C J Oliver v. Minister of National Revenue, [1984] CTC 2080, 84 DTC 1092

Bonner, TCJ:—The appellant appeals from assessments of income tax for the 1974, 1975 and 1976 taxation years. The appeals stem from the refusal of the Minister to allow deductions in respect of certain payments made by the appellant on behalf of companies in which he had an interest. Broadly speaking, those companies carried on the business of land development.

During the period from 1970 to 1979 the appellant owned 100 per cent of the issued shares of C J Oliver Industries Ltd (hereinafter called “Industries”). Industries in turn owned 100 per cent of the issued shares of C J Oliver Limited (hereinafter called “Limited”). Industries also owned, during the period between 1970 and the spring of 1975, 100 per cent of the issued shares of C J Oliver Developments Ltd (hereinafter called “Developments”). Further, Industries owned 50 per cent of the issued shares of Compass Management Ltd (hereinafter called “Compass”). The appellant personally owned 20 per cent of the Compass shares and a Mr Bell owned the remaining 30 per cent. It is unnecessary to name other companies in the Oliver group which held projects which the appellant had developed.

In the normal case, at least, each of the companies named played a specialized role in the conduct of the development business. Developments sought properties that offered an opportunity for profitable development. It acquired the land and arranged financing for the proposed projects. Limited carried on the construction operations. Compass did the leasing work and managed the completed project. The whole process from acquisition of the land through to management of the completed project was carried on with a view to the ultimate sale of the project as a going concern although such sales did not take place in all cases.

In a typical case, although Developments was the owner of the land and was the company which was in fact carrying on the development business the mortgage lenders and other creditors looked to the appellant as owner of the corporations and called upon him to guarantee financing.

In 1973 and 1974 a number of business misfortunes befell the Oliver group. It became difficult for the companies to meet their obligations. In 1975 and 1976 the appellant proceeded to meet obligations of various of the companies using both his own funds and borrowed money. He did so, of course, so that the companies could avoid bankruptcy and continue to carry on business. In addition the appellant felt a personal obligation to some of the creditors of the companies, particularly in cases where loans had been made to the companies on the strength of the trust which lenders reposed in the appellant.

Originally, the appellant claimed to deduct the amounts in issue as if the outlays were made by him in payment of expenses which he incurred in carrying on his own business. In effect, the corporate veil was ignored. Counsel for the appellant did not, on appeal, attempt to assert deductibility on that basis.

The primary argument advanced by counsel for the appellant was that the amounts were deductible in accordance with paragraph 18(l)(a) of the Income Tax Act because they were laid out for the purpose of gaining or producing income from property, namely, the appellant’s shares. Two alternative arguments were advanced. The first was that where an individual makes outlays of this kind for purposes of commercial expediency the amounts are deductible. In this regard counsel relied mainly on the decision of the Federal Court in Margaret Ann Frappier v The Queen, [1976] CTC 85; 76 DTC 6066. The second alternative was that the appellant was running a business operation and that in accordance with the principles laid down in MNR v Henry J Freud, [1968] CTC 438; 68 DTC 5279, the losses are deductible because gains would have been taxable had they been realized.

In connection with the primary argument counsel referred to a number of cases including the decision of the Exchequer Court in Trans-Prairie Pipelines, Ltd v MNR, [1970] CTC 537; 70 DTC 6351, as authority for the proposition that an expense may be regarded as incurred for the purpose of gaining or producing income from a business or property even though it is not possible to trace the expenditure directly to a precise dollar of income earned.

In my view the outcome of this case is governed by the decisions of the Supreme Court of Canada in Stewart & Morrison Limited v MNR, [1972] CTC 73; 72 DTC 6049, and Donald Preston McLaws v MNR, [1972] CTC 165; 72 DTC 6149. Those cases involve situations indistinguishable in principle from the present case. The companies in which the appellant was interested were neither his agents nor were they shams. The businesses which got into difficulties and required the appellant’s assistance were the businesses of the companies and not of the appellant. There is no basis in the evidence for a finding that the acquisition by the appellant of his interests in the various companies in question here was related in any way to any sort of adventure in the nature of trade. The role of the companies in the Oliver group was to serve the appellant, whether directly or indirectly, as an investment, as a source of dividend income. Although the appellant did indicate that eventually, in his thinking, he would ultimately sell the shares in his corporations his plan was to do that, he said, if and when he eventually wanted to slow down or retire. The decision of the Supreme Court of Canada in MNR v Freud is, therefore, readily distinguishable.

Counsel’s primary submission with respect to the decision in Stewart & Morrison v MNR, namely, that that case is no longer good law rested on an analysis of decisions of the inferior courts. Such decisions cannot be relied on as the basis for an argument that a decision of the Supreme Court of Canada is no longer good law. The payments in issue are, therefore, payments on account of capital, the deduction of which is prohibited by paragraph 18(1)(b) of the Income Tax Act.

The appellant pleaded that:

In the alternative, the Appellant says that if any or all of such amounts are not deductible expenses, which is not admitted, then the payment of all such amounts resulted in the companies becoming indebted to the Appellant in the full amount thereof and, because such debts were bad at the end of the 1975 and 1976 taxation years, respectively, the Appellant incurred a capital loss of $305,152.31 in the 1975 taxation year and $55,069.95 in the 1976 taxation year.

The position of the respondent was that the payments have not been shown to be bad debts of the appellant in the years under appeal. The relevant provision of the Income Tax Act is paragraph 50(1 )(a) which reads:

50(1) For the purposes of this subdivision, where

(a) a debt owing to a taxpayer at the end of a taxation year (other than a debt owing to him in respect of the disposition of personal-use property) is established by him to have become a bad debt in the year,

the taxpayer shall be deemed to have disposed of the debt or the share, as the case may be, at the end of the year and to have reacquired it immediately thereafter at a cost equal to nil.

The argument of the appellant’s counsel rested on the premise that the debts to the appellant which arose as a result of the payment by the appellant of the liabilities of his companies became bad, either immediately or in any event before the end of the year in which they arose. There was, however, no evidence that the value of those debts decreased at any time after they arose. Whether the obligations of the companies were worth one cent on the dollar or one hundred cents on the dollar, the value thereof was not shown to have diminished at any time following the moment of payment by the appellant of the original corporate obligations. In the result I find that there were outlays of capital, but no losses of capital. The appeals will, therefore, be dismissed.

Appeals dismissed.