Lending money was not a business; losses on loans were not deductible
In the recent Kallis case, the taxpayer was a businessman who founded and ran a pipeline business. After the business became financially successful, he decided to use some of the surplus funds to make loans to various third parties.
Unfortunately, two of the borrowers became bankrupt and could not repay their loans. As a result, the taxpayer incurred losses on those loans. He argued that his lending activities constituted a business such that the losses were fully deductible against other sources of income. The CRA disagreed, and held that his losses were capital, and therefore only one-half deductible (and usable only against capital gains). The taxpayer appealed to the Tax Court of Canada.
The taxpayer did not keep detailed books or records of the loans and did not actively solicit potential borrowers. He stated that he tried to stay “under the radar” because he was not trying to compete with banks.
Unfortunately for Mr. Kallis, the lack of proactive business activity was his undoing at the Tax Court. The Court found that he was not in the business of lending, so his losses were capital losses. The Court noted that the taxpayer’s success as a self-made businessman was admirable, and that his losses on the loans were very unfortunate. However, the Court held that it “cannot find that he was in the business of lending money during the years under appeal because the positive [indications] of a business were either absent or minimally present”.
