United News (Wholesalers) LTD v. Minister of National Revenue, [1983] CTC 2596, 83 DTC 539

Goetz, TCJ:—This appeal was heard by r in Calgary, Alberta, on September 21, 1982 in my capacity as a Member of the Tax Review Board but this judgment is being rende d in my present capacity as a judge of the Tax Court of Canada. This appeal relates to the 1977 taxation year.

Issue

The simple issue in this appeal is whether an investment made by the appellant with B/C Concerts Ltd was on account of capital or on account of income

Facts

Lawrence C Shapiro, President of the appellant, gave evidence that the appellant’s business was that of distribution of books and paper supplies which was a business started by his father in which he was active since he was a youngster. The appellant’s business was quite successful and had a good cash flow. As a result, either the appellant or Shapiro (on obtaining loans from the appellant) made numberous investments in a multitude of businesses and of varied nature from entertainmen to land development and financial investment companies. Shapiro owns 51% interest in two apartment buildings in Red Deer, Alberta, and the appellant owns 80% interest in an apratment building in Saskatoon, Saskatchewan, which building is composed of 350 rental units. Some of the businesses were acquired, operated at a profit, and eventually sold at a profit. Some, on the other hand, failed. The appellant still holds interests in other companies which are, apparently operating with success. Mr Shapiro obviously was the driving force behind the appellant and, as he indicated, he entered into many deals for the purposes of investment and if the investment was of a large nature, usually it was the appellant who would advance the investment funds.

In February 1977, Mr Shapiro’s friend, Jerry Libin, who was an impresario, sought him out with a view to his promoting a “Toller Cranston and The Ice Show” across Canada. The appellant was to put up $210,000 (Canadian) to allow the show to open on Broadway. An agreement was drawn up some time in May 1977 between the appellant and B/C Concerts Ltd wherein the appellant was described as the “Investor” and the other party as the “Producer”. In the Recitals of the agreement, paragraph (C) reads as follows:

C. The investor desires to advance to the Producer the sum of Two Hundred Thousand ($200,000) Dollars in consideration of receiving Five (5%) per cent of all net proceeds from the presentation in the Dominion of Canada aforesaid during the term hereof.

Paragraph 11 of this agreement entitled “Relationship of the Parties” reads as follows:

11. Relationship of the Parties.

Nothing contained in this Agreement shall be deemed to create or constitute a partnership between or joint venture by the parties to this Agreement. Neither party to this Agreement shall hold itself out contrary to the terms of this Paragraph 11 and neither party shall become liable for any representation, act or omission of the other party contrary to the provisions of this Paragraph 11.

A second agreement was entered into whereby the consideration for the advancement of funds to the producer of $210,000 which was originally 5% of the net proceeds from the presentations in Canada of the Toller Cranston and The Ice Show was changed to “net” to “gross” proceeds. This arose due to the fact that the show had a fair number of debts that had been incurred by the producer prior to the appellant advancing the $210,000. It was the hope of the appellant that it would get a return of $150,000 over and above the $210,000 advance or loan. In order to minimize the appellant’s risk in its investment, the following clauses were included in the agreement:

22. Guarantee

It is understood and agreed that the Producer will obtain a Personal Guarantee of Dennis L Bass in the sum of Two Hundred Fifty-two Thousand ($252,000.00) Dollars guaranteeing to the Investor repayment by the Producer of the Advance and of the Guaranteed Return.

23. Insurance

The Producer shall obtain life and disability insurance on Toller Cranston in the minimum amount of Four Hundred Sixty-Four Thousand ($464,000.00) Dollars naming the Investor and the Purchaser as co-insured.

24. Performance Bond

The producer shall obtain a Performance Bond guaranteeing the Performances in the Dominion of Canada during the term hereof, which said Performance Bond shall be in the amount of Four Hundred Sixty-Four Thousand ($464,000.00) dollars and shall name the Purchaser and Investor a beneficiaries.

