Roger Lachapelle v. Minister of National Revenue, [1990] 2 CTC 2396

Brulé, T.CJ.:— This is an appeal from reassessments issued by the respondent in respect of the appellant's 1981, 1982, 1983 and 1984 taxation years.

Issues

There are two issues in this appeal. In his 1982 income tax return, the appellant claimed a business loss which arose on the disposition of shares and debt. The Minister, in reassessing, allowed only a business investment loss of $71,740 being one-half of $143,480 claimed.

In the years 1981 to 1984 inclusive, the appellant earned income from bank deposits in Nassau. He claimed that the funds on deposit were trust funds being held by him and that the interest earned of $212,182 should not be charged to him as was set out in the reassessments.

Facts

Roger Lachapelle is a businessman operating primarily in the province of Quebec. He has, in the course of the past 25 years or so, participated in numerous business ventures ranging from real estate construction to automobile sales. It is fair to say that, like most people, he pursued his various interests with a view to turning a profit.

In 1971, the appellant, along with two other persons, caused to be incorporated "Les Investissements Mirage Inc.” (the "corporation"). Each of these incorporators subscribed for one-third of the shares. The corporation's sole purpose was to trade in real estate and there is no dispute that lands acquired by the corporation were held in its inventory. The appellant stated in evidence that there were a number of business reasons for operating through a corporation such as to take advantage of the lower tax rates on corporate profits. In the present case, evidence showed that the corporation made sales, reported profit as income, all of which was reinvested.

Prior to the fall in land values precipitated by the recession of the early 1980s, the corporation turned a profit on some of its sales. These profits, to the recollection of the appellant, were reinvested by the corporation. In his testimony, the appellant stated that he anticipated that the corporation would become a successful ongoing business. It is also evident from his testimony that the appellant did not acquire his shares for the purpose of resale, although, as an experienced businessman, he did not preclude the possibility.

Due to poor market conditions existing in the mid- to late 1970s, the corporation began to experience difficulty in disposing of its inventory. By 1982, the corporation was indebted to its bank in the amount of $1,803,000. The appellant was one of the joint and several guarantors of this debt, and in that year, was called upon to honour his guarantee. As a result, the shareholders acquired from the corporation in 1982 its remaining inventory of land at fair market value and assumed all debts owing to the bank by the corporation. The net result of these transactions was that the corporation became indebted to the appellant for the amount of $143,480.

Late in 1982, the appellant disposed of his shares and the debt for no consideration. In his tax return of 1982, the appellant claimed the entire loss on the debt as a business loss. As stated above, the Minister subsequently reassessed the appellant to disallow the business loss and to allow in its place, a business investment loss being one-half of the amount claimed.

With respect to the interest received from the bank deposits in Nassau, the matter was disclosed to Revenue Canada by the appellant during an audit. In the 1970s, the appellant was a dealer for Cessna Aircraft. A lawsuit was pending by Cessna against Le Groupe du Barry Inc. in which the appellant had an interest. This latter company and 84049 Canada Inc. transferred funds to the appellant who placed these on deposit in personal accounts in the Bahamas. The result was that interest income of $212,182 was earned in the appellant's name during the years under appeal. He claimed that the interest, although earned in his name, belonged to the corporations, This was not accepted by the Minister and the interest was reassessed to the appellant.

Analysis

Interest Income Issue

Of some $784,457 of capital transferred to Nassau, the Minister is only concerned with the amount of $479,896. Of this latter amount, the appellant is only objecting to interest being earned on $368,166 as being included in his income. This amount is made up of $293,166 being a reimbursement of a shareholder loan by 84049 Canada Inc. and a salary payment of $75,000 from Le Groupe du Barry Inc. Both amounts were paid to the appellant and deposited in Nassau.

Counsel for the appellant argued that the appellant's action in placing the funds in Nassau was only a protective measure to distance the money from the Court action by Cessna Aircraft. Evidence was given that the funds were replaced and thus while the form of the transaction may not have been proper certainly the substance of it was. Of significance, it was said, was the voluntary disclosure of the transactions and the result that no penalties were assessed by the Minister.

On the other hand, the counsel for the Minister said that no evidence other than the [payroll] evidence of the appellant was presented to the Court. There was no documentation that the money had been returned to the companies, and if so on what terms. Were they then loans from the appellant? In any event, the moneys were properly taken out and thus were the property of the appellant. While one account in Nassau was shown to be “in trust" others were not.

