Heron Bay Investments Ltd. v. The Queen

Heron Bay Investments Ltd. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2009-09-08
Neutral citation
2009 TCC 337
File numbers
2003-4006(IT)G
Judges and Taxing Officers
Robert James Hogan
Subjects
Income Tax Act
Decision Content
Docket: 2003-4006(IT)G
BETWEEN:
HERON BAY INVESTMENTS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on February 25, 26 and 27, 2009, at Toronto, Ontario.
Before: The Honourable Justice Robert J. Hogan
Appearances:
Counsel for the Appellant:
William I. Innes
Douglas Stewart
Brendan Bissell
Counsel for the Respondent:
John Shipley
Perry Derksen
____________________________________________________________________
JUDGMENT
The appeal of the August 14, 2003 reassessment for the Appellant’s 1995 taxation year is dismissed, with costs, for the reasons attached hereto.
Signed at Ottawa, Canada, this 8th day of September 2009.
"Robert J. Hogan"
Hogan J.
Citation: 2009 TCC 337
Date: 20090908
Docket: 2003-4006(IT)G
BETWEEN:
HERON BAY INVESTMENTS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
I. Introduction
[1] Heron Bay Investments Ltd. (“Heron Bay”) loaned money to a related company in its 1994 fiscal year. For its 1995 taxation year, Heron Bay deducted the entire loan as a write-off for a doubtful debt under subparagraph 20(1)(l)(ii) or a bad debt under subparagraph 20(l)(p)(ii). That write-off is contested by the Minister.
II. Issues for Determination
[2] The issues for determination have to do with whether the three conditions prescribed in either subparagraph 20(1)(l)(ii) or subparagraph 20(1)(p)(ii) of the Income Tax Act (the “ITA”) have been met and are as follows:
(a) Does the Appellant’s ordinary business include the lending of money?
(b) Was the loan made in the ordinary course of the Appellant’s moneylending business? and
(c) Was the loan established to be doubtful under subparagraph 20(1)(l)(ii) or uncollectible under subparagraph 20(1)(p)(ii)?
The Appellant contends that all of the conditions have been satisfied. Not surprisingly, the Respondent alleges the opposite.
III. Factual Background
A. Background and General Business Practices of the Conservatory Group of Companies
[3] The late Ted Libfeld was a holocaust survivor who immigrated to Canada at the end of the war with nothing more than his personal belongings. He went on to build a very successful real estate firm, first with partners and later with his four sons. For the last 50 years, the Conservatory Group of Companies has carried on the business of real estate development, from commercial buildings to condominiums and residential housing in the Greater Toronto Area. In addition, in later years the Conservatory Group provided mortgages to third-party purchasers in connection with its real estate business and invested large amounts of surplus funds in commercial paper.
[4] The Conservatory Group is now run by Ted’s four sons: Sheldon, Jay, Mark and Corey.
[5] Heron Bay is one of the oldest corporations in the Conservatory Group. Heron Bay’s business activities include the purchase and development and subsequent sale of real property. It also loans money to related entities. Heron Bay builds residential homes on its own and in partnership or through joint ventures with other corporations within the Group. In the taxation years under review, it operated its business as a merchant real estate developer, performing sales, marketing and design functions. It left the risky business of home building to third‑party builders. The common shares of Heron Bay are owned equally by the four brothers. Sheldon Libfeld is, and was during the relevant years, the president and secretary of Heron Bay.
IV. The Acquisition of the Frost Farm
A. Runnymede Development Corporation Ltd.
[6] Runnymede Development Corporation Ltd. (“Runnymede Development”) carries on the business of real estate development in the Greater Toronto Area.
B. First Right of Purchase
[7] By memorandum of agreement dated April 14, 1988, Runnymede Development granted Ted Libfeld in Trust a first right to purchase any future residential building lots owned by Runnymede in the town of Ajax.
[8] In the early 1990s, Runnymede announced that it was ready to sell certain land known as the “Frost Farm”, Group I and Group II lots. Potential purchasers, including Rosehue Downs Development Inc. and Burlmarie Developments Inc., both members of the Conservatory Group, expressed interest in the Group I and Group II lots.
[9] There was some disagreement as to the interpretation of the “first right to purchase” enjoyed by Ted Libfeld in trust. Mr. Libfeld understood that he enjoyed a “right of first refusal” such that Runnymede would have to present an executed offer, whereupon Mr. Libfeld would have the right to match the offer and purchase the lots. Runnymede understood the term to mean that it could present an offer to Mr. Libfeld for acceptance within a reasonable time (“right of first purchase”), failing which Runnymede could sell the lots at an equal or better price. A right of first refusal would have greater value to the Conservatory Group than a right of first purchase as, in the long run, it would dissuade third parties from bidding for the properties.
[10] During the dispute over the interpretation of the term “first right of purchase”, Runnymede presented offers to Libfeld’s lawyer, who was to confirm that these offers were made by bona fide third parties. Neither Mr. Libfeld nor Jack Feintuch, the executive vice‑president of Runnymede, could recall the outcome of the referral to Libfeld’s lawyer.
[11] Despite Runnymede’s denial that there was a binding agreement of purchase and sale with respect to the Group I lots, Mr. Libfeld took the position that there was a binding agreement and threatened legal action on the basis of a right of first refusal.
[12] With the agreement of both parties, the issue of the scope of the right of first purchase and other unrelated issues were taken to arbitration. At a cost of $5 million, Runnymede, obtained, inter alia, a release with respect to Libfeld’s right of first purchase and related right of joint venture. Mr. Feintuch testified that the release and the payment of the $5 million had nothing to do with the purchase price or the fair market value of the Frost Farm lots. The reduction in price was merely a mechanism for the payment of the $5 million for the release with respect to Libfeld’s right of first purchase and the settlement of other, non-relevant, issues. Mr. Libfeld took the contrary view and alleged that part of the $5 million settlement award related to a rebate on the purchase price of the Frost Farm. Mr. Libfeld felt that they had overpaid for the Frost Farm.
[13] The following members of the Conservatory Group executed agreements to purchase the Frost Farm lands from Runnymede as follows:
• 147 building lots for $11,764,000 by Rosehue Downs Development Inc. by agreement executed August 10 and 12, 1994;
• 142 building lots for $12,202,800 by Burlmarie Developments Inc. by agreement executed August 10 and 12, 1994.
[14] The transactions were structured using a long-form agreement of purchase and sale. Under such an arrangement, title does not pass until a sale to the ultimate homeowner occurs and payment has been made on a lot-by-lot basis. Only then, would the deed to the lot held by Runnymede be put directly in the homeowner’s name. When a deposit is made for the property, there is no security given for the funds being advanced. The developer who puts the deposit down only obtains the right to build on and develop the lots.
[15] Contemporaneously with the above transactions, Marlo Developments Inc. (“Marlo”), another member of the Conservatory Group, acted as trustee for the Marlo joint venture in which Viewmark Homes Ltd. (“Viewmark Homes”) holds a 95% interest and Shellfran Investments Ltd. holds the remaining 5% interest. Marlo agreed to purchase:
• 147 building lots for $12,000,000 from Rosehue Downs Development Inc. by agreement dated August 10, 1994;
• 142 building lots for $12,500,000 from Burlmarie Developments Inc. by agreement dated August 10, 1994.
[16] Heron Bay loaned Viewmark Homes a total of $3,770,000 from Heron Bay’s investment in other real estate joint ventures [i.e. Viewmark Homes Ltd. (trustee)] during October to November 1994. This loan was to enable Marlo, on behalf of the joint venture, to acquire the property. The $3,770,000 represented nearly 100% of the deposit required for the leveraged acquisition of the Frost Farm lands from Burlmarie and Rosehue. The two properties purchased consist of an aggregate of 289 building lots (the “Property”).
[17] By agreement dated November 30, 1994, Heron Bay confirmed advances totalling $3,770,000 to Viewmark Homes. The $3,770,000 debt was secured by a promissory note to Heron Bay and by a pledge to Heron Bay of Viewmark Homes’ investment interest in the Marlo joint venture. The terms of the loan were as follows:
• The principal balance and interest were repayable on demand.
• The loan was without recourse, which means that Heron Bay’s sole recourse under the loan was against Viewmark Homes’ interest in the Property (i.e. its 95% interest in the Marlo joint venture).
• The loan bore interest at 8% per annum.
V. Heron Bay’s Tax Position
[18] By November 1994, Sheldon Libfeld was alleging that the fair market value (“FMV”) of Viewmark Homes’ interest in the Property had been determined to be less than its cost of the Property. In the course of dealing with the appraiser hired by the Appellant to value the properties, Sheldon Libfeld gave that appraiser information respecting property transactions in Whitby. Appraisals obtained at the request of Heron Bay put the FMV of the Property as at November 30, 1994 at no more than $17,235,000. That coupled with other encumbrances on the Property totalling $20,636,000, which ranked ahead of Heron Bay’s claim, led to Heron Bay’s determination that the value of the loan was nil. It should be noted that this occurred within a short period after the funds were first advanced.
[19] In computing its income tax for its 1995 taxation year, the Appellant claimed a deduction from income of the entire amount of the $3,770,000 loan on the basis that the loan had become a doubtful or bad debt at that time. No adjustment was made in the T2S(1) for tax purposes as, for accounting purposes, the deduction was entered on Heron Bay’s profit and loss statement. It is Heron Bay’s position that the loan was made in the ordinary course of its business, which included the lending of money, both of which are essential conditions to be met in order for a taxpayer to claim a deduction for a doubtful loan or bad debt.
VI. The Minister’s Position
[20] The Minister suggests that at all material times the major business activity of Heron Bay was real estate and that the lending of money was not an integral part of its business operations, but merely part of an occasional investment of surplus funds, generally in the form of term deposits.
[21] The Minister also submits that the loan made by Heron Bay was outside the ordinary course of any moneylending business and was not consistent with Heron Bay’s related-party transactions. In brief, Heron Bay made only two non-recourse loans and claimed a doubtful or bad debt deduction in respect of each of those two loans.
[22] Finally, the Minister contends that the evidence does not show that the loan was doubtful, uncollectible or bad.
VII. Rezoning Expenses
[23] Heron Bay incurred an expense of $89,799 for the rezoning of a parking lot on its 90 Dundas Street West property in Toronto so that the construction of a condominium building would be permitted. The parking lot portion of that property was treated by Heron Bay as part of its inventory. Heron Bay claims that the condominium sales did not take place, though, due to a decline in the condominium market. As a result, Heron Bay obtained an appraisal with respect to the property and on the basis of this appraisal, determined that the FMV attributable to the parking lot was less than the actual purchase price of the parking lot. While Heron Bay did not increase the portion of the Dundas Street property which it regarded as inventory by the amount of the expense incurred for the rezoning, it did deduct the $89,799 in computing its income for its 1995 taxation year. Heron Bay submits that claiming the expense in this fashion was the same as if the amount had been included in its inventory and a deduction taken in accordance with subsection 10(1) of the ITA since the fair market value of the inventory item was less than its cost.
[24] The Minister argues that no evidence was provided to substantiate the decline in value and submits that the parking lot was not inventory of Heron Bay and that Heron Bay accordingly had no basis for writing down its inventory under section 10(1) of the ITA. Rather, the Minister submits, the rezoning expense was an expenditure on account of capital, since it was a one-time expenditure for the purpose of bringing into existence an asset of permanent and enduring advantage, and thus the deduction thereof is prohibited by paragraph 18(1)(b) of the ITA.
VIII. Analysis
[25] Paragraph 20(1)(l) of the ITA as it applies to Heron Bay’s 1995 taxation year reads as follows:
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:
. . .
(l) a reserve determined as the total of
(i) a reasonable amount in respect of doubtful debts that have been included in computing the income of the taxpayer for that year or a preceding taxation year, and
(ii) where the taxpayer is a financial institution (as defined in subsection 142.2(1)) in the year or a taxpayer whose ordinary business includes the lending of money, an amount in respect of properties (other than mark-to-market properties, as defined in that subsection) that are doubtful loans or lending assets that were made or acquired by the taxpayer in the ordinary course of the taxpayer’s business of insurance or the lending of money or that were specified debt obligations (as defined in that subsection) of the taxpayer, equal to the total of
(A) the prescribed reserve amount for the taxpayer for the year, and
(B) in respect of doubtful loans or lending assets for which an amount was not deducted for the year by reason of clause (A) (in this clause referred to as the “loans”, the lesser of
(I) a reasonable amount as a reserve for the loans in respect of the amortized cost of the loans to the taxpayer at the end of the year, and
(II) the product obtained when the total of
1. the part of the reserve for the loans reported in the financial statements of the taxpayer for the year that is in respect of the amortized cost to the taxpayer at the end of the year of the loans, and
2. the total of all amounts included under subsection 12(3) or paragraph 142.3(1)(a) in computing the taxpayer’s income for the year on a preceding taxation year to the extent that those amounts reduced the part of the reserve referred to in sub-subclause 1.
is multiplied by one minus the prescribed recovery rate,
or such lesser amount as the taxpayer may claim where the lesser amount is the total of a percentage of the amount determined under clause (A) and the same percentage of the amount determined under clause (B);
[Emphasis added.]
[26] Subparagraph 20(1)(l)(i) is inapplicable in the present appeal. It allows the deduction of a reasonable reserve in respect of doubtful debts which have been included in computing income. The loan made to Viewmark Homes was made with after-tax funds and was not included by Heron Bay in the determination of its income.
[27] Subparagraph 20(1)(l)(ii) is relevant to the present appeal. The part that concerns us applies to doubtful loans or lending assets of taxpayers whose ordinary business includes the lending of money, where such doubtful loan were made or acquired in the ordinary course of the taxpayer’s business of the lending of money.
[28] Clause 20(1)(l)(ii)(A) applies only to certain types of loans made by banks and is not applicable in the present appeal. Clause 20(1)(l)(ii)(B) provides for a general reserve and is relevant to the present appeal. This reserve is equal to the lesser of a reasonable reserve in respect of doubtful loans and the reserve amount entered on the financial statements. The Appellant relies on clause 20(1)(l)(ii)(B) to claim a deduction for the loan made to Viewmark Homes. It argues that the loan was doubtful at the end of its 1995 taxation year and that it meets all of the above conditions.
[29] The Appellant also relies on paragraph 20(1)(p). This provision allows a taxpayer to deduct the full amount of a loan that has been made where:
(a) the ordinary business of the taxpayer includes the lending of money;
(b) the taxpayer made the loan in the ordinary course of its business of lending money; and
(c) it has been established in the year by the taxpayer that the loan has become uncollectible.
[30] The conditions described in paragraphs (a) and (b) above are identical to those set out in paragraph 20(1)(l). The condition described in paragraph (c) above is different. Paragraph 20(1)(l) requires only that the debt be established as doubtful. Paragraph 20(1)(p) requires the debt to have become uncollectible in the year. This, obviously, is a more stringent standard. If the Appellant fails to establish that its loan to Viewmark Homes satisfies the two conditions in paragraph 20(1)(l) that are the same as those under paragraph 20(1)(p), it will also fail under paragraph 20(1)(p). The Appellant’s counsel, Mr. Innes, directed his arguments at trial to the Appellant’s case under paragraph 20(1)(l) in acknowledgment of the fact that this was the easier of the two provisions to rely on to justify the Appellant’s deduction of the Viewmark Homes loan.
A. Whether Ordinary Business Includes Moneylending
[31] The Minister submits that Heron Bay does not carry on the business of moneylending. The Minister argues that even though Heron Bay made loans, it did not act as a moneylender as that term is commonly understood, since Heron Bay did not seek to profit at all from the loans it made, because it either charged no interest or did not enforce the debt.[1]
[32] Determining whether or not a moneylending business exists is a question of fact. If it can be shown, after considering as a whole all the facts of the case, that there is a degree of system and continuity about the transactions, the existence of a moneylending business will be established.
[33] Case law which establishes the test set out above can be found in Orban v. M.N.R., 54 DTC 148 (ITAB), a decision in which Mr. Fordham quoted old English cases on moneylending at pages 149-50:
. . . In Litchfield v. Dreyfus, (1906) 1 K.B. 584, at p. 589, Farwell J., said:
But not every man who lends money at interest carries on the business of money‑lending. Speaking generally, a man who carries on a money‑lending business is one who is ready and willing to lend to all and sundry, provided that they are from his point of view eligible . . . it is a question of fact in each case.
