October 07, 2011

Geoffrey D. F. Skerrett (Appellant) v. The Minister of National Revenue (Respondent)

91 DTC 1330
Tax Court of Canada
October 22, 1991

(Court File No. 90-3881(IT).)

Deductions — Taxpayer investing in a Unit of Participation comprising shares of Panamanian corporation and two Bahamian lots — Whether such investment an adventure in the nature of trade — Whether taxpayer entitled to deduct inventory write-down in respect thereof — Income Tax Act, S.C. 1970-71-72, c. 63, s. 10(1).

The taxpayer, a lawyer specializing in tax law, acquired a Unit of Participation consisting of shares of a Panamanian corporation and two lots of Bahamian real estate. Other Bahamian lots were owned by SANC Ltd. (whose shares were owned in part by the said Panamanian corporation) and these were to be sold to generate income for the ultimate benefit of the holders of the said Units of Participation. The lots did not sell as anticipated and, eventually, the decision was made to sell them en bloc in order to cut losses. In computing his income for his 1981 taxation year, the taxpayer deducted an inventory write-down to reflect the loss in value of his Unit of Participation. The Minister disallowed such deduction and the taxpayer appealed to the Tax Court of Canada.

Held: The taxpayer’s appeal was allowed. Although the method by which the scheme was organized had been driven by tax, corporate, financial and other considerations, in substance, it was a real estate play. Units of Participation had been acquired by the taxpayers and others to enable them to acquire an interest in the entire scheme, which involved the sale of their lots along with those of SANC Ltd. The venture, therefore, was a speculation, and no long term income therefrom was ever anticipated. Hence, the taxpayer’s participation therein constituted an adventure in the nature of trade which, under subsection 248(1) of the Act, was a business. His Unit of Participation was accordingly business inventory, and, applying the ratio in Cull v. The Queen (87 DTC 5322) (F.C.T.D.), he was correct in writing down its value when it had become worthless. He was therefore entitled to the deduction sought and the Minister was ordered to reassess accordingly.