Date: 20000324
Docket: 98-2067-IT-G
BETWEEN:
SANTOKH SINGH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bonner, J.T.C.C.
[1] This is an appeal from an assessment of income tax for the appellant's 1993 taxation year. By the assessment in issue, the Minister of National Revenue ("Minister") disallowed the deduction of $150,000 claimed by the appellant under subparagraph 20(1)(p)(ii) of the Income Tax Act. The deduction was claimed in respect of a loan of $225,000 made by the appellant to Sergio Pancella in July of 1992.
[2] Subparagraph 20(1)(p)(ii) reads:
20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:
...
(p) the aggregate of
...
(ii) all amounts each of which is that part of the amortized cost to the taxpayer at the end of the year of a loan or lending asset made or acquired in the ordinary course of business by a taxpayer who was an insurer or whose ordinary business included the lending of money established by him to have become uncollectable in the year;
[3] The central issues were whether the loan was made in the ordinary course of business and whether the appellant's ordinary business included the lending of money as required by paragraph 20(1)(p). It was the position of the respondent that the appellant did not carry on the business of a money-lender at all.
[4] The only person who testified at the hearing of the appeal was the appellant. I formed the opinion that he was a credible witness.
[5] His evidence established that his money-lending activities commenced in 1988. He made four loans:
(a) a loan in 1988 to Amrik Walia of $8,500;
(b) a loan in 1992 to Sergio Pancella of $225,000;
(c) a loan in 1993 to 659327 Ontario Inc. of $100,000;
(d) a loan in 1993 to Michael Gerrior of $16,000.
The money-lending activities were unsuccessful. In 1993, the appellant stopped lending because of defaults on the loans which he had made.
[6] The appellant is a licensed professional engineer. He works as a general contracting project manager through corporations which he controls and which employ him. The money-lending activities described in evidence were not conducted on a large scale nor were they elaborately organized. The appellant did not utilize a separate telephone line for purposes of the activity. He did not have business cards or letterhead printed. None of this was necessary in order to attract potential borrowers and to deal with loans made to them.
[7] The 1988 loan was made to enable Amrik Walia to discharge an encumbrance against a property which Walia was buying. The appellant's personal bank account was the source of the money loaned. The loan bore interest at 12% per annum and was evidenced by a promissory note. The appellant decided not to take security due to the small amount and the short term of the loan. The borrower defaulted. The appellant sued and obtained judgment but was unable to collect.
[8] The Pancella loan was made in July of 1992 to assist the borrower to buy real property in Petrolia, Ontario. The loan bore interest at 12% per annum and was due and payable on March 31, 1993. It was evidenced by promissory note. The appellant took no security for the loan at the time of the advance. The appellant raised all but $20,000 of the amount loaned by borrowing against his lines of credit at financial institutions. He raised the $20,000 by borrowing from an acquaintance. The interest cost in the aggregate of the money borrowed by the appellant was 9.45%. The appellant and Pancella discussed the latter's financial position in December of 1992. The appellant learned that Pancella was experiencing difficulty in selling the Petrolia property. This gave rise to concerns about collectibility which led the appellant to arrange for the immediate repayment by Pancella of $75,000. As well, the appellant took an assignment of a mortgage owned by a Pancella family member as security for the repayment of the $150,000 balance of the original loan. Later the security evaporated when a prior encumbrancer sold the property under a power of sale. It is the refusal of the Minister to allow a deduction in respect of this bad debt that has given rise to this appeal.
[9] In the third transaction the borrower was 659327 Ontario Inc. operating under the name of Nu-West Businesses & Properties. The appellant advanced $50,000 to this firm of March 2, 1993 and a further $50,000 on April 5, 1993. Interest at the rate of 12% per annum was payable monthly. The loan fell due on March 31, 1994. It was evidenced by promissory note. The loan was made to enable the borrower to pay municipal taxes on real property which the borrower owned. Once again the money which the appellant loaned was raised by borrowing against the appellant's line of bank credit. The borrower paid interest to the appellant from the outset until March of 1994 when default occurred. The principal was repaid in March of 1997.
[10] The fourth and final loan was made by the appellant in August of 1993 to Michael Gerrior, a used car salesman who needed $16,000 to cover the cost of shipping cars to Europe. The appellant borrowed part of the money required to make the loan on one Visa Card and the remainder on another credit card. The borrower defaulted. The appellant took legal action against the borrower but has been unable to collect.
[11] The appellant must establish that his ordinary business included the lending of money and that the Pancella loan was made in the ordinary course of business.
[12] In Morflot Freightliners Limited v. The Queen,[1] at 5185 Strayer J. (as he then was) noted that "... in cases of this nature ... one must try to characterize a situation from a practical business point of view ...". As I see it, when the facts are viewed in this manner it is clear that the appellant in making the loans entered into the business of lending money. He evaluated the lending opportunities and considered both the potential gain for himself and the ability of the borrowers to repay. He obtained security when possible. The loans appear to have been made at ordinary commercial rates of interest. The loans though few in number, were not remarkable for any feature which distinguished them from the operations of an ordinary commercial money-lender. The 1992 and 1993 loans were not investments of the appellant's own capital. Rather, they were made with money borrowed at an interest cost expected to be lower than the interest earned. In short, the appellant expected to earn money on the spread between the two rates and thus to mimic the operations of other commercial lenders. Neither the fact that the operation eventually failed nor the fact that it was short-lived can support a conclusion that the operation was not an ordinary commercial venture. The use of borrowed money to make the last three loans negates any suggestion that the loans were simple investments of accumulated capital. A business is nonetheless a business because it is in its initial stages. The appellant therefore meets the first branch of the paragraph 20(1)(p) test.
[13] In my opinion, the Pancella loan was made in the ordinary course of business. The terms of the loan were not affected by any circumstance which might take it out of the ordinary course. The subsequent transactions are relevant to show a course of conduct.[2] The appellant therefore meets the second branch of the paragraph 20(1)(p) test.
[14] There was no suggestion that the Pancella debt did not become uncollectable in 1993. For the foregoing reasons, the appeal will be allowed, with costs, and the assessment referred back to the Minister for reassessment on the basis that the appellant is entitled to the deduction in issue.
Signed at Ottawa, Canada, this 24th day of March 2000.
"M.J. Bonner"
J.T.C.C.