. . . In Newton v. Pyke, (1908) T.L.R. 127, at p. 128, Walton, J. states:
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.
In Nash v. Layton, (1911) 2 Ch. 71, at p. 82, Buckley, L.J., said:
Whether a man is a money-lender or not is an investigation whether he has done such a succession of acts as that upon the facts proved by establishing that those acts were done the Court arrives at the conclusion as matter of law that he falls within the definition of a money-lender.
[Emphasis added.]
[34] It is true that in all three cases the effect of the British Money-lenders Act, 1900 was under consideration, but in each of them the court concerned had, in addition, to deal with the subject of moneylending generally.
[35] In R.S. Jackson Promotions Ltd. v. M.N.R., 85 DTC 145 (TCC), Sarchuk J. added the following at page 149:
The presence or absence of any single factor referred to does not by itself establish whether that the appellant was not carrying on the business of money-lending. It is the cumulative effect of this evidence that leads the Court to that conclusion . . .
[Emphasis added.]
[36] Furthermore, the Federal Court of Appeal stated in footnote 2 of Loman Warehousing Ltd. v. Canada, [2000] F.C.J. No. 1717 (QL):
. . . the business of lending money under the Act extends not only to one who lends money to all who qualify in the conventional sense (see Litchfield v. Dreyfus (1906) 1 K.B. 584 at 589), but would also include one who lends money on a regular and continuous basis over time to a limited group of borrowers for an arm’s length consideration . . .
[Emphasis added.]
[37] The Minister submits that it is not sufficient to have interest income to prove that a moneylending business exists. The Minister argues that receiving interest from mortgages associated with the sale of property is not carrying on the business of a moneylender. Rather, it is the receiving of payment of the unpaid purchase price of property.[2] Furthermore, the Minister suggests that the lending activity is not being carried on with a view to profit because it involves a number of related‑party transactions in which the Appellant borrows at 15% and lends at a lower rate, for example, 8%.[3]
[38] Dealing with the first argument, I find it difficult to accept the suggestion that the receipt of interest relates only to the unpaid purchase price of property. The receipt of interest payments with respect to the mortgages associated with the sale of property implies that a loan was made to the purchaser in order to assist the purchaser in completing the purchase of the property. The loan is a separate transaction from the sale. Accordingly, when payments are made on the purchase price of a home, interest is charged on the portion of the loan that is outstanding.
[39] Regarding the second argument made by the Minister, it was suggested that Heron Bay did not act as a typical moneylender would since it did not lend with a view to profit, as Heron Bay borrowed at 15% but made loans on which it charged a lower percentage. This implies that a typical moneylender would borrow at a lower rate and lend out at a higher rate, thereby earning a profit in the form of the interest income from the spread between the two rates. While this is generally true, it is useful to point out that the 15% rate at which Heron Bay borrowed funds was on shareholder loans.[4] It is also important to note that a business can make loans from profits earned and retained in the business.
