A
W
Prociuk
(orally:
December
10,
1976):—The
appellant,
The
May
Company
Limited,
appeals
from
the
respondent’s
reassessment
of
its
income
for
the
taxation
year
1971,
wherein
a
deduction
of
$150,000
from
its
income
was
disallowed,
on
the
ground
that
it
was
not
a
business
loss
but
a
capital
loss
within
the
meaning
of
paragraph
(b)
of
subsection
(1)
of
section
12
of
the
Income
Tax
Act,
as
it
was
then
in
force.
The
appellant
states
it
was
a
business
loss
within
the
meaning
of
paragraph
(a)
of
subsection
(1)
of
section
12
of
the
said
Income
Tax
Act,
in
that
it
made
a
loan
to
a
controlling
company
of
a
competitor
in
the
same
business
of
ladies’
wear
for
the
purpose
of
improving
and
producing
profit
by
reduction
of
operating
costs
through
joint
arrangements
in
respect
of
warehousing,
window
dressing
and
volume
purchases.
The
appellant,
in
its
notice
of
appeal,
sets
out
in
chronological
order
the
sequence
of
events
in
paragraphs
1,
2,
3,
4,
5,
6,
8,
9
and
10
which
read
as
follows:
1.
The
Appellant
carries
on
the
business
of
a
department
store
in
the
City
of
Toronto.
2.
Pursuant
to
an
agreement
dated
October
25,
1961
between
the
Appellant
and
Benrush
Holdings
Limited
in
which
David
Rush
joined
as
Guarantor,
the
Appellant
made
a
loan
of
$325,000
to
Benrush
Holdings
Limited.
3.
Benrush
Holdings
Limited
was
the
controlling
shareholder
of
John
Northway
&
Son
Limited,
a
public
corporation
which
carried
on
another
department
store
business
known
as
“Northway”
in
competition
with
the
Appellant.
4.
The
share
of
Benrush
Holdings
Limited
were
owned
by
David
E
Bennett
and
David
Rush.
5.
David
E
Bennett
was
also
a
substantial
shareholder
and
the
Secretary-
Treasurer
of
Principal
Investments
Limited,
a
major
developer
of
shopping
centres
and,
in
1961,
one
of
the
largest
landlords
in
Canada.
6.
The
aforementioned
loan
agreement
provided
that
the
term
of
the
loan
was
six
months
from
October
25,
1961
to
April
25,
1962,
the
rate
of
interest
was
12%
per
annum,
and
Benrush
Holdings
Limited
hypothecated
and
pledged
880,000
common
shares
in
the
capital
stock
of
John
Northway
&
Sons
Limited
as
security
for
the
repayment
of
the
loan.
8.
On
December
27,
1961,
David
E
Bennett
entered
into
an
agreement
whereby
he
guaranteed
50%
of
the
aforementioned
obligation
of
Benrush
Holdings
Limited.
9.
No
payments
of
principal
were
made
or
became
due
prior
to
April
25,
1962,
however
the
fact
is
that
none
of
the
parties
to
the
agreement
could
have
made
the
payment
of
$325,000
that
fell
due
on
April
25,
1962.
10.
On
April
24,
1962,
therefore,
a
further
agreement
was
entered
into
between
Benrush
Holdings
Limited
and
the
Appellant
in
which
David
E
Bennett
and
Principal
Investments
Limited
acted
as
guarantors
for
the
full
amount
of
the
indebtedness,
but
into
which
David
Rush
did
not
enter
as
a
party.
Exhibit
A-1,
tab
6,
consists
of
three
agreements
referred
to
above.
The
first
agreement
reads
as
follows:
MEMORANDUM
OF
AGREEMENT
made
this
25th
day
of
October
1961,
BETWEEN:
BENRUSH
HOLDINGS
LIMITED,
a
company
incorporated
under
the
laws
of
the
Province
of
Ontario,
having
its
head
Office
in
the
City
of
Toronto,
Hereinafter
called
“Benrush”
OF
THE
FIRST
PART:
—
and
—
THE
MAY
COMPANY
LIMITED,
a
Company
incorporated
under
the
laws
of
the
Province
of
Ontario,
having
its
head
office
in
the
City
of
Toronto,
Hereinafter
called
“May
Company”
OF
THE
SECOND
PART:
—
and
—
DAVID
RUSH,
of
the
City
of
Toronto,
in
the
County
of
York,
Executive,
Hereinafter
called
“Guarantor”
OF
THE
THIRD
PART:
WHEREAS
May
Company
has
agreed
to
lend
to
Benrush,
the
sum
of
Three
Hundred
and
Twenty-Five
Thousand
($325,000.00)
Dollars
on
the
terms
and
conditions
hereinafter
set
out
and
Benrush
has
agreed
to
hypothecate
and
pledge
Eight
Hundred
and
Eighty
Thousand
(880,000)
common
shares
of
the
capital
stock
of
John
Northway
and
Son,
Limited
as
security
for
repayment
of
such
loan;
AND
WHEREAS
Six
Hundred
and
Six
Thousand,
Nine
Hundred
(606,900)
common
shares
of
capital
stock
of
John
Northway
and
Son,
Limited
are
Subject
to
escrow,
and
are
to
be
released
as
to
one-third
(
Zj)
on
the
30th
day
of
November,
1961,
as
to
one-third
(Va)
on
the
28th
day
of
February,
1962,
and
as
to
the
balance
on
the
31st
day
of
May,
1962,
subject
as
to
all
or
part
to
earlier
release
with
the
written
consent
of
the
Ontario
Securities
Commission.
While
the
said
escrow
continues,
the
common
shares
subject
thereto
may
be
sold
or
transferred
only
with
the
written
consent
of
the
Ontario
Securities
Commission.
WITNESSETH
that
in
consideration
of
the
premises
and
the
agreements
hereinafter
contained,
it
is
hereby
covenanted
and
agreed
as
follows:—
1.
Upon
the
execution
of
these
presents,
May
Company
shall
advance
to
Benrush,
the
sum
of
Three
Hundred
and
Twenty-Five
Thousand
($325,000.00)
Dollars
by
cheque,
made
payable
to
Messrs.
Gotfrid
and
Devor,
Solicitors
for
Benrush;
2.
BENRUSH
covenants
and
agrees
to
pay
the
sum
of
$325,000.00
to
May
Company
on
the
25th
day
of
April,
1962,
together
with
interest
at
the
rate
of
12%
per
annum
calculated
and
payable
monthly
as
well
after
as
before
maturity
and
both
before
and
after
default
on
such
portion
of
the
principal
as
remains
from
time
to
time
unpaid
on
the
25th
days
of
each
and
every
month
in
each
year
until
the
principal
is
fully
paid,
the
first
payment
of
interest
to
be
computed
from
the
25th
day
of
October,
1961,
upon
the
whole
amount
of
the
principal
to
become
due
and
payable
on
the
25th
day
of
November,
1961.
It
is
agreed
that
Benrush
shall
have
the
privilege
of
requesting
the
receiving
a
re-assignment
of
all
or
any
part
of
the
said
Shares
upon
payment
to
May
Company
in
reduction
of
principal
of
$2.00
for
each
share
re-assigned.
Notwithstanding
any
prepayment
on
account
of
principal,
Benrush
agrees
to
pay
interest
as
hereinbefore
provided
on
the
principal
amount
of
$325,000.00
to
and
including
the
25th
day
of
January,
1962.
Benrush
further
agrees
notwithstanding
any
prepayment
on
account
of
principal
on
or
after
the
25th
day
of
January,
1962,
to
pay
interest
as
hereinbefore
provided
on
principal
balance
outstanding
on
the
25th
day
of
January,
1962,
to
and
including
the
maturity
date
of
this
loan.
3.
In
consideration
of
the
said
loan,
Benrush
hereby
agrees
to,
contemporaneously
with
the
execution
of
this
agreement,
hypothecate
and
pledge
with
May
Company
the
said
880,000
common
shares
of
the
capital
stock
of
John
Northway
and
Son,
Limited
hereinbefore
mentioned
and
shall
deposit
with
May
Company
the
certificates
representing
the
said
shares
duly
endorsed
in
blank
for
transfer,
all
as
security
for
the
payment
of
the
said
$325,000.00.
BENRUSH
hereby
represents,
upon
which
representation
May
Company
relies
in
making
this
loan,
that
it
is
a
majority
shareholder
of
John
Northway
and
Son,
Limited
and
as
such
Benrush
hereby
covenants
and
agrees
that
so
long
as
any
part
of
the
said
balance
of
$325,000.00
aforesaid
remains
unpaid,
the
following
provisions
shall
be
in
full
force
and
effect:—
(a)
The
business
of
John
Northway
and
Son,
Limited
shall
be
carried
on
and
conducted
in
the
ordinary
and
usual
course
thereof
in
accordance
with
sound
business
and
accounting
principles,
provided
that
the
renewal
of
leases
and
the
entering
into
of
new
leases
for
the
purpose
of
carrying
on
the
business
of
John
Northway
and
Son,
Limited
shall
be
deemed
to
be
transactions
in
the
ordinary
and
usual
course
of
business:
(b)
The
aggregate
monthly
amount
to
be
paid
for
executive
remuneration
including
directors’
fees,
salaries
of
officers
and
directors,
bonuses
and
like
items
usually
included
in
executive
remuneration
shall
not
exceed
the
total
amount
of
such
monthly
remuneration
paid
in
respect
of
the
month
of
August,
1961;
(c)
No
payment
shall
be
made
by
the
said
Company
by
way
of
dividend,
whether
in
cash
or
otherwise,
or
by
way
of
distribution
of
capital
or
assets
to
shareholders;
(d)
No
action
shall
be
taken
to
terminate
the
corporate
existence
of
the
said
Company,
or
to
alter
or
amend
its
charter,
or
increase
or
decrease
its
capital,
without
the
consent
in
writing
of
the
said
May
Company;
(e)
None
of
the
unissued
shares
of
the
capital
of
the
said
Company
shall
be
allotted
or
issued,
nor
any
options
or
rights
granted
with
respect
thereto,
without
the
consent
in
writing
of
the
said
May
Company;
(f)
None
of
the
said
Company’s
assets
and
property
shall
be
sold,
mortgaged
or
otherwise
disposed
of
or
encumbered
except
in
the
ordinary
course
of
business
and
no
funded
indebtedness
or
long
term
debt
shall
be
created
or
issued,
without
the
consent
in
writing
of
the
said
May
Company.
4.
UNLESS
and
until
default
shall
be
made
by
Benrush
in
the
payment
of
the
said
principal
amount
or
interest
as
aforesaid,
it
is
agreed
that
Benrush
whose
stock
is
pledged
shall
be
entitled
to
vote
such
stock
at
all
meetings
of
the
shareholders
of
John
Northway
and
Son,
Limited.
5.
IN
the
event
of
default
by
Benrush
in
payment
of
the
said
principal
amount
and
or
interest
in
the
manner
hereinbefore
provided,
or
in
the
event
of
default
by
Benrush
to
cause
the
observance
by
John
Northway
and
Son,
Limited
of
the
performance
of
any
of
the
provisions
of
paragraph
3
hereof
or
in
the
event
that
John
Northway
and
Son,
Limited
shall
make
an
assignment
for
the
benefit
of
creditors
or
become
bankrupt
or
insolvent
or
take
the
benefit
of
any
act
now
or
hereafter
in
force
for
bankrupt
or
insolvent
debtors
or
any
order
shall
be
made
for
the
winding
up
of
John
Northway
and
Son.
Limited
and
such
default
continues
for
five
days
then,
after
ten
days’
written
notice
thereof
to
Benrush,
the
whole
of
the
principal
sum.
together
with
interest
to
the
25th
day
of
April,
1962,
immediately
shall
become
due
and
payable.
6.
IF
Benrush
shall
fail
to
cure
any
default
as
herein
provided,
within
the
period
of
ten
days
after
receipt
of
the
notice
referred
to
in
paragraph
5,
then
upon
expiration
of
such
ten
day
period,
May
Company
shall
become
ipso
facto
the
owner
of
the
said
shares
or
balance
thereof
pledged
herein
to
May
Company.
7.
UPON
payment
in
full
by
Benrush
of
the
said
principal
money
and
interest
thereon
as
herein
mentioned,
May
Company
shall
deliver
to
Benrush
the
said
pledged
shares
and
certificates
representing
the
same,
and
this
agreement
shall
thereupon
terminate
and
be
at
an
end
and
May
Company
shall
be
relieved
of
all
further
duty
or
obligation
hereunder.
8.
AND
the
Guarantor
of
the
Third
Part
in
consideration
of
May
Company
making
the
loan
hereunder
to
Benrush
and
of
the
sum
of
One
($1.00)
Dollar
of
lawful
money
of
Canada
now
paid
to
him
by
the
May
Company
(the
receipt
whereof
is
hereby
by
him
acknowledged)
for
himself,
his
heirs,
executors,
administrators,
and
assigns
doth
covenant
with
and
guarantee
to
May
Company
that
Benrush
will
pay
all
moneys
payable
hereunder
when
due
and
will
duly
observe,
perform
and
keep
all
of
its
covenants
herein
contained
and
doth
hereby
covenant
to
indemnify
and
save
harmless
the
May
Company
from
any
loss,
costs
or
damages
arising
from
non-payment
of
the
said
moneys
or
breach
or
non-performance
of
the
covenants
herein
contained
and
doth
further
agree
that
the
May
Company
may
arrange
with
Benrush
or
itS
successors
and
assigns
to
alter
the
terms
hereof
in
any
manner
whatsoever
and/or
allow
Benrush
to
be
in
arrears
and/or
may
extend
the
time
for
payment
of
any
moneys
and/or
deal
with
the
security
given
herewith
however
as
it
may
deem
fit;
and
all
without
releasing
the
Guarantor
from
his
obligation
hereunder
and
without
notice
to
him
and
May
Company
shall
not
be
bound
to
exercise
its
remedies
against
Benrush
or
any
other
person
or
against
the
security
before
requiring
payments
of
money
or
performance
of
covenants
from
the
Guarantor.
9.
ANY
notice
provided
for
hereunder
if
given
by
May
Company
to
Benrush
Shall
be
sufficiently
given
if
mailed
by
registered
mail
in
the
City
of
Toronto
postage
prepaid
addressed
to
Benrush
Holdings
Limited
attention
Mr.
D.
Rush,
President
c/o
John
Northway
and
Son,
Limited,
240
Yonge
Street,
Toronto
Attention
Mr.
Samuel
Gotfrid,
Secretary,
c/o
Messrs.
Gotfrid,
Devor,
Noble
and
Dennis,
133
Richmond
Street
West,
Toronto.
Any
notice
mailed
as
aforesaid
shall
be
conclusively
deemed
to
have
been
given
on
the
next
business
day
following
the
day
on
which
such
notice
is
mailed
as
aforesaid.
THIS
AGREEMENT
shall
extend
to
and
enure
to
the
benefit
of
and
be
binding
upon
the
parties
hereto
and
each
of
their
respective
heirs,
executors,
administrators,
successors
and
assigns.
The
agreement
of
April
24,
1962
provides
equal
monthly
instalments
of
$5,000
commencing
on
May
25,
1962,
with
the
balance
due
on
April
25,
1964,
and
the
interest
rate
was
reduced
from
12%
to
10%.
As
of
January
29,
1963,
the
sum
of
$285,000
was
still
owing.
John
Northway
and
Sons,
Limited
became
bankrupt
on
or
about
February
25,
1963.
The
appellant
took
legal
proceedings
against
the
borrowers
and
their
guarantors,
and
succeeded
in
obtaining
judgment
for
the
full
amount
as
claimed,
that
is
the
sum
of
$285,000
with
interest
thereon
at
10%,
together
with
court
costs.
It
succeeded
in
the
said
judgment
right
up
to
the
Supreme
Court
of
Canada.
In
addition
the
appellant
also
sued
its
solicitor
who
purported
to
act
on
its
behalf
in
loan
negotiations.
The
appellant,
in
its
Notice
of
Appeal,
states
as
follows
in
paragraph
17,
in
reference
to
the
action
taken
against
the
solicitor:
During
the
trial
of
this
action
in
October
1971
a
settlement
was
reached
pursuant
to
which
the
solicitor
agreed
to
pay
to
the
appellant
$135,000
of
the
$284,000
principal
amount
of
the
loan.
That
left
$150,000
thereof
unrecoverable.
Benrush
Holdings
Limited,
Principal
Investments
Limited,
David
Rush
and
David
E
Bennett
were
by
1971
all
insolvent.
It
is
this
$150,000
that
is
the
subject
matter
of
the
appeal,
and
the
appellant
relies
on
paragraph
12(1
)(a)
of
the
Income
Tax
Act
as
it
was
then
in
force,
to
claim
the
said
loss
as
a
business
loss.
Paragraphs
12(1
)(a)
and
12(1
)(b)
of
the
Income
Tax
Act,
as
they
then
applied,
read
as
follows:
12.
(1)
In
computing
income,
no
deduction
shall
be
made
in
respect
of
(a)
an
outlay
or
expense
except
to
the
extent
that
it
was
made
or
incurred
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income
from
property
or
a
business
of
the
taxpayer,
(b)
an
outlay,
loss
or
replacement
of
capital,
a
payment
on
account
of
capital
or
an
allowance
in
respect
of
depreciation,
obsolescence
or
depletion
except
as
expressly
permitted
by
this
Part,
Mr
Sydney
Stein,
president
of
the
appellant
company,
testified
in
support
of
the
appeal.
He
started
in
retail
business
of
ladies’
wear
in
1939
in
Toronto
and
by
1961
had
two
retail
outlets
in
the
Province
of
Ontario,
which
were
doing
very
well.
Mr
Samuel
Gotfrid,
QC
also
testified
on
behalf
of
the
appellant,
and
stated
that
Mr
Stein
was
doing
very
well,
and
some
of
his,
that
is
Mr
Stein’s,
real
estate
investments
in
addition
to
the
store
business,
were
very
successful
financially.
Mr
Stein
struck
me
as
a
very
able,
astute
and
knowledgeable
businessman.
In
perusing
the
original
agreement,
that
is
the
agreement
of
October
29,
1961,
I
am
impressed
by
the
meticulous
manner
in
which
this
document
is
drafted
and
the
safeguards
provided
therein
for
repayment
of
the
loan.
However,
nowhere
in
that
agreement,
nor
its
subsequent
revision,
is
there
any
mention
of
any
programme
or
arrangement
for
the
mutual
reduction
of
operating
costs
with
a
view
to
realizing
profits
for
the
appellant.
The
oral
evidence
adduced
was
intended
to
convey
this
aspect
as
the
main
factor
in
motivating
the
appellant
to
make
a
loan.
However,
the
totality
of
the
evidence,
including
the
exhibits,
compels
me
to
the
view
that
investment
income
to
the
appellant
was
the
sole
factor.
The
loan
was
a
short-term
one.
The
interest
rate
was
attractive,
bearing
in
mind
that
the
bank’s
prime
rate
at
that
time
was
somewhere
between
5%
and
6%
per
annum.
I
do
not
think
that
there
is
any
question
that
the
appellant
would
qualify
for
a
prime
rate
treatment
by
any
bank
or
other
respectable
financial
institution
at
the
material
time.
Mr
Stein
stated
that
no
effort
was
made,
nor
any
steps
taken
in
regard
to
the
joint
warehousing,
window
dressing
nor
volume
purchasing,
as
there
was
no
One
with
whom
he
could
deal
at
the
time,
since
the
borrowers
got
into
financial
difficulties
the
very
next
month
or
the
following
month.
Mr
Stein,
in
my
humble
opinion,
did
not
need
to
join
forces
in
that
direction.
I
should
think
that
if
any
discussion
with
regard
to
management
and
conduct
of
retail
business
took
place
at
all,
it
was
Mr
Stein’s
offer
to
assist
Northway,
whose
managerial
cadre,
consisting
of
Messrs
Rush
and
Bennett,
was
new
and
inexperienced
in
the
field
and
obviously
required
assistance
as
subsequent
events
clearly
indicate.
It
is
a
fair
inference
to
make,
I
believe,
that
Mr
Stein
would
primarily
be
interested
in
protecting
his
own
investment
income.
Northway’s
success
meant
interest
income
to
the
appellant.
Unfortunately
for
the
appellant,
it
did
not
pan
out
in
this
manner.
In
my
humble
opinion,
the
appellant
has
failed
to
establish
that
it
is
entitled
to
invoke
the
provisions
of
paragraph
(a)
of
subsection
(1)
of
section
12
of
the
Act
to
enable
it
to
deduct
the
sum
of
$150,000,
an
otherwise
uncollectable
remainder
of
the
judgment
that
it
had
obtained,
as
a
business
loss
from
its
income,
and
the
appeal,
accordingly,
is
dismissed.
Appeal
dismissed.
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