E v Keith Enterprises LTD v. Minister of National Revenue, [1974] CTC 2073

The Chairman (orally: September 26, 1973):—This is an appeal by E V Keith Enterprises Ltd against a reassessment of the Minister of National Revenue for the 1969 taxation year.

The point in issue is whether or not the appellant is entitled to deduct from its income the sum of $15,000 loaned to one Alan James who, the evidence indicates, became a bankrupt in the year in question. The Minister of National Revenue has disallowed the write-off of this sum under paragraph 11(1)(f) of the Income Tax Act as it applies to the 1969 taxation year, on the basis that this company was not in the business of moneylending.

The facts are that, as shown in appellant’s Exhibit A-1, over a period of time from 1953 to 1970 the company did make a series of advances to various individuals and companies. They seem to break down into about four groups:

In the first group are advances to individuals or corporations, who would then enter into a business that would be a potential supplier to one of the appellant’s “associated companies”, although there is no evidence that they were associated in law under the Income Tax Act (and I refer mainly to the company that has been referred to in evidence as Keith Construction Limited).

There is also a second group of individuals, who purchased cabins on land owned by the appellant, but which said cabins had been constructed by Keith Construction Limited. In some instances the money went directly from the appellant to the construction company, in other instances, it went from the appellant to the alleged borrower and back to the construction company.

The third group is a smaller group—but a large sum of money is involved in each instance—of companies in which the principal shareholder of the appellant company, Mr Keith, was also a shareholder.

The fourth group would appear to be made up of persons who, when Mr Keith decided to get out of the ranching business, had purchased parcels of real estate from someone and to whom the appellant company lent money on the strength of their agreements of sale, which I think, by analogy, could be referred to as a type of mortgage or charge upon real estate.

Then there is a fifth group of advances, which I do not really consider, by any stretch of the imagination, to have been loans, namely, the term deposits with the bank and treasury bills purchased.

If I were faced only with the evidence contained in Exhibit A-2 for the years 1970 to 1973, where all but one or two of the alleged loans involved this type of term deposit, I would have less difficulty with this case, because, in my view, that is clearly not what is contemplated by the Act as the lending of money by a company in the ordinary course of its business. It is agreed by both parties that, if the advances in question were made in the ordinary course of the company’s business, then the appellant will succeed; and if they were not, then of course the Minister’s reassessment must be upheld.

Both parties have cited two English cases, both very old, namely, Litchfield v Dreyfus, [1906] 1 KB 584, and Newton v Pyke (1908), 25 TLR 127. These two cases really say no more than has been said so many times in tax cases, that each case depends upon its individual facts. There are some general principles referred to in them, such as that the company or individual alleging that it or he is a moneylender must be ready and willing to lend to anyone eligible; but how can anyone determine who is eligible until one looks at the facts of each individual application? In the Newton v Pyke case (supra) the principle cited to support the appellant’s position is that there must be some systematic and continuous course of conduct to substantiate the allegation of being in the business of moneylending.

On the other side of the coin, the respondent’s counsel points out, and appellant’s counsel acknowledges, that one of the criteria is whether or not the appellant company advertised or held itself out as being in the moneylending business. The evidence in this case is clearly that it did not; in fact, the evidence is that this appellant company did no advertising whatsoever in the carrying out of its operations.

There is no evidence as to whether or not the company was ever licensed as a moneylender, because the only witness, one Bernard Eeles, the treasurer of the company, has said that he does not know. I must say that I find that difficult to accept from a man who has been with the company since 1956. Nevertheless, that is his evidence.

The respondent’s counsel also points out that, in the memorandum of association under The Companies Act of Alberta which incorporated this private company the objects or powers are wide and general and do not in themselves constitute prima facie evidence of the company’s being in the moneylending business.

I think that one must take these assertions, as they have been put by learned counsel for the respondent, as the various bits and pieces that one must consider to make up the whole when deciding, on the facts before the Board, whether or not at the material time, the appellant company was in the business of lending money. As has been pointed out by learned counsel for the appellant, it is not necessary that moneylending be the company’s only business, and it can be in the business of lending money as well as in the land development business which apparently was its main occupation or endeavour.

Appellant’s Exhibit A-1 indicates approximately thirty advances of the type that I have grouped earlier. It is true that in a great many, if not all instances, the money that went from the appellant found its way either directly or indirectly back into one particular company, namely, Keith Construction Company. However, the evidence is not sufficient to establish that these advances were a sham in any sense

of the word. The evidence of the only witness, Mr Eeles, the treasurer of the company, is that in all instances cash was advanced, cash was received in return, and interest was paid and taken into revenue.

Although I find the evidence of the appellant’s witness something less than overwhelming, I think that this is a borderline case and that the appellant has established a course of conduct over the period of years shown in Exhibit A-1 sufficient to indicate that one of its occupations or endeavours was the lending of money, albeit perhaps only to individuals with whom its officers were acquainted, but nevertheless to a wide group of individuals and sufficient to satisfy me, on all the facts of this case, that it has discharged the onus, albeit only slightly.

The appeal with respect to the taxation year 1969 should therefore be allowed and the matter referred back to the Minister for reassessment accordingly.

Appeal allowed.