Cullen,
J.:—This
is
an
appeal
from
a
reassessment
of
tax
for
the
plaintiff's
1981,
1982,
1983
and
1984
taxation
years.
In
the
reassessment
the
Minister
of
National
Revenue
disallowed
the
amounts
claimed
by
the
plaintiff
for
the
deduction
of
a
reserve
for
doubtful
debts
in
the
1982,
1983
and
1984
taxation
years
and
denied
the
deduction
of
non-capital
losses
arising
in
the
plaintiff's
1982
and
1983
taxation
years
in
computing
the
plaintiff's
taxable
income
in
its
1981
taxation
year.
(During
the
hearing
counsel
for
the
plaintiff
advised
that,
with
respect
to
the
issue
of
a
limitation
period,
they
were
only
challenging
the
reassessment
of
the
1981
taxation
year,
claiming
it
to
be
statute-barred.)
Background
The
plaintiff
is
a
Saskatchewan
corporation,
carrying
on
a
business
of
manufacturing
farm
equipment
which
is
sold
through
a
dealer
distribution
system.
The
plaintiff's
operation
is
not
limited
to
Saskatchewan
but
extends
throughout
Canada
and
the
world,
including
the
U.K.,
the
U.S.A.,
Switzerland,
France,
the
Netherlands
and
Australia.
This
is
a
most
successful
business
enterprise
and
looking
only,
for
example,
at
Exhibit
P-3
we
note
that
sales
in
1981
were
in
excess
of
$17
million
and
in
1982
in
excess
of
$15
million.
The
gross
margins
after
allowing
for
cost
of
goods
sold
exceeded
$7
million
in
1981
and
$6
million
in
1982.
The
statement
of
retained
earnings
in
Exhibit
P-3
show
$5,294,200
in
1981
and
$,4,714,400
in
1982.
The
plaintiff
is
also
authorized
under
its
Memorandum
of
Association
to
carry
out
the
following
activities:
—
to
invest
and
deal
with
the
monies
of
the
Company
not
immediately
required
in
such
a
manner
as
from
time
to
time
may
be
determined;
—
to
take
over,
manage
and
dispose
of
in
any
manner
whatsoever,
any
business
or
undertaking
in
which
the
Company,
may
be
interested
or
in
the
securities
of
which
it
may
have
invested
its
funds
or
with
which
it
may
have
business
relations;
—
to
buy
or
otherwise
acquire
and
hold,
sell
and
deal
in
real
property
and
personal
property
of
all
kinds
and
rights,
in
particular
lands,
.
.
.
business
or
industrial
concerns
and
undertakings,
mortgages
or
charges
on
personal
property,
.
.
.
securities
.
.
.
book
debts
Terry
Summach
(Terry
S.)
and
his
immediate
family
own
fifty
per
cent
of
Flexi-Coil’s
shares
and
his
uncle,
Ken
Summach
(Ken
S.)
and
his
immediate
family
own
the
other
fifty
per
cent.
Terry
S.
runs
the
plaintiff's
day-to-day
business
operations.
Robert
Murray
Design
Images
Ltd.
(RMDI)
is
a
B.C.
corporation
formed
for
the
purpose
of
importing
"state
of
the
art"
silk
plants
from
the
orient
and
marketing
them
in
Canada
on
a
wholesale
basis.
The
initial
common
shareholders
of
RMDI
were
Lloyd
and
Sharon
Mineer
with
56
shares
(26
per
cent),
three
other
RMDI
employees
with
53
shares
(26
per
cent),
and
Summach
Management,
a
company
owned
by
Terry
S.,
with
91
shares
(45.5
per
cent).
Later
I
will
be
going
into
more
detail
with
respect
to
the
formation
of
RMDI
but
for
now
I
need
only
point
out
that
Terry
S.
realized
late
in
the
day
that
the
financial
requirements
of
RMDI
were
beyond
the
resources
of
Summach
Management
Ltd.
After
seeking
and
securing
Ken
S.'s
approval
the
plaintiff
advanced
RMDI
substantial
working
capital
and
in
return
acquired
67
per
cent
of
RMDI's
outstanding
shares
for
a
nominal
amount.
The
plaintiff
purchased
the
91
shares
held
by
Summach
Management
Ltd.
and
subscribed
43
shares
from
the
treasury.
At
the
same
time
two
employees
sold
their
43
shares
back
to
RMDI.
Throughout
its
1982
taxation
year
the
plaintiff
advanced
funds
to
RMDI
and
also
guaranteed
certain
loans
made
by
the
Royal
Bank
of
Canada
(Royal
Bank)
to
RMDI.
However,
in
1982
RMDI's
projected
sales
did
not
come
to
fruition
and
when
the
plaintiff
prepared
its
year-end
financial
statements
for
September
30,
1982,
it
wrote
down
loans
to
RMDI
for
financial
statement
purposes
of
$1,435,200.
In
its
1982
income
tax
return
the
plaintiff
deducted
a
reserve
for
doubtful
debts,
per
paragraph
20(1)(l)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act")
in
the
amount
of
$1,435,200,
which
resulted
in
a
claimed
non-capital
loss
of
$1,379,395
for
its
1982
taxation
year.
On
April
22,
1983
the
Minister
of
National
Revenue
issued
a
notification
that
no
tax
was
payable
in
respect
of
the
plaintiff's
1982
taxation
year.
As
a
result
of
having
incurred
this
capital
loss
the
plaintiff
also
claimed
a
deduction
of
$1,379,395
as
a
non-capital
loss
under
paragraph
111(1)(a)
in
computing
its
taxable
income
for
its
1981
taxation
year
by
filing
prescribed
form
(T2A)
on
March
30,
1983.
By
Notice
of
Reassessment,
dated
January
27,
1984,
the
Minister
of
National
Revenue
allowed
the
non-capital
loss
carry-back
from
the
1982
taxation
year
and
reassessed
the
plaintiff's
tax
liability
accordingly.
(The
original
assessment
was
dated
June
28,
1982.)
During
late
1982
and
early
1983,
RMDI's
business
deteriorated
further
and
it
was
left
with
an
excessive
amount
of
unsold
inventory.
In
May
1983
the
plaintiff
placed
RMDI
in
receivership.
After
reviewing
RMDI's
business
the
Receiver
ceased
RMDI's
operation
and
liquidated
the
stockpiled
inventory.
At
this
point
there
was
little
chance
of
RMDI
repaying
its
loan
to
the
plaintiff.
In
1983,
for
financial
statement
purposes,
the
plaintiff
took
a
further
write-down
of
its
loans
to
RMDI
in
the
amount
of
$1,658,609.
This
amount
included
$300,000
as
an
estimated
amount
the
plaintiff
would
have
been
required
to
pay
on
behalf
of
RMDI
to
the
Royal
Bank
and
$134
for
its
shares
in
RMDI.
In
its
1983
income
tax
return
the
plaintiff
deducted
a
reserve
for
doubtful
debts
in
the
amount
of
$1,658,609
(the
above-noted
write-down)
which
resulted
in
a
non-capital
loss
in
the
amount
of
$1,319,256
for
the
plaintiff's
1983
taxation
year.
As
a
result
of
having
incurred
this
non-capital
loss
in
its
1983
taxation
year,
the
plaintiff
claimed
a
deduction
of
$1,319,256
as
a
non-capital
loss
in
computing
its
taxable
income
for
the
1981
taxation
year
by
filing
prescribed
form
T2A,
amending
its
1981
return,
on
March
30,
1984.
By
notice
of
reassessment
dated
May
28,
1985,
the
Minister
of
National
Revenue
allowed
the
non-capital
loss
carried
back
from
the
1982
taxation
year
and
reassessed
the
plaintiff's
1981
income
tax
return
accordingly.
Also,
the
plaintiff
was
advised
that
no
tax
was
payable
in
respect
of
its
1982
taxation
year.
In
its
1984
taxation
year
the
plaintiff
was
required
to
advance
funds
on
behalf
of
RMDI
to
the
Royal
Bank
pursuant
to
its
loan
guarantee.
As
a
result,
the
plaintiff
wrote
off
the
sum
of
$109,047
as
an
administrative
expense
for
both
financial
statement
purposes
and
income
tax
purposes.
By
notices
of
reassessment,
dated
February
15,
1989,
the
Minister
of
National
Revenue
disallowed
the
plaintiff's
claims
for
the
deduction
of
a
reserve
for
doubtful
debts
in
its
1982,
1983
and
1984
taxation
years
by
the
amounts
claimed
in
those
years
and
denied
the
deduction
of
the
non-capital
losses
arising
in
the
plaintiff's
1982
and
1983
taxation
years
in
computing
its
taxable
income
in
its
1981
taxation
year.
By
notices
of
objection
dated
May
15,
1989
and
July
26,
1989,
the
plaintiff
objected
to
the
reassessments
relating
to
its
1982,
1983,
and
1984
taxation
years
and
relating
to
its
1981
taxation
year
respectively.
By
notice
of
confirmation
dated
October
6,
1989,
the
Minister
of
National
Revenue
confirmed
the
reassessments
relating
to
the
plaintiff's
1982,
1983
and
1984
taxation
years
and
by
notice
of
confirmation
confirmed
the
reassessment
relating
to
the
plaintiff's
1981
taxation
year.
Plaintiff's
position
The
plaintiff
submits
that
the
reassessment
by
the
Minister
of
National
Revenue,
dated
February
15,
1989,
as
it
applies
to
taxation
year
1981
was
issued
beyond
the
time
limitation
set
forth
in
subsection
152(4)
of
the
Act
and
is
therefore
invalid.
In
the
pleadings
it
is
the
plaintiff's
position
that
it
had
as
part
of
its
business
the
establishment
and
pursuit
of
new
corporate
ventures.
The
loans
to
RMDI
were
an
integral
part
of
the
business
of
the
plaintiff.
Therefore,
the
plaintiff's
losses
in
respect
of
RMDI
were
properly
deducted
under
section
9
and
paragraph
18(1)(a)
of
the
Act.
The
plaintiff
is
of
the
view
that
by
making
loans
to
its
subsidiary
companies,
it
has
earned
substantially
more
income
from
the
sale
of
its
manufactured
products
than
would
otherwise
have
been
the
case.
In
addition
to
the
loans
to
its
subsidiaries,
the
plaintiff
made
loans
to
individuals
and
corporations
and
it
is
the
plaintiff's
contention
that
most
of
these
loans
relate
in
one
way
or
another
to
the
business
activities
of
the
plaintiff,
thereby
enhancing
its
overall
business
activities
and
income-earning
potential.
The
plaintiff
maintains
that
it
was
entitled
to
a
deduction
in
respect
of
its
loans
to
RMDI
pursuant
to
either
paragraph
20(1)(I)
or
20(1)(p)
as
the
plaintiff's
ordinary
business
included
the
lending
of
money
and
each
loan
it
made
to
RMDI
was
made
in
the
ordinary
course
of
its
business
of
lending
money.
The
plaintiff
further
maintains
that
when
it
determined
that
the
loans
to
RMDI
became
either
doubtful
or
bad
debts
it
was
entitled
to
the
deduction
claimed
in
the
1982,
1983
and
1984
taxation
years
and
as
such
it
was
entitled
to
deduct
the
non-capital
losses
which
arose
in
the
1982
and
1983
taxation
years
in
computing
its
taxable
income
in
its
1981
taxation
year.
I
have
been
careful
to
add
at
the
beginning
of
the
plaintiff's
position
that
it
is
the
position
as
taken
in
the
pleadings.
Counsel
for
the
defendant
maintained,
"the
argument
that
my
friend
advanced
is
outside
of
those
pleadings,
in
my
submission,
and
indeed
the
positions
taken
by
the
plaintiff
in
the
statement
of
claim
have
been
largely,
if
not
totally,
abandoned
by
my
friend
in
the
course
of
his
argument".
I
shall
deal
with
this
matter
later.
Defendant's
position
The
statement
of
defence
indicates
that
the
reassessment
of
the
plaintiff's
1981
taxation
year
was
issued
with
due
dispatch
and
within
the
time
limitations
and
in
accordance
with
the
provisions
of
subsection
153(4)
of
the
Act
and
is
therefore
valid.
The
defendant
is
of
the
view
that
the
plaintiff
is
in
the
business
of
manufacturing
farm
equipment
and
that
the
plaintiff
is
not
in
the
business
of
lending
money.
The
loans
the
plaintiff
made
to
its
subsidiaries
or
individuals
were
trade
receivables
on
the
sale
of
products.
Therefore,
the
amounts
claimed
by
the
plaintiff
as
doubtful
debts
in
the
1982
and
1983
taxation
years
cannot
be
deducted
under
paragraph
20(1)(p)
of
the
Act
because
the
plaintiff's
ordinary
business
during
the
relevant
period
was
not
the
lending
of
money.
The
defendant's
position
is
that
RMDI
is
a
subsidiary
of
the
plaintiff;
that
the
business
operations
of
RMDI
have
no
relation
to
the
plaintiff's
business;
that
the
loans
advanced
to
RMDI
were
to
finance
the
growth
of
RMDI
and
to
increase
the
value
of
the
shares
the
plaintiff
held
in
RMDI
and
that
the
plaintiff's
loans
to
RMDI
were
non-bearing
interest
loans
and
did
not
contain
any
repayment
terms.
As
such,
if
the
plaintiff
is
determined
to
be
in
the
business
of
lending
money,
the
loans
were
not
made
in
the
ordinary
course
of
business.
Further,
it
is
also
the
defendant's
submission
that
the
loans
to
RMDI
were
not
made
for
the
purpose
of
gaining
or
producing
income
from
a
business
or
property
and
therefore
prohibited
under
paragraph
18(1)(a)
of
the
Act.
The
defendant
maintains
that
the
plaintiff's
investment
in
RMDI
was
on
account
of
capital
and
that
the
plaintiff's
guarantee
for
RMDI
of
$109,047
was
an
outlay
or
payment
on
account
of
capital.
The
defendant
also
submits
that
there
were
no
non-capital
losses
for
the
1982,
1983
and
1984
taxation
years
that
were
deductible
in
computing
taxable
income
in
respect
of
the
plaintiff's
1981
taxation
year,
pursuant
to
the
provisions
of
paragraphs
111(1)(a)
and
111(8)(b)
of
the
Act.
Issues
The
issues
raised
in
this
case
relate
to:
the
validity
of
the
notice
of
reassessment
dated
February
15,
1989
in
respect
of
the
plaintiff's
1981
taxation
year
and
the
deductibility
of
the
losses
relating
to
the
loans
made
by
the
plaintiff
to
RMDI,
either
under
section
9
and
paragraph
18(1)(a)
of
the
Act
or
under
paragraph
20(1)(I)
or
20(1)(p)
of
the
Act.
Pleadings
“Ambush”,
the
word
used
by
counsel
for
the
defendant,
is
probably
inappropriate
in
the
circumstances
here
but
certainly
there
was
a
not
too
subtle
shift
from
the
wording
in
the
pleadings
to
the
emphasis
on
adventure
in
the
nature
of
trade
at
trial.
I
would
agree
with
counsel
for
the
defendant
who
states
at
pages
35-37
of
the
transcript:
.
.
.
the
rules
of
pleading
have
been
developed
over
the
course
of
a
great
number
of
years
of
litigation
and
have
moved
further
and
further
away
from
allowing
parties
to
raise
at
trial
issues
that
have
not
been
pleaded,
to
present
evidence
that
cannot
be
anticipated,
or
to
in
other
ways
ambush
the
other
part.
My
friend
is
able
to
argue
that
it
perhaps
supports
an
adventure
in
the
nature
of
trade,
but
no
amendment
was
moved
up
to
and
including
the
close
of
my
friend's
case,
and
indeed
up
to
and
including
the
close
of
my
friend's
argument
My
Lord,
on
that
basis
I
would
submit
that
the
Court
would
not
be
looking
at
an
adventure
in
the
nature
of
trade
argument
and
would
then
be
restricted
to
the
issues
as
raised
in
the
pleadings,
and
for
the
reasons
that
I
outlined
in
dealing
with
paragraph
40,
that
allegation
in
the
pleadings
has
simply
not
been
supported
by
the
evidence.
Defence
counsel's
argument
was
most
persuasive,
especially
considering
the
fact
that
I
had
read
the
pleadings
in
the
record
and
did
not
read
in
the
fact
that
the
plaintiff
would
be
emphasizing
or
even
referring
to
an
adventure
in
the
nature
of
a
trade.
However,
defence
counsel
had
open
to
him
the
opportunity,
as
stressed
by
counsel
for
the
plaintiff:
(page
170
of
transcript):
If
my
friend
thought
that
the
pleadings
were
vague,
I
believe
the
rules
do
provide
for
a
request
for
specifics,
and
that
was
not
done
in
this
case.
What
was
done
in
this
case
was
there
was
an
examination
for
discovery
held,
and
at
that
examination
for
discovery
Mr.
Terry
Summach
was
examined
for
discovery
and
questioned
extensively
with
respect
to
this
particular
transaction.
And
in
regards
to—in
reply
to
a
question
Mr.
Summach
is
reported
from
the
transcript
of
the
examination
for
discovery
to
have
said
the
following:
Well,
you
know,
I
guess
I
don't
know,
like
if
it
was
all
that
complex
it
was,
you
know,
it
was
probably
an
issue
of
let's
get
Flexi-Coil
involved
in
this
thing
and
finance
the
thing
and
turn
it
into
something
of
value
and
then,
you
know,
probably
dump
it.
Because
you
know,
like
I
say,
we
are
in
the
farm
machinery
business
and
this
seemed
like
a
nice
opportunity
to
turn
some
cash.
I
would
have
preferred
clearer
pleadings
given
the
fact
that
all
of
the
evidence
is
known
to
the
plaintiff,
whereas
the
defendant
must
base
its
case
on
assumptions
made
and
must
really
answer
the
allegations
in
the
statement
of
claim.
On
balance,
however,
the
defendant
must
seek
information
if
pleading
seems
vague
and
here
the
pleading
of
section
9
should
have
alerted
the
defendant
along
with
the
evidence
at
the
examination
for
discovery.
For
the
edification
of
the
plaintiff
I
came
within
a
whisker
of
allowing
the
defendant's
position.
Validity
of
the
notice
of
reassessment
in
respect
of
the
plaintiff's
1981
taxation
year
Section
152
of
the
Act,
among
other
things,
provides
the
Minister
of
National
Revenue
with
the
authority
to
make
assessments
of
tax,
interest
and
penalties
and
sets
statutory
time
limits
on
assessments,
reassessments
and
additional
assessments
by
the
Minister
of
National
Revenue.
As
this
section
has
been
amended
a
number
of
times
since
1982,
I
think
it
would
be
useful
to
set
out
the
various
subsections
and
the
relevant
amendments
made
within
the
time
period
applicable
to
this
appeal.
Subsection
152(4)
prescribes
the
time
period
in
which
the
Minister
of
National
Revenue
may
reassess
tax.
In
1982
the
limitation
period
for
reassessment
under
subsection
152(4)
was
four
years
from
the
date
of
mailing
an
original
notice
of
assessment
unless
there
was
misrepresentation
or
other
fault,
or
a
waiver
by
the
taxpayer.
At
that
time,
subsection
152(4)
read
in
part
as
follows:
152.
(4)
The
Minister
may
at
any
time
assess
tax,
interest
or
penalties
under
this
Part
or
notify
any
person
by
whom
a
return
of
income
for
a
taxation
year
has
been
filed
that
no
tax
is
payable
for
the
taxation
year,
and
may
(b)
within
4
years
from
the
day
referred
to
in
subparagraph
(a)(ii),
[i.e.,
the
day
of
mailing
of
a
notice
of
an
original
assessment
or
a
notification
that
tax
is
payable
for
a
taxation
year]
in
any
other
case,
reassess
or
make
additional
assessments,
or
assess
tax,
interest
or
penalties
under
this
Part,
as
the
circumstances
require.
In
1983
the
four-year
limitation
period
was
extended
to
seven
years.
At
that
time
the
subsection
read
in
part
as
follows:
152.
(4)
The
Minister
may
at
any
time
assess
tax,
interest
or
penalties
under
this
Part,
or
notify
in
writing
any
person
by
whom
a
return
of
income
for
a
taxation
year
has
been
filed
that
no
tax
is
payable
for
the
taxation
year,
and
may
(a)
.
.
.
(b)
within
7
years
from
the
day
referred
to
in
subparagraph
(a)(ii),
if
(i)
an
assessment
or
reassessment
of
the
tax
of
the
taxpayer
was
required
pursuant
to
subsection
(6)
or
would
have
been
required
if
the
taxpayer
had
claimed
an
amount
by
filing
the
prescribed
form
referred
to
in
that
subsection
on
or
before
the
day
referred
to
therein,
or
(ii)
.
.
.
and
(c)
within
4
years
from
the
day
referred
to
in
subparagraph
(a)(ii),
in
any
other
case,
reassess
or
make
additional
assessments,
or
assess
tax,
interest
or
penalties
under
this
Part,
as
the
circumstances
require,
except
that
a
reassessment,
an
additional
assessment
or
assessments
may
be
made
under
paragraph
(b)
after
4
years
from
the
day
referred
to
in
subparagraph
(a)(ii)
only
to
the
extent
that
it
may
reasonably
be
regarded
as
relating
to
the
assessment
or
reassessment
referred
to
in
that
paragraph.
The
time
for
extending
the
period
of
loss
carryback
under
subsection
111(1)
to
a
previous
taxation
year
was
also
extended
from
one
year
to
three
years.
Therefore,
in
1982
the
period
allowed
for
carryback
losses
in
respect
of
the
plaintiff's
1981
taxation
year
was
one
year.
Subsection
111(1)
as
amended
by
S.C.
1983-84,
c.
1,
subsection
54(1)
and
applicable
with
respect
to
the
computation
of
taxable
income
for
the
1983
and
subsequent
taxation
years
is
set
out
in
part
below:
111.
(1)
For
the
purposes
of
computing
the
taxable
income
of
a
taxpayer
for
a
taxation
year,
there
may
be
deducted
such
portion
as
he
may
claim
of
(a)
his
non-capital
losses
for
the
taxation
year
immediately
preceding
and
the
3
taxation
years
immediately
following
the
year
Further,
subsection
152(6)
referred
to
in
subsection
152(4)
as
amended,
outlines
the
procedure
whereby
a
taxpayer
may
request
and
obtain
carryback
to
earlier
taxation
years
of
certain
deductions
and
credits,
including
loss
carrybacks
under
section
111.
Prior
to
April
19,
1983,
and
including
1982,
the
subsection
152(6)
carryback
provision
was
limited
to
loss
carrybacks
under
section
111.
The
subsection
as
amended
by
the
S.C.
1983-84,
c.
1,
subsection
84(4)
is
reproduced
in
part
below:
152.
(6)
Where
a
taxpayer
has
filed
the
return
of
income
required
by
section
150
for
a
taxation
year
and
an
amount
is
subsequently
claimed
by
him
or
on
his
behalf
for
the
year
as
(c)
a
deduction
under
.
.
.
section
111
in
respect
of
a
loss
for
a
subsequent
taxation
year
by
filing
with
the
Minister,
on
or
before
the
day
on
or
before
which
the
taxpayer
is,
would
be
if
a
tax
under
this
Part
were
payable
by
him
for
that
subsequent
taxation
year,
required
by
section
150
to
file
a
return
of
income
for
that
subsequent
taxation
year,
a
prescribed
form
amending
the
return,
the
Minister
shall
reassess
the
taxpayer's
tax
for
any
relevant
taxation
year
(other
than
a
taxation
year
preceding
the
particular
taxation
year)
in
order
to
take
into
account
the
deduction
claimed.
Subsection
84(6),
S.C.
1983-84,
c.
1,
amending
these
sections
states
that:
(6)
Subsections
(3)
and
(4)
are
applicable
after
April
19,
1983,
except
that
where
the
subsequent
taxation
year
referred
to
in
subsection
152(6)
of
the
said
Act,
as
enacted
by
subsection
(4),
is
a
taxation
year
ending
after
1982,
the
prescribed
form
referred
to
in
subsection
152(6)
may
be
filed
for
the
subsequent
taxation
year
at
any
time
on
or
before
the
later
of
(a)
the
day
on
or
before
which
it
would
be
required
by
the
said
subsection
152(6)
to
be
filed,
and
(b)
the
day
that
is
90
days
after
the
day
on
which
this
Act
is
assented
to.
Prescribed
forms
include
Forms
T1A
or
T2A.
In
this
case
the
plaintiff
filed
Form
T2A
on
March
30,
1983
and
on
March
30,
1984.
Subsection
152(4)
was
subsequently
amended
and
the
limitation
period
for
reassessments
in
respect
of
loss
carryback
to
a
previous
taxation
year
was
reduced
from
seven
to
six
years.
