Spencer Investments LTD v. Minister of National Revenue, [1972] CTC 2001, 72 DTC 1028

The Chairman:—Appellant is an Alberta corporation formed in 1949 and, until late in 1967, it was managed by one O L Spencer. It conducted an investment business and had a seat on the Calgary Stock Exchange. In 1967, Spencer and his family moved to Vancouver. All their shares of the appellant’s capital stock were then acquired by members of the family of Victor C Morrison, CA of Calgary, where this appeal was heard in April 1970 and judgment reserved. Assessments made in July 1969 and relating to the taxation years 1964, 1965 and 1967 require reviewing.

In its income tax returns for the said years, the appellant’s business is described as “Financial”. Current assets in 1964 amounted to $316,918.31. It now claims to have conducted “a very active and aggressive business of lending money and dealing in financing with quite a number of people”. This resulted in the setting up, by the appellant, of the following reserves for doubtful debts:

All four reserves were subsequently disallowed by the respondent and hence this proceeding. The only witness heard was Victor Morrison; none was put forward by respondent’s counsel. Thirteen exhibits were filed on behalf of the appellant.

It appears that the sum of $20,000 was advanced to Fabric World and Interiors Ltd in October 1960 through one Harold J Tribe, its progenitor and principal figure. The money was wanted in order to develop a furniture-manufacturing and re-upholstering enterprise that seemed to have good prospects. The advance was to be repaid within seven years and to bear interest at 6% per annum, in the meantime. The full terms were evidenced by a 9-page typewritten agreement (Exhibit A-1). I suppose that this could be called a “loan” although strictly speaking, I think ‘financing’ would be more accurate.

Another transaction, or series of transactions, began on or about 1961 and was with Alberta Stationers & Office Suppliers Ltd (hereinafter called “Alberta Stationers”). It involved an advance of $15,000 secured by a demand promissory note with interest at 1 /2% per month. About two years later, $18,000 was also advanced by the appellant to the same company. Then the interest rate was changed to 15% per annum. The first note could not be produced, but the second was filed as Exhibit A-2. Next, there was reference to a letter dated November 21, 1958 (Exhibit A-3), signed by Alberta Stationers & Office Suppliers Ltd, in which mention is made of certain shareholders’ loans, repayment of which, it was agreed, should be deferred for an unstated time. No figures are given and I do not discern any additional liability to the appellant. Incidentally, Alberta Stationers became bankrupt in September 1966.

Following the recounting of these happenings, there was evidence regarding a number of so-called loans, which I consider were nothing other than the buying of conditional sale agreements from Alberta Stationers at a discount. In other words, a dealing in trade paper such as takes place, for instance, in connection with the sales of thousands of automobiles annually. One such agreement was filed as Exhibit A-4 and shows on its face that Alberta Stationers “sells, assigns, transfers and sets over” all its rights thereunder. There is no real lending in a transaction of this kind; instead the relation of vendor and purchaser becomes created and I so find.

There also were 89 transactions with Wild Rose Leasing Ltd, which leased furniture and office equipment to various law firms and others, by the month. The contracts covering these rental agreements were assigned to the appellant at a discount as in the case of Alberta Stationers.

Paragraph 11(1 )(e) of the Income Tax Act provides that there may be a reasonable reserve for 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. Here, I think that it was a part of the appellant’s business to lend money. The Act does not say that it must be solely the appellant’s business, it is well-settled that a corporation may have more than one business. There was no break-down of the relevant figures, but I think that in fixing the correct reserves, the sales of trade paper mentioned should be omitted, as not constituting loans, and only the first several transactions treated as properly being loans.

Cases such as Orban v MNR, 10 Tax ABC 178, and there are a number of them, have little, if any, application in a matter of the present kind. Money-lenders, in the popular meaning of that term, refer to the makers of personal loans — usually more or less small — to numerous individuals and not to the advancing of large amounts to corporations and other commercial ventures. The latter process is a lending, in the sense of financing, and can involve large sums of money.

In the result — and it has seemed unnecessary to discuss all the evidence tendered — I think that the appeal should be allowed in part and the matter referred back to the respondent to adjust the reserves where trade paper is involved in accordance with the above-mentioned findings.

Before parting with this appeal, I may add that these reasons were drafted a number of weeks ago and only untoward circumstances have prevented their being engrossed earlier than now.

Appeal allowed in part.