R St-Onge (orally: April 11, 1975):
1 This appeal is from a reassessment dated October 25, 1973 in respect of the 1972 taxation year and came before me on April 9, 1975 in the City of Winnipeg, Manitoba. In this appeal the appellant is trying to obtain a “small business” deduction under subsection 125(1) of the Income Tax Act, SC 1970–71–72, c 63, and amendments thereto.
2 When the appellant company was incorporated on August 24, 1970 letterhead and business cards were printed indicating the company's office address and telephone number which, in effect, were the personal address and telephone number of the main shareholder, Mrs Faye Raber. There was also an indication that the company's business was “First and second mortgages, all types of financing”.
3 Heard as a witness, Mrs Faye Raber, who had worked as a legal secretary prior to being in the money-lending business, explained that she started lending money in 1959 with a capital of $10,000.
4 By the end of 1971 she had an equity of $95,315.06 which was credited to her in the company's financial statement. When the company took over, she became the sole beneficial owner of the company and for the 1971 taxation year the appellant company filed its first income tax return as a non-personal corporation. The appellant company's office is situated at the residence of Mrs Raber and contains a desk, some chairs, a typewriter and a filing cabinet. In 1971 and 1972 Mrs Raber was employed by her husband and was paid $10,000 and $15,000 for the respective years. She did not get any salary from her own company for the said years but received $5,600 from it as salary in 1973 and $12,000 in 1974.
5 She also owns a duplex that she acquired in 1959, but the said asset was not transferred to the company because she considered that this property was producing rental, and not business, income and therefore was a well-secured personal investment.
6 She explained that the company's business was the lending of money at high interest rates and for short periods of time. She was borrowing money and lending it at an interest rate that was higher by 3% to 5%. In 1971 she had a line of credit with the Imperial Bank of Commerce of $125,000, and of $240,000 in 1974. She has also borrowed from her family the following amounts, which appear on the company's December 31, 1972 financial statement:(1) from her husband, Leon Raber $65,000
(2) from her daughter, Frayda Raber (20 years old) 6,100
(3) from her son, Lionel Raber (17 years old) 4,500
7 The appellant company's activity in 1972, 1973 and 1974 reveals the following transactions:- (A) Money lent on mortgage:
- (B) In 1972 the appellant company renewed four loans on promissory notes, namely:
(1) Genevieve Holdings Ltd—$70,000 12.5%
(2) Jean Horban (amount of loan not specified) 12.5%
(3) Patricia Horban (amount of loan not specified) 10%
(4) L Miles—$27,887.42 12%
8 In 1972 she was the only employee of the company and received $15,000 from her husband's business and nothing from her own company, but in 1973 she received $5,600 from the appellant company, which also paid $900 to each of her two children for answering the telephone and for making some deposits at the bank.
9 Mrs Raber's work for the appellant company was to contact clients, prepare the deposits, meet with the lawyer and accountant, collect the accounts receivable and keep the books of account.
10 As to the collection of money, all the payments were made by postdated cheques and the company had some 16 clients in 1972, most of them being friends of the family.
11 One of the clients, Sabray Investment Ltd, was owned by a Mr Hirsch and a Mr Gindin who were also clients of the appellant company.
12 Two weeks after receiving a letter from the Income Tax Department, addressed to the appellant company's accountant and saying that the company's income was not from an active business, a small advertisement was published in the Winnipeg Free Press saying: “Funds available for first and second mortgages—L & F Holdings Ltd—489–8560”
13 Mrs Raber terminated her testimony by saying that the appellant company did not have any trouble collecting its money; that in 1972 she had worked an average of four hours a day for her company; that in the same year she did not have any specific time to work for her husband although she was receiving $15,000 from him and nothing from her own company; and that out of an amount of $274,000 in loans, $200,000 was borrowed from members of her family. She even testified that lending to friends was a good investment because there were no bad debts.
14 Counsel for appellant argued that it was useless to refer to the jurisprudence on sections 67 and 68 of the old Act since the said jurisprudence dealt with personal corporations and had no value for the purpose of construing section 125 of the new Act; and that, in the light of the recent jurisprudence on section 125, to wit, Cosmopolitan Investment Co Ltd v Minister of National Revenue, [1974] C.T.C. 2335, 74 D.T.C. 1252, Farlan Investments Ltd v Minister of National Revenue, [1975] C.T.C. 2016, 75 D.T.C. 12, and Lazare Investments Corp v Minister of National Revenue, [1975] C.T.C. 2036, 75 D.T.C. 26, the present appeal should be allowed.
15 In commenting on the above jurisprudence, appellant's counsel stated that section 125 was incentive legislation as opposed to the prohibitive legislation of sections 67 and 68 of the old Act, and that the limits imposed by subsection 125(2) and the payment of dividends would reduce the abuse of this new system.
16 He also said that the non-payment of a salary to the chief shareholder and the actual number of transactions in a given year were immaterial in determining if a corporation was actively engaged in a business, and that subsequent transactions should be taken into account to find out if the appellant company was active in 1972.
17 Counsel for respondent mentions three types of income: (1) income from property; (2) income from a business; and (3) income from an active business.
18 He said that section 125 cannot be read alone, since section 129 mentions income from a business other than an active business and income of a corporation from a source that is a property. He then referred to the definition of property, which includes money, to support his contention that rental and interest is income from property and not from business activity. Since the income in question in the present appeal is from money, which is property, it cannot be from an active business.
19 Respondent's counsel then referred to the case of Poppie Beale Glaspie v. MNR, 33 Tax A.B.C. 274, 63 D.T.C. 828, to contend that each year should be analysed separately in order to construe the activity of a company.
20 As to the facts, he contended that to lend money to a few friends does not constitute a great degree of activity; that very few names appear on the list of borrowers; that the lending of money was more in the nature of investment; and that, no matter how big a corporation is, one has to look at its activity before one can determine whether or not it is carrying on an active business. And, finally, he said that, if the Board is to follow the recent jurisprudence, the appeal should be allowed.
21 Actually the Board is in a dilemma and, having to render a decision in the present circumstances, I have no other alternative but to rest on sections 125, 129 and 95 of the new Act.
22 According to these sections one may say that there are three types of income: income from property, income from business, and income from active business.
23 The evidence has revealed that the sole activity of the appellant consisted in the lending of money to friends, and as money is property, the income therefrom is income from property. To change this source of income into an active business would necessitate the creation of a set-up which would in no way whatsoever resemble a friendly family organization such as the appellant herein.
24 I come to the conclusion that the appellant's course of conduct in the 1972 taxation year was not that of an organization designed to carry on an active money-lending business. The evidence in this appeal does not demonstrate that the degree of activity of the appellant company in 1972 was substantial enough to place it in the category of active business within the meaning of section 125 of the new Income Tax Act.
25 For the above reasons the appeal is dismissed.
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