This
six-year
limitation
period
was
made
applicable
to
the
1983
and
subsequent
taxation
years.
The
plaintiff's
position
with
respect
to
the
reassessment
of
its
1981
taxation
year,
as
it
relates
to
the
1982
loss
carryback
to
1981,
is
that
the
four-year
limitation
period
provided
for
in
subsection
152(4)
is
the
proper
limitation
period
and
that
the
amendment
to
subsection
152(4)
does
not
apply,
as
per
the
reasoning
in
Placer
Dome
Inc.
v.
Canada,
[1991]
1
C.T.C.
361,
91
D.T.C.
5115
(F.C.T.D.).
Therefore,
the
reassessment
dated
February
18,
1989
was
issued
beyond
the
limitation
period
and
cannot
stand.
It
is
also
the
plaintiffs
position
that
the
reassessment
related
to
a
second
carryback
loss
in
its
1983
taxation
year
and
carried
back
to
the
1981
taxation
year
was
also
beyond
the
limitation
period
and
therefore
invalid.
The
plaintiff
maintains
that
it
is
clear
from
the
wording
that
the
intent
of
this
provision
is
that
an
assessment
beyond
the
four
years
applies
only
to
the
limited
circumstances
referred
to
in
paragraph
152(4)(b),
which
provides
that
the
Minister
of
National
Revenue
can
reassess
within
seven
years
from
the
date
referred
to
in
(a)
(ii)
if
an
assessment
or
reassessment
of
tax
was
required
pursuant
to
subsection
152(6).
Subsection
152(6)
provides
that
where
a
taxpayer
claims
a
loss
under
section
111
in
respect
of
a
loss
for
a
subsequent
year
the
Minister
of
National
Revenue
shall
reassess
the
taxpayer
for
any
relevant
tax
year
(other
that
a
tax
year
preceding
the
particular
year)
in
order
to
take
into
account
the
claimed
deduction.
Thus,
according
to
the
plaintiff,
the
reassessment
in
subsection
152(4)
arises
out
of
the
taxpayer's
claiming
a
deduction
under
section
111
and
is
limited
to
circumstances
where
the
taxpayer
has
claimed
a
deduction
under
section
111.
The
application
of
the
loss
carryback
does
not
extend
to
situations
where
a
claim
has
been
made
for
the
loss
carryback
and
the
Minister
of
National
Revenue
has
reassessed
under
section
152(4)
or
152(6)
and
then
the
Minister
of
National
Revenue
wants
to
change
that
assessment
where
it
allows
the
loss
carryback.
If
I
understand
the
plaintiff's
argument,
an
assessment
made
by
the
Minister
of
National
Revenue
in
respect
of
a
correction
by
the
Minister
of
National
Revenue,
is
not
a
reassessment
contemplated
under
section
152(6)
in
that
it
is
not
a
reassessment
that
results
from
the
taxpayer
seeking
a
deduction,
but
a
reassessment
that
results
from
the
Minister
of
National
Revenue
having
reconsidered
the
taxpayer's
claim
after
it
was
allowed.
The
plaintiff
also
submits
that
there
is
nothing
in
subsection
152(6)
that
allows
for
the
reassessment
made
against
the
taxpayer
in
these
circumstances,
in
respect
of
the
carryback
of
the
1983
loss
to
1981.
The
final
aspect
of
the
plaintiff's
argument
is
that
subsection
152(4)
was
further
amended
in
1984,
reducing
the
reassessment
period
from
four
to
three
years
and
from
seven
to
six
years.
If
these
amendments
apply
after
April
19,
1983,
to
either
the
1982
or
1983
taxation
years,
then
the
limitation
period
in
respect
of
the
1981
taxation
year
is
not
seven
years
but
six
years.
Therefore,
the
limitation
period
would
expire
on
June
28,
1988
and
the
February
1989
reassessments
would
be
beyond
the
limitation
period
and
invalid.
Counsel
for
the
defendant
agreed
with
the
determination
in
Placer
Dome
and
indicated
that
if
the
case
before
me
was
limited
to
the
1982
taxation
year
the
appeal
would
have
to
be
allowed
with
respect
to
the
notice
of
reassessment
being
out
of
time,
based
on
the
reasoning
in
Placer
Dome.
However,
in
this
case
there
was
a
further
application
by
the
plaintiff
after
April,
1983,
the
date
for
adjustment
under
subsection
152(6),
of
its
1981
taxation
year.
Therefore,
this
is
a
situation
where
the
plaintiff
has
taken
the
opportunity
afforded
by
the
amended
section
111,
after
April
19,
1983,
to
claim
a
loss
carry
back
to
1981.
The
defendant
argues
that
this
is
sufficient
to
allow
subsection
152(4)
in
its
expanded
seven-year
rule
to
apply
not
only
to
the
1983
losses
carried
back
but
to
apply
to
other
losses
carried
back
pursuant
to
an
application
under
subsection
152(6).
The
defendant
submits
that
the
wording
is
clear
that
the
Minister
of
National
Revenue
may
assess
within
seven
years
from
the
date
of
assessment
if
an
assessment
was
required
pursuant
to
subsection
152(6)
only
to
the
extent
it
may
be
reasonably
regarded
as
relating
to
the
assessment
or
reassessment
referred
to
in
that
paragraph,
and
that
reasoning
would
apply
not
only
to
applications
made
after
April
19,
1983
but
to
any
application
made
thereunder.
In
other
words,
by
filing
its
application
after
April
19,
1983
the
plaintiff
opened
itself
to
the
seven-year
limitation
as
it
relates
not
only
to
those
reassessments
resulting
from
the
particular
subsection
152(6)
amendment
but
to
any
subsection
152(6)
amendment.
In
this
case,
the
defendant
submits,
there
was
a
application
after
April
19,
1983
(which
was
not
the
case
in
Placer
Dome)
and
this
is
sufficient
to
open
up
the
1981
taxation
year.
In
reply
to
the
second
aspect
of
the
plaintiff's
argument,
that
the
amendment
reduced
the
limitation
period
from
seven
to
six
years,
the
defendant
notes
that
the
amendment
and
the
comments
outlined
in
the
Commons
Bill
provide
that
it
be
applied
to
1983
and
later
taxation
years.
The
defendant
further
submits
that
this
case
deals
with
the
1981
taxation
year,
the
claim
has
already
been
made
and
completed
prior
to
the
amendment
and
therefore
the
reduction
from
seven
to
six
years
is
not
applicable
to
the
facts
of
this
case.
With
respect
to
the
plaintiff's
subsection
152(6)
argument,
the
defendant
maintains
that
there
is
nothing
in
the
section
that
changes
the
applicability
of
subsection
152(4)
and
to
suggest
that
an
application
was
not
made
pursuant
to
subsection
152(6)
is
not
in
accordance
with
the
concession
made
by
Mr.
Summach.
The
defendant
argues
that
there
is
no
doubt
that
the
application
was
made,
the
dispute
lies
with
how
it
affects
the
loss
carrybacks.
The
proper
interpretation
to
be
given
to
subsections
152(4)
and
(6)
and
their
respective
amendments
was
effectively
dealt
with
by
MacKay,
J.
in
Placer
Dome
and
the
parties
are
in
agreement
that
his
interpretation
accurately
describes
the
state
of
the
law.
At
pages
370-71
(D.T.C.
5122)
MacKay,
J.
concluded
that:
.
.
.
subsection
152(4)
as
amended
by
S.C.
1983-
84,
c.
1,
subsections
84(3)
and
84(6),
has
prospective
effect
only,
in
all
aspects
of
its
application
and
is
applicable
only
where
the
opportunity
afforded
by
the
amended
subsection
111(1)
is
taken
by
the
taxpayer
after
April
19,
1983
to
claim
a
loss
carryback,
which
could
only
be
done
for
a
taxation
year
commencing
after
December
31,1982.
In
any
case
like
that
of
the
plaintiff
where
the
loss
was
claimed
in
a
prior
taxation
year
and
carried
back
within
the
then
prevailing
limit
of
one
year,
the
Minister
is
limited
in
the
period
for
reassessment
by
the
terms
of
subsection
152(4)
as
it
was
prior
to
April
19,
1983,
permitting
reassessment
for
a
period
up
to
four
years.
If
it
were
otherwise,
and
the
extended
period
for
reassessment
at
the
option
of
the
Minister
were
deemed
to
apply,
transactions
completed
under
the
law
then
prevailing
(here
the
filing
of
a
tax
return,
its
assessment
and
reassessment
by
the
Minister)
could
be
affected
adversely
to
the
interests
of
the
taxpayer.
With
respect
to
the
later
amendments
of
subsection
152(4),
reducing
the
seven
year
period
within
which
the
Minister
of
National
Revenue
could
reassess
to
six
years,
Kempo,
T.C.J.
held
in
Silverman
v.
M.N.R.,
[1989]
2
C.T.C.
2024,
89
D.T.C.
307
that
looking
at
the
section
as
a
whole,
Parliament
intended
to
make
the
amendment
applicable
in
relation
to
the
1983
and
subsequent
taxation
years
and
it
did
not
intend
to
make
the
amendment
applicable
on
a
particular
date
arising
in
the
1983
and
subsequent
years.
In
that
case,
the
taxpayer
in
filing
his
return
for
1980
showed
a
non-capital
loss,
which,
pursuant
to
section
111,
was
carried
back
and
deducted
in
computing
his
taxable
income
for
1979.
The
original
notice
of
assessment
was
dated
June
24,
1980.
As
a
consequence
of
a
reassessment
of
the
taxpayer's
1980
return,
the
Minister
of
National
Revenue
reassessed
the
taxpayer's
1979
taxation
year,
by
notice
of
reassessment
dated
October
17,
1986.
The
Tax
Court
found,
based
on
its
interpretation
of
the
subsection
152(4),
that
the
Minister
of
National
Revenue
was
within
its
permitted
seven-year
reassessment
period.
The
case
before
me
is
different
than
the
above-noted
cases,
in
that
two
loss
carrybacks
are
involved,
a
1982
loss
carried
back
to
the
1981
taxation
year
under
the
pre-1983
amendment
and
a
further
loss
carryback
in
1983
also
in
respect
of
the
1981
taxation
year.
Therefore
in
dealing
with
the
question
of
whether
or
not
all
or
a
portion
of
the
reassessments
are
barred
one
must
determine
if
the
subsection
152(4)
amendments
apply
to
the
plaintiff
and
if
so,
how?
I
agree
with
the
plaintiff
that
based
on
the
reasoning
and
finding
of
Placer
Dome
the
reassessment
of
the
1981
taxation
year
as
it
relates
to
the
carryback
of
the
1982
loss
is
subject
to
the
four-year
limitation
period
as
provided
for
in
subsection
152(4)
prior
to
amendment
and
therefore
the
reassessment
dated
February
15,
1989
with
respect
to
the
1982
loss
carryback
was
issued
beyond
the
time
limitation
and
is
invalid.
Regarding
the
second
loss
carryback,
the
plaintiff
argued
that,
based
on
a
plain
reading
of
the
amendments,
subsections
152(4)
and
152(6)
are
restrictive
in
the
sense
that
the
seven-year
reassessment
period
applies
only
if
an
assessment
of
tax
was
required
pursuant
to
subsection
(6),
i.e.,
if
the
taxpayer
claimed
a
deduction
under
section
111.
According
to
the
plaintiff,
the
case
before
me
involves
an
assessment
that
the
Minister
of
National
Revenue
made
in
respect
of
a
correction
and
as
such
is
not
a
reassessment
contemplated
under
subsection
152(6).
With
respect
I
cannot
accept
this
portion
of
the
plaintiff's
argument.
In
keeping
with
MacKay,
J.'s
comments,
I
believe
this
is
a
situation
where
the
opportunity
afforded
by
the
amended
subsection
111(1)
is
taken
by
the
taxpayer
after
April
19,
1983
to
claim
a
loss
carryback,
which
could
only
be
done
for
a
taxation
year
commencing
after
December
31,
1982,
as
the
plaintiff
filed
the
prescribed
form
T2A
amending
its
1981
tax
return,
on
March
30,
1984.
The
question
then
becomes:
does
the
expanded
limitation
period
apply
to
just
the
1983
year
(the
plaintiff's
position)
or
does
it
apply
not
only
to
the
1983
losses
carried
back
but
to
other
losses
carried
back
pursuant
to
an
application
under
subsection
152(6)?
This
is
not
a
case,
as
in
Placer
Dome,
where
the
loss
was
claimed
in
a
prior
taxation
year
and
carried
back
within
the
prevailing
limit
of
one
year
and
the
Minister
of
National
Revenue
is
limited
to
the
terms
of
subsection
152(4)
as
it
was
prior
to
April
19,
1983,
namely
a
four-
year
reassessment
period.
Further,
in
this
case,
unlike
Placer
Dome,
there
was
an
application
for
the
loss
carryback
to
1981.
I
am
of
the
opinion
that
the
seven-
year
assessment
period
applies
in
respect
of
the
1983
loss
carryback
to
1981
and
therefore
this
portion
of
the
1981
notice
of
reassessment
is
valid.
In
regards
to
the
plaintiff's
argument
that
the
further
amended
subsection
152(4),
with
a
six-year
reassessment
period,
would
apply
to
the
facts
of
this
case,
I
agree
that
this
amendment
is
applicable
to
the
1983
and
later
taxation
years.
Here
we
have
a
situation
relating
to
the
1981
taxation
year,
where
a
claim
has
already
been
made
and
completed
prior
to
the
subsequent
amendment
and
as
such
the
reduction
from
seven
to
six
years
is
clearly
not
applicable.
Money
lender
or
operating
a
business
of
lending?
First
I
should
indicate
that
nothing
in
the
evidence
convinced
me
that
the
acquisition
of
RMDI
was
an
integral
part
of
the
business
of
the
plaintiff,
nor
was
the
plaintiff
either
a
lending
institution
or
in
the
business
of
lending
money.
An
examination
of
Exhibit
P-7
and
the
evidence
of
Terry
S.
left
no
room
for
doubt
on
that
issue.
All
loans
were
really
"in
house”
deals
to
help
employees,
and
in
situations
where
larger
amounts
were
loaned",
the
plaintiff
only
expected
to
receive
the
money
lent
plus
the
cost
to
the
corporation
and
in
several
instances
no
charges
were
made.
The
process
was
commendable
but
it
certainly
didn't
support
any
contention
that
the
plaintiff
was
operating
in
a
business
sense
under
its
Memorandum
of
Association
to
lend
money.
Therefore,
the
plaintiff
is
not
entitled
to
a
deduction
in
respect
of
its
loans
to
RMDI
pursuant
to
either
paragraph
20(1)(l)
or
20(1)(p)
as
the
plaintiff's
ordinary
course
of
business
did
not
include
the
lending
of
money
and
the
plaintiff
is
not
in
the
business
of
lending
money.
Adventure
in
the
nature
of
trade?
Lloyd
Mineer
(Mineer)
was
the
brother-in-law
of
Terry
S.
Mr.
and
Mrs.
Mineer
moved
to
a
new
home
in
Richmond
where
they
met
Brian
Woolley,
a
neighbour.
Woolley
was
sales
manager
for
the
company
of
Robert
Murray
(Murray).
This
was
"a
floral
giftware",
Christmas
type
of
goods
business
and
he
[Woolley]
had
worked
for
them
for
quite
some
time.
Murray
wanted
out
and
Woolley
wanted
the
Mineers
to
join
him
and
a
couple
of
other
employees
in
purchasing
the
business.
The
Mineers
looked
over
the
proposition,
were
very
interested
but
clearly
did
not
have
(nor
did
any
of
the
others)
sufficient
capital
to
acquire
the
company.
In
the
middle
of
June,
1980,
Mineer
looked
at
competing
companies,
weighing
their
strengths
and
weaknesses
and
filed
away
information
about
it.
On
a
social
occasion
in
October
1980
the
Mineers
and
the
Terry
Summachs
were
at
dinner.
Terry
S.
asked
questions
and
finally
said
to
Mineer:
“Well,
why
don’t
you
put
something
together"
(p.
77
of
transcript).
Terry
S.,
according
to
Mineer,
wanted
to
know
if
it
was
the
kind
of
business
that
could
make
a
lot
of
money,
how
fast,
and
what
kind
of
money
might
be
required.
"Give
me
just
some
of
the
financial
things
that
it
looks
like
and
if
it
looks
like
something
that
we
can
get
in,
get
it,
and
get
out,
well,
let's
see
what
it's
like"
(p.
