http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/72961/index.do 
SRI Homes Inc. v. The Queen (June 5, 2014 – 2014 TCC 180 ) was a case involving a determination of whether losses incurred by the corporate taxpayer were non-capital losses and accordingly deductible (as claimed by the taxpayer) or capital losses (as claimed by the Minister) and accordingly non-deductible:
[1] In the years in question, the Appellant was in the business of manufacturing and selling manufactured homes. In April 2001, in anticipation of the sale of the Appellant’s shares to a third party named R&M Frontier Holdings Corporation (“R&M”), the Appellant disposed of a number of its assets to a related company. Two of those assets were shareholder loans in subsidiary companies. The Appellant claimed non-capital losses relating to the disposition of those shareholder loans in its taxation year ending April 30, 2001. The Appellant carried those losses back to its taxation year ending December 31, 2000. The Minister of National Revenue ultimately reassessed to deny the losses and the carrybacks. The Appellant applied for a loss determination. The Minister determined the Appellant’s non-capital losses from its taxation year ending April 30, 2001 to be an amount that did not include the losses that the Appellant claimed arose from the disposition of the shareholder loans. The Appellant has appealed both the reassessment and the loss determination.
The loans in question arose out of the appellant’s business of selling manufactured homes:
[7] In 2001, the Appellant was a wholly-owned subsidiary of NorTerra Inc. (“NorTerra”). NorTerra was a holding company for a number of different investments. The Appellant’s core business was building manufactured homes. The Appellant had 3 plants employing 400 to 500 employees. With a few exceptions that are not relevant for the purposes of the Appeal, the Appellant sold its homes exclusively to dealers who, in turn, sold them to consumers. The Appellant had approximately $60M in revenue from manufactured home sales in 2001. The Appellant also operated 5 manufactured home dealerships in various locations in British Columbia and Alberta and was involved in a number of manufactured home parks either as an owner or a part owner (the “Park Business”). Most of the manufactured home parks that made up the Park Business were owned directly by the Appellant but two of the parks were held through companies known as Valley Vista Seniors Park Inc. (“Valley”) and Lakeside Pines Development Inc. (“Lakeside”).
[8] The Appellant owned one-third of the shares of Valley. The company was formed in approximately 1992 by 3 shareholders: a landowner who wanted to develop its land; one of the Appellant’s dealers who wanted to sell manufactured homes; and the Appellant. Each party received one-third of the common shares of Valley for a total purchase price of $700 each. The shareholders agreed that the landowner would contribute the land, the dealer would provide financing and look after sales and the Appellant would provide both financing and overall management. The land was divided into 183 pads. The plan was to rent each of the pads to consumers and to require those consumers to purchase one of the Appellant’s manufactured homes from the dealer. The landowner contributed the land to Valley in exchange for preferred shares. The dealer made an initial shareholders loan of $100,000. The Appellant made an initial shareholders loan of $200,000.
[9] The Appellant owned 50% of the shares of Lakeside. Lakeside was formed in 1992 or 1993 by one of the Appellant’s dealers and the Appellant. Each party received half of the shares of Lakeside for a total purchase price of $1 each. Lakeside developed lots and sold them to people along with one of the Appellant’s manufactured homes. The dealer and the Appellant both made equal shareholder loans to Lakeside.
In 2001 the shareholder loans were sold to a related corporation at a loss:
[18] The $1,332,797 purchase price for the shareholder loans was $411,830 less than the book value of the loans: $71,078 less than the book value in the case of Lakeside and $340,751 less than the book value of the loan in the case of Valley. The $411,830 difference represents the total amount of losses in issue.
[Footnote omitted]
The court accepted that the appellant had established a loss of at least $411,830 on this disposition:
[30] In summary, while the evidence entered by the Appellant was by no means ideal, I find that the valuation that Mr. Holterhus prepared during the negotiations is sufficient evidence of value to demolish the assumption of fact made by the Minister. It is not necessary for me to conclude that Mr. Holterhus’ figures are the correct fair market values nor that the figures used by the Appellant are. I do not need to reach an exact determination of the fair market value of the loans. It is sufficient for me to find that the fair market value of the loans was no higher than the amounts claimed by the Appellant. Based on all of the evidence, I make that finding and therefore conclude that $411,830 in losses were incurred by the Appellant on the disposition of the shareholder loans.
The court rejected the taxpayer’s argument that the loans were advanced in the course of a money-lending business:
[36] The factors that make the Appellant’s financing business a money lending business are simply not present with the shareholder loans. There was no evidence that the Appellant took any security for the loans and the interest received on the loans did not appear to be an important factor for the Appellant. In fact, in the case of the loan to Valley, the agreement among the shareholders of Valley provided that interest on the shareholder loans and dividends on the preferred shares were to be paid at the discretion of Valley’s directors, that any payment of interest or dividends and that any repayment of loans or redemption of preferred shares was to occur pro-rata among the parties. A person in the money lending business would not put themselves in a position where their ability to receive interest or a repayment of capital was subject to the discretion of two other people.
The court concluded however that the loans were made as part of the appellant’s business of selling manufactured home and for the purpose of earning income in connection with that business:
[40] In the case at bar, substantially all of the Appellant’s revenue came from selling its manufactured homes. The Appellant was involved in the Park Business for the purpose of selling its homes, not for the purpose of owning and operating a manufactured home park or speculating on the sale of manufactured home lots. The Appellant only entered into deals in respect of parks where the consumers who would be leasing pads or buying lots in the parks were required to purchase one of the Appellant’s manufactured homes as part of their purchase or lease. If the Appellant’s interest had been in leasing or selling land it would not have cared whose manufactured homes were placed on the lots. The Appellant sold its homes to dealers who then sold them to the consumers who had leased a pad or purchased a lot. Thus, by becoming involved in the parks, the Appellant was able to ensure that its dealers had a market for its products and therefore that the Appellant would be able to sell more products to the dealers. In addition, by supporting dealers through these sales, the Appellant made it more likely that the dealers would be financially viable and thus that the dealers would continue to be available to make other sales of the Appellant’s manufactured homes to other consumers. The Appellant’s strategy was to sell its interest in a given park once the potential to place new homes in the park ended. It had no interest in earning long term rental income.
…
[44] Based on all of the foregoing, I find that the Appellant advanced the shareholder loans to Valley and Lakeside for the purpose of earning income from its manufactured home business and thus that the losses incurred on the ultimate disposition of those loans were non-capital losses.
The appeal was accordingly allowed “on the basis that the appellant had an additional $411,830 in non-capital losses in its taxation year ending April 30, 2001”.