Phyllis Perlman v. Minister of National Revenue, [1985] 1 CTC 2032, 85 DTC 46

Taylor, TCJ:—These appeals were heard in Toronto, Ontario, on September 19, 1984 against income tax assessments for the years 1976, 1977, 1978 and 1979, in which the Minister of National Revenue disallowed as deductions, amounts related to uncollectibility of outstanding loans. Both parties relied upon the provisions of paragraphs 20(l)(l) and 20(1)(p) of the Income Tax Act, SC 1970-71-72, c 63, as amended, (the “Act”). There were relatively small differences in the amounts claimed by the appellant from year to year but essentially in each of the four years of the time material she deducted 25 per cent of an uncollected loan, the original amount of which was $25,000; but at its uncollectible stage stood at $22,786.81. The important aspects from the documentation filed were:

For the appellant:

— I commenced the business of lending money to developers for bridge financing secured by second mortgages bearing high interest rates in 1975. During the calendar year 1976, I had five such loans outstanding, totalling $45,786.81.

— In July of 1976, serious problems developed in connection with the Queenscourt mortgage loan and interest payments were discontinued.

— On my Income Tax Return for 1978, I claimed a Reserve for Doubtful Debts in the amount of $5,681.71, in connection with my business as a money lender.

— Since I was engaged in the business of money lending and was not engaged in any other business in the taxation year, and one of my mortgage loans was in serious default during the year, I believe that I am entitled to claim a Reserve for Doubtful Debts in the amount of 25% of the monies which I advanced on that loan being a reasonable business estimate of the potential loss during that period, pursuant to subsection 20(l)(l)(ii) of the Income Tax Act.

For the respondent:

In reassessing the Appellant as aforesaid, the Respondent relied upon the following findings or assumptions of fact:

— at all material times the Appellant was a full-time employee of Adelyork Investments Limited;

— each of the loans was made through trustees, Lou Lokash Limited, and the interest payments were received by the Appellant from the trustees;

— each of the loans referred was a second mortgage;

— the second mortgage referred to as Queenscourt was given by Lou Lokash Limited to Veinkuhl Construction Company Limited on 14 August, 1975, which mortgagor at all material times was a Canadian-controlled private corporation;

— at all material times, the Appellant was not in the business of moneylending;

— the loan by the Appellant to the trustees with respect to the Queenscourt project was a payment on account of capital;

— the principal amount of the loan by the Appellant to the trustees with respect to the Queenscourt project was at no time included in the computation of the Appellant’s income.

A schedule of the loans was provided by the respondent, and agreed to by the appellant.

The testimony of Mrs Perlman added little to the above information, other than to indicate her employment with Adelyork, supra, was related to her alleged money-lending activity, and that neither activity required much time or supervision. It was clear that Mr Lokash, supra, assumed all responsibilities, and indeed Mrs Perlman was barely aware of the conduct of the loans, including the reason why the one at issue became uncollectible. A document of “trust”, between Lokash, supra, and the appellant indicated the original $25,000 loan at issue had been part of a larger second mortgage totalling about $7 million to Queenscourt, in connection with real estate development and construction. There was no indication in cross-examination by the respondent that the Minister challenged the fact Mrs Perlman had loaned money, and indeed had done so on generally the terms and conditions (including a high interest rate of about 4 per cent over prime) that were detailed in the available documentation and testimony. The Minister’s only dispute revolved around the question, whether Mrs Perlman was in the “business” of lending money.

The jurisprudence referenced by counsel for the appellant largely related to comparisons which might be found in case law dealing with the small business deduction under section 125 of the Act. He agreed it was of little help directly, but counsel asserted that it would serve to indicate that the amounts involved did not have to be great, nor did the frequency of the transactions, in order for the activity to be claimed as a business. Counsel largely relied upon the perception that the “high risk” nature of the loans made by Mrs Perlman — (second mortgage, 4 per cent over prime) indicated a “business” as opposed to a straight “investment”.

Counsel for the respondent noted the cases of Cross Country Industrial Development Corp v MNR, [1981] CTC 2558; 81 DTC 475; Highfield Corporation Ltd v MNR, [1982] CTC 2812; 82 DTC 1835; and Oakland Homes Ltd v MNR, [1980] CTC 2494; 80 DTC 1432. In addition he noted the minimum number and type of transactions entered into by Mrs Perlman as well as the complete lack of “business” indicia in the operation of Mrs Perlman — no address, no business card, no soliciting, no regular turnover of funds, etc, as further proof that she was only an investor.

I readily agree that there are substantial difficulties in the way for Mrs Perlman to establish that her money-lending activity could be considered a “busi- ness”. However, I do not believe I need address that specific question, and the Court raised another aspect of the matter.

The reference in paragraph 20(l)(l) of the Act is to business ‘‘— but it is not merely to ‘business’ it is — part of whose ordinary business —[Emphasis added] I am impeded by the fact that in the instant appeal, while it might be argued the “lending of money” was the ordinary business of this taxpayer, (since she was engaged in no other possible “business”), it could not be argued that the lending of money was a “part” of that business. It was the whole of the business if a business it was at all. I am not called upon in this judgment to make a determination of what might be the relief available to a taxpayer with a “doubtful debt” when that taxpayer’s only business was the lending of money as it would appear to be in this case. I am only called upon to decide if this taxpayer can fit herself under the provisions of paragraph 20(l)(l) of the Act, and I am unable to see that she can.

If it can be said, (and I need not do so), that the ordinary business of this taxpayer, was the “lending of money” then that was the “total” of the taxpayer’s business, not a “part” of it, and the circumstances of this appeal do not provide the relief sought by this taxpayer under section 20( 1)(1) of the Act.

The appeals are dismissed.

Appeals dismissed.