Tax Court of Canada Judgments

Date: 20000531

Docket: 98-1188-IT-G

BETWEEN:

SOLOMON YUNGER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bonner, J.T.C.C.

[1] The Appellant appeals from assessments of income tax for the 1991, 1992 and 1993 taxation years. There are two issues under appeal:

(a) Deductibility of $7,086.00 in 1991 and $34,729.00 in 1992 under subparagraph 20(1)(p)(ii) of the Income Tax Act ("Act");

(b) Deductibility of $20,100.00 in 1992 and $36,000.00 in 1993, being amounts which the Appellant pleaded were paid to Yuncorp Holdings Limited ("Yuncorp") for services in respect of the management of rental properties in which the Appellant had an interest.

[2] Paragraph 20(1)(p) of the Act provides:

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.

It was the position of the Respondent that the Appellant did not meet two of the requirements of this provision because, (a) the loans giving rise to the losses were not made in the ordinary course of business by the Appellant, and (b) the Appellant did not have an ordinary business which included the lending of money. The losses, according to the Respondent, were losses of capital.

[3] The management fees are alleged to have been paid to Yuncorp, a corporation whose shareholders were the Appellant's wife and children. The position of the Respondent with respect to the management fees is that the outlay was not reasonable in the circumstances and was therefore prohibited by section 67 of the Act which reads:

67. In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.

Although the Reply to the Notice of Appeal is not clear on the point, both parties approached the case on the basis that, in addition to the section 67 question, the issues included whether paragraph 18(1)(a) of the Act is satisfied viz., whether the payments were made for the purpose of gaining or producing income from a business of the Appellant.

[4] I will deal first with the bad debt issue. It was common ground that the Appellant incurred bad debt expenses as follows:

(a) in 1991 a loss of $7,086.00 in respect of the transaction known as the Beeton mortgage; and

(b) a 1992 loss of $34,728.00 in respect of a transaction known as the Aurora mortgage.

[5] The Appellant is married to Lily Yunger and has a daughter and two sons, Samuel Yunger and David Yunger. The family is close-knit. The Appellant's principal occupation has been in the jewellery business but he has also been active for more than 40 years in buying, selling and investing in real estate. As the result of this activity he became familiar with the use of mortgages in the financing of real estate transactions.

[6] It was the thesis of the Appellant that in or about 1990 the Yunger family heard that friends were earning profits by lending money on the security of mortgages arranged through Samuel Sochaczewski, a lawyer with a busy real estate practice. The Yunger family, led by the Appellant, took steps to engage in this type of lending. Mr. Sochaczewski was contacted by the Appellant or his son Samuel and told of the family's interest in mortgage investments. As a result Mr. Sochaczewski began to call either the Appellant or Samuel Yunger when trying to arrange a mortgage loan to a client. Mr. Sochaczewski furnished particulars of the borrower, the security, the amount of the loan and proposed terms. Usually the Appellant would take time to discuss the proposal with family members and would then call Mr. Sochaczewski to indicate either general acceptance or rejection of the proposal. I say general acceptance because normally a demand was made for a higher rate of interest than originally offered. All or almost all of the loans involved a bonus to the lender. Typically the mortgages were seconds or lower in priority.

[7] About half of the proposals made by Mr. Sochaczewski to the Yungers resulted in loans. The Appellant and his son Samuel considered expanding the lending activity by contacting two other lawyers believed to be sources of potential mortgage loans. However they did not proceed to lend money through these individuals. As well, some consideration was given to expanding the activity by entering into the personal finance business, but this initiative was not pursued.

[8] Mr. Sochaczewski gave evidence. He had prepared a written list of seven mortgage transactions involving the Yunger family, all of which were made through him. All were for a term of one year. At least five of the seven called for instalments of interest only during the term. Yuncorp was named as mortgagee in two of the seven. Individual members of the Yunger family other than the Appellant were named as mortgagees in the remaining five. At least two other loans originated with Mr. Sochaczewski. They were the Beeton and Aurora mortgages.

[9] There is no evidence that the Appellant had a direct financial interest as lender in any of the seven transactions just referred to. The Appellant stated that he had given to Leah Yunger the money loaned by her in one case. His explanation was that he "might have" given the money and put it in her name, either for tax or other reasons. He insisted that he was "involved" in the transactions, at least in that way.

[10] All three transactions in which the Appellant did have a direct interest went bad. The losses incurred in two of them are in issue. The Aurora mortgage was in the amount of $103,000.00 and bore interest at 10% per annum. The interest adjustment date was April 13, 1991. The mortgage was due on September 13, 1992. The chargees named on the face of the document are Sol Yunger, trustee,[1] as to a 47% interest, David Yunger, as to a 20% interest and David Good, trustee, as to a 33% interest. The mortgage went into default. The value of the property subject to the mortgage declined. Pursuant to a settlement reached among the parties to the mortgage, part only of the principal and interest was paid to the lenders.

[11] The 1991 loss arose from the Beeton mortgage. It secured a loan of $160,000.00 made in May of 1990. The mortgage fell due in November of 1990. Interest only was payable in monthly instalments during the term of the mortgage. The mortgage bore interest at 19% per annum. The mortgagee named in the charge was Samuel Sochaczewski in trust. The evidence indicated that it was Mr. Sochaczewski's practice to hold mortgages in trust to facilitate the collection and distribution of payments when more than one client was lender. The Appellant indicated in his evidence that in the case of the Beeton mortgage the family did not know at the outset who was going to make the investment. He stated that in this case he "took the whole thing".

