T-3817-73
The Queen (Plaintiff)
v.
Pollock Sokoloff Holdings Corp. (Defendant)
Trial Division, Walsh J.—Montreal, May 9;
Ottawa, May 29, 1974.
Income tax—Monies not collected under loans by parent
company—Transfer of loans by parent company to subsidi-
ary—Validity of transfer as against Minister—Right of
transferee to deduction of bad debt—Civil Code, art. 1570,
1571—Income Tax Act, R.S.C. 1952, c. 148, ss. 11(1)(e), (f),
12(1)(b), 137(1), 139(1)(e).
Loans were made to C from 1962 to 1965 by M.H.
Corporation, through S, an officer and director of that
company, and of its subsidiary, the defendant. Transactions
respecting the loans were carried out by S between C and
M. H. Corporation or the defendant, interchangeably. Inter
est was paid on the loans until 1966. In 1967, the loans were
transferred by M. H. Corporation to the defendant at their
full book value of $50,000. The defendant claimed deduc
tion for the 1968 taxation year of $30,000, written off as a
bad debt under section 11 of the Income Tax Act. The
Minister disallowed the deduction on the ground that section
11 was inapplicable and that the loss should have been
treated as a capital one under section 12(1)(b). The defend
ant's appeal was allowed by the Tax Review Board. The
Minister appealed.
Held, dismissing the appeal and referring the 1968 assess
ment back to the Minister for re-assessment. 1. As to the
Minister's contention that the transfer from M. H. Corpora
tion tothe defendant was invalid under articles 1570 and
1571 of the Civil Code: the Minister had no right to inter
vene to set aside such a sale of debts, for want of formality,
when the parties concerned admitted that it took place and
when the debtor knew of it. There was no suggestion of
fraud or of evasion under the Income Tax Act. An accept
able explanation for the transfer was that it effected a
reduction in provincial taxation, which was not of concern
to the plaintiff. 2. On the Minister's contention that the
defendant was not qualified to claim deduction for the
writing off of a bad debt in terms of section 11 of the Act:
the defendant came within the meaning of the phrase in
section 11(1Xe), (f), "loans made in the ordinary course of
business by a taxpayer part of whose ordinary business was
the lending of money" even though the defendant's loans
were not extensive in proportion to its total activities. It was
true that the loans were initiated, not by the defendant, but
by M. H. Corporation, which was not in the ordinary
business of lending money, but they were transferred for
their full book value to the defendant, part of whose busi
ness was the lending of money.
Litchfield v. Dreyfus (1906) 1 K.B.D. 584 and Newton
v. Pike (1908-09) 25 T.L.R. 127, distinguished. Orban v.
M.N.R. 54 DTC 148; Valutrend Management Services
Limited v. M.N.R. [1972] C.T.C. 2170; Wood v. M.N.R.
[1969] S.C.R. 330; M.N.R. v. Maclnnes [1962] Ex.C.R.
385, reversed [1963] S.C.R. 299; Sun Securities Limited
v. M.N.R. 64 DTC 821 and Western Wood Products
Limited v. M.N.R. [1963] Ex.C.R. 380, considered.
INCOME tax appeal.
COUNSEL:
Hughes Richard and Alban Garon for
plaintiff.
Michael D. Vineberg for defendant.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Phillips & Vineberg, Montréal, for
defendant.
The following are the reasons for judgment
delivered in English by
WALSH J.: This is an appeal by plaintiff from
a decision of the Tax Review Board dated June
6, 1973 maintaining defendant's appeal of the
assessment for its 1968 taxation year and refer
ring same back to the Minister of National
Revenue for re-assessment. The Minister had
disallowed a deduction of an amount of $30,000
claimed as a bad debt by defendant in that year,
on the basis that it was not owing to the defend
ant, that it had not become bad in 1968, that it
had not been included in computing the income
of defendant for 1968 or any previous year, that
part of defendant's ordinary business was not
the lending of money, nor was the defendant
during its 1968 taxation year in the business of
trading in receivables. Plaintiff therefore claims
that it should have been treated as a capital loss
within the meaning of section 12(1)(b) of the
Income Tax Act'.
