Highfield Corp. v. MNR, 82 DTC 1835, [1982] CTC 2812 (TRB)

D E Taylor:—This is an appeal heard in Calgary, Alberta, on May 26 and 2/, 1982, against income tax assessments dated December 12, 1979, for the years 1974, 1975 and 1976, in which the Minister of National Revenue made several substantial adjustments to the net income (loss) reported by the appellant. It was proposed by the parties that this decision record an agreement reached between them regarding some parts of certain items reflected on those assessments, and that those items would not be further contested at the hearing. The agreement was that the appellant be allowed a further deduction of $13,400 in 1974, nd $16,533 in 1975 for wages; and an amount of $76,508.50 with respect to interest income for 1975. Other than noting these and accepting the commitment from counsel for the respondent that the appropriate adjustments would be made, the Board does not deal in this decision with these amounts, or any amounts in the complex assessments under appeal, save and except the following increases to taxable income totalling $2,356,147 which have been challenged by the appellant:

The basis for the appeal is detailed in an amended statement of facts presented by the appellant at the outset of the hearing. It is quoted to the degree applicable to the issue before the Board, but is regarded by the Board as a statement of position rather than a statement of facts — the areas disputed by the respondent to be noted later:

AMENDED STATEMENT OF FACTS

1. Highfield Corporation Ltd. (“the Taxpayer’) is an Alberta corporation formed on July 15, 1964 as a result of the statutory amalgamation of several other Alberta companies.

2. From the date of its formation in 1964 through to 1971, the Taxpayer carried on the business of real estate development.

3. In 1971 the Taxpayer underwent a reorganization of its business to become a management, lending, investment and holding company, it being intended that the real estate development operations be carried on in subsidiary corporations established for that purpose.

4. This change was brought about in order to give the local managers in the various areas of operation direct equity in a separate corporation, all of which corporations would benefit from the financial strength and experience of the Taxpayer.

9. At the same time, the Taxpayer expanded its holding company profile into various non-real estate areas including the food business, the resource industry, raising livestock, the hardware business and tree farming.

6. Hence, after 1971 the Taxpayer’s major business became that of an investment banker. The Taxpayer obtained the necessary funds to be used as “stock-in-trade” in its lending business primarily from loans obtained from some 30 different financial institutions, other corporations and individuals. Funds were also obtained from dividends and interest from subsidiaries and to a lesser extent proceeds from the liquidation of real estate holdings. As some of its subsidiaries become more profitable the Taxpayer also looked to them for funds which would in turn be reloaned to other subsidiaries. Close to 50 individuals and corporations have borrowed funds from the Taxpayer. In this way the Taxpayer acts as an “in-house” banker for start-up capital and working capital requirements of a large group of affiliated companies headed by the Taxpayer.

7. Generally, the Taxpayer has charged a lending rate of 2% over prime on the loans which it makes, and as well assumes a 75% equity interest in the borrower. As well, the Taxpayer has on occasion made loans on a conventional basis, ie. to earn interest on a non-equity basis.

8. For the Taxpayer’s 1974, 1975 and 1976 taxation years interest income accounted for 21%, 32% and 25% respectively, or in excess of 25% of the Taxpayer’s aggregate sources of income for the said three years. During the same period the equity side of the Taxpayer’s lending business gave rise to dividend income which accounted for approximately 54% of the Taxpayer’s aggregate income.

9. During the period 1972 to 1976 the total loans and notes receivable grew from approximately $800,000 to $11,000,000, a portion of which became doubtful as to collection or became uncollectible, in the aggregate sum of $2,355,259 to the end of 1976 namely:

Waco Associated Distributors Ltd	$1,000,000
Highmark Holdings Ltd	621,053
Hickman Tye Hardware Co Ltd	509,861
Briggs Construction Ltd	1,656
Thomson Realty Corporation Ltd	22,745
O M F Investments Ltd	50,000
Whitefleet Cruiships Ltd	49,834
Keil Construction	110
Lonnie’s Restaurants Ltd	100,000
	$2,355,259* [1]

10. Highmark Holdings Ltd was incorporated in the province of British Columbia in 1973 for the purpose of acquiring all of the issued and outstanding shares of another British Columbia company, Hickman Tye Hardware Co Ltd. 75% of the issued shares of Highmark Holdings Ltd were purchased by the Taxpayer and 25% were issued to a company controlled by two individuals, Mr W J O’Donnell and Mr A Godrevitch. The Taxpayer agreed to finance the acquisition of Hickman Tye Hardware Co Ltd on the basis that funds required for the purchase of the shares would be advanced to Highmark Holdings Ltd on a debt basis and that the Taxpayer would maintain a 75% controlling interest in the shares of Highmark Holdings Ltd while any loans were still outstanding.

11. The Taxpayer also agreed to lend funds to Hickman Tye Hardware Co Ltd as required by that company for its working capital and to enable it to finance projected increases in sales volume.

12. Subsequent to the purchase of the shares of Hickman Tye Hardware Co Ltd, Mr J W O’Donnell wanted to supplement the hardware distribution business with an architectural hardware company and to enable that company to establish a network of offices throughout Western Canada. The Taxpayer agreed to finance the acquisition of Waco Associated Distributors Ltd and the establishment of the network of businesses by providing the necessary funds by way of debt and in turn taking the controlling interest in the companies while any loans were outstanding. After the acquisition loans were made, additional working capital was loaned to the company by the Taxpayer in order to maintain receivable and inventory levels brought about by increased sales and the establishment of the new sales offices.

13. In 1975, as a result of insolvency, Hickman Tye Hardware Co Ltd was put into voluntary liquidation. Since that time and during the liquidation of the assets of that company, substantial losses have been incurred and as such the company is unable to pay its loans to the Taxpayer. Highmark Holdings Ltd, because of the total loss of its investment in Hickman Tye Hardware Co Ltd as a result of the latter’s insovency and liquidation, is in turn unable to repay its loan to the Taxpayer.

14. During the years that followed the acquisition and establishment of its business, circumstances were such that Waco Associated Distributors Ltd continued to suffer operating losses and as such kept requiring additional working capital to be invested which was again provided by the Taxpayer by way of debt. The Taxpayer was also required to postpone the interest on the debt for two years so that Waco Associated Distributors Ltd could remain solvent and not be forced to declare bankruptcy. During these periods of unprofitable operation it became apparent that the Company might suffer losses for some time, and as such the Taxpayer stood at substantial risk in not being able to collect amounts owing to it. As such an allowance for doubtful debts was recorded on the books of the taxpayer against the amount receivable from Waco Associated Distributors Ltd.

