6 March 1995 Internal T.I. 9430707 - 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.

		March 6, 1995

	Belleville Tax Services	Head Office
	Terry Law	Rulings Directorate
	Audit Division	A.M. Brake
(613) 957-8953
		943070

XXXXXXXXXX

This is in reply to referral of November 24, 1994 relating to 4 issues involving write-offs or deductions claimed by XXXXXXXXXX as follows:

XXXXXXXXXX

XXXXXXXXXX

It is your position that the amounts in question have not been included into income and that they have not gone bad. Also, it is your position that they are not in the business of lending money within the context set out in subparagraph 20(1)(p)(ii) of the Act.

We agree that XXXXXXXXXX is not in the money lending business as envisaged under subparagraph 20(1)(p)(ii) of the Act. In order to qualify under subparagraph 20(1)(p)(ii) of the Act the loan must have been made "in the ordinary course of business by a taxpayer who was an insurer or whose ordinary business included the lending of money".

The Ordinary Course of Business

The term "ordinary course of business" may refer either to the business of a particular person as conducted by him or to business in general as usually conducted. Nourse v. Canadian Canners Ltd., (1935) 3 D.L.R. 168.

In Daconart Investments Limited v. Her Majesty the Queen DTC 1993, the crown attorney and the appellant argued over whether this particular corporation's ordinary business included the lending of money. Judge Dussault considered this irrelevant because he viewed the loan as not being made in the ordinary course of business. The salient feature of the case was the advance had been made as part of a scheme or fraud invented by some of the company's shareholders to deprive it of its assets.

In the case of Haddow vs. M.N.R., 1993, the Court decided that the taxpayer could not deduct partnership losses as the business of the partnership did not exist. The taxpayer was a victim of a fraud as the entity he had invested in did not exist.

Holding Oneself Out As a Money-lender

"Generally a (person) 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...(I)t is a question of fact in each case." Litchfield v. Dreyfus, (1906) 1 KB 584.

In George A. Orban v. M.N.B., 54 DTC 148 the taxpayer did not qualify as a money lender. Orban did not hold himself out as a money lender and the fact that he had money available was known to only a few individuals with whom he was acquainted. He neither advertised nor listed himself anywhere as a money lender.

In Consolidated Bowling Limited v. M.N.R., 68 DTC 357 the taxpayer did not qualify as a money lender because it made advances to its subsidiaries only and did not hold itself out to all and sundry as a money lender.

Similarly, in Charter Industries Limited v. M.N.R. 75 DTC 270 (TRB) it was established that the taxpayer advanced money only to non-arm's length parties. The taxpayer did not lend money to the general public or any disinterested third parties.

It is our understanding that XXXXXXXXXX does not identify itself in any of its tax returns as a money lender and that XXXXXXXXXX does not advertise or identify itself to the public or its customers or business associates as a money lender. In conclusion, there is no evidence that XXXXXXXXXX carried on a money lending business as one who is ready and willing to lend to all and sundry provided that they are from their point of view eligible.

In E.V. Keith Enterprises Limited v. M.N.R., 74 DTC 1052 (TRB) the taxpayer demonstrated that between 1953 and 1970, thirty loans had been advanced to individuals and corporations. The judge indicated that he felt this was a border line case but what had determined the matter was that the loans had been to a wide variety of persons.

The "Busy-ness" of Lending Money

In Granite Apartment Ltd. v. M.N.R., 75 CTC 2175, Mr. Cardin suggested the following:

My interpretation of "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."

In Alec Eisen v. M.N.R. 80 DTC (T.R.B.) p 1431, the Appellant had made nine mortgage loans and one other loan over a six year period. One mortgage loan went into default and was not recoverable. The Appellant testified that he inspected properties and made inquiries once or twice a week when offered a mortgage. In this case Judge M.J. Bonner concluded that "... Mere repetition does not necessarily change the character of the activity...the level of activity shown in evidence is not indicative of the existence of a money lending business."

In 1987, T.C.J. Sarchuk decided that Ellaman Holdings Inc. (Ellaman Holdings Inc.v. M.N.R. 87 DTC (TCC) 481) was not carrying on the business of lending money. The minimal amount of activity involved in the purchase and management of sixteen mortgages did not satisfy the court:

In all instances the mortgages held by Scheinman ... were participation in mortgages, the trustee and broker of which was Roebuck, a close friend of Scheinman. The appraisal of properties and the initial evaluation of risk with respect to each investment as well as the search for new investors was done by Roebuck. The mortgages were personally guaranteed by Roebuck...There was no evidence of purchasing mortgages at a discount; there was no evidence that mortgages were offered to Scheinman by real estate agents or that he solicited such offers...The appellant, in my view, did not conduct its management of this portfolio as a money lender would. It did not have any commercial organization and it was not licensed or listed as a money lender...There was, in my view, minimal activity involved in acquiring the investments, and as I noted earlier in these reasons there were no other transactions after the appellant acquired the mortgage portfolio. There were no employees involved other than Scheinman and, on the face of it, it would appear as though very little of his time was required.