78
of
transcript).
Mineer
put
together
the
information
(Exhibit
P-8)
for
Robert
Murray
Sales
Ltd.
and
some
of
its
competitors.
Mineer
confirmed
in
evidence
that
Terry
S.
would
come
in
because
of
high
gross
margins
(as
high
as
70%)
and“
It
was
an
opportunity,
to
his
way
of
thinking,
a
short
period
of
time
to
make
some
money
and
get
out."
[Emphasis
added.]
Now
to
the
evidence
of
Terry
and
Ken
S.
(transcript,
page
4):
Flexi-Coil
designs,
manufactures
and
sells
to
farm
machinery
dealers
farm
equipment.
We
specialize
in
seeding,
tillage,
and
chemical
application
equipment
for
dry
land
grain
farming.
I
have
already
indicated
the
size
and
success
of
this
operation.
Terry
S.
confirms
Mineer's
approach
to
him—"to
consider
becoming
involved
with
them
financially
to
help
them
acquire
a
company
by
the
name
of
Robert
Murray
Sales
Ltd.”
When
approached,
Terry
S.
tells
us
at
page
9
of
the
transcript:
And
it
was
at
a
time
when
I
just
completed
a
real
estate
transaction
that
had
generated,
we
thought,
a
considerable
amount
of
revenue,
and
so
it
looked
like
a
reasonable
thing
for
me
to
get
involved
with
them.
My
part
really
was—at
that
point
was
from
a
financial
side.
I
did
not
see
it
at
that
point
as
the
large
venture
that
it
turned
out
to
be
and
when
we—I
looked
at
the
records,
I
looked
at
the
business
plan
and
various
other
things
around
the
business
and
it
turned
out
that
it
was
going
to
take
about
a
total
of
the
sum
of
1.1
million
to
buy
Robert
Murray
Sales,
and
we
bought
the
assets
and
those
assets
were
put
into
the
company
that
we
named
Robert
Murray
Design
Images
Ltd.
[Emphasis
added.]
And
later
at
pages
11-12
of
the
transcript:
Mr.
Mckenzie:
Q.
Could
you
indicate
to
me
Court
[sic]
why
you
became
personally
involved?
A.
Well,
I
guess
there
were
two
issues,
and
the
first
was
simply
to
help
my
sister
get
involved
in
a
business
that
she
wanted
to
become
involved
in
with
her
husband.
However,
I
wouldn't
do
that
without
there
being
financial
justification
behind
it
and
I
was
convinced
by
these
people
that
there
was
great
possibility
for
profit
and
in
helping
them
get
started
they
could
end
up
with
a
business
and
I
could
end
up
making
some
money
out
of
it.
We
believed
that
the
major
chain
stores,
such
as
Eaton's
and
Sears
and
the
Bay
were
changing
their
buying
practices
and
centralizing
their
buying
more
than
the
individual
stores
going
out
and
buying
things
like
this.
That
was
my
understanding
at
the
time
at
least.
Whether
or
not
in
fact
that
was
true
I
don’t
know.
And
so
there
was
a
major
effort
to
try
and
move
in
and
capture
some
of
that
centralized
buying
market,
which
can
result
obviously
in
very
large
dollars
if
it
can
be
achieved.
And
so
there
was
quite
a
change
in
the
style
of
the
company
and
I
say
that
because
we
were
losing
money
at
first
and
I
saw
that
as
kind
of
a
business
development
cost
while
we
established
this
new
style
of
doing
business.
[Emphasis
added.]
The
business
and
Terry
S.,
however,
ran
into
serious
difficulties
as
a
result
of
several
factors.
First,
despite
Terry
S.'s
business
acumen
in
the
farm
machinery
business,
that
talent
was
not
much
in
evidence
here.
On
the
basis
of
conversations
with
his
sister
and
brother-in-law,
and
an
examination
of
the
data
in
Exhibit
P-7
(who
prepared
it,
Mineer
or
Woolley
or
both?),
he
was
prepared
to
commit
up
front
1.5
million
dollars.
No
one
else
contributed
any
significant
amount.
I
guess
initially
I
think
I
had
put
about
$600,000
into
the
venture
and
that
was—and
in
addition
to
that
the
company,
based
on
my
guarantee,
had
borrowed
additional
funds
that
it
got
to
the
point
where
we
had
inventory
coming
in
for
the
next
selling
season
and
there
was
not
going
to
be
enough
money
there
and
so
at
that
point
we
had
to—if
this
was
all
going
to
happen
we've
got
to
get
additional
funding
and
Flexi-Coil
seemed
to
be
the
logical
source
because
Flexi-Coil
had
availability
of
a
line
of
credit
at
that
time
We
also
heard
that
the
real
estate
deal
fell
through
leaving
Terry
S.
in
a
position
where
he
could
no
longer
commit
that
money,
had
guaranteed
a
bank
loan,
advanced
$600,000
and
then
reality
settled
in
by
late
1981
or
early
January
1982,
"that
it
got
to
the
point
where
we
had
inventory
coming
in
for
the
next
selling
season
and
there
was
not
going
to
be
enough
money
there".
We
had
Terry
S.'s
candid
observation:
"It
was
the
importation
and
wholesaling
of
artificial
flowers
and
plants
and
something
that
by
the
way
I
knew
nothing
about
prior
to
this
time
and
I
still
admit
to
not
knowing
very
much
about
it.”
After
the
real
estate
deal
failed
to
generate
the
revenue
anticipated,
Mineer
saw
it
this
way
(page
82
of
transcript):
Q.
What
did
you
do?
A.
We
turned
over
Flexi-Coil
to
the
position
that
they
ended
up
with,
a
lot
of
shares.
Q.
Okay.
A.
There
was
no
choice.
We
had
to
have
the
cash
in
order
to
go
through
with
it.
Everything
up
to
this
point
had
to
do
with
Terry
S.
personally
and/or
his
company
Summach
Management
Company.
Terry
S.'s
situation
was
a
textbook
example
of
an
adventure
in
the
nature
of
trade.
However,
it
is
not
his
tax
position
but
that
of
Flexi-Coil
we
are
dealing
with
here.
Does
the
eventual
involvement
of
the
plaintiff
with
RMDI
qualify
as
an
adventure
in
the
nature
of
trade?
It
is
clear
from
the
evidence
that
it
does
not.
The
situation
facing
the
plaintiff
was
considerably
different
than
that
facing
Terry
S.
when
he
first
decided
to
finance
RMDI.
Had
the
assurances
of
Woolley
and
Mineer
been
accurate
or
even
close
with
respect
to
the
firm's
potential,
then
RMDI
would
have
evolved
much
differently,
and
Terry
S.
would
never
have
had
to
approach
the
plaintiff.
Even
to
this
day
Mineer
talks
about
what
they
"believed"
which
was
in
fact
not
the
case.
There
was
grand
talk
about"
the
opportunity
to
pick
up
Eaton's,
which
was
going
to
be
something
in
the
neighbourhood
of
$800,000
for
the
business"
(Mineer
at
page
86
of
transcript).
In
fact,
Eaton's
paid
for
a
sample
order
costing
about
$1000.
The
schemes
sounded
wonderful
but
the
reality
was
quite
different.
Terry
S.
who
conceded
not
knowing
much
about
the
flower
business
was
completely
taken
in
by
this
opportunity
for
investment,
but
with
the
handwriting
on
the
wall,
Flexi-Coil
could
not
or
should
not
have
been.
What
was
the
situation
when
the
plaintiff
became
involved?
It
was
vastly
different
from
the
situation
facing
Terry
S.
when
he
first
became
involved.
Terry
S.
“believed
.
.
.
the
projections
were
that
in
the
next
year
we
were
going
to
be
able
to
sell
at
least
$7
million
I
believe
was
the
figure
that
was
thrown
around,
and
we
thought
it
was
going
to
grow
from
there,
and
that
was
all
at
50
per
cent
margin,
and
so
you
know
the
recovery
was
in
sight”
(page
25
of
transcript).
Mineer
had
done
most
of
the
work
on
the
projection,
a
man
who
had
no
expertise
in
the
floral
business,
nor
any
knowledge
of
the
business
at
all
until
approached
by
Woolley.
Terry
S.
tells
us
I'd
always
really
trusted
the
people
there
and
I
had
been
a
little
lax
on
not
pursuing—you
know,
actually
checking
out
all
the
documentation
that
they
said
was
there"
(page
28
of
transcript;
emphasis
added).
One
projection
was,
"a
very
large
Christmas
order
from
Eatons
and
when
I
I
say
very
large,
I
don't
remember
how
large
that
was,
but
it
would
have
been
at
least
a
half
a
million
dollars,
and
maybe
as
much
as
a
million
and
a
half
dollars,
for
the
next
Christmas
season".
When
checked,
as
earlier
stated,
the
order
was
for
a
small
sample
order
of
$1,000.
We
know
several
things
about
the
plaintiff's
involvement.
First,
it
was
sufficiently
unusual
that
Terry
S.
needed
the
approval
of
Ken
S.
It
is
also
clear
that
Ken
S.
wanted
no
part
of
the
deal,
and
was
not
convinced
it
was
a
good
thing
for
Flexi-Coil,
who
were
after
all
in
the
farm
machinery
business.
It
was
also
clear
that
since
1975
Ken
S.
was
semi-retired
or
"they
might
say
I
was
retired"
and
from
that
date
Terry
S.
effectively
ran
the
company.
Ken
S.
was
eventually
persuaded
by,
“the
facts
as
to
the
contracts
that
were
supposed
to
be
coming
up,
Eatons,
Sears
and
so
on
..
.
and
with
their
advertising
brochures
that
it
looked
like
we
were
going
to
make
money."
He
did
not
know
in
detail
the
extent
of
the
debt
that
existed
at
that
time.
Nor
did
he
know
how
much
Flexi-Coil
would
be
required
to
inject.
It
struck
me
that
Ken
S.’s
position
as
a
retired
or
semi-retired
person
left
him
remarkably
disinterested
in
the
project
to
purchase
or
finance
RMDI.
But
of
real
significance
to
me
was
the
dire
straits
in
which
Terry
S.
found
himself
and
with
no
further
money
of
his
own,
no
possibility
of
borrowing
further
from
the
bank
and
this
pronouncement
by
Mineer
that
it
was
Terry
S.
who
suggested,
“we
can
get
Flexi-Coil
involved”
(transcript,
page
82).
Q.
What
did
you
do?
Could
you
just—
A.
We
turned
over
Flexi-Coil
to
the
position
that
they
ended
up
with,
a
lot
of
the
shares.
Q.
Okay.
A.
There
was
no
choice.
We
had
to
have
the
cash
in
order
to
go
through
with
it.
[Emphasis
added.]
This
was
plainly
and
simply
a
bailout
situation.
Money
was
committed
by
the
plaintiff,
shares
were
transferred
to
it
by
the
shareholders,
and
at
a
time
when
all
projections
were
clearly
wrong
and
had
no
basis
in
fact.
Counsel
for
the
plaintiff
chastised
counsel
for
the
defendant
for
even
suggesting
this
when
he
had
not
put
the
question
to
Terry
S.
or
Ken
S.
Counsel
for
the
defendant,
however,
did
put
a
lot
of
questions
and
secured
a
good
deal
of
evidence
that
leaves
no
room
for
doubt
that
this
was
a
bailout.
The
plaintiff
and
its
accountants
moved
very
quickly
to
a
tax
stance
initially
accepted
by
the
defendant.
Even
a
cursory
examination
or
checking
of
the
projections
would
have
revealed
the
truth—there
were
not
nor
were
there
going
to
be
sales
of
the
order
of
magnitude
used
to
first
convince
Terry
S.
and
later
Ken
S.
It
should
be
mentioned
that
counsel
for
the
plaintiff
also
did
not
put
the
direct
question,
"Was
this
a
bailout?”
to
either
Ken
S.
or
Terry
S.
Operating
motivation
The
plaintiffs
amended
position
was
that
the
loans,
advances
and
the
shares
acquired
were
part
of
an
adventure
in
the
nature
of
trade
and
therefore
any
gains
or
losses
were
on
account
of
income
and
therefore
the
losses
were
deductible.
In
order
for
the
loans
to
be
deductible
the
Court
must
be
satisfied
that
the
operating
motivation
of
the
plaintiff
in
acquiring
the
asset,
namely
RDMI,
or
advancing
the
loans
and
acquiring
shares
was
for
the
purpose
of
resale
of
profit,
i.e.,
an
adventure
in
the
nature
of
trade.
In
this
regard,
counsel
for
plaintiff
referred
to
Racine
v.
M.N.R.,
[1965]
C.T.C.
150,
65
D.T.C.
5098.
Although
the
Racine
case
dealt
with
whether
on
the
facts
the
acquisition
and
disposition
of
shares
constituted
an
adventure
in
the
nature
of
trade
or
whether
it
was
an
account
of
capital
and
taxable
as
profits,
counsel
urged
me
to
follow
the
approach
in
Racine
in
the
disposition
of
this
case.
The
following
comments
by
Noël,
J.
were
noted
at
page
158
(D.T.C.
5103):
It
seems
to
me
that
one
must
ask
oneself
the
question,
was
the
only
objective
of
the
appellants,
at
the
time
they
made
their
purchase,
to
add
this
business
to
all
their
other
enterprises,
or
did
they
acquire
the
business
for
the
purpose
of
running
it
and
for
the
purpose
of
reselling
it
at
a
profit
following
circumstances
which
might
arise
and
offers
which
might
be
made
to
them?
and
at
page
164
(D.T.C.
5106):
If
in
accomplishing
these
things
the
appellants
had
as
one
of
their
motivations
the
idea
of
reselling
the
business
at
a
profit,
this
profit
would
be
taxable.
If
on
the
other
hand,
as
I
decided
it,
they
accomplished
these
things
in
the
course
of
executing
their
avowed
intention
of
operating
the
business
indefinitely,
the
profit
arising
from
the
sale
which
they
made
under
the
circumstances
is
not
taxable.
In
dealing
with
the
question
of
whether
the
transactions,
which
resulted
in
the
losses
claimed
by
the
plaintiff,
are
considered
to
be
an
adventure
in
the
nature
of
trade,
I
agree
that
the
issue
is
not
whether
loans
can
be
part
of
an
adventure
in
the
nature
of
trade
because
they
are
part
and
parcel
of
the
acquisition
because
the
case
law
referred
to
by
counsel
for
the
plaintiff
clearly
shows
that
loans
in
the
proper
circumstances
have
been
considered
to
be
an
adventure
in
the
nature
of
trade
and
that
much
was
conceded
by
counsel
for
the
defendant.
Therefore,
in
making
my
determination
on
this
question,
it
is
operating
motivation
of
the
plaintiff,
not
Terry
S.,
that
is
to
be
ascertained
at
the
time
the
loans
were
made
and
funds
advanced.
In
regards
to
the
question
of
the
plaintiff's
motivation
I
also
note
Noël,
J.'s
further
comment
in
Racine
at
page
155
(D.T.C.
5101):
To
give
to
a
transaction
which
involves
the
acquisition
of
capital
the
double
character
of
also
being
at
the
same
time
an
adventure
in
the
nature
of
trade,
the
purchaser
must
have
in
mind,
at
the
moment
of
purchase,
the
possibility
of
reselling
as
an
operating
motivation
for
the
acquisition;
that
is
to
say
he
must
have
had
in
mind
that
upon
a
certain
type
of
circumstances
arising
he
had
hopes
of
being
able
to
resell
it
at
a
profit
instead
of
using
the
thing
purchased
for
purposes
of
capital.
Generally
speaking,
a
decision
that
such
motivation
exists
will
have
to
be
based
on
inferences
surrounding
the
transaction
rather
than
on
direct
evidence
of
what
the
purchaser
had
in
mind.
It
is
clear
that
the
initial
operating
motivation
of
Terry
S.
when
he
personally
became
involved
was
singularly
different
than
the
operating
motivation
of
the
plaintiff
for
the
reasons
above-stated.
It
is
of
course
self-serving
for
the
parties
most
intimately
involved
to
declare
their
motivation
as
getting
in,
getting
out
and
selling
at
a
profit.
The
Court,
however,
is
bound
to
look
at
all
the
circumstances
surrounding
the
transaction
to
determine
if
what
they
said
they
intended
to
do
is
consistent
with
what
in
fact
happened
and
what
they
did.
The
defendant
has
pointed
out
that
which
I
stated
earlier
in
these
reasons
(pages
139-42
of
transcript):
And
what
are
those
circumstances,
My
Lord?