15. Collection of othe accounts named was also doubtful due to the respective creditors incapacity to pay.

16. As a result of the poor financial condition of each of these creditors, the Taxpayer made a reasonable and responsible assessment of all circumstances of each debt, and in each case determined that collection of the outstanding balance of the loans was in serious jeopardy. The Taxpayer accordingly deducted a reserve for doubtful accounts in respect of each of such debts in calculating its income for purposes of the Income Tax Act.

17. By Notice of Reassessment dated December 12, 1979, the Minister added back to the income of the Taxpayer for the 1974, 1975 and 1976 taxation years amounts which had been previously deducted by the Taxpayer for doubtful debts or bad debts as follows:

Year	Amount	Description
1974	$ 703,676	“Provision for Doubtful
		Accounts, Non-Allowable”
1975	$1,120,561	“Provision for Doubtful
		Accounts, Non-Allowable”
1976	$ 531,910	“Bad Debts, Non-Allowable”
	($2,356,147)* [2]

STATUTORY PROVISIONS UPON WHICH THE TAXPAYER RELIES AND REASONS WHICH HE INTENDS TO SUBMIT

1. The Taxpayer relies, inter alia, upon paragraphs 20(1 )(l) and (p) and subsection 18(1)(a) of the Income Tax Act (Canada) and related provisions.

2. The Taxpayer relies, inter alia, upon the following case authorities:

MNR v Kelvingrove Investments Ltd, [1974] CTC 450; 74 DTC 6357;

The Queen v E V Keith Enterprises Ltd, [1976] CTC 21; 76 DTC 6018;

Associated Investors of Canada Ltd v MNR, [1967] CTC 138; 67 DTC 5096;

The Queen v Pollock Sokoloff Holdings Corp, [1974] CTC 391; 74 DTC 6321:

and

Massey Ferguson Ltd v The Queen, [1977] CTC 6; 77 DTC 5013.

3. Part of the ordinary business of the Taxpayer is the lending of money. The debts in issue arose in the ordinary course of the Taxpayer’s business and as such the Taxpayer is entitled to deduct the bad debts or a reserve for the doubtful debts from its income.

4. Further, the loans were an outlay or expense made for the general business purpose of gaining or producing income, being interest and dividend income from the Taxpayer’s business of establishing and pursuing various corporate ventures.

The view of the respondent was summarized in the reply to notice of appeal:

(a) In advancing funds to Waco and Highmark, the Appellant did not make an outlay for the purpose of gaining or producing income from property or a business of the Appellant, but instead for the purpose of making an investment;

(b) no part of the ordinary business of the Appellant was the lending of money;

(c) the advances made to Waco and Highmark were not made in the ordinary course of business;

(d) the advance to Highmark was not a doubtful account in the 1974 taxation year;

(e) the advance made to Waco was not a doubtful debt in the 1975 taxation year;

(f) the advances made to Highmark and to Waco were not bad debts in the 1976 taxation year.

The respondent relied, inter alia, upon section 3, paragraphs 18(1 )(a), 20(1 )(c), 20(1 )(l) and 20(1 )(p) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

In conclusion, the respondent asserted:

— the funds advanced by the Appellant to Waco and Highmark were properly attributable to capital and are therefore not deductible.

— that no part of the ordinary business of the Appellant was the lending of money, and that the loans allegedly made were not made in the ordinary course of the business of the Appellant.

— that the funds advanced by the Appellant to Waco and Highmark did not become bad or doubtful debts in the years alleged or at all.

Evidence

The evidence, which was lengthy and detailed, was presented through three witnesses, Mr Robert George Elliott, Chairman of the Board of High- field Corporation, Mr Jean-Marc Van der Muhll, former controller of Waco Associated Distributors Ltd., and Mr Peter Mason, Chartered Accountant of the firm of Deloitte, Haskins & Sells, auditors for the company. The efforts of counsel for the appellant were directed to indicating to the Board the origins of the company, its problems in obtaining early financing, and its growth and diversification, particularly by utilization of subsidiary corporations. In doing so, a complete dossier of documents was presented by counsel, the Index of which gives a graphic picture of the complete nature of the presentation:

HIGHFIELD CORPORATION LTD

IN THE MATTER OF THE TAX REVIEW BOARD

INDEX OF EXHIBITS

A. Highfield Corporation Ltd.

1. Addition to Objects in Memorandum of Association

2. Page 1 of Corporate Tax Return for 1974 amended, 1975 and 1976

3. Promissory Notes — (84)

4. Illustrations of calculation of interest — working papers

5. Notice of Indebtedness of Highfield Corporation Ltd to Highfield Development Corp (Edmonton) Ltd.

6. Acknowledgement of indebtedness of Highfield Tree Farms Ltd to Highfield Corporation Ltd.

Confirmation of indebtedness of Monarch Steelcraft Ltd to Highfield Corporation Ltd.

Request for Confirmation of indebtedness of Mr G Briscoe (Ask The Wizard) to Highfield Corporation Ltd

7. Interest Analysis — Sources of Income for 1974, 1975 and 1976 taxation years

8. Loans/Advances and Asset Analysis

9. Doubtful/Bad Debts Analysis

10. Major Reserves and Interest Accruals Analysis

11. Doubtful Debt Experience on a Percentage Basis of Total Loans and Notes Receivable

12. Illustration of Present Project Financing

13. Operating Losses/Income Analysis

14. Finacial Statements for 1974, 1975 and 1976

15. T2S(13) for 1974, 1975 and 1976, Operating Losses/Income Analysis (repeat)

B. High mark Holdings Ltd

16. Financial Statements for 1974 and 1975

C. Hickman Tye Hardware Ltd

17. Financial Statements for 1973, 1974, 1975, 1976, 1977 and 1978

18. Notice of Resolution to Wind-up, Proof of Claim of Highfield Corporation Ltd

E. Oh My Food Products Ltd

19. Financial Statements for 1974, 1975, 1976 and 1977

F. G W Thompson Realty Ltd

20. Financial Statements for 1971, 1972, 1973 and 1974, Agreement for Sale of Shares to Mr Thomson together with Promissory Note

21. Eljay Irrigation Ltd — Sale of Shares together with Promissory Notes

G. Lonnie’s Restaurants Ltd

22. Financial Statements for 1975 and 1976

H. Waco Associated Distributors Ltd

23. Financial Statements for 1974, 1975 and 1976

I. Monarch Steelcraft Ltd

24. Financial Statements and/or Corporate Tax Returns for 1974, 1975, 1976, 1977 and 1978

J. Waco Associated Companies Ltd

25. Corporate Tax Returns for 1975 and 1974

The respondent called no witnesses, but agreed to the filing of the Exhibits noted above.

In addition to the cases cited by counsel for the appellant in the amended statement of facts (Supra), counsel also referenced:

The Queen v Rockmore Investments Ltd, [1976] CTC 291; 76 DTC 6156;

The Queen v Cadboro Bay Holdings Ltd, [1977] CTC 186; 77 DTC 5115;

Valutrend Management Services Ltd v MNR, 72 DTC 1147;

Swystun Management Ltd v MNR, [1979] CTC 2476; 79 DTC 417;

G Hogan v MNR, 15 Tax ABC 1; 56 DTC 183;

Neonex International Ltd v The Queen, [1978] CTC 485; 78 DTC 6339;

C Chaffey v MNR, [1978] CTC 253; 78 DTC 6176.

Counsel for the respondent in argument also cited several of the above cases, but added comments regarding:

George A Orban v MNR, [1954] Tax ABC 178; 54 DTC 148;

Aaron Saltzman v MNR, 35 Tax ABC 93; 64 DTC 259;

Donald C Brock v MNR, 41 Tax ABC 373; 66 DTC 517;

Consolidated Bowling Limited v MNR, [1968] Tax ABC 371; 68 DTC 357;

Wassons Company Limited v MNR, 38 Tax ABC 257; 64 DTC 616;

MNR v Stewart & Morrison Limited, [1970] CTC 431; 70 DTC 6295; Charter Industries Limited v MNR, [1975] CTC 2349; 75 DTC 270;

W H Enterprises Ltd v MNR, [1971] Tax ABC 530; 71 DTC 381.

Findings

The multitude of cases dealing with this subject (noted above) and some others that have not been referenced but which may be relevant, when combined with the fact that there appear to be two branches to the argument of counsel for the appellant (termed for purposes of this decision “the moneylender” route and the “business” route), lead me to examine the question at issue from a rather unusual perspective. I intend to deal first with the basis upon which the Minister has struck the assessment, as it is expressed by the comments made by counsel for the respondent. Simply put, if the basis for the assessment is not clear and well founded, irrespective of the particular facts, then the assessment may be in jeopardy. That will not, in any way, relieve the appellant of the primary onus of establishing its entitlement to the deduction claimed under the Act, but it may at least shed some light on a subject that retains considerable uncertainty even though it has dealt with frequently in the jurisprudence. I quote certain selected portions from the argument of counsel for the respondent, and I trust in doing so that I will not do an injustice to the train of that argument:

It is our opinion that it is not entitled to make those deductions because of the prohibitions in section 18(1 )(b) prohibiting the deduction of capital; and it is our position that these loans, as they hae been loosely called, were in fact investments, investments made as capital or on account of capital, and thus not deductible from income. And, it is also our position that those amounts are not deductible under SS. 20(1 )(l) or 20(1 )(p), the subsections dealing with doubtful debts and bad debts.

If I could first deal with the position that the amounts made are in fact investments and not loans, and as investments they are not deductible simply because of the prohibitions in sect 18(1 )(b) and which reads as follows:

“In computing the income of a taxpayer from a business or property, no deduction shall be made in respect of

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, etc ...”

It is the Minister’s position that what the appellant Highfield was doing in these circumstances was investing in subsidiary companies. That position is borne out and substantiated by the appellant’s own financial statements for the years under appeal, the years 1974, 1975 and 1976. Those statement are contained in the appellant’s exhibits at Tab 14, and clearly, on those statements on the first page, the amount which has been identified as the loans that are in issue, are identified as “Investments”.

Now, perhaps this would be the time, Mr Chairman, to look at exactly what losses, in the Minister’s position, would be properly claimed. My comments in this regard would also apply to the argument under sec. 20 but perhaps this would serve to clarify the factual matters.

I am referring, for easy reference as to what is in issue, to Schedule 9 of Exhibit 9 in the appellant’s exhibits. With regard firstly to Waco Associated Distributors Ltd, reserves are claimed in 1974, 1975 and 1976. It is the Minister’s position that the loss sustained by the appellant on its investments in Waco, which is one of the three hardware companies, and which form, I think, 95 percent of the amount in issue, would be properly claimed only in 1976.

Again, though, I must reiterate that the loss sustained by the parent company would be a capital loss. And indeed, Mr Chairman, I think this whole question of some $2 million dollars that was lost in the hardware venture of Highfield Corporation, of the parent company, can be properly viewed as in fact that Highfield the parent (the appellant), made bad investments in the hardware business. It had been successful in real estate without a doubt, very successful in real estate, and had been involved in that area since the early ’60’s. Mr Elliott, the President and sort of moving force behind that company had also been involved since that date and certainly evidenced a great deal of knowledge in that area. But it appears that when the parent got involved in other areas, it didn't do as well. The losses, all of the losses on the list of what is claimed by the appellant in its amended statement of facts are, with the exception of G GW Thomson Realty, in its diversified area and not in the real estate area, and with regard to the over $2 million dollars that are 95 percent of what is in issue, it came from the hardware area. There is no evidence that Highfield or Mr Elliott had any experience in that area other than they saw what they thought were pretty talented and aggressive men who they wanted to invest in. But basically, Mr Chairman, Highfield made bad investments in the hardware business, and that is one of the — that can be seen as a kind of bottom line, if you like, to one part of our argument. In other words, if you see the whole of the evidence and look at all of the facts, it is quite consistent with that statement.

In the other diversified area in which Highfield lost money, firstly with Oh My Food Products, again something outside of the expertise and knowledge of the appellant ...

We can't quarrel with that evidence and the law on the businessman’s judgment, and again I refer — I would only say again that the loss is a capital loss, it was a question of Highfield investing in the pizza business and another investment that went bad.

Those comments, Mr Chairman, would also apply to G W Realty, Mr G Briscoe and Whitefleet Cruise Ships Ltd.

With regard to Whitefleet, the collection of its notes is still being pursued. With regard to the other loans, they were subsequently written off and there certainly doesn't appear to be any doubt that they did in fact go bad, that the appellant lost money. Again the question of the characterization and our position that they were bad investments.

. . . there are many specifics that are not found in the Act and the Act is not intended to cover every specific circumstance. What is in the Income Tax Act is a prohibition in sec. 20 against the claiming of a bad or doubtful debt as a deduction by anyone but a money-lender. And where the Income Tax Act addresses itself to this fact situation (a parent and loans to subsidiaries), is in the judicial interpretation of the word “money-lender”. The legislature has included that word and the courts, in their wisdom, and this Board has over the years interpreted that word to mean something other than what the appellant was (doing) in the circumstances.

The appellant is precluded from claiming deductions under sec. 20 by virtue of the judicial interpretation of the statutory phrase “money-lender”.

Mr Chairman, I am probably belabouring the point, but if this was an appeal of Highfield’s Financial Corporation Ltd, Highfield Mortgage, Highfield Funding, or even Guarantee Mortgage from the ’60’s, we probably wouldn’t find ourselves here today.

If this was an appeal of Highfield Corporation the parent, lending money to entities other than its subsidiaries, we probably wouldn’t find ourselves here today.

But what we are dealing with here specifically is that advances of funds made by a parent to its subsidiaries, owned 75 percent by the parent, for a span of time that is really quite brief in the whole history of these corporations.

From the beginning there is no question that Mr Elliott was intent on being a banker, again to quote from my learned friend’s argument, and his evidence is that, at this point in time, the Highfield Group does own some American banks and is able to do financing through those banks as well as in other ways, that, he said in the last two years he has been involved in.

But, what we are dealing with is the years 1973 to 1976, and investments made basically in the hardware area, by a parent who incorporated subsidiaries in that hardware area.

Parents who lend money to subsidiaries and have that kind of control, as Mr Elliott said, are outside of the realm of what the law understands to be a moneylender.

. .. notwithstanding the fact that other subsidiaries in the group as a whole have been involved in banking, financing and mortgaging funding in one way or another, and certainly for large amounts and incredibly successfully, doesn't change the fact that the parent appellant in those three years was doing this on a limited basis in very strict circumstances.

Firstly, with regard to the position that sec. 18(1 )(b) prohibits the deduction of these amounts because they are on account of capital, our authority for that is primarily the case of Stewart & Morrison, which is a Supreme Court case decided in 1972. The facts of this — if I can just say by way of an aside — the facts of this appeal are, in terms of my research, quite unique. There is not a case that is on all fours with subsidiaries being advanced, so many subsidiaries being advanced so much money by such a parent. But there are cases that deal with each of the components of this case. The component which Stewart & Morrison deals with is loans to a subsidiary by a parent. The comment of the Supreme Court of Canada, and which I would like to direct the Board’s attention to, is found at page 6051, the second xeroxed page on the right-hand side, where the Court, by Mr Justice Judson, says:

“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.”

So, from that statement we would draw the conclusion that the Supreme Court of Canada sees the financing of subsidiaries by a parent as something outside of the normal course of business.

In regard to the sec. 20 argument, the bad debt argument, the jurisprudence in this area appears to have its starting point in a Tax Appeal Board case of 1954 and decided by Mr Fordham. It is the case of George Orban v MNR. In this case Mr Fordham sets out old English cases, some of the old English cases on money- lending, and if I can just quote a couple of the statements which he relies upon:

“But not every man who lends money at interest carries on the business of money-lending. Speaking generally, a man who carries on a money-lending business is one who is ready and willing to lend to all and sundry, provided that they are from his point of view eligible .. .”

Again it is a question of fact in each case. He finds that, as a matter of fact, the appellant in that case was more of an investor; he did not hold himself out as being a money-lender; he neither advertised himself nor was he listed any where as a money-lender, and finds that what the appellant lost must be regarded as a Capital loss.

The Orban case has been cited in a number of subsequent Tax Appeal Board and Tax Review Board cases

The Chaffey case, which was distinguished by my learned friend, is relied upon by us because the issues are the same. The issues in that case are cited by the Federal Court of Appeal to either be that the loss is deductible as an adventure in the nature of trade, or that it was deductible as a bad debt. And the law, as applied by the Federal Court of Appeal, is relevant to us in that respect.

. . . the appellant suffered losses; those losses were suffered by it as the result of some — mainly some bad investments in the hardware business. The losses are therefore properly deductible as capital losses; .. .

And it is further our position that the parent itself is not a money-lender; was not a money-lender in the years under appeal, for the reasons that we have stated . .

Dealing first with the “money-lender” branch of the argument above, counsel has relied substantially on what I shall term the “Orban” line of cases, which commencing with Orban (supra) continued through (among other) Saltzman, Brock, Consolidated Bowling, and W H Enterprises (all Supra), all dismissed, but culminating, as I see it in Valutrend (supra) allowed by the same decider of fact who dismissed Orban (supra) originally. As I read it, the essence of the rationale for dismissal of the Orban case (supra), followed so faithfully in the others, is that to be a “money-lender” there must be (1) evidence of more than three loans over a period of three years, and (2) evidence of notification to the public of the availability of loans. Counsel in the instant case did not indicate any section in the Act which would make public proclamation or announcement of a businessman’s intention and availability as a lender of money a prerequisite to identification as such; nor that a mathematical calculation of the number of loans would also serve any such purpose. The text of Valutrend (supra) does not provide details of the manner in which these two pre-conditions were therein fulfilled, but in light of the Valutrend decision, it would appear to me that the Board today should be more comfortable with the fact that it was allowed, rather than that Orban was dismissed. It could also be noted that the question of minimal lending activity was dealt with in The Queen v Pollock Sokoloff Holdings Corp, at [1974] CTC 391; 74 DTC 6326, by the Federal Court in the following terms:

It is not necessary that the number of loans made by a company or the amount of them be great in proportion to its total business activities for it to be possible to say that part of its business is the lending of money; no proportion is established under the Act and plaintiff’s argument based on the relatively small proportion of defendant’s assets devoted to straight loans (not including term bank deposits and bond investments) cannot be accepted.

In the instant case, counsel’s mere insistence that the amounts at issue were “investments” rather than “loans” does not make them investments. Nor does any simple reliance on the accounting records or financial statements add definitive characteristics to them. In my view there is no question at all that the amounts at issue were loans — the question still remains though, were they loans which are deductible as claimed by the appellant? It is not the mere appellation “loan” which should beguile the Minister, nor the appellation “investment” which should give him comfort. It might be argued that the “lending of money” could result in either a “business” or an “investment”, but it can hardly be a subject of dispute that “making a loan” (where money is involved) is equivalent to the “lending of money”. Simply based on the argument proposed by counsel for the Minister, there would be no reason in this matter to even reject out of hand the claim of the appellant that the loan transactions in question would constitute a “business”. I need only make reference to Rockmore Investments (supra) and Cad boro Bay Holdings (supra). But returing to this branch of the argument (moneylender), I would note the decision of the Board in Roynat Limited v MNR, [1977] CTC 2481; 77 DTC 353, favourable to the taxpayer on a point not totally dissimilar, and upheld on appeal by the Federal Court, Trial Division, at [1981] CTC 93; 81 DTC 5072, with the following observation by the learned judge at 106 and 5081 respectively:

In West Coast Parts Co Ltd v MNR my brother Cattanach, J at page 5320 of the report, after quoting that approval from the Taylor case, supra, had this comment to make:

There can be no doubt that a money lender who advances money in the course of an established business on terms whereby he charges interest as such plus a fixed amount determined by reference to the special risk involved, would count as profits from his “trade” not only the interest collected as such, but the additional amounts charged by reason of special risks. If it be true that such an amount is a profit from a money lender’s trade, it follows, in my view, that, when a person who is not a money lender enters into such a contract and thus embarks on an adventure in the nature of the money lender’s trade and earns a similar profit, he acquired a profit from an adventure in the nature of trade.

The other major element in this “money-lender” argument by counsel for the respondent arises from the view that a parent financing a subsidiary is “outside the normal course of business”, therefore somehow barred by paragraph 18(1 )(b) of the Act (as a capital item), and “is precluded from claiming deductions under section 20 by virtue of the judicial interpretation of ‘money-lender’”. If indeed that be the case (on either or both grounds), then this appeal must be dismissed without any detailed examination. However, that reduces the argument to a different level, and indeed divides it in two — first, that if an amount is capital, it is not deductible under section 20; and second, that whatever the circumstances, a loan from a parent to a subsidiary does not qualify because the parent cannot be described as a “moneylender”.

Regarding the Minister’s contention that a “capital” loan is not qualified under section 20, I would note that except for the unusual example described by Jacket, P, at page 5102 in Associated Investors, [1967] CTC 138; 67 DTC 5096 as a “bond dealer” (who conceivably might treat his bond acquisitions and disposals as trading in inventory and therefore account for them on an accrual accounting basis), most loans would be regarded by the creditors as investments and therefore, technically for them at least, as on capital account.

Distinctions might be found from case to case and example to example, but I have determined that for my purposes, the single case most favourable to the proposition of this appellant is that of Pollock Sokoloff (supra) and the single case most damaging to the appellant is that of Stewart & Morrison (supra). Pollock Sokoloff is different than Stewart & Morrison in that the appeal in Stewart & Morrison was launched under paragraph 12(1 )(a) and 12(1 )(b) of the Act, and dealt with accordingly; whereas Pollock Sokoloff was decided under section 20 of the Act. The Minister of National Revenue apparently attempted to relate Pollock Sokoloff (supra) to paragraph 12(1 )(b) of the Act, but I do not find in the judgment that the Court viewed that attempt seriously.

There is, however, an immediate and striking difference between Pollock Sokoloff (supra) and the instant appeal. Pollock Sokoloff was a Holding corporation, engaged in the investment field, and it claimed successfully that the loan at issue, while part of its investment portfolio, was made in its role as a “lender of money” inherent therein. The Minister tried to distinguish this specific investment activity (the loan in question) from the other investment business of that appellant. That the Court found no merit in the Minister’s argument is not surprising. The critical phrase which came out of that judgment as it pertains to this issue arises at page 6326, and has been quoted earlier in this decision.

It should be noted that Kelvingrove (supra) was an appeal heard at about the same period of time (1974) in which the appellant was apparently in an investment business similar to Pollock Sokoloff (supra)*, [1] but launched the appeal, successfully, based upon paragraphs 18(1)(a) and (b) of the Act. A comment to be found at page 6360 is relevant however:

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

Reference should also be made to Keith Enterprises (supra) in which the same “investment business” element appears to be evident.

A recent decision of the Board, Swystun (supra) referenced Pollock Sokoloff ( supra) as support for a portion of the appeal allowed, and Kelvingrove Investments (supra) for the balance allowed. I would draw from that decision a conclusion that failing to qualify under paragraph 20(1 )(l) of the Act does not necessarily inhibit the taxpayer from attempting to deduct under paragraph 18(1)(a) and (b) of the Act. The Board will return to that point also (if required), but it should be noted that the favourable decision leans heavily upon the view that the appellant corporation (Swystun) was engaged almost exclusively in the investment business.

The relevance of the “investment business” background in the Pollock Sokoloff, Kelvingrove, Keith and Swystun comments (supra), as I see it, is to be found in the preamble to paragraphs (I) and (p) of subsection 20(1):

(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 appplicable to that source or such part of the following mounts as may reasonably be regarded as applicable thereto:

As suggested by counsel for the appellant, I can only intrepret that to mean (for purposes of this appeal) that whereas paragraph 18(1 )(b) specifically denies a deduction on account of capital, the relevant paragraphs under subsection 20(1) do not impose such a prohibition. It is for this reason that I have noted earlier that the “loan” designation in itself should provide neither great assurance nor great discomfort; and I can only conclude that the designation “capital”, when applied to the loan, should have no effect at all for purposes of section 20 deductions.

The specific loan transactions at issue in Pollock Sokoloff, Kelvingrove, Keith and Swystun (supra), while they might have exhibited certain distinctions from the balance of the activities in those corporations, those distinctions were regarded as only minor and did not affect adversely each taxpayer’s claim to the deduction. Simply put, the funds placed in “real estate”, “bank deposits”, “corporate shares”, etc. (referenced in the cases noted immediately above) were all of an investment nature, no distiction of merit could be perceived between those and the “loans” at issue in the relevant circumstnces. Taken altogether, those activities apparently fulfilled the requirement that the loans had been “made in the ordinary course of business by a taxpayer part of whose ordinary business was the lending of money”.

As I see it, the two critical phrases in subparagraph 20(1 )(l)(ii) of the Act — “loans made in the ordinary course of business by a taxpayer” and “part of whose ordinary business was the lending of money” — can only be placed in juxtaposition to each other by more exotic definitions than I can read into either one, or the entire section. Since making a loan is the lending of money, it would seem to me that a loan made in the “ordinary course of business” would identify that transaction as part of the “ordinary business” of the taxpayer. For a loan to fall short of those parameters, it would need to be extraordinary or extracurricular in some distinct fashion and clearly different from the day-to-day operation of the business as an entity. It would appear as an aberration or an abnormality of some kind. Perhaps there is a bottom line consisting of a certain required frequency, or similarity of “loan” transactions below which it could not be said that they formed part of the ordinary business of the taxpayer. However, I am not faced with the problem of locating that “bottom line” in this appeal. The constant and consistent procedures adopted and followed by Highfield when making its investments make the particular loans in question “ordinary” in every respect. That conclusion is not based upon the simple assertion of counsel for the appellant that the mere “purpose of gaining or producing income” is sufficient to qualify them for inclusion under subparagraph 20(1 )(l)(ii) of the Act, and the consequent deduction sought. While that proposition might have merit in a consideration of a deduction claimed under paragraph 18(1 )(a) of the Act, it is not the governing factor under paragraph 20(1 )(l) of the Act.

