Date: 20010730
Docket: 1999-1962-IT-G
BETWEEN:
576315 ALBERTA LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bonner, T.C.J.
[1]
The Appellant appeals from assessments of income tax for the 1988
and 1990 taxation years. At issue is the deductibility in 1990
under s. 20(1)(p)(ii) of the Income Tax Act (the
"Act") of three amounts:
the sum of $1.7 million advanced by 241467 Alberta Ltd.
(241467), a predecessor of the Appellant, to 161062 Canada Ltd.
(161062) in June of 1989.
(b)
the sum of $325,000.00 advanced by 241467 to 600666 Ontario Ltd.
(600666) late in 1989 and early in 1990;
(c)
the sum of $410,000.00 paid by 241467 to 161062 on June 27, 1988
if that payment was, as the Appellant and Respondent at one time
agreed, a loan, and not, as the Appellant now says, a payment of
the subscription price for shares of 161062.
[2]
It was the position of the Appellant in the Notice of Appeal that
the three loans became uncollectable in its taxation year
ending December 31, 1990 giving rise to deductions under s.
20(1)(p)(ii) which reads as follows:
"(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:
...
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]
As a consequence of the discovery process counsel for the
Appellant took the position at the hearing of the appeal that the
payment of $410,000.00 was not a loan of money but rather was a
part of the subscription price paid by 241467 to 161062 for the
issuance of shares. Consequently his position was that the total
amount deductible by the Appellant in 1990 under s.
20(1)(p)(ii) of the Act was $2,025,000.00.
[4]
Counsel for the Respondent took the position that all three
payments were loans of money and that no deduction was available
to the Appellant under s. 20(1)(p) because:
(a)
lending money was not part of the ordinary business of the
Appellant;
(b)
the loans were not made by the Appellant in the ordinary course
of business; and
(c)
the Appellant did not establish that the loans became
uncollectable in 1990.
[5]
One person testified at the hearing of the appeal. He was
Donald Evernden. He was a careful and credible witness.
Shortly after graduating from high school in 1955, he went to
work in the oil and gas industry. In 1965, he entered the tanker
truck business. By early 1980 Mr. Evernden or his companies
operated as many as 135 tank and trailer units engaged in the
hauling of oil. Mr. Evernden testified that 241467 was
incorporated to lend money and operate a finance business because
he wanted to get out of the trucking business and into money
lending. Mr. Evernden held, at all material times, either
directly or indirectly 100% of the shares of 241467. That
corporation at all material times held at least 90% of the shares
of 161062 which in turn held 100% of the shares of 600666. 241467
had no employees. It was run by Mr. Evernden.
[6]
Up to 1987 the income of 241467 was earned from the leasing of
trucks, trailers, aircraft and buildings to corporations in which
Mr. Evernden had an interest. Thereafter 241467 commenced to
enter into dealings which involved the lending of money to a
variety of individuals and corporations. 241467 did not advertise
or hold itself out to the public as a money lender. Advertising
was unnecessary. Opportunities to lend appear to have arisen
because (a) Mr. Evernden was related by blood or marriage to the
borrower, (b) Mr. Evernden was acquainted with the borrower
through either the trucking business or Mr. Evernden's
activities in aviation, or (c) the transaction was brought to Mr.
Evernden's attention by his investment advisor Mr.
Parker.
[7]
Mr. Evernden gave evidence regarding the general nature of the
business activity of 241467. He sketched out some of the details
of 24 transactions or groups of transactions listed in a
schedule marked Exhibit A-1, tab 24. At least six of the
transactions are of little assistance in determining whether
241467's ordinary business included the lending of money. In
four of the six, one of which was a loan to Mr. Evernden himself,
no interest was charged. In the other two interest was charged on
some but not all of the advances. In three of the 24 cases loans
were made to relatives. Two of those three cases involved
loans to Mr. Evernden's son-in-law. There were defaults
on those two loans and substantial losses resulted. I regard the
six loans as transactions falling outside the scope of
business.
[8]
Two of the 24 transactions did not involve loans at all. A
distinction is to be drawn between an indebtedness which arises
as a result of the deferral of payment of the whole or part of a
sale price and an indebtedness which arises as a result of a loan
of money.[1] The
so-called advance of 1.9 million dollars referred to in the
tab 24 exhibit was in fact not a loan of money at all but
rather the deferred balance of the purchase price of aircraft
sold by 241467 to a corporation known as Sunwest Charters.
Similarly the evidence of Mr. Evernden indicates that what
is recorded as a 4.29 million dollar advance in 1988 under the
heading "Koch Loan" is in point of fact an unpaid
balance owing to 241467 as a result of the sale by it to Koch of
trucking equipment which it had previously leased out to
Koch.
[9] A
number of the loans referred to in evidence were made to
truckers, garage operators and others directly or indirectly
involved in the trucking industry. The testimony of Mr. Evernden
indicates that the loans were made to enable the borrowers to
acquire equipment or business premises or trucks needed to carry
on their respective businesses. Included in this category
are:
(a)
the 1989 advance to Lady Carmen Trucking
(b)
the 1987 advance to B.J.'s Transportation
(c)
the 1988 advance to GBM Trailer
(d)
the 1988 advance to Harvey
(e)
the 1989 advance to Bob Robertson
(f)
the 1991 advance to Ivor Parker
(g)
the 1991 and 1992 advances to GN Transportation
(h)
the 1991 advance to Bob Scott
(i)
the 1991 advance to Dave Lyons.
The suitability of all nine loans was investigated, the loans
were properly documented with promissory notes and 241467 took
security where appropriate.
[10] The money
lending activities of 241467 were not restricted to transactions
which offered the corporation reward in the form of interest
alone. The 1988 loan to GBM Trailer was made on the basis that
241467 was to receive 75% of the shares of the borrower. The
arrangement was intended to permit 241467 as lender to monitor
and control the activities of the borrower. As well, upon
repayment, 241467 was able to resell the shares at a considerable
profit. Mr. Evernden described another transaction in which
241467 advanced funds to 408653 Alberta Ltd. to enable it to
carry out a land development venture. Because 241467 advanced 75%
of the money required for the venture, it received 75% of the
issued shares of the borrower in addition to interest on the
principal. Once again, 241467 was able, as holder of an absolute
majority of the shares of the borrower, to monitor and control
the borrower's activities.
[11] Finally,
in 1989, 241467 advanced a substantial sum of money to a
corporation which operated a bar or tavern. It took a second
mortgage as security. Following default on the first mortgage it
redeemed. Eventually it became owner of the real estate which
yielded rental income for a period of time before the property
was sold. Mr. Evernden indicated that overall the venture yielded
a profit.
[12] Mr.
Evernden explained the events which led to the involvement of
241460 with 161062 and 600666. Frederick Saturley, who had been
Mr. Evernden's bank manager, wanted to enter the business of
the franchising of restaurants. He approached Mr. Evernden for
assistance with respect to the franchising of a chain to be known
as Phil's restaurants. Mr. Evernden consulted his business
advisor, Mr. Parker. 161062 was incorporated on April 15, 1988.
241467 subscribed for 86% of the shares for 161062. Other shares
were issued to Lady Carmen Trucking Ltd. and to Stratrek
Distributors Ltd., Mr. Saturley's corporation.
Mr. Evernden became president and Mr. Saturley became
secretary-treasurer. Mr. Evernden gave unequivocal evidence that
the consideration for the issue to 241467 of the shares of 161062
included a payment of $410,000. That evidence was supported by a
photostat of a cheque voucher recording the issuance by 241467 of
a cheque in the amount of $410,000 to 161062. That voucher bears
the notation "re: balance shares Phil's Pancake
franchise". Although 161062 did issue a $410,000 promissory
note dated June 27, 1988 and signed on behalf of the company by
Mr. Saturley, I accept Mr. Evernden's explanation that the
note was issued as result of a simple misunderstanding. I note
too that the notion that the $410,000 payment was an advance is
inconsistent with the 1989 financial statements of 161062. I
therefore find that the $410,000 payment was made not as a loan
of money but as consideration for the issuance of shares.
