H.Y. Louie Co. Ltd. v. The Queen, 86 DTC 6228, [1986] 1 CTC 499 (FCTD)

Muldoon, J.:—Given the subject matter of this litigation, this Court's constitutional basis in section 101 of the Constitution Act, 1982 and the provisions of subsection 48(1) and Schedule I of the Federal Court Act, the descriptive words “. .. in Right of Canada" applied to the defendant in the Original style of cause are redundant. Accordingly, the style of cause is amended nunc pro tunc to appear as it is displayed above.

The plaintiffs action herein constitutes an appeal from a notice of reassessment, dated January 21, 1986, No. 729303, by the Minister of National Revenue whereby he reassessed the plaintiff for its taxation year ending March 4, 1978, characterizing the plaintiffs non-recovery of a certain sum of $200,000 as a business investment loss, as more particularly set out in the certified record, and the other documents filed herein at trial. For the reasons which follow, the plaintiff’s action and appeal will be dismissed. The plaintiffs course of conduct at the material times, objectively demonstrated by the documentary evidence then created was not and could not be shown in a different light, or of different import, despite the earnest testimony of the trial’s only two witnesses, both called on behalf of the plaintiff, namely, Brandt Louie and James Wilson Wyse.

The parties' respective solicitors and counsel are commended for their most helpful professionalism in preparing and tendering an “agreed statement of facts," Exhibit 1 at trial. Shorn of superfluous detail, Ex. 1 runs its agreed course as follows:

1. The Plaintiff, H. Y. Louie Co. Limited, is a body corporate duly incorporated under the laws of the Province of British Columbia having its registered office at 2821 Production Way, in the District of Burnaby, in the Province of British Columbia, VSA 3G7.

2. The Defendant, Her Majesty the Queen . . . , as at all material times acting through her officer, the Deputy Minister of National Revenue for Taxation for Canada (hereinafter called the “Minister”).

2A. The principal business of the Plaintiff is food distribution.

3. On August 31, 1976, the Plaintiff entered into an agreement with Twosome Projects Ltd. and Threesome Projects Ltd. (hereinafter called the “Agreement,” "Twosome/’ and "Threesome/’ respectively) whereby the parties agreed to construct a 75-unit condominium building on land in the District of Burnaby, Province of British Columbia . . . the said Agreement [being] attached as Exhibit “1” to this Agreed Statements of Facts.

4. The Plaintiff did advance the sum of $200,000.00 to Twosome pursuant to this Agreement. Twosome has not repaid the advance, neither in whole nor in part. [sic]

5. The Plaintiff did receive 100 common shares in the capital stock of Twosome at the price of $1.00 each pursuant to the Agreement. The said 100 shares have since the date of receipt thereof by the Plaintiff comprised 50% of the issued shares in the capital stock of Twosome.

6. In order to finance the cost of constructing the condominium building, Twosome borrowed funds, inter alia, from The Royal Bank of Canada and as security for such loan executed a debenture in favour of The Royal Bank of Canada.

7. On or about September 28, 1977 and pursuant to the said debenture granted by Twosome, The Royal Bank of Canada appointed Harold S. Sigurdson as Receiver-Manager of Twosome.

8. On June 28, 1979 Harold S. Sigurdson filed a Form 8 Notice under the Company Act (British Columbia) that he had ceased to act as Receiver-Manager of the property of Twosome on the 21st day of June, 1979.

9. Harold S. Sigurdson, neither [sic] in his capacity as Receiver-Manager of Twosome nor [sic] in any other capacity, did not repay to the Plaintiff, in whole or in part the advance [$200,000 + $50,000] referred to in paragraphs 4 and 5 of the Statement of Claim.

10. The Plaintiff duly filed its corporation income tax return for the fiscal year ended March 4, 1978 and by Notice of Reassessment dated May 14, 1981, No. 564483 the Minister reassessed the Plaintiff for its taxation year ending March 4, 1978 disallowing, inter alia, as a business expense the claimed deductible advance of $200,000.00 and the claimed write-off of payment for common shares in the capital stock of Twosome of $100.00. The said reassessment characterized the said deductions, totalling $200,100.00, as capital losses, creating a net-capital loss of $100,050.00.

