Peter Whitehouse v. Minister of National Revenue, [1979] CTC 2448, 79 DTC 383

J B Goetz:—This is an appeal by Peter Whitehouse with respect to his seeking to have included in his 1973 and 1974 tax returns what he considered to be a non-capital loss in the amount of $125,860. This request was refused by the Department of National Revenue. In so doing the respondent relied, inter alia, upon section 3, papagraphs 38(b), 39(1)(b), subsections 50(2) and 152(7) of the Income Tax Act, RSC 1952, c 148 as amended by section 1, SC 1970-71-72, c 63.

The appellant describes himself as a marketing management consultant and in this capacity in 1968 he sought to put together a company known as Bookprint Rapide Ltd (hereinafter referred to as “the company”). He received 1999 shares as a bonus for setting up the company. These shares were common shares valued at 10¢ each. He says that in 1968 he advanced the sum of $5,500 to the company and the next infusion of capital appears to have occurred at a meeting of thirteen directors of the company which meeting was held on March 2, 1970. At that time there was a subscription for shares and loans made to the company in the amount of $338,611.50, of which the appellant contributed $112,800.

The appellant filed two statutory declarations, one of Gordon Osler and one of William Zboroluk, insisting that he invest in the company before they would contribute any loans on account of operating capital for the company. This he did.

In cross-examination by counsel for the Minister, the appellant appeared to be somewhat evasive and finally consented to the filing of a list of the Directors present at the meeting of March 2, 1970. This list indicates who the subscribers were for common shares and the units of loans made by each individual shareholder. The total was in the amount of $338,611.50 and was intended to get the company into operation. The said list reads as follows:

This was the day the company received its operating capital.

The appellant states that he became president and general manager and that his staff grew to a number of 60 persons.

The company went into operation in November 1970 and in that year the appellant received a salary of $16,866 and what he calls fees in the sum of $1,380. In 1971 he says his salary was $7,717 because “I was less involved” and further he had other ventures in mind. In 1972 his income was based, according to his evidence, on salary $11,449 and professional income $7,559. In May of 1972 he says he severed relationship with Bookprint Rapide Ltd on the grounds that the company was being destroyed because of the Directors’ attitude towards him. At that time he says the company was in a precarious financial position but nevertheless he sued the Directors and the company on the grounds of alleged wrongful dismissal.

The appellant, in making loans to the company, borrowed $75,000 from the Toronto-Dominion Bank and approximately $25,000 from private investors with which he combined approximately $25,000 of his own funds, which were advanced as loans to Bookprint Rapide Ltd on March 2, 1970.

The company was declared bankrupt in 1974 and the private investors who had advanced to the appellant the said $25,000 forgave his debt owing to them. This occurred in 1976.

The appellant treated the establishment of Bookprint Rapide Ltd as his brain child and as a result of his concept the company was established and loans advanced to the company for operating capital.

The appellant argues that the funds advanced by him were for the purpose of earning income from a business venture and the losses sustained were business losses and therefore properly deductible from his other income. The loans made by the shareholders were to establish capital in the company in order that it could become a viable operation. But, unfortunately, as so often happens, within a short space of time the company encountered financial difficulties. The appellant was one of the principal major shareholders in the company and it would appear that the monies ad- vanceed by him as well as by other shareholders were capital outlays to get the company into operation and to keep it so doing.

The appellant might be termed a marketing and business consultant and was not engaged in the business of lending money. The loans made by the appellant were voluntarily paid by him in the hope of establishing a viable business.

Pigeon, J in the case of MNR v Henry J Freud, [1968[ CTC 438, 68 DTC 5279, states at pages 443 and 5282 respectively:

It is, of course, obvious that a loan made by a person who is not in the business of lending money is ordinarily to be considered as an investment. It is only under quite exceptional or unusual circumstances that such an operation should be considered as a speculation.

These loans made by all the shareholders of the company were for the purpose of giving the company working capital.

The appellant argued further that the loans made by him were for the purpose of earning income from the business of Bookprint Rapide Ltd and that the losses he sustained when the went bankrupt were business losses and therefore properly deductible from his other income.

I hold that the money advances by way of loans to the company by the appellant were a capital investment and therefore not deductible as a business loss. See G A Orban v MNR, 10 Tax ABC 178; 54 DTC 148; L C Kar- dos v MNR, 40 Tax ABC 429; 66 DTC 271 ; 8 BJ Arnold v MNR 32, ABC 349; 63 DTC 598; and G Rosenberg v MNR, [1968] Tax ABC 1131; 68 DTC 830.

On the above grounds I dismiss the appeal.

Appeal dismissed.