In the case of R.S. Jackson Promotions Limited v. M.N.R., 85 DTC 145 (TCC) the facts indicated that the appellant was not in the business of lending money:

The appellant did not conduct this activity as a money lender would...It was not ready and willing to lend all and sundry; there was no pattern of making funds available to potential borrowers nor was there a seeking out of borrowers; all mortgage loans were granted to the same individual and were made through one law firm. The appellant did not hold itself as a money lender either by advertising or word of mouth, was not licensed or listed as a moneylender and had no commercial organization...This was no active business-like involvement in the production of this income...The appellant cited several cases to support its position that the extent or degree of the business activity was not by itself determinative of the issue. The case of M.R.T. Investments Ltd. et al v. Her Majesty the Queen, 75 DTC 5224, was one of the cases so relied upon...The Court found that the appellant in that case was always looking for new agents to enable it to increase its lending business. There were substantial negotiations with respect to the terms of the mortgages, the amount of the loans, the rates of interest, the durations of the loans and the terms of repayment. The taxpayer's activities were so organized that it even had its own forms for loan applications...Similar facts do not exist in the case at bar...I have concluded that the appellant, in advancing funds to Marshall, was not carrying on the business of lending money... . The interest so earned was not derived from an activity which could be characterized as a business..."

In Aaron Salzman v. M.N.R., 64 DTC 259 (TAB), advances to a legal firm for investment were not established as part of the ordinary business of lending money, as there was no continuity or system to the lending, which was informal and lacked organization:

The appellant's evidence throughout his entire examination left much to be desired. Repeatedly he was unable to furnish details which it would have been reasonable to expect would be well within his knowledge if he were in fact in the business of lending money. This fact in itself would tend to establish an absence of that degree of organization which would seem to be essential for a person in the business of lending money.

In Wassons Company Ltd. v. M.N.R., 64 DTC 616 (TAB), the judge indicated that the role of a money lender was a serious type of business that did not embrace the limited activity of the appellant.

Other Authorities

We cite three Canadian Tax Journal or Canadian Tax Conference articles that specifically discuss the business of money lending.

In his article in the 1991 Volume 29, Issue Number 4 of the Canadian Tax Journal, Joseph V. Frankovic concludes after his review of the cases of R.S. Jackson Promotions Limited v. M.N.R., 85 DTC 145 (TCC) and Anderson and Miskin Ltd. v. M.N.R., 69 DTC 536 (TAB) that:

There must be a business-like undertaking involving some level of activity, time, and effort; consequently, temporary passive investments would not normally constitute a money-lending business.

In his article, "Capital vs Income: Loans and Real Estate", in the 1992 Canadian Tax Conference at 26:1, D. Lernard Morris indicates a number of requirements that a hypothetical corporation would have to meet in order to prevail in court, namely:

The corporation would have to have adequate and complete records plus verbal testimony in order to establish certain facts.

The corporation should identify itself as a money lender on the face of its T2.

The files would disclose that the corporation had clear policies and procedures for each loan application. Detailed loan applications and verification of the information submitted must be evident. Periodic monitoring of the loan such as in the review of financial statements and verification of the title to security would be required. Finally, there should be clear evidence that the corporation sought borrowers generally.

In his article "Loans To Shareholders", Canadian Tax Journal Volume 36 No. 6, 1988, John W. Durnford offers a number of interesting comments. He asserts that frequent loans will not of themselves establish that the taxpayer was a moneylender:

The principle was well expressed in Dutch-More Corp. (1981, CTC 2023 (T.R.B.)): "no limits have been set as to the number of loans required to be made before the taxpayer can qualify under paragraph 20(1)(p)".

After reviewing the case law concerning paragraph 20(1)(p), Mr. Durnford concludes that the criteria that has been arrived at to classify who is and who is not a money lender is of limited value. Mr. Durnford argues that each case is ultimately a unique mix of facts. He suggests that the search for a fundamental guidepost could begin with the criteria articulated in the income vs. capital gains case of Irrigation Industries Ltd. v. MNR, (1962) CTC 215. In this case Judge Martland is quoted as saying:

Were the operations involved in the present case of the same kind and carried on in the same way as those which are characteristic of ordinary trading in the line of business under which the venture was made?

In our view, XXXXXXXXXX would not meet the test of one whose ordinary business included the lending of money.

R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch