Quigley v. The Queen, 96 DTC 1057, [1996] 1 CTC 2378 (TCC)

Bowman J.T.C.C.:-These appeals are from reassessments for the appellant’s 1988 and 1989 taxation years. The point is a narrow one having to do with the interaction of subsection 15(2), section 80.4 and paragraph 20(l)(j) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the “Act”). Essentially the question is this: “Do the words ‘was included’ in paragraph 80.4(3)(b) extend to amounts that ought to have been included under subsection 15(2) but were not?”

The matter proceeded on an agreed statement of facts. I shall not reproduce it in its entirety. The following summary is sufficient to put the issue in perspective.

The appellant was at all times relevant to the appeal a shareholder and employee of Cinematics Canada Corporation. There appears during the entire period from 1986 to 1990 to have been a loan account balance between the appellant and the company. In the earlier years the appellant advanced money to the company and later the company loaned money to him by way of advance or in respect of a housing loan. [1]

During these years, including 1987, further advances were made and repayments were made. [2] The repayments resulted from the appellant’s charging the company rent for a building that he owned and from a crediting of dividends that were declared against the indebtedness. Attached as schedule A is a copy of Exhibit A-4 which sets out a summary of loans and repayments. The only inaccuracy is that the column “Amounts Included in Income under Subsection 15(2)” should read “Amounts that the appellant contends should have been included in income under subsection 15(2)”.

On December 31, 1987 the appellant owed $187,632.37 to the company. This resulted from advances of $186,649.07, to which was added $6,187.18, the balance outstanding on December 31, 1986, less $5,203.88, the amount of the repayment prior to April 30, 1987. This calculation does not appear to take into account the $8,000 credited between May 1, 1987 and December 31, 1987.

The amount of $187,632.37 was, according to the appellant, not repaid to the company within one year after the end of the taxation year of the company in which the loan or indebtedness was made or incurred.

The appellant contends that this amount should have been included in his income for 1987 pursuant to subsection 15(2) of the Income Tax Act. The exact figure that should have been included for 1987 under section 15(2) is not $187,632.37. For one thing the amount advanced in 1987 calendar year was $186,649.07. The $5,203.88 paid between January 1, 1987 and April 30, 1987 was all applied against the $6,187.18 owing from 1986.

The company’s taxation year ended on April 30 in each year. To avoid being taxed in 1987 on the $85,943.59 advanced to him by the company between January 1, 1987 and April 30, 1987 (the end of the company’s 1987 taxation year) the appellant would have had to repay it by April 30, 1988. To avoid being taxed in the appellant’s 1987 taxation year on the $100,705.48 advanced to him in the period May 1, 1987 to December 31, 1987 (during the company’s 1988 taxation year but the appellant’s 1987 taxation year) the appellant would have had to repay that amount by April 30, 1989, i.e., one year after the end of the company’s 1988 taxation year in which the loan of $100,705.48 was made.

In fact by April 30, 1988 further repayments totalling $12,000 had been made. If we apply this in accordance with the “fifo” method referred to in footnote 2 above, $983.30 would be applied to the balance of $6,187.18 after the application of the $5,203.88 and the balance of $11,016.70 would be applied against the indebtedness that arose in the period January 1, 1987 to April 30, 1987. Therefore, in respect of the $85,943.59, $74,926.89 would have been includible in the appellant’s income for 1987. So far as the further advances made between May 1, 1987 and December 31, 1987 of $100,705.48 [3] made in the company’s 1988 taxation year are concerned, by April 30, 1989 a total of $172,900 (by crediting rental charges of $14,400 and a dividend of $158,500) had been repaid. If we apply $74,926.89 of this first to the remainder of the $85,943.59 advanced before the end of April 1987, it leaves $97,973.11 to be applied against the $100,705.48 advanced in the period May 1, 1987 to December 31, 1987. It would follow therefore that of the $100,705.48, all but $2,732.37 was repaid by the end of the company’s 1989 fiscal period.

Therefore the Minister chosen to include any amount in the appellant’s income for 1987 under subsection 15(2) it would have been $77,659.26, not, as alleged by the appellant, $187,632.37. [4]

The Minister in fact did not include any amount in the appellant’s income for 1987 under subsection 15(2). The taxation year 1987 is now statute-barred.

In assessing for 1988 the Minister included $21,703 under subsection 15(2) and $17,967.51 as an interest benefit under subsection 80.4(2). For 1989 the Minister allowed a deduction of $21,703 under paragraph 20(1 )(j), evidently on the theory that this had been repaid out of the dividend of $158,500. Also, the Minister included a net interest benefit of $6,376.93 under subsection 80.4(2), being the amount of the difference between the interest benefit of $23,046.34 calculated by the Minister and that declared by the appellant in his T4 supplementary for that year of $16,669.41.

So far as 1988 is concerned, the basis of the inclusion of $21,702.76 under subsection 15(2) seems to be that $25,702.76 was advanced to the appellant between January 1, 1988 and April 30, 1988. $4,000 by way of rent credit was applied, leaving $21,702.76. Counsel informed me that the figure results from a comparison between the amount owing on December 31, 1987 and the amount owing on April 30, 1988. It comes to the same thing.

To justify any inclusion under subsection 15(2) for 1988 one must determine whether any of the advances to the appellant made in the calendar year 1988 were repaid within one year from the end of the taxation year of the company in which the loan was made. We know that between January 1, 1988 and April 30, 1988, $25,702.76 was advanced. If it was not to be included in the appellant’s 1988 income it would have had to be repaid by April 30, 1989. Between May 1, 1988 and December 31, 1988 (i.e. in the company’s 1989 taxation year) a further $90,192.11 was advanced. For it not to be taxed in the appellant’s 1988 taxation year it would have had to be repaid by the end of the company’s 1990 taxation year i.e. by April 30, 1990. Thus we have a potential inclusion for 1988 under subsection 15(2) of $115,894.87.

By April 30, 1989 the appellant had paid off $184,900 exclusive of the $5,203.88 which was applied against the 1986 indebtedness of $6,187.18. All but $983.30 of the $184,900 would have been used to repay the $186,649.07 advanced in 1987. Thus I do not see how it could have been assumed that any portion of the repayments made up to April 30, 1989 could have been applied against the $25,702.76.

Between May 1, 1989 and April 30, 1990 further repayments of $119,400 were made. That amount should have been applied in the following order:

(a) $2,732.37, the amount owing after the application against the $186,649.07 of the $184,900 net of $983.30.

(b) $115,894.87 to be applied against the advances made in 1988. The effect of this would not be to save the $25,702.76 from taxation in 1988, but it would prevent the inclusion under subsection 15(2) of the $90,192.11 advanced between May 1, 1988 and December 31, 1988 and would justify the deduction in 1989 under paragraph 20(1)(j) of the amount of $21,702.76 previously included.

(c) The remaining $772.76 should be applied against the advances made in 1989.

From this analysis it is evident that the inclusion under subsection 15(2) in the appellant’s income in 1988 of $21,703 cannot be criticized, nor can the deduction in 1989 of the same amount under paragraph 20(l)(j). Indeed, on my analysis the correct figure should have probably been $25,702.76 because the $4,000 ought to have been applied against an earlier indebtedness and not the $25,702.76 advanced in the period January 1, 1988 to April 30, 1988. That however is not my concern, the only issue being whether the assessment is too high.

Before dealing with the question of law raised by the appellant, it is first necessary to consider the mathematical basis of the inclusions in 1988 and 1989 under section 80.4.

Simply put, the appellant’s case is that the Minister should have included $187,632.37 in his income for 1987 under section 15(2). The fact that he did not do so and that the year is now statute-barred, is, according to the appellant, irrelevant because paragraph 80.4(3)(b) excludes from the operation of subsections 80.4(1) and (2) debts any debt that “was included” in computing the income of a person or partnership under this Part. The appellant reads “was included” to mean “ought to have been included”.

As the above analysis has demonstrated the only amount that the Minister could have justified including under subsection 15(2) in 1987 was $77,659.26 and not $187,632.37.

In computing the section 84.1 interest benefit for 1988 and 1989 the Minister took the closing monthly balance (minus, in 1988 the $21,702.76 that he included under subsection 15(2)) and applied against it the prescribed rate for the month provided in Part 43 of the Regulations. There is no challenge to the Minister’s mathematics but the appellant contends that there should be removed from the closing monthly balance against which the prescribed rate is applied not only the $21,702.76 that the Minister in fact included under subsection 15(2) for 1988 but also the amount that ought to have been included under subsection 15(2) in 1987 which, by the appellant’s calculation is $187,632.27 and by mine $77,659.26. He puts his argument in two ways:

(a) that the words in paragraph 80.4(3)(b) “that was included in computing the income of a person or partnership under this Part” mean ’’that ought to have been included”;

(b) that the requirement that an indebtedness be included in income under subsection 15(2) effects a notional repayment of the amount.

I think that as a matter of fact the Minister did impose tax on an imputed interest benefit under section 80.4 in respect of an indebtedness that should have been taxed in 1987 under subsection 15(2). This is true whether one takes as the correct figure $187,632.37 or $77,659.26. If I accepted the appellant’s figure of $187,632.37 and if I accepted his proposition of law it would substantially erase the income inclusion for 1988 and 1989 under section 80.4. Whatever figure is correct, however, I do not think that the proposition of law advanced by the appellant can be sustained. Just because subsection 15(2) provides that an amount “shall be included” in computing income, it does not follow that it “was included”. Whether something was or was not included is purely a question of fact. Whether an amount is “required to be included” — words used, for example in subsection 104(12), or subsection 144(7) — is a question of law. [5] The distinction between the two phrases is recognized throughout the Act. A good example of this is found in paragraph 20(1 )(j), which permits a deduction when a shareholder’s loan that was previously included in income under subsection 15(2) is repaid. Since 1983 the paragraph has read, in part, as follows:

Such part of a loan or indebtedness repaid by the taxpayer in the year as was by virtue of subsection 15(2) included in computing his income for a preceding taxation year.

Prior to 1983 the relevant portion of the phrase read “such part of any loan repaid by the taxpayer as was by subsection 15(2) required to be included...”.

The reason for the amendment is obvious as it was arguable that a deduction would result from repayment even if there were no prior inclusion. To give effect to the appellant’s interpretation of the words in paragraph 80.4(3)(b) would mean that a similar interpretation should be given to virtually the same wording in paragraph 20(1 )(j). Such an inter- pretation would defeat the purpose of the amendment.

The appeals are dismissed with costs.

Appeals dismissed.