Beginning in 2006, the two married taxpayers (Susan and Barry) used their retirement funds and borrowed money to make advances to two real estate developers (on a pooled basis along with other investors through an intermediary corporation referred to as “ACI”) at interest rates 10% to 19% higher than prevailing borrowing rates. Following the 2008 financial crisis, each of the advances was in default and an almost total loss was sustained.
In finding that the taxpayers were not entitled to s. 20(1)(p)(ii) deduction, Bocock J first found, after referring (at para 38) to “[t]he presence of recurring interest, specific balance due dates, mortgage security and the fulsome rights of enforcement,” that the advances qualified as loans or lending assets. However, in going on to find that they were not engaged in a money-lending business, he noted (at para 54):
a) The initial inconsistent approach and characterization of the advances by Susan as property investments earning income in the early and operative years of the business. …
c) The usual activities of a money lending business of this nature were not consistently present. There was no negotiation of financial terms with the borrowers, no revision of legal documentation reflecting the appellants’ direction and discernment and the lending opportunities were offered by a single third party and, at that, only on a take it or leave it basis; …
d) … ACI … acted as the primary party engaged in the relevant trade or undertaking and was not a mere agent or bare trustee facilitating the operation of Susan and Barry’s money lending business. …
e) Had the loans not ultimately defaulted, the Appellant was willing and did continue to advance funds solely for the purpose of earning interest, rather than turning the loans over for a profit in the nature of a business. …