A J Anderson v. Minister of National Revenue, [1983] CTC 2308, 83 DTC 247

D E Taylor:—The appeals of Dr Alvin J Anderson were heard in Toronto, Ontario, on March 2, 1983, and are against income tax assessments for the years 1975, 1976, 1977, 1978 and 1979 in which the Minister of National Revenue treated an amount of $180,000 as a capital loss rather than as a noncapital loss as claimed by the appellant. There was a second issue raised related to certain expenses claimed but counsel for the appellant withdrew this part of the appeal and agreed to its dismissal.

There is some slight variation in the wording of the notices of appeal as they relate to different years and the loss “carry-forward” provisions, but the year 1977 is basic and reads as follows:

2. The Appellant is a medical doctor by profession and a businessman.

3. For some years, including 1975, the Appellant carried on amongst other businesses the business of providing chartered holiday tours for students under the name “Ships School” through Ship’s School of Canada Incorporated, a corporation incorporated under the laws of the Province of Ontario.

4. Ship’s School in 1975 arranged for approximately 3,000 students to travel to Europe for the Easter break in 1975. Ship’s School experienced severe financial difficulties thereby rendering it unable to complete its commitment to the student tours. The Appellant in order to attempt to maintain his own personal business reputation and sustain the operations of Ship’s School by enabling it to fulfil its contracts advanced, in addition to amounts already advanced, substantial amounts of money to Ship’s School with the result that the Appellant suffered a loss of $180,000 in 1975. By September, 1975, Ship’s School was bankrupt and the Appellant had no possibility of recouping his loss.

In reply, the Minister stated:

— prior to 1975, the Appellant advanced Ship’s School of Canada Incorporated the total sum of $180,000 with interest pursuant to a loan agreement dated April 6,1975, and as such the said loan was a Capital asset of the Appellant;

— during 1975, Ship’s School of Canada Incorporated became insolvent with the result that the said sum of $180,000.00 became uncollectable;

— the said loss of $180,000.00 was not expended by the Appellant for the purpose of earning income from a business of the Appellant;

It would serve little purpose to recite all the lengthy lists of corporations, associated and/or related and the various inter-connected financial dealings and transactions with such corporations and/or their respective shareholders (sometimes including the appellant or his nominee corporation,* [1] and sometimes not) which were described at the hearing as having an impact on this matter. The bottom line is whether the $180,000 advanced by the appellant personally to, or on behalf of the obligation of, Ship’s School is deductible as claimed. Counsel for the appellant adduced evidence designed to establish that the amount in question was a “loan” and, as such, merely a continuation of and an evidence of the money-lending activities of the appellant which had extended over a period going back to 1959. The summary of his argument reads:

And I’d suggest that, on the evidence, we're talking about someone in the money- lending business who did not quit merely because he formed a corporate intermediary; he merely did not want to appear to be in the money-lending business to certain people, but he operated that company and, indeed, if we’re talking about a question of fact, we’re talking about a question of substance and while the legalities of a corporate entity are one thing, the Income Tax Act is rife with applications of what, in substance was the transactions or transaction. And I’d suggest that here we have a situation where he and the company were carrying on, as he individually had always carried on, and he put this company between himself and some of the public; not to leave the money-lending business — if that had been the case, he would not have continued at all — but rather, to shield himself from some of the undesirable attitudes, some legal, some non legal, with respect to that business.

And I would therefore conclude and submit that the Appellant is in the money- lending business and, therefore, should be allowed a deduction on the basis of non-capital loss, a business loss, for the year 1975, with the normal attendant loss carried forward under Section 111 of the Income Tax Act.

In my opinion, the few amounts involved, the circumstances of the transactions and security obtained for the relatively minor funds loaned to friends, patients or acquaintances by the appellant during the years 1959 to 1973, do not form a pattern of conduct which can be described such that his “ordinary business was the lending of money” (see paragraph 20(1 )(l) of the Income Tax Act). This early, limited and sporadic loaning of money had no relationship or similarity to the advance of the $180,000 at issue in these appeals. Money-lending cannot be said to have constituted even a part of this appellant’s ordinary business as it could be seen in Highfield Corporation Limited v MNR, [1982] CTC 2812; 82 DTC 1835. For this appellant to support such a claim, it would be implicit that any lending of money at all for any taxpayer constituted a business and while it has been noted in Highfield (supra) that no precise numerical formula for establishing such a claim is clear in the jurisprudence, I am not prepared to agree that the minimum level of money-lending activity (whatever that may be) has been met in these appeals.

Counsel for the appellant relied substantially upon The Queen v E V Keith Enterprises Ltd, [1976] CTC 21; 76 DTC 6018, but in my view the critical phrase therein is to be found at 24 and 6020 respectively:

The Defendant had established over the years a pattern of both loaning money and carrying deferred balances to accommodate persons and companies doing business with the operating entities through which its construction and other activities were carried on.

I do not agree that this appellant established any such pattern, and that case law does not assist him.

It might well be argued (and it was proposed by the respondent) that even if the appellant had established a pattern of a personal money-lending “business”, this “business” had been discontinued as such in 1973 (two years before the advance of the $180,000) by incorporation of Hurstgreen Investments Limited for ostensibly that purpose — to consolidate the appellant’s financial affairs (and outstanding loans) and to manage his professional office. Hurstgreen was not used as the vehicle for providing Ship’s School with the $180,000, although it was contended that Hurstgreen could not do so since it did not have a credit base of its own. Hurstgreen had loaned funds to Ship’s School and some of the related corporations, but the testimony showed that the funds loaned by Hurstgreen were in turn loaned to Hurstgreen by the appellant. The loaning of these funds to and from Hurstgreen at the very best forms a tenuous basis for contending that even Hurstgreen was ever in the business of lending of money. As I see it, that perspective is of no aid to this appellant. Also it might well be questioned whether the amount of $180,000 at issue was a bona fide loan for income tax purposes, irrespective of the documentation filed allegedly to support that contention.

While the notices of appeal indicated a certain reliance on a second contention — that the appellant was in the business conducted by Ship’s School

— counsel did not assert this perspective at the hearing. In my view it would not have been productive to have done so. The circumstances cannot be equated to those described in MNR v Henry J Freud, [1968] CTC 438; 68 DTC 5279, wherein the funds loaned to the US corporation were for the •purpose — one last effort — to make the company profitable by producing the prototype car. In the instant case, Ship’s School was insolvent, if not already bankrupt, and the prospect of recovery of the $180,000 funds advanced was nil. At the hearing the appellant attempted to portray a rather rosy picture for Ship’s School at the time of the $180,000 advanced, but as noted above I am not convinced that it could even be called an investment. I would tend to accept the statement in the notice of appeal dealing with the 1975 and 1976 years as follows:

Ships School had arranged for approximately 3,000 students to travel to Europe for the so-called Easter break in 1975. In that year the business suffered severe cash flow difficulties rendering it unable to complete its commitments to the student tours. This in the Appellant’s view was completely unthinkable as he considered that his own business reputation was at stake, and that in the absence of any other, it was his sole responsibility to ensure that the students with whom Ships School had contracted could complete their tour and be returned safely to Canada on the date stipulated.

Whether out of the goodness of his heart (and I believe the appellant would have been loath to see the students stranded); out of an attempt to protect his professional reputation from indirect damage; or to avoid potentially more costly law suits; or for any other reason, Dr Anderson did advance the money. No acceptable basis was put forward at the hearing for deducting the advance from other income which would bring it within the parameters of the relevant sections of the Act.

The appeals are dismissed.

Appeal dismissed.