Valutrend Management Services Limited v. Minister of National Revenue, [1972] CTC 2170

The Chairman:—The least that can be said of this income tax appeal is that it is a formidable one; the notice of appeal occupies 13 pages and these contain 39 paragraphs of allegations, plus a further 17 paragraphs of reasons for appealing, all of which paragraphs require to be noted. In addition, eight exhibits were filed and the hearing, which took place at Toronto, lasted the better part of two days. The taxation years 1964, 1965 and 1966 are involved and the appellant’s fiscal year corresponds with the calendar year.

There are three issues to be decided. The first has to do with the alleged right to deduct from income certain trading losses incurred, in 1964 and 1965, in dealing with the shares of Phantom Industries Limited, hereinafter called “Phantom”, the said shares having been acquired at a high price, but sold at a low figure. Counsel for the parties agreed that the losses claimed were $2,960 in 1964 and $640 in 1965. The second issue relates to the correct quantum of a reserve claimable for doubtful debts under paragraph 11(1)(e) of the Income Tax Act, the reserve claimed in this matter being $78,156.29. The third and major issue concerns a reserve for doubtful debts arising from transactions in the ordinary course of appellant’s business which, it says, involved the lending of money, a statement which the respondent challenges. These are just brief descriptions of the three facets of this contest that call for adjudication.

In the evidence adduced, it developed that in 1964 the appellant had offices at 121 Richmond Street West and, in 1965 and 1966, at 365 Bay Street where it now occupies approximately 3,500 or more square feet. There are about 15 full-time employees, but this number varies downward from time to time. The pertinent income tax returns show the appellant’s business to be “Management services and securities trading” in 1964, 1965 and 1966, but in an amended return for the latter year filed on June 28, 1968, the appellant’s business is stated to be “Loans and administration services” — a noteworthy change. (The italics are mine.) The notice of appeal describes it as “the business of rendering management and administrative services, lending money and trading in securities”. The most accurate description is something that has to be determined in this proceeding.

At the outset, Mr R D Thomas, respondent’s counsel, informed the Board that a loss of $40,959 on trading transactions in Phantom originally claimed by the appellant, had been forgone by it. According to my understanding of the resulting situation an agreement between counsel left only $2,960 in 1964 and $640 in 1965 as Phantom losses still in abeyance. I propose returning to this phase of the appeal later herein.

As regards the second issue, Schedule A at the end of the Reply to Notice of Appeal contains the figures and their relevancy that are material in considering this facet of what is in dispute, which is the quantum of a certain reserve for doubtful debts claimed by the appellant, but only partly accepted by the respondent, a circumstance that has led to the appeal. In respect of 1965, debts due from seven companies were included in a reserve amounting to $80,034.37. The first six ranging from $79.84 to $660 were accepted in full, but the seventh for $78,156 was accepted to the extent of only $19,539, or one-quarter of the amount claimed. These figures were similarly treated in respect of 1966. It seems that initially the respondent denied that the $78,156 was shown as income by the appellant in 1964 and let his opposition to the claim of this sum as a reserve stop at that. Later, however, it developed that 1965 and not 1964 was the relevant year. Counsel having agreed that 1965 was the pertinent year of deduction and this evidently having been the only bone of contention, I fail to see why the appellant should not be allowed the sum claimed and, accordingly I find in the appellant’s favour in this connection and direct that a larger reserve be granted by the respondent regard being had to the fact that reserves for the six other debts were allowed in toto. The fact that these were only small accounts should not prejudice the indebtedness of Ottawa Sanitation Services, the debtor in reference to the $78,156.

Next, I turn to what evidently is viewed as the major issue. In this connection there is in dispute a claimed doubtful debts reserve of $118,579.95 arising principally from the lending of money by the appellant to, for the most part, certain selected borrowers. I think that the main difference between the parties in this respect is the refusal of the respondent to accept the submission that the lending of money was part of the appellant’s ordinary business. After listening to the evidence adduced ! consider that the making of judicious loans of substantial sums was a part of appellant’s income-earning process. Mr Thomas, in his argument, made much of the fact that often no security was given by the borrower. Mr Sydney Rosen, the appellant’s president, had stressed that only recommended and selected borrowers were dealt with and that on the whole this policy had worked out well. Mr Rosen is no fool and impressed me as being shrewd and canny and not likely to make rash commitments. If, as occasionally happened, a borrower turned out to be a disappointment as a risk, the making of a loan to him could be put down as an error of judgment rather than carelessness or insufficient. investigation. As may be well known, the great international banker, the late J Pierpont Morgan, used to say that he was more concerned with the character and integrity of a would-be borrower than with what could be offered as security. This principle appears to have been observed by the appellant, albeit things seem often to have gone wrong and default resulted. But this is simply part and parcel of money-lending as a business.

Mr Thomas put before the Board some well-known cases such as Orban v MNR, 10 Tax ABC 178, but these have no place in a proceeding of this kind and relate to the makers of small individual shortterm loans. Here, what was done was the advancing of large sums on loans for longer or shorter periods at an agreed rate of interest. One may call it financing, if one will, but it was still the placing of money on loan. While the appellant could not profess to be a moneylender within the restricted meaning of Orban v MNR (supra), it was nevertheless a lender of money but to a much larger degree in that it dealt in the thousands and made only what may be designated as commercial loans. Hence, I am of the opinion that such loans as are involved in this matter were made in the ordinary course of appellant’s business and, where they have not proved satisfactory and collectable, are qualified to be classified as doubtful debts and made the subject of a reasonable reserve accordingly.

I may add that whereas at the end of 1966 the unpaid loans, according to the evidence of Mr I M Noble, the appellant’s secretarytreasurer, amounted to $1,152,000, ail became paid in 1970 — an indication that perhaps some, at least, of the loans involved were not so doubtful after all. Still, that is judging by hindsight and in 1964, 1965 and 1966 the appellant could not be certain as to what might occur as far forward as 1970. Matters might improve or they might not — no one really knew. Nevertheless, as the loans evidently were much better, as such, than was believed to be the case during the years under review, I think that not much above the minimum level should be fixed and granted as a reserve.

It should have been mentioned earlier herein that counsel informed the Board that claims relating to a loss of $28,000 arising with respect to shares in Capital Leasing Limited and to a loss of $9,999 concerning 34 shares of Designex Limited had been abandoned by the appellant.

Returning to the Phantom affair, it is acknowledged at page 11 of the Notice of Appeal that the dealing in the shares of that company was basically an “adventure or concern in the nature of trade”. Therefore, I think that, taking into account its history, it should be regarded as having been outside the appellant’s normal course of business activities and not properly the subject of the loss provisions of the Income Tax Act. Accordingly, no relief can be forthcoming where this branch of the appeal is involved.

Before parting from this review of the merits of the appeal, it should be noted that, as happens too often, no assessor or other witness was put forward on behalf of the respondent and that the only direct evidence was that of two officers of the appellant; it went wholly uncontradicted.

There is a minor point of procedure that should not be overlooked. After the appellant’s solicitors had already lodged a Notice of Appeal covering the three years involved, together with a filing fee of $15, a second and duplicate such notice was sent to the Board. This was done under the mistaken impression that, because the firm’s name on the first notice was typewritten and not in ink, that first notice might not be valid. Hence, to be on the safe side, the second notice with the firm’s name duly endorsed in ink went forward to the Board. Shortly thereafter a second cheque for $15 also was sent as a result of some further misunderstanding among the solicitors concerned. Incidentally, the precaution of filing a second Notice of Appeal was: unnecessary; the Board observes the practice that has obtained in the Ontario courts for many years of accepting solicitors’ typewritten endorsements of their names on pleadings, etc. Accordingly — and this is why reference is made to the circumstance — the second filing fee of $15 should be refunded to the solicitors concerned forthwith; the initial deposit of $15 was sufficient.

In the light of the foregoing observations, the appeal should be allowed in part as to all three years affected and the entire matter referred back to the respondent for the allowance of such appropriate reserves for doubtful debts as is hereinbefore indicated.

Appeal allowed in part.