A Godfrey Harvey v. Minister of National Revenue, [1980] CTC 2129, [1980] DTC 1094

Guy Tremblay:— This case was heard in Vancouver, British Columbia, on February 20, 1979.

1. Point at Issue

The main point is whether the amount of $33,929.54 claimed, by the appellant, a lawyer, in his 1973 return, as a “Provision for doubtful accounts” is a business expense. According to the respondent, the loss is a capital one which totalled $4,224.89.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results especially from several judicial decisions, one of which is including the judgment delivered by the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. The Facts

3.01 The appellant is a lawyer who was born in South Africa, and practised law there. He had a firm which was expropriated. He left South Africa for Canada in 1953. Accepted as a member of the Bar of British Columbia in 1954, he became counsel for Canadian Pacific Railway (CPR) for 12 years.

3.02 In 1966, he left CPR and carried on the general practice of law in North Barnaby, BC.

3.03 The appellant testified that with the money he had on hand, he made loans to different persons.

3.04 In the Fall of 1969, a friend of his, Mr Paul Lebracty (a specialist in estate planning), who from time to time had referred clients, sent a Mr Osward H’Oseason. This person was described as a business man and promoter who might become a valuable client.

3.05 During the period 1970 to 1972, the appellant did all Mr H’Oseason’s legal work. The fees amounted to $5,168.35 which was paid in full. In his testimony, the appellant said that according to Mr H’Oseason this amount, however, was supposed to be insignificant compared to the income the appellant would be earning in the future.

3.06 In a letter dated May 4, 1976, to the Regional Director of Appeals, the appellant well summarized what he said in his testimony—the following are Specific instances:

1. On one occasion he informed me that he expected to put together a very lucrative contract and it would be necessary for him to spend about three weeks in Southern Africa. He wished me to accompany him—all expenses would be paid, plus a generous fee. He enquired whether I would be able to accompany him at a time which he specified.

2. On another occasion H’Oseason wished me to accompany him to Columbia, South America, for about ten days—again, all expenses would be paid, plus excellent remuneration for any time. I had completed all the necessary arrangements to travel when, two days before our departure date, he informed me there was a hitch and our trip would have to be “postponed”.

3. On another occasion H’Oseason informed me that through his wife’s connections in mainland China (his wife is Chinese) he was sure he would be able to arrange for me to be appointed Chinese Consul in Vancouver. He assured me that this could prove to be financially very rewarding.

4. On another occasion H’Oseason stated he wished to retain my services on a permanent basis in the near future and he enquired as to the retainer I would require. It was contemplated that approximately half my time, on an average, would be devoted exclusively to looking after his interests and that I would be paid a retainer of not less than $2,000 a month, in addition to fees paid my firm for work done.

3.07 Indeed, Mr H’Oseason informed him he had sunk a large sum of money in the Northwest Territories, after proving he did not have sufficient funds to bring the mine to production; he had therefore sold his interest to Kuan- Yin Jade Industries Ltd, the consideration being approximately three quarter of a million shares in Kuan-Yin Jade Industried Ltd. However, these shares were subject to pooling and escrow agreements (Exhibit R-16).

3.08 From inquiries, which were made from Guarantee Trust Company (the transfer agent) and other sources, it appeared that the shares would come on the market at about $4 a share when they were released by the Securities Commission. “I therefore regarded Mr H’Oseason, not without reason, as a potentially wealthy man.” (Exhibit R-16, an appellant’s letter dated August 23, 1974 to the Director-Taxation.)

3.09

On January 2, 1970 since I had money to invest and since it appeared that the release of Mr H’Oseason’s stock by the Securities Commission was taking longer then anticipated, I agreed to lend him $12,000, the interest at 9% per annum to be paid quarterly in advance. At this time it was anticipated that Mr H’Oseason’s stock in Kuan-Yin Jade would be released by the Securities Commission within about six months. (Exhibit R-16, pages 1 and 2)

The $12,000 was payable on April 6, 1970.

3.10

During 1970 I had funds invested (as appears from my Statement of Investment Income attached to my 1970 Income Tax Return, copy of which is enclosed herewith) on short term deposit with the Guarantee Trust Company, The Montreal Trust and with the Bank of Nova Scotia. However these funds were withdrawn and from time to time lent to Mr H’Oseason. My purpose was to keep my money in a more or less liquid state and at the same time earn a reasonable rate of interest on my investment. Further it seemed likely that by lending the money to Mr H’Oseason an additional benefit would accrue to me in that I would be establishing a good business relationship with a man whom I regarded as a potentially wealthy client. (Exhibit R-16, page 2)

3.11 The Exhibit A-1 shows the advances of the appellant to Mr H’Oseason. The exhibits (promissory notes) concerning each transaction appear in the fourth column:

SCHEDULE OF ADVANCES, HARVEY TO H’OSEASON

		Rate of
Date	Amount Amount	Interest	Exhibit
January 2, 1970	$12,000.00	9%	R-1
April 10, 1972	2,495.10	9.75%	R-13
April 10, 1972	5,721.44	8.75%	R-13
February 21, 1972	900.00	9%	R-4
May 1, 1970	15,179.28	10%	R-7
May 12, 1970	1,040.00	9.%%	R-9
August 3, 1970	900.00	10%	R-10
March 10, 1970	900.00	10%	R-5
April 10, 1970	300.00	10%	R-6
	$39,435.82
Less Payments:
February 8, 1972	250.00
June 30, 1973	5,256.28
	5,506.28
NET OWING:	$33,929.54

3.12 On January 2, 1970, (same date as Exhibit R-1), the appellant made an agreement (Exhibit R-3) with Mr H’Oseason by which the latter would transfer 5,000 shares of Kuan-Yin Jade Industries Ltd (Subject to a pooling agreement between the trustee and H’Oseason) to the appellant as soon as H’Oseason would be entitled to claim delivery of the said shares from the trustee. The transfer was never done, but this transfer would have been done “in consideration for the loan of aforesaid loans of $12,000”. On 2,000 shares, H’Oseason would have transferred to the appellant ‘‘absolutely all his rights, title, claim and interest”. The other 3,000 shares was only a guarantee, but the appellant had “the right to elect to retain the said 3,000 shares referred to( ) in satisfaction of the aforesaid promissory notes”, if it was not already paid.

3.13 On August 4, 1970, an agreement (Exhibit R-8) was signed between the appellant and Mrs Jaye Anne (Oswald) H’Oseason by which the latter (the mortgagor) “doth grant and mortgage’’ unto the appellant (the mortgagee), in consideration of the sum of $3,000 due by the mortgagor. The mortgage was registered on a certain piece of property described as District Lot 6902—Vancouver Assessment District.

3.14

For reasons which are still not altogether clear to me Mr H’Oseason’s stock in Kuan-Yin Jade Industries Ltd never was released by the Securities Commission and I am advised that the stock is now worthless. (Exhibit R-16, page 2, paragraph 4)

3.15

Finally it became clear to me that my investment in H’Oseason was a very bad one and I demanded payment on the promissory notes. In August 1973 I commenced action against Mr and Mrs H’Oseason on the promissory notes. A defence was filed (alleging inter alia) that I had elected to take stock in Kuan-Yin Jade Industries Ltd in lieu of payment on the notes (which was untrue) and the case was ordered to go to trial. (Exhibit R-16, page 2, paragraph 5)

3.16

As far as I have been able to discover H’Oseason has no assets. At the time of writing I am undecided whether it would be worthwhile proceeding with my action against him since this would probably cost me in the region of $2,000 in legal expenses. (Exhibit R-16, page 2, paragraph 7)

3.17 In filing his income tax return, the appellant claimed a business loss of $34,657.58 made on the said loans.

3.18 By his notice of reassessment dated February 27, 1975, the respondent refused the deduction, and included the said amount in the computation of the net income.

3.19 Assuming that any loss incurred by the appellant in respect of “loans’’ to Mr H’Oseason represented capital losses, the respondent valued the gross Capital loss to $8,449.78:

According to the respondent, the amount of $4,224.89 represents the allowable capital cost. The amount of $1,000 was applied in deduction in virtue of paragraph 3(1)(e) of the Income Tax Act.

4. Law—Precedents—Comments

4.1 Law

The main sections of the Income Tax Act involved in the present case are paragraphs 18(1 )(a) and (b), 20(1)(l) and (p), subparagraph 40(1)(b)(i):

18.(1) In computing the income of a taxpayer from a business or property 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 the business or property;

(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;

20.(1) Notwithstanding paragraphs 18(1)(a), (b) and (h) in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(I) 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;

(p) 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 the year ora previous year;

40.(1) Except as otherwise expressly provided in this Part

(b) a taxpayer’s loss for a taxation year from the disposition of any property is,

(i) if the property was disposed of in the year, the amount, if any, by which the aggregate of the adjusted cost base to him of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition, exceeds his proceeds of disposition of the property.

4.2 Precedents

The following cases were cited by the parties:

1. Malcolm C Kronby v MNR, 76 DTC 1226;

2. Her Majesty the Queen v F H Jones Tobacco Sales Co Ltd, 2, [1973] CTC 784; 73 DTC 5577;

3. Pigott Investments Limited v Her Majesty the Queen, [1973] CTC 693; 73 DTC 5507;

4. MNR v Kelvingrove Investments Limited, [1974] CTC 450; 74 DTC 6357;

5. Her Majesty the Queen v EV Keith Enterprises Ltd, [1974] CTC 2073; 74 DTC 1052;

6. MNR v George H Steer, [1966] CTC 731; 66 DTC 5481;

7. H R Morris Limited v MNR, [1967] Tax ABC 582; 67 DTC 429;

8. Industrial Investments Ltd v MNR, [1973] CTC 2161; 73 DTC 118;

9. Donald Preston McLaws v MNR, [1970] CTC 420; 70 DTC 6289;

10. No 474 v MNR, 18 Tax ABC 180; 57 DTC 561.

4.3 Comments

After considering the evidence, especially, the facts described in paragraphs 3.05 to 3.08, the Board arrives at the conclusion that on one hand the appellant had interest to cultivate the potentially wealthy client, Mr H’Oseason. Indeed, after inquiries, the appellant arrived at the conclusion that the three quarter of a million shares would come on the market at about $4 a share when they were released by the Securities Commission. The Board thinks the part of the loan could be considered as a business expense.

On the other hand, because of the facts described in paragraphs 3.12 and 3.13 (security at first glance is a guarantee to investment) and because the appellant was not in the field of lending money, it is the Board’s opinion that part of the loan can be considered as an investment. However, it is not possible in a problem of that nature to divide the solution. All the loans have to be considered either as an investment or as an expense incurred for the purpose of gaining income.

In fact, it is a question of preponderance of evidence. What is the yardstick in the present case which can help the Board to find the right solution? The intention seems the best yardstick. It is not easy to decide. At the hearing, the appellant testified that his first intention in lending money was an expense incurred to keep his client. However, in the letter (to the director-taxation dated August August 23, 1974—Exhibit R-16), the appellant describes his intention in lending money to Mr H’Oseason (see paragraph 3.10):

My purpose was to keep my money in a more or less liquid state and at the same time earn a reasonable rate of interest on m investment. Further it seemed likely that by lending my money to Mr H’Oseason an additional benefit would accrue to me in that I would be establishing a good business relationship with a man whom I regarded as a potentially wealthy client.

It is clear that the business relationship was only an “additional benefit” and not the prime intention which was the investment. What is the evidence which is the best to describe the truth, the verbal testimony or the letter? The Board retains the letter. First, indeed at the time of the letter in 1974, the facts were fresher than in 1979, when he has testified. Secondly, when one writes a letter, especially to the director-taxation, to describe facts and intention concerning his own case, he ordinarily tells the truth when he writes something which can be interpreted against him except in special circumstances. In the present case, the appellant is a lawyer and he was aware of the facts. He wrote a long and detailed letter. This written evidence must be retained rather than the verbal testimony at the hearing.

The conclusion is that the loans are considered as investments and the loss as a capital one, but what was the value of the receivable accounts on December 31, 1971? The respondent in his assessment considers that the value was “nil”. The appellant, who has the burden of proof, did not give evidence of another value.

The appeal is dismissed.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.