Millford Development Limited (Formerly Nobledale Construction Limited) v. Minister of National Revenue, [1985] 1 CTC 2284, 85 DTC 248

Brulé, TCJ:—This is an appeal by Nobledale Construction Limited with respect to its taxation year wherein the company treated a discount of $73,769.61 on the sale of a mortgage as an income loss while the Minister of National Revenue claimed that the discount was a capital loss and reassessed accordingly.

The appellant was a body corporate incorporated under the laws of the Province of Ontario. (Since the commencement of this appeal the company has amalgamated and is now known as Millford Development Limited.) At all material times Nobledale carried on the business of real estate development. It engaged in the buying and selling of raw land, the development of land for construction, and in the construction of residential housing and apartment buildings for sale or as rental properties.

In 1976 Nobledale, Frank Orsi Construction Ltd and Golden Estates Limited, sold a large tract of land near Aurora, Ontario to Markborough Properties Limited. As part of the said sale transaction, the vendors took back a mortgage for a portion of the sale price. In filing its income tax return for 1976, Nobledale reported the gain realized on the disposition of the property as income. In 1980 Nobledale and the other vendors sold the mortgage receivable at a discount to Heavenly Homes Development Limited.

Nobledale’s share of the discount was $73,769.61 which amount it reported in its 1980 income tax return as being a loss on income account. By a notice of reassessment dated October 2, 1981 the Minister of National Revenue reassessed Nobledale for additional tax on the basis that the discount of $73,769.61 was a capital loss. Nobledale objected to the said notice of reassessment by filing a notice of objection. The said reassessment was confirmed by the Minister by a notification dated August 20, 1982.

The appellant submits that the taking back of mortgages by Nobledale as part of the sale price of properties is an integral and necessary part of its business, and any loss incurred as a result of taking back such mortgages, is therefore on income account.

The respondent does not disagree with the facts. It is claimed that the appellant was not in the business of buying and selling mortgages — these were not an integral part of the business and, therefore, the discount of $73,769.61 on the sale of the mortgage in question was properly reassessed as a capital loss. It was acknowledged that the appellant often held a large mortgage portfolio as a result of acquiring these when sales of land were made. At times a trust company was retained to collect payments on the portfolio of mortgages.

The appellant claimed that the loss occurred in the course of carrying on a business. His counsel cited certain cases wherein profits which occurred in the course of carrying on business but from non-operating items were deemed to be on account of income.

In Tip Top Tailors Ltd v MNR, [1957] CTC 309; 57 DTC 1232, the company involved realized a profit as a result of currency exchange rates on funds required to pay for cloth purchased in Great Britain. The Supreme Court of Canada found that these profits arising as a result of funds borrowed as working capital and then repaid at a lower foreign exchange rate than when originally contracted, were to be treated as income as a part of the company’s trading operations. The Court relied on the decision of the Court of Appeal of England in Imperial Tobacco Company v Kelly, 25 TC 293, wherein a similar foreign exchange profit occurred.

In the case of Atlantic Sugar Refineries v MNR, [1949] CTC 196; 49 DTC 602, the Supreme Court of Canada held that hedging operations in the futures market in sugar were a part of the company’s business and the resulting profits were on account of income.

Similarly the Exchequer Court of Canada in MNR v Mandelbaum, [1962] CTC 165; 62 DTC 1093, determined that profits from discounted agreements and mortgages purchased by two brothers from a company owned by them be treated as income.

Thorson, P, said at 173 (DTC 1098):

. . . It would surely be an anomalous situation if the respondent and his brother, who were the managers of Sunnibilt and in complete control of it, could purchase all its accounts receivable from the sale of its prefabricated buildings at a substantial discount which was, in effect, what they did, and thereby reduce its income tax liability and at the same time be able to claim that the amount of the discount at which they had made the purchase which they realized when the payments under the mortgages and agreements were made was an accretion of their capital and, therefore, not subject to income tax. In my opinion, such a situation would not be possible.

Counsel for the appellant said that all these cited cases point to these types of profit as being income as all transactions were in the course of business. In the present case he said the principle was the same, taking the mortgage was in the course of business and the loss suffered by the sale of this particular mortgage should be on income and not on capital account. The sale of the property produced a profit, which profit included the mortgage. The profit on the sale was treated as income and tax was paid accordingly. In this business the taking of a mortgage back was not a capital item.

The respondent allowed that the appellant gave and received mortgages during the course of his business. Most mortgages received were held to maturity unless cash was needed. The mortgage involved in the present case was held for over three years before the sale took place.

On the balance sheets of the company’s financial statements, land was shown as a current asset but the mortgages were not so described and therefore presumably not trading items. They were more like capital assets.

In support of his position counsel for the respondent offered certain authorities. In Hiwako Investments Ltd v The Queen, [1978] CTC 378; 78 DTC 6281, it was held that a sale at a profit was not a motivating factor and therefore the sale of apartment properties was a capital gain and not income. The appellant attempted to rebut this by saying that in the present case there was a trading motive for profit. That, I believe, is correct but only in so far as the sale of the Original property was concerned. The accepting of a mortgage back was not a trading asset but one that could be considered as an investment.

The value of what a person accepts as part of a sale, be it money or other property, must be determined in calculating the amount of profit, but once this is done what has been accepted in payment becomes capital to the vendor. Provision is made in the Income Tax Act for certain reserves to be shown with respect to particular assets received in the sale transaction but this does not characterize these assets as trading items.

Other cases put forward by the respondent included:

Heating and Plumbing Finance Ltd v MNR, 11 Tax ABC 257; 54 DTC 415;

William Borenstein v MNR, 10 Tax ABC 394; 54 DTC 263;

Ted Davy Finance Co Ltd. v MNR, [1964] CTC 194; 64 DTC 5124;

Rosevale Apartments Ltd v MNR, 29 Tax ABC 393; 62 DTC 411;

The Queen v Greenington Group Ltd, [1979] CTC 31; 79 DTC 5026;

Vancouver Pile Driving & Contracting Co Ltd v MNR, [1963] CTC 10;

63 DTC 1007;

George Rossy v MNR, [1971] Tax ABC 979; 71 DTC 686;

Columbia Records of Canada Ltd v MNR, [1971] CTC 839; 71 DTC 5486.

In all of these cases the sales of assets were not deemed to be in the ordinary course of business and therefore were considered as capital transactions. This, I believe, distinguishes these cases from those cited by the appellant.

Even though the appellant accepted mortgages as part of sale transactions he entered into, the buying and selling of these mortgages was not a part of his regular business. At least no evidence was offered to this effect. His mortgage portfolio was large enough at times to require a professional manager, a normal procedure with capital investments.

There was no suggestion that if the mortgage had been held to maturity any loss might have occurred. The fact that it was sold to a company owned by the appellant’s wife is perhaps of no importance but the sale did provide the needed cash. When funds were needed, no evidence was offered as to any attempt to use other methods of raising cash by the appellant and the other companies holding a portion of this mortgage.

In my opinion the mortgage involved in this case became a capital asset at the time it was accepted by the appellant and, while it arose as a result of carrying on a business, was not acquired either as a venture in the nature of trade nor as a trading asset in the appellant’s business. It was a substitute for money and, until sold, was an investment which produced income to the appellant, an indication of a capital asset. When sold it was on this basis.

The result therefore is that this appeal is dismissed.

Appeal dismissed.