There was no declaration of trust and it did no good to make the companies judgment-proof if the appellant was not made judgment-proof. There should have been a yearly accounting for the interest earned by one party or another. Ignoring this requisite of the Income Tax Act does not absolve the appellant. He certainly did not treat the interest earned in an acceptable manner. He may have chosen another method in dealing with the funds but in as much as he did not do so, he must accept the statutory consequences. His appeal in respect to this issue is dismissed.

Business Loss or Business Investment Loss Issue

Before dealing with the specifics of the present appeal, there are certain principles to be considered in cases such as this.

The Income Tax Act does not define “capital loss" or “business loss". The guidelines for characterizing losses (and gains) have been laid down in a series of past judicial decisions. Where a dispute arises over the proper characterization of a loss on the disposition of an asset, the courts have approached the matter by asking whether the asset was acquired as an investment or for the purpose of trade. Similarly, where a taxpayer has sustained losses on loans or guarantees, the courts have treated the loss as a capital loss unless it (the loan or guarantee) was made by the taxpayer for the purpose of gaining or produc- ing income related to the taxpayer's business and it was not made to produce a benefit of an enduring nature.

It was set out in the case of Edmund Peachey Ltd. v. The Queen, [1979] C.T.C. 51; 79 D.T.C. 5064 that the key factor in characterizing the nature of any particular gain or loss is the intent of the taxpayer at the time the expenditure was incurred or the asset acquired. To then determine the taxpayer's intent all the facts must be considered in the context of the taxpayer's entire course of conduct, The matter was discussed in Algoma Central Railway v. M.N.R., [1967] 2 Ex. C.R. 88; [1967] C.T.C. 130; 67 D.T.C. 5091; [1968] S.C.R. 447; [1968] C.T.C. 161; 68 D.T.C. 5096 wherein Fauteux, J. said at page 162 (D.T.C. 5097; S.C.R. 449):

Parliament did not define the expressions “outlay. . .of capital” or "payment on account of capital”. There being no statutory criterion, the application or nonapplication of these expressions to any particular expenditures must depend upon the facts of the particular case. We do not think that any single test applies in making that determination and agree with the view expressed, in a recent decision of the Privy Council, B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, [1966] A.C. 224, by Lord Pearce. In referring to the matter of determining whether an expenditure was of a capital or an income nature, he said, at page 264:

The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer.

In the text by Arnold, McNair, Young, Materials on Canadian Income Tax, eighth edition, there is said in relation to this subject at page 367:

It is difficult to determine the intention of a person under any circumstances, particularly when it is attempted on a highly subjective basis. Also, businessmen virtually always contemplate a range of alternative possibilities with respect to the purchase of an asset, including selling it if other considerations do not materialize.

The key determinant is how the taxpayer intended to profit. Hence, if a taxpayer acquires an asset with the intention of deriving a stream of income therefrom, the subsequent loss is a capital loss or allowable business investment loss. If the asset was acquired with the intent to sell, hopefully at a profit, the appellant may claim a business loss if the venture proves unsuccessful. (Californian Copper Syndicate v. Harris (1904), 5 T.C. 159.)

In addition, if at the relevant time, the taxpayer had a secondary intention to sell, there is a long line of judicial precedents which suggest that any subsequent gain or loss will be an ordinary gain or loss. (See the Supreme Court of Canada decision in Regal Heights Ltd. v. M.N.R., [1960] S.C.R. 902; [1960] C.T.C. 384; 60 D.T.C. 1270; and the Exchequer Court case of Bayridge Estates Ltd. v. M.N.R., [1959] Ex. C.R. 248; [1959] C.T.C. 158; 59 D.T.C. 1098.)

Dealing more particularly with corporate shares, it must be determined whether or not a taxpayer is entitled to claim a business loss in respect of his disposition of shares in the corporation. The principal factor to be considered is whether or not he acquired the shares as an investment or a trading asset. Authority for this is found in the following:

Ronald K. Fraser (No. 2) v. M.N.R., [1963] Ex. C.R. 334; [1963] C.T.C. 130; 63 D.T.C. 1083, affd [1964] S.C.R. 657; [1964] C.T.C. 372; 64 D.T.C. 5224 (S.C.C.)

M.N.R. v. James N. Sissons, [1969] S.C.R. 507; [1969] C.T.C. 184; 69 D.T.C. 5152 (S.C.C.)

M.N.R. v. Joichi G. Kato et al., [1969] C.T.C. 492; 69 D.T.C. 5308 (Ex.Ct.)

In the present appeal, the appellant has not alleged that he acquired the shares of the corporation for the purpose of reselling them at a profit. Nor does he allege that he is a "trader" in shares. Rather, he is asking the Court to “lift the corporate veil” and to analyze the losses incurred as if he carried on the business of the corporation directly. The appellant argued that his prior dealings in real estate coupled with the inherently speculative nature of the undertaking make it appropriate to ignore the imposition of the corporation in characterizing his losses.

In the case of Constitution Insurance Co. of Canada v. Kosmopoulos, [1987] 1 S.C.R. 2; 34 D.L.R. (4th) 208 at page 213, the Court said in dealing with “lifting the corporate veil":

As a general rule a corporation is a legal entity distinct from its shareholders: Salomon v. Salomon & Co., [1897] A.C. 22; [1895-9] All E.R. 33 (H.L.). The law on when a court may disregard this principle by “lifting the corporate veil" and regarding the company as a mere "agent" or "puppet" of its controlling shareholder or parent corporation follows no consistent principle. The best that can be said is that the "separate entities” principle is not enforced when it would yield a result “too flagrantly opposed to justice, convenience or the interests of the Revenue": L.C.B. Gower, Modern Company Law, 4th ed. (1979), at p. 112.

There is a persuasive argument that "those who have chosen the benefits of incorporation must bear the corresponding burdens, so that if the veil is to be lifted at all that shouldonly be done in the interests of third parties who would otherwise suffer as a result of that choice": Gower, supra, at p. 138.

Professor Bruce Welling in his text Corporate Law in Canada-- The Governing Principles, (1984) sets out at page 140:

It is still common in Canada to see judges speaking, obiter, of “piercing the corporate veil" despite warnings from high authority that this is not a permissible practice. Perhaps this terminology can now be laid to rest as the C.B.C.A. type of statutes have come into force in most Canadian jurisdictions. We now are in a situation whereby most corporate statutes specifically state that corporations have the rights of natural persons and also provide that the issue of a certificate of incorporation is to be taken as conclusive evidence that the corporation has come into existence. It therefore seems clearly arguable on a statutory basis, as well as through reliance on Salomon's case, that judges simply do not have the power to ignore the separate existence of a corporation in the name of some unarticulated notion of justice and fair play.

The standard approach to characterizing losses on loans and guarantees was established by the Supreme Court of Canada in M.N.R. v. George H. Steer, [1967] S.C.R. 34; [1966] C.T.C. 731; 66 D.T.C. 5481 (S.C.C.) and Stewart & Morrison Ltd. v. M.N.R., [1972] C.T.C. 73; 72 D.T.C. 6049 (S.C.C.). In Steer, as the present case, the taxpayer guaranteed the indebtedness of a company in which he held an equity interest. Due to financial difficulties encountered by the company, the taxpayer was called upon to honour the guarantee. He subsequently deducted the entire amount as a business loss. In dismissing the taxpayer's appeal, the Court held that losses of such a character in the hands of the individual taxpayer were clearly losses on account of capital. This presumption, of course, may be rebutted by evidence the taxpayer was engaged in a venture in the nature of trade.

Similarly, in Stewart & Morrison, the taxpayer corporation provided both loans and a loan guarantee to a subsidiary it incorporated in the United States. The U.S. subsidiary eventually ceased operations and the taxpayer did not collect some $72,000 in unpaid debt. The Court rejected the taxpayer's argument that the subsidiary should be treated like a branch office in determining the deductibility of expenses. In fact, the Court found that it was immaterial that the corporate taxpayer could have deducted the amounts had it operated a branch office rather than incorporating a subsidiary. At page 74 (D.T.C. 6051), Judson, J. said:

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.

The reasoning in Steer and Stewart & Morrison has been confirmed in a series of more recent cases. For example, in Isaac Meisels Investments Ltd. v. The Queen, [1985] 1 C.T.C. 9; 85 D.T.C. 5029 the Federal Court-Trial Division, denied a business loss to a corporate taxpayer which loaned money to a subsidiary. In dismissing the taxpayer's appeal, Rouleau, J. held that where, in substance, a loan is made for the purpose of providing working capital to a corporation, any loss which may result, is a capital loss. At page 14 (D.T.C. 5033) he says:

It is obvious from the facts of this case that the second corporation, Weisfeld Ltd, was set up to deal with the property in Guelph; it was going to be developing the real estate acquired by building townhouses and condominiums. Any profits derived therefrom would have been treated as income by Weisfeld Ltd. The latter company would have been taxed on the income, not Meisels; any profits remaining may have been transferred by way of dividends to the plaintiff Meisels and could have remained in its coffers untaxed until such time as it disposed of it by way of dividends to shareholders. Had Weisfeld Ltd been successful, there is no evidence of any other intention but to repay Meisels for the loan.

Had the plaintiff corporation been a direct participant in the development, the resulting profits, in the event the venture proved successful, would have been income and therefore taxable at the corporate rate. Likewise any losses therefrom would have been deductible to offset other income. It would have been an income related expense.

He later concludes at page 15 (D.T.C. 5034):

The Stewart & Morrison case, (supra) is on all fours with the case at bar. The Supreme Court stated that the appellant provided its subsidiary with working capital by way of loans. The money was lost, and the losses were on account of capital, and the deduction prohibited by paragraph 12(1)(b) of the Act. That, I believe, was the substance of the transaction.

A similar view had been advanced in this Court in N.M. Tilley Realty Ltd. v. M.N.R., [1984] C.T.C. 2386; 84 D.T.C. 1343. Sarchuk, T.C.J., relying on Algoma Central Railway v. M.N.R., supra, held that loans and guarantees given by the appellant to a related company were outlays on account of capital and not business losses because they were given to provide working capital to the company. As in Meisels, the Court pointed out that no direct connection could be drawn between these outlays and the earning of business income.

Although a loss arising on a guarantee or a loan is normally characterized as a loss on account of capital, such losses may constitute business losses if the loan or guarantee is given inthe ordinary course of the taxpayer's business for the purpose of earning an ongoing and increasing income stream.

For instance, in the leading case of F.H. Jones Tobacco Sales Ltd v. M.N.R., [1973] F.C. 825; [1973] C.T.C. 784; 73 D.T.C. 5577 (F.C.T.D.), a loss suffered by the plaintiff taxpayer on a guarantee of a customer's loan was held to be a fully deductible business loss on the basis that the guarantee was made with the purpose of yielding business income and was not to provide a benefit of an enduring nature. At page 790 (D.T.C. 5581), Judge Noël said:

Clearly, as I have already indicated, the payment made by the Jones company was one which fell within the exception provided in paragraph (a) of subsection 12(1). It was in fact made for the purpose of gaining or producing income from defendant's business, and the evidence establishes that, until the bankruptcy of La Société des Tabacs de Québec Inc it actually yielded considerable income by the sales of Tobacco made by the company to the latter concern.

And at page 792 (D.T.C. 5582):

I also conclude that the loss sustained by defendant when it was called on to act as surety must be treated as an outlay made for the purpose of gaining or producing income in the operation of its business undertaking, and not an outlay or loss on account of capital.

FH. Jones was applied in Panda Realty Ltd. v. M.N.R., [1986] 1 C.T.C. 2417; 86 D.T.C. 1266. In this latter decision, a loss on a guarantee given by the taxpayer to its tenant was found to constitute a business loss because the guarantee was aimed at preserving the appellant's income stream and did not provide a benefit of an enduring nature. In both of these cases the taxpayer was engaged in a business (tobacco sales in FH. Jones and rentals in Panda).

The appellant placed a number of cases before the Court in which losses incurred on the disposition of shares and losses incidental to loans and loan guarantees were held to be business losses. The appellant, who submitted 15 cases for the Court's consideration, relied primarily on the following four cases :

Sydney John Becker v. The Queen, [1983] C.T.C. 11; 83 D.T.C. 5032 (F.C.A.)

Patrick J. Cull v. The Queen, [1987] 2 C.T.C. 63; 87 D.T.C. 5322 (F.C.T.D.)

Ronald K. Fraser (No. 2) v. M.N.R., 63 D.T.C. 1083, affd 64 D.T.C. 5224 (S.C.C.)

M.N.R. v. Henry J. Freud, [1969] S.C.R. 75; [1968] C.T.C. 438; 68 D.T.C. 5279 (S.C.C.)

I will review each of these cases with reference to this appeal.

In Becker, losses incurred on shares, loans and guarantees given by the taxpayer to a corporation he controlled were held to be fully deductible business losses. However, there are clear differences between this case and the case at bar. For example, the Court in Becker established that the taxpayer purchased the shares with the intent to resell them at a profit after he had turned the company around. In short, the taxpayer was engaged in an "adventure in the nature of trade". The loss on the loans and the guarantee were also fully deductible business losses because they were incidental to the taxpayer's business (that being the undertaking to purchase and sell the business at a profit).

The Becker case tends to undermine rather than support the appellant's position. First, the taxpayer in Becker did not claim to be engaged in the underlying business of the corporation. Second, the taxpayer clearly undertook to buy and sell the business; he never intended to recoup his investment by establishing an ongoing operation. In fact, Kato, supra; Robert Howard Leslie v. M.N.R., [1986] 1 C.T.C. 2209; 86 D.T.C. 1152; and M.N.R. v. James A. Taylor, [1956-60] Ex. C.R. 3; [1956] C.T.C. 189; 56 D.T.C. 1125 (all cited by the appellant in argument) were also decided on this same principle. In each of these cases, the taxpayer's gain or loss was characterized on the basis that the taxpayer had intended to sell his shares.

For a situation where an appellant had no intention of selling his shares at the time that he acquired them see the Federal Court of Appeal decision in The Queen v. Dumas, [1989] 1 C.T.C. 52; 89 D.T.C. 5004.

Cull is both a difficult decision to explain and distinguish, partly because Madame Justice Reid gave a broad interpretation to the Freud case and partly because the decision suggests that the business of the corporation was also the business of the taxpayer/shareholder. However, the decision is fully justified on the basis that the taxpayer acquired the shares not as an investment, but as a trading asset. The Court said at page 68 (D.T.C. 5325):

In my view the Freud case is directly applicable to the present situation. The shares in the hands of the partnership were not, as the defendant claims, merely of the usual and normal investment character. They were acquired for the purpose of acquiring an interest in the lands under option and in the development project, for the purpose of making a profit therefrom, either by Simlac selling its assets or by the shareholders selling their shares.

As the taxpayer was engaged in a adventure in the nature of trade, advances made to the corporation in the form of loans and loan guarantees were also fully deductible. Unlike the present appeal, Cull dealt with an isolated transaction in one piece of land and not with an ongoing business. Further, as the taxpayer intended to divest himself of his interest in the undertaking from the outset, Cull is not as closely analogous with the case at bar as the appellant has suggested.

In Cull, the Court tended to overlook the separate existence of the corporation. This would violate the basic principle of a separate corporate personality as established in the leading English case of Salomon v. Salomon & Co., [1897] A.C. 22; [1895-9] All E.R. 33. The subject as well covered by Christie, A.C.J., in the case of K.J. Beamish Construction Ltd. v. M.N.R., [1990] 2 C.T.C. 2199; 90 D.T.C. 1584. In reviewing this separate corporate entity and it being regarded in law as a legal entity with a personality of its own and quite distinct from its shareholders he quotes Pigeon, J. in the Supreme Court of Canada case of Jack Appleby v. M.N.R., [1975] 2 S.C.R. 805; [1974] C.T.C. 693; 74 D.T.C. 6514 at 698 (D.T.C. 6517; S.C.R. 813) as follows:

Ever since Salomon v Salomon, [1897] AC 22, it has been accepted that although the shares of a limited company may be beneficially owned by the same person who also manages it, its business is nevertheless in law that of a distinct entity, a legal person having its own rights and obligations. The Income Tax Act unmistakably implies that this rule holds good for tax purposes.

In Fraser, the taxpayer incorporated two companies to hold two pieces of real estate. The venture was undertaken within a limited time frame at which latter time the taxpayer intended to divest himself of his interest, The fact that the taxpayer had previously dealt in real estate was relevant only in that it contradicted the taxpayer's stated intent to hold the shares as an investment. Although the Supreme Court of Canada did say that incorporating and selling shares was an alternative to purchasing a single piece of land and selling it personally, the gain on the disposition of the shares in this case was held to be business income because the taxpayer intended to sell the shares from the beginning. Pigeon, J. in Freud, explained the reasons upon which Fraser was decided in the following words at page 441 (D.T.C. 5281) of the Freud case:

It was there held that where real estate operators had incorporated companies to hold real estate, the sale of shares in those companies rather than the sale of the land was merely an alternative method of putting through the real estate transactions and the profit was therefore taxable. This decision does not in my view necessarily imply that the existence of the companies as separate legal entities was disregarded for income tax assessment purposes.

