T-4756-80
T-4758-80
T-4759-80
The Queen (Plaintiff)
v.
Dr. Eugene Lalande and Dr. Hubert Watelle
(Defendants)
Trial Division, Decary J.—Montreal, April 26 and
27; Ottawa, June 30, 1983.
Income tax — Income calculation — Deductions — Income
tax appeals allowed in part — Population in defendants' area
of practice declining due to exodus of young people —
Defendants incurring legal expenses in unsuccessfully chal
lenging decision to build school elsewhere — Defendants
losing money as advances or security to non-profit corporation
for construction of home for aged — Home would allow
defendants to keep and expand practices — Defendant also
owning pharmacy — Legal costs deductible under s. 18(1)(a)
Income Tax Act as expense for purpose of gaining or produc
ing income from business because incurred to increase medical
and pharmaceutical business — Advances or security not
deductible because capital in nature pursuant to s. 18(1)(b) —
No business of lending money nor adventure in nature of trade
— Prospective benefits from larger practices or operation of
home itself — Advances and security deductible under excep
tion in s. 40(2)(g)(ii) since debts incurred for purpose of
gaining or producing income from business or property —
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 3, 18(1)(a),(b), 38,
39, 40(2)(g)(ii), 50.
The defendants practised medicine in Ville-Marie, the gener
al population of which was aging due partially to an exodus of
young people. As the owner of a pharmacy and rental proper
ties, it was in Dr. Lalande's personal interest for the population
to increase. Dr. Lalande incurred legal expenses to unsuccess
fully challenge a School Board decision to build a comprehen
sive school in another community instead of in Ville-Marie.
Both defendants lost in excess of $63,000 in the form of
advances or security to a non-profit corporation for the con
struction of a home for the elderly. Such a home would have
enabled the defendants to keep their practices and to expand
them since aged persons would be encouraged to move to the
area and the defendants would have a regular source of income
from residents in the home. The defendants did not intend to
finance construction of the home themselves, but stood security
and invested their own money in order to avoid the demise of
the project. The corporation was obliged to repay the defend
ants, but did not do so. The defendants never carried on the
business of providing security or lending money. The first
question is whether the legal costs incurred were deductible
under paragraph 18(1)(a) of the Income Tax Act as an expense
"for the purpose" of gaining or producing income "from the
business". Secondly, were the security and advances payments
of a capital nature within the meaning of paragraph 18(1)(b),
and if so, were the losses incurred deductible capital losses
within the meaning of sections 3, 38, 39, 40(2)(g)(ii) and 50 of
the Income Tax Act?
Held, the appeals are allowed in part. The legal costs were
incurred in order to increase the medical and pharmaceutical
business and, notwithstanding that this aim was not achieved,
were deductible under paragraph 18(1)(a) of the Act. The
Royal Trust Company v. Minister of National Revenue
(1957), 57 DTC 1055 (Ex. Ct.) was applied. The advances or
security were capital in nature, within the meaning of para
graph 18(1)(b), and cannot be deducted in computing the
defendants' income. Losses on debts resulting from loans or
security may be subject to deduction when the taxpayer is in
the business of lending money or providing security or when
there is an adventure in the nature of trade. Neither of the
defendants were in the business of providing security or lending
money. Nor was there an adventure in the nature of trade.
There was no suggestion of immediate resale of the home for
short-term profit. The benefit which the defendants hoped to
obtain would derive from a larger practice or from operation of
the home itself. When the two doctors undertook the project, it
was to "preserve their practice and expand it". The intention
was to take steps to ensure that elderly persons would locate in
Ville-Marie rather than leaving the county; to reduce the
number of house calls; and finally, to create a lasting source of
income. The defendants financed the corporation to prevent its
failure. The issue of whether the losses were deductible capital
losses depends upon whether the debts were acquired "for the
purpose of gaining or producing income from a business or
property" and so within the exception in subparagraph
40(2)(g)(ii) of the Act. Since the aim was to increase a
professional practice and so increase income, the advances and
security are subject to the deduction in subparagraph
40(2)(g)(ii).
CASES JUDICIALLY CONSIDERED
APPLIED:
The Royal Trust Company v. Minister of National
Revenue (1957), 57 DTC 1055 (Ex. Ct.): The Queen v.
H. Griffiths Company Limited, [1977] 1 F.C. 476; 76
DTC 6261 (T.D.).
DISTINGUISHED:
Minister of National Revenue v. Freud, [1969] S.C.R.
75; 68 DTC 5279; Minister of National Revenue v. Steer,
[1967] S.C.R. 34; 66 DTC 5481, reversing [1965]
Ex. C.R. 458; 65 DTC 5115; McLaws v. The Minister of
National Revenue, [1974] S.C.R. 887; 72 DTC 6149,
affirming (1970), 70 DTC 6289 (Ex. Ct.).
CONSIDERED:
Minister of National Revenue v. Algoma Central Rail
way, [1968] S.C.R. 447; 68 DTC 5096, affirming [1967]
2 Ex.C.R. 88; 67 DTC 5091; Stewart & Morrison Lim
ited v. Minister of National Revenue, [1974] S.C.R. 477;
72 DTC 6049, affirming (1970), 70 DTC 6295 (Ex. Ct.).
REFERRED TO:
Chaffey v. The Minister of National Revenue (1978), 78
DTC 6176 (F.C.A.), affirming (1974), 74 DTC 6478
(F.C.T.D.); British Columbia Electric Railway Company
Limited v. Minister of National Revenue (1958), 58
DTC 1022 (S.C.C.); Becker v. The Queen, [1983] 1 F.C.
459; 83 DTC 5032 (C.A.); Paco Corporation v. Her
Majesty The Queen (1980), 80 DTC 6215 (F.C.T.D.);
Her Majesty The Queen v. Malone (1982), 82 DTC 6130
(F.C.T.D.).
COUNSEL:
Guy Laperrière for plaintiff.
Mario Ménard and John Bulger for defend
ants.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Verchère, Noël & Eddy, Montreal, for
defendants.
The following is the English version of the
reasons for judgment rendered by
DECARY J.: The issue before the Court is
whether the expenses incurred by Drs. Lalande
and Watelle, and described in the partial agree
ment on the facts, are in the nature of income, that
is, incurred for the purpose of earning income from
property or a business, or are capital in nature.
The three appeals were heard on common
evidence.
The evidence showed that in the early seventies
the town of Ville-Marie had a population of about
2,000 persons. At that time it was the centre of
Temiscaming. The young people tended to migrate
to Abitibi or Ontario, and this was attributed to
the lack of services and better schools. The older
people tended to remain in the Temiscaming
region.
At that time, Drs. Lalande and Watelle of Ville-
Marie were the two leading doctors practising in
the Temiscaming region. Their colleagues had
smaller practices.
Dr. Lalande also operated the only pharmacy in
Ville-Marie. This pharmacy sold not only medi
cines but all types of products as well, and was
described as a [TRANSLATION] "mini-general
store". Dr. Lalande owned certain vacant lots in
the Ville-Marie region as well, that were suitable
for development, and some apartment buildings.
He was concerned that his practice would decrease
because young people were leaving and the popula
tion of the region was growing older. It was clearly
in his personal interest for the population to
increase, and thus increase the number of his
patients and the return from his pharmacy and the
rental of his buildings.
The first project, which would have helped Drs.
Lalande and Watelle increase the number of their
patients and the income from the pharmacy, was
to be the creation of a comprehensive school in
Ville-Marie. It was in fact decided to go ahead
with building this comprehensive school in Ville-
Marie, but sometime later the site was changed to
Lorrainville, some five or six miles from Ville-
Marie. Dr. Lalande elected to challenge the deci
sion to build the comprehensive school in Lorrain -
ville and incurred legal costs of $10,783.80 in
doing so.
There was also a second project in which Dr.
Lalande was actively involved, that of the Manoir
Ville-Marie. As the population of Temiscaming
consisted of people with strong ties to their part of
the country, and at the time there was no home
providing care for older persons in that part of
Quebec, it was proposed to build a home for the
elderly. A non-profit corporation was created for
this purpose.
Just over 200 persons were interested in residing
permanently in such a home, and some 150 other
persons also eventually indicated their interest.
Unfortunately, because of misunderstandings be
tween the federal and provincial governments, the
project was stillborn.
As can be seen from the partial agreement on
the facts, Dr. Lalande in 1974 and 1975 lost the
sum of $63,604.85 and Dr. Watelle lost
$63,036.68 in the form of advances or security.
The agreement on the facts reads as follows:
[TRANSLATION] Subject to their other rights, the parties
through their undersigned counsel agree on the following facts
for the purpose of this action/appeal only.
1. On August 29, 1966 the Cuivre Regional School Board
adopted a resolution to build a comprehensive school in the
municipality of Ville-Marie.
2. On March 25, 1968 the Cuivre Regional School Board
rescinded its resolution of August 29, 1966 and, in a second
resolution, decided to build the comprehensive school in ques
tion in the municipality of Lorrainville.
3. As a consequence of these events, Dr. Lalande unsuccessfully
brought an action against the Cuivre Regional School Board:
the conclusions of the said action were to set aside the decision
of March 25, 1968 and to obtain an order that the comprehen
sive school be built in Ville-Marie as stipulated in the initial
resolution of August 29, 1966.
4. The comprehensive school that was to have been built in
Ville-Marie would have accommodated 1,500 students. The
population of Ville-Marie was about 2,000 persons in 1969.
5. In a survey done in 1969, 208 residents of the Temiscaming
region indicated their interest in residing in a home for the
elderly, if one were built in Ville-Marie. The same survey
showed that between 150 and 200 of the residents of Ternis-
caming had indicated some interest in such a project, adding
that they would wait until construction was complete before
definitely deciding what to do. This survey was done by local
social welfare personnel, at the request of Mrs. Yvette
Lanouette, an employee of the Department of Social Affairs.
6. The deductions at issue here are as follows:
1. Dr. Lalande
(i) 1973
Legal costs
(a) Martineau Walker $ 8,000.00
(b) Claude Larouche $ 2,018.80
765.00
$10,783.80
These legal costs, amounting to $10,783.80 were incurred by
Dr. Lalande in connection with the action mentioned in para
graph 3.
(ii) 1974
Payments made under surety contracts $24,561.00
Advances not repaid by the corporation $11,517.63
$36,078.63
(iii) 1975
Payments made under surety contracts $21,538.26
Advances not repaid by the corporation $ 6,057.96
$27,596.22
2. Dr. Watelle
(i) 1974
Payments made under surety contracts $26,000.00
Advances not repaid by the corporation $ 5,768.12
$31,768.12
(ii) 1975
Payments made under surety contracts $25,394.50
Advances not repaid by the corporation $ 5,874.07
$31,268.57
7. Drs. Lalande and Watelle in fact paid the amounts men
tioned in paragraph 6 above.
8. This agreement shall apply also to cases T-4758-80 and
T-4759-80.
Dr. Lalande testified that a home would have
enabled defendants to [TRANSLATION] "keep their
practice and expand it", and this largely explained
their interest in the project. With its sixty-five
beds and its scope for expansion by the addition of
other modules, Manoir Ville-Marie would encour
age elderly persons to come and live in Ville-
Marie. The home would make it unnecessary for
the two doctors to make many visits to elderly
persons in the locality. The presence of elderly
persons in the home would be a regular source of
income for the two doctors.
The setbacks encountered with the home for the
elderly were summarized as follows: shortly after
the incorporation, the directors of the corporation
approached various levels of government for finan
cial assistance. Despite certain initial promises of
financing, the Department of Social Affairs soon
withdrew from the project. However, the corpora
tion succeeded in obtaining a grant from the feder
al Department of Manpower and Immigration
under the Local Initiatives Program. As the pur
pose of this program was to create jobs during the
winter season, it was agreed that in principle the
construction work would terminate in the spring
and the grant would only be used to pay work-
men's wages. As a condition of its grant, the
Department of Manpower and Immigration fur
ther required that full security be given for the
cost of materials needed for the project. The cor
poration and the Department expected to be able
to obtain a firm commitment from the Quebec
Housing Corporation in this regard. The corpora
tion accordingly proceeded with construction of
the nursing home in the winter of 1972, but as a
result of various events the Quebec Housing Cor
poration delayed giving the expected guarantees.
This delay led the corporation to request and
obtain from the Department of Manpower and
Immigration an extension of the time applicable to
its grant. Meanwhile, the corporation was having
to pay current expenses, the result among other
things of contracts for the installation of electrical
equipment and the purchase of lumber.
Drs. Lalande and Watelle stood surety for the
loans made to the corporation by the Canadian
National Bank and the Caisse Populaire of Ville-
Marie, and also made direct advances of money to
the corporation. It should be noted that when they
undertook the project, the two doctors never
intended to finance construction of the Manoir
themselves. The urgent need for funds by the
corporation, however, led them to stand surety and
to invest their own money: they did this in order to
avoid the collapse of the entire project and the loss
of grants already obtained. Finally, contrary to
expectations, the Quebec Housing Corporation
and the Central Mortgage and Housing Corpora
tion refused to make the guarantees promised. On
April 19, 1974 the corporation assigned all its
rights in the building in question to the trustee
Paul Perras of Montreal. The corporation was not
able to repay to Drs. Lalande and Watelle the
advances made by them. In addition, Drs. Lalande
and Watelle were obliged to pay the debts for
which they had stood surety with the Canadian
National Bank and the Caisse Populaire of Ville-
Marie. The amounts in question are listed in para
graph 6 of the agreement on the facts. Finally, it
appeared that even though it did not do so, the
corporation had a duty to repay the two doctors
the amounts spent by them.
It may be noted that no interest or costs were
attached to the security or the money advanced,
and Drs. Lalande and Watelle have never carried
on a business of providing security or lending
money.
As regards the legal costs for Dr. Lalande in
taxation year 1973, as Thorson P. of the Excheq-
uer Court said in The Royal Trust Company v.
Minister of National Revenue,' referring to para
graph 12(1)(a) of the old Income Tax Act: 2
The essential limitation in the exception expressed in section
12(1)(a) is that the outlay or expense should have been made
by the taxpayer "for the purpose" of gaining or producing
income "from the business". It is the purpose of the outlay or
expense that is emphasized but the purpose must be that of
gaining or producing income "from the business" in which the
taxpayer is engaged. If these conditions are met the fact that
there may be no resulting income does not prevent the deducti-
bility of the amount of the outlay or expense.
Paragraph 12(1)(a) of the old Act is identical,
of course, with paragraph 18(1)(a) of the Income
Tax Act, S.C. 1970-71-72, c. 63.
In my view, the legal costs were incurred in
order to increase the medical and pharmaceutical
business, and though this aim was not achieved,
they are nonetheless deductible under the provi
sions of paragraph 18(1)(a) of the Act, because of
Royal Trust (supra), inter alia.
The question with regard to the taxation years
1974 and 1975 of Drs. Lalande and Watelle is
whether the security and advances constitute pay
ments of a capital nature within the meaning of
paragraph 18(1)(b) of the Income Tax Act. If
these were payments of a capital nature, then it
must be established whether the losses incurred by
defendants are deductible capital losses within the
meaning of sections 3, 38, 39, 40(2)(g)(ii) and 50
of the Income Tax Act.
Regarding paragraph 18(1)(b), defendants
referred to Minister of National Revenue v.
Algoma Central Railway,' a railway company
serving a sparsely populated area which, with a
view to increasing its turnover, had geological
research done in the area served by it. The aim
was to identify mineral deposits and make these
known to investors so as to attract them to the
1 The Royal Trust Company v. Minister of National Reve
nue (1957), 57 DTC 1055 [Ex. Ct.], at p. 1062. See also
British Columbia Electric Railway Company Limited v. Min
ister of National Revenue (1958), 58 DTC 1022 [S.C.C.], at p.
1027, in fine, per Abbott J.
2 Income Tax Act, R.S.C. 1952, c. 148.
3 Minister of National Revenue v. Algoma Central Railway,
[[1968] S.C.R. 447]; 68 DTC 5096, affirming [[1967] 2
Ex. C.R. 88]; 67 DTC 5091.
region, and thus increase railway traffic. The Ex
chequer Court and the Supreme Court held that
these expenses were not of a capital nature. Rely
ing on this decision, inter alia, defendants invited
the Court to conclude that the payments at issue
also are not expenses of a capital nature.
Plaintiff distinguished Algoma Central Railway
from the case at bar. The Algoma Central Rail
way Company was not trying to deduct a debt
resulting from a loan or security, but to deduct the
payments made to the private firm which had
carried out the aforementioned geological
research. Plaintiff considered that this distinction
was significant.
In Stewart & Morrison Limited v. Minister of
National Revenue 4 Judson J., per curiam, relied
on this finding in deciding that the deductions at
issue were prohibited by paragraph 12(1)(b) of the
old Act. That case concerned a Canadian com
pany, Stewart & Morrison Limited, which had
decided to enter the U.S. market. Rather than
opening a branch, the Canadian company decided
to incorporate a U.S. subsidiary, to which it loaned
money. It was never repaid this money, and
claimed to deduct it. As Judson J. wrote: 5
The deduction of these losses has been rightly found to be
prohibited by s. 12(1)(b) of the Income Tax Act.
We are not concerned in this appeal with what the result
would have been if the appellant taxpayer had chosen to open
its own branch office in New York. For reasons of its own, it
did not choose to operate in this way. It financed a subsidiary
and lost its money.
The case of L. Berman & Co. Ltd. v. M.N.R. ([1961] C.T.C.
237), relied upon by the appellant in this case, is, in my
opinion, not in point. In the Berman case the taxpayer made
voluntary payments to strangers, i.e., the suppliers of its sub
sidiary, for the purpose of protecting its own goodwill from
harm because the subsidiary had defaulted on its obligations.
The basis of the decision in the Exchequer Court was this:
4 Stewart & Morrison Limited v. Minister of National Reve
nue, [[1974] S.C.R. 477]; 72 DTC 6049, affirming (1970), 70
DTC 6295 (Ex. Ct.).
5 Ibid., [p. 479 of S.C.R.] p. 6051.
It paid the amounts because it had been doing business with the
suppliers and was going to continue to do business with them.
The payments were made by it for its own purposes and their
amounts never became debts of United to the appellant
(Berman). [Emphasis added.]
Defendants established a non-profit corporation,
that is, a separate legal entity, for which they
stood surety and to which they advanced sums of
money. As in Stewart & Morrison Limited
[supra], the money in question was lost despite the
corporation's obligation to repay it.
Losses on debts resulting from loans or security
may be subject to deduction when it can be con
cluded from the facts of the case that there was a
business of lending money or providing security, 6
or when there was an adventure in the nature of
trade.' However, as Pigeon J. noted in Freud [at
page 82, Supreme Court Reports], cited above:
It is, of course, obvious that a loan made by a person who is not
in the business of lending money is ordinarily to be considered
as an investment. It is only under quite exceptional or unusual
circumstances that such an operation should be considered as a
speculation.
Freud concerned a lawyer who had made
advances of money to a company in which he was
a shareholder and a director. The purpose of the
company was to develop a prototype sports car and
resell it at a short-term profit. There was never
any question that the company would, in the long
term, become a sports car manufacturer. As
Pigeon J. noted: 8
... the circumstances of the present case are quite unusual and
exceptional. It is an undeniable fact that, at the outset, the
operation embarked upon was an adventure in the nature of
trade. It is equally clear that the character of the venture itself
remained the same until it ended up in a total loss ....
In the case at bar, neither of the defendants
operated a business providing security or lending
money. Additionally, there was no suggestion that
the corporation would resell the Manoir in the
short term, for the purpose of making an immedi-
6 See the judgments cited in Minister of National Revenue v.
Freud, [[1969] S.C.R. 75]; 68 DTC 5279 at p. 5282.
' See: Freud, cited above Becker v. The Queen, [[1983] 1
F.C. 459]; 83 DTC 5032 (C.A.), and Paco Corporation v. Her
Majesty The Queen (1980), 80 DTC 6215 (F.C.T.D.).
8 Freud, supra [p. 82, S.C.R.] at p. 5282.
ate profit. The benefit which defendants believed
they would obtain from the project they undertook
consisted rather in the income they would derive
from a larger practice or from operation of the
Manoir itself. The corporation began suffering
liquidity problems, and defendants took steps to
provide financing; working capital was needed to
avoid losing the grants and causing the project to
fail.
The facts of the case at bar are similar to those
in Steer 9 and McLaws. 10 In each of those cases a
lawyer had stood surety for a private company in
which he was a shareholder. They believed that the
activities of the companies would yield them a
long-term income. Both companies were going
concerns. In McLaws, the security was subscribed
when the company was being threatened with
bankruptcy. Both lawyers had to honour their
signatures and were never repaid. It was held in
both cases that the payments in question were of a
capital nature. "
It is true that plaintiffs Steer and McLaws
expected to obtain long-term income from the
companies in the form of salaries, bonuses or
royalties, while in the case at bar this long-term
income would have come exclusively from defend
ants practising their profession. This distinction
seems to be conclusive. On either assumption, the
payments at issue were made as loans or security;
and while in Steer and McLaws the purpose was to
preserve a source of income in the form of the
companies receiving the security, it may properly
be said here that the payments at issue were made
... with "a view of bringing into existence an advantage for the
enduring benefit" [of a trade].... 12
9 Minister of National Revenue v. Steer, [[1967] S.C.R. 34];
66 DTC 5481, reversing [[1965] Ex.C.R. 458]; 65 DTC 5115.
1° McLaws v. The Minister of National Revenue, [[1974]
S.C.R. 887]; 72 DTC 6149 affirming (1970), 70 DTC 6289
(Ex. Ct.).
"See also, to the same effect, Chaffey v. The Minister of
National Revenue (1978), 78 DTC 6176 (F.C.A.), affirming
(1974), 74 DTC 6478 (F.C.T.D.).
12 See The Queen v. H. Griffiths Company Limited, [[1977]
1 F.C. 476, at p. 483]; 76 DTC 6261 (T.D.), at p. 6264, and the
authorities cited there.
When the two doctors undertook the project, it
was to [TRANSLATION] "preserve their practice
and expand it": the intention was to take steps to
ensure that elderly persons would locate in Ville-
Marie rather than leaving the county; to reduce
the number of house calls; and finally, to create a
lasting source of income. When the two doctors
financed the corporation, they did so for the very
purpose of preventing its failure. To use the words
of Dubé J. in The Queen v. H. Griffiths Company
Limited: 13
As it turned out, the advantage did not in fact endure, but it is
quite clear that [it] ... was not meant to be a mere passing
fancy.
In my view the payments at issue are capital in
nature, within the meaning of paragraph 18(1)(b),
and they cannot be deducted in computing the
income of defendants' businesses for 1974 and
1975. It must then be determined whether the
losses incurred by defendants are deductible capi
tal losses within the meaning of sections 3, 38, 39,
40(2)(g)(ii) and 50 of the Income Tax Act. Sub-
paragraph 40(2)(g)(ii) reads as follows:
40....
(2) Notwithstanding subsection (1),
(g) a taxpayer's loss, if any, from the disposition of a
property, to the extent that it is
(ii) a loss from the disposition of a debt or other right to
receive an amount, unless the debt or right, as the case
may be, was acquired by the taxpayer for the purpose of
gaining or producing income from a business or property
(other than exempt income) or as consideration for the
disposition of capital property to a person with whom the
taxpayer was dealing at arm's length ...
is nil.
The question is whether the debts at issue were
in fact acquired "... for the purpose of gaining or
producing income from a business or property ..."
This is essentially a question of weighing the facts
of the case. The fact that there was no interest or
costs attached to the debts in question is not
13 Ibid., [p. 483, F.C.] p. 6264. See also Her Majesty The
Queen v. Malone (1982), 82 DTC 6130 (F.C.T.D.).
relevant in deciding whether they were acquired
for the purpose of gaining or producing income.
In my view, the aim was to increase a profes
sional practice and so increase income. The
advances and security are subject to the deduction
provided in subparagraph 40(2)(g)(ii) of the Act.
By an order made on February 10, 1983, my
brother Dubé J. directed that cases T-4758-80,
T-4759-80 and T-4756-80 be heard together on
evidence common to the three cases.
The appeals having Nos. T-4758-80 and
T-4759-80 are allowed in part and the assessments
referred back to the Minister for re-examination
and reassessment; the appeal having No. T-4756-
80 is dismissed and the assessment is set aside;
plaintiff shall pay seventy-five per cent (75%) of
the costs to defendants, as if it were a single
action, since the three appeals were joined.
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.