11. By Notice of Reassessment dated May 14, 1981, No. 564482 the Minister reassessed the Plaintiff for its taxation year ending March 5, 1977 so as to deduct from the previous net income of the Plaintiff for its taxation year ending March 5, 1977 a net-capital loss carried back from Plaintiff’s taxation year ending March 4, 1978 the sum of $8,310.00 leaving a net-capital loss available to be carried forward from the taxation year of the Plaintiff ending March 4, 1978 of $91,740.00.

12. By Notice of Objection served on the Minister August 11, 1981, the Plaintiff duly objected, inter alia, to the reassessments referred to in paragraphs 10 and 11 hereof in respect of the amounts set out in paragraphs 10 and 11 hereof.

13. By Notice of Reassessment dated January 21, 1983, No. 729303, the Minister reassessed the Plaintiff for its taxation year ending March 4, 1978 characterizing the advance in the amount of $200,000.00 to Twosome as a business investment loss.

The agreement mentioned in paragraph 3 of Ex. 1 is also trial exhibit 2(5). Exhibit 2(5) is a photocopy of a written agreement dated August 31, 1976, between Twosome Projects Ltd., therein called “the Company,’ Threesome Projects Ltd., therein called "the Manager” and the plaintiff, therein called "the Investor.” It recites that the company (Twosome) is registered owner of the lands and premises (the “lands’’) and is desirous of constructing on those lana: “a seventy-five suite condominium.” It further recites that the manager (Threesome) has agreed to provide the management services for the company to construct such condominium; and that the investor (the plaintiff) “has agreed to advance the equity funds for the project/'

The pertinent, operative provisions of that agreement (Ex. 2(5)) are as follows:

1. The Manager covenants and agrees to construct on the lands a seventy-five unit condominium building registered pursuant to the Strata Titles Act, R.S.B.C. as amended and sell the same;

2. In consideration therefor, the Company shall pay to the Manager the sum of FOUR THOUSAND ($4,000.00) DOLLARS at the begining of each month starting the day that the building permit is issued and to continue until the total sum paid is FORTY-EIGHT THOUSAND ($48,000.00) DOLLARS, as a Manager’s fee.

3. The Investor agrees to advance TWO HUNDRED THOUSAND ($200,000.00) DOLLARS (hereinafter called the “principal”) and the Investor shall in consideration therefor, upon the sale of the units comprising the condominium referred to herein, receive TWO HUNDRED FIFTY THOUSAND ($250,000.00) DOLLARS (inclusive of principal). The difference, that is to say the sum of FIFTY THOUSAND ($50,000.00) DOLLARS shall be a “financial fee” payable to the Investor by the Company.

4. If in order to complete the construction, the project requires additional equity funds, the Investor agrees to advance to the project the additional funds required, such funds to be included in the principal. The Manager and the principals of Threesome Projects Ltd. hereby agree to Guarantee the TWO MILLION ($2,000,000.00) DOLLAR first mortgage placed with First City Investments.

5. The ranking of funds by the Company for the purpose of disbursement shall be as follows:

First Priority — Investor’s Principal

First Priority — Manager’s Fee

Second Priority — Investor’s Financial fee

Third Priority — Project Profit.

[The ranking of funds for the repayment of any losses shall be in the reverse order of the above. (Deleted) I

6. The parties hereto covenant and agree to execute such further documents and grant such assurances as may be required to carry out the true intent and meaning of this Agreement fully and effectually.

7. In consideration therefore the Investor and the Manager shall each receive and agree to purchase 50% of the issued common shares of the Company.

9. This agreement shall enure to the benefit of and be binding upon the parties hereto, and their heirs, executors, administrators, successors and assigns, as the case may be.

It appears that Twosome, no doubt to give effect to paragraph 7 above, did or meant to execute the agreement by the hands of James Wilson Wyse, a principal of Threesome and of Brandt Louie, a principal of the plaintiff. The same Mr. Brandt Louie signed the agreement on behalf of the plaintiff.

At a later date, April 26, 1977, pursuant to the provincial Real Estate Act, Schedule 2 (Strata Lots), there was issued a prospectus of Twosome for “Bakerview” the name of the residential condominium project then in construction on and at the above mentioned lands. It is Exhibit 2(6) and it appears to follow the prescribed statutory form. The promoter is Twosome. In section 2 of the prospectus there is a brief narrative business biography of the two above mentioned principals who were the only two witnesses to testify at the trial.

James Wilson Wyse has, for the last five years been President of Project Management Ltd. and a construction management consultant for a number of companies, from 1973 to the present date, and during 1972 and 1973, was manager of the Ottawa Ski Club ski facilities at Camp Furtune, Quebec. Brandt C. Louie is associated with H. Y. Louie & Co. Ltd. in Vancouver, and was previously a chartered accountant in practice with Touche Ross & Co. in Vancouver. . . .

Section 3, “BUSINESS TRANSACTED” states that “The Promoter has been recently incorporated, and intends to continue in the business of land transactions and real estate property development?* The testimony of the two witnesses was not nearly so positive as that assertion.

Section 7 of the prospectus indicates that construction of the project “commenced in October, 1976 and will be substantially completed on or about May 31st, 1977.” Section 12 discloses that the land registered in the promoter's name is subject to two encumbrances. The first is a mortgage in favour of City Savings and Trust Company for $2 million with interest at 15.25 per cent per annum; and the second is a registered debenture in favour of the Royal Bank of Canada for $500,000 payable on demand with interest at the bank's prime commercial rate plus 2 per cent per annum.

Not surprisingly, the prospectus makes no mention of the plaintiff's advance of $200,000 to Twosome, of which the plaintiff was an equal halfowner of that corporation's issued shares. Although Ex. 2(5), the agreement, refers to the construction project which is the subject of Ex. 2(6), the prospectus, the plaintiff’s money was, in effect, advanced to Twosome to aid it in doing what it was incorporated to do. The nexus between the plaintiff and Twosome in the prospectus is the declaration in section 5(3):

(i) the authorized capital consists of $10,000.00, divided into 10,000 shares with a nominal or par value of $1.00 each of which 200 shares have been issued and paid up.

A prospective purchaser of a condominium unit would not know, but all those who had and have access to Ex. 2(5), the agreement, know that according to its paragraph 7, the plaintiff and Threesome each bought “50 per cent of the issued common shares of the Company," that is Twosome, called the promoter in the prospectus.

According to their respective testimony Mr. Louie and Mr. Wyse have been on friendly terms since they met when Mr. Louie was a student articled to Touche Ross. From time to time Mr. Wyse offered Mr. Louie, who was the plaintiff's vice-president of merchandising, the opportunity of joining in one of Mr. Wyse's until-then highly successful real estate development projects. The one which figures in this case was of interest to Mr. Louie who considered it to be a good project for the plaintiff’s investment.

The lands were acquired after all demolition, building and zoning permits had been obtained through the previous owner. That factor, according to Mr. Louie's testimony could shave six months off the time for completion of the project. Mr. Louie testified that the plaintiff could invest its $200,000 at that stage, in the expectation that it would take six to nine months for construction and a further three months for sale of the condominium units, and after that year’s time the plaintiff's quite substantial rate of return Mr. Wyse estimated, could possibily be $50,000 to $150,000. According to both witnesses, in 1976 the market for development and sale of residential condominium units was strong.