Further, in Fraser, the corporation held an identifiable parcel of land. Therefore, it could also be said that the sale of shares would be an effective alternative to disposing of the underlying asset. Where the facts demonstrate that a taxpayer has incorporated and held a single piece of land or assembled land so that it would be as easy for a purchaser to buy the shares rather than to acquire the land directly, the courts have viewed this as evidence the taxpayer was involved in an adventure in the nature of trade. In the case at bar, however, the corporation bought and sold such a wide variety of properties that it would be highly unlikely that a potential purchaser of land would buy the appellant's shares, preferring instead to purchase individual properties from the corporation. This, I submit, is an important difference between the case at bar and the adventure in the nature of trade cases where losses incurred by a shareholder were fully deductible.

In Freud, the taxpayer incorporated a company to design and produce a prototype sports car. Once the design was finalized, the car was to be sold with its specifications to a car manufacturer. The venture failed and the taxpayer lost his capital as well as a loan which he advanced to the corporation. Given the taxpayer's intent to divest himself of any interest in the car as soon as it could be marketed, the taxpayer did not hold his shares in the corporation as an investment. Since any gain on the disposition of the shares, had the venture been successful, would have been business income, the loss that was sustained was held to be a business loss. Mr. Justice Pigeon neatly summed up the rationale behind the Freud decision at page 444 (D.T.C. 5283):

In the present case as we have seen, the basic venture was not the development of a sports car with a view to the making of a profit by going into the business of selling cars but with a view to a profit on selling the prototype. Therefore, the venture, from its inception, was not for the purpose of deriving income from an investment but for the purpose of making a profit on the resale which is characteristic of a venture in the nature of trade.

The Freud case, like the majority of those dealing with losses on the disposition of shares, reveals that the intent of the taxpayer was to acquire an asset for resale rather than become involved in an ongoing business. It is also clear that the courts look at the taxpayer's own intent to undertake an adventure in the nature of trade. In no tangible sense are the activities of the corporation ascribed to the holder of the shares.

Conclusion

The appellant was not in the business of buying and selling shares nor was he involved in a single adventure or concern in the nature of trade which may have been sufficient for the Court to “lift the corporate veil”. Neither the speculative nature of the undertaking nor the appellant's apparent expertise in real estate are, in themselves, capable of turning the taxpayer's shares into a “trading business” as the term is understood in tax law. According to the evidence, the corporation bought some properties for resale and some for investment. The business in the case at bar belongs to the corporation.

While the appellant's counsel placed great importance on the decision in the Cull case, Christie, A.C.J. summed up the situation in that case at page 2215 (D.T.C. 1596) of the Beamish case as follows:

With deference, my understanding is that a person who acquires a share in a corporation does not thereby acquire an interest in land that is an asset of the corporation. The legal interest in the land is exclusively vested in the corporation, not its shareholders, and if a profit is made on the sale of the land that profit belongs to the company and it remains with it until distributed to the shareholders by way of dividends or it is otherwise disposed of.

And on page 2216 (D.T.C. 1596) he says:

I have noted on other occasions that I regard myself bound by decisions of the Federal Court-Trial Division. But this is necessarily subject to the caveat that it does not apply when I am satisfied that a judgment of the Federal Court-Trial Division is inconsistent with higher judicial authority to which I must also pay heed. Where I perceive conflict between Cull and such higher authority is:

(a) Steer is a precedent for the proposition that money paid pursuant to a bank guarantee under the circumstances existing in Cull is an outlay on account of capital.

(b) In Freud, Mr. Justice Pigeon said that it is 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. There, in deviating from the general rule, he found ”. . . that the circumstances of the present case are quite unusual and exceptional.” There is no suggestion of the existence of circumstances of that kind in the reasons for judgment in Cull. Nor is there anything in the facts of that case that indicate unusual and exceptional circumstances. The acquisition by taxpayers of shares in corporations involved in the development of real estate is commonplace.

(c) There was no weighing of the evidence to ascertain the intention with which the plaintiff acquired the shares in Simlac and a determination of the fact therefrom of whether the shares were an investment or were acquired as trading assets. This is the essential approach: M.N.R. v. Foreign Power Securities Corporation Ltd., [1967] S.C.R. 295; [1967] C.T.C. 116; 67 D.T.C.5084. The acquisition of shares of Simlac by the partnership points to an investment: Irrigation Industries Ltd. v. M.N.R., [1962] S.C.R. 346; [1962] C.T.C. 215; 62 D.T.C. 1131.

The Minister was correct in arguing that the Court is bound in law to treat the corporation as an entity which is separate and distinct from its shareholders. As the appellant has not established that he carried on business personally and that the guarantee and the loans were given for the purpose of augmenting income from this business the losses under appeal are capital losses.

The result is that both issues in the appeal are dismissed.

Appeal dismissed.