At
the
time
when
this
plaintiff
got
involved
Mr.
Summach
indicated
there
were
two
major
reasons.
The
first
was
that
he
didn't
have
the
finances
anymore
to
carry
on.
He
had
already
acquired,
and
it
may
well
be
that
his
reason
for
getting
into
the
transaction
with
his
brother-in-law
and
his
sister
was
this
motivation
to
make
a
profit,
but
in
the
eight
or
nine
months
following
that,
through
to
October
of
1981,
in
my
submission
the
circumstances
had
already
changed
materially.
They
were
no
longer
simply
dealing
with
a
third
party
company
with
some
projections
made
by
Lloyd
Mineer
as
to
what
may
or
may
not
happen,
and
the
prospect
of
making
vast
amounts
of
money.
By
October
of
1982
they
are
already
$600,000
advanced,
$600,000
guaranteed,
and
a
further
call
for
some
$300,000
I
believe.
So
by
October
6,
1981,
another
$300,000
has
come
from
Flexi-Coil.
Mr.
Summach’s
evidence
was
that
it
was
equally
likely
that
this
first
$300,000
was
done
simply
by
him
to
satisfy
the
fund
requirements
to
keep
things
going
as
it
was
part
of
Flexi-Coil’s
plan
to
actually
come
into
this.
In
other
words,
it
may
well
have
pre-dated
any
decision
by
this
plaintiff
to
acquire
anything,
be
it
in
the
nature
of
trade
or
otherwise,
it
was
something
he
did
on
his
own,
or
it
may
have
been
something
he
did
on
his
own
because
he
financially
had
to
do
that
and
he
didn't
have
the
resources
himself.
So
that
by
February
5,
1982,
which
is
when
the
next
transfer
of
funds
starts
to
occur
and
when
a
decision
is
actually
taken
by
this
plaintiff
to
acquire
something,
circumstances
had
deteriorated
even
further.
They
are
already
into
this
company
for
a
million
and
a
half
dollars
either
advanced
or
potentially
liable
to
the
bank.
There
is
a
call
that
is
going
to
require
in
the
month
of
February,
5th
or
22nd,
a
further
$140,000.
There
are,
and
Mr.
Summach
could
not
say
the
dates
or
how
much
was
loaned
or
anything
else,
but
there
was
in
place
other
financing
to
the
Royal
Bank
by
that
time,
to
the
extent
that
by
early
March,
within
one
month,
Flexi-
Coil
is
signing
yet
another
guarantee
for
$1.5
million,
which
results
by
May
in
an
assumption
of
the
bank
loan
in
that
amount
of
$1.5
million.
So
it
was
fully
advanced
by
May.
And
in
the
face
of
those
circumstances
the
evidence
is
but
we
went
in
because
we
thought
we
could
turn
it
around
and
make
money.
And
in
my
submission,
My
Lord,
an
equally
likely
circumstance,
and
one
which
Mr.
Summach
indicated
in
his
evidence
was
the
fact
that
he
was
personally
or
through
his
management
company
exposed
to
significant
amounts
of
liability
and
loss,
significant
by
anybody's
standards.
And
in
my
submission,
to
suggest
that
the
reason
Flexi-Coil
took
him
out
was
so
that
Flexi-Coil
could
make
the
profit
as
opposed
to
him
making
the
profit
is
not
supported
by
the
circumstances.
The
operating
motivation
of
Flexi-Coil
in
coming
in
this
as
directed
by
its
president
and
decided
by
the
directors
on
consultation
was,
in
my
submission,
nothing
more
nor
less
than
a
damage
control
exercise
in
respect
of
the
$300,000
Flexi-Coil
had
already
advanced
and
the
1.2
million
that
Mr.
Summach
was
on
the
hook
for.
And
in
my
submission
those
circumstances
were
clearly
and
fairly
presented
by
Mr.
Summach
who
was
prepared
to
concede
that
was
certainly
in
his
mind
at
the
time.
[Emphasis
added.]
One
more
matter
caused
me
some
concern
about
the
real
intention
here,
and
I
can
do
no
better
than
to
quote
counsel
for
the
defendant
at
pages
145-6
of
the
transcript:
My
Lord,
I
would
also
point
out
that
this
is
not
a
situation
where
the
witnesses
have
indicated
their
intention
was
to
get
in,
turn
around
and
flip.
Their
evidence,
right
up
to
this
morning
with
Mr.
Mineer,
was
that
they
went
in
with
the
intention
of
advancing
working
capital,
getting
the
thing
up
and
running,
using
the
profits,
which
were
going
to
be
high,
to
pay
them
back
and
to
cover
their
interest
expense,
and
then
to
turn
it
over
to
the
other
principals,
namely
Lloyd
Mineer
and
his
three
friends
that
had
absolutely
no
money.
And
the
only
evidence
as
to
how
the
share
buy
out
could
have
or
would
have
proceeded
was
given
this
morning
by
Mr.
Mineer,
who
indicated
there
was
a
written
and
signed
shareholder's
agreement,
something
that
Mr.
Summach
certainly
did
not
allude
to
at
all
in
his
evidence,
and
Mr.
Mincer's
evidence
was
that
that
shareholder's
agreement
included
a
buy
sell
provision
that
he
understood
was
there
to
protect
the
two
individuals
that
were
planning
to
leave
early,
within
five
or
ten
years,
and
anybody
else.
And
it
was
going
to
provide
that
they
would
be
taken
out,
their
shares
would
be
bought
back
by
the
company
at
what
he
said
was
fair
market
value.
But
where
is
the
agreement
and
the
corporate
documentation,
and
where
is
Mr.
Summach's
knowledge
that
that's
what
was
the
arrangement.
As
I
understood
his
evidence
none
of
this
was
in
writing,
it
was
all
done
verbally.
So
in
my
submission,
that
small
amount
of
evidence
as
to
any
sort
of
detail
as
to
how
Flexi-
Coil
or
Mr.
Summach
previous
to
Flexi-Coil
was
going
to
be
taken
out
of
this
by
the
other
principals
has
not
been
presented
in
any
manner
supporting
a
profit
motive
in
terms
of
the
sale
of
the
shares.
Further,
after
reviewing
the
cases
referred
to
by
the
plaintiff,
which
deal
with
an
adventure
in
the
nature
of
trade,
namely:
M.N.R.
v.
Freud,
[1968]
C.T.C.
438,
68
D.T.C.
5279;
Becker
v.
The
Queen,
[1983]
C.T.C.
11,
83
D.T.C.
5032;
Leslie
v.
M.N.R.,
[1986]
1
C.T.C.
2209,
86
D.T.C.
1152;
Cull
v.
The
Queen,
[1987]
2
C.T.C.
63,
87
D.T.C.
5322;
and
W.
Green
Holdings
Ltd.
v.
M.N.R.,
[1990]
2
C.T.C.
2068,
90
D.T.C.
1605,
I
note
that
each
can
be
distinguished
on
the
facts
and
that
the
key
element
in
the
various
conclusions
was
that
the
evidence
showed
that
the
transaction,
be
it
a
loan
or
the
acquisition
of
shares,
was
conducted
for
the
purpose
of
making
a
profit
and
therefore
was
considered
to
be
an
adventure
in
the
nature
of
trade.
Based
on
the
evidence
before
me,
I
am
not
satisfied
that
the
operating
motivation
of
the
plaintiff
in
making
the
loans
was
that
of
profit
and
therefore
the
transactions
in
question
could
not
be
considered
an
adventure
in
the
nature
of
trade.
Conclusion
For
the
reasons
stated
above,
I
conclude
that
the
losses
in
question
were
not
incurred
in
the
course
of
an
adventure
in
the
nature
of
trade
nor
in
operating
a
business,
including
the
business
of
lending
money
and
therefore
were
properly
disallowed.
Regarding
1981
reassessment,
I
find
that
it
is
statute
barred
with
respect
to
the
1982
loss
carryback
to
1981
only
and
that
the
loss
carryback
in
1983
to
the
1981
taxation
year
was
made
within
the
requisite
time
period
and
is
therefore
valid.
The
appeal
is
dismissed
on
the
issue
of
the
deductibility
of
the
losses
and
allowed
in
part
in
respect
of
the
validity
of
the
February
1989
notice
of
reassessment
relating
to
the
1981
taxation
year.
In
the
circumstances
here
there
will
be
no
order
as
to
costs.
Appeal
allowed
in
part.