[12] There was one other transaction in which the Appellant loaned money. In 1990 the sum of $200,000.00 was loaned to 820126 Ontario Inc., a company owned by Rex Heslop. The Appellant knew Mr. Heslop as a customer of the family jewellery store. The term of the loan was six months and the interest rate was 15%. Some arrangement was made between Mr. Heslop or the corporation on the one hand and the Yunger family on the other for a bonus in the form of the right to buy lots in a subdivision being developed by 820126. The chargees named in the mortgage document were David and Samuel Yunger. It appears that nothing was recovered.

[13] In my view, when considering the question whether the Appellant was a taxpayer whose ordinary business included the lending of money, it is necessary to focus on the lending transactions in which the Appellant was involved as lender. Although it is clear on the evidence that various members of the family participated as lenders in at least 10 transactions, the evidence indicates that the Appellant was involved as lender in only three of them. I do not view the Appellant's advances to members of the family to enable them to make loans to others as evidence that the Appellant carried on the requisite ordinary business. There was no evidence that the Appellant and family members as a group carried on a lending business in common. The Appellant did not report interest income from mortgage loans except in relation to the two transactions in issue. It is clear that the Appellant advised members of the family with respect to the loans made by them and indeed that he was influential. That, however, is not evidence that the Appellant carried on the business of a money lender.

[14] The Appellant testified that he borrowed the money required to make the loans. The borrowing of money with a view to re-lending it at a higher rate of interest is an activity which is distinctly different from the investment of one's savings in mortgage loans.[2] The former activity is strong evidence of the existence of a money lending business. However, I am not convinced that this is what the Appellant did. The Appellant did not produce any documentation supporting his claim that he borrowed money for the purpose of re-lending it nor did he seek any tax deduction for an interest cost associated with any such borrowing.

[15] One of the factors which differentiates between loans made as simple investments of capital and loans made in the course of the business of a money lender is continuity. In Newton v. Pyke (1908), 25 T.L.R. 127, at page 128, Walton J. stated:

Whether a man was carrying on business as a money lender must be, as was pointed out in Litchfield v. Dreyfus, a question of fact in each case. It seems impossible to lay down any definition or description which would be of much assistance, but I feel that it is not enough merely to shew that a man has on several occasions lent money at remunerative rates of interest; there must be a certain degree of system and continuity about the transactions.

The need for system and continuity is emphasized in paragraph 20(1)(p) which requires not only that the taxpayer's ordinary business include the lending of money but also that the loan in question be made in the ordinary course of that business. When considering the application of paragraph 20(1)(p) the Court must give effect to the repeated use of the adjective "ordinary". The activity involved in the making of the Appellant's three loans is, in my view, so restricted in scope as to be insufficient to establish that the Appellant's ordinary business included the lending of money.

[16] I turn next to the management fee issue. The Appellant owned a 20% interest in a commercial rental property known as Woolwich-Norfolk. He and his wife collectively owned a 22% interest in an industrial rental property known as Northline. The management fees in issue which were said to be paid or payable by the Appellant to Yuncorp are supposed to have been consideration for services rendered by the Appellant as employee of Yuncorp which services were said to relate to the management of the two properties. Each of the two properties was operated by a property manager on behalf of the co-owners as a group. The Appellant's services were in addition to those of the property manager. It is not clear exactly what contribution to the operation of the properties was made by the Appellant acting as an employee of Yuncorp. He said that he was driven to Guelph one day a month to visit one of the properties and that he put in 12-hour days in this connection. He said that in total he spent 250 hours in rendering management services. The evidence of time spent and of the nature of the services rendered was vague and unsatisfactory. No contemporary record was produced.

[17] The Appellant produced an agreement made "as of" the first day of August 1988 between the himself and his wife on the one hand and Yuncorp on the other. By that agreement the two retained Yuncorp to provide "certain key managerial and administrative services as (the Appellant and his wife) may require from time to time in the course of carrying on . . . business with respect to (their) investment in Northline Building and Woolwich-Norfolk . . .". That agreement called for the Appellant and his wife to pay Yuncorp an amount equal to 10% of the gross expenses of the head office of Yuncorp in respect of such services. The parties further agreed to review and determine the fee for subsequent years. It is far from clear that the payments in issue were made pursuant to this contract. The words "as of" generally signify timing that has been arbitrarily assigned to an event. There is no evidence indicating when this contract was formed. That might have happened before the Appellant rendered the services in question but, equally, it might not. There is no evidence whatever that this agreement in any way governed the quantum of the payments in issue. There is no evidence that the payments were in any way commensurate with the value of the services said to have been provided. I cannot find that Yuncorp was paid pursuant to a bona fide arrangement made with a view to earning income from Woolwich-Norfolk and Northline. The deduction is therefore prohibited by paragraph 18(1)(a) of the Act. Further, absent any rational connection between the expenditure on the fees and the process of earning income from investments in the two properties, section 67 also applies to prohibit the deductions. The appeals will therefore be dismissed with costs.

Signed at Ottawa, Canada, this 31st day of May 2000.

"Michael J. Bonner"

J.T.C.C.

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