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Citation: 2004TCC405
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Date: 20040601
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Dockets: 2001-3126(IT)G
2001-4526(IT)G
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BETWEEN:
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CANADIAN FOREST PRODUCTS LTD.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Margeson, J.
[1] With respect to court file
number 2001-3126(IT)G, the Appellant hereinafter referred to
as "Canfor" appealed from:
(a) Notice of Reassessment for
Part I.3 tax dated January 26, 1999 issued in
respect of its 1994 taxation year which reassessment the Appeals
Branch of the Canada Customs and Revenue Agency
("CCRA") on June 4, 2001 agreed to vary in
part;
(b) Notice of Reassessment dated
December 15, 1999 for Part I.3 tax issued in
respect of its 1995 taxation year and subsequently confirmed on
June 7, 2001; and
(c) Notice of Reassessment dated
February 12, 2001 for Part I.3 tax issued in
respect of its 1996 taxation year and subsequently reassessed on
May 28, 2001 and confirmed on
June 7, 2001.
[2] In court file
number 2001-4526(IT)G, the Appellant appealed from
Notice of Reassessment for Part I.3 tax dated
May 28, 2001 issued in respect of its 1997 taxation
year which reassessment was confirmed on
September 5, 2001.
[3] It was agreed that at the outset
that all of these appeals would be heard on common evidence.
Issues
[4] The issues in respect to the 1997
assessment are:
1. Do the net amounts as at the Appellant's
year-end constitute "loans and advances" within the
meaning of paragraph 181.2(3)(c) of Part I.3 of the
Income Tax Act ("Act") as assessed?
2. Should the calculation of the cash balances on
hand for purposes of determining the net amounts include the
Appellant's short-term investments?
[5] With respect to the assessments
for the 1994, 1995 and 1996 taxation years, the issues are:
1. Do the net amounts as at the Appellant's
year-end constitute "loans and advances" within
the meaning of paragraph 181.2(3)(c) of Part I.3
of the Act as assessed?
2. Should the calculation of the cash balances on
hand for purposes of determining the net amounts include the
Appellant's short-term investments?
[6] Robert McDonald was a
chartered accountant. He was manager of taxation for Canfor. He
has been with Canfor since 1990 and before that he was a partner
with Price Waterhouse.
[7] Exhibit R-1 was admitted by
consent without limitation. He explained the system, how an
invoice received from a supplier was stamped, receipted and
forwarded to someone for approval for payment. It is approved and
is directed to accounts payable, which sends out payment of the
invoice.
[8] The year-end for the 1997
taxation year was December 26. Twice a week there is a
cheque run. They are normally printed and mailed the same date.
He referred to Tab 2 and said that the
Bank of Montreal ("the bank") was
Canfor's bank. The cheque at Tab 2 was for payment dated
December 11, 1997. It went to the bank and was
deposited on January 2, 1998. This delay is very
common. There is usually a four to eight day's delay from the
time the cheque is issued to the time it is cashed. Canfor is
entitled to put a stop-payment on a cheque for different
reasons such as a lost cheque, an improper invoice or a
stale-dated cheque. When the cheque is cashed, the next day
Canfor gets a magnetic tape and two days later a hard copy of the
cancelled cheques. Tab 3 was an Account Reconciliation
Service report processed on January 2, 1998 by the
bank. Each of Canfor's 25 sections will have a similar
system in place. He referred to page 3 where the cheque
showed up in the amount of $18,746.63. The total of the cheques
presented that day for payment was $3,094,555.98.
[9] Tab 4 was a Statement of
Account. He referred to the total debit on page 2 in the
same amount as the total presented for payment on
January 2, 1998 at the bank amounting to $3,094,555.98.
He admitted that at that time Canfor owed the bank that amount.
The bank closes off all divisions and puts them into this cash
account (total cash balance for all Canfor's Canadian
accounts that day). (It shows the amount of money that Canfor
owes the bank and the credit shows the deposits that day, set one
off against the other, and a net balance of $1,919,891.66.)
[10] If there is a shortfall, the balance
would be shown at zero because the bank would use their line of
credit to show a zero balance.
[11] Canfor has a record which shows all
outstanding cheques. This type of record was shown at Tab 5.
On page 13, a cheque earlier referred to in
paragraph [8] above, showed up in that list. It was still
outstanding. The bank does not know the number of the outstanding
cheques. During this period of time because there were more
outstanding cheques than money in the bank, it did not cause any
concern because the system in place always guarantees a
sufficient supply of cash. They track cash coming and going.
[12] There never was a situation where all
of the outstanding cheques came due all in one day.
[13] Tab 6A showed the one main account
of Canfor for reconciliation purposes. He referred to Tab 7A
and said that the Minