8 May 1998 Internal T.I. 9808077 - LOSSES - MONEY LENDING BUSINESS?

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Enquiry seeking our views on the circumstances under which a taxpayer would be allowed to deduct, as a current expense, the principal amount of a mortgage which became a bad debt given the specific situation described in the letter

Position TAKEN:

None. General comments given.

Reasons FOR POSITION TAKEN:

Owing to the fact that the author is seeking information in connection with completed transactions involving a specific taxpayer, our response was channelled through the local TSO (request initially forwarded to us by the TSO) and was limited to very general comments concerning subparagraph 20(1)(p)(ii) ?bad debts?.

			May 8, 1998

PETERBOROUGH TSO HEADQUARTERS
P. Diguer
Attn: Shann Paget, A/team leader (613) 957-8953
Business Audit Section
7-980807

Advance income tax ruling request

We are writing in response to your memo dated March 27 1998 in which you referred to a request (copy attached to your memo) (the “Request”) from a taxpayer’s representative (the “Representative”) in which he requests our views on the circumstances under which his client would be allowed to deduct, as a current expense, the principal amount of a mortgage which became a bad debt given the specific situation described in the Request.

As discussed in recent telephone conversations (McCalden/Diguer) (Pagett/Diguer), the Request relates to completed transactions. Enquiries involving completed transactions fall within the purview of the relevant Tax Services Office. Accordingly, as agreed, we are returning this letter to you for your reply to the Representative. Our views in regards to the issue set out in the Request are set out in the following text which could be included in your reply to the Representative.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC-70-6R3 dated December 30, 1996 (copy enclosed). This Directorate also provides technical interpretations of the various provisions of the of the Income Tax Act (Canada) (the “Act”) but we do not provide tax planning advice. As stated in paragraph 22 of IC-70-6R3, where the particular transactions are completed, the enquiry should be directed to the relevant tax services office. Nevertheless, we offer the following general comments in connection with your request which we hope is of assistance to you.

In computing income for a taxation year from a business a taxpayer may deduct an amount as a bad debt pursuant to subparagraph 20(1)(p)(ii) of the Act where the loan was made in the ordinary course of business by the taxpayer whose ordinary business included the lending of money and where it is established by the taxpayer that the debt has become uncollectable in the year.

Thus, a loss realized on a mortgage that has become a bad debt may be deductible pursuant to subparagraph 20(1)(p)(ii) of the Act where it is established that:

i) the debt in issue arose from a loan made in the ordinary course of its’ business; and

ii) that part of its ordinary business includes the lending of money.

Money lending business

Income from business or income from property

For an amount to be deductible on the grounds that it was incurred in the ordinary course of its business the taxpayer must have been carrying on a business in the fiscal period in which the expense was incurred.

The characterization of income as income from a business or income from property must be made from an examination of the taxpayer’s whole course of conduct viewed in the light of the surrounding circumstances. In following this method, the courts have examined the number of transactions, their volume, their frequency, the turnover of the investments and the nature of the investments themselves.

In Granite Apartment Ltd. v M.N.R., 75 DTC 140 (TRB), judge Lucien Cardin, Q.C. interpreted a “business” as follows:

?A business is? an income-generating organization in which the three essential elements of production, as I see it, of capital, labour and management, are coordinated and manifestly operative and , as such, distinguishable from an investment venture in which the emphasis is predominantly on the capital aspect and the return one may expect from capital alone.

Income from a money-lending business

Whether or not a taxpayer is carrying on a money-lending business is essentially a question of fact to be determined in each case. In the British case of Litchfield v. Dreyfus, ((1906) 1KB 584), Farwell J. defines money-lending business at page 589:

Speaking generally, a man who carries on a money-lending business is one who is ready and willing to lend to all and sundry, provided that they are from his point of view eligible... It is a question of fact in each case.

The Department’s position on whether a taxpayer’s business included the lending of money is summarized in paragraph 11 of IT-442R (copy enclosed) wherein it is stated that when determining whether a taxpayer’s business included the lending of money it is not sufficient merely ?to find? that loans are made; they must be made as an integral part of a business operation and in this regard IT-442R states that:

It is required that there be a certain system and continuity in the making of loans, and the purpose must not be the occasional investment of surplus funds, accommodation to friends or customers or advances that are intended to remain a part of the capital of the borrower.

In George A Orban v. M.N.R., 54 DTC 148 (TAB), judge R.S.W. Fordham, Q.C. considered whether the taxpayer, who made no loans other than the three mentioned in the case (loss realized on two of the loans), was a money lender. In the case at bar, the taxpayer had some money available and this fact was known to only a few individuals with whom he was acquainted. Moreover, the taxpayer never advertised himself nor was he listed anywhere as a money lender. Judge Fordham 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 and found on the facts that these elements were not present and concluded that the loss in question must be regarded as a capital loss and not deductible (pre 72 Act).

In E.V. Keith Enterprises Ltd v. M.N.R., 74 DTC 1052, (TRB) judge K.A. Flanigan, Q.C., considered whether a loss on a $15,000 loan realized by the taxpayer, who was in the real estate development business, was deductible under paragraph 11(1)(f) ?now 20(1)(p)? of the Act where the taxpayer had made thirty loans over a period of nearly 20 years to various individuals and corporations. Judge Flanigan held that the provision merely states that a taxpayer must lend money in the ordinary course of its business and that part of that ordinary business must be the lending of money and that on the facts the taxpayer’s conduct over the years indicated that one of its occupations or endeavours was the lending of money such that the loss was deductible under paragraph 11(1)(f) as it then read.

In Aaron Salzman v. M.N.R., 64 DTC 259, (TAB), judge W.O. Davis, Q.C., considered whether a taxpayer who made money available to a firm of lawyers from time to time to invest for him was entitled to claim a reasonable amount as a reserve for 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. Judge Davis held that there was no continuity or system of lending money, that the process was informal and lacked organization, and accordingly concluded that the taxpayer was not in the business of lending money and therefore not entitled to any reserve under paragraph 11(1)(e) of the Act as it then read.

The jurisprudence briefly outlined above serves to illustrate that determining whether or not a taxpayer is carrying on a money-lending business is essentially a question of fact to be determined in each case. Generally this information would be obtained in the normal course of an audit carried out by a Tax Services Office.

The foregoing represents our general views with respect to the subject matter of your letter. The foregoing opinions are not rulings and in accordance with the guidelines set out in IC 70-6R3 they are not binding on Revenue Canada, Customs, Excise and Taxation.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department’s mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

We hope our comments will be of assistance to you. If you have any questions concerning this matter please feel free to contact us.

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch