsection 152(6) to be filed, and
(b) the day that is 90 days after the day on which this Act is assented to.
Prescribed forms include Forms T1A or T2A. In this case the plaintiff filed Form T2A on March 30, 1983 and on March 30, 1984.
Subsection 152(4) was subsequently amended and the limitation period for reassessments in respect of loss carryback to a previous taxation year was reduced from seven to six years. This six-year limitation period was made applicable to the 1983 and subsequent taxation years.
The plaintiff's position with respect to the reassessment of its 1981 taxation year, as it relates to the 1982 loss carryback to 1981, is that the four-year limitation period provided for in subsection 152(4) is the proper limitation period and that the amendment to subsection 152(4) does not apply, as per the reasoning in Placer Dome Inc. v. Canada, [1991] 1 C.T.C. 361, 91 D.T.C. 5115 (F.C.T.D.). Therefore, the reassessment dated February 18, 1989 was issued beyond the limitation period and cannot stand.
It is also the plaintiffs position that the reassessment related to a second carryback loss in its 1983 taxation year and carried back to the 1981 taxation year was also beyond the limitation period and therefore invalid. The plaintiff maintains that it is clear from the wording that the intent of this provision is that an assessment beyond the four years applies only to the limited circumstances referred to in paragraph 152(4)(b), which provides that the Minister of National Revenue can reassess within seven years from the date referred to in (a) (ii) if an assessment or reassessment of tax was required pursuant to subsection 152(6). Subsection 152(6) provides that where a taxpayer claims a loss under section 111 in respect of a loss for a subsequent year the Minister of National Revenue shall reassess the taxpayer for any relevant tax year (other that a tax year preceding the particular year) in order to take into account the claimed deduction. Thus, according to the plaintiff, the reassessment in subsection 152(4) arises out of the taxpayer's claiming a deduction under section 111 and is limited to circumstances where the taxpayer has claimed a deduction under section 111. The application of the loss carryback does not extend to situations where a claim has been made for the loss carryback and the Minister of National Revenue has reassessed under section 152(4) or 152(6) and then the Minister of National Revenue wants to change that assessment where it allows the loss carryback. If I understand the plaintiff's argument, an assessment made by the Minister of National Revenue in respect of a correction by the Minister of National Revenue, is not a reassessment contemplated under section 152(6) in that it is not a reassessment that results from the taxpayer seeking a deduction, but a reassessment that results from the Minister of National Revenue having reconsidered the taxpayer's claim after it was allowed. The plaintiff also submits that there is nothing in subsection 152(6) that allows for the reassessment made against the taxpayer in these circumstances, in respect of the carryback of the 1983 loss to 1981.
The final aspect of the plaintiff's argument is that subsection 152(4) was further amended in 1984, reducing the reassessment period from four to three years and from seven to six years. If these amendments apply after April 19, 1983, to either the 1982 or 1983 taxation years, then the limitation period in respect of the 1981 taxation year is not seven years but six years. Therefore, the limitation period would expire on June 28, 1988 and the February 1989 reassessments would be beyond the limitation period and invalid.
Counsel for the defendant agreed with the determination in Placer Dome and indicated that if the case before me was limited to the 1982 taxation year the appeal would have to be allowed with respect to the notice of reassessment being out of time, based on the reasoning in Placer Dome. However, in this case there was a further application by the plaintiff after April, 1983, the date for adjustment under subsection 152(6), of its 1981 taxation year. Therefore, this is a situation where the plaintiff has taken the opportunity afforded by the amended section 111, after April 19, 1983, to claim a loss carry back to 1981. The defendant argues that this is sufficient to allow subsection 152(4) in its expanded seven-year rule to apply not only to the 1983 losses carried back but to apply to other losses carried back pursuant to an application under subsection 152(6). The defendant submits that the wording is clear that the Minister of National Revenue may assess within seven years from the date of assessment if an assessment was required pursuant to subsection 152(6) only to the extent it may be reasonably regarded as relating to the assessment or reassessment referred to in that paragraph, and that reasoning would apply not only to applications made after April 19, 1983 but to any application made thereunder. In other words, by filing its application after April 19, 1983 the plaintiff opened itself to the seven-year limitation as it relates not only to those reassessments resulting from the particular subsection 152(6) amendment but to any subsection 152(6) amendment. In this case, the defendant submits, there was a application after April 19, 1983 (which was not the case in Placer Dome) and this is sufficient to open up the 1981 taxation year.
