Her Majesty the Queen v. Pollock Sokoloff Holdings Corp, [1974] CTC 391, 74 DTC 6321

Walsh, J:—This is an appeal by plaintiff from a decision of the Tax Review Board dated June 6, 1973 maintaining. defendant’s appeal of the assessment for its 1968 taxation year and referring same. back to the Minister of National Revenue for reassessment. The Minister had disallowed a deduction of an amount of $30,000 claimed as a bad debt by defendant in that year, on the basis that it was not owing to the defendant, that it had not become bad in 1968, that rt had not been included in computing the income of defendant for 1968 or any previous year, that part of defendant’s ordinary business was not the lending of money, nor was the defendant during its 1968 taxation year in the business of trading in receivables. Plaintiff therefore claims that it should have been treated as a capital loss within the meaning of paragraph 12(1)(b) of the Income Tax Act, RSC 1952, c 148, as amended.

Proof revealed that Mysam Holdings Corporation, of which defendant is a subsidiary, made loans in the amounts of $10,000, $30,000, and $10,000 in 1962, 1963 and 1965 respectively to a Mr F L Crystal, which loans bore interest at 12% and were secured by the pledge of Mr Crystal’s shares in three real estate companies, namely Fanpal Realties Inc, Riva Realty Inc, and Delco Realty Inc, with respect to the first two loans, the third loan being allegedly evidenced merely by a promissory note which was not, however, produced. It is of interest to note, however, that the amount loaned was advanced to Mr Crystal by a cheque, not of Mysam Holdings Corporation the alleged lender, but of the defendant Pollock Sokoloff Holdings Corp dated January 27, 1965. The explanation given by witnesses in testimony was that no formal loan agreement was drawn up in connection with the last loan because Mr Crystal had no further assets to pledge and it was felt, in any event, that the substantial assets of the real estate companies in which he had already pledged his shares as security for the first two loans was sufficient guarantee for the third loan also. Testimony was also given to the effect that although the first $10,000 loaned was repayable on July 26, 1962, six months after it was made, the second loan of $30,000 was repayable on July 25, 1965, two years after it was made and no date was specified for the repayment of the third $10,000 loaned on January 27, 1965, the delays for payment of all these loans were extended verbally by the lenders since they felt that the security was satisfactory and, in fact, interest on ail three loans was duly paid up to ‘and including instalments due in August 1966. Although the shares pledged by Mr Crystal did not represent all the shares of the three companies in question, they represent a substantial proportion consisting of one-quarter of the shares of Riva Realty Inc, one-quarter of the shares of Delco Realty Inc, and one-sixth of the shares of the Fanpal Realties Inc. Mr Crystal testified that in 1962-63 his. aggregate investment in the three companies in question was about $60,000 and that he considered that his interest in the land held by these companies was worth about $200,000.

Mr Samuel Sokoloft, who was Vice-President and Secretary-Treasurer of defendant and President and Director of Mysam Holdings Corporation, testified that these companies are wholly-owned by two families. They invest in common shares, bonds, make loans on real estate and also own real estate including undeveloped land. The balance sheet of defendant as of December 31, 1968 shows assets of $15,288.383 which included, inter alia, short term deposits of $6,000,000, marketable securities at cost of $1,021,559, advances to Mysam Holdings Corporation, the parent company, of $2,252,688 shares in Fleetwood Corporation of $1,122,450, mortgages and notés receivable in the amount of $116,211; which included the $20,000 not yet written off at that date of the loans to Crystal, and real estate in the amount of $4,253,602. For the year 1967, mortgages and notes receivable appear in the amount of $185,816 this being before the $30,000, which is the subject of the present appeal, was written off as a bad debt.

In addition to the loans to Crystal, the company had a $20,000 loan to S Jacobson outstanding from 1964 to 1968 which was allegedly guaranteed by a pledge of shares in a land company in which Mr Jacobson had a one-third interest, $20,000 starting in 1964 and reduced to $3,514 by 1968 loaned to Messrs C Redler and P Waid, guaranteed by a personal note, $75,000 loaned to M Feinstein Inc allegedly guaranteed by its interests in certain land which loan was fully repaid by 1967, and a further loan of $70,526 to M Feinstein Inc made in 1965 which was still outstanding at the end of 1968; there was also a loan to one Harry Feifer, of $50,000 made in 1965 and reduced to $2,141 by the end of 1968, allegedly guaranteed by his assigning his interests in real estate as a collateral hypothec, a loan of $100,000 in 1964 to Real Estate Investors Corporation on the security of a note which was apparently fully paid by 1965 as was a loan in the amount of $7,500 to Mrs B Feinstein guaranteed by hypothec on a country property. Finally, there was a loan to J T Stone Cabinet Manufacturing Company Limited in the amount of $82,500 outstanding in 1964 and fully paid by 1967. The total loans outstanding at the end of 1964 totalled $305,000 and, as previously indicated, by the end of 1968 these had been reduced to $116,181 after the writing-off as a bad debt of $30,000 of the loan to Mr Crystal. Mr Sokoloff testified that this was the only loan which the company had ever written off as a bad debt. These loans all bore interest from 8% to 10%, a good rate at the time. He testified that the company purchases buildings and frequently deals with real estate agents who submit various propositions to him and know that his company has money to lend but that he always requires good security and visits and examines the land which is being given in security whether directly or by the assignment of shares in companies owning the land, and that he did this in the case of the loans to Mr Crystal.

As for Mysam Holdings Corporation, it was apparently originally formed primarily as a holding company and its balance sheet as of December 31, 1966 indicates assets consisting mainly of loans receivable $50,000 (the loans to Crystal), shares in Pollock Sokoloff Holdings Corp, valued at $6,505,000 and advances of $174,873. By December 31, 1967 the loan receivable of $50,000 had disappeared from its balance sheet as had the advances of $174,873 to Pollock Sokoloff Holdings Corp, but it then held marketable securities at cost value of $954,081 and an income debenture in Canadian Power and Paper Securities Limited of a value of $1,000,000.

It is quite clear from the evidence given by Mr Sokoloff that he had no understanding of any distinctions to be made resulting from the separate corporate personality of Pollock Sokoloff Holdings Corp and Mysam Holdings Corporation (hereinafter referred to as “Pollock Sokoloff” and “Mysam” respectively) and used the companies more or less interchangeably according to the advice of his auditors and attorneys with a view to minimizing, as is legally permissible, the liability of the two companies for Quebec taxes on paid up capital and Quebec corporation tax. The companies were so interchangeable in his mind that he found nothing unusual, for example, in Pollock Sokoloff issuing the $10,000 cheque to Mr Crystal in connection with the third loan although same had been made by Mysam. Similarly, an account from the companies’ solicitor rendered to Mysam for legal services in connection with the eventual bankruptcy of Mr Crystal in 1969 was paid by Pollock Sokoloff as Mr Lipper, one of their attorneys, testified. Nevertheless, the accounting records of the two corporations which were produced in evidence reflect the various intercompany transactions, and Mr Louis Burstein, CA, the auditor for both companies, testified and explained these records in his evidence. It was he who gave the explanation as to why the loans to Crystal were made by Mysam and not by Pollock Sokoloff. By virtue of Mysam entering into the investment business by making this loan it could deduct its principal investment in shares of Pollock Sokoloff for purposes of payment of the Quebec tax on corporate capital, and he believes that he advised Mr Sokoloff that for this reason the loan should be made by Mysam. Subsequently, due to changes in Quebec taxing statutes, details of which it is not necessary to go into here, it became necessary, if Mysam was to be considered as a pure investment company, that its investments should not include its loan to Crystal which would have disqualified it from being so considered. This was also explained by him to Mr Sokoloff and accordingly at the start of 1967 this loan was transferred from Mysam to Pollock Sokoloff and, conversely, all Canadian corporation bonds held by Pollock Sokoloff were transferred to Mysam. The bonds were transferred at their market value and the loan at its face value and no money changed hands, the transactions merely being reflected by entries in the inter-company accounts. Copies of minutes of directors’ meetings of both companies were produced dated January 2, 1967, the first business day of the year, reflecting the sale and transfer of Mysam to Pollock Sokoloff of its interest in the loans receivable in the sum of $50,000 from Mr Samuel Crystal, the consideration being payment to Mysam of the said $50,000 by Pollock Sokoloff. As at that date there was no outstanding overdue interest on the loan and Mr Burstein testified that no reserve was set up as both he and Mr Sokoloff felt that the capital of the loan was fully recoverable. Mr Crystal confirmed that he was informed verbally of this transfer in due course and had no objection to it. When an interest payment became due in January 1967 he was unable to make this at the time but in his occupation as a real estate agent he had several pending deals of substantial size which he anticipated would yield him considerable income which, unfortunately, fell through. He and his brother who was in business with him had advanced considerable sums to Fanpal, Riva and Delco, their land holding companies, in 1964, 1965 and 1966. Although the property owned was vacant land the north shore autoroute had gone through it and part of the property has been expropriated for this purpose and he was optimistic that this would attract developers. However, there was a severe recession in real estate sales in Quebec following Expo 67 and despite all efforts they were unable to make sales and went further and further into debt. The capital repayment of his loans from Mysam had been overdue for some time but he had spoken to Mr Sokoloff about this and the latter has always been willing to extend them as long as the interest was paid, which he was able to do until the August 1966 payment. By June 1969 his finances had reached such a low ebb that his telephone was disconnected and he finally made an assignment in bankruptcy on August 29, 1969 and his brother, who had also guaranteed the loans, made a similar assignment a week later.

Mr Sokoloff then instructed his attorneys to bring proceedings to execute on the shares of Fanpal Realties Inc, Riva Realty inc, and Delco Realty Inc given as security for the loans but he neglected to tell them that the loans had been transferred from Mysam to Pollock Sokoloff. The attorney, Mr Lipper, acting merely on incomplete information in his files which included the two loan agreements from Mysam to Crystal totalling $40,000, Issued a petition in bankruptcy in Mysam’s name to have the pledged shares sold by public auction on the basis of the first two loans for which they had been given as security and by judgment dated November 20, 1969 this was duly authorized. They were seized on December 30, 1969 and brought to sale on February 9, 1970 and purchased for $1 by Mysam in each case. As the realty companies are still in existence the shares may eventually have sufficient value for Mysam to recover the amount of the losses but this is not an issue here. It is also hardly necessary to point out that the $1 price does not indicate that the shares had no value at the date of the sale, but merely that any other interested purchaser would be aware that Mysam would bid them up to a sufficient price to cover its loan, arrears of interest, and costs of the sale, and was not prepared to pay this price for them.

Although Mr Sokoloff signed the affidavit accompanying the petition to have the pledged shares sold, I am satisfied that he had no appreciation whatsoever of the significance of the fact that the petition was being made by Mysam although the loans had already been transferred by it to Pollock Sokoloff, and he apparently merely signed the document that was put before him.

It is clear that Pollock Sokoloff certainly considered itself to be, and acted as, the creditor of the loans due by Mr Crystal following the transfer of same by Mysam to it on January 2, 1967. In a schedule annexed to Pollock Sokoloff’s financial statement for the year ended December 31, 1968 appears a memorandum showing interest due by Crystal, 1966—$2,083; 1967—$5,000; 1968—$5,000; old interest— $124.98; total—$12,207.98. There is also an indication that $7,207.98 of these arrears had accrued as of December 31, 1967 and that this amount was being written off against 1968 interest earned. It was explained in evidence by Mr Burstein that the sum of $2,083 repre- sented interest accrued from the date of the August 1966 interest payment to December 31, 1966. Thereafter interest would be an even $5,000 per annum at 10% [1] *. The amount of $7,207.98 written off in 1968 had been set up as an asset and income tax paid on same in 1967 as it was not until 1968 that it was considered to be a bad debt. This does not appear to be an unreasonable or improper accounting practice as it was by no means clear during 1967 that the debt could not be collected and had a reserve been set up for the interest or capital of it as a bad debt during that year this might well have been disallowed. A working paper annexed to the financial statements of Pollock Sokoloff for December 31, 1969 shows under the heading of “Other Investments”, 17 Z> common shares Delco Realty Inc;t [2] 25 common shares of Riva Realty Inc, and 15 common shares of Fanpal Realties Inc, each at a value of $1.

Furthermore, in another schedule to the financial statements of Pollock Sokoloff as of December 31, 1969 we find, in addition to the shares in the said three companies entered at a price of $1 each, that advances were made to Riva Realty Inc of $248, to Delco Realty Inc of $248 and to Fanpal Realties Inc of $1 which, together with the three $1 payments for the shares, makes a total of $500 paid to H Blauer in trust, with the notation “to record acquisition of the above assets at bailiff’s sales through H Blauer”. A cheque of Pollock Sokoloff was issued io Mr Blauer in this amount on October 9, 1969 and evidence relating to this explained that there were certain tax obligations of these companies and that a portion of them proportional to the share holdings had to be advanced. While it seems extraordinary that this advance should have been made in October and the transactions recorded in the financial statements of the company as of December 31, 1969 when title to the shares was only acquired at the bailiff’s sale on February 9, 1970, (and then it was Mysam who bought the shares) there is certainly nothing, despite these apparent irregularities, to indicate that Pollock Sokoloff did not at all times following the acquisition of these loans from Mysam on January 2,1967 treat them in its accounts as being loans owing to it and deal with them accordingly. I cannot see how the erroneous proceedings taken to execute on the security by Mysam in 1969 when they should have been brought by Pollock Sokoloff, nor the fact that it was Mysam and not Pollock Sokoloff that bought the shares at the bailiff’s sale can in any way affect the validity of the transfer of the loans from Mysam to Pollock Sokoloff in 1967. At the time of the Crystal bankruptcy the loan itself was Clearly due not to Mysam but to Pollock Sokoloff and was wiped out by the bankruptcy. Whether or not the shares of the realty companies pledged to secure it were irregularly brought to sale by Mysam and therefore irregularly bought by it and whether Pollock Sokoloff is legally entitled to set itself up as owner of same in its 1969 financial statements might only be a matter of concern to plaintiff when and if these shares acquire some value in the future, but in no way concerns the writing off of part of the loans as a bad debt in the 1968 tax return of defendant, which is in issue here.

Plaintiff invokes articles 1570 and 1571 of the Quebec Civil Code which read as follows:

1570. The sale of debts and rights of action against third persons, is perfected between the seller and buyer by the completion of the title, if authentic, or the delivery of it, if under private signature.

1571. The buyer has no possession available against third persons until signification of the act of sale has been made, and a copy of it delivered to the debtor. He may, however, be put in possession by the acceptance of the transfer by the debtor, subject to the special provisions contained in article 2127.

and states that there was no valid transfer of the loans from Mysam to Pollock Sokoloff so as to affect plaintiff, who claims to be a third person within the meaning of these articles. This is an attempt to distort the meaning of these articles and apply them to a situation for which they were never intended. While there was no actual deed of sale between Mysam and Pollock Sokoloff, there were resolutions of both companies approving same and while, in the absence of a formal deed of sale there was of course no copy of it delivered to the debtor, Mr Crystal, he was informed of the transfer verbally and accepted same, which he admits. It was of no concern to him whether future payments be made to Pollock Sokoloff or Mysam. These articles deal with rights to possession of debts sold and affect the claims of the parties themselves including third persons directly affected by the sale but surely the Minister of National Revenue has no right to intervene and seek to set aside such a sale for want of formality when all the parties directly affected admit that it took place and that the debtor was aware of and accepted it, merely because it might be more advantageous from the taxation point of view for the Department of National Revenue if such a sale had not taken place. There is no suggestion whatsoever in the pleadings or argument in the present case that the sale was a fraudulent one or made with a view to avoiding federal income tax. The motivation for the sale has been given an acceptable explanation and the taxation that was reduced as a result thereof was provincial taxation and no concern of plaintiff.

Plaintiff contended that these loans were not made in the ordinary course of business of defendant and that its normal business is not money lending and through a witness, Henri Vernneau, an accountant with the Minister of National Revenue, analyzed defendant’s balance sheet as of December 31, 1968 which showed only $116,211 of mortgages and notes receivable out of total assets of some $15,288.000, a ratio of .8%. Defendant for its part argued that its short term deposits in the bank are a form of loan to the bank and that its investments in bonds are equivalent to loans to the governments and companies whose bonds it held, and furthermore that, while its loans to real estate developers and others, details of which have been outlined above, were not perhaps very extensive in connection with its total activities in the real estate field, nevertheless, part of its ordinary business was the lending of money within the meaning of paragraphs 11(1)(e) and 11(1)(f) of the Act, the relevant portions of which read as follows:

11. (1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the Income of a taxpayer for a taxation year:

(e) a reasonable amount as a reserve for

(i) doubtful debts that have been included in computing the Income of the taxpayer for that year or a previous year, and

(ii) doubtful debts arising from loans made in the ordinary course of business by a taxpayer part of whose ordinary business was the lending of money;

(f) the aggregate of debts owing to the taxpayer

(i) that are established by him to have become bad debts in the year,

and

(ii) that have (except in the case of debts arising from loans made in the ordinary course of business by a taxpayer part of whose ordinary business was the lending of money) been included in computing his income for that year or a previous year;

It is not necessary that the number of loans made by a company or the amount of them be great in proportion to its total business activities for it to be possible to say that part of its business is the lending of money; no proportion is established under the Act and plaintiff’s argument based on the relatively small proportion of defendant’s assets devoted to straight loans (not including term bank deposits and bond investments) cannot be accepted.

Considerable jurisprudence was referred to by plaintiff but most of it deals with somewhat different situations or is not directly in point. Cases dealing with whether or not a litigant is a money lender within the meaning of the British Money Lenders Act, 63 864 Vict, c 51, c 6, such as Litchfield v Dreyfus, [1906] 1 KB 584, and Newton v Pyke (1908) TLR 127, are of little relevance since the question here is not whether defendant was in the money lending business and had to be licensed as such, but merely whether part of its business was the making of loans. The case of George A Orban v MNR, 10 Tax ABC 178; 54 DTC 148, a Tax Appeal Board case, discussed these judgments and held that in order for a man to be a money lender there must be a certain degree of system and continuity in his transactions. In that case the appellant had only made three loans, and it was found that since the fact that he had some money available was known to only a few individuals with whom he was acquainted and that he never advertised himself or was listed anywhere as a money lender, therefore his loss on two of these loans was a capital loss. In a later case of Valutrend Management Services Limited v MNR, [1972] CTC 2170; 72 DTC 1147, the same Board member (R S W Fordham, QC)’ distinguished the decision stating, at page 2173 [p 1149]:

While the appellant could not profess to be a money-lender within the restricted meaning of Orban v MNR (supra), it was nevertheless a lender of money but to a much larger degree in that it dealt in the thousands and made only what may be designated as commercial loans. Hence, I am of the opinion that such loans as are involved in this matter were made in the ordinary course of appellant’s business and, where they have not proved satisfactory and collectable, are qualified to be classified as doubtful debts and made the subject of a reasonable reserve accordingly.

Two other cases to which I was referred were decided on the basis of paragraph 139(1)(e) of the Act and did not deal with paragraph 11(1)(e) or 11(1)(f), the question being whether loans made by an individual in the circumstances in which he made them constituted an adventure in the nature of trade, or whether they were investments. In the first of these, J Harold Wood v MNR, [1969] CTC 57; 69 DTC 5073, a lawyer whose firm had a substantial mortgage practice personally acquired 13 mortgages over a period of eight years. In one of these the appellant benefited to the extent of $700 by discount, which was held by the Supreme Court to be a capital gain as the pattern of his mortgage activities was consistent with the making of personal investments and not with the carrying on of a business. Plaintiff cited it mainly because of the statement of Abbott, J in rendering judgment at page 60 [5075] to the effect that:

Appellant’s purchases were not speculative and, according to his evidence, they were made after he had inspected each property and reached a decision that each mortgage was a safe investment for him.

There was no question of part of appellant’s ordinary business being the making of loans in that case, unlike the present case where I have decided that this was part of the ordinary business of Pollock Sokoloff and the fact that Mr Sokoloff carefully investigated the properties of the realty companies whose shares were being given as security for the present loans and that this was his invariable practice, as he testified, in connection with all the loans made, and that he did not consider them to be speculative indicates merely that he was a prudent businessman and does not have the effect of converting loans made as part of the ordinary business of his company into investment transactions. The same comment applies to the case of MNR v William Hedley Maclnnes, [1962] CTC 350; 62 DTC 1208, in which Thurlow, J held that although over a ten year period the taxpayer had purchased some 309 mortgages at a discount, which mortgages were offered to him by real estate agents without any solicitation on his part, and held them until they were paid off either at or before maturity, the discounts were nevertheless capital gains resulting from enhancement of value on the realization of investments. This judgment was reversed in the Supreme Court, [1963] SCR 299; [1963] CTC 311; 63 DTC 1203, which found that the taxpayer was engaged in a highly speculative business of purchasing mortgages at a discount and holding them to maturity in order to realize the maximum amount of profit out of the transaction. It is of some significance in the present case that the loans bore interest rates substantially in excess of the going rate at the time, which is some indication of the speculative nature of the loans, despite the fact that no discount was involved.

