Leonard v. The Queen (April 30, 2021 – 2021 TCC 33, Sommerfeldt J.).
Précis: Mr. Leonard claimed a non-capital loss in the amount of $1,472,006 in 2011 arising out of foreclosure proceedings in a complex land deal. CRA denied the loss. That also had the result of increasing the family income which reduced the Canada Child Tax Benefit which his wife had claimed. They both appealed to the Tax Court. The issue in the main appeal was whether the loss incurred by Mr. Leonard was on income or capital account. The Tax Court found that there was another issue to be determined, i.e., the quantum of the loss.
The Tax Court found that Mr. Leonard was engaged in an adventure in the nature of trade and that the loss was on income account. Nevertheless the Court concluded that Mr. Leonard’s loss claim was overstated and reduced his loss to $826,426. Thus both his appeal and that of his spouse were allowed.
Decision: The facts of the underlying foreclosure transaction are rather complex and the court concluded that Mr. Leonard had been engaged in an adventure in the nature of trade:
(7) Weighing of Factors
 Summarizing the above discussion, the following factors indicate that the Transaction was on income account:
(a) Mr. Leonard’s stated intention was to make a profit, by one of two alternatives, i.e., either:
(i) acquiring the Mortgage, the Note and the Debt and then, at the judicial sale, realizing an amount greater than his cost of the Mortgage, the Note and the Debt, or
(ii) after acquiring the Mortgage, the Note and the Debt, purchasing Lot B-2 at the judicial sale, and later selling it for a profit.
The surrounding circumstances (such as Mr. Leonard’s expectation that the judicial sale would close sooner than it did, his listing of Lot B-2 with a real estate agent shortly after the auction, and the facts described in paragraph 50 above) were consistent with his stated intention. In his mind, he had formulated a scheme for profit-making.
(b) The nature of the Mortgage, the Note and the Debt (i.e., distressed debt that was in default, with no expectation of interest being paid, and the Mortgage already in foreclosure) point to income account, rather than capital account.
(c) Mr. Leonard’s use of borrowed money to pay the entire price to purchase the Mortgage, the Note, the Debt and Lot B-3 is indicative of an adventure in the nature of trade.
 The factors suggesting that the Transaction may have been on capital account were:
(a) The dissimilarity between Mr. Leonard’s dredging business and the acquisition of the Mortgage, the Note and the Debt are not supportive of the Transaction being on income account.
(b) As Mr. Leonard did not expend any work or effort to put the Mortgage, the Note and the Debt or Lot B-2 into a more marketable condition (other than combining Lots B-2 and B-3), the factor described as “work expended” does not indicate that the Transaction was on income account.
 The following factors do not clearly point in either direction:
(a) With respect to the length of ownership, the fact that Mr. Leonard presumably still holds the Deficiency Judgment and still owns Lot B-2 (which is now combined with Lot B-3) suggests that the Transaction was on capital account.  However, shortly after the auction, Mr. Leonard took steps to sell Lot B-2, which suggests that the Transaction was on income account. Therefore, this is a neutral factor.
(b) As the Mortgage was discharged and cancelled by operation of law, as part of the foreclosure and judicial sale proceedings, and as Mr. Leonard continues to hold the Deficiency Judgment and Lot B-2, the factor described as “circumstances responsible for disposition” is not applicable.
 The factors described in paragraph 74 above outweigh the factors described in paragraph 75 above. The factors described in paragraph 76 above do not affect the analysis.
 Based on my understanding of the evidence, although Mr. Leonard seemed to have misunderstood some of the technicalities of the foreclosure process, he nevertheless had a scheme for profit-making, which is the first requirement for an adventure in the nature of trade. In addition, after weighing the above factors, I have come to the conclusion that Mr. Leonard’s acquisition of the Mortgage, the Note and the Debt and his subsequent efforts to realize a profit were part of an adventure in the nature of trade (on income account), and not an investment (on capital account). However, it remains to be determined whether Mr. Leonard incurred the Loss, and, if so, in what amount.
The Court concluded however that Mr. Leonard’s loss was less than he had claimed and recalculated the loss to be $826,426:
 Although there was no expert valuation evidence presented at the hearing, given the circumstances described in the factual evidence that was provided, particularly the financial distress in which Mr. Anderson found himself in 2009, the Bank’s inability to collect the Debt, necessitating the commencement of foreclosure proceedings in respect of the Mortgage, the recognition that the continuation of the foreclosure proceedings was the only viable method for the Bank initially (or Mr. Leonard subsequently) to recover anything in respect of the Note or the Debt, and the understanding that, apart from Lot B-2, which was subject to the Mortgage, no other assets of Mr. Anderson were available to satisfy the Note or the Debt, it is reasonable to allocate almost all of the consideration (i.e., $1,300,000) received by the Bank to the Mortgage, with only a nominal portion of that consideration being allocated to the Note and the Debt. In numerical terms, it is reasonable to allocate 99.9% of the consideration to the Mortgage, and 0.1% of the consideration to the Note and the Debt. Therefore, I am of the view that $1,298,700, (i.e., 99.9% of $1,300,000) should be allocated to the Mortgage, and $1,300 (i.e., 0.1% of $1,300,000) should be allocated to the Note and the Debt.
 It is also my view that, to achieve symmetry, the same proportion (i.e., 99.9%) that was used to allocate the purchase consideration to the Mortgage should also be used to allocate a portion of the proceeds of the judicial sale to the Mortgage. As the net proceeds of the judicial sale were $472,746.74 (i.e., the judicial sale price of $500,000 less expenses of $27,253.26), the amount of Mr. Leonard’s proceeds of disposition in respect of the Mortgage was $472,273.99 (i.e., 99.9% of $472,746.74), which I have rounded to $472,274.
 Using the formula set out by Justice Major in Friesen, as shown in paragraph 82 above, Mr. Leonard’s loss in respect of the disposition of the Mortgage is calculated as follows:
Income = Profit = Sale Price − Purchase Cost
Income = $472,274 − $1,298,700
Income = −$826,426
Accordingly, I am of the view that the amount of the Loss sustained by Mr. Leonard on the disposition of the Mortgage in 2011 was $826,426.
Thus both Mr. Leonard’s appeal and that of his spouse were allowed. Justice Sommerfeldt ordered one set of costs and invited the parties to make submissions on the amount of costs to be awarded.