In reply to the second aspect of the plaintiff's argument, that the amendment reduced the limitation period from seven to six years, the defendant notes that the amendment and the comments outlined in the Commons Bill provide that it be applied to 1983 and later taxation years. The defendant further submits that this case deals with the 1981 taxation year, the claim has already been made and completed prior to the amendment and therefore the reduction from seven to six years is not applicable to the facts of this case. With respect to the plaintiff's subsection 152(6) argument, the defendant maintains that there is nothing in the section that changes the applicability of subsection 152(4) and to suggest that an application was not made pursuant to subsection 152(6) is not in accordance with the concession made by Mr. Summach. The defendant argues that there is no doubt that the application was made, the dispute lies with how it affects the loss carrybacks.
The proper interpretation to be given to subsections 152(4) and (6) and their respective amendments was effectively dealt with by MacKay, J. in Placer Dome and the parties are in agreement that his interpretation accurately describes the state of the law. At pages 370-71 (D.T.C. 5122) MacKay, J. concluded that:
. . . subsection 152(4) as amended by S.C. 1983- 84, c. 1, subsections 84(3) and 84(6), has prospective effect only, in all aspects of its application and is applicable only where the opportunity afforded by the amended subsection 111(1) is taken by the taxpayer after April 19, 1983 to claim a loss carryback, which could only be done for a taxation year commencing after December 31,1982. In any case like that of the plaintiff where the loss was claimed in a prior taxation year and carried back within the then prevailing limit of one year, the Minister is limited in the period for reassessment by the terms of subsection 152(4) as it was prior to April 19, 1983, permitting reassessment for a period up to four years. If it were otherwise, and the extended period for reassessment at the option of the Minister were deemed to apply, transactions completed under the law then prevailing (here the filing of a tax return, its assessment and reassessment by the Minister) could be affected adversely to the interests of the taxpayer.
With respect to the later amendments of subsection 152(4), reducing the seven year period within which the Minister of National Revenue could reassess to six years, Kempo, T.C.J. held in Silverman v. M.N.R., [1989] 2 C.T.C. 2024, 89 D.T.C. 307 that looking at the section as a whole, Parliament intended to make the amendment applicable in relation to the 1983 and subsequent taxation years and it did not intend to make the amendment applicable on a particular date arising in the 1983 and subsequent years. In that case, the taxpayer in filing his return for 1980 showed a non-capital loss, which, pursuant to section 111, was carried back and deducted in computing his taxable income for 1979. The original notice of assessment was dated June 24, 1980. As a consequence of a reassessment of the taxpayer's 1980 return, the Minister of National Revenue reassessed the taxpayer's 1979 taxation year, by notice of reassessment dated October 17, 1986. The Tax Court found, based on its interpretation of the subsection 152(4), that the Minister of National Revenue was within its permitted seven-year reassessment period.
The case before me is different than the above-noted cases, in that two loss carrybacks are involved, a 1982 loss carried back to the 1981 taxation year under the pre-1983 amendment and a further loss carryback in 1983 also in respect of the 1981 taxation year. Therefore in dealing with the question of whether or not all or a portion of the reassessments are barred one must determine if the subsection 152(4) amendments apply to the plaintiff and if so, how? I agree with the plaintiff that based on the reasoning and finding of Placer Dome the reassessment of the 1981 taxation year as it relates to the carryback of the 1982 loss is subject to the four-year limitation period as provided for in subsection 152(4) prior to amendment and therefore the reassessment dated February 15, 1989 with respect to the 1982 loss carryback was issued beyond the time limitation and is invalid.
Regarding the second loss carryback, the plaintiff argued that, based on a plain reading of the amendments, subsections 152(4) and 152(6) are restrictive in the sense that the seven-year reassessment period applies only if an assessment of tax was required pursuant to subsection (6), i.e., if the taxpayer claimed a deduction under section 111. According to the plaintiff, the case before me involves an assessment that the Minister of National Revenue made in respect of a correction and as such is not a reassessment contemplated under subsection 152(6). With respect I cannot accept this portion of the plaintiff's argument. In keeping with MacKay, J.'s comments, I believe this is a situation where the opportunity afforded by the amended subsection 111(1) is taken by the taxpayer after April 19, 1983 to claim a loss carryback, which could only be done for a taxation year commencing after December 31, 1982, as the plaintiff filed the prescribed form T2A amending its 1981 tax return, on March 30, 1984. The question then becomes: does the expanded limitation period apply to just the 1983 year (the plaintiff's position) or does it apply not only to the 1983 losses carried back but to other losses carried back pursuant to an application under subsection 152(6)? This is not a case, as in Placer Dome, where the loss was claimed in a prior taxation year and carried back within the prevailing limit of one year and the Minister of National Revenue is limited to the terms of subsection 152(4) as it was prior to April 19, 1983, namely a four- year reassessment period. Further, in this case, unlike Placer Dome, there was an application for the loss carryback to 1981. I am of the opinion that the seven- year assessment period applies in respect of the 1983 loss carryback to 1981 and therefore this portion of the 1981 notice of reassessment is valid.
In regards to the plaintiff's argument that the further amended subsection 152(4), with a six-year reassessment period, would apply to the facts of this case, I agree that this amendment is applicable to the 1983 and later taxation years. Here we have a situation relating to the 1981 taxation year, where a claim has already been made and completed prior to the subsequent amendment and as such the reduction from seven to six years is clearly not applicable.
Money lender or operating a business of lending?
First I should indicate that nothing in the evidence convinced me that the acquisition of RMDI was an integral part of the business of the plaintiff, nor was the plaintiff either a lending institution or in the business of lending money. An examination of Exhibit P-7 and the evidence of Terry S. left no room for doubt on that issue. All loans were really "in house” deals to help employees, and in situations where larger amounts were ” loaned", the plaintiff only expected to receive the money lent plus the cost to the corporation and in several instances no charges were made. The process was commendable but it certainly didn't support any contention that the plaintiff was operating in a business sense under its Memorandum of Association to lend money. Therefore, the plaintiff is not entitled to a deduction in respect of its loans to RMDI pursuant to either paragraph 20(1)(l) or 20(1)(p) as the plaintiff's ordinary course of business did not include the lending of money and the plaintiff is not in the business of lending money.
Adventure in the nature of trade?
Lloyd Mineer (Mineer) was the brother-in-law of Terry S. Mr. and Mrs. Mineer moved to a new home in Richmond where they met Brian Woolley, a neighbour. Woolley was sales manager for the company of Robert Murray (Murray). This was "a floral giftware", Christmas type of goods business and he [Woolley] had worked for them for quite some time. Murray wanted out and Woolley wanted the Mineers to join him and a couple of other employees in purchasing the business. The Mineers looked over the proposition, were very interested but clearly did not have (nor did any of the others) sufficient capital to acquire the company. In the middle of June, 1980, Mineer looked at competing companies, weighing their strengths and weaknesses and filed away information about it. On a social occasion in October 1980 the Mineers and the Terry Summachs were at dinner. Terry S. asked questions and finally said to Mineer: “Well, why don’t you put something together" (p. 77 of transcript). Terry S., according to Mineer, wanted to know if it was the kind of business that could make a lot of money, how fast, and what kind of money might be required. "Give me just some of the financial things that it looks like and if it looks like something that we can get in, get it, and get out, well, let's see what it's like" (p. 78 of transcript). Mineer put together the information (Exhibit P-8) for Robert Murray Sales Ltd. and some of its competitors. Mineer confirmed in evidence that Terry S. would come in because of high gross margins (as high as 70%) and“ It was an opportunity, to his way of thinking, a short period of time to make some money and get out." [Emphasis added.]
