Kempo,
J.T.C.C.:—
These
general
procedure
appeals
concern
the
appellant’s
1987
and
1988
taxation
years,
its
fiscal
periods
being
April
1,
1986
to
March
31,
1987,’and
April
1,
1987
to
March
31,
1988,
respectively.
The
respondent,
acting
through
the
Minister
of
National
Revenue
(the
"Minister")
failed
to
file
a
reply
to
the
notice
of
appeal
and
the
appellant
made
an
application
under
the
Tax
Court
of
Canada
Rules,
Genera!
Procedure
for
default
judgment
pursuant
to
Rule
63(2)(c)
or
alternatively,
a
direction
pursuant
to
Rule
63(2)(b).
The
appellant's
application
was
granted
([1992]
1
C.T.C.
2394,
92
D.T.C.
1306),
the
Court
making
the
direction
pursuant
to
Rule
63(2)(b),
at
page
2396
(D.T.C.
1308),
that
"the
hearing
proceed
on
the
basis
that
the
facts
as
alleged
in
the
notice
of
appeal
are
presumed
to
be
true".
In
its
reasons
the
Court
noted
two
examples
of
factual
omissions
in
the
notice
of
appeal
which
effectively
precluded
a
judgment
by
default
being
entered.
One
concerned
the
absence
of
the
appellant's
fiscal
year-end
dates
which
may
or
may
not
have
attracted
applicability
of
paragraph
20(1
)(p)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act")
as
purportedly
amended,
and
the
other
was
the
absence
of
the
factual
statements
concerning
uncollectibility
of
the
loans
in
the
year.
At
this
juncture
it
is
appropriate
to
reproduce
the
notice
of
appeal.
I
have
added
square
brackets
around
those
allegations
which,
according
to
counsel
for
the
appellant,
are
argumentative
in
nature,
her
position
being
that
the
remaining
allegations
for
the
purposes
of
this
trial
are
facts
presumed
to
oe
true.
FACTS
AND
REASONS:
1.
For
the
years
1987
and
1988,
Discovery
Research
Systems
Inc.
(the
company)
was
engaged
in
the
businesses
of
trading
in
securities
and
the
lending
of
money.
2.
For
tax
purposes,
the
income
from
these
activities
has
been
treated
as
active
business
income
as
set
out
in
paragraph
125(7)(a)
of
the
Income
Tax
Act
(the
“Act’”’).
The
treatment
of
the
income
was
accepted
by
the
respondent
and
is
not
part
of
this
appeal.
3.
In
the
years
1987
and
1988,
the
company
made
allowances
for
bad
debts
on
its
loans
of
$30,102.04
and
$103,415.46
respectively.
4,
The
company
was
reassessed
on
April
30,
1990,
and
$30,102.04
in
bad
debt
expense
was
disallowed
as
an
expense
against
income
in
1987
and
$73,414.32
was
disallowed
as
an
expense
against
income
in
1988.
These
amounts
were
composed
of
loans
to
the
following
companies:
|
1987
|
|
1988
|
|
Tropicana
Development
Corp.
|
—
|
$59,723.92
|
|
Casa
Grande
Energy
&
Mines
Ltd.
|
$9,320.04
|
7,672.00
|
|
Project
Quasar
Technologies
Ltd.
|
17,650
|
—
|
|
Intuitech
Marketing
|
3,150.00
|
3,263.17
|
|
Image
International
|
—
|
1,170.23
|
|
United
Liberty
|
—
|
925.00
|
|
Leis
Industries
Ltd.
|
—
|
660.00
|
|
$30,120.04
|
$73,414.32
|
5.
The
respondent
has
allowed
as
bad
debts,
loans
made
to
the
following
companies:
6.
All
of
the
instruments
of
debt
pertaining
to
the
loans
noted
in
paragraphs
4
and
5
contain
a
specified
rate
of
interest
and
terms
of
repayment
[and
are
distinguished
from
advances
by
those
items].
There
are
no
differences
between
the
instruments
of
debt
for
those
bad
debts
which
were
disallowed
and
the
instruments
of
debt
for
those
bad
debts
which
were
allowed.
[The
question
of
whether
or
not
loans
to
non-arm's
length
companies
are
deductible
as
bad
debts
when
those
debts
have
become
bad
debts
is
a
question
of
fact].
|
1988
|
|
Siel
Holdings
Ltd.
|
$8,600.00
|
|
Krugerrand
Resources
Corp.
|
21,401.14
|
|
$30,001.14
|
7.
The
provision
under
which
the
bad
debts
were
claimed
as
an
expense
in
the
years
in
question
is
subparagraph
20(1)(p)(ii)
of
the
Act.
8.
The
company’s
and/or
related
parties’
shareholdings,
as
a
percentage
of
total
issued
and
outstanding
shares
of
the
above-mentioned
companies,
at
the
year-end
of
the
company
in
which
the
loans
were
claimed
to
be
bad
debts,
are
as
follows:
|
The
|
Related
|
|
|
Company
|
Parties
|
Total
|
|
Tropicana
|
0.4%
|
13.80%
|
14.2%
|
|
Casa
Grande
|
4.6%
|
57.5%
|
62.1%
|
|
Project
Quasar
|
2.00%
|
85.00%
|
87.00%
|
|
Intuitech
(100%
of
Project
Quasar)
|
|
|
Image
International
|
8.00%
|
56.00%
|
64.00%
|
|
United
Liberty
|
4.2%
|
4.55%
|
8.75%
|
|
Leis
Industries
|
0.00%
|
69.00%
|
69.00%
|
|
Siel
Holdings
Ltd.
|
0.00%
|
100.00%
|
100.00%
|
|
Krugerrand
Resources
|
0.00%
|
0.00%
|
0.00%
|
9.
Considering
the
loans
separately
on
a
company
by
company
basis,
the
following
demarcations
should
be
noted:
TROPICANA
(a)
the
company
and
related
parties
held
14.20
per
cent
of
the
issued
and
outstanding
shares.
(b)
the
loans
was
for
the
purchase
of
property
by
a
company
related
to
Tropicana.
CASA
GRANDE/PROJECT
QUASAR/INTUITECH/IMAGE
INTERNATIONAL
(a)
the
company
has
a
minority
interest
in
the
above
companies,
with
no
interest
exceeding
8
per
cent.
Related
parties
have
a
controlling
interest.
LEIS/SIEL/KRUGERRAND
(a)
the
company
has
no
direct
interest
in
these
companies.
Related
parties
have
a
controlling
interest
in
Leis
and
Siel,
but
do
not
hold
any
shares
in
Krugerrand.
In
the
first
case,
Tropicana,
the
loan
was
not
for
working
capital
and
the
company
and
related
parties
did
not
have
a
significant
share
position,
and
the
shares
were
inventory.
In
the
second
case,
the
company
did
not
have
a
significant
share
position,
the
shares
were
held
as
inventory,
and
the
loans
were
to
safeguard
the
value
of
inventory.
In
the
third
case,
the
company
had
no
direct
interest
in
the
companies,
and
with
one
of
the
companies,
no
related
parties
held
an
interest
either.
[The
only
conceivable
reason
for
the
company
to
have
lent
the
moneys
to
these
companies
was
for
the
purpose
of
earning
income
from
the
money-lending
business.]
10.
The
respondent
has
accepted
that
the
appellant
has
been
in
the
business
of
lending
money
by
accepting
the
deduction
of
some
bad
debts
for
1988.
11.
The
appellant’s
ordinary
business
included
the
lending
of
money.
12.
The
loans
were
all
made
for
the
sole
purpose
of
earning
income
and
not
to
support
a
capital
investment.
13.
Although
the
debtor
companies
may
have
reported
substantial
losses,
they
were
resource
and
development
companies
[which,
because
of
the
favourable
treatment
afforded
such
companies
under
the
Act,
were
able
to
report
substantial
losses
in
their
initial
years.
This
is
typical
for
companies
in
that
field.]
14.
Although
the
debtor
companies
may
have
depended
on
the
appellant
to
cover
their
operating
expenses,
this
is
true
of
all
of
the
debtor
companies,
including
those
for
whom
the
bad
debt
claim
in
1988
was
allowed,
with
the
exception
of
Tropicana,
where
the
moneys
lent
were
for
the
specific
purpose
of
allowing
Tropicana
to
purchase
a
parcel
of
land.
15.
The
company
made
minimal
advances
after
receivables
owing
by
them
had
been
written
off
in
a
prior
year,
and
provided
minimal
other
services
to
the
debtor
companies
to
maintain
those
companies
on
the
basis
that
if
those
minimal
advances
had
not
been
made
and
those
minimal
services
not
rendered,
any
hope
of
recovery,
either
partial
or
complete,
would
disappear.
Effectively
then
the
evidentiary
burden
of
rebutting
these
facts,
and
also
of
establishing
the
facts
underlying
the
assessments,
falls
upon
the
Minister.
However,
and
I
agree
with
Crown
counsel
on
this
one,
the
overriding
risk
of
nonpersuasion
nonetheless
belongs
to
the
appellant
as
the
validity
of
the
assessments,
pursuant
to
subsection
152(8)
of
the
Act,
remains
undiminished.
It
reads:
152(8)
An
assessment
shall,
subject
to
being
varied
or
vacated
on
an
objection
or
appeal
under
this
Part
and
subject
to
a
reassessment,
be
deemed
to
be
valid
and
binding
notwithstanding
any
error,
defect
or
omission
therein
or
in
any
proceeding
under
this
Act
relating
thereto.
Accordingly
the
evidence
in
these
appeals
was
comprised
of
the
facts
as
alleged
in
the
notice
of
appeal,
the
oral
testimony
of
the
appellant’s
sole
shareholder
and
principal
director,
its
documentary
evidence
and
the
oral
testimony
of
the
Minister’s
assessing
auditor
and
his
documents.
Issue
The
core
issue
in
these
appeals
concerns
the
deductibility
of
bad
debts
pursuant
to
paragraph
20(1
)(p)
of
the
Act
which
reads:
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:
(p)
the
aggregate
of
debts
owing
to
the
taxpayer
(i)
that
are
established
by
him
to
have
become
bad
debts
in
that
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
or
a
previous
year.
Both
counsel
agreed
that
for
the
purposes
of
this
case
the
factual
requisites
the
appellant
must
meet
to
satisfy
this
provision
were
four
fold.
(1)
There
were
to
be
debts
arising
from
loans,
(2)
that
part
of
the
appellant’s
ordinary
business
was
the
lending
of
money,
(3)
that
the
debts
arose
from
loans
made
in
the
ordinary
course
of
that
business
and
(4)
that
the
loans
became
bad
in
the
year.
It
was
not
disputed
that
the
debts
had
been
included
in
the
appellant’s
computation
of
its
income
for
the
year
or
a
previous
year.
Subsumed
within
this
issue
was
the
question
of
whether
the
loans
were,
in
any
event,
capital
in
nature
and
were
therefore
excluded
from
this
provision.
The
position
of
the
parties
Counsel
for
the
Minister
averred
that
the
appellant
was
advancing
funds
and
providing
services
to
support
speculative
projects
which
would
be
repaid
if
they
ad
become
successful.
More
particularly,
it
was
actually
capitalizing
the
subject
debtor
companies
for
the
purpose
of
either
getting
them
listed
on
the
stock
exchange
and/or
keeping
them
alive
while
they
were
in
that
process
in
order
to
enhance
the
value
of
its
own
shareholdings
(and
that
of
related
parties)
therein.
If
successful
all
unpaid
loans,
rental
arrears
and
management
related
services
would
be
paid.
The
Crown's
evidence
would
show
the
subject
debtor
companies
were
mere
shells,
that
they
were
kept
alive
by
the
appellant
and
that
the
debts
sought
to
be
written
off
by
the
appellant
were
capital
in
nature.
In
this
vein,
the
amounts
provided
were
not
loans;
they
were
merely
advancements
with
no
reasonable
expectation
of
interest
return
and
were
not
made
in
the
course
of
the
appellant’s
purported
money
loaning
business.
Authorities
noted:
Chaffey
v.
M.N.R.,
[1978]
C.T.C.
253,
78
D.T.C.
6176
(F.C.A.),
Wesco
Property
Developments
Ltd.
v.
M.N.R.,
[1989]
2
C.T.C.
2431,
89
D.T.C.
590
(T.C.C.),
Townsend
Co.
v.
M.N.R.
(1957),
17
Tax
A.B.C.
360,
57
D.T.C.
372,
N.M.
Tilley
Realty
Ltd.
v.
M.N.R.,
[1984]
C.T.C.
2386,
84
D.T.C.
1343
(T.C.C.),
Investissements
Roger
Barré
Inc.
v.
M.N.R.,
[1981]
C.T.C.
2574,
81
D.T.C.
521
(T.R.B.),
No.
415
v.
M.N.R.
(1957),
17
Tax
A.B.C.
110,
57
D.T.C.
226
(T.A.B.),
Berretti
v.
M.N.R.,
[1986]
2
C.T.C.
2293,
86
D.T.C.
1719
(T.C.C.),
and
Associated
Investors
of
Canada
Ltd.
v.
M.N.R.,
[1967]
C.T.C.
138,
67
D.T.C.
5096
(Ex.
Ct.).
Counsel
for
the
appellant
submitted
that
the
matter
is
one
of
fact,
that
all
requisites
of
paragraph
20(1
)(p)
of
the
Act,
infra,
had
been
met
and
that
the
advances
were
bona
fide
loans
made
in
the
course
of
its
money
lending
business
from
which
it
reasonably
expected
to
earn
interest
income.
The
overall
principal
purpose
was
not
merely
to
capitalize
the
borrowers.
Rather
it
was
to
earn
income
from
rentals,
clerical-management
types
of
services
and
interest
on
loans
of
money.
If
the
borrower
was
successful
or
had
obtained
financing
for
its
projects,
the
debts
including
interest
would
be
paid
to
the
appellant
along
with
the
possibility
of
its
own
shareholdings
in
the
company
being
enhanced.
While
the
potential
of
a
return
of
interest
earned
on
the
loans
was
speculative,
that
was
the
ind
of
money
loaning
business
in
which
the
appellant
was
involved.
The
appellant's
business
also
included
share
trading
on
income
account,
and
all
of
its
debtor-company
shares
were
held
in
its
inventory
account
as
part
of
its
share
trading
business.
In
any
event,
paragraph
20(1
)(p)
of
the
Act
expressly
operates
notwithstanding
paragraph
18(1)(b)
of
the
Act
which
generally
prohibits
a
capital
outlay
or
loss
in
the
computation
of
income
from
a
business.
Authorities
noted:
M.N.R.
v.
Kelvingrove
Investments
Ltd.,
[1974]
C.T.C.
450,
74
D.T.C.
6357
(F.C.T.D.),
Wesco
Property
Developments,
supra,
High
field
Corp.
v.
M.N.R.,
[1982]
C.T.C.
2812,
82
D.T.C.
1835
(T.R.B.),
and
Morflot
Freightliners
Ltd.
v.
Canada,
[1989]
1
C.T.C.
413,
89
D.T.C.
5182
(F.C.T.D.).
The
facts
generally
Oral
testimony
on
behalf
of
the
appellant
was
given
by
Ms.
Madge
Leis
who
is
known
by
her
maiden
surname
of
Thompson.
Hereafter
she
will
be
called
Ms.
Thompson.
She
has
a
college
degree
in
business
management
with
no
formal
training
in
accounting.
Her
husband,
Hank
Leis,
has
a
master’s
degree
in
business
administration
with
training
taken
in
mining
matters.
They
were
married
in
1986.
The
appellant
(hereafter
called
the
"company")
was
incorporated
May
20,
1982
by
Ms.
Thompson.
She
was,
at
all
times
material,
a
director,
its
sole
shareholder
and
its
principal
employee.
As
its
business
developed
its
employees
also
included
a
bookkeeper,
a
secretary
and
an
accountant.
All
business
decisions
were
made
by
Ms.
Thompson
for,
as
she
said,
she
ran
the
company.
Its
fiscal
year
end
is
March
31,
being
that
date
for
both
1987
and
1988.
Ms.
Thompson
testified
that
the
first
business
ventures
of
the
company
were
in
the
buying
and
selling
of
shares
of
public
companies
trading
on
various
stock
exchanges
through
various
brokerage
firms.
Beginning
December
of
1983,
and
at
all
times
thereafter,
in
addition
to
those
profitable
share
trading
activities,
loans
had
been
made
to
various
business
people
and
to
corporations
and
individuals
associated
with
the
mining
industry.
She
said
the
company’s
income
revenues
during
1986,
1987
and
1988
were
derived
from
share
trading,
from
interest
earned
on
money
lending,
from
rental
of
office
space
located
in
its
own
commercial
property
and
from
the
bookkeeping/accounting/management
services
rendered
to
its
clients.
With
respect
to
the
loans,
Ms.
Thompson
adamantly
maintained
that
all
advances
were
for
the
purpose
of
earning
interest
income.
She
denied
the
loans
were
Capital
in
nature
as
had
been
determined
by
the
Minister's
auditor.
Ms.
Thompson
explained
the
company’s
economic
experiences
as
follows
[T.
26
I.
17
to
T.
27
I.
19]:
Q.
Could
you
explain
the
development
of
Discovery's
business
from
the
date
of
incorporation
to
the
present?
A.
I
think,
as
I
said
earlier,
at
the
beginning
when
I
I
first
started
Discovery
Research
the
climate
that
I
started
in
was
excellent,
the
economic
climate.
The
market
was,
which
I
rely
on
with
my
clients,
was
like
I
think
never
has
been
since
and
at
that
time
I
was
able
to
make
money
on
the
stocks,
also
was
able
to
make
money
by
loaning
through
interest,
as
was
stated.
And
as
I
grew
and
made
more
money
I
bought
the
office
in
White
Rock
and
that
changed
my
business
because
now
I
I
had
office
space
that
I
needed
to
rent
out
and
so
I
looked
for
tenants
and,
again,
got
through
my
connections
in
the
mining
industry.
And
then
I
started
managing
these
companies
and
I
was
able
to
—
no
longer
did
I
have
to
do
all
the
work
myself.
I
was
able
to
employ
three
time
employees.
And
I
think
that
up
until
this
point
I
was
very,
very
successful.
That
my
loans
were
being
paid
and
I
was
making
a
nice
profit
on
the
stock
market.
But
in
October
17
of
1987,
which
was
referred
to
in
the
Vancouver
Stock
Exchange
as
"Black
Friday",
the
economic
conditions
changed
and
the
market
crashed.
It
not
only
was
in
Vancouver
but
it
was
also
in
Toronto
and
in
New
York,
so
it
was
quite
a
shock
to
all
of
us
who
were
in
the
industry
at
the
time
and
certainly
to
me.
And
that
is
the
reason
that
I
have
such
large
bad
debts
—
write
offs
in
1988.
She
testified
that
before
loans
were
made
the
recipients’
projects,
plans
and
viability
were
considered,
collateral
was
taken
where
feasible
and
promissory
notes
were
drawn
up
in
all
cases
to
evidence
the
debts.
The
terms
of
the
loans
were
normally
one
year
maturity
with
fixed
interest
at
the
current
bank
rate
commencing
at
advance
but
payable
at
maturity.
She
explained
on
cross-
examination
that
it
was
structured
this
way
to
simplify
record
keeping
thus
alleviating
the
need
of
maintaining
a
time
consuming
interest
accrual
system.
All
loans
made
had
been
included
in
the
calculation
of
its
annual
income
in
its
financial
statements
as
accounts
receivable
which
also
included
unpaid
invoices
for
rent
and
clerical-management
related
services
provided
throughout
the
fiscal
year
to
the
subject
debtor
companies
who
in
the
main
were
operating
out
of
the
appellant’s
commercial
premises
and
thus
were
also
its
tenants.
The
appellant's
own
business
operations
were
carried
on
in
these
premises
as
well.
Ms.
Thompson
explained
the
sudden
and
severe
stock
exchange
downfall
on
October
17,
1987,
called
“Black
Friday”,
caused
cancellations
of
financing
resources
then
under
negotiation
by
some
of
the
subject
debtor
companies
causing
complete
termination
of
their
plans
and
proposals
and
that
it
had
had
a
decidedly
negative
impact
on
the
plans
and
projects
of
the
others.
More
will
be
said
about
this
later
in
these
reasons.
The
debtor
companies
The
notice
of
appeal,
supra,
contains
facts
concerning
the
shareholdings
of
the
companies
as
to
the
appellant
and
related
parties.
As
they
were
not
put
into
dispute,
and
nothing
in
the
evidence
arose
in
contradiction,
they
will
be
presumed
to
be
true.
Mr.
Kirk
(the
Minister's
field
auditor
and
assessor
on
these
reassessments)
testified
that
he
spent
almost
two
weeks
at
the
appellant’s
premises
to
conduct
his
audit
of
the
appellant.
Apparently
he
told
Ms.
Thompson
the
appellant
had
been
flagged
on
a
random
basis
for
audit
plus
there
were
concerns
expressed
about
the
large
write-offs.
He
said
he
was
given
space
and
full
cooperation
while
performing
his
audit
duties,
however
all
his
inquiries
of
Ms.
Thompson
were
deferred
by
her
in
favour
of
her
husband,
Hank
Leis,
who
was
always
at
the
business
premises.
Ms.
Thompson's
domestic
and
new
family
concerns
made
her
absence
from
the
office
necessary
during
this
time.
As
the
majority
of
the
subject
debtor
companies
operated
out
of
the
appellant's
premises,
some
or
all
of
their
accounting
records
were
there
also.
Mr.
Kirk
confirmed
that
his
assignment
did
not
include
an
audit
of
their
affairs,
nor
did
he
attempt
to
do
so
notwithstanding
the
availability
of
their
records
on
the
premises.
He
said
he
relied
on
the
verbal
representations
made
by
Mr.
Leis
in
response
to
his
inquiries,
and
that
at
all
times
he
had
expected
him
to
produce
sufficient
information
evidencing
and
justifying
the
appellant's
debt
write-offs
under
investigation.
Respecting
the
latter,
and
apart
from
written
promissory
notes
being
produced
when
evidence
of
the
debts
was
requested,
no
specific
demands
or
requests
for
particulars
concerning
the
debtor
companies’
business
affairs
was
ever
made.
In
is
view
the
promissory
notes
produced
by
Mr.
Leis
were
notes
signed
by
him
in
his
own
favour
and
therefore
ne
was
pessimistic
about
their
probity.
The
notes
were
not
produced
into
the
evidence.
Mr.
Kirk,
apparently,
expected
the
appellant
to
prove
its
position
before
and
after
the
communication
of
his
opinion
that
the
loans
were
capital
in
nature
and
therefore
not
deductible.
Having
been
given
access
to
all
the
files
located
in
the
appellant's
business
premises
(in
most
cases
the
registered
office
and
therefore
the
corporate
minute
books
were
elsewhere),
Mr.
Kirk
had
examined
them
because
he
said
he
had
made
notes
therefrom
concerning
the
“involvement
of
[the
appellant]
and
related
parties
in
the
ownership
and
operations
in
the
companies";
see
Exhibit
R-12
which
is
his
own
working
paper.
He
conceded
on
cross-examination
that
these
observations
were
suspect
because
the
files
he
had
examined
were
incomplete
as
to
corporate
documentation.
Mr.
Kirk
concluded
the
loan
write-offs
were
on
capital
account
because:
(1)
the
same
group
of
knowledgeable
people
were
involved
who
were
all
utilizing
the
same
office
space
with
Ms.
Thompson
who,
through
performance
of
clericalaccounting-management
functions
for
them,
at
all
times
had
the
knowledge
and
opportunity
to
exert
influence
respecting
payment
of
their
indebtedness
to
the
appellant,
(2)
at
the
material
times
the
debtor
companies
were
mere
shells
without
income
or
net
assets
and
simply
were
being
kept
alive
through
the
appellant's
loans
and
services
pending
Mr.
Leis
through
his
own
company
Strato
Geological
vending
its
mining
properties
into
them
for
shares,
and
that
(3)
once
done,
the
shares
would
then
be
promoted
for
profit
to
all
concerned,
and
the
loans
and
management
service
accounts
be
paid
to
the
appellant.
Mr.
Kirk
testified
his
audit
of
the
appellant’s
1987
and
1988
business
operations
revealed
its
major
revenue
sources
were
from
market
share
trading,
management
fees
received
from
Strato
Geological,
rental
income
and
"other
income”
which
had
not
included
any
interest
income
nor
recovery
of
bad
debt
expenditures
and
that
its
financial
statements
had
reflected
and
treated
the
shares
held
as
on
inventory
account.
Mr.
Kirk
did
not
audit
the
subject
debtor
companies,
nor
did
he
make
any
independent
assessment
of
their
business
affairs.
He
conceded
he
had
assumed
they
were
without
any
activity
or
prospects
and
that
he
simply
waited
for
Mr.
Leis
to
give
him
whatever
information
was
needed
to
defend
the
appellant’s
position.
On
cross-examination
he
confirmed
he
did
not
consider
that
a
breach
of
a
fiduciary
duty
by
voluntary
disclosure
of
such
information
may
have
been
required
but
instead
drew
negative
inferences
from
this
failure.
He
was
influenced
by
the
fact
that
in
some
cases
the
loans
and
services
continued
notwithstanding
prior
bad
debt
write-offs.
He
did
not
however
concern
himself
with
the
appellant's
pre-1987
fiscal
years
and
activities,
and
said
he
was
not
overly
concerned
with
the
unpaid
service
related
debts
because
they
were
included
in
income
as
receivables
and
then
written
off
as
bad
and
thereby
were
merely
a
"wash"
having
no
tax
significance.
Because
Mr.
Kirk
had
not
examined
or
analyzed
any
of
the
subject
debtor
companies’
business
affairs,
the
only
information
advanced
thereon
arose
out
of
the
oral
testimony
of
Ms.
Thompson.
Although
at
times
it
may
have
been
vague
and
unsubstantiated
in
some
particulars,
on
an
overall
basis
it
was
generally
credible
and
reliable.
Crown
counsel
during
cross-examination
of
Ms.
Thompson
expected
her
to
produce
documents
which
Pad
not
been
disclosed
for
production
in
the
appellant's
late-filed
affidavit
of
documents,
appellant’s
counsel
advised
the
Court
of
her
week
old
retainer
and
that
it
was
for
this
reason
she
did
not
have
the
time
to
review
and
fully
update
the
affidavit
but
that
there
had
been
conferences
between
counsel
on
this
subject.
Crown
counsel
had
given
his
assurances
at
the
commencement
of
the
trial
that
he
was
ready
to
proceed
with
the
case
and
made
no
intimations
that
his
trial
position
would
be
compromised
or
hampered
by
the
want
of
prior
full
disclosure
of
documents
on
the
part
of
the
appellant.
Accordingly,
no
negative
inferences
will
be
attributed
to
the
appellant’s
failure
to
make
full
prior
disclosure.
On
observing
the
manner
and
demeanour
of
Ms.
Thompson,
I
find
her
answers
on
cross-examination
were
reasonably
responsive
and
that
she
was
open
and
cooperative
throughout.
She
had
all
the
means
for,
and
advantages
of,
knowing
about
the
subject
debtor
companies’
affairs
and
particularly
what
their
plans
and
prospects
involved.
In
other
words,
she
was
privy
to
their
business
affairs
and
as
such
was
able
to
exercise
an
independent
judgment
on
the
appellant’s
behalf
concerning
the
wisdom
of
making
loan
advances
and
providing
management
services
to
them.
This
also
provided
her
with
knowledge
as
to
collectibility
by
way
of
legal
action
as
she
knew
that
empty
judgments
are
normally
a
waste
of
money.
Mr.
Kirk's
confirmation
that
the
appellant’s
books,
records
and
financial
statements
kept
and
prepared
by
Ms.
Thompson
were
complete
and
accurate
and
had
appropriately
disclosed
all
of
the
appellant's
business
transactions
lends
some
support
to
her
overall
credibility.
Indeed
the
particulars
in
his
audit
working
papers
(Exhibit
R-1)
confirm
the
management
services
performed
on
behalf
of
Tropicana
Development,
Casa
Grande,
Project
Quasar,
Intuitech,
and
United
Liberty
had
included
the
provision
of
office
supplies,
telephone,
utilities,
typing,
photocopying,
and
accounting
on
an
ongoing
monthly
basis.
This
gives
further
support
to
Ms.
Thompson's
testimony
that
there
were
some
ongoing
business
activities
on
the
part
of
these
debtor
companies
notwithstanding
that
none
enjoyed
any
revenues
during
1987
and
1988
nor
had
any
realizable
assets
of
significant
value
to
offset
their
liabilities
during
those
periods.
It
is
now
appropriate
to
examine
the
evidence
respecting
the
business
activities
of
each
of
the
subject
debtor
companies
in
light
of
crown
counsel's
position
that
there
was
no
reasonable
expectation
of
interest
returns
on
the
loans
as
made,
and
that
they
had
not
been
made
in
the
course
of
the
appellant's
money
loaning
activities.
Tropicana
Development
Corporation
("Tropicana")
This
was
a
public
company.
According
to
the
notice
of
appeal
the
appellant
held
a
0.4
per
cent
interest
therein
on
its
own
account.
With
related
parties,
there
was
an
overall
minority
interest
holding
of
14.20
per
cent.
Its
actual
directorship
for
any
period
of
time
remained
unclear
and
unsubstantiated,
however
it
was
run
and
managed
out
of
the
appellant’s
premises.
The
names
of
Ms.
Thompson,
Hank
Leis,
Len
Clark,
C.
Leonard
Clark,
George
Perry,
Val
Scott
and
Ken
Saunders
came
up
without
any
firm
indication
as
to
who
were
the
authoritative
players.
By
Mr.
Kirk's
working
papers
(Exhibit
R-1,
tabs
1
and
2),
four
loans
totalling
$1,975
were
made
to
Tropicana
during
the
appellant’s
1987
fiscal
year
which
were
fully
written
off
at
year
end,
and
for
1988
(the
year
under
appeal)
a
further
nine
loans
were
made
totalling
$59,723.92
which
is
the
amount
being
denied
as
a
bad
debt
write-off
for
1988.
These
working
papers
tend
to
signify
activity
on
Tropicana's
part
arising
out
of
the
office
administrative/accounting
services
provided
by
the
appellant
which
included
approximately
$15,0000
for
typing,
telephone
and
photocopying
plus
$4,600
for
accounting
and
$2,187
for
office
supplies.
Ms.
Thompson
said
the
loans
were
made
in
1988
for
the
purpose
of
earning
interest
income
and
with
the
hope
and
prospect
of
recovering
its
former
unpaid
receivables
because
Tropicana
was
actively
pursuing
a
$5
million
loan
which
it
intended
to
advance
to
its
California
subsidiary
for
use
in
a
housing
project
having
an
excellent
development
potential
in
that
state.
Up
to
the
date
of
the
"Black
Friday"
market
crash
(October
1987)
some
$54,000
nad
already
been
loaned
for
the
above
noted
reasons.
Thereafter
only
small
amounts
were
advanced
and
the
need
for
clerical
management
services
declined.
By
year
end,
March
31,
1988,
Tropicana's
financing
sources
had
not
recovered,
and
its
California
subsidiary
had
filed
under
American
bankruptcy
protection.
The
appellant
invoiced
a
total
of
$24,000
for
rent
and
management
for
1987
and
$15,250
for
1988.
According
to
Ms.
Thompson
the
appellant
continued
the
loan/services
pattern
for
interest
earning
and
debt
recovery
purposes
until
late
summer
of
1990
when
Tropicana
was
taken
over
by
new
shareholders
with
new
management
bringing
in
new
projects.
This
precipitated
negotiations
concerning
Tropicana's
debts
which
were
then
exchanged
for
shares
and
sold.
Ms.
Thompson
said
the
negotiated
settlement
amount
had
excluded
accrued
interest
and
was
taken
into
the
appellant’s
income
account
when
the
settlement
moneys
were
received.
Casa
Grande
Energy
&
Mines
Ltd.
("Casa
Grande")
This
was
also
a
public
company
operating
out
of
an
office
in
the
appellant's
business
premises.
The
facts
in
the
notice
of
appeal
state
the
appellant
held
a
4.6
per
cent
interest
therein
with
57.50
per
cent
being
held
by
related
parties.
The
identity
of
the
related
parties
was
unsubstantiated,
however
it
was
Ms.
Thompson's
testimony
that
they
were
herself,
her
husband
(Hank
Leis),
or
companies
they
controlled.
She
confirmed
the
directors
were
Verna
Wilson,
Leonard
Clark
and
her
husband,
and
that
her
husband
was
the
person
particularly
involved
in
managing
Casa
Grande's
affairs.
She
said
during
1987
and
1988
Casa
Grande
had
no
revenues
and
its
assets
were
mining
properties
held
for
exploration
as
to
their
viability.
She
did
not
expand
on
what
this
meant.
Hank
Leis
had
no
professional
qualifications
in
mining
however
she
said
he
was
experienced
on
the
business
side
of
this
kind
of
activity
through
his
corporation,
Strato
Geological,
which
was
being
run
by
Ralph
England
and
which
was
owned
20
per
cent
by
Mr.
England,
20
per
cent
by
Ms.
Thompson
and
60
per
cent
by
Hank
Leis.
Similarly,
its
clerical-management
needs
were
being
provided
by
the
appellant
through
Ms.
Thompson
who
thereby
was
privy
to
their
business
affairs.
She
stated
loans
were
advanced
for
both
1987
and
1988
for
the
purpose
of
earning
interest
income
and
thereafter
for
the
same
purpose
and
with
the
continuing
hope
and
expectation
they
would
be
paid
once
its
projects
were
underway.
It
was
without
revenues
or
positive
net
worth
for
1987
and
1988
therefore
no
legal
action
was
taken.
Amounts
totalling
$9,320
were
advanced
and
written
off
as
bad
for
1987.
For
1988
the
advances
totalled
and
written
off
were
$7,672.
Invoices
for
rent
and
management
amounted
to
$24,000
for
each
of
1987
and
1988.
The
advance/
service
situation
continued
into
1990
with
the
explanation
that
nothing
was
working
out
for
Casa
Grande.
No
particulars
were
provided
as
to
its
projects.
In
May
of
1990
Casa
Grande's
new
directors
converted
its
debts
into
shares
which
were
then
sold
and
the
proceeds
used
to
pay
its
debt
to
the
appellant
who
in
turn
put
it
into
its
income
account.
Ms.
Thompson
said
that
two
years
later
all
of
the
appellant's
and
related
parties'
share
holdings
in
Casa
Grande
were
profitably
sold
with
its
profits
being
put
into
revenue
account
as
part
of
its
share
trading
business.
Project
Quasar
Technology
Ltd.
("Project
Quasar")
and
Intuitech
Marketing
("Intuitech")
Both
of
these
were
private
corporations,
Intuitech
being
wholly
owned
by
Project
Quasar.
During
1987
and
1988
Project
Quasar
was
purportedly
into
the
development
of
computer
projects
and
Intuitech
was
to
be
its
marketing
arm.
Ms.
Thompson
said
the
project
and
the
equipment
being
used
in
the
project
were
located
in
the
office
premises
as
both
were
the
appellant’s
tenants
as
well.
According
to
the
notice
of
appeal
the
appellant
held
a
two
per
cent
interest
in
Project
Quasar
and
related
parties
held
85
per
cent
for
a
total
holding
interest
of
87.0
per
cent.
The
related
parties,
according
to
Ms.
Thompson,
included
herself,
Hank
Leis
and
his
corporation,
Strato
Geological
and
the
directors
were
herself,
Hank
Leis,
Len
Clark
and
Ralph
England.
The
development
of
the
computer
projects
was
done
on
the
premises
by
a
hired
computer
expert.
While
this
was
happening,
other
than
research
and
development
money
coming
in,
no
revenue
was
gained.
Apparently
Len
Clark
had
computer
knowledge
as
well
and
was
working
on
a
promotional
video
and
a
prospectus.
Ms.
Thompson
said
the
overall
object
was
to
make
Quasar
public
and
be
listed
on
the
stock
exchange
in
order
to
gain
appropriate
funding
and
in
the
meantime
the
appellant
would
be
advancing
loans
and
performing
clerical-management
services
in
the
expectation
all
would
be
successful
in
that
the
latter
would
be
paid
and
the
former
would
be
recovered
with
interest.
Project
Quasar
received
six
advances
totalling
$17,650
from
the
appellant
during
1987
which
the
appellant
seeks
to
write-off.
No
loan
write-off
was
claimed
for
1988.
Ms.
Thompson
said
Project
Quasar
sold
an
accessory
item
to
one
of
its
computers
to
pay
some
of
its
debts.
For
1987
the
clerical-management
services
provided
included
typing,
telephone
and
accounting
totalling
approximately
$3,000.
Rents
and
management
were
invoiced
at
$30,000
for
1987
with
invoicing
continuing
thereafter
because
progress
was
seen
by
Ms.
Thompson
to
be
ongoing.
The
advances
to
Intuitech
which
the
appellant
seeks
to
write
off
as
bad
debts
were
$3,150
for
1987
and
$3,263.17
for
1988.
For
1987
management
fees
of
$12,000
were
invoiced
and
for
1988
they
were
$7,000
plus
$3,000
for
rent.
Project
Quasar
was
not
successful,
it
did
not
get
listed
nor
did
it
pay
all
of
its
debts
to
tne
appellant.
Intuitech’s
loans
and
repayments
were
small,
and
it
was
not
clear
from
the
testimony
as
to
whether
its
loans
had
been
eventually
paid
with
or
without
interest.
Image
International
("Image")
was
a
private
company
developing
into
the
movie
business.
The
shareholdings
were
eight
per
cent
by
the
appellant
and
56
per
cent
by
related
parties
for
a
total
of
64
per
cent.
The
related
parties
were
Ms.
Thompson
and
Hank
Leis.
The
directors
were
said
to
be
Hank
Leis,
Len
Clark,
Keith
Cutler
who
was
president
of
ACTRA
and
Wendy
McDonald
who
had
been
previously
nominated
as
business
woman
of
the
year.
Ms.
Thompson
said
Image
had
three
projects,
that
it
produced
one
film
but
for
1987/88
it
had
no
revenues.
Four
loans
totalling
$1,170.23
were
made
in
1987
and
written
off
as
bad
in
1988.
For
1987
and
1988
the
clerical-accounting
invoices
ranged
between
$1,200
to
$1,500.
Rent
and
management
invoiced
was
$24,000
for
1987
and
$19,250
for
1988.
Ms.
Thompson
said
Image
was
taken
over
by
Ralph
England
in
September
of
1988
and
that
there
was
a
name
change.
However
the
evidence
was
unclear
as
to
whether
the
loans
and
other
receivables
were
paid
in
whole
or
in
part.
United
Liberty
("United")
This
company
was
a
listed
public
company
which
started
off
in
mining
and
then
turned
its
attention
to
truck
leasing
projects
in
the
U.S.A.
The
appellant
held
4.2
per
cent
of
its
shares
and
related
parties
held
4.55
per
cent.
Ms.
Thompson
said
United
was
actively
seeking
out
financing
for
this
venture
which
she
had
assessed
as
viable.
Their
failure
to
obtain
financing
was
attributable
to
the
Black
Friday
event,
and
the
death
of
the
key
person
involved
in
this
project
effectively
terminated
the
whole
plan.
United
was
eventually
delisted.
Two
loans
totalling
$950
were
made
in
1987
and
written
off
as
bad
in
1988.
Invoices
for
rent
and
management
were
$20,000
for
1987,
and
were
$20,000
in
1988
for
management
alone.
Invoices
for
clerical-accounting
services
were
in
the
range
of
$3,000
for
each
year.
Leis
Industries
("Leis")
Ms.
Thompson
said
this
was
a
private
company
in
the
business
of
private
placements.
This
kind
of
activity
was
not
explained.
No
shareholdings
were
held
by
the
appellant.
The
related
party
holdings
of
69
per
cent
were,
according
to
the
evidence,
predominantly
in
the
hands
of
Hank
Leis
with
a
smaller
proportion
thereof
being
held
by
Ms.
Thompson.
The
1988
loan
write-off
of
$660
arose
from
a
loan
of
$160
in
1987
and
a
further
$500
in
1988.
Clerical-accounting
invoices
were
in
the
$1,000
range
for
1987
and
1988.
Management
was
invoiced
at
$12,000
for
1987
and
at
$7,000
for
1988,
with
rental
of
$1,250
being
invoiced
in
1988.
Invoicing
for
clerical-accounting
services
continued
with
payments
thereon
being
made
however
Ms.
Thompson
said
there
are
amounts
still
outstanding.
Seil
Holdings
("Seil")
This
company
was
wholly
owned
by
Hank
Leis.
The
write-off
of
$8,600
by
the
appellant
was
allowed
by
the
Minister
for
its
1988
year.
This
amount
was
made
up
of
three
unpaid
advances
made
during
that
year.
Clerical-accounting
invoices
totalled
approximately
$2,500
with
no
billings
for
rent
or
management.
The
loan/
service
situation
continued
with
some
invoices
yet
remaining
unpaid.