[40] Turning to the evidence appearing in the financial statements, it can be observed that interest income is broken down into several components on the Non‑Consolidated Statement of Income[5] as follows:
Interest Earned from:
Year Ended: Aug 31/96
% of Total Interest
Year Ended: Aug 31/95
% of Total Interest
Mortgage
54,571
5.9%
64,607
6.1%
Term Deposits & T-Bills
55,885
6.0%
64,576
6.1%
Loans Receivable
822,040
88.1%
933,029
87.8%
Total Interest:
932,496
100%
1,062,212
100%
[41] From the above table, it is clear that for the fiscal years ended August 31, 1995 and 1996, interest income from mortgages and loans receivable made up a substantial portion of the interest income received. The interest on the loans receivable is explained in notes 4 and 5 to the financial statements dealing with interest earned on loans made to related parties. [6]
[42] Mr. Libfeld stated that internal funds were used for lending within the group instead of relying on bank financing.[7] The funds were lent out to help other entities cover construction costs or cash requirements as necessary from time to time.[8] Eventually, when surplus funds become available, they are used to repay Heron Bay.[9] From 1992 onward, interest was normally charged on all loans.[10] Furthermore, there was evidence presented that showed the history of numerous loan transactions with individuals and related parties, including the amounts loaned, the interest rates charged over different periods of time, the payments made and the outstanding balances.[11] Along with the results reflected in the income statement, all these factors support the notion that there is a capacity to make a profit from such loans through the earning of interest income. While there may have been a few loans that bore no interest,[12] interest rates and the timing of interest payments are really terms of the loan that is negotiated between the parties. The fact remains that loans are commonly made by Heron Bay. Accordingly, after considering the factors above, it can be said that a certain degree of system and continuity does exist with respect to the transactions in question. This is similar to the situation in Langhammer v. The Queen, 2001 DTC 45 (TCC), a case in which Judge Rip (as he then was) found that loans were made for the purpose of earning interest income as opposed to income from property. Judge Rip found that continuity or system in the lending activities was established due to the fact that the loans were made for specific terms (in that case, three years or shorter) and the lender kept track of interest payment due dates and outstanding balances.
[43] In Saltzman v. M.N.R., 64 DTC 259 (TAB), Mr. Saltzman provided money to a law firm that made mortgage loans on his behalf. After receiving interest, Mr. Saltzman proceeded to claim a reserve for doubtful debts in the same amount. Mr. Davis, Q.C. found that Mr. Saltzman was not in the business of moneylending because he lacked continuity or system in lending out his money. Mr. Saltzman just put in the money, but did not know who the borrowers were, what the exact nature and terms of the mortgages being issued were, or whether he had gotten any money back and knew little of how his money was invested. This can be contrasted to Heron Bay’s case.
[44] Whether the loans are made to related parties or not, Heron Bay is not precluded from being a moneylender. In 576315 Alberta Ltd. v. Canada, [2001] T.C.J. No. 510 (QL), the corporate taxpayer made two loans to two different corporate entities. The first loan of $1.7 million was to finance four restaurants while the second loan of $325,000 was to enable a debtor to pay its bills. The Minister argued that the taxpayer had not established a systematic and continuous pattern of lending money, did not always collect interest on loans, did not hold itself out to the public as a moneylender, and made a number of loans to related persons or business associates. Nonetheless, Judge Bonner allowed the appeal in part by allowing a deduction related to the first loan since financing was part of the taxpayer’s ordinary business and the lending done was part of that financing activity. The inference is that the fact that a loan is made to a related party does not preclude the related-party lender from being a moneylender.
[45] In Rich v. The Queen, 2003 DTC 5115 (FCA) (hereinafter “Rich”), Rothstein J.A. stated at paragraph 16 that while a non-arm’s length relationship may justify closer scrutiny than arm’s-length situations, a non-arm’s length relationship alone, without more, cannot lead to a finding that the creditor did not act honestly and reasonably in determining the debt to be bad.
[46] I find that Heron Bay is in the business of moneylending since making loans is an integral part of its business and, as established above, there were both system and continuity in the making of the loans. Hence the purpose of the loans was not just the occasional investment of surplus funds. The factors indicating the existence of a moneylending business far outweigh any factors that suggest otherwise.
B. Whether the Loan Was Made in the Ordinary Course of Business
[47] In determining the treatment of the deduction under examination, the next question is whether the loan to Viewmark Homes was made by Heron Bay in the ordinary course of its business. As part of the Conservatory Group system, Heron Bay loaned money to related parties and did so on a rather regular basis. One might be tempted, at first blush, to conclude that because the loan to Viewmark Homes was made on income account, it follows that this loan was made in the ordinary course of the Appellant’s moneylending activities. In my opinion, such an approach would confuse the proper fact-finding test of the first condition with the fact-finding enquiry needed to determine the second issue. By adding the word “ordinary” to the second condition, namely that the loan be made “in the ordinary course of the taxpayer’s business . . . of lending . . . money”, the legislator has indicated that the taxpayer must demonstrate not only that the loan was made in the course of the taxpayer’s business, but also that it was made in the normal or regular (“ordinary”) course of the taxpayer’s business of lending money. In my opinion, the non‑recourse feature of the Viewmark Homes loan makes this loan stand out as an extraordinary transaction when compared to the other types of loans that are commonly made by the Appellant.
[48] The argument put forward by Heron Bay in this regard is based on the “normalcy” of the loan in question. It submits that the loan was made in connection with its overall profit-making scheme and was of a class of loan arrangement usually entered into by it. Heron Bay asserts as well that the loan was prompted by the ordinary business considerations that governed its making of loans.
[49] For a loan to fail this test, it would need to be extraordinary or “extracurricular” in some distinct fashion and different from activities carried on in the day-to-day operation of the business as an entity. The loan would need to appear as an aberration or an abnormality of some kind.
[50] As a preliminary noteworthy point, the wording used in paragraph 20(1)(l) is not “ordinary course of business”, but “ordinary course of the taxpayer’s business of . . . lending . . . money”. I will, accordingly, consider Heron Bay’s business and the types of loans it typically makes in order to determine whether the loan it made to Viewmark Homes was made in the ordinary course of its business.
[51] An instructive point of departure for the purpose analysis is to delineate the meaning and scope of the phrase “in the ordinary course of the taxpayer’s business”. This phrase is found in other provisions of the ITA, and has also been judicially considered in different contexts.
[52] Activity falling within “the ordinary course of business” involves repetition and continuity.[13] Factors considered in distinguishing between transactions on account of capital and transactions on income account are useful but not necessarily determinative.[14] Moreover, “[i]t is trite law that there is a rebuttable presumption that the income earned from anything that a corporation does within the limits of its corporate objects or enabling legislation is business income.”[15] But this is not to suggest that anything done by a corporation under the umbrella of its corporate objects or enabling legislation is done in the ordinary course of business or in the ordinary course of that corporation’s business “because Parliament has used the word ‘ordinary’. The addition of the word ‘ordinary’ to the expression ‘course of business’ must have been intended to capture particular transactions and not just anything done by the corporation in its business.”[16]
[53] The phrase was canvassed by Judge Rip (as he then was) in British Columbia Telephone Company v. M.N.R., 86 DTC 1286 (TCC) in the context of former paragraph 20(1)(gg) dealing with inventory allowances. At page 1290, Judge Rip commented as follows, relying on international decisions:
In a bankruptcy matter before the High Court of [Australia], Rich, J. wrote that for transactions to be considered in the ordinary course of business supposes “that according to the ordinary and common flow of transactions in affairs of business there is a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done; that it should form part of the ordinary business as carried on, calling for no remark and arising out of no special or particular situation”: Downs Distributing Co. Pty., Ltd. v. Associated Blue Star Stores Pty., Ltd. (In Liquidation), (1948), 76 C.L.R. 463, at page 477. Street, J., of the Supreme Court of New South Wales stated that “the transaction must be one of the ordinary day-to-day business activities, having no unusual or special features, and being such as a manager of a business might reasonably be expected to be permitted to carry out on his own initiative without making prior reference back or subsequent report to his superior authorities, such as, for example, to his board of directors.”: Re Bradford Roofing Industries Pty., Ltd., (1966) 84 W.N. (Pt. 1) (N.S.W.) 276 at page 285 . . . .
[Emphasis added.]
[54] To similar effect is the discussion in Highfield Corporation Ltd. v. M.N.R., 82 DTC 1835 (TRB), at page 1843, of the phrase “in the ordinary course of [the taxpayer’s] business” in the moneylending context:
. . . Since making a loan is the lending of money, it would seem to me that a loan made in the "ordinary course of business" would identify that transaction as part of the "ordinary business" of the taxpayer. For a loan to fall short of those parameters, it would need to be extraordinary or extracurricular in some distinct fashion and clearly different from the day-to-day operation of the business as an entity. It would appear as an aberration or an abnormality of some kind. Perhaps there is a bottom line consisting of a certain required frequency, or similarity of "loan" transactions below which it could not be said that they formed part of the ordinary business of the taxpayer. However, I am not faced with the problem of locating that "bottom line" in this appeal. The constant and consistent procedures adopted and followed by Highfield when making its investments make the particular loans in question "ordinary" in every aspect.
[Emphasis added.]
[55] The phrase “in the ordinary course of the taxpayer’s business” covers “the amalgam of day-to-day activities carried out with regularity and a degree of frequency by the management of the taxpayer in conducting the taxpayer’s business, which may be contrasted with isolated transactions infrequently engaged in, including significant asset acquisitions or dispositions that are extraordinary events.”[17]
[56] The “appropriate approach of interpretation should be the one that considers the specific characteristics and operating history of the particular business that included an impugned transaction.”[18] Support for this approach is found in Royal Bank v. Tower Aircraft Hardware (1991), 3 CBR (3d) 60 (Alta. Q.B.), a decision in which the nature of past advances to shareholders was found by the court to be relevant in determining whether a subsequent shareholder advance was made in the ordinary course of business. Similarly, in Can. Commercial Bank, etc. (1986), 49 Alta. L.R. (2d) 58 (Alta. Q.B.) at 62, the court considered “what is ordinary in light of all the circumstances” in delineating the scope of ordinary course of trade. Both of these cases demonstrate that courts take into account the specific relationship of the parties in order to determine whether an impugned transaction was carried out in the ordinary course of business.[19]
[57] In Industrial Investments Ltd. v. M.N.R., 73 DTC 118 (TRB), the appellant company loaned money to an affiliated company. No security or collateral was obtained and no interest was charged. The shareholders stated that the reason for proceeding in this manner was that they controlled the American company and the money would be repaid as soon as the funds became available from that company’s business operations. The Board found that the loan was not made “in the ordinary course of business” by the Appellant and that it was more in the nature of an accommodation for an associate, or a capital investment.[20]
[58] Against this background, the determination of what falls within the scope of “ordinary”, whether in terms of business generally or in the taxpayer’s business specifically, becomes an exercise that is highly fact-specific. “Authorities generally agree that the expression [“in the ordinary course of business”] cannot be defined with any precision in the abstract and that its proper interpretation will depend on the facts specific to each case.”[21] The Supreme Court of Canada, for bankruptcy law purposes, in Robitaille v. American Biltrite (Canada), [1985] 1 S.C.R. 290, at 291 stated that “it is best to consider the circumstances of each case and to take into account the type of business carried on between the debtor and creditor” when determining what constitutes the ordinary course of the taxpayer’s business.
[59] The Supreme Court approved the following passage from the Quebec Court of Appeal’s majority decision in Pacific Mobile Corp. (In re): American Biltrite (Canada) Ltée c. Robitaille, [1982] C.A. 501 at 506:
It is apparent from these authorities, it seems to me, that the concept we are concerned with is an abstract one and that it is the function of the courts to consider the circumstances of each case in order to determine how to characterize a given transaction. This in effect reflects the constant interplay between law and fact.
[60] Some of the judicial statements referred to above related to provisions of the ITA that are inapplicable in the instant appeal or to provisions of other statutes. This does not necessarily render inapplicable the judicial treatment of those provisions. Legislative drafters are understood to abide by the principle of uniformity of expression, so that each term has one and only one meaning.[22] Therefore, the same words appearing in a statute are to be given the same meaning.
[I]t is a basic principle of statutory interpretation that where the same words are used in a statute, they are to be given the same meaning.
In Ainsworth Lumber Co. Ltd. v. The Queen,[23] the court considered the issue of how to interpret the words used in the Act and adopted the following commentary:
[T]he third edition of Driedger on the Construction of Statutes at page 163 . . . says:
It is presumed that the legislature uses language carefully and consistently so that within a statute or other legislative instrument the same words have the same meaning.
. . .
In R. v. Zeolkowski, (1989) 61 D.L.R. (4th) 725, at 732 (S.C.C.), Sopinka, J. wrote:
Giving the same words the same meaning throughout a statute is a basic principle of statutory interpretation.
Driedger at page 475 reads:
In preparing an enactment, the legislature is presumed to be aware of existing case law and to take that case law into account in drafting its provisions. Where words have been given a particular meaning in a case or series of cases, and those words are then used in legislation, the obvious inference is that the legislature intended to give the words the same established meaning.[24]
[61] The concept of “ordinary course” has also bee