Accordingly, Brandt Louie testified, although the plaintiff had never before been involved in land development investments, (except for its own business premises) the plaintiff advanced the money and expected the best. Neither he personally nor the plaintiff corporation sought outside legal or accounting advice. Mr. Louie “didn’t really ask" how the project was to be structured. The plaintiff received no security for its “principal” but gave no guarantees for the project. Mr. Wyse was to handle all aspects of building, promotion and sales and Mr. Louie assumed that Wyse would go about it as before. The $50,000 ‘financial fee" to be recovered by the plaintiff in addition to the plaintiff’s ""principal" was an indication of Mr. Wyse's fairness in balancing off his (i.e. Threesome's) ""manager's fee." The agreement, Ex. 2(5), had been wholly prepared by Mr. Wyse's solicitor without any input by the plaintiff through Brandt Louie, or at all. Despite the declaration of section 3 in the prospectus, Mr. Louie testified that he never had any discussions about what was to happen to Twosome after all of the condominia would have been sold. He left that matter up to Mr. Wyse and did not discuss it with him. Testifying on behalf of the plaintiff, Brandt Louie swore that ""we" intended to invest in a highly speculative venture for a very large return, to be, hopefully, quickly realized. No resolution or minute of the plaintiff corporation ever recorded its corporate intention. Mr. Louie in testimony characterized the $200,000 as ""seed money.”

Exhibit 2(9) is a copy of the audited financial statements of H. Y Louie Co. Ltd., March 4, 1978. Noteworthy is the item in the included balance sheet under ""investments and other" of $200,000 described therein as "investment in and advances to corporate joint venture,’ which is shown in the 1977 column. The very same item appears in the included statement of changes in financial position, under “application of funds."

Perhaps because of the good and friendly relationship between Brandt Louie and James Wyse, perhaps also because of the confidence generated by Mr. Wyse's many successes in previous projects, or perhaps again because of the honourable dealings between Mr. Louie and his father, another of the plaintiff's principals, on the one hand and Mr. Wyse on the other hand, the ""boiler-plate" documentation of the dealings had become ""sloppy" to utilize Mr. Wyse's words. The “principal” sum advanced by the plaintiff to Twosome could well be characterized as a shareholder's loan, as this latter witness did characterize it, even though no written security or means of enforcement of collection is evinced in Ex. 2(5), the agreement.

The two encumbrances on the title to the lands appear to be construction loans, since as Exs. 2(6) and 2(8) indicate, both included provisions for partial discharges prior to full discharge. The “principal” contributed by the plaintiff to its half-owned corporation Twosome, was evidently working capital. The gain it was to realize was the “financial fee’’ and profits as dividends on its 50 per cent shareholdings. The reality of this transaction was that the plaintiff, in effect, lent $200,000 working capital to Twosome, of which it was half-owner, but in whose venture it did not otherwise participate.

Matters did not proceed as anticipated. After the spring of 1977 the market deteriorated. Mr. Wyse met with Mr. Louie and his father to report upon the difficulties which Twosome was encountering. They agreed that the plaintiff had only two practical options: either to put up more money, or ""walk away,” as Mr. Wyse put it. On his recommendation, the plaintiff decided not to invest any further money in Twosome. Although Twosome was never tipped formally into bankruptcy and was ultimately simply ""struck off the roll’ as Mr. Wyse put it, the result was that the plaintiff never recovered its ""principal"; and it realized nothing on its shares in Twosome.

There is a great load of jurisprudence on the subject of this litigation. Counsel cited some 21 judicial decisions, some of which were mentioned by both sides. Eliminating the repeated citations they are as follow: For the plaintiff: Fraser [No. 2] v. M.N.R., [1964] C.T.C. 372; 64 D.T.C. 5224 (S.C.C.), M.N.R. v. Freud [1968] C.T.C. 438; 68 D.T.C. 5279 (S.C.C.), Becker v. The Queen, [1983] C.T.C. 11; 83 D.T.C. 5032 (F.C.A.), Gestion Louis Riel Inc. v. M.N.R., [1985] 2 C.T.C. 2211; 85 D.T.C. 550 (T.C.C.), Dunlap v. M.N.R., [1985] 1 C.T.C. 2438; 85 D.T.C. 407 (T.C.C.), Darade v. M.N.R., [1985] 2 C.T.C. 2168; 85 D.T.C. 525 (T.C.C.), Jordan v. M.N.R., [1985] 2 C.T.C. 2131; 85 D.T.C. 482 (T.C.C.), and O. & M. Investments Ltd. v. M.N.R., [1985] 2 C.T.C. 2207; 85 D.T.C. 535 (T.C.C.). For the defendant: Henry J. Freud v. M.N.R., [1966] C.T.C. 641; 66 D.T.C. 5414 (Exch. Crt.) [S.C.C.], Gibraltar Mines Ltd. v. The Queen, [1982] C.T.C. 1; 82 D.T.C. 6031, Kit-Win Holdings (1973) Limited v. The Queen, [1981] C.T.C. 43; 81 D.T.C. 5030, Sidney John Becker v. The Queen, [1981] C.T.C. 184; 81 D.T.C. 5129, (F.C.T.D.), Donald Preston McLaws v. M.N.R., [1972] C.T.C. 165; 72 D.T.C. 6149, Stewart & Morrison Limited v. M.N.R., [1972] C.T.C. 73; 72 D.T.C. 6049, Isaac Meisels Investments Ltd. v. M.N.R., [1983] C.T.C. 2301; 83 D.T.C. 256; Isaac Meisels Investment Ltd. v. The Queen, [1985] 1 C.T.C. 9; 85 D.T.C. 5029 (F.C.), C. J. Oliver v. M.N.R., [1984] C.T.C. 2080; 84 D.T.C. 1092, and N. D. L. Nouvelles Distributrices Ltée. v. M.N.R., [1986] 1 C.T.C. 2153; 86 D.T.C. 1097.

It is reasonable to characterize the advance of the plaintiff’s “principal” as a loan of funds for working capital to Twosome. That corporation had obtained loans for the construction of the building secured by the lands and the company's assets, but it still required funds in the amount of the plaintiff’s advance of the “principal” in order to carry out the project. These latter funds were not secured by any pledge against the land or other assets. They were not secured at all, but simply advanced to Twosome to aid it in performing its business venture. In effect, the plaintiff was a passive lender, because it did not in any way participate in Twosome's business venture apart from contributing a sum for working capital.

It is a question of fact whether the plaintiff’s “principal” was contributed as lent capital or for “the acquisition of land with a view to a profit upon resale so that it became a trading asset,” as it was put by Mr. Justice Pigeon in the Freud case in the Supreme Court at 442 (D.T.C. 5282). Pigeon, J. is further reported at the same page thus:

. Appellant further contends that the disbursements made by respondent should be considered as a loan to the company. This is somewhat doubtful because while reimbursement of the sums advanced to the company could probably have been claimed as money had and received, the sums paid direct to third parties might well have been considered as voluntary payments and not recoverable (Halsbury’s Laws of England, 3rd ed., vol. 8, p. 231).

Assuming that the whole amount should properly be considered as a debt due by the company, this does not necessarily imply that the outlay was an investment. Obligations to pay money can be trading assets just like other things (Scott

V. M.N.R., 1963 S.C.R. 223; [1963] C.T.C. 176; M.N.R v. Maclnnes, [1963] S.C.R. 299; [1963] C.T.C. 311; M.N.R. v. Curlett, [1967] S.C.R. 280; [1967] C.T.C. 62). It is true that in those cases the conclusion that the acquisition of mortgages at a discount was a speculation, not an investment, rests upon a consideration of the large number of operations of a similar nature that were effected. But, on account of the definition of “business,” this is not the only basis on which this conclusion can be reached. As previously pointed out, a single venture in the nature of trade is a business for the purposes of the Income Tax Act “as well in the case of an individual as of a company.”

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.

And again, at 444 (D.T.C. 5283), he wrote:

. . . As we have seen while there is a presumption against an isolated operation having such a character in the hands of an individual, this presumption can be rebutted and it may be shown that even a single operation is in fact a venture in the nature of trade and therefore a “business” for income tax purposes.

The case of Stewart & Morrison Limited v. M.N.R. (supra) resulted in a unanimous decision of the Supreme Court of Canada for whom Mr. Justice Judson gave the judgment. The Tax Appeal Board had decided in the taxpayer's favour, but that decision was subsequently reversed on the Minister's appeal to the Exchequer Court. Judson, J. is reported at 74 (D.T.C. 6050-51), thus:

The learned trial judge has correctly characterized these dealings between the parent company and its American subsidiary. The parent company provided working capital to its subsidiary by way of loans. These loans were the only working capital the American subsidiary ever had with the exception of the sum of $1,000.00 invested by Stewart & Morrison Limited for the acquisition of all of the issued share capital of its subsidiary. The money was lost and the losses were capital losses to Stewart & Morrison Limited. . . .

We are not concerned in this appeal with what the result would have been if the appellant taxpayer had chosen to open its own branch office in New York. For reasons of its own, it did not choose to operate in this way. It financed a subsidiary and lost its money.

Reference should also be made to Isaac Meisels Investments Ltd. v. The Queen (supra) a decision of Mr. Justice Rouleau of this Court. There it was found that the taxpayer’s advance to its subsidiary of $101,000 by way of loan. The venture turned out to be a disaster and the taxpayer's entire investment was lost. The Court found that the substance of the transaction was that the taxpayer had provided it with working capital by way of loans. In those circumstances, the loss of the money was held to be a capital loss, and it was irrelevant whether the loans were long-term investments or short-term advances. Rouleau, J. held that because there was no evidence of any intention other than that the loans were simply to be repaid to the taxpayer. Despite the articulate criticisms of this decision by the plaintiff's counsel, it appears to be quite correct.

The taxpayer's intention at the material times appears to be of some significance in resolving issues such as this. The plaintiff is a corporation. As Viscount Haldane, L.C. noted in the case of Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd., [1915] A.C. 705 at 713; [1914-15] All E.R. 280 at 283: "My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own." To which Associate Chief Judge Christie added in O & M Investments Ltd. v. M.N.R. (supra) at 2209 (D.T.C. 537): “It is the intention of the natural person or persons who are properly regarded as responsible for the corporate act or acts giving rise to the issue of liability which is ascribable to the corporation." In this case that person is Brandt Louie, with his father whose intention appears to have been identical with that of Brandt Louie.

Clearly the two witnesses Brandt Louie and James Wyse were called to testify in support of the plaintiff's appeal and, if possible, to explain away any previous evidence which is unfavourable to the appeal. Frequently such witnesses are called to express hindsight to establish previous great clairvoyance or, at least, adequate foresight. The scintilla of such an attitude in the testimony given here did not, however, dilute Mr. Louie’s caution and moderation about his intention. Asked more than once what his intention was at the time and what paragraph 3 of the agreement, Ex. 2(5), meant to him, his consistent response was that he intended what that agreement prepared by Mr. Wyse's solicitor meant. His intention was in the agreement. Indeed, if he testified at variance from the objective evidence created at the material times, one would simply have to discount his testimony. Mr. Louie did not suggest any exceptional circumstances and none can be perceived.

Here, by testifying that his intention resided in the agreement, he effectively invites the Court to construe the agreement in order to discern his intention at and during the material time or times. The plain meaning of that agreement was that the plaintiffs advancing of the "principal” was contributing, if not lending, working capital to its half-owned corporation Twosome to aid the latter in carrying on its operations. The plaintiff intended, sooner rather than later, to recover its capital, together with a “financial fee.” There is nothing extraordinary about that. The money was not advanced to a third party or stranger. Therefore, the loss was a business investment loss. So was the loss upon the apparent evaporation of the $100 worth of shares in Twosome.

The Minister of National Revenue correctly disallowed those amounts as expenses pursuant to the provisions of the Income Tax Act on which the defendant relied, inter alia upon sections 3, 9(1), 18(1)(b), 20(1)(p), 38(c), 39(1)(c) and 50(1). For all of the foregoing reasons, the appeal is dismissed with costs.

Appeal dismissed.