One Dennis Bass, the owner of B/C Concerts Ltd wrote a lette dated August 26, 1977 in the following words:

The purpose of this letter is to confirm that the Agreement dated May 12, 1977 between B/C Concerts Ltd and United News Wholesalers Inc is intended to provide that United News Wholesalers compensation thereunder after the recoupment of their advance of $210,000.00 Canadian Dollars, they shall be paid the greater of $42,000.00, or 5% of gross receipts . . .

The funds were to be derived from the Toller Cranston Tour of Canada.

Dennis Bass was apparently, in the real estate business and according to Libin’s advice, dabbled in show productions. Libin also contributed funds for the venture, but the amount was not disclosed in evidence.

On April 24, 1977, Larry Shapiro wrote his solicitor, Mr Joseph Spier:

Dear Joe:

One of the primary reasons for us investing in the Ice Show was the fact that Jerry Libin had received a Triple A credit report for Dennis Bass. We now know that this report was erroneous.

The above letter was filed as Exhibit R-1. With respect to the Toller Cranston matter, Shapiro stated. “I was backing the show. It was really a personal thing on my part”. He had several meetings with Bass and Libin with respect to unpaid bills turning up before the first show and finally contacted his accountant, John Collins, after the show had closed. He admitted in cross- examination that he did not want his company to be involved in any way personally with the Cranston enterprise and stated that it was purely an investment. He indicated that he advanced the money in order to get “into the deal”. He could not differentiate between an advance and a loan. It was the company’s modus operandi to effect security for any loans through security of mortgages, promissory notes and guarantees and either Shapiro, in his personal capacity or as President of the company, in making any loans or investments, attempted to protect his investments in every way and as Shapiro stated: “I got all the security I could get”. He advised that he was convinced that Dennis Bass “was gold plated” and, apparently, he relied heavily on this. Shapiro, on behalf of the appellant, relied on professional advice, both legal and accounting.

John Collins, a chartered accountant since 1953, and a man of apparent wide experience in his profession, gave evidence on behalf of the appellant. He had only spoken to Shapiro on the tiephone and when he was informed that the appellant was putting up $210,000, he advised Shapiro to be careful. He admitted he had no tax discussions with Shapiro or the appellant’s lawyer. When he finally supervised the preparation of the financial statements of the apellant for the 1977 taxation year, which would be some time in 1978, he listed as an extraordinary item “Loss on realization of advance with respect to Toller Cranston Ice Show $210,000”. Filed as an Exhibit, was a portion of the Canadian Institute of Chartered Accountants Handbook which Collins described as the chartered accountants’ Bible. Among other points set forth in the said Handbook, are the following clauses:

Prior to 1969, there was a lack of consistency in practice in Canada with respect to the accounting treatment for extraordinary or special items of income or expense where such items were not expected to occur regularly or involved material amounts which might distort operating results for the period. In some cases such items were included in retained earnings whereas in comparable circumstances similar items were included in the income statement. The variation in practice often resulted in significantly different income figures which were said to present fairly the reults of operations for the period.

Extraordinary items should include only gains, losses and provisions for losses which, by their nature, are not typical of the normal business activities of the enterprise, are not expected to occur regularly over a period of years and are not considered as recurring factors in any evaluation of the ordinary operations of the enterprise.

The 1977 balance sheet of the appellant does not show the Toller Crnston investment. Mr Collins stated that he considered that it was a risky transaction on the part of the appellant; that it was a joint business venture with the producer and Libin; and that the profit or loss is only disclosed when the venture is concluded. He first became aware of the details of the Cranston transaction at the conclusion of his field audit in March 1978. It was his function to supervise the audit performed by others. He admitted in cross- examination that the appellant had engaged in a large number of ventures, some of which were losing propositions, but others were quite successful and in all ventures in which the appellant was involved, it took all the security it could obtain. Collins could not differentiate the present transction from many successful ventures in which the appellant had invested. At all times the appellant minimized the risk, as much as possible, in making investments. The triple “A” rating of Mr Bass seems to be a material factor in the appellant making the investment. Collins stated that he felt show business was a gray area, that more investigation of other parties involved was vital and that, on the telephone call referred to above, he advised Shapiro to get a sound legal agreement. When questioned with respect to advances, he more or less hedged in his answer as to whether one would necessarily want one’s money back in making an advance. On the other hand, he said, a person might obtain shares in lieu of return of money. He expected that with a loan, pure and simple, one would expect repayment. It was his view that it was an adventure in the nature of trade. That, of course, is for this court to decide.