[13] In June
of 1989, 161062 acquired, in an arm's length transaction for
a consideration of $1.7 million the shares and receivables of
600666. 600666 operated four restaurants which were intended to
function as sample or demonstration operations to be used in the
promotion of the Phil's franchise concept. 241467 loaned the
entire $1.7 million to 161062 and received a promissory note as
evidence of the debt. The loan was repayable by monthly principal
instalments of $30,000 plus interest at the rate of 12% per
annum. The transaction took place at a time when general economic
circumstances were poor. The four restaurants lost money and
franchises could not be sold.
[14] On or
about January 10, 1990, 241467 advanced $325,000 to 600666 to
enable it to pay rent, taxes and other accumulated debts. The
loan was evidenced by promissory note payable December 31, 1990
and bearing interest at 12% per annum. Mr. Evernden
explained that he felt responsible to "see us through
this" and he therefore caused 241467 to lend the money even
though he knew that the borrower was experiencing financial
problems.
[15] During
1990, Mr. Evernden's efforts were devoted to trying to sell
the restaurants and "get out of it with whatever I
could". In or about May of 1991, the shares of 600666 were
sold but for very little consideration and as a result neither
161062 nor 241467 received anything from the sale.
[16] The
question whether a taxpayer's ordinary business includes the
lending of money is one of fact. It is to be determined by
reference to what the taxpayer in question ordinarily does in the
pursuit of profit. 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[2], 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.
[17] The
argument of counsel for the Respondent was largely based on
assumptions which the Respondent pleaded had been made by the
Minister of National Revenue on assessment[3]. Counsel argued that the Appellant
did not establish a systematic and continuous pattern of lending
money, did not always collect interest on loans, did not hold
itself out to the public as a money lender, and made a number of
loans to related persons or business associates. She also pointed
out that the tax returns of 241467 did not list money lending as
an activity.
[18] Counsel
for the Appellant aptly characterized 241467's overall
activities as a financing business. That is what Mr. Evernden
intended the business to be and that in fact is what the
corporation did. I agree with the submission. The evidence which
I have summarized shows that 241467 entered into lease and loan
transactions repeatedly with a view to earning income in the form
of lease payments or interest. The financing business was its
ordinary business and the lending of money was part of that
activity. As Cotton, L.J. noted in Erichsen v. Last[4]:
"... where a person habitually does a thing which is
capable of producing a profit for the purpose of producing a
profit and enters into a contract habitually he is carrying on a
trade or business."
Moreover the presumption arising from incorporation must be
taken into account. In Canadian Marconi Company v. The
Queen[5], the
Supreme Court of Canada considered the distinction between income
from a business and income from property. The Court noted the
existence of a rebuttable presumption that, in the case of a
corporate taxpayer, income received from an activity done in
pursuit of an object set out in the corporation's constating
documents is income from the business. The Court also noted at
page 470 that corporations formed under some statutes need not
list their corporate objects. I gather that 241467 was one such
corporation. Wilson, J. speaking for the Court expressed the
opinion at page 470 that the rebuttable presumption should extend
to corporations formed under those statutes so long as it is
recognized that the presumption is rebuttable. In my view the
activity of 241467 in receiving, considering and rejecting or
accepting the applications for loans which were made to it
constitutes the carrying on of a business activity. There is
nothing to rebut the presumption.
[19] Counsel
for the Respondent pointed to the fact that 241467 made loans in
some cases to members of Mr. Evernden's family and did not
collect interest on all loans. None of that alters the fact that
in making the interest bearing loans which it did in fact make
the corporation was carrying on one aspect of its financing
business. In my view, the instances relied upon by counsel for
the Appellant were not representative of 241467's activities
as whole.
[20] Counsel
for the Respondent argued further that the loans to 161062 and
600666 were not made in the ordinary course of 241467's
business. I disagree with respect to the loan to 161062 but agree
with respect to the loan to 600666.
[21] The
argument of counsel for the Respondent with respect to the loan
to 161062 was somewhat convoluted. It will be recalled that the
evidence of Mr. Evernden was that in advancing the $1.7
million to 161062, 241467 acquired a block of shares of the
borrower. He testified that the shares were intended to give
241467 absolute voting control over the activities of the
borrower for so long as the loan was outstanding. The plan was
that upon repayment of the loan the shares would be sold to Mr.
