Date: 19981007
Dockets: 96-4184-IT-G; 96-4712-IT-G
BETWEEN:
WHITLAND CONSTRUCTION COMPANY LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Teskey, J.T.C.C.
[1] The Appellant appeals its reassessment of income tax for its taxation years 1991, 1992 and 1993.
Issue
[2] The sole issue is whether the Appellant in computing its income for its 1991 taxation year is entitled to deduct the amount of $1,701,375 as a bad or uncollectable debt under subparagraph 20(1)(p)(ii) of the Income Tax Act (the "Act").
[3] For this question, paragraph 20(1)(p) reads:
(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
(i) all debts owing to the taxpayer that are established by him to have become bad debts in the year and that have been included in computing his income for the year or a preceding taxation year, and
(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 the taxpayer to have become uncollectable in the year;
...
[4] It is common ground for the requirements of this provision that the following four conditions must be satisfied:
1. There must be a loan;
2. The loan must have been made "in the ordinary course of business";
3. By a taxpayer (who was an insurer or) "whose ordinary business included the lending of money"; and
4. The loan must be established by the taxpayer to have become uncollectable in the year.
[5] The Respondent acknowledges that conditions 1, 3 and 4 exist, leaving the only fact to be determined to be whether the loans in question were made "in the ordinary course of the Appellant's business".
Facts
[6] Charles Gold ("Gold"), a medical doctor and an assistant professor at the University of Toronto Medical School (an instructor in obstetrics and gynaecology, his specialty) is the president, sole shareholder and founder of the Appellant.
[7] Gold gave his evidence without hesitation or evasion. I accept without reservation his entire testimony as factual.
[8] Because of the admission made by the Respondent at trial, the majority of the facts the Minister of National Revenue (the "Minister") assumed at the time of the assessment are immaterial.
[9] From the sworn testimony of Gold and the production of 48 documents that fully backup the viva voce testimony, I find that the loans were made in the ordinary course of the Appellant's business.
[10] The Appellant, a highly successful private company, has been in the business of land development and lending of money since 1962.
[11] The Appellant's money lending business centres around:
(1) joint ventures for the development of land for industrial, retail or housing purposes;
(2) to tenants;
(3) to taking back mortgages to facilitate sales;
(4) purchasing commercial paper of Canadian corporations;
[12] In 1988, when the real estate development business was at an all time high, the Appellant was asked to take part in several joint ventures. Seven of these proposed joint ventures, which were all land development, met the Appellant's criteria for investment. They were good business deals in Gold's opinion.
[13] Gold, on advice of professionals, decided that it was time his three adult children got directly involved in land development. As a result, his son Jamie who holds degrees in economics and law from the University of Toronto and his other son Paul, who holds three university degrees, and his daughter Barbara, who was involved with her mother's company, known as Garthhome, each separately incorporated companies known as Barlaco Holdings Inc., Sandbox Holdings Inc. and Revolver Holdings Inc. (collectively, the B.S.R. Companies).
[14] The incorporation of the B.S.R. Companies was a means for the Appellant to spread any possible risk in some of the seven joint ventures and at the same time, could possibly lead to estate planning.
[15] The Appellant entered into two of the proposed joint ventures and arranged for the B.S.R. Companies to enter into the remaining five joint ventures.
[16] The five joint ventures the B.S.R. Companies entered into are known as:
(1) Seclusion
(2) Wilberford
(3) CamLane
(4) Kokomo
(5) Guelph - Grangehill
[17] Briefly, they can be described as follow:
Seclusion was a land development adventure of 150 acres near Barrie, Ontario, at a total cost of $14.1 million in which B.S.R. had a five percent interest.
Wilberford was a 40 acres proposed industrial site near Aurora with a purchase price of $9 million. B.S.R. had a five percent interest.
CamLane was a 700 acres land assembly in the Keswick area requiring $43 million. B.S.R. had a two percent interest.
Kokomo was a 750 acres development requiring three separate purchases, requiring $103 million. B.S.R. had a two and a half percent interest.
Guelph-Grangehill was two separate developments, one being in the city and the other in the township, totalling 846 acres of land at a total cost of $16.8 million. B.S.R. had a two percent interest.
[18] Gold made the business decision that these five joint ventures were sound business adventures and the Appellant would have entered directly into these five joint ventures if he had not decided to involve his three children as stated above. Gold was the signing officer for each of the B.S.R. Companies so that the joint venturers who were comfortable with Gold would not object to the B.S.R. involvement.
[19] Gold believed that all seven joint venture proposals were sound business deals that should be entered into. The major parties to these proposals were his two brother-in-laws, Ralph Halbert and Jack Rose, who he had been continually doing deals with since 1962. The other parties were well known names in land development in Ontario.
[20] In order for these three B.S.R. Companies to take part in these five joint ventures, the Appellant loaned them the money that it would have put up if it had directly entered into the joint venture projects, at prime plus one-half percent.
[21] All four companies showed these loans on their financial statements. The loans were not formalized until 1992.
[22] The fact that the loans were not formalized until 1992 is of no importance. Gold was dealing with his three children and as signing officer for each of the three B.S.R. Companies, there really was no need to do so for the purposes of the four related entities.
[23] Unfortunately for the Appellant, the downturn in 1990 destroyed the value of these projects.
[24] Small amounts of money were still being loaned even after the downturn and the writing was on the wall. These further loans made abundant good business sense and I could not attempt to second guess Gold.
[25] Gold testified that at times, the proper business decision would be to keep a project going in the hopes that there would be an economic turn around and that a project may be salvaged and money recuperated. He stated that if a developer let a project die, that is if the vendor took back the project or the bank foreclosed, there was no hope of recapturing your investment.
[26] I am satisfied that all the decisions made by Gold were made in a business sense with the sole purpose of making a profit. The money loaned by the Appellant to the B.S.R. Companies would have been placed directly into the joint ventures by the Appellant if Gold had not decided to spread the risk to the rest of the projects. If the B.S.R. Companies had not entered into the five joint ventures, the Appellant would have, money would still have gone out and been lost.
[27] The loans made to the B.S.R. Companies were real, they were made by the Appellant which was in business of lending money and were made in the course of its ordinary business.
[28] For these reasons, the appeals are allowed, with costs.
Signed at Ottawa, Canada, this 7th day of October, 1998.
"Gordon Teskey"
J.T.C.C.