Lamarre
Proulx
J.T.C.C.:-This
is
an
appeal
for
the
1987
taxation
year.
The
questions
at
issue
are
whether
a
loan
made
to
the
appellant
by
a
corporation
of
which
the
appellant
is
a
shareholder
was
made
to
acquire
fully
paid
shares
of
the
capital
stock
of
a
corporation
related
to
the
first
corporation
and
whether
a
bona
fide
arrangement
was
made,
at
the
time
the
loan
was
made,
for
repayment
thereof
within
a
reasonable
time,
within
the
meaning
of
subsection
15(2)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
’’Act”).
Subsection
15(2)
of
the
Act,
for
the
pertinent
part
reads
as
follows:
15.(2)
Where
a
person
(other
than
a
corporation
resident
in
Canada)
or
a
partnership
(other
than
a
partnership
each
member
of
which
is
a
corporation
resident
in
Canada)
is
a
shareholder
of
a
particular
corporation,
is
connected
with
a
shareholder
of
a
particular
corporation
or
is
a
member
of
a
partnership
or
a
beneficiary
of
a
trust,
that
is
a
shareholder
of
a
particular
corporation
and
the
person
or
partnership
has
in
a
taxation
year
received
a
loan
from
or
has
become
indebted
to
the
particular
corporation,
to
any
other
corporation
related
thereto
or
to
a
partnership
of
which
the
particular
corporation
or
a
corporation
related
thereto
is
a
member,
the
amount
of
the
loan
or
indebtedness
shall
be
included
in
computing
the
income
for
the
year
of
the
person
or
partnership,
unless
(a)
the
loan
was
made
or
the
indebtedness
arose
(iii)
where
the
lender
or
creditor
is
a
corporation,
in
respect
of
an
employee
of
the
corporation
to
enable
or
assist
the
employee
to
acquire
from
the
corporation
fully
paid
shares
of
the
capital
stock
of
the
corporation,
or
to
acquire
from
a
corporation
related
thereto
fully
paid
shares
of
the
capital
stock
of
the
related
corporation,
to
be
held
by
him
for
his
own
benefit,
or
and
bona
fide
arrangements
were
made,
at
the
time
the
loan
was
made
or
the
indebtedness
arose,
for
repayment
thereof
within
a
reasonable
time;
or
The
facts
on
which
the
Minister
of
National
Revenue,
(the
"Minister”),
relied
to
reassess
the
appellant
are
described
at
paragraph
9
of
the
reply
to
the
notice
of
appeal,
(the
’’Reply”),
and
are
the
following:
(a)
the
facts
hereinbefore
stated
and
admitted;
(b)
at
all
material
times
the
appellant
was
a
shareholder
and
employee
of
Service
de
Pneus
Lavoie
Outaouais
Inc.
(hereinafter
referred
to
as
SPL
Inc.)
and
Pneus
Pierre
Lavoie
Inc.
(hereinafter
referred
to
as
PLO
Inc.);
(c)
in
or
about
September
1986
the
appellant
obtained
a
loan
from
the
National
Bank
of
Canada,
in
the
amount
of
$50,000,
in
order
to
purchase
shares
in
SPL
Inc.;
(d)
in
or
about
December
1987
the
appellant
borrowed
an
amount
of
$40,000
from
PLO
Inc.
which
money
was
used
to
pay
off
the
said
loan
at
the
National
Bank
of
Canada,
in
the
amount
of
$40,000;
(e)
during
the
1987
taxation
year
the
appellant
qua
shareholder
received
from
PLO
Inc.
loans
in
the
amount
of
$40,000
which
loans
were
not
repaid
within
the
1987
taxation
year
or
within
one
year
from
the
end
of
the
1987
taxation
year
of
PLO
Inc.;
(f)
no
bona
fide
arrangements
were
made
at
the
time
the
said
loan
was
made
or
the
indebtedness
arose
for
repayment
thereof
within
a
reasonable
time;
(g)
the
amount
of
$40,000
was
not
borrowed
by
the
appellant
nor
was
it
lent
to
him
by
PLO
Inc.
to
enable
or
assist
him,
as
an
employee
or
shareholder
of
PLO
Inc.,
to
acquire
from
PLO
Inc.,
or
a
corporation
related
thereto,
previously
unissued
fully
paid
shares
of
the
capital
stock
of
PLO
Inc.
or
the
related
corporation
to
be
held
by
the
appellant
for
the
appellant’s
own
benefit;
(h)
PLO
Inc.
did
not
lend
the
amount
of
$40,000
to
one
of
its
employees
to
enable
or
assist
the
employee
to
acquire
a
dwelling
house;
(i)
the
amount
of
$40,000
is
to
be
included
in
the
income
of
the
appellant
qua
shareholder
for
the
1987
taxation
year.
Counsel
for
the
appellant
stated
at
the
beginning
of
the
hearing
that
subparagraphs
9(b),
9(c),
9(d),
9(e)
and
9(h)
of
the
reply
were
admitted.
Mr.
Gérard
Robineault,
an
accountant
of
Maniwaki,
testified
for
the
appellant.
He
has
known
the
appellant
since
1985
and
was
the
auditor
of
the
appellant’s
company,
Pneus
P.
Lavoie
Inc.
This
is
the
old
company
and
it
does
business
in
Maniwaki.
It
has
been
in
‘existence
since
the
mid-60s
and
the
appellant
owned
98
per
cent
of
its
voting
shares.
The
new
company,
Service
de
pneus
Lavoie
Outaouais
Inc.,
does
business
in
Gatineau.
Formerly
its
name
was
Réchappage
de
pneus
Lavoie
Inc.
The
witness
produced
as
Exhibit
A-l,
his
recollection
of
the
events.
This
recollection
proved
not
to
be
in
accordance
with
some
dates
of
the
events
as
they
really
took
place.
For
example,
his
recollection
was
that
the
appellant
had
borrowed
the
amount
of
$50,000
May
15,
1986
whereas
the
respondent
produced
a
copy
of
the
actual
borrowing
from
the
bank
and
the
date
was
September
15,
1986.
Another
example
is
that
the
witness
said
that
the
promissory
note
was
signed
on
or
about
September
18,
1986
whereas
the
promissory
note
produced
as
Exhibit
A-2
was
dated
December
16,
1987.
Let
us
put
aside
the
errors
regarding
the
dates
and
examine
whether
a
binding
agreement
had
been
entered
into
between
the
corporation
and
the
appellant
which
is
the
second
question
at
issue.
If
the
answer
is
"no”
to
this
question,
there
will
be
no
need
to
examine
the
first
question
at
issue.
The
witness
said
that
the
appellant’s
intent
was
to
reimburse
the
corporation
when
there
would
be
a
sufficient
amount
of
liquidities
in
the
corporations
in
question.
When
he
was
asked
in
cross-
examination
if
it
was
because
dividends
or
salaries
would
be
paid,
the
witness
answered
"no",
only
the
cash
flow
had
to
be
considered.
According
to
his
projections
this
sufficient
cash
flow
should
not
have
taken
more
than
five
years
to
accumulate.
He
says
that
the
reimbursement
at
the
end
of
those
five
years
proved
that
the
plan
had
been
followed
and
that
there
had
been
a
true
commitment
to
repay
the
loan.
He
goes
on
to
express
the
view
that
this
commitment
was
as
binding
as
any
other
well
structured
document
that
could
have
been
written
and
not
complied
with.
The
wording
of
the
promissory
note
signed
by
the
appellant
to
the
corporation
is
as
follows:
Je,
soussigné
Pierre
Lavoie,
domicilié
à
Maniwaki,
Province
de
Québec
reconnaît
devoir
la
somme
de
QUARANTE
MILLE
DOLLARS
(40
000
$)
à
Pneus
Pierre
Lavoie
Inc.
Cette
somme
porte
intérêt
à
10
%
et
sera
remboursable
à
demande.
Signé
ce
seizième
jour
de
décembre,
mil
neuf
cent
quatre-vingt-sept
(16
décembre
1987).
Signé
Pierre
Lavoie
The
witness
said
that
the
interest
had
been
paid
by
the
appellant.
Was
this
promissory
note
signed
by
the
appellant
a
bona
fide
arrangement
for
repayment
within
a
reasonable
time?
Counsel
for
the
appellant
submitted
that
the
promissory
note
was
the
type
of
agreement
that
is
entered
into
by
business
people
for
business
reasons.
He
also
pointed
out
that
the
Tribunal
must
look
at
what
was
the
mischief
that
this
provision
wanted
to
sanction.
It
was
the
taking
of
a
corporation’s
money
by
the
shareholder
in
the
guise
of
a
loan
without
ever
paying
it
back
to
the
corporation
and
not
paying
income
tax
on
the
money
so
appropriated.
He
said
that
the
term
of
repayment
was
determined
by
the
cash
flow
of
the
corporations.
This
is
a
precise
undertaking
business
wise.
Respecting
the
submission
that
one
may
enter
into
a
strict
agreement
and
not
comply
with
it
and
therefore
an
agreement
based
on
what
is
reasonable
business
is
as
good
as
a
strict
agreement
which
is
not
complied
with,
I
am
of
the
view
that
if
a
complete
and
binding
agreement
had
been
signed
between
the
corporation
and
the
appellant,
and
had
the
appellant
not
complied
with
the
terms
of
the
agreement,
it
would
have
been
open
to
the
Minister
to
consider
that
the
agreement
was
not
binding,
if
the
cir-
cumstances
could
lead
to
this
conclusion.
At
any
rate,
what
I
have
to
analyze
is
the
actual
agreement
of
repayment.
This
Court
in
the
matter
of
Perlingieri
v.