Now to the evidence of Terry and Ken S. (transcript, page 4):
Flexi-Coil designs, manufactures and sells to farm machinery dealers farm equipment. We specialize in seeding, tillage, and chemical application equipment for dry land grain farming.
I have already indicated the size and success of this operation. Terry S. confirms Mineer's approach to him—"to consider becoming involved with them financially to help them acquire a company by the name of Robert Murray Sales Ltd.” When approached, Terry S. tells us at page 9 of the transcript:
And it was at a time when I just completed a real estate transaction that had generated, we thought, a considerable amount of revenue, and so it looked like a reasonable thing for me to get involved with them.
My part really was—at that point was from a financial side. I did not see it at that point as the large venture that it turned out to be and when we—I looked at the records, I looked at the business plan and various other things around the business and it turned out that it was going to take about a total of the sum of 1.1 million to buy Robert Murray Sales, and we bought the assets and those assets were put into the company that we named Robert Murray Design Images Ltd.
[Emphasis added.] And later at pages 11-12 of the transcript:
Mr. Mckenzie:
Q. Could you indicate to me Court [sic] why you became personally involved? A. Well, I guess there were two issues, and the first was simply to help my sister get involved in a business that she wanted to become involved in with her husband. However, I wouldn't do that without there being financial justification behind it and I was convinced by these people that there was great possibility for profit and in helping them get started they could end up with a business and I could end up making some money out of it.
We believed that the major chain stores, such as Eaton's and Sears and the Bay were changing their buying practices and centralizing their buying more than the individual stores going out and buying things like this. That was my understanding at the time at least. Whether or not in fact that was true I don’t know. And so there was a major effort to try and move in and capture some of that centralized buying market, which can result obviously in very large dollars if it can be achieved. And so there was quite a change in the style of the company and I say that because we were losing money at first and I saw that as kind of a business development cost while we established this new style of doing business.
[Emphasis added.] The business and Terry S., however, ran into serious difficulties as a result of several factors. First, despite Terry S.'s business acumen in the farm machinery business, that talent was not much in evidence here. On the basis of conversations with his sister and brother-in-law, and an examination of the data in Exhibit P-7 (who prepared it, Mineer or Woolley or both?), he was prepared to commit up front 1.5 million dollars. No one else contributed any significant amount.
I guess initially I think I had put about $600,000 into the venture and that was—and in addition to that the company, based on my guarantee, had borrowed additional funds that it got to the point where we had inventory coming in for the next selling season and there was not going to be enough money there and so at that point we had to—if this was all going to happen we've got to get additional funding and Flexi-Coil seemed to be the logical source because Flexi-Coil had availability of a line of credit at that time
We also heard that the real estate deal fell through leaving Terry S. in a position where he could no longer commit that money, had guaranteed a bank loan, advanced $600,000 and then reality settled in by late 1981 or early January 1982, "that it got to the point where we had inventory coming in for the next selling season and there was not going to be enough money there". We had Terry S.'s candid observation: "It was the importation and wholesaling of artificial flowers and plants and something that by the way I knew nothing about prior to this time and I still admit to not knowing very much about it.” After the real estate deal failed to generate the revenue anticipated, Mineer saw it this way (page 82 of transcript):
Q. What did you do?
A. We turned over Flexi-Coil to the position that they ended up with, a lot of shares.
Q. Okay.
A. There was no choice. We had to have the cash in order to go through with it.
Everything up to this point had to do with Terry S. personally and/or his company Summach Management Company. Terry S.'s situation was a textbook example of an adventure in the nature of trade. However, it is not his tax position but that of Flexi-Coil we are dealing with here. Does the eventual involvement of the plaintiff with RMDI qualify as an adventure in the nature of trade? It is clear from the evidence that it does not. The situation facing the plaintiff was considerably different than that facing Terry S. when he first decided to finance RMDI. Had the assurances of Woolley and Mineer been accurate or even close with respect to the firm's potential, then RMDI would have evolved much differently, and Terry S. would never have had to approach the plaintiff. Even to this day Mineer talks about what they "believed" which was in fact not the case. There was grand talk about" the opportunity to pick up Eaton's, which was going to be something in the neighbourhood of $800,000 for the business" (Mineer at page 86 of transcript). In fact, Eaton's paid for a sample order costing about $1000.
The schemes sounded wonderful but the reality was quite different. Terry S. who conceded not knowing much about the flower business was completely taken in by this opportunity for investment, but with the handwriting on the wall, Flexi-Coil could not or should not have been. What was the situation when the plaintiff became involved? It was vastly different from the situation facing Terry S. when he first became involved. Terry S. “believed ... the projections were that in the next year we were going to be able to sell at least $7 million I believe was the figure that was thrown around, and we thought it was going to grow from there, and that was all at 50 per cent margin, and so you know the recovery was in sight” (page 25 of transcript). Mineer had done most of the work on the projection, a man who had no expertise in the floral business, nor any knowledge of the business at all until approached by Woolley. Terry S. tells us ” I'd always really trusted the people there and I had been a little lax on not pursuing—you know, actually checking out all the documentation that they said was there" (page 28 of transcript; emphasis added). One projection was, "a very large Christmas order from Eatons and when I I say very large, I don't remember how large that was, but it would have been at least a half a million dollars, and maybe as much as a million and a half dollars, for the next Christmas season". When checked, as earlier stated, the order was for a small sample order of $1,000.
We know several things about the plaintiff's involvement. First, it was sufficiently unusual that Terry S. needed the approval of Ken S. It is also clear that Ken S. wanted no part of the deal, and was not convinced it was a good thing for Flexi-Coil, who were after all in the farm machinery business. It was also clear that since 1975 Ken S. was semi-retired or "they might say I was retired" and from that date Terry S. effectively ran the company. Ken S. was eventually persuaded by, “the facts as to the contracts that were supposed to be coming up, Eatons, Sears and so on .. . and with their advertising brochures that it looked like we were going to make money." He did not know in detail the extent of the debt that existed at that time. Nor did he know how much Flexi-Coil would be required to inject. It struck me that Ken S.’s position as a retired or semi-retired person left him remarkably disinterested in the project to purchase or finance RMDI. But of real significance to me was the dire straits in which Terry S. found himself and with no further money of his own, no possibility of borrowing further from the bank and this pronouncement by Mineer that it was Terry S. who suggested, “we can get Flexi-Coil involved” (transcript, page 82).
Q. What did you do? Could you just—
A. We turned over Flexi-Coil to the position that they ended up with, a lot of the shares.
Q. Okay.
A. There was no choice. We had to have the cash in order to go through with it.
[Emphasis added.]
This was plainly and simply a bailout situation. Money was committed by the plaintiff, shares were transferred to it by the shareholders, and at a time when all projections were clearly wrong and had no basis in fact. Counsel for the plaintiff chastised counsel for the defendant for even suggesting this when he had not put the question to Terry S. or Ken S. Counsel for the defendant, however, did put a lot of questions and secured a good deal of evidence that leaves no room for doubt that this was a bailout. The plaintiff and its accountants moved very quickly to a tax stance initially accepted by the defendant. Even a cursory examination or checking of the projections would have revealed the truth—there were not nor were there going to be sales of the order of magnitude used to first convince Terry S. and later Ken S. It should be mentioned that counsel for the plaintiff also did not put the direct question, "Was this a bailout?” to either Ken S. or Terry S.
Operating motivation
The plaintiffs amended position was that the loans, advances and the shares acquired were part of an adventure in the nature of trade and therefore any gains or losses were on account of income and therefore the losses were deductible. In order for the loans to be deductible the Court must be satisfied that the operating motivation of the plaintiff in acquiring the asset, namely RDMI, or advancing the loans and acquiring shares was for the purpose of resale of profit, i.e., an adventure in the nature of trade. In this regard, counsel for plaintiff referred to Racine v. M.N.R., [1965] C.T.C. 150, 65 D.T.C. 5098. Although the Racine case dealt with whether on the facts the acquisition and disposition of shares constituted an adventure in the nature of trade or whether it was an account of capital and taxable as profits, counsel urged me to follow the approach in Racine in the disposition of this case. The following comments by Noël, J. were noted at page 158 (D.T.C. 5103):
It seems to me that one must ask oneself the question, was the only objective of the appellants, at the time they made their purchase, to add this business to all their other enterprises, or did they acquire the business for the purpose of running it and for the purpose of reselling it at a profit following circumstances which might arise and offers which might be made to them?
and at page 164 (D.T.C. 5106):
If in accomplishing these things the appellants had as one of their motivations the idea of reselling the business at a profit, this profit would be taxable. If on the other hand, as I decided it, they accomplished these things in the course of executing their avowed intention of operating the business indefinitely, the profit arising from the sale which they made under the circumstances is not taxable.
In dealing with the question of whether the transactions, which resulted in the losses claimed by the plaintiff, are considered to be an adventure in the nature of trade, I agree that the issue is not whether loans can be part of an adventure in the nature of trade because they are part and parcel of the acquisition because the case law referred to by counsel for the plaintiff clearly shows that loans in the proper circumstances have been considered to be an adventure in the nature of trade and that much was conceded by counsel for the defendant. Therefore, in making my determination on this question, it is operating motivation of the plaintiff, not Terry S., that is to be ascertained at the time the loans were made and funds advanced.
In regards to the question of the plaintiff's motivation I also note Noël, J.'s further comment in Racine at page 155 (D.T.C. 5101):
To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in mind, at the moment of purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such motivation exists will have to be based on inferences surrounding the transaction rather than on direct evidence of what the purchaser had in mind.
It is clear that the initial operating motivation of Terry S. when he personally became involved was singularly different than the operating motivation of the plaintiff for the reasons above-stated. It is of course self-serving for the parties most intimately involved to declare their motivation as getting in, getting out and selling at a profit. The Court, however, is bound to look at all the circumstances surrounding the transaction to determine if what they said they intended to do is consistent with what in fact happened and what they did.
The defendant has pointed out that which I stated earlier in these reasons (pages 139-42 of transcript):
And what are those circumstances, My Lord? At the time when this plaintiff got involved Mr. Summach indicated there were two major reasons. The first was that he didn't have the finances anymore to carry on. He had already acquired, and it may well be that his reason for getting into the transaction with his brother-in-law and his sister was this motivation to make a profit, but in the eight or nine months following that, through to October of 1981, in my submission the circumstances had already changed materially. They were no longer simply dealing with a third party company with some projections made by Lloyd Mineer as to what may or may not happen, and the prospect of making vast amounts of money.
By October of 1982 they are already $600,000 advanced, $600,000 guaranteed, and a further call for some $300,000 I believe. So by October 6, 1981, another $300,000 has come from Flexi-Coil. Mr. Summach’s evidence was that it was equally likely that this first $300,000 was done simply by him to satisfy the fund requirements to keep things going as it was part of Flexi-Coil’s plan to actually come into this. In other words, it may well have pre-dated any decision by this plaintiff to acquire anything, be it in the nature of trade or otherwise, it was something he did on his own, or it may have been something he did on his own because he financially had to do that and he didn't have the resources himself.
So that by February 5, 1982, which is when the next transfer of funds starts to occur and when a decision is actually taken by this plaintiff to acquire something, circumstances had deteriorated even further. They are already into this company for a million and a half dollars either advanced or potentially liable to the bank. There is a call that is going to require in the month of February, 5th or 22nd, a further $140,000.
There are, and Mr. Summach could not say the dates or how much was loaned or anything else, but there was in place other financing to the Royal Bank by that time, to the extent that by early March, within one month, Flexi- Coil is signing yet another guarantee for $1.5 million, which results by May in an assumption of the bank loan in that amount of $1.5 million. So it was fully advanced by May.
And in the face of those circumstances the evidence is but we went in because we thought we could turn it around and make money. And in my submission, My Lord, an equally likely circumstance, and one which Mr. Summach indicated in his evidence was the fact that he was personally or through his management company exposed to significant amounts of liability and loss, significant by anybody's standards. And in my submission, to suggest that the reason Flexi-Coil took him out was so that Flexi-Coil could make the profit as opposed to him making the profit is not supported by the circumstances.
The operating motivation of Flexi-Coil in coming in this as directed by its president and decided by the directors on consultation was, in my submission, nothing more nor less than a damage control exercise in respect of the $300,000 Flexi-Coil had already advanced and the 1.2 million that Mr. Summach was on the hook for. And in my submission those circumstances were clearly and fairly presented by Mr. Summach who was prepared to concede that was certainly in his mind at the time.
[Emphasis added.]
One more matter caused me some concern about the real intention here, and I can do no better than to quote counsel for the defendant at pages 145-6 of the transcript:
My Lord, I would also point out that this is not a situation where the witnesses have indicated their intention was to get in, turn around and flip. Their evidence, right up to this morning with Mr. Mineer, was that they went in with the intention of advancing working capital, getting the thing up and running, using the profits, which were going to be high, to pay them back and to cover their interest expense, and then to turn it over to the other principals, namely Lloyd Mineer and his three friends that had absolutely no money.
And the only evidence as to how the share buy out could have or would have proceeded was given this morning by Mr. Mineer, who indicated there was a written and signed shareholder's agreement, something that Mr. Summach certainly did not allude to at all in his evidence, and Mr. Mincer's evidence was that that shareholder's agreement included a buy sell provision that he understood was there to protect the two individuals that were planning to leave early, within five or ten years, and anybody else. And it was going to provide that they would be taken out, their shares would be bought back by the company at what he said was fair market value.
But where is the agreement and the corporate documentation, and where is Mr. Summach's knowledge that that's what was the arrangement. As I understood his evidence none of this was in writing, it was all done verbally. So in my submission, that small amount of evidence as to any sort of detail as to how Flexi- Coil or Mr. Summach previous to Flexi-Coil was going to be taken out of this by the other principals has not been presented in any manner supporting a profit motive in terms of the sale of the shares.
Further, after reviewing the cases referred to by the plaintiff, which deal with an adventure in the nature of trade, namely: M.N.R. v. Freud, [1968] C.T.C. 438, 68 D.T.C. 5279; Becker v. The Queen, [1983] C.T.C. 11, 83 D.T.C. 5032; Leslie v. M.N.R., [1986] 1 C.T.C. 2209, 86 D.T.C. 1152; Cull v. The Queen, [1987] 2 C.T.C. 63, 87 D.T.C. 5322; and W. Green Holdings Ltd. v. M.N.R., [1990] 2 C.T.C. 2068, 90 D.T.C. 1605, I note that each can be distinguished on the facts and that the key element in the various conclusions was that the evidence showed that the transaction, be it a loan or the acquisition of shares, was conducted for the purpose of making a profit and therefore was considered to be an adventure in the nature of trade.
Based on the evidence before me, I am not satisfied that the operating motivation of the plaintiff in making the loans was that of profit and therefore the transactions in question could not be considered an adventure in the nature of trade.
Conclusion
For the reasons stated above, I conclude that the losses in question were not incurred in the course of an adventure in the nature of trade nor in operating a business, including the business of lending money and therefore were properly disallowed. Regarding 1981 reassessment, I find that it is statute barred with respect to the 1982 loss carryback to 1981 only and that the loss carryback in 1983 to the 1981 taxation year was made within the requisite time period and is therefore valid.
The appeal is dismissed on the issue of the deductibility of the losses and allowed in part in respect of the validity of the February 1989 notice of reassessment relating to the 1981 taxation year. In the circumstances here there will be no order as to costs.
Appeal allowed in part.