Findings

I have gone into the facts in some detail in order to show the background of the appellant’s wide and diversified investment activity. Each case must be determined on its own facts.

Counsel for the appellant, in his very capable argument, cited the following cases in support of his position that the advance of $210,000 by the appellant was of a trading nature and not a capital investment:

MNR v James A Taylor, [1956] CTC 189; 56 DTC 1125;

West Coast Parts Co Ltd v MNR, [1964] CTC 519; 64 DTC 5316;

MNR v Henry J Freud, [1968] CTC 438; 68 DTC 5279;

Joseph Sedgwick v MNR (No 702 v MNR),[1962] CTC 400; 62 DTC 1253.

Counsel for the appellant relied heavily on the decision in Taylor (supra). Certain criteria were laid down in that case as to whether a particular transaction constituted an adventure in the nature of trade. On the facts of that case, I certainly concur with the decision. The other cases cited by counsel for the appellant, each on its own facts, determined that certain transactions were of a trading nature.

No single criterion can be set down to make the determination as to whether a certain transaction is of a trading or capital nature. The facts and circumstances surrounding a business transaction are the determinative factor.

The appellant’s business was that of distribution of books and paper supplies. It was not in the business of lending money per se. With an excellent cash flow it was able, over the years, to make substantial and variable investments, some risky and quite successful and others risky and not so successful. In all investments the appellant was able to obtain collateral security to protect itself.

When the appellant became interested in the Toller Cranston Ice Show, Shapiro sought legal advice and acted on it. The two agreements entered into in May 1977 described the appellant as (the “Investor”); the other party to the agreements was described as (the “Producer”). They precluded the relationship of a partnership or a joint venture, which fits in with Shapiro’s statement that the appellant did not wish to become involved. It provided for a personal guarantee of Dennie L Bass, the owner of B/C Concerts Ltd, for the advance by the appellant. This guarantee was in fact given by Bass in his letter of August 26, 1977, hereinbefore referred to. Further, the appellant placed great comfort in the fact that Bass had a triple “A” credit rating from the bank. (See Exhibit R-1). Though Shapiro expected the ice show to do well and give him a substantial return on his investment, he protected the appellant from any risk (in his mind) by obtaining as much security as possible and, on the face of it, it was therefore a sound investment and not speculative.

It was the appellant’s infusion of funds in the amount of $210,000 that provided the working capital to enable Sounds of The World Ltd, a company owned by Libin, to carry the Toller Cranston Ice Show in Canada. Sounds of The World Ltd was described in the agreements as (the “Purchaser”). Though, admittedly, the loan was for a short term in that the appellant was entitled to payments after each performance by Toller Cranston, such payments could be considered as a steady income from an investment comparable to interest payments. The appellant had no control whatsoever as to how its investment money was to be used.

The advance or loan by the appellant was similar to many other investments made by the appellant through the course of years. This venture, however, turned out to be a complete failure and the producer, B/C Concerts Ltd, went bankrupt, leaving the appellant with a complete loss of the capital provided by it. The appellant seeks to have this investment recognized as a Capital loss.

I am sure that had the ice show been a financial success, the appellant’s counsel would have argued, just as eloquently, that the advance was of a Capital nature.

On the whole of the evidence, I find that the advance or loan made by the appellant was of a capital investment nature. See James Frederick Scott v MNR, [1963] SCR 223; [1963] CTC 176; 63 DTC 1121.

I therefore dismiss the appeal.

Appeal dismissed.