Levi Dress Shoppes Inc v. Minister of National Revenue, [1977] CTC 2325

Roland St-Onge (orally: February 25, 1977):—The appeals of Levi Dress Shoppes Inc came before me on February 22, 1977 at the City of Montreal, Quebec, and the question at issue is whether the loss of some $15,000 can be deducted in the appellant’s 1971 and 1972 taxation years.

In his reply to the notice of appeal, the respondent admits the first three of appellant’s allegations and I quote:

In 1959 a group of individuals purchased a large tract of land in Chornedey, Quebec. Eldridge Development Corporation was formed, and Levi Dress Shoppes Inc was allotted shares of the company.

From 1959 until 1972, the land was left vacant and the company did not attempt in any way to develop the property.

In 1971 and 1972, Levi Dress Shoppes concluded that the investment of $15,546 in “Eldridge” was uncollectible, as the property in question was forfeited for taxes—(and is now defunct).

In his reply, the respondent alleged the following, and I quote:

6. In assessing the Appellant for the 1971-1972 years, the Minister of National Revenue relies, inter alia, on the following assumptions of facts:

(a) The Appellant held 10% of the allotted shares of Eldridge Development Corporation . . . ;

(b) In 1959, Eldridge purchased land in Chomedey, Quebec;

(c) It held the land for twelve years;

(d) In 1971, the land, Eldridge’s only asset, was forfeited for municipal taxes;

(e) The Appellant claimed to deduct $7,800 in 1971 and $7,746 in 1972 as a business loss.

At the hearing two witnesses were heard: Mr Wm Malus, president of Eldridge Development Corporation, and Mr Norman Levi, shareholder and director of the appellant company. Mr Malus explained that the company Eldridge Development Corporation was incorporated for the purpose of holding land, that his own company had surplus money to invest and that, at that time, it seemed better to invest in land than to buy securities.

Upon cross-examination, he also stated that the farm was purchased from Mr Clovis Valiquette who continued to carry on farming operations but did not pay any rent; that some of the shareholders of Eldridge Development Corporation stopped sending money to pay their share of the property taxes; that, after the second year, the shareholders realized that they did not have a bonanza and decided that each shareholder would try to sell the land but none was successful.

Mr Levi, who was in the business of selling dresses, as other shareholders of Eldridge Development Corporation, testified that the said company was incorporated to buy land and to dispose of it in due course for a quick profit; that later the shareholders realized the land boom was over and that they were unable to recoup the money they had invested.

Upon cross-examination, he stated that the shareholders did not care where the land was situated and that they were ready to invest in land as they would in any other kind of investment, such as buying stock, bonds or securities.

He also stated that the appellant company invested $7,500 in 1959 and the balance of money was loaned to the company in order to pay the property taxes.

It was argued on behalf of the appellant company that the Board should pierce the corporate veil in order to discover the shareholders’ intentions and that the nature of the transaction was an adventure in the nature of trade.

Counsel for respondent argued that 13 individuals, most of them being in the garment industry, decided to incorporate a company for the purpose of investing in land but not one of them really wanted to be involved in such a venture. The said company was incorporated and became the owner of the land. The shareholders of Eldridge Development Corporation did benefit from the legal entity and since the project did not turn out the way they wanted, they should bear the consequences.

Referring to the jurisprudence, counsel for respondent also said that the Eldridge Development Corporation did not serve as a vehicle for an adventure in the nature of trade because there were 13 shareholders who were not interested in dealing in land, but only in making an investment in a company that became the owner of the land.

According to the evidence adduced, it is more probable that Eldridge Development Corporation was incorporated to hold land than to dispose of it as a trader in land. The said company held the land for some 13 years and did not sell it at a substantial profit. On the contrary, the company lost money and, because it did not have any other income, it could not claim any trading loss. The appellant company, that is one of the 13 shareholders of Eldridge Development Corporation, wants to claim as a trading loss the money it invested in the said company.

According to the evidence, there is no doubt that the money the appellant company put in Eldridge Development Corporation was an investment. The appellant company was in the business of selling dresses and there is no evidence to show that it was in any other kind of business. Consequently, the money the appellant company lost by buying shares in and lending money to Eldridge Development Corporation can in no way whatsoever be considered a trading loss because these disbursements had nothing to do with the appellant company’s business.

For these reasons, the appeals are dismissed.

Appeal dismissed.