Krugerrand
Resources
("Krugerrand")
There
were
no
appellant/related
party
shareholdings
in
this
company
and
according
to
Ms.
Thompson
no
office/management
services
were
provided.
One
loan
of
$21,000
was
made
with
some
United
Liberty
stock
being
taken
as
collateral
security.
She
said,
without
further
elaboration,
that
Krugerrand
required
the
money
for
its
investment
program.
The
loan
was
written
off
because
of
the
Black
Friday
repercussions
on
Krugerrand's
investments
and
also
because
the
United
Liberty
shares
held
as
collateral
had
become
worthless.
This
write-off
was
allowed
by
the
Minister.
Returning
now
to
matters
in
general
for
the
three-year
period
1987,
1988
and
1989,
all
of
the
seven
companies
whose
debt
write-offs
were
disallowed
had
carried
on
their
business
affairs
in
the
appellant's
premises.
Krugerrand
had
its
premises
elsewhere
and
Seil
was
not
billed
for
rent.
According
to
the
records
submitted
covering
this
three-year
period
(Exhibits
R-4
and
R-5)
it
appears
that
the
appellant
had
performed
clerical/managerial
types
of
services
for
thirteen
other
companies,
seven
were
ostensibly
resource
type
companies,
nine
were
operating
in
the
appellant’s
business
premises,
four
received
loans
in
addition
to
the
services,
and
unpaid
debts
of
eight
of
these
companies
were
written
off
as
bad
at
the
appellant’s
1989
year
end.
The
post-1988
taxation
years
are
not
under
appeal,
however
documentary
evidence
was
introduced
by
the
Crown
through
cross-examination
of
Ms.
Thompson
and
through
Mr.
Kirk
in
chief
concerning
the
appellant's
service/loan
activities
for
a
further
two
year
period,
1990
and
1991.
They
show
that
this
same
general
pattern
of
operation
continued,
that
some
recoveries
were
made
in
one
way
or
another,
and
that
all
recoveries
were
recorded
on
income
account.
No
evidence
was
advanced
tending
to
show
or
infer
that
the
appellant’s
loans
were
being
redirected
back
to
itself
by
the
debtor
companies
in
order
to
pay
the
service
related
debts.
With
respect
to
the
appellant's
pre-1987
activities
from
what
I
am
able
to
gather
from
the
documents,
all
of
the
seven
subject
debtor
companies
(except
Tropicana)
had
received
services,
loans
or
both
during
the
1986
fiscal
year.
As
noted
earlier,
Ms.
Thompson's
testimony
was
that
loans
and
services
had
been
provided
for
profit
to
other
individuals
and
companies
and
that
on
acquisition
of
its
commercial
premises
the
appellant
obtained
rental
revenues
as
well.
In
a
nutshell,
the
focal
event
causing
the
major
disruption
in
the
appellant's
profitable
income-earning
scheme
was
said
to
be
the
stock
market
crash
of
October
17,
1987
which
had
frustrated
all
of
the
plans
and
projects
of
the
subject
debtor
companies.
Analysis
and
Conclusions
Counsel
have
agreed
that
the
core
issue
is
directed
to
the
applicability
of
subparagraph
20(1
)(p)(ii)
of
the
Act,
the
requisites
being
the
establishment
1.
of
debts
arising
from
loans,
that
2.
part
of
the
appellant’s
ordinary
business
was
money
lending,
that
3.
the
loans
were
made
in
the
ordinary
course
of
that
business,
and
that
4,
the
loans
became
bad
in
the
year.
These
requisites
are
factual
in
nature.
All
of
the
relevant
circumstances
are
to
be
considered
utilizing
a
pragmatic
business
approach.
As
noted
in
Morflot
Freightliners
Ltd.,
supra,
at
page
416
(D.T.C.
5185):
It
has
frequently
been
said
in
cases
of
this
nature
that
one
must
try
to
characterize
a
situation
from
a
practical
business
point
of
view
to
determine
the
intent
with
which
the
money
was
provided.
Loans
The
facts
here
are
fully
supportive
of
the
finding
that
the
debts
arose
from
loans
of
money
made
by
the
appellant.
Promissory
notes
had
been
obtained
evidencing
the
indebtedness
and
the
interest
charged.
They
were
produced
to
the
Minister’s
auditor
who,
improperly
in
my
view,
dismissed
their
probity
on
the
basis
of
being
merely
self
serving.
Ordinary
business
of
money
lending
In
my
view
it
has
been
amply
established
that
an
appropriate
portion
of
the
appellant’s
business
was
concerned
with
the
lending
of
money.
That
activity
encompassed
a
system
and
continuity
which
formed
an
elemental
part
of
the
appellant's
income
earning
ventures.
Particularly
the
appellant,
acting
through
Ms.
Thompson,
had
at
the
appropriate
time
considered
the
projects
and
ability
of
the
debtors
to
repay,
took
collateral
where
available,
received
written
promissory
notes,
charged
a
reasonable
rate
of
interest
and
had
reviewed
and
monitored
the
debtor's
projects
and
needs
on
an
ongoing
basis.
These
steps
had
been
easily
accomplished
on
a
day-to-day
basis
because
of
their
close
proximity
and
connection.
The
money
to
be
earned
from
the
money
lending
operations
formed
an
integral
part
of
the
appellant's
profit
making
activities.
Risk
is
almost
always
an
adjunct
to
money
lending
activities
and
therefore,
while
Crown
counsel
made
much
of
this,
it
ought
not
to
be
overplayed
in
the
determination
of
whether
part
of
the
appellant's
ordinary
business
was
money
lending.
The
reasons
why
interest
was
not
paid
in
some
circumstances
has
been
sufficiently
explained.
In
Wesco
Property
Developments
Ltd.,
supra,
at
page
2436
(D.T.C.
593-94)
it
was
noted:
It
is
well
settled
that
the
question
whether
or
not
a
taxpayer
is
carrying
on
a
money-
lending
business
is
essentially
a
question
of
fact
to
be
determined
in
each
case.
Here
there
is
no
doubt
that
the
making
of
advances
was
part
and
parcel
of
the
appellant's
ordinary
business.
I
agree
with
the
contention
of
Counsel
for
the
appellant
that
the
advances
were
made
by
the
appellant
as
part
of
its
usual
business
operations
with
a
view
to
making
a
profit.
The
money-lending
feature
of
the
appellant’s
business
was
an
important
part
of
its
total
business
operations
in
the
taxation
years
under
appeal.
There
was
the
required
degree
of
system
and
continuity
in
its
lending
operations
to
justify
a
finding
that
part
of
the
appellant’s
ordinary
business
was
the
lending
of
money.
[Emphasis
added.]
A
similar
approach
was
employed
in
R.
v.
E.V.
Keith
Enterprises
Ltd.,
[1976]
C.T.C.
21,
76
D.T.C.
6018
(F.C.T.D.),
dealing
with
paragraph
11
(1
)(f),
predecessor
to
subparagraph
20(1
)(p)(ii).
Its
facts
concerned
loans
to
business
associates
that
had
become
bad.
Despite
that
relationship,
the
bad
debt
deduction
was
allowed.
At
page
24
(D.T.C.
6020),
Mahoney,
J.,
noted:
The
defendant
had
established
over
the
years
a
pattern
of
both
loaning
money
and
carrying
deferred
balances
to
accommodate
persons
and
companies
doing
business
with
the
operating
entities
through
which
its
construction
and
other
activities
were
carried
on.
It
had,
on
previous
occasions
given
the
accommodation
to
the
individual
principals
of
the
actual
business
connection.
.
.
.
While
this
loan
may
have
been
an
unwise
one
to
make
in
the
circumstances
and
the
decision
to
make
it
may
have
been
influenced
by
the
fact
[of
the
family
relationship]
.
.
.
it
remains
that
the
loan
was
of
a
class
that
the
defendant
had
the
power
to
make
and
had
established,
over
the
years,
a
pattern
of
making
in
the
ordinary
course
of
its
business,
and
.
.
.
notwithstanding
the
relationship,
was
within
the
class
of
persons
to
whom
such
financial
accommodation
had
been
regularly
extended.
Subparagraph
20(1
)(p)(ii)
is
applicable
where
the
lending
of
money
forms
part
of
the
taxpayer's
scheme
of
earning
income.
By
its
own
terms
that
provision
operates
"notwithstanding
paragraph
18(1
)(b)"
of
the
Act
which
otherwise
prohibits
a
deduction
in
respect
of
an
outlay
or
loss
that
is
capital.
In
Chaffey,
supra,
the
deduction
of
bad
debts
pursuant
to
paragraph
11(1
)(f)
[now
subparagraph
20(1
)(p)(ii)]
was
being
considered.
Le
Dain,
J.,
at
page
258
(D.T.C.
6179),
in
agreeing
with
the
conclusions
of
the
trial
judge,
opined
that:
.
.
.
shareholders’
advances
do
not
constitute
the
business
of
lending
money;
they
are
simply
a
particular
form
by
which
capital
is
put
into
the
company.
The
loans
made
by
the
partnership
did
not
have
as
their
principal
object
the
accommodation
of
persons
in
return
for
income
in
the
form
of
interest;
they
were
merely
a
device
for
the
financing
of
projects
through
which
profit
was
to
be
made
by
other
means.
[Emphasis
added.]
In
my
view
this
is
not
a
general
maxim
wherein
a
shareholder
relationship
would
necessarily
preclude
a
business
of
lending
money.
Evidentiary
concerns
arise
in
cases
involving
close
relationships
between
the
lender
and
the
borrower
calling
for
an
appropriate
examination
of
all
of
the
evidence.
In
any
event
the
principal
focus
of
the
jurisprudence
is
that
each
case
must
be
viewed
and
determined
on
its
own
facts
and
merits.
In
Charles
Chaffey
there
apparently
was
no
provision
for
the
charging
of
interest,
nor
was
there
any
lending
pattern
or
system
established.
The
trial
judge
opined
([1974]
C.T.C.
598,
74
D.T.C.
6478,
at
page
610
(D.T.C.
6486)):
...
1
do
not
think
that
the
making
of
such
advances
proves
that
the
lending
of
money
was
part
of
their
ordinary
business,
or
that
the
evidence
as
a
whole
proves
that
it
was.
Here,
in
my
opinion,
the
evidence
establishes
that
the
appellant
was
in
the
business
of
loaning
money
to
resource
and
development
types
of
businesses,
that
it
held
only
very
minority
share
interests
on
its
own
account
in
most
of
them
and
that
its
loaning
activities
were
not
cloaking
devices
for
profit
making
through
other
means.
The
position
that
the
lending
purposes
were
capital
in
nature
in
that
they
were
merely
to
shore
up
VSE
shell
companies
whose
snares
would
ultimately
be
taken
for
debt
and
thereafter
profitably
sold
for
everyone's
benefit
has
not
been
made
out.
Ms.
Thompson’s
testimony
concerning
the
business
projects
of
the
subject
debtor
companies
was
not
rebutted.
Loans
made
in
the
ordinary
course
of
business
Probative
evidence
accompanied
by
an
appropriate
weighing
thereof
has
to
be
brought
to
those
situations
attracting
the
caution
mentioned
by
the
Court
in
Neonex
International
Ltd.
v.
The
Queen,
[1978]
C.T.C.
485,
78
D.T.C.
6339
(F.C.A.),
at
page
491
(D.T.C.
6343):
It
must
first
be
said
that
while
it
is
true
that
a
company
may
be
engaged
in
the
business
of
financing
its
subsidiaries
in
whole
or
in
part,
it
does
not,
in
my
view,
necessarily
follow
that
all
transactions
between
a
parent
and
subsidiary
are
part
of
its
financing
business.
.
.
.
The
evidence
here
establishes,
in
my
opinion,
that
the
loans
written
off
were
of
the
type
that
the
appellant
was
in
the
business
of
making.
They
were
made
in
connection
with
its
overall
profit
making
scheme
and
were
of
a
class
usually
entered
into
by
the
appellant.
The
bad
debts
originated
from
loans
that
were
prompted
by
the
ordinary
considerations
that
had
governed
the
appellant’s
making
of
loans.
Loans
became
bad
in
the
year
The
appellant
was
connected
to
each
of
the
debtor
companies
either
as
director,
shareholder
or
bookkeeper
through
which
she
was
able
to
judge
and
monitor
the
circumstances
in
which
the
debtor
found
themselves.
She
had
a
close
connection
with
the
directors
of
each
company
and
knew
of
the
debtor's
ability
to
repay
the
loans.
In
each
case
she
testified
of
the
circumstances
that
led
her
to
consider
each
amount
uncollectible.
Indeed,
Mr.
Kirk's
testimony
implicitly
concedes
that
these
amounts
were
uncollectible
at
the
particular
time.
There
is
no
reason
to
dismiss
Ms.
Thompson's
testimony
respecting
the
devastation
caused
to
the
appellant’s
business
because
of
the
"Black
Friday"
stock
market
crash.
The
argument
advanced
concerning
no
collection
activity
has
been
fully
met
by
Ms.
Thompson's
testimony
that
she
was
very
knowledgeable
about
each
debt
and
to
have
undertaken
legal
activity
would
be
throwing
good
money
after
bad.
She
had
made
a
sound
and
pragmatic
judgment
at
the
appropriate
time
not
to
initiate
legal
collection.
As
noted
previously,
all
of
the
debt
amounts
written
off
had
been
included
in
the
appellant’s
computation
of
its
income
for
the
year
or
a
previous
year.
Decision
The
appeals
are
allowed
and
the
matters
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
on
the
basis
that
the
appellant
was
entitled
to
deduct
allowances
for
bad
debts
of
$30,120.04
for
1987
and
$73,414.32
for
1988
pursuant
to
subparagraph
20(1
)(p)(ii)
of
the
Income
Tax
Act.
The
appellant
is
entitled
to
its
costs
on
a
party-to-party
basis.
Appeal
allowed.
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