I am prepared to accept that the appellants’ claims in the cases of Pollock Sokoloff etc (supra) were discernably qualified for inclusion under subparagraph 201 )(l)(ii) of the Act, because of the overall investment value of the respective businesses. Nevertheless, it could be argued that all the transactions in those cases were of a “capital” nature when taken individually, with the end result that the loans at issue were no more, and no less so, and deductible as claimed. Equally, it could be argued that in Highfield the “investment” activity (as distinct from the real estate development activity) was a business in itself, theeby falling directly into Pollock Sokoloff (supra); or that it formed a part of the total corporate business operation of Highfield and was just as clearly qualified for the consideration requested by the appellant. In either event, I find no basis for rejecting the claim based on the respondent’s argument that the loans were on capital account and therefore disqualified for consideration under section 20 of the Act.

On the “parent-subsidiary” perspective, counsel based this view to a major extent on Stewart & Morrison Limited v MNR, (supra) and Charter Industries Limited v MNR (supra). While certainly the judgment in Stewart & Morrison (supra) could lend support to that opinion and it was argued that it formed the basis for the decision in Charter Industries(supra), I have great difficulty in reaching the same conclusion. The learned judge in Stewart & Morrison (supra) enumerated the various factors which influenced his decision as follows (from 70 DTC 6295, at p 6299):

The evidence adds up to this, as I appreciate it. The respondent decided that an American subsidiary, to be wholly owned by the respondent, would be incorporated and would carry on business in the United States and be a source of income and profit for the respondent. The subsidiary would carry on business as a separate American company in its name and right, but it would, to use Stewart’s words, be 'master-minded' by its parent company and their affairs would be closely related and managed. The subsidiary needed capital, but had none. The respondent would supply, or arrange to supply, the needed capital." (Emphasis added)

Those factors comprise a wide range of points, and I would venture that had the determination of the learned judges at either the Supreme Court or the Exchequer Court level been as simple as counsel’s version, the above passage could have ended after the second sentence:

The respondent decided that an American subsidiary, to be wholly owned by the respondent, would be incorporated and would carry on business in the United States and be a source of income and profit for the respondent.

There would have been no reason to enumerate the operational characteristics which evidenced their business relationships.

In Stewart & Morrision (supra), it is of interest to me that the decision at the Tax Appeal Board level, [1969] Tax ABC 65; 69 DTC 95, to allow the appeal was based on the view that the subsidiary acted only as agent for the parent, and provided thereby the entitlement for the parent of the deduction sought. It was against this view that the appeal was later taken to the Exche- quer Court by the Minister of Natinal Revenue and was there rejected and the decision reversed. I do not see in Charter Industries (supra) any expressed opinion that the ratio decidendi for that dismissal was simply that the loan was from a parent to a subsidiary. The presiding chairman stated directly and only that the issue was the same as in Stewart & Morrison (supra). In the latter case, I would note that the appeal was launched under paragraph 12(1)(a) and 12(1 )(b) of the Act (now 18(1 )(a) and 18(1 )(b) ). The learned judge commented on page 6297 of the Exchequer Court of Canada judgment, [1970] CTC 431; 70 DTC 6295 as follows:

and not much thought was given to the mechanics or manner by which profits would flow back to the respondent by dividends or otherwise. Nor was any consideration given to charging interest to the subsidiary on advances made by the respondent.

Similarly, at [1975] CTC 2353; 75 DTC 270, of Chartered Industries (supra), one finds:

At no time was it established that the advances made to Fanco were for the purpose of earning income.

Accordingly, as I see it, both appellants referred to above faced a virtually insurmountable task in any attempt to qualify the transactions as a “business” under paragraph 11 (1 )(e) or 11 (1)(f) of the Act (now 20(1 )(l) and 20(1 )(p) ) and they apparently were just as unsuccessful in bringing the transactions under paragraph 12(1)(a) (now 18(1 )(a)) of the Act, which it is implied by counsel for the appellant in this appeal, is of wider dimensions. The process adopted in providing the loans in both the above cases, together with the neglect to ensure reciprocal benefit to the appellant creditors combined to determine that the loans could not qualify either as “doubtful accounts” or “bad debts” (paragraph 20(1 )(l) and 20(1 )(p)), and when combined with their clear capital nature disqualified them from deduction by virtue of paragraph 12(1 )(b) (now 18(1 )(b) ) of the Act. In the instant case (while net interest income may have been small — a point referenced later on), the loans themselves carried a respectable rate of interest and did earn interest, while at the same time very substantial dividends were received from the corporate share investments.

The only case of which I am aware that comes close to making the point adopted by counsel (although not noted by counsel as support for the proposition) is Chaffey (supra). I would quote therefrom at 78 DTC 6179:

I agree with this conclusion. In my opinion shareholder’s advances do not constitute the business of lending money; they are simply a particular form by which capital is put into a company. The lonas made by the partnership did not have as their principal object the accommodation of persons in return for income in the form of interest; they were merely a device for the financing of projects through which profit was to be made by other means.

While the conclusion might be reached that in Chaffey (supra) the learned justices were indeed stating as a maxim the view which counsel has espoused, it is not clear to me that such was their intent. In putting forward this doubt I do note that in Chaffey there was no “parent-subsidiary” relationship, but that of a shareholder to a corporation, and that thee was no provision for earning income from the investments. I also rely upon two earlier judgments by the same court in which, although the questions posed to the courts were different from that before the Board in this instance, the fact that the loans involved were from a parent to a subsidiary apparently did not bar a determination in each case which could be in conflict with the view of counsel in this matter, or at minimum, not supportive of it. In Massey-Ferguson Limited v Her Majesty The Queen, [1977] CTC 6; 77 DTC 5013, the following comments are to be found:

In so far as the finding of the Judge that there was no legitimate business purpose for involving Verity in the transaction is concerned, I must again respectfully disagree with him. (pp 5018 & 13)

Verity had been incorporated in 1957 apparently as a successor to a long-time subsidiary of the Appellant, for the purpose of holding investments in and making loans to other companies in the Massey Ferguson group, (pp 5018 & 13)

This evidence is uncontradicted and certainly demonstrates that there were, in 1967, valid business reasons for Verity’s continued existence, not the least important of which, for the purpose of deciding the issue in the case, was that of loaning money to its subsidiaries. Moreover, on the basis of other evidence, there is no question of the necessity for placing in the Perkins treasury further funds to meet its working capital requirements. It was conceded by the Respondent that the borrowed money was used for that purpose, (pp 5019 & 14)

I am unable, with respect, to agree with this view of the transaction. As I have said, the evidence discloses that one of the reasons that Verity was in business was to lend money to Massey Ferguson subsidiaries and there is some evidence derived from its financial statements to show that it did so, not only in the case at bar, but also in other cases. The money for such purposes was acquired, in other cases, as well as in this, by borrowing from Verity’s parent, the Appellant. Neither the existence of the corporate entity, nor the business in which it was engaged was in any way a sham, (pp 5019 & 15)

In this case the Appellant adopted a method of lending money for bona fide purposes in a manner which obviated the risk of having included in its income deemed interest on the loan, which if it had been included, would have increased its taxable income. (pp 5019 & 15)

I am conscious of the fact that the issue under examination there did not deal with whether the loan from Verity to Perkins would have been deductible under circumstances similar to those in this appeal, but I do have difficulty reaching a conclusion that a determination on that point, if required, would have been adverse merely because of the parent-subsidiary relationship. In Neonex International Ltd v The Queen, [1978] CTC 485; 78 DTC 6339, at 491 and 6343 respectively, the following is to be found:

It must first be said that while it is true that a company may be engaged in the business of financing its subsidiaries in whole or in part, it does not, in my view, necessarily follow that all transactions between the parent and subsidiary are part of its financing business.

While the judgment determined that the particular amount at issue in the appeal was on capital rather than on income account, I do not read that this was so merely because of the parent-subsidiary relationship. There does not appear to be any indication in either decision that the activity of a parent lending money to a subsidiary could not be classified as a business activity.

In summary, at this point I am not persuaded by the proposition that loans from a parent to a subsidiary cannot constitute a business or a part of a business, for inclusion as a deduction under paragraph 18(1 )(a); or that for the same reason a creditor is automatically disqualified as a “money-lender” for purposes of paragraph 20(1 )(l) of the Act. As I! see it, there does not appear to be a solid foundation in the argument of counsel for the respondent which would limit this appellant’s right to claim that the amounts at issue are deductible either as part of its regular business, whatever that may have been, or as part of the business of lending money. It would also seem that counsel for the respondent has dealt with both “branches” of the appellant’s argument in one argument, but in my mind not very persuasively.

The only other point raised by counsel related to the experience of the appellant in certain lines of business (particularly hardware) into which it ventured. I cannot take that argument seriously. Demonstrable expertise in a business field is not a prerequisite to undertaking a venture in the nature of trade, although the demonstration of a reasonable expectation of profit certainly would be.

That leads us then to an examination of the evidence and argument of the appellant — fundamentally that Highfield qualifies for the deduction claimed on either or perhaps both branches of the above propositions, and I would quote some critical portions of that argument:

In summary of course it is the taxpayer’s respectful submission that sec. 20(1)(l)(i) makes a deduction unequivocally in respect of those amounts of accrued income that are already included in the income, in respect of its being in the business but merely by virtue of that statutory provision.

It follows therefore that from the outset a reserve was properly accorded pursuant to sec. 20(1 )(l)(i) for those items referred to in Exhibit 10, being the total of accrued interest included in income and therefore amounts against which the taxpayer can reserve provided that the collection of those amounts is deductible.

The second tenet of the taxpayer’s position is of course that it is entitled, as a matter of law, to deduct the principal sum of the loans made pursuant to sec. 20(1 )(l)(i), given that the taxpayer is a taxpayer, part of whose ordinary business was the lending of money. And, I emphasize, sir, the word “part” of whose ordinary business is the lending of money.

We also rely upon the definition of “business” in sec. 248(1) and which defines the same to be, ‘a trade or undertaking of any kind whatever, including an adventure in the nature of trade for these purposes.’

Then finally, if it is possible, and we respectfully submit that it is not on the facts of this case, to find that the business of the taxpayer was not that of lending, but if it can be said that it was some other business, then at the very least the loans were an integral part of that business and to the extent of the evidence before you, is that those loans were bad, they are probably deductible in computing the profit, under the General Business Rules, Sec 9(1) and (2) and Sec 18(1 )(a) of the Income Tax Act.

.. . unless the stte of the law today is that in no case can a corporate taxpayer be considered to be in the business of lending or part of its business to be that of lending, where it makes a loan to a company in which it has equity, ie shares, the taxpayer must succeed in this case.

. .. the equity that Highfield had in the various companies to which it lent money, it is repectfully submitted, are supportive of its lending activities, given that the evidence indicates that such shares were received as extra consideration for loans being made and therefore don’t detract from its status as a lender.. .

Dealing with the evidence of Mr Elliott, he started into the real estate business in 1960, when he discovered, even at that early stage in his career, that in order to consummate real estate transactions it was apparent that financing had to be arranged to consummate it, and indeed the financing may well be more important that the most important ingredient of the sale.

He states that he would finance young, aggressive men in these centres, young aggressive men who were capable of earning money, but who at this stage in their career did not have such resources.

This is not indicative of the involvment by a parent in the usual subsidiary relationship.

. . . all of the companies, except unfortunately those situations where they weren't successful, did mature and over the course of three to five years did obtain replacement financing;

. . . given the conclusion by the Board that doubtful debts do arise from loans made in the ordinary course of the business of the taxpayer, and if you also conclude that part of the taxpayer’s business was the lending of money, you don’t necessarily have to find that the doubtful debts arose from the business which was lending.

In other words, the two requirements of ss (2) of (1) it is respectfully submitted, could be argued by stating that as long as there are doubtful accounts arising from loans made in the ordinary course of business, and as long as the taxpayer, part of the taxpayer’s business is the business of lending money, it is not necessary that . . . doubtful loans arose in the lending business. It can be read disjunctively. In this case sir, it is respectfully submitted that we don’t have to read disjunctively because part of the taxpayer’s business is clearly and unequivocally that of lending money and these loans arose in the course of that activity. And if they didn’t arise in the course of lending, they certainly arose in the course of some business activity, and which of course, a general deduction in the calculation of profit, pursuant to sec 9(1)(a) of the Case Law.

If Parliament had intended that loans to companies in which it has a shareholder’s interest should be excluded as loans which qualify as loans being made in the course of lending, then it would have said so. It didn’t. And, for us to infer or read in those words strikes me as inflicting a hardship on the taxpayer in this case, and inflicting an interpretation on the Section which was not intended by Parliament.

. . . if Highfield doesn’t qualify as a lender, then no private company can qualify as a lender under Canadian law in respect of loans made to companies in which it has some share interest.

The magnitude, complexity and variety of the loan transactions of the appellant and/or its associates before and during the relevant years have been established adequately. The evidence supports a conclusion that the functions termed “banking” by apppellant’s counsel have increased and become formalized in subsequent years. This lending of money activity was not the only activity of the appellant, it continued its real estate development activities and, while I do not necessarily subscribe to the specifics of the percentage ratios provided by the appellant in paragraph 8 of the amended statement of facts (supra), I am quite prepared to agree that the financing operations were substantial. However, as I have already noted, I do not find much in that mathematical argument which should be considered critical to a determination of the issue before the Board. Unless anything else in the Act would prohibit the deductions claimed, the appellant in these circumstances fits into the terminology of paragraph 20(1 )(l) of the Act: “made in the ordinary course of business by a taxpayer part of whose ordinary business was the lending of money”.

Certain of the deductions claimed were made under paragraph 20(1 )(l) and others under paragraph 20(1 )(p) of the Act. I am by no means certain that the proper deductions were made under the proper section and there was considerable lack of precision in argument from the parties which would aid the Board in making any such decision. Accordingly, I refrain from so doing. I am quite satisfied that if the amounts deducted under paragraph 20(1 )(p) of the Act as “Bad Debts” were not indeed bad debts, then they qualified for a similar amount of deduction under paragraph 20(1 )(l) of the Act in the year in question. I reach this conclusion irrespective of the fact that the requirements and application of the two paragraphs 20(1 )(l) and (p) of the Act may be quite different and several aspects of these differences were noted by counsel. A “Reserve for doubtful debts” established under paragraph 20(1 )(l) of the Act would seem to leave with the taxpayer a much greater degree of flexibility in using business judgment with regard to the inclusion of amounts in such a reserve than is permitted to a taxpayer in claiming a deduction under paragraph 20(1 )(p) of the Act for a “bad debt”. The term “doubtful debt” in itself can mean only what it says — the debt is owing and possible of collection, but that possibility is not sufficiently certain in the mind of the taxpayer that he wishes to be placed in the disadvan- tageous position of having to pay income tax thereon before that possibility has become more of a certainty.

In effect, a taxpayer may be given a year’s grace with the application of paragraph 12(1)(d) of the Act serving to bring the reserve back into income in the following year, at which point he is presumably required or permitted to re-examine the situation and reserve against the amount again, or not do so depending on his business judgment then, and the situation at that time. Obviously if his original concern regarding collectibility had been ill- founded and the amount collected in the interim, it would be credited as income. Conversely, under paragraph 20(1 )(p) of the Act, it is necessary for the taxpayer to establish that the amount at issue is a “bad debt” — in simple language uncollectible. It has gone beyond any reasonable hope of recovery and is effectively worthless (not merely doubtful) as an asset. That, as I see it, requires considerably greater support for the claim than may be required under paragraph 20(1 )(l).

Subparagraph 20(1 )(p)(i) reads “that are established by him to have become bad debts in that year” (underling mine), and I would note the emphasis to be placed on past tense and the reference to the financial period. The claim must be one that can be asserted as having become uncollectible by the end of the fiscal year. To whatever degree “hindsight” (at the date of preparation of financial statements for example) may be permissible in the utilization of paragraph 20(1 )(l) of the Act I find no similar flexibility for paragraph 20(1 )(p). I would also suggest that paragraph 20(1 )(p) may well be called into play and the amount declared a “bad debt” in the “second year” — that is the year following its inclusion as part of a reserve established under paragraph 20(1 )(l) (see earlier comments).

Finally, I should like to note that the Board’s attention was not called to subsection 20(1) of the Act during the hearing on this matter. Indeed it may have been superfluous to do so but I do not have the benefit of counsel’s views on the section. Nevertheless, I do wish to point out that I rest something less than completely at ease since the possible impact of the term from subsection 20(1):

. . . 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

has not been examined. The question that a “business” or “property” of the appellant might be the shares in the subsidiary corporations of Highfield is an intriguing one.

Without going into details, I would suggest that the net interest income earned from the loans was pitifully small in comparison to the obvious risks; and there could be little basis for relying on the greater income earned from dividends on the corporate shares, when the comments in D W S Corporation v MNR, [1968] CTC 65; 68 DTC 5045, at 5050-51 are reviewed:

It was not suggested that the money was used for the purpose of earning income in the form of dividends from World T and I Corporation but I do not think such a contention would be tenable anyway since such dividends, if received, would, I think, be income from the appellant’s property in the shares of World T and I Corporation rather than from the property right evidenced by the demand note. On this point Rand, J in Canada Safeway Limited v MNR said at page 728:

The word “property” is introduced in paras (i) and (ii) but I cannot see that it can help the appellant: the language borrowed money used for the purpose of earning income from . . . property (other than property the income from which is exempt) in (i) means the income produced by the exploitation of the property itself. There is nothing in this language to extend the application to an acquisi- tion of ‘power’ annexed to stock, and to the indirect and remote effects upon the company of action taken in the course of business of the subsidiary.

Though in the present case there was no use of the borrowed money to purchase stock to obtain “power” or control over World T and I Corporation I think that the possibility of increased dividends by lending to World T and I Corporation must be taken to be too remote to characterize the lending of the borrowed money to it without interest as use for the purpose of earning income from the property represented by the loan. It is the loan itself rather than the shares that I think Rand, J refers to when he says the statute means “the income produced by the exploitation of the property itself.

Decision

The primary position of the appellant that the losses claimed should be deductible under section 20 of the Act has been established to my satisfaction. The loans which constitute the claim are not barred from such deduction by virtue of the fact that they may have been made on capital account, nor are they barred by virtue of the fact that they were transactions between a parent and a subsidiary. The question of whether the loans would have been deductible under paragraph 18(1 )(a) of the Act is not one which the board need address in the circumstances. The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment in a manner not inconsistent with these reasons.

Appeal allowed.