United News (Wholesalers) Ltd. v. The Queen, 94 DTC 6508, [1994] 2 CTC 180 (FCA)

Strayer J.:—This is an appeal from a decision of the Tax Court of Canada dated August 30, 1983 ([1983] C.T.C. 2596, 83 D.T.C. 539. While this appeal was, of course, in the form of a trial de novo the basic facts are not in dispute and I make the same essential findings of fact as did the learned judge of the Tax Court. It appears that I had the same documents before me and the evidence of the same principal witness, Mr. Lawrence Shapiro, former president of the plaintiff company. I did not have the evidence of Mr. John Collins, an accountant for the plaintiff who testified before the Tax Court, but I am able to come to essentially the same findings of fact as his evidence does not appear to have added much. The essential issues are legal, involving the characterization of the arrangement for the advance of $210,000 which the plaintiff company made to B/C Concerts Ltd. in 1977 so as to enable the latter company and Sounds of the World Ltd. to present ''Toiler Cranston and the Ice Show" in Canada during the latter part of 1977. The money was advanced pursuant to an agreement dated May 12, 1977 which provided for the plaintiff to be repaid the advance at the rate of $10,000 after each of performances 21 to 41. Further the agreement provided for the plaintiff receiving five per cent of gross receipts from the performances in Canada with a guarantee of a minimum of $42,000. The agreement stated that the repayment of the advance, plus the payment of $42,000 as minimum consideration for the advance, was to be guaranteed by Dennis Bass, principal of B/C Concerts Ltd. Such a guarantee was in fact provided by Mr. Bass.

The performances were not a financial success, however. Very early in the process the plaintiff gave up its right to five per cent of the gross receipts. In fact it never received either the repayment of the advance or the minimum consideration of $42,000 owing to it in respect of the advance. The guarantee of Mr. Bass proved to be worthless.

In its income tax return for the 1977 taxation year the plaintiff showed the $210,000 loss of the advance as a loss from a business venture. The Minister reassessed on the basis that the loss of the advance was a capital loss.

The essential issue is that the plaintiff contends that the arrangements surrounding the making of the advance of $210,000 was a speculative transaction involving a high risk and a potentially high return (even the minimum consideration of $42,000, for the use of $210,000 for about one-half a year, would represent a 40 per cent return on the use of the money). Mr. Shapiro as former president of the plaintiff testified that in fact he had thought the consideration of five per cent of gross receipts would yield in the order of $150,000 which would have provided a return at an annual rate of well over 100 per cent. Thus the plaintiff argues that this was an adventure in the nature of trade and the loss of the advance should be treated as a business loss. On the other hand the defendant contends that this was an investment of a capital sum of $210,000 whose loss should be treated as a capital loss.

I have concluded, as did the learned Tax Court judge, that the advance amounted to the investment of a capital sum whose loss was a capital loss.

Once again it is necessary to fit a transaction shaped by transitory business considerations on to the Procrustean bed of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). As has been said in various forms in the past

. . . the question whether a particular transaction is an adventure in the nature of trade depends on its character and surrounding circumstances and no single criterion can be formulated. [1]

I believe that the evidence here substantially supports the view that this was an investment in the form of a loan made by the plaintiff to B/C Concerts Ltd. While the agreement of May 12, 1977 uses the rather neutral word "advance" to describe the sum of $210,000 provided by the plaintiff, the agreement refers in paragraph 7 to the "repayment of the advance", a term more typical of a loan arrangement. The agreement also in paragraph 8 refers to the "repayment" of the guaranteed return of $42,000 owing as consideration for the making of the advance. Paragraph 22 confirms that a guarantee is to be given by Mr. Bass in the sum of $252,000 guaranteeing to the plaintiff "repayment" of the advance and the "guaranteed return". The agreement refers to the plaintiff as the "investor". Paragraph 11 makes it clear that the agreement does not create a partnership or joint venture between the plaintiff and the other parties to the agreement. Further, the evidence is clear that the plaintiff took no part in organizing or presenting the performances of Toller Cranston and the Ice Show. The business of the plaintiff is that of a distributor of books, magazines, greeting cards, etc. and has nothing to do with show business. The evidence of Mr. Shapiro, the former president of the plaintiff, was that he did not pretend to have any knowledge of show business and relied entirely on information provided to him by his friend Mr. Libin, an impresario who was the principal of Sounds of the World Ltd. Mr. Shapiro took steps such as an investor would take: he insisted on a personal guarantee from Mr. Bass of repayment of the advance plus a minimum of $42,000 for the use of his money. Unfortunately, he relied on information which Mr. Libin had obtained as to Mr. Bass’s solvency. This information turned out to be incorrect. At the time of advancing the money it is reasonable to conclude that Mr. Shapiro on behalf of the plaintiff did not view this as a very risky venture as he had obtained what he reasonably believed at that time to be an effective guarantee both of repayment of the advance plus a minimum return on his money of 40 per cent per annum with, of course, the possibility of a return up to well over 100 per cent per annum.

While a number of cases were cited to me, they all turn on their own facts. I believe that the two cases most supportive of the plaintiff's position were West Coast Parts, supra, a decision of the Exchequer Court of Canada of 1964. That involved a loan made by a company, not in the lending business, of $125,000 with a bonus to be paid to the lender of $56,000. Cattanach J. interpreted that to be an adventure in the nature of trade. He regarded the “lump sum payment”, namely the bonus of $56,000, not as payment for the use of money but

as an inducement to the lender to incur the risk of not getting his money back in speculative circumstances” (page 526 (D.T.C. 5320)).

It will be noted there that ten per cent interest was also payable on the loan. I would distinguish the West Coast Parts case for at least two of the reasons for which Heald J. distinguished it from the situation before him in Lunham & Moore Ltd. v. The Queen, [1975] C.T.C. 183, 75 D.T.C. 5131 (F.C.T.D.), at page 190 (D.T.C. 5135). In West Coast Parts the plaintiff company was one of a set of interrelated companies at least one of which was involved in the money lending business. In the present case the plaintiff was not in the entertainment business or in any business closely related to it. In West Coast Parts the loan was unsecured and therefore the bonus could be seen as compensation for the risk. In the present case the loan was, on paper and to the best information of the plaintiff, fully secured through the personal guarantee of Mr. Bass.

The case of Freud v. M.N.R., [1969] S.C.R. 75, [1968] C.T.C. 438, 68 D.T.C. 5279, also appeared to provide some support for the plaintiff's position. In that case a lawyer loaned money to a U.S. company which he had organized, to assist the company in completing the development of a prototype of a new car. When the money was lost through the financial difficulties of the company, it was held to have been an outlay for gaining income from an adventure in the nature of trade. It is important, however, to note the observations of Pigeon J., at page 443 (D.T.C. 5282-83)

It is, of course, obvious that a loan made by a person who is not in the business of lending money is ordinarily to be considered as an investment. It is only under quite exceptional or unusual circumstances that such an operation should be considered as a speculation. However, the circumstances of the present case are quite unusual and exceptional. It is an undeniable fact that, at the outset, the operation embarked upon was an adventure in the nature of trade. It is equally clear that the character of the venture itself remained the same until it ended up in a total loss. Under those circumstances, the outlay made by respondent in the last year, when the speculative nature of the undertaking was even more marked than at the outset due to financial difficulties, cannot be considered as an investment. . . it is clear that the monies were not invested to derive an income therefrom but in the hope of making a profit on the whole transaction.

Thus it is confirmed that normally a person who lends money when he is not in the business of money lending makes an investment unless there are unusual circumstances. There were no unusual circumstances in the present case comparable to those in Freud, supra. In the Freud case the lender had been involved with the enterprise from the beginning and the loan was made in the late stages of the venture in the hope of bringing it to its conclusion. No such circumstances exist in the present case.

At the trial the defendant, with the consent of the plaintiff, amended the statement of defence to add an ''alternate argument" to the effect that the loan could not be seen as an expense in a business venture because there was no reasonable expectation of profit. Without the consent of the plaintiff I would not have allowed such an amendment at that late stage. I need not consider further its propriety, in any event, because I do not find that the evidence supports the proposition that there was no reasonable expectation of profit. As indicated earlier, I believe it was perfectly reasonable for the plaintiff to expect a very substantial return on its investment and if it were otherwise characterizable as an outlay for gaining income from an adventure in the nature of trade I would have to see that adventure as one in which there was a reasonable expectation of profit. For reasons stated earlier, however, I must regard it as an investment.

The appeal must therefore be dismissed.

Appeal dismissed.