SFG Construction Ltée v. Minister of National Revenue, [1983] CTC 2467, 83 DTC 401

Guy Tremblay [TRANSLATION].—This case was heard in the city of Montreal, Quebec on September 16 and 17, 1982.

1. Point at issue

The question is whether the appellant is entitled to deduct as bad debts, in computing its income for the taxation years 1975 and 1976, sums of money loaned to two companies in which it was a minority shareholder. These sums of money became irrecoverable in the years concerned.

The respondent contended that, as the appellant’s business was not wholly or partly for the purpose of lending money in the ordinary course of its business, it could not deduct such amounts in computing its income pursuant to paragraph 20(1 )(l) of the Income Tax Act, SC 1970-71-72, c 63, as amended. The appellant argued, on the other hand, that though part of its business consisted of building houses for resale, another part involved the making of loans and provision of financing to individuals.

2. Burden of proof

2.01 The appellant has the burden of showing that the respondent’s assessments are incorrect. This burden of proof results not from one particular section of the Income Tax Act, but from several judicial decisions including a judgment of the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195, 3 DTC 1182.

2.02 The facts presumed by the respondent are described in subparagraphs

(a) to (o) of paragraph 5 of the respondent’s reply to the notice of appeal. This paragraph reads as follows:

5. In assessing the appellant for the taxation years at issue, the respondent replied, inter alia, on the following presumptions of fact:

(a) in the years at issue, the appellant carried on a business of building single family houses for resale;

(b) the company Les Habitations Emerillon (Canada) Ltee was incorporated to build a block of apartments for the purpose of deriving property income therefrom;

(c) during the period at issue, the appellant held 33 / of the ordinary shares of the capital stock of Les Habitations Emerillon (Canada) Ltée;

(d) in order to enable Les Habitations Emerillon (Canada) Ltee to acquire the working capital needed to build the building mentioned in subparagraph (b) of this paragraph, the appellant during the taxation years at issue loaned the latter the following sums:

1975	$71,847.00
1976	$45,394.00

(e) during the taxation years at issue, the appellant was a minority shareholder in Les Placements France Pierre Inc;

(f) during the taxation year 1976, the appellant loaned Les Placements France Pierre Inc the sum of $12,400.00;

(g) the appellant concluded that most of the advances made to Les Habitations Emerillon (Canada) Ltée were irrecoverable and, in computing its taxable income for the taxation year 1975, claimed a deduction of $33,500.00, half the capital loss of $67,000.00, which was the total amount of the advances considered by the appellant to be irrecoverable;

(h) in computing its income for the taxation years 1974 and 1975, the appellant included the total amount of $5,847.45 as interest receivable on the advances mentioned above;

(i) in computing its income for the taxation year 1976, the appellant claimed a deduction of $45,660.00 as bad debts, namely:

— Bad debts		$62,641.00
	Less
— Recovery of bad debts	Sub-total	$22,828.00
	Plus	$39,813.00
— Bad debs resulting
from interest on advances		$ 5,847.00
— Bad debts claimed	Total	$45,660.00

(j) the appellant did not prove that the debts claimed were bad debts in the taxation years at issue;

(k) in the taxation years 1976, 1977 and 1978, Les Habitations Emerillon (Canada) Ltée repaid the following amounts to the appellant:

1976	$22,828.00
1977	$ 1,198.00
1978	$20,126.00

(l) the total debts which were allegedly bad in the taxation years 1975 and 1976 were not included in computing the appellant’s income for the said years or any earlier year;

(m) the debts of appellant which were allegedly bad in the taxation years 1975 and 1976 do not result from loans made by the appellant in the ordinary course of the appellant’s business;

(n) the appellant’s ordinary business did not consist wholly or even partly in the lending of money;

(o) the advances mentioned in subparagraphs (f) and (g) of paragraph 5 of this reply to the notice of appeal, made by the appellant during the years at issue, do not constitute an expense incurred for the purpose of earning income from its business.

3. Facts

3.01 The first witness for the appellant, Mr Roger Landreville, CA, testified as follows.

(a) He began working for the appellant as an auditor in early 1977.

(b) On form T/7W-C, issued by the respondent with the reassessment pertaining to the taxation year 1976, it should read that the amount of $39,813 is a “bad debt”, not a “inventory deduction” as indicated on the form. This was an error, and it is admitted as such by counsel for the respondent.

(c) The appellant was incorporated in September 1963. The three shareholders were Messrs Maurice Filiatrault, René Sanfaçon and Clément Grégoire. Each owned 33 / per cent of the shares (letters patent — Exhibit A-2). Its principal purpose was to carry on a construction and general contracting business.

(d) The appellant owned 33 / per cent of the shares of Les Habitations Emerillon (Canada) Ltée (hereinafter referred to as “Emerillon”), which was incorporated in May 1973. One of the purposes of this company was to carry on the operations of general building contractors (letters patent

— Exhibit A-3). The other shareholders are Les Habitations Grillon Inc. (3314 per cent) and Les Placements France Pierre Inc (33% per cent).

(e) The appellant is also part of a company formed with Les Placements France Pierre Inc and Les Habitations Grillon Inc on March 9, 1976 (hereinafter referred to as “La Société”). La Société was formed to assist Emeril- lon with financing; for this purpose the three shareholders loaned money individually, either by paying its debts or by doing work. In May 1976, Emerillon transferred to La Société an account receivable, the balance on the price of a sale to the two Ciancimino brothers of $214,792 (notarial contract — Exhibit A-7) as a guarantee of its debts to the three shareholders. At other times, other assets were also transferred to La Société as security.

(f) All amounts relating to loans, sales and work done by the appellant to or for Emerillon were posted in the appellant’s accounting system on a card (Exhibit A-1) titled “Accounts receivable” of Emerillon. This card has more than eighty entries.

(g) These entries include, first:

(1) eighteen loans from November 1974 to June 1976, totalling

$97,000, for which the notes and cheques were filed as Exhibit A-4;

(2) two loans in May 1976 totalling $4,000, for which the cheques (without notes) were filed as Exhibit A-5;

(3) cheques made to creditors of Emerillon and bills between November

1976 and August 1977, totalling $2,983 (Exhibit A-6);

(4) two cheques ($5,000 and $1,000) made to La Société in June and October 1976 (Exhibits A-8 and A-9);

(5) a cheque for $400 in September 1976 to Les Habitations Grillon

Inc for one-third of a debt paid by it for Emerillon (Exhibit A-10);

(6) two transfers of funds to La Société by the appellant from its bank account on April 14, 1976 ($5,000) and on June 23, 1976 ($3,000), in accordance with bank documents (Exhibit A-11 );

(7) a series of twenty-eight bills from August 26, 1974 to November 23, 1976, relating to property sold or work done by the appellant for Emerillon, totalling $6,212.09 (Exhibit A-12).

(h) All these accounts described in paragraph (g) total $124,595.09 and are listed in Exhibit A-1.

3.02 In his examination-in-chief Mr Maurice Filiatrault, a shareholder (33 / per cent of the shares) and secretary of the appellant, testified as follows.

(a) The appellant, after its incorporation in 1963, began doing carpentry work, that is, was a carpentry subcontractor in the finishing of houses. Later, in 1964, it built single-family homes by itself and continued doing so until 1967, when it also began building duplexes. However, in 1969 the appellant returned to building single family homes exclusively. It continued in this type of construction.

(b) Setting aside the loans made to Emerillon and to La Société, the appellant made thirty-four loans of between $300 and $67,100, totalling $205,278.64, over the period from November 1970 to November 1981. At the end of 1976, the number of loans totalled twenty-four. Of the thirty- four loans, thirty-one were established by notarial contracts giving the amount, the rate of interest, the terms of payment and the hypothecary security. The other three were established by notes and cheques. All these documents were filed as Exhibit A-17.

(c) Exhibits A-5 to A-12 filed earlier (see para 3.01(g), 2 to 7) are accurate and clearly show why they were filed. Suitable comments were made in this regard for each of the said exhibits.

(d) The statement of the bank account of La Société at the Bank of Montreal, No 1004-078, was filed as Exhibit A-18.

(e) There were six shareholders of Emerillon when it was incorporated, each having a one-sixth share. Of these six shareholders, three sold or assigned their shares sometime in 1974, and this left only the appellant, Les Placements France Pierre Inc and Les Habitations Grillon Inc, each having a one-third share (Exhibit A-19).

(f) Emerillon’s activities were the building of apartment houses. It built between twenty and twenty-two, most of them in Longueuil and vicinity.

(g) In February 1974, the building of a 72-apartment structure was begun. This building was the start of Emerillon’s financial problems, and also the occasion for the first loans and general financial aid by the three shareholders. The said building was started after a written purchase offer was made by Mr Dodier, with a deposit of $200,000. Its price was the cost of construction plus a percentage, and Emerillon was not required to give any rental guarantee.

(h) In the same year, because of strikes and other circumstances, the conclusion of the construction had to be delayed and costs increased, so that Mr Dodier refused to take possession of the building and brought a court action in January 1975 (Exhibit A-20). After considering all the aspects of the case, it was decided by those concerned to settle the matter out of court, and to return the $200,000 to Mr Dodier, leaving Emerillon with a tenantless building and a $100,000 penthouse. It took a year and a half to rent the apartments. During that time, Emerillon and La Société had to bear the costs. The roof began leaking, and the subcontractor had to be sued.

(i) A series of claims and legal actions extending into 1978 and totalling some $85,000 was brought against Emerillon. The majority were by suppliers or subcontractors. All the documents relating to these claims and actions were filed as Exhibit A-21.

(j) On April 9, 1976 the said building was sold to the brothers Ciancimino (Exhibit A-22) for $1,500,000, less than the cost price, with a balance payable of $214,792. It is this account receivable which was transferred to La Société in May 1976 (Exhibit A-7) as security (see para 3.01(e)).

3.03 In cross-examination, Mr Filiatrault testified as follows.

(a) At the time the case at bar was heard, the appellant had a loan balance of $150,000. If all the loans made from the beginning were compiled, the cumulative total would be between $500,000 and $600,000.

(b) In November 1974, before construction of the 72-apartment building by Emerillon, the appellant had advanced the latter $30,000 (Exhibit A-1).

(c) In April 1976, La Société borrowed from Sharman Investment Corp the sum of $200,000 to settle out of court the action brought by Mr Dodier (see para 3.02(h)). The statement for bank account No 1004-078 (Exhibit A-25) shows this payment.

(d) At the end of 1974, Mr Dodier asked Mr Piette (of Les Placements France Pierre Inc) to handle subletting the 72-apartment building, and early in 1975 Mr Dodier decided to refuse to take possession of the building and to bring the action.

(e) The reason La Société paid Emerillon’s bills was so that it could continue building apartment houses (twelve or twenty-four apartments) and then sell them, recovering the mortgage advances and making a good profit: “If everything is finished, if we sell them at a good profit, it pays. We invest the money, and we do it to make more.”

Q. Why did you want to pay Emerillon’s bills?

A. Because we had to finish the apartment houses, the twelve or twenty-four apartments, so we could sell them; and then to sell them, if we did not finish them we were not able to sell them, and then recover the mortgage advances.

Q. If you did not make advances, Emerillon would be in difficulty; SFG was losing $13,000.00, and perhaps $30,000.00?

A. In what year? We did more than that.

Q. Early in 1975?

A. At the beginning, not enough progress had been made. When the houses were well enough along, they had gone far enough so that the mortgages could be recovered, and they had to be finished.

Q. But that is what I do not understand: your responsibility in Emerillon — you had capital stock of $13,000.00 — was that your investment?

A. Yes.

Q. If you were not taking — you were not making advances, you were not continuing, you were withdrawing, then there would simply be $13,000.00. What happened afterwards?

A. If everything is finished, if we sell them at a good profit, it pays. We invest the money, and we do it to make more. (Trans pp 59-60).

(f) A personal guarantee by the shareholders of Emerillon and La Société was given for Emerillon’s loans. The guarantee was also given by the companies, which were members of La Société:

Q. But did you give a personal guarantee for Emerillon’s loans?

A. Yes, we did.

Q. On how much?

A. I don’t remember: the loan of Emerillon at the bank?

Q. Did the SFG act as surety?

A. The lending companies required both the companies and the individuals to be sureties. All the loans were the same, both acted as sureties. Some asked for it, and others did not. (Trans pp 60-61).

(g) In early 1975, La Société and the shareholders had advanced too much money to Emerillon not to continue settling its difficulties. There were other apartment buildings besides the 72-apartment building to be finished, leased or sold: “If you go into a company, the ultimate purpose is to make as much money as possible. When you figure it out, at some point it will be sold and a certain amount will remain. That is what you expect. When the whole thing is over, you know if it was worth the trouble.” (Trans p 65).

“We had to go on. There was too much invested . . “We tried to lose as little as possible” (Trans pp 71-72).

(h) “To protect your reputation?”

“Our real aim was to make money at the end of the line . . . by leasing it as quickly as possible” (Trans p 73).

(i) The advances made “were to pay Emerillon’s bills as they became due. In order to continue, they had to be paid” (Trans p 74).

(j) La Société opened a bank account on March 9, 1976 to pay Emerillon’s bills, and thereby protect the balances still outstanding on the sale price by avoiding court actions (Trans p 75). The purpose was to protect Emerillon’s assets (Trans p 76) and to transfer the balances to La Société (Trans p 78). Before March 1976, the appellant was already paying bills for Emerillon. Thus in 1974, it paid $302, $943 and $30,000 (Trans p 77). The purpose of the account opened in March 1976 was to transfer Emerillon’s accounts receivable to La Société. Even after the 72-apartment building was sold in April 1976, La Société continued to pay for court actions which had been brought against Emerillon before the sale (Trans p 83).

(k) Certain sums of money were recovered in 1976 ($12,000) and in 1978 ($20,000) (Trans p 85).

(l) The bank account of La Société was closed in November 1978.

(m) Emerillon never went into bankruptcy and still exists, though it no longer has any assets (Trans p 86). It still owes the appellant $85 - 90,000 (Trans p 87). A cheque for $70,800 was made by Emerillon to the appellant, as a result of dividing the sale of land into three parts. It was not in fact cashed by the appellant, for there was no money.

3.04 In his re-examination, Mr Filiatrault testified that:

(a) on March 9, 1976 Emerillon sold the selling price balances to La Société (Exhibit A-26) for $83,333.34;

(b) a cheque issued by Emerillon, dated March 8, 1976, to SFG Construction Ltée in the amount of $70,780 was filed as Exhibit A-27;

(c) Exhibit A-28, a document issued by the Bank of Montreal, refers to account No 1001-491 of Emerillon (Canada) Ltée; it refers to three cheques issued to each of the partners: two for $70,780 and one for $70,777.77, making a total of $212,337.77;

(d) Exhibit A-29, a cheque issued by Emerillon to Les Habitations Grillon Inc for $70,780, is dated March 8, 1976.

4. Act — case law — analysis

4.01 Act

The principal provisions of the Income Tax Act involved in the case at bar are 18(1 )(a) and 20(1 )(I) and (p). They read as follows:

18. (1) In computing te income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

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:

(I) a reasonable amount as a reserve for

(i) doubtful debts that have been included in computing the income of the taxpayer for that year or a previous year, and

(ii) doubtful debts arising from loans made in the ordinary course of business by a taxpayer part of whose ordinary business was the lending of money;

(p) the aggregate of debts owing to the taxpayer

(i) that are established by him to have become bad debts in the 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;

4.02 Case law

Counsel for the parties referred the Board to the decisions rendered in the following cases:

1. The Queen v F H Jones Tobacco Sales Co Ltd, [1973] CTC 784; 73 DTC 5577;

2. The Queen v E V Keith Enterprises Ltd, [1976] CTC 21; 76 DTC 6018;

3. Swystun Management Ltd v MNR, [1979] CTC 2476; 79 DTC 417;

4. MNR v Kelvingrove Investments Ltd, [1974] CTC 450; 74 DTC 6357;

5. MNR v Henry J Freud, [1968] CTC 438; 68 DTC 5279;

6. Associated Investors of Canada Limited v MNR, [1967] CTC 138; 67 DTC 5096;

7. Charles Chaffey v MNR, [1978] CTC 253; 78 DTC 6176;

8. Donald Preston McLaws v MNR, [1972] CTC 165; 72 DTC 6149;

9. Stewart & Morrison Ltd v MNR, [1972] CTC 73; 72 DTC 6049;

10. MNR v George H Steer, [1966] CTC 731; 66 DTC 5481;

11. Gorden Rosenberg v MNR, [1968] Tax ABC 1131; 68 DTC 830;

12. The Queen v Terrence T Malone, [1982] CTC 145; 82 DTC 6130;

13. Steven Michael Overgaard v MNR, [1982] CTC 2351; 82 DTC 1278;

14. Albert J A Reid v MNR, [1973 CTC 2073; 73 DTC 69;

15. The Queen v Pollock Sokoloff Holdings Corp, [1976] CTC 349; 76 DTC 6181;

16. Industrial Investments Ltd v MNR, [1973] CTC 2161; 73 DTC 118;

17. Townsend Company Limited v MNR, 17 Tax ABC 360; 57 DTC 372;

18. L A MacNabb v MNR, [1979] CTC 3139; 79 DTC 904;

19. Dutch-More Corp v MNR, [1981] CTC 2023; 81 DTC 34;

20. Gibraltar Mines Ltd v The Queen, [1982] CTC 1; 82 DTC 6031;

21. No 415 v MNR, 17 Tax ABC 110; 57 DTC 226:

22. Santel Investments Ltd v MNR, [1980] CTC 2352; 80 DTC 1305;

23. Alfred M Kotelko v MNR, [1977] CTC 2274; 77 DTC 205;

24. Peter Whitehouse v MNR, [1979] CTC 2448; 79 DTC 383;

25. Sidney John Becker v The Queen, [1981] CTC 184; 81 DTC 5129;

26. Les Investissements Roger Barré Inc v MNR, [1981] CTC 2574; 81 DTC 521.

4.03 Analysis

4.03.1 Counsel for the appellant, referring to the evidence, argued that a large part of the appellant’s business since 1971 had consisted of the making of loans, and the provision of financing to the buyers of houses which it built.

The loans made to Emerillon were made in the ordinary course of its business. Referring to F H Jones Tobacco Sales Co Ltd, (supra), E V Keith Enterprises Ltd, (supra), and Swystun Management Ltd, (supra), counsel said that in substance, for the appellant, losses resulting from such loans are bad debts and that, in accordance with paragraph 20(1 )(p) cited above, these bad debts should be deducted without first having to be included in the appellant’s income, as the respondent contended in paragraph 5(1) of the assumption of facts cited above (paragraph 2.02). The lending of money in fact formed part of the appellant’s ordinary business.

4.03.2 Arguments of the respondent

Counsel for the respondent referred to Industrial Investments Ltd, (supra), in which the taxpayers made interest-free loans on a very limited basis to a branch in the first case, and to agents in the second. The courts held that these loans were not made in the ordinary course of their business.

4.03.3 In Dutch-More Corporation, (Supra), More-Wood Homes Ltd had loaned $65,000 to Montenegrino in 1976 to pay the company Dutch Sash and Door, a company affiliated with More-Wood Homes Ltd.

In 1977, Montenegrino was in financial difficulty and unable to pay; More- Wood Homes Ltd in calculating its income claimed the sum of $65,000 as a bad debt, alleging that the loan had been made in the ordinary course of its business.

In 1978 More-Wood Homes Ltd had made several loans to customers to finance property sold by it.

In 1979, More-Wood Homes Ltd merged with three other affiliated companies, including Dutch Sash and Door, to form the appellant Dutch-More Corporation. The Tax Review Board held that the sum of $65,000 loaned in 1976 could not be regarded as a loan made in the course of More-Wood Homes Ltd’s business, even though in 1978 it did make loans which could be regarded as made in the ordinary course of its business — 81 DTC 34, at 37:

I have no difficulty whatever in accepting that the loans made by More-Wood in 1978 were loans made in the ordinary course of its business, part of which was the lending of money. I cannot however, on the basis of the evidence, reach that conclusion for the loan of $65,000.00 made to Montenegrino in 1976. In my opinion, we are not dealing here with a bad trade debt of More-Wood and the provisions of section 20(1 )(p) are not applicable to the facts of this appeal.

Because of its nature and the purpose for which the Montenegrino loan was made, the subsequent loss arising from the non-repayment of the loan was, in my opinion, Capital in nature.

4.03.4 In Charles Chaffey, (supra), the two taxpayers, Chaffey and Taylor, had held shares for several years in various corporations which had been engaged in the purchase and sale of real property, in the ownership and development of property, and even in mortgage lending. In 1966 these two individuals decided to form Canadia Niagara Falls Limited with other individuals to operate a tourist attraction business on land of forty acres. The business fell into financial difficulty. As the partners had made loans in the form of advances to Canadia, they claimed the loans as resulting from an adventure in the nature of trade, and alternatively, that the loans were part of the ordinary course of their business.

The Federal Court of Appeal, affirming a judgment of the Trial Division, dismissed the taxpayers’ appeals. The Federal Court of Appeal cited the trial judge, 78 DTC 6176, at 6177:

The advances made by the Taylor-Chaffey partnership to Canadia were, in my opinion, loans to provide it with working capital and were outlays of a capital nature, the loss of which was a capital loss to the partnership and to the partners, the deduction of which is prohibited by section 12(1 )(b) of the Income Tax Act.

and in the last paragraph of the judgment, 78 DTC 6176, at 6179, it states:

In my opinion shareholder’s advances do not constitute the business of lending money; they are simply a particular form by which capital is put into a 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.

4.03.5 In D P McLaws, (supra), Stewart & Morrison Ltd, (supra), and G H Steer, (supra), the Supreme Court held that the losses resulting from providing working capital to a business by acting as surety for bank loans, by advances or by loans constituted capital losses. These were not loans made in the ordinary course of business.

4.03.6 What, on the evidence, is the nature of the loans made by Emerillon and subsequently by La Société in 1975 and 1976?

According to the testimony of the accountant, Mr Roger Landreville (paras 3.01 (e), (f) and (g) ) and Mr Maurice Filiatrault (paras 3.02 (h) and 3.03 (c), (e), (f), (g), (i) and (j) ), the weight of the evidence is in favour of the respondent’s argument, namely that all these loans made to Emerillon, both before and after its formation of La Société, were made to provide working capital, to save Emerillon and avoid the worst (by paying debts, doing work for it, guaranteeing bank loans and so on).

4.03.7 In D P McLaws, (supra), the Supreme Court referred to the case of G H Steer, 72 DTC 6149, at 6153

The Steer case was in respect of a deduction claimed for a sum paid by the taxpayer to a bank under a guarantee of the indebtedness of a company which needed money for the drilling of oil wells as a continuing operation. In delivering the judgment of this Court, Judson J. said at p 37:

“I have no difficulty in defining the character of this transaction. The company needed money for the drilling of three wells. The convenient way of supplying this money was by a bank loan with the respondent’s guarantee to the extent of $62,500. The guarantee meant that at some time the respondent might have to step into the bank’s shoes to this extent. This happened in 1957. He was then subrogated to the bank’s position. He subsequently proved as a creditor in the company’s bankruptcy and received two dividends — one in 1959 for $6,119 and the other in 1961 for $3,200. The transaction was a deferred loan to the company, part of which was recovered in the bankruptcy.”

Further, all the judges of the Supreme Court affirmed the decision in D P McLaws rendered by Kerr, J of the Exchequer Court. They referred to that case:

Having considered Freud and Steer and other cases, including Minister of National Revenue v Algoma Central Railway, [1968] S.C.R. 447 (68 DTC 5096), Farmers Mutual Petroleums Limited v Minister of National Revenue, [1968] S.C.R. 59 (67 DTC 5277), as well as British Columbia Electric Railway Company v Minister of National Revenue, [1958] S.C.R. 133 (58 DTC 1022), Kerr, J. concluded:

“In my opinion the appellants outlays were on account of capital, within the meaning of Section 12(1 )(b) and the claimed deductions are prohibited. In my view of the situation, the guaiantee was given to protect and preserve the source of income, a business which was in immediate danger of bankruptcy and whose existence was imperilled. The character of the ensuing outlays in honouring the guarantee is quite different from expenditures which fall naturally into the category of income disbursements and business losses. In my opinion, the outlays are of the character of payments on account of capital and are not of the kind of expenditures that the Statute contemplated to be allowed as deductions under the language “made or incurred by the taxpayer for the purpose of gaining or producing income from property or a business of the taxpayer”, in Section 12(1)(a), or under the language “business losses sustained . . . in the course of the carrying on of a business”, in Section 32(5)(d).”

4.03.8 The Board believes that it has no choice but to conclude that the appellant’s losses resulting from the loans made to Emerillon in 1975 and 1976 should be considered capital losses, even though the evidence showed that loans of over $200,000 (para 3.02(b)) were made to persons other than Emerillon. If losses had been claimed as a result of those loans, the Board would not have hesitated to regard them as business losses.

5. Conclusion

The appeal is dismissed in accordance with the foregoing reasons for judgment.

Appeal dismissed.