The most serious problem in the present case arises from the fact that the loans were not originally made by defendant but rather by Mysam and then transferred to defendant at their full book value in 1967. Plaintiff contends that it cannot be said that part of the ordinary business of Mysam was the lending of money since these three loans were the only loans which it made. This may well be the case, but it is not Mysam’s taxation which is before the Court nor was it Mysam which wrote off $30,000 of the loans as a bad. debt in 1968. Since I have found that part of defendant Pollock Sokoloff’s ordinary business was the lending of money and that this particular loan. became a bad debt in 1968 when part of it was written off, which was amply confirmed by the bankruptcy of the indebtor in 1969, there would have been no problem at all had the loan in question originally been made by Pollock Sokoloff. itself. Since the wording of paragraph 11(1)(f) however refers to “debts arising from loans made in the ordinary course of business by a taxpayer” the question arises as to whether loans which were not actually made by the taxpayer himself but acquired by transfer from another taxpayer can be written off by the transferee. In a decision in the Tax Appeal Board case of Sun Securities Limited v MNR, 37 Tax ABC 106; 64 DTC 821, the appellant company sought to set up a reserve under paragraph 11(1)(e) for a bad debt acquired by it by transfer from one of its minority shareholders who had made the loans and it was held that this could not be done because of the wording of paragraph 11(1)(e) of the Act. The decision stated at page 108 [822]:

From a reading of this section, there appears to be no doubt that the reserve must be set up by the person who made the loans. In the present appeal, the facts do not show this course of conduct. The loans were made by Lawrence E Swinburne whereas the reserve was set up by Sun Securities Limited. Furthermore, the loans under consideration were not made by the appellant in the ordinary course of its business as a moneylender. On the contrary, they were made by one Lawrence E Swinburne personally without taking the precautionary measures usually expected of a man in the business of lending money.

While this case dealt with the setting up of a reserve for a doubtful debt under paragraph 11 (1)(e), and not the writing off of a bad debt by virtue of paragraph 11 (1)(f), the words “loans made in the ordinary. course of business by a taxpayer” appear in both sections and if this judgment were to be followed then plaintiff would succeed in the appeal. I believe that we have to look at the circumstances in which the loans were made :in the present case, however. The loans were agreed to after investigation by Mr Sokoloff, who habitually acted for both Mysam and Pollock Sokoloff. They were made in the name of Mysam rather than Pollock Sokoloff for reasons arising from Quebec taxation statutes. The actual cheque to Mr Crystal representing the proceeds of the third loan of $10,000 was a cheque of Pollock Sokoloff*. [3] To say that a company, part of whose ordinary business is the lending of money, cannot also acquire by transfer made by another company, or that if it does so a distinction must be made between bad debts arising out of loans made by it itself which can be written off and loans acquired by it by transfer, which it acquired at their full face value, and that the latter loans cannot be written off even if they become bad debts, would appear to me to be an unreasonable distinction and one which would interfere greatly with normal business operations of companies whose business or part of whose business is the lending of money. Surely it cannot have been intended that loans acquired at a time when they are not in arrears and appear to be well secured and for which the full face value has been paid can never be written off by the transferee as bad debts under paragraph 11(1)(f), nor that a reserve cannot, subsequent to the acquisition, be set up for them as a doubtful debt under paragraph 11(1)(e). Moreover, the interest on these loans was set up in the books of Pollock Sokoloff in 1967 although it was not collected and tax was paid on same, no reserve being allowed for it as a doubtful debt, and it was not until 1968 that this was reversed and this uncollectable interest was written off against 1968 interest earned.

One other case to which I was not referred, namely that of Western Wood Products Limited v MNR, [1963] CTC 99; 63 DTC 1053, might at first sight appear to help the plaintiff’s case but on closer reading it is evident that it was decided on another point. In this case the taxpayer set up a reserve for a bad debt which was acquired by it from a subsidiary corporation which had financed a third company also controlled by the taxpayer on the understanding that any resultant losses would be borne by the taxpayer itself. It was held that in the absence of documentary evidence, the taxpayer could not be regarded as a creditor of the borrowing company whose indebtedness to the lender arose from a transaction foreign to the taxpayer, and that the taxpayer was therefore excluded from the scope of the permissive exception in subparagraph 11 (1)(e)(i) of the Act. A reading of the judgment discloses, however, that it was based on subsection 137(1) of the Act as an attempt to “unduly or artificially reduce” the income of the appellant. The judgment also refers at page 107 [1057] to “the absence of assignments or guarantees”. There is no suggestion whatsoever in the present case, as already stated, that any fraud was involved or that the transfer was made with a view to attempting to unduly or artificially reduce the income of defendant, Pollock Sokoloff.

I therefore find that the amount of $30,000 was properly written off as a bad debt of defendant in 1968 and dismiss plaintiff’s appeal against the decision of the Tax Review Board, with costs, and refer the 1968 income tax assessment of defendant back to the Minister for reassessment in accordance with this judgment.