Norman Direnfeld v. Minister of National Revenue, [1985] 1 CTC 2200, 85 DTC 172

Brulé, TCJ:—This appeal is brought with respect to the appellant’s 1981 taxation year. In filing his income tax return for the said year the appellant claimed carrying charges as a deduction from income in the amount of $62,293 in relation to mortgage interest paid in respect of a parcel of land beneficially owned by him. The Minister of National Revenue disallowed this deduction.

The appellant is a professional engineer and also a barrister and solicitor. He has engaged in various construction and developing projects either alone or in conjunction with others. His first project as a builder-developer was in 1955 when he constructed a 60-suite apartment building in Toronto. Then in 1962 and until 1965 he was engaged in another five projects. There was another development in 1967 and then no new undertaking until 1975 when, with a partner, he reconstructed an existing property. A great deal of his time in this period from 1967 until the subject property was purchased in 1979 was devoted to the practice of law. In at least one instance the appellant did not invest any of his capital in the project.

In May of 1979 the appellant purchased a 25-acre parcel of land in the Town of Whitby for $540,000 paying $10,000 in cash with a first mortgage back for $530,000. A corporation, 416808 Ontario Limited, was incorporated to hold the land in trust for the appellant and a proper trust agreement was executed. In 1980 plans of subdivision for the property were prepared and negotiations entered into with the Town of Whitby. These were not concluded until 1983.

The issue to be decided is whether the appellant is entitled to deduct interest in the amount of $62,293 in respect of his 1981 taxation year. While the amount of the deduction is not in dispute and is not being denied to the appellant the timing of the deduction is in question.

The appellant contends that he is in the business of developing and improving land for commercial sale. The purpose of purchasing the lands was to carrying on the said business. As part of the operation he claims to be entitled to deduct the interest payable with respect to the carrying cost of the property during the 1981 taxation year from other income.

The respondent submits that the appellant has been properly assessed in respect of his 1981 taxation year, in that the expense the appellant sought to deduct was in respect of an amount paid on account of interest on borrowed money used to acquire land which was not used in or held in the course of a business carried on by the appellant or held primarily for the purpose of gaining or producing income of the appellant in the 1981 taxation year. He further submits that the interest expense was not incurred for the purpose of earning income from a business or property and, therefore, is not deductible pursuant to paragraph 20(l)(c) of the Income Tax Act.

The determination of this question turns on the interpretation of the appellant’s activities as to whether he is deemed to be carrying on business, or that the purchase and development of the property was an adventure in the nature of trade.

Subsection 18(2) of the Income Tax Act limits the deduction of interest on money borrowed to acquire land, interest on amounts payable by the taxpayer for land, and property taxes paid or payable by the taxpayer to a province or a Canadian municipality. Deduction of such carrying charges is denied except to the extent that any gross revenue from the land for the year in question exceeds all other amounts deducted in computing the taxpayer’s income from the land for that year.

Exceptions are made in the case of land used or held in the course of carrying on a business by the taxpayer, and the land held primarily for the purpose of gaining or producing income of the taxpayer for the year. The definition of “business” in subsection 248(1) of the Income Tax Act expressly provides that an adventure in the nature of trade is not included for the purposes of paragraph 18(2)(c). The amount disallowed is to be added to the cost of the land.

The appellant offered to the Court a list of his business activities with respect to his engaging in development and construction. While this list covered a period from 1955 to the present there were many periods in which no activity took place and in many instances he engaged in his activities either alone, in partnership or in corporations with different individuals. Each of the appellant’s activities seemed to be isolated one from another. The Minister classified these projects as a series of adventures in the nature of trade as opposed to the carrying on of a business.

The respondent referred the Court to the case of MNR v James A Taylor, [1956] CTC 189; 56 DTC 1125, a decision of the Exchequer Court of Canada wherein there was considered the term “adventure in the nature of trade”. The leading British cases were analysed and cetain conclusions reached, some of which are important to the present case.

First of all at 199 [1131], of the report the Court said:

t . ._ It is, I think plain from the wording of the Canadian Act, quite apart from any judicial decisions, that the terms “trade” and “adventure or concern in the nature of trade” are not synonymous expressions.

Secondly the Taylor case (supra) referred to the decision in CIR v Livingston et al (1926), 11 TC 538, wherein Lord President Clyde said as follows:

. . . The trade of a dealer necessarily consists of a course of dealing, either actually engaged in or at any rate contemplated and intended to continue.

In the Taylor case (supra), the Court suggests that a person may be involved in an adventure in the nature of trade and this may be carried out in the same manner as a person carrying on business, but this does not classify the adventure as a business. The character and the surrounding circumstances must be considered and no single criterion can be formulated.

In Tara Exploration and Development Company Limited v MNR, [1970] CTC 557; 70 DTC 6370, an Exchequer Court case in which Jackett, P said at 567 [6376]:

. . . the better view is that the words “carried on” are not words that can aptly be used with the word “adventure”. To carry on something involves continuity of time or operations such as is involved in the ordinary sense of a “business”. An adventure is an isolated happening. One has an adventure as opposed to carrying on a business.

This reasoning was later adopted and approved in Fergusson et al v MNR, [1984] CTC 2084; 84 DTC 1107.

Cattanach, J of the Federal Court in David Tobias v The Queen, [1978] CTC 113; 78 DTC 6028 set out at 136 [6042]:

. . . The expenses incurred over a period of time should be charged as expenses in whole or in part in the year revenue was derived from the project.

The appellant cited a passage from the same case at the same page as follows:

. . . He could have sought a deduction not against income from the project because there was none, but from other income in the year the expenses were incurred.

The appellant did not go on to refer to other parts of the same and following paragraphs which in referring to the above statement suggested, “that would simply mean that the expenditures for the year would be charged to a mental profit and loss account,” and later, “it is equally as cogent that the plaintiff should mentally assign the cumulative expenditure to a deferred account to be set off against revenue in the year it arises”.

There was not a consistent approach taken to the expenses in the year in question. The appellant only sought to deduct loan interest from his unrelated income. He did not attempt to deduct other expenses such as property taxes, but carried these forward. Presumably the deduction of the large amount of loan interest suited his affairs in filing his 1981 personal income tax return.

I have come to the conclusion that this project which gives rise to the appeal was an adventure. Almost each [sic] of the appellant’s activities which he set out were isolated one from the other. Certainly this one particular endeavour was, and as such the number of individual endeavours or separate adventures do not constitute “carrying on business” within the ordinary meaning of the words.

The result therefore is that the appeal is dismissed.

Appeal dismissed.