Investissements 3,38 – Court of Quebec finds that a lender’s gain from selling a foreclosed home was a business profit

A closely-held corporation (“3.38”) run by a retired notary (Blouin) made a mortgage loan to an individual who, a year after the second advance under the loan, defaulted, with 3.38 then foreclosing and, five months later (after having done some minor work on the home) selling it at a gain, representing 32% of the sales proceeds.

In finding that 3.38 had been carrying on a money-lending business, notwithstanding that it had only made two loans prior to this one, Davignon JCQ noted inter alia the rebuttable presumption in Marconi that a corporation’s activities constitute a business, the high level of risk evidenced by the 15% interest rate charged on the loan and the commercial experience of Blouin. Before further concluding that “3.38 clearly acquired the Building in the ordinary course of its business of lending money,” so that its gain on sale was income from that business, Davignon JCQ stated:

The very short period of time during which the taxpayer owned the Building clearly testifies to the animating intention at the time of its acquisition. It was never its intention to hold it as an investment, but simply to use it to recover its debt, seeing in it a business opportunity to make a profit.

Neal Armstrong. Summary of Investissements 3,38 inc. v. Agence du revenu du Québec, 2022 QCCQ 2534 under s. 9 – capital gain. v. profit – real estate.