Minister of National Revenue v. Curlett, 67 DTC 5058, [1967] CTC 62, [1967] SCR 280

Ritchie, J. (all concur) :—This is an appeal from the judgment of Gibson, J. of the Exchequer Court of Canada allowing an appeal from the respondent’s income tax assessment for the year 1962 and holding that the profit which the respondent realized from the sale in 1961 of all the second mortgages which he then held to Associated Investors of Canada Ltd. (hereinafter called ‘‘ Associated’’), a company of which he was for all practical purposes the sole shareholder, was a capital profit and therefore not subject to tax under the provisions of the Income Tax Act, R.S.C. 1952, c. 148.

The learned trial judge has found that immediately before and at the time when the sale in question was concluded the respondent “patently was in the money lending business’’ and that the bonuses received from second mortgages held by him were taxable as income. The question raised by this appeal, however, is whether the profit which he realized on the sale of all the second mortgages which were then in his investment portfolio was a profit from the sale of his second mortgage business as a going concern, or whether it was simply a profit from the sale in bulk of his then existing inventory of second mortgages.

In conducting his mortgage loan business between 1949 and 1952, it was the respondent’s usual practice to advance to the borrowers 85 per cent of the face value of the mortgages and to then assign and sell the mortgages at their face value to Associated. The profits from these transactions were held to be a part of the respondent’s income in the case of Curlett v. M.N.k.,

[1961] Ex. C.R. 427; [1961] C.T.C. 338; [1962] S.C.R. vii.

Before concluding the transaction which gave rise to the profit, the character of which is now in dispute, the respondent had changed his method of doing business so that the security given by the borrower was a first mortgage in the name of Associated and a second mortgage in the respondent’s own name, it being understood that the discount to be received by the respondent was to be calculated on the basis of the amount advanced by both Associated and himself, although Associated was not entitled to any part of the discount. All the mortgages that were sold to Associated in 1961 were of this latter type and the net result of the sale was that the purchase price paid to the respondent exceeded the amount owing to him on the mortgages by the sum of $28,896.71, and it is this profit which was not received by the respondent until 1962 which the Minister of National Revenue claims to be taxable as income.

At the outset it appears to me to be convenient to reproduce the following relevant sections of the Income Tax Act:

3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all

(a) businesses,

(b) property, and

(c) offices and employments.

4, Subject to the other provisions of this Part, income for a taxation year from a business or property is the profit therefrom for the year.

85E. (1) Where, upon or after disposing of or ceasing to carry on a business or a part of a business, a taxpayer has sold all or any part of the property that was included in the inventory of the business, the property so sold shall, for the purposes of this Part, be deemed to have been sold by him

(a) during the last taxation year in which he carried on the business or the part of the business, and

(b) in the course of carrying on the business.

139. (1) In this Act, . . .

(w) “inventory” means a description of property the cost or value of which is relevant in computing a taxpayer’s income from a business for a taxation year; . . .

I agree with the finding of the learned trial judge to which I have referred that at the time when the sale of these second mortgages was concluded the respondent ‘‘patently was in the money lending business” and as the profits which he derived from his second mortgages were taxable it appears to me that their cost or value’’ was relevant in computing the taxpayer’s income from his loan business, and that they therefore constituted ‘‘inventory’’ within the meaning of Section 139(1) (w) of the Income Tax Act. ERS

It is noted by Martland, J. in Frankel Corporation Limited v. M.N.R., [1959] S.C.R. 713 at 723; [1959] C.T.C. 244 at 255, that Section 85E of the Act had no application to that case because it only became effective in respect of sales made after April 5, 1955. That section, however, undoubtedly, applies to the present case and I am unable to escape the conclusion that in making the sale to Associated Mr. Curlett was disposing of at least a part of his money-lending business and that the sale which he made was a sale of property which was included in the inventory of that business. I am, therefore, of the opinion that it was a sale made ‘‘in the course of carrying on the business” and was income from that business within the meaning of Section 3 of the Income Tax Act.

In holding that the profit made by Mr. Curlett on his sale to Associated was not to be related to the sale of the mortgages but was rather to be treated as the amount paid for his ‘‘substantial money lending business as a going concern’’, the learned trial judge said :

On the facts of this case, I am of opinion that the said sum of $28,896.71 was not a receipt by the appellant of any part of the discounts or bonuses incorporated in the principal sums payable under these said second mortgages. Instead, it was part of the purchase monies received by him in a bona fide realization sale to Associated Investors of Canada Limited of all the assets of his substantial money-lending business as a going concern.

With the greatest respect, I am unable to attach any reality to the conception of going concern’’ value as an element in a transaction whereby Mr. Curlett sold his inventory of second mortgages to the company which already held all the first mortgages and of which he was, for all practical purposes, the only shareholder.

For those reasons, I would allow this appeal and restore the assessment made by the Minister of National Revenue in respect of the profit of $28,896.71 realized by the respondent in the year 1962 from the sale of his second mortgages to Associated. The appellant will have his costs in this Court and in the Exchequer Court of Canada.

No appeal has been asserted in relation to the other questions which were determined by the judgment of the learned trial judge.