M.N.R.,
[1993]
1
C.T.C.
2137,
93
D.T.C.
158
has
already
examined
whether
a
loan
payable
on
demand
was
a
binding
arrangement.
I
quote
the
Tribunal
at
2140
(D.T.C.
161):
Arrangements
to
repay
the
loan
must
be
made
in
good
faith
at
the
time
the
loan
was
made.
At
the
time
the
loan
is
made
the
creditor
and
the
debtor
must
be
aware
of
the
arrangements
made
between
them
for
the
repayment
of
the
loan.
The
debtor
must
know
when
he
must
repay
the
loan
at
the
time
the
loan
is
made.
Because
a
demand
loan
is
open
ended
with
respect
to
repayment,
at
the
time
the
loan
is
made
the
creditor
may
or
may
not
know
when
he
will
demand
payment
and
the
debtor
does
not
know
when
he
will
have
to
make
payment.
Hence
no
bona
fide
arrangement-indeed
no
arrangement
at
all<+->has
been
made
at
the
time
of
the
demand
loan
for
its
repayment.
It
is
clear
that
an
important
feature
of
the
appellant’s
legal
situation
regarding
the
demand
note
signed
by
him
is
that
he
owned
98
per
cent
of
the
voting
shares
of
the
corporation
from
which
he
had
obtained
the
loan.
In
such
circumstances,
it
is
impossible
to
consider
a
demand
loan
as
a
binding
agreement
between
the
corporation
and
its
debtor.
Counsel
for
the
respondent
referred
to
the
decision
of
the
Federal
Court
of
Appeal
in
Silden
v.
M.N.R.,
[1993]
2
C.T.C.
123,
93
D.T.C.
5362
and
more
specifically
at
pages
125-26
(D.T.C.
5364-65):
The
Trial
Division
found
that
the
loan
to
the
respondent,
even
though
made
after
the
acquisition
of
the
house,
ought
to
be
considered
to
have
been
made
to
enable
or
assist
him
to
purchase
that
house
since
the
loan
was
made
pursuant
to
a
commitment
given
by
the
lender
to
the
respondent
prior
to
the
acquisition
of
the
house.
We
need
not
express
any
opinion
on
the
correctness
of
that
finding
since
we
are
of
the
view
that
the
Trial
Division
clearly
erred
in
concluding
that
the
second
condition
prescribed
for
the
application
of
subparagraph
15(2)(a)(ii)
was
met.
The
finding
of
the
Trial
Division
with
respect
to
this
second
condition
flows
from
its
conclusion
that
the
understanding
that
the
loan
would
be
repaid
if
and
when
the
respondent
left
his
employment
or
ceased
to
own
the
house
was
in
the
circumstances
a
reasonable
arrangement.
That
is
beside
the
point.
What
the
statute
requires
is
that
arrangements
be
made
"at
the
time
the
loan
[is]
made
for
repayment
thereof
within
a
reasonable
time”.
The
real
question
therefore
is
not
whether
the
arrangements
relating
to
the
repayment
of
the
loan
were
reasonable
but
whether,
pursuant
to
those
arrangements,
the
loan
was
to
be
reimbursed
within
a
reasonable
time.
That
question
cannot,
in
this
instance,
be
answered
in
the
affirmative
since
the
arrangements
that
were
made
at
the
time
of
the
loan
did
not
permit
to
determine
with
any
certainty
the
time
within
which
it
had
to
be
reimbursed.
[Emphasis
added.
]
To
conclude
that
a
loan
made
by
a
corporation
to
one
of
its
shareholder
employees
should
not
be
included
in
that
person’s
income
as
is
required
by
subsection
15(2)
of
the
Act,
the
Court
has
to
be
convinced
that
a
bona
fide
agreement
of
repayment
of
the
loan
had
been
entered
into
and
not
only
an
arrangement
that
"did
not
permit
to
determine
with
certainty
the
time
within
which
it
had
to
be
reimbursed".
In
this
instant
case,
the
Court
is
of
the
view
that
it
is
the
latter
situation
that
occurred.
If
the
terms
of
the
reimbursement
of
the
loan
are
uncertain,
the
amount
should
be
included
in
the
calculation
of
the
taxpayer’s
income
and
when
the
loan
is
repaid,
the
taxpayer
may
ask
for
its
deduction
in
accordance
with
paragraph
20(1
)(j)
of
the
Act
which
reads
as
follows:
20.(1
)(j)
such
part
of
any
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
(except
to
the
extent
that
the
amount
of
the
loan
or
indebtedness
was
deductible
from
the
taxpayer’s
income
for
the
purpose
of
computing
his
taxable
income
for
the
preceding
taxation
year,
if
it
is
established
by
subsequent
events
or
otherwise
that
the
repayment
was
not
made
as
part
of
a
series
of
loans
or
other
transactions
and
repayments;
The
appeal
is
therefore
dismissed
with
costs.
Appeal
dismissed
with
costs.
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