Mosport Park Limited v. Minister of National Revenue, [1977] CTC 2397, 77 DTC 264

Roland St-Onge (orally: June 20, 1977):—The appeal of Mosport Park Limited came before me on June 17, 1977 at the City of Toronto, Ontario and it has to do with the loss of the sum of $56,115 that the appellant is trying to deduct in its 1973 taxation year. The following paragraphs of the appellant’s notice of appeal are admitted and I quote:

1. The Appellant is a corporation carrying on the business of promoting, sponsoring and operating motor racing events for the entertainment of the public in the Province of Ontario.

2. In the course of carrying on its business, the Appellant required that programs for the motor racing events which it featured be printed and supplied to it for distribution to its customers and spectators.

5. At the conclusion of the Appellant’s fiscal period ended March 31, 1969, such advances made to Cantrack Publishing Company Limited and Cantrack Printing Limited aggregating $56,115.00 proved to be unrecoverable by the Appellant.

7. During the 1969 taxation year the name of the Appellant was Cantrack Motor Racing Corporation Limited (subsequently changed to Mosport Park Limited) and the Appellant, Cantrack Publishing Company Limited and Cantrack Printing Limited were affiliated corporations.

The appellant further alleged that the advances which it made to Cantrack Publishing Company Limited and to Cantrack Printing Limited were an integral part of its current profit-making activities and as such were made or incurred for the purpose of gaining or producing income from its business within the meaning of paragraph 12(1)(a) [sic] of the Income Tax Act.

On the other hand the respondent alleged that the said advances were not made in the ordinary course of business by the appellant, part of whose ordinary business was the lending of money, that the Said advances and the subsequent loss therefrom were not an expense made or incurred by the appellant for the purpose of gaining or producing income from a business or property of the appellant. In the alternative, the said advances and subsequent loss were a loss of capital and especially prohibited as a deduction pursuant to paragraph 12(1 )(b) [s/c] of the Act.

Only one witness was heard on behalf of the appellant, Mr Harvey Hudes, a chartered accountant and auditor of the company since 1968 and its present general manager.

He explained the following: Prior to 1968 Messrs Jerry Polivka, Irwin Fineberg, Anthony Esposito and Mrs Charlotte Fineberg were the shareholders of the appellant company, each holding 25% of the Shares.

With the exception of Mr Esposito, the other three persons (Messrs Jerry Polivka and Irwin Fineberg and Mrs Charlotte Fineberg) were the shareholders in the two other companies, Cantrack Publishing Company Limited and Cantrack Printing Limited, each holding one third of the shares. As may be seen, the said companies were affiliated. Around 1969 Mr Hudes became the shareholder of the appellant company because the former shareholders had lost faith in it. At that time, the appellant owned 130 acres with a racetrack thereon which was situated some 50 miles from Toronto and could hold 90,000 to 100,000 people.

Apparently, this was achieved by the publication of an elaborate program which contained numerous advertisements, speed conversion tables, the gauge of time, pictures of the racing cars, studies on the drivers and some other major racing events.

The publication of this program was done by the two companies as already mentioned and represented only 10% of their operations.

The organization of the material and its publication was granted to Cantrack Printing Limited whereas the artistic aspect such as the design of the book, the engagement of the people to write the stories were made by Cantrack Publishing Company Limited.

When money was needed, the appellant made various advances to the said companies and when the work was completed, the appellant was billed for it. This procedure was effectuated in order to better ensure the timely printing and delivery of programs and to enable the printers to achieve certain Operational economy, the benefit of which would be passed on to the appellant by virtue of the financial control that it maintained over them by making such advances.

The appellant received between $35,000 to $45,000 from the sale of the programs with the advertisements therein. Apparently, this was the most efficient and economical way for the appellant to do business. The appellant was not skilled in the printing and publishing field and the work of the said companies would give three definite advantages to the appellant company, that is:

1. no additional cost to obtain the deadline of printing and delivery;

2. a great saving of money regarding the paper stock which was bought in larger quantity:

3. consistency of the product which was necessary to please the customers.

The loss occurred because the appellant advanced more money to the companies than the quantity of work for which they were charged. Mr Esposito purchased shares in Cantrack Motor Racing Corporation Limited in 1968. He was very unhappy when it was agreed during the directors’ meeting in the spring of 1969 that it was impossible to recover the advances outstanding from Cantrack Printing Limited and Cantrack Publishing Company Limited and that a write-off was necessary. The sale of the printing and publishing companies was made at $1 in order to avoid a bankruptcy, but they went bankrupt some 18 months later.

Some adjustments in the loan account were made by Messrs Fine- berg and Polivka to satisfy Mr Esposito who did not want to share in the loss which had already existed at the time he bought the appellant company. Mr Hudes also testified that the appellant now does its own publishing but still gives its printing to an independent contractor; that Cantrack Printing Limited and Cantrack Publishing Company Limited came into existence in 1960 and Motor Racing Corporation Limited in 1966 and were affiliated; that Cantrack Motor Racing Corporation Limited expended some $35,000 in 1968 and some $12,000 in 1969; that the advances were made to both companies and that there was no interest charged on the advances which were made on a running account; that the appellant company never made any loans to anyone else. He went on to say that the name of Cantrack Motor Racing Corporation Limited was changed to Mosport Park Limited because there was a change of ownership and also because the name of the park had always been known as Mosport Park.

The witness also explained that the advances were made on an irregular basis and when the money was needed, not to preserve the printing and publishing companies, but to secure the appellant company’s own position; that the appellant company’s shares were sold to Mr Esposito, first for $100,000 of which $75,000 was cash and the balance by a $25,000 note; that, as already mentioned, there was an adjustment later to reduce the price to $75,000; and that Mr Esposito still owns 25% of these shares in the appellant company and was the only one in the group to receive this treatment.

Counsel for the appellant argued that the advances were not made in an ordinary moneylending business, but as an integral part of its current profit-making activities and on a running account basis, that they could not be regarded as capital outlay since they did not create a long-term advantage or benefit to the appellant company, that they were an advance on account of services to be rendered and the losses therefrom were advances to services that had not been rendered. He referred the Board, amongst other cases, to MNR v Algoma Central Railway, [1968] CTC 161; 68 DTC 5096, and to Associated Investors of Canada Ltd v MNR, [1967] CTC 138; 67 DTC 5097. He also argued that the advances were made to earn additional income from the sale of advertisements and programs and also by reducing the costs, that this evidence was not contradicted by the respondent.

Counsel for respondent argued that the Board must look at the reality that the three companies were affiliated, that the advances of money were not an integral part of the appellant’s business, that the appellant did not prove that the advances had produced income from its business and that Cantrack Printing Limited and Cantrack Publishing Company Limited did not have any capital to operate and had to obtain it from the appellant company and that consequently the advances were capital expenditures.

According to the evidence adduced, it is self-evident that the appellant company was not engaged in the moneylending business nor did it advance any capital amounts to its affiliated companies in the nature of an enduring benefit. Consequently, these two allegations of the respondent must be put aside. The remaining contention made by the respondent is that the advances and the subsequent loss therefrom was not an integral part of its current profit-making activity and was thus not incurred for the purpose of gaining or producing income.

However, the uncontradicted facts seem to show the contrary. Indeed, these advances were made by the appellant who was not skilled in the printing and publishing activities to reduce the costs of programs, to ensure a timely printing and delivery and consequently to earn more income from the sale of programs and advertisements. As a matter of fact, the appellant company, as already mentioned, received for a year between $35,000 and $45,000 for the said programs and advertisements and this, without taking into consideration the saving of money due to the fact that the printing and publishing were done by separate entities.

Furthermore, Mr Hudes testified that this method at that time was the most efficient and economical way to earn additional income. As long as there is no sham, a taxpayer is free to arrange his affairs to earn more income. In the case at bar, it seems the appellant was successful in achieving this aim. This being the case, the advances became an integral part of the current profit-making activities of the appellant company. The principles that need to be applied in the case at bar are well enunciated in the decision of Associated Investors of Canada Ltd (supra), especially at page 144 [5099]. In the light of this decision and because of the uncontradicted evidence that was introduced before the Board, the appeal must be allowed.

Consequently the appeal is allowed.

Appeal allowed.