Capital Loss v. Loss

The taxpayer, a mining company, bought over $9 million of shares in, and made over $8 million in loans to, an exploration company ("Windarra"). The loan subsequently was settled for a payment by the exploration company of $1 million, with the taxpayer claiming the $7 million loss as an income loss. The Court accepted the trial judge's finding that the taxpayer was not ordinarily in the business of lending money, that the loans made were incidental to the taxpayer's gold-mining business, and therefore that taxpayer had not rebutted the presumption that shareholder loans are made to secure an enduring benefit, so that the loss was on capital account. Dawson J.A. stated (at para. 32):

I accept the respondent's submission that the monies advanced pursuant to the Windarra Loan could be characterized as "sums expended on the structure within which profits were to be earned," one of the expressions descriptive of a capital transaction cited with approval by the Supreme Court in Johns-Manville [85 DTC 5373, [1985] 2 S.C.R. 46].

In order to strengthen the balance sheet of its U.S. subsidiary, the taxpayer contributed a trade receivable to the subsidiary, with the amount contributed credited in part to paid-in surplus and in part to contributed surplus. Given that there was a resulting change in use of the amount represented by the trade debt to capital, an ensuing loss of the taxpayer was on capital account.

The two taxpayers, who transferred land inventory to a newly-incorporated corporation, guaranteed a bank loan to the corporation and, later, were called upon to honour their guarantees of that debt, were not able to deduct their losses on income account, given that they had failed to establish that at the time their guarantees were given they intended to sell their shares at a profit. Robertson J.A. indicated (at p. 5465) that the Beamish decision (90 D.T.C 1584) and the Cull decision (87 DTC 5322) could "no longer be considered persuasive authorities".

In reaching his decision, Robertson J.A. noted at page 5468 (DTC) that the law presumes that advances or outlays from shareholder to corporation are capital in nature. The two major exceptions are where the shareholder is ordinarily in the business of lending money, and where the shareholder holds the shares on income account (i.e. as a trading asset).

The taxpayer, which was in the business of developing and selling real estate, acquired, in an arm's length transaction and for a purchase price of approximately $70,000, all the shares of a corporation ("Fraserview") whose sole asset was a parcel of land having a cost amount of approximately $7.5 million. Mara then wound-up Fraserview in accordance with s. 88(1) and immediately thereafter sold the land in an arm's length sale for approximately $3.0 million.

La Forest J., without providing detailed reasons, found that in these circumstances the property retained its character as inventory in the hands of the taxpayer with the result that it realized a non-capital loss on the sale.

Strayer J. found that the taxpayer, which was a distributor of books and magazines, made an advance of $252,000 to a company ("B/C") to finance an ice show as an investment in light of the taking of steps that an investor would take (receiving a personal guarantee of the individual principal of B/C whom the taxpayer incorrectly believed had assets sufficient to support his guarantee) and the absence of any relationship of the advance to the taxpayer's business. The fact that the taxpayer anticipated a very high rate of the return on the advance was not conclusive. Strayer J. stated (pp. 6510-6511):

"... Normally a person who lends money when he is not in the business of money lending makes an investment unless there are unusual circumstances."

The taxpayer, a real estate developer, sold land on income account, taking back a mortgage for a portion of the sale price. In finding that a sale of the mortgage receivable to a related company at a discount four years later in response to financial pressure from a bank gave rise to a loss on income account, Rothstein J. stated (p. 5055):

"The test seems to be whether or not the asset, eg. foreign currency or a mortgage, giving rise to the gain or loss, was acquired for the purpose of effecting a commercial or business transaction. The stage of the underlying transaction with which the asset's acquisition is associated does not seem to me to bear upon the issue."

He also noted that the Minister's position would result in the taxpayer paying tax on income which it did not receive given that the net effect of the sale of the mortgage at a discount was to reduce the proceeds of the previous sale.

The taxpayer, who was a practising lawyer but also engaged in real estate transactions on income account, personally guaranteed bank loans to two private corporations (engaged in the laundromat business and a land development business) in which he was a significant shareholder. The resulting losses realized by him were of a capital nature given the presumption that shares of a corporation are an investment and given that the two corporations had carried on their regular businesses for more than five years (indicating that the holding of their shares was not a venture in trade for the purpose of resale at a profit).

In finding that the two individual taxpayers sustained capital losses as a result of their guarantee of bank loans made to corporations owned by them and engaged jointly in the development of a failed real estate joint venture, Dubé J. stated (p. 6222) that he viewed the guarantees "as investments on their part in a Joint Venture which they felt was to be for their enduring benefit".

Loan advances and guarantees made by the taxpayer in favour of another corporation in which one of its principal shareholders had a substantial indirect investment were made in order to help bail him out rather than with a profit-making intention. Resulting losses accordingly were non-deductible.

In finding that the taxpayer realized losses on income account on amounts advanced by him (and advanced on his fehalf by another of his companies) to a start-up car rental and service station company in Florida (W.J.V. Inc.), Jerome A.C.J. stated:

"it is irrelevant whether the money sent to W.J.V. Inc. was used to cover its operating costs or not. The money spent by him, and the amounts imputed to him, are losses suffered in the course of his adventure in the nature of trade. He was trying to create a company that he could sell and thus produce income, so his losses are deductible in computing his income tax."

The taxpayer, which acted as the North American agent for a Soviet shipping company in respect of the operation of the Soviet company's ships into and out of ports on the Pacific coast of Canada and the Northwestern United States, was unable to deduct advances which it made to support the operations of the taxpayer's U.S. subsidiary, which was the U.S. sub-agent, when political problems for the U.S. subsidiary arising out of the 1979 invasion of Afghanistan effectively destroyed the subsidiary's business. Strayer, J. found "that the advances were provided by the plaintiff with a long-term objective in mind, namely to preserve for the indefinite future its U.S. subsidiary as a viable contracting party through which its agency responsibilities in Far Eastern Shipping could be carried out in the United States".

The taxpayer for many years had engaged in numerous transactions in the stock market, and on March 1, 1981 he severed his employment in order to devote all his working hours to the stock market. He realized substantial losses, which were held to be on capital account, partly in light of the fact that for the 1982 taxation year, and all previous taxation years, he had initially reported the transactions as capital transactions.

The taxpayer, which was in the business of food preparation, advanced $200,000 in working capital to a company incorporated for the purpose of constructing a condominium in return for the agreement of that company and its other principal that the company would pay the taxpayer $250,000 upon the sale of the condominium units. The taxpayer's funds were characterized as contributed capital, and the total loss of its investment accordingly was found to be a business investment loss.

Advances of $101,000 made by a real-estate company to a subsidiary with a share capital of $100, for the purpose of enabling the subsidiary to construct and sell 100 condominium and townhouse units, constituted the subsidiary's only capital (with the exception of the nominal share capital). When the taxpayer's investment was later lost, it accordingly realized a capital loss.

The plaintiff established that it acquired shares of Bad Boy Limited with the intention of utilizing non-capital losses of Bad Boy, turning Bad Boy around into a profitable position within a period of two or three years, then liquidating its position at a profit. The shares accordingly were inventory and it was permitted to deduct losses arising from valuing the shares for their nil fair market value in accordance with s. 10(1).

As part of the refinancing of a company ("C1") that was in financial difficulty and to which the plaintiff had made substantial loans, the plaintiff paid $1.4 million for preferred shares of C1 whose par value was that amount but whose fair market value was at most $0.7 million. The plaintiff contended that the difference of $0.7 million should be treated as a business loss which arose by virtue of the plaintiff receiving the shares in lieu of payment to it of debts of a greater amount. It was held, however, that the purpose of the plaintiff in subscribing to the preference shares was to assist the continued operation of C1 by making available a substantial amount of equity capital, and any possible capital losses accordingly would have to be claimed at the time of disposition of the shares.

Two doctors, who had never carried on a business of providing security or lending money, made interest-free advances to a non-profit corporation which had been established to construct and operate an old-age home. They also became sureties for bank loans. Since their intention in becoming so obligated was to foster an increase in the number of potential patients for their practice and thereby create an enduring benefit, the ensuing losses were on capital account.

Since the bonuses paid by an incorporated securities dealer to its salesmen were proportional to the amount they had invested in the company, including advances made by them in order for it to maintain the level of working capital prescribed by The Toronto Stock Exchange, those advances were capital in nature. Losses sustained by a salesman when the company went into bankruptcy and was unable to repay his advances thus were non-deductible in computing his income from his stockbrokering business.

Losses sustained by the taxpayer radiologist from the purchase and sale of silver futures were fully deductible. "[B]earing in mind that silver brings no interest and no dividend, it becomes obvious that his governing motive was to speculate".

Losses that he sustained from the resale of convertible debentures that he had purchased on margin were also held to be fully deductible, in light of the steep risks involved and the fact that "the interest from the bonds would not cover the interest on the loans, not to mention the repayment of the borrowed capital. The doctor would not have borrowed so heavily and purchased on margin to assemble a safe long-term investment portfolio".

A Canadian company ("Paco") in the business of making and selling machinery used in the manufacture of concrete blocks helped found a small block-manufacturing company in France, loaned substantial amounts to the company to fund operating losses, and then realized a substantial loss on the sale of the company. Since the overriding intent of Paco at the time of making its investment was to establish a demonstrator factory in order to facilitate the sales of its machinery in Europe, and not to establish a manufacturing operation per se, the investment expenditures were deductible.

It was held that a securities sales representative who acquired shares in the holding company of a stock brokerage company, realized a capital loss when he sold the shares for one dollar. "It is true ... that such venture promised him more earnings and greater insight into the business but it made him also a shareholder in the company. While he did not realize any dividends on the stock he was entitled thereto if any were earned and declared."

The shareholders of a company ("Canadia") in a tourist attraction business made advances to it because they were confident that it would be successful in its own right, and not because they viewed their advances to Canadia as a part of the promotion and development of the land, in which they also had an interest, for resale at a profit. The advances accordingly were investments, and later losses realized on the sale of the indebtedness were non-deductible.

The taxpayer, who was a licensed investment dealer, made advances to her clients to cover their losses when the brokerage company for which she worked went into bankruptcy. The advances became deductible losses in the subsequent year (when they were established to be irrecoverable) given that her purpose was to maintain the clients as a source of revenue and continued referrals.

An affiliate of the taxpayer made loans to an arm's length individual and then, in response to changes in the Quebec taxing statutes assigned, the loans for their face value to the taxpayer, whose principal business was the making of investments and shares, bonds and real estate. The taxpayer's loss upon the bankruptcy of the debtor was non-deductible. "That amount does not, in my view, represent a cost of the respondent's business on current account. In effect, it represents a diminution in the value of property that had been transferred to the respondent as part of an exchange of assets with a related company, which exchange was effected with the sole objective of improving the tax position under provincial tax laws."

The taxpayer's business activities, after selling rental properties for $842,382 in cash, consisted of purchasing and selling gold futures, purchasing and selling stocks, purchasing swap and deposit receipts, and the making of four loans, including the loan in question, which had been made to a company owned by two minority shareholders of the taxpayer who also were sons of its controlling shareholder. The loan was held to have been made as an integral part of the taxpayer's business, and the taxpayer suffered its loss on income account.

It was found that the taxpayers in the course of their rental business made loans to their tenants in order to retain them as tenants. Substantial losses realized on loans made to one such tenant were deductible notwithstanding that the taxpayers at one point received approximately 1/3 of the shares of that tenant as a means of guaranteeing loans already made and to be made.

The taxpayer, whose business was the processing of tobacco, guaranteed a loan to a tobacco distributor ("Tabacs Quebec"), the proceeds of which Tabacs Quebec used to acquire shares of a tobacco manufacturer ("Tabacs Trans-Canada") which theretofore had been purchasing only about 20% of its tobacco needs from the taxpayer, but which agreed that thenceforth it would purchase exclusively from the taxpayer. Noel, J. held that since the purpose of the taxpayer in guaranteeing the loan was to ensure growth in its sales to Tabacs Trans-Canada, a loss which it suffered when it was required to make good on its guarantee was deductible.

When a corporation owned by the taxpayer was facing bankruptcy, the bank proposed to call its loans, but offered to extend additional credit to keep the corporation going provided that the taxpayer gave a personal guarantee secured by the deposit of securities with the bank. The loss sustained by the taxpayer when he was required to honour his guarantee a year later was a capital loss. Although he was entitled to receive guarantee fees from his corporation, it was found that he gave the guarantee in order to protect and preserve a source of income, rather than to earn the guarantee fees.

The taxpayer incorporated an American subsidiary to carry on its business in the U.S. and advanced the necessary funds for the subsidiary to carry on its business. The subsequent loss which the taxpayer sustained on these advances was a capital loss. Unlike the Berman case, where the taxpayer made voluntary payments to strangers for the purpose of protecting its business goodwill, here the payments were loans to a separate corporation.

The taxpayer, who was a lawyer, organized and, with some friends, funded a U.S. corporation for the purpose of developing and promoting a series of prototypes of a car. A loss which the taxpayer's sustained when this venture failed and advances which he had made to the corporation (after the other shareholders has refused to put in any other money) became unrecoverable was found to be fully deductible by him given that the venture itself clearly was a speculative adventure and any gain which would have been realized by him from disposing of his investment in the corporation would have been taxable on income account. Pigeon J. stated (p. 5281):

"Fairness to the taxpayers requires us to be very careful to avoid allowing profits to be taxed as income but losses treated as on account of capital and therefore not deductible from income when the situation is essentially the same."

One of the activities of the taxpayer, whose main business was that of a dock and wharfage company, was to finance the purchase of shares in its U.S. parent by employees (primarily employees of affiliates) by acquiring such shares for cash and selling the shares to the employee for the same price, payable over 15 years with a below-market rate of interest and secured by a pledge of the shares.

The taxpayer was unsuccessful in its submission that this represented a financing business. A loss realized by the taxpayer when it sold its portfolio of employee receivables to a bank in connection with "cleaning up" its balance sheet for a public offering was a capital loss.

The taxpayer and his associate each received 1/4 of the shares of a petroleum company together with the royalty interest in consideration for guaranteeing 1/2 of the indebtedness of the company to a bank of $125,000. The taxpayer was called on his guarantee in 1957, deducted a loss of $62,500 for that taxation year, and after proving as a creditor in the company's bankruptcy received dividends in 1959 and 1961 for $6,109 and $3,200. Judson J. characterized the guarantee as a deferred loan to the company, part of which was recovered in bankruptcy, with the result that the taxpayer's loss was a non-deductible capital loss.

Amounts advanced by the taxpayer (which was a shoe manufacturer and retailer) to a supplier of leather that was in financial difficulty were not deductible when the supplier ceased operations and the amounts had to be written off.