Alec Eisen v. Minister of National Revenue, [1980] CTC 2527

M J Bonner:—This is an appeal from an assessment of income tax for the appellant’s 1976 taxation year. The appellant sought to deduct, in computing income, the sum of $47,483, being the loss sustained as a result of default in repayment of a loan of money to a couple named Margaret and Stephen French. The loan was originally in the amount of $70,000 and was secured by a second mortgage on the French home in Toronto.

On assessment the loss was treated as a capital loss. The respondent regarded the loan as a simple investment made by the appellant. He did not view it as a loan made in the course of a business. The appellant contended that the loan was made in the course of a business of lending money and the loss was deductible in the computation of income from that business. He contended as well that it was deductible by virtue of paragraph 20(1)(p) of the Income Tax Act.

The appellant started business in 1956. He incorporated a company, Albill Investments Limited (hereinafer called “Albill”). It carried on a construction business, bought, sold and developed land both alone and in association with others, invested in income producing real property and loaned money. Twenty-five percent of the issued shares of Albill were owned by each of the appellant, his wife, William Orlan and his wife.

The appellant’s money earning endeavours were not all conducted through Albill. In about 1965 he commenced to lend money for his own account. In most cases the loans were secured by a mortgage of real property. Many potential loans were brought to the appellant’s attention by his solicitors. The rest came from persons whom the appellant knew as the result of his activities in connection with Albill’s business.

When a mortgage was offered the appellant personally inspected the real property and made his own inquiries as to the relevant financial details. Although he said he inspected properties sometimes as often as once or twice a week the evidence as to the relatively small number of loans actually made indicates that either the inspections must have been less frequent than stated or that a large number of applications must have been rejected.

A list of loans made by the appellant during the period from 1964 to 1974 was introduced as Exhibit A-1. Ledger sheets pertaining to loans made after 1968 were introduced as Exhibit A-2. The appellant’s records prior to 1968 appear to have been incomplete. During the period from 1968 to 1974 the appellant made nine mortgage loans and one loan evidenced by a promissory note and secured by personal guarantees. One of the nine was the loan made to Mr and Mrs French.

The appellant never bought mortgages at a discount. In most cases he held them until maturity. He did not borrow money and reloan it. The appellant said that he loaned his “own money’, which I take to mean his savings.

The appellant’s counsel argued that the appellant engaged in the real estate development business in all its aspects. In that business it was said that he gained the expertise used in assessing the risk involved in a proposed loan. It was argued that in determining the nature of Mr Eisen’s business activities it is insufficient to look at the income which he received personally, but rather that consideration must be given to the variety of ventures undertaken for the account of Albill. All of those activities, it was said, were in the real estate development area. The lending activities were closely associated with real estate development in that when assessing the risk the appellant investigated each loan separately, inspected the property and used expertise which he gained as the operating head of Albill. It was suggested that corporations tend to be used interchangeably and that it is artificial to look at one pocket, namely the appellant’s, without regard to the other, Albill’s.

It seems to me that one cannot properly determine the question whether the appellant, in making loans, was carrying on a business by looking at the activities of Albill and asking the question whether, had the loan to Mr and Mrs French been made by Albill, it could be regarded as made in the course of carrying on the business of a money lender. The loan was made by the appellant from his own funds. There is no basis for regarding Albill as the alter ego or a mere puppet of the appellant.

If a person engages in an activity or venture closely associated with or of the same character as the ordinary business activities of a corporation which he directs, then that closeness may tend to indicate that the individual’s activity or venture is of the same nature as that of the corporation. In this case, however, I cannot see that the appellant’s money lending, whether viewed in isolation or, alternatively, viewed with the various business activities of Albill in mind, can be regarded as a business. On the evidence before me the activities of the appellant in lending money may, I think, be described more accurately as the making of a series of investments than as the carrying on of the business of a money lender. Put another way, I have concluded that the appellant simply, from time to time, invested his savings in mortgages.

Where an individual uses money which he has saved by lending it at interest he is, I think, prima facie, making an investment. The fact that he evaluates the risk inherent in a loan does not change the position. No prudent investor would fail to do so.

I note that the mortgage loans made by the appellant were never lower in priority than second. There was no indication that the loans were high risk or speculative in nature.

The utilization of knowledge gained in connection with ordinary income earning activities does not change the position. For example, a mortgage lending officer at a bank may well be regarded as making investments as opposed to carrying on a business in circumstances where he lends his own funds on the security of mortgages. Mere repetition does not necessarily change the character of the activity. Where savings are used repetition may well be simply a reflection of the amount of money available for investment and the size of the particular loan opportunities which arise. Even when the somewhat sketchy evidence regarding lending during the period from 1965 to 1968 is taken into account together with the appellant’s later lending the level of activity shown in evidence is not indicative of the existence of a money lending business.

For these reasons the appeal is dismissed.

Appeal dismissed.