' R.S.C. 1952, e. 148 as amended.
Proof revealed that Mysam Holdings Corpo
ration, of which defendant is a subsidiary, made
loans in the amounts of $10,000, $30,000, and
$10,000 in 1962, 1963 and 1965 respectively to
a Mr. F. L. Crystal, which loans bore interest at
12% and were secured by the pledge of Mr.
Crystal's shares in three real estate companies,
namely Fanpal Realties Inc., Riva Realty Inc.,
and Delco Realty Inc., with respect to the first
two loans, the third loan being allegedly evi
denced merely by a promissory note which was
not, however, produced. It is of interest to note,
however, that the amount loaned was advanced
to Mr. Crystal by a cheque, not of Mysam
Holdings Corporation, the alleged lender, but of
the defendant Pollock Sokoloff Holdings Corp.
dated January 27, 1965. The explanation given
by witnesses in testimony was that no formal
loan agreement was drawn up in connection
with the last loan because Mr. Crystal had no
further assets to pledge and it was felt, in any
event, that the substantial assets of the real
estate companies in which he had already
pledged his shares as security for the first two
loans was sufficient guarantee for the third loan
also. Testimony was also given to the effect that
although the first $10,000 loaned was repayable
on July 26, 1962, six months after it was made,
the second loan of $30,000 was repayable on
July 25, 1965, two years after it was made and
no date was specified for the repayment of the
third $10,000 loaned on January 27, 1965, the
delays for payment of all these loans were
extended verbally by the lenders since they felt
that the security was satisfactory and, in fact,
interest on all three loans was duly paid up to
and including instalments due in August 1966.
Although the shares pledged by Mr. Crystal did
not represent all the shares of the three compa
nies in question, they represent a substantial
proportion consisting of one-quarter of the
shares of Riva Realty Inc., one-quarter of the
shares of Delco Realty Inc., and one-sixth of the
shares of the Fanpal Realties Inc. Mr. Crystal
testified that in 1962-63 his aggregate invest
ment in the three companies in question was
about $60,000 and that he considered that his
interest in the land held by these companies was
worth about $200,000.
Mr. Samuel Sokoloff, who was Vice-Presi
dent and Secretary-Treasurer of defendant and
President and Director of Mysam Holdings Cor
poration, testified that these companies are
wholly-owned by two families. They invest in
common shares, bonds, make loans on real
estate and also own real estate including
undeveloped land. The balance sheet of defend
ant as of December 31, 1968 shows assets of
$15,288,383 which included, inter alia, short
term deposits of $6,000,000, marketable securi
ties at cost of $1,021,559, advances to Mysam
Holdings Corporation, the parent company, of
$2,252,688, shares in Fleetwood Corporation of
$1,122,450, mortgages and notes receivable in
the amount of $116,211, which included the
$20,000 not yet written off at that date of the
loans to Crystal, and real estate in the amount
of $4,253,602. For the year 1967, mortgages
and notes receivable appear in the amount of
$185,816 this being before the $30,000, which
is the subject of the present appeal, was written
off as a bad debt.
In addition to the loans to Crystal, the com
pany had a $20,000 loan to S. Jacobson out
standing from 1964 to 1968 which was allegedly
guaranteed by a pledge of shares in a land
company in which Mr. Jacobson had a one-third
interest, $20,000 starting in 1964 and reduced
to $3,514 by 1968 loaned to Messrs. C. Redler
and P. Waid, guaranteed by a personal note,
$75,000 loaned to M. Feinstein Inc. allegedly
guaranteed by its interests in certain land which
loan was fully repaid by 1967, and a further
loan of $70,526 to M. Feinstein Inc. made in
1965 which was still outstanding at the end of
1968; there was also a loan to one Harry Feifer
of $50,000 made in 1965 and reduced to $2,141
by the end of 1968, allegedly guaranteed by his
assigning his interests in real estate as a collater-
al hypothec, a loan of $100,000 in 1964 to Real
Estate Investors Corporation on the security of
a note which was apparently fully paid by 1965
as was a loan in the amount of $7,500 to Mrs.