Saturley for market value. Thus 241467 would, if the venture
turned out to be a success, earn not only interest on the loan
but also a profit on the sale of the shares. The Respondent's
argument that the loan was not made in the ordinary course of the
business of 241467 was that, if the venture were successful and
if the share sale did take place as planned, some or all of the
return to 241467 would have been received in the form of
dividends. Counsel proceeded from that point to assert that
"the whole transaction is really to acquire a capital
asset".
[22] In my
view, this branch of the Respondent's argument is not
supported by the evidence and has little to do with the question
whether the loan was made in the ordinary course of the business
of 241467. I reiterate that I accept Mr. Evernden's
evidence both in general and, in particular, as to the nature of
the plan. The language of s. 20(1)(p)(ii) is not obscure.
The words "in the ordinary course of business" refer to
the business practices of the taxpayer-lender. The
acquisition by a lender of control over the borrower is a
sensible arrangement particularly where the lender is advancing
virtually all of the borrower's capital as was the case here.
The evidence indicated that 241467 acquired control of the
borrower in a similar way in at least two other cases. The plan
to earn a profit, if possible, in the sale of the shares to Mr.
Saturley or his company does not separate that transaction from
the ordinary course. I therefore find that the $1.7 million
loan was made in the ordinary course of the business.
[23] In my
opinion the $325,000 loan to 600666 stands on a different
footing. The money was advanced in circumstances quite distinct
from the ordinary course of 241467's business. It was not
advanced with a view to earning interest. At the time the money
was advanced there was little hope of repayment of the advance
and less hope of ever receiving interest The $325,000 was the
total of several advances made to 600666 late in 1989 and early
in 1990 to enable the borrower to pay its bills. Part of the
money was advanced by way of cheques issued directly to creditors
of 600666. The borrower was losing money at the time. I can
discover no basis in the evidence for finding that the $325,000
loan was made by 241467 in the ordinary course of the money
lending business.
[24] Finally,
I find that the loans were established by the taxpayer to have
become uncollectable in its 1990 taxation year. Mr. Evernden
testified "... by the end of 1990 I knew that it was a lost
cause". As noted above, it was a lost cause long before the
end of the year. There was ample support for that conclusion.
[25] It
follows that the Appellant is entitled to a deduction in the 1990
taxation year under s. 20(1)(p)ii in respect of the $1.7
million loan to 161062. It is not entitled to a deduction under
that provision in respect of the $325,000 loan to 600666. It is
not entitled to a deduction under that provision in respect of
the $425,000 payment which was not a loan. It is common ground
that part of the resultant loss may be carried back to the 1988
taxation year. Judgment will therefore issue allowing the appeals
with costs and referring the assessments back to the Minister of
National Revenue for reassessment in accordance with these
reasons.
Signed at Ottawa, Canada, this 30th day of July 2001.
"M.J. Bonner"
J.T.C.C.
COURT FILE
NO.:
1999-1962(IT)G
STYLE OF
CAUSE:
576315 Alberta Ltd. and H.M.Q.
PLACE OF
HEARING:
Calgary, Alberta
DATE OF
HEARING:
February 28, 2001
REASONS FOR JUDGMENT BY: the
Honourable Judge M.J. Bonner
DATE OF
JUDGMENT:
July 30, 2001
APPEARANCES:
Counsel for the Appellant: George McKenzie
Counsel for the
Respondent:
Margaret Irving
COUNSEL OF RECORD:
For the
Appellant:
Name:
George McKenzie
Firm:
Felesky Flynn
Calgary, Alberta
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-1962(IT)G
BETWEEN:
576315 ALBERTA LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on February 28, 2001 at Calgary,
Alberta, by
the Honourable Judge M.J. Bonner
Appearances
Counsel for the
Appellant:
George McKenzie
Counsel for the
Respondent:
Margaret Irving
JUDGMENT
The
appeal from the assessments made under the Income Tax Act
for the 1988 and 1990 taxation years is allowed, with costs, and
the assessment is referred back to the Minister of National
Revenue for reassessment in accordance with the attached Reasons
for Judgment.
Signed at Ottawa, Canada, this 30th day of July 2001.
J.T.C.C.
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