B. Feinstein guaranteed by hypothec on a coun
try property. Finally, there was a loan to J. T.
Stone Cabinet Manufacturing Company Limited
in the amount of $82,500 outstanding in 1964
and fully paid by 1967. The total loans out
standing at the end of 1964 totalled $305,000
and, as previously indicated, by the end of 1968
these had been reduced to $116,181 after the
writing-off as a bad debt of $30,000 of the loan
to Mr. Crystal. Mr. Sokoloff testified that this
was the only loan which the company had ever
written off as a bad debt. These loans all bore
interest from 81 - 10%, a good rate at the time.
He testified that the company purchases build
ings and frequently deals with real estate agents
who submit various propositions to him and
know that his company has money to lend but
that he always requires good security and visits
and examines the land which is being given in
security whether directly or by the assignment
of shares in companies owning the land, and
that he did this in the case of the loans to Mr.
Crystal.
As for Mysam Holdings Corporation, it was
apparently originally formed primarily as a hold
ing company and its balance sheet as of Decem-
ber 31, 1966 indicates assets consisting mainly
of loans receivable $50,000 (the loans to Crys
tal), shares in Pollock Sokoloff Holdings Corp.,
valued at $6,505,000 and advances of $174,873.
By December 31, 1967 the loan receivable of
$50,000 had disappeared from its balance sheet
as had the advances of $174,873 to Pollock
Sokoloff Holdings Corp., but it then held mar
ketable securities at cost value of $954,081 and
an income debenture in Canadian Power and
Paper Securities Limited of a value of
$1,000,000.
It is quite clear from the evidence given by
Mr. Sokoloff that he had no understanding of
any distinctions to be made resulting from the
separate corporate personality of Pollock Sokol-
off Holdings Corp. and Mysam Holdings Corpo
ration (hereinafter referred to as "Pollock
Sokoloff" and "Mysam" respectively) and used
the companies more or less interchangeably
according to the advice of his auditors and
attorneys with a view to minimizing, as is legally
permissible, the liability of the two companies
for Quebec taxes on paid up capital and Quebec
corporation tax. The companies were so inter
changeable in his mind that he found nothing
unusual, for example, in Pollock Sokoloff issu
ing the $10,000 cheque to Mr. Crystal in con
nection with the third loan although same had
been made by Mysam. Similarly, an account
from the companies' solicitor rendered to
Mysam for legal services in connection with the
eventual bankruptcy of Mr. Crystal in 1969 was
paid by Pollock Sokoloff as Mr. Lipper, one of
their attorneys, testified. Nevertheless, the
accounting records of the two corporations
which were produced in evidence reflect the
various intercompany transactions, and Mr.
Louis Burstein, C.A., the auditor for both com
panies testified and explained these records in
his evidence. It was he who gave the explana
tion as to why the loans to Crystal were made
by Mysam and not by Pollock Sokoloff. By
virtue of Mysam entering into the investment
business by making this loan it could deduct its
principal investment in shares of Pollock Sokol-
off for purposes of payment of the Quebec tax
on corporate capital, and he believes that he
advised Mr. Sokoloff that for this reason the
loan should be made by Mysam. Subsequently,
due to changes in Quebec taxing statutes, details
of which it is not necessary to go into here, it
became necessary, if Mysam was to be con
sidered as a pure investment company, that its
investments should not include its loan to Crys
tal which would have disqualified it from being
so considered. This was also explained by him
to Mr. Sokoloff and accordingly at the start of
1967 this loan was transferred from Mysam to
Pollock Sokoloff and, conversely, all Canadian
corporation bonds held by Pollock Sokoloff
were transferred to Mysam. The bonds were
transferred at their market value and the loan at
its face value and no money changed hands, the
transactions merely being reflected by entries in
the intercompany accounts. Copies of minutes
of directors meetings of both companies were
produced dated January 2, 1967, the first busi
ness day of the year, reflecting the sale and
transfer by Mysam to Pollock Sokoloff of its
interest in the loans receivable in the sum of
$50,000 from Mr. Samuel Crystal, the consider
ation being payment to Mysam of the said
$50,000 by Pollock Sokoloff. As at that date
there was no outstanding overdue interest on
the loan and Mr. Burstein testified that no
reserve was set up as both he and Mr. Sokoloff
felt that the capital of the loan was fully recov
erable. Mr. Crystal confirmed that he was
informed verbally of this transfer in due course
and had no objection to it. When an interest
payment became due in January 1967 he was
unable to make this at the time but in his occu
pation as a real estate agent he had several
pending deals of substantial size which he
anticipated would yield him considerable
income which, unfortunately, fell through. He
and his brother who was in business with him
had advanced considerable sums to Fanpal,
Riva and Delco, their land holding companies, in
1964, 1965 and 1966. Although the property
owned was vacant land the north shore autor-
oute had gone through it and part of the prop
erty has been expropriated for this purpose and
he was optimistic that this would attract de
velopers. However, there was a severe reces
sion in real estate sales in Quebec following
Expo 67 and despite all efforts they were
unable to make sales and went further and fur
ther into debt. The capital repayment of his
loans from Mysam had been overdue for some
time but he had spoken to Mr. Sokoloff about
this and the latter had always been willing to
extend them as long as the interest was paid,
which he was able to do until the August 1966
payment. By June 1969 his finances had
reached such a low ebb that his telephone was
disconnected and he finally made an assignment
in bankruptcy on August 29, 1969 and his
brother, who had also guaranteed the loans,
made a similar assignment a week later.
Mr. Sokoloff then instructed his attorneys to
bring proceedings to execute on the shares of
Fanpal Realties Inc., Riva Realty Inc., and
Delco Realty Inc. given as security for the loans
but he neglected to tell them that the loans had
been transferred from Mysam to Pollock Sokol-
off. The attorney, Mr. Lipper, acting merely on
incomplete information in his files which includ
ed the two loan agreements from Mysam to
Crystal totalling $40,000, issued a petition in
bankruptcy in Mysam's name to have the
pledged shares sold by public auction on the
basis of the first two loans for which they had
been given as security and by judgment dated
November 20, 1969 this was duly authorized.
They were seized on December 30, 1969 and
brought to sale on February 9, 1970 and pur
chased for $1 by Mysam in each case. As the
realty companies are still in existence the shares
may eventually have sufficient value for Mysam
to recover the amount of the losses but this is
not an issue here. It is also hardly necessary to
point out that the $1 price does not indicate that
the shares had no value at the date of the sale,
but merely that any other interested purchaser
would be aware that Mysam would bid them up
to a sufficient price to cover its loan, arrears of
interest, and costs of the sale, and was not
prepared to pay this price for them.
Although Mr. Sokoloff signed the affidavit
accompanying the petition to have the pledged
shares sold, I am satisfied that he had no
appreciation whatsoever of the significance of
the fact that the petition was being made by
Mysam although the loans had already been
transferred by it to Pollock Sokoloff, and he
apparently merely signed the document that was
put before him.
It is clear that Pollock Sokoloff certainly con
sidered itself to be, and acted as, the creditor of
the loans due by Mr. Crystal following the
transfer of same by Mysam to it on January 2,
1967. In a schedule annexed to Pollock Sokol-
off's financial statement for the year ended
December 31, 1968 appears a memorandum
showing interest due by Crystal, 1966—$2,083;
1967—$5,000; 1968—$5,000; old interest—
$124.98; total—$12,207.98. There is also an
indication that $7,207.98 of these arrears had
accrued as of December 31, 1967 and that this
amount was being written off against 1968 in
terest earned. It was explained in evidence by
Mr. Burstein that the sum of $2,083 represented
interest accrued from the date of the August
1966 interest payment to December 31, 1966.
Thereafter interest would be an even $5,000 per
annum at 10% 2 . The amount of $7,207.98 writ
ten off in 1968 had been set up as an asset and
income tax paid on same in 1967 as it was not
until 1968 that it was considered to be a bad
debt. This does not appear to be an unreason
able or improper accounting practice as it was
by no means clear during 1967 that the debt
could not be collected and had a reserve been
set up for the interest or capital of it as a bad
debt during that year this might well have been
disallowed. A working paper annexed to the
financial statements of Pollock Sokoloff for
December 31, 1969 shows under the heading of
"Other Investments", 17i common shares
Delco Realty Inc. 3 ; 25 common shares of Riva
Realty Inc., and 15 common shares of Fanpal
Realties Inc., each at a value of $1.
2 The loan agreements in connection with the first two
loans called for interest at 12% . Possibly when the delay for
payment was extended verbally the interest was also
reduced to 10% which is, in any event, the amount claimed.
Only 15 shares of this company were pledged by Mr.
Crystal in the loan agreement with Mysam and only 15
shares were seized and sold in the bailiff's sale so the
reference to 171 shares may be an error.
Furthermore, in another schedule to the
financial statements of Pollock Sokoloff as of
December 31, 1969 we find, in addition to the
shares in the said three companies entered at a
price of $1 each, that advances were made to
Riva Realty Inc. of $248, to Delco Realty Inc.
of $248 and to Fanpal Realties Inc. of $1 which,
together with the three $1 payments for the
shares, makes a total of $500 paid to H. Blauer
in trust, with the notation "to record acquisition
of the above assets at bailiff's sales through H.
Blauer". A cheque of Pollock Sokoloff was
issued to Mr. Blauer in this amount on
October 9, 1969 and evidence relating to this
explained that there were certain tax obligations
of these companies and that a portion of them
proportional to the share holdings had to be
advanced. While it seems extraordinary that this
advance should have been made in October and
the transactions recorded in the financial state
ments of the company as of December 31, 1969
when title to the shares was only acquired at the
bailiff's sale on February 9, 1970, (and then it
was Mysam who bought the shares) there is
certainly nothing, despite these apparent
irregularities, to indicate that Pollock Sokoloff
did not at all times following the acquisition of
these loans from Mysam on January 2, 1967
treat them in its accounts as being loans owing
to it and deal with them accordingly. I cannot
see how the erroneous proceedings taken to
execute on the security by Mysam in 1969 when
they should have been brought by Pollock
Sokoloff, nor the fact that it was Mysam and
not Pollock Sokoloff that bought the shares at
the bailiff's sale can in any way affect the
validity of the transfer of the loans from Mysam
to Pollock Sokoloff in 1967. At the time of the
Crystal bankruptcy the loan itself was clearly
due not to Mysam but to Pollock Sokoloff and
was wiped out by the bankruptcy. Whether or
not the shares of the realty companies pledged
to secure it were irregularly brought to sale by
Mysam and therefore irregularly bought by it
and whether Pollock Sokoloff is legally entitled
to set itself up as owner of same in its 1969
financial statements might only be a matter of
concern to plaintiff when and if these shares
acquire some value in the future, but in no way
concerns the writing off of part of the loans as a
bad debt in the 1968 tax return of defendant,
which is in issue here.
Plaintiff invokes articles 1570 and 1571 of
the Quebec Civil Code which read as follows:
1570. The sale of debts and rights of action against third
persons, is perfected between the seller and buyer by the
completion of the title, if authentic, or the delivery of it, if
under private signature.
1571. The buyer has no possession available against third
persons until signification of the act of sale has been made,
and a copy of it delivered to the debtor. He may, however,
be put in possession by the acceptance of the transfer by the
debtor, subject to the special provisions contained in article
2127.
and states that there was no valid transfer of the
loans from Mysam to Pollock Sokoloff so as to
affect plaintiff, who claims to be a third person
within the meaning of these articles. This is an
attempt to distort the meaning of these articles
and apply them to a situation for which they
were never intended. While there was no actual
deed of sale between Mysam and Pollock Sokol-
off, there were resolutions of both companies
approving same and while, in the absence of a
formal deed of sale there was of course no copy
of it delivered to the debtor, Mr. Crystal, he was
informed of the transfer verbally and accepted
same, which he admits. It was of no concern to
him whether future payments be made to Pol-
lock Sokoloff or Mysam. These articles deal
with rights to possession of debts sold and
affect the claims of the parties themselves
including third persons directly affected by the
sale but surely the Minister of National Reve
nue has no right to intervene and seek to set
aside such a sale for want of formality when all
the parties directly affected admit that it took
place and that the debtor was aware of and
accepted it, merely because it might be more
advantageous from the taxation point of view
for the Department of National Revenue if such
a sale had not taken place. There is no sugges
tion whatsoever in the pleadings or argument in
the present case that the sale was a fraudulent
one or made with a view to avoiding federal
income tax. The motivation for the sale has
been given an acceptable explanation and the
taxation that was reduced as a result thereof
was provincial taxation and no concern of
plaintiff.
Plaintiff contended that these loans were not
made in the ordinary course of business of
defendant and that its normal business is not
money lending and through a witness, Henri
Vernneau, an accountant with the Minister of
National Revenue, analyzed defendant's bal
ance sheet as of December 31, 1968 which
showed only $116,211 of mortgages and notes
receivable out of total assets of some $15,288,-
000, a ratio of .8 %. Defendant for its part
argued that its short term deposits in the bank
are a form of loan to the bank and that its
investments in bonds are equivalent to loans to
the governments and companies whose bonds it
held, and furthermore that, while its loans to
real estate developers and others, details of
which have been outlined above, were not per
haps very extensive in connection with its total
activities in the real estate field, nevertheless,
part of its ordinary business was the lending of
money within the meaning of section 11(1)(e)
and 11(1)(f) of the Act, the relevant portions of
which read as follows:
ii. (1) Notwithstanding paragraphs (a), (b) and (h) of
subsection (1) of section 12, the following amounts may be
deducted in computing the income of a taxpayer for a
taxation year:
(e) a reasonable amount as a reserve for
(i) doubtful debts that have been included in computing
the income of the taxpayer for that year or a previous
year, and
(ii) doubtful debts arising from loans made in the ordi
nary course of business by a taxpayer part of whose
ordinary business was the lending of money;
(f) the aggregate of debts owing to the taxpayer
(i) that are established by him to have become bad
debts in the year, and
(ii) that have (except in the case of debts arising from
loans made in the ordinary course of business by a
taxpayer part of whose ordinary business was the lend
ing of money) been included in computing his income
for that year or a previous year;
It is not necessary that the number of loans
made by a company or the amount of them be
great in proportion to its total business activities
for it to be possible to say that part of its
business is the lending of money; no proportion
is established under the Act and plaintiff's argu
ment based on the relatively small proportion of
defendant's assets devoted to straight loans (not
including term bank deposits and bond invest
ments) cannot be accepted.
Considerable jurisprudence was referred to
by plaintiff but most of it deals with somewhat
different situations or is not directly in point.
Cases dealing with whether or not a litigant is a
money-lender within the meaning of the British
Money Lenders Act 4 such as Litchfield v.
Dreyfus 5 and Newton v. Pyket are of little rele
vance since the question here is not whether
defendant was in the money-lending business
and had to be licensed as such, but merely
whether part of its business was the making of
loans. The case of Orban v. M.N.R. 7 , a Tax
Appeal Board case, discussed these judgments
and held that in order for a man to be a money-
lender there must be a certain degree of system
and continuity in his transactions. In that case
the appellant had only made three loans, and it
was found that since the fact that he had some
money available was known to only a few
individuals with whom he was acquainted and
that he never advertised himself or was listed
anywhere as a money-lender, therefore his loss
on two of these loans was a capital loss. In a
later case of Valutrend Management Services
4 63 & 64 Vict., c. 51, s. 6.
s [ 1906] 1 K.B.D. 584.
6 (1908-09) 25 T.L.R. 127.
7 54 DTC 148.
Limited v. M.N.R. 8 the same Board member
(R.S.W. Fordham, Q.C.) distinguished the deci
sion stating, at page 2173:
While the appellant could not profess to be a money-lender
within the restricted meaning of Orban v. M.N.R. (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.
Two other cases to which I was referred were
decided on the basis of section 139(1)(e) of the
Act and did not deal with section 11(1)(e) or
11(1)(O, the question being whether loans made
by an individual in the circumstances in which
he made them constituted an adventure in the
nature of trade, or whether they were invest
ments. In the first of these, Wood v. M.N.R. 9 a
lawyer whose firm had a substantial mortgage
practice personally acquired 13 mortgages over
a period of eight years. In one of these the
appellant benefited to the extent of $700 by
discount, which was held by the Supreme Court
to be a capital gain as the pattern of his mort
gage activities was consistent with the making
of personal investments and not with the carry
ing on of a business. Plaintiff cited it mainly
because of the statement of Abbott J. in render
ing judgment at page 334 to the effect that:
Appellant's purchases were not speculative and, according
to his evidence, they were made after he had inspected each
property and reached a decision that each mortgage was a
safe investment for him.
8 [ 1972] C.T.C. 2170.
9 [1969] S.C.R. 330.
There was no question of part of appellant's
ordinary business being the making of loans in
that case, unlike the present case where I have
decided that this was part of the ordinary busi
ness of Pollock Sokoloff and the fact that Mr.
Sokoloff carefully investigated the properties of
the realty companies whose shares were being
given as security for the present loans and that
this was his invariable practice, as he testified,
in connection with all the loans made, and that
he did not consider them to be speculative indi
cates merely that he was a prudent businessman
and does not have the effect of converting loans
made as part of the ordinary business of his
company into investment transactions. The
same comment applies to the case of M.N.R. v.
Maclnnes 1° in which Thurlow J. held that
although over a ten-year period the taxpayer
had purchased some 309 mortgages at a dis
count, which mortgages were offered to him by
real estate agents without any solicitation on his
part, and held them until they were paid off
either at or before maturity, the discounts were
nevertheless capital gains resulting from
enhancement of value on the realization of
investments. This judgment was reversed in the
Supreme Court 11 which found that the taxpayer
was engaged in a highly speculative business of
purchasing mortgages at a discount and holding
them to maturity in order to realize the max
imum amount of profit out of the transaction. It
is of some significance in the present case that
the loans bore interest rates substantially in
excess of the going rate at the time, which is
some indication of the speculative nature of the
loans, despite the fact that no discount was
involved.
The most serious problem in the present case
arises from the fact that the loans were not
originally made by defendant but rather by
Mysam and then transferred to defendant at
their full book value in 1967. Plaintiff contends
that it cannot be said that part of the ordinary
business of Mysam was the lending of money
1° [ 1962 ] Ex.C.R. 385.
11 [1963] S.C.R. 299.
since these three loans were the only loans
which it made. This may well be the case, but it
is not Mysam's taxation which is before the
Court nor was it Mysam which wrote off
$30,000 of the loans as a bad debt in 1968.
Since I have found that part of defendant Pol-
lock Sokoloff's ordinary business was the lend
ing of money and that this particular loan
became a bad debt in 1968 when part of it was
written off, which was amply confirmed by the
bankruptcy of the indebtor in 1969, there would
have been no problem at all had the loan in
question originally been made by Pollock Sokol-
off itself. Since the wording of section 11(1X,f)
however refers to "debts arising from loans
made in the ordinary course of business by a
taxpayer" the question arises as to whether
loans which were not actually made by the
taxpayer himself but acquired by transfer from
another taxpayer can be written off by the
transferee. In a decision in the Tax Appeal
Board case of Sun Securities Limited v.
M.N.R. 12 the appellant company sought to set
up a reserve under section 11(1)(e) for a bad
debt acquired by it by transfer from one of its
minority shareholders who had made the Ioans
and it was held that this could not be done
because of the wording of section 11(1)(e) of
the Act. The decision stated at page 822:
From a reading of this section, there appears to be no
doubt that the reserve must be set up by the person who
made the loans. In the present appeal, the facts do not show
this course of conduct. The loans were made by Lawrence
E. Swinburne whereas the reserve was set up by Sun
Securities Limited. Furthermore, the loans under consider
ation were not made by the appellant in the ordinary course
of its business as a moneylender. On the contrary, they were
made by one Lawrence E. Swinburne personally without
taking the precautionary measures usually expected of a
man in the business of lending money.
While this case dealt with the setting up of a
reserve for a doubtful debt under section
11(1Xe), and not the writing off of a bad debt by
virtue of section 11(1)(f), the words "loans
made in the ordinary course of business by a
taxpayer" appear in both sections and if this
12 64 DTC 821.
judgment were to be followed then plaintiff
would succeed in the appeal. I believe that we
have to look at the circumstances in which the
loans were made in the present case, however.
The loans were agreed to after investigation by
Mr. Sokoloff, who habitually acted for both
Mysam and Pollock Sokoloff. They were made
in the name of Mysam rather than Pollock
Sokoloff for reasons arising from Quebec taxa
tion statutes. The actual cheque to Mr. Crystal
representing the proceeds of the third loan of
$10,000 was a cheque of Pollock Sokoloff 13 . To
say that a company, part of whose ordinary
business is the lending of money, cannot also
acquire by transfer loans made by another com
pany, or that if it does so a distinction must be
made between bad debts arising out of loans
made by it itself which can be written off and
loans acquired by it by transfer, which it
acquired at their full face value, and that the
latter loans cannot be written off even if they
become bad debts, would appear to me to be an
unreasonable distinction and one which would
interfere greatly with normal business opera
tions of companies whose business or part of
whose business is the lending of money. Surely
it cannot have been intended that loans acquired
at a time when they are not in arrears and
appear to be well secured and for which the full
face value has been paid can never be written
off by the transferee as bad debts under section
11(1)(O, nor that a reserve cannot, subsequent
to the acquisition, be set up for them as a
doubtful debt under section 11(1X e). Moreover,
the interest on these loans was set up in the
books of Pollock Sokoloff in 1967 although it
was not collected and tax was paid on same, no
reserve being allowed for it as a doubtful debt,
and it was not until 1968 that this was reversed
and this uncollectable interest was written off
against 1968 interest earned.
13 There was no evidence as to which company issued the
cheques for the first two loans.
One other case to which I was not referred,
namely that of Western Wood Products Limited
v. M.N.R. 14 , might at first sight appear to help
the plaintiff's case but on closer reading it is
evident that it was decided on another point. In
this case the taxpayer set up a reserve for a bad
debt which was acquired by it from a subsidiary
corporation which had financed a third com
pany also controlled by the taxpayer on the
understanding that any resultant losses would
be borne by the taxpayer itself. It was held that
in the absence of documentary evidence, the
taxpayer could not be regarded as a creditor of
the borrowing company whose indebtedness to
the lender arose from a transaction foreign to
the taxpayer, and that the taxpayer was there
fore excluded from the scope of the permissive
exception in section 11(1)(e)(i) of the Act. A
reading of the judgment discloses, however, that
it was based on section 137(1) of the Act as an
attempt to "unduly or artificially reduce" the
income of the appellant. The judgment also
refers at page 388 to "the absence of assign
ments or guarantees". There is no suggestion
whatsoever in the present case, as already
stated, that any fraud was involved or that the
transfer was made with a view to attempting to
unduly or artificially reduce the income of
defendant, Pollock Sokoloff.
I therefore find that the amount of $30,000
was properly written off as a bad debt of
defendant in 1968 and dismiss plaintiff's appeal
against the decision of the Tax Review Board,
with costs, and refer the 1968 income tax
assessment of defendant back to the Minister
for re-assessment in accordance with this
judgment.
14 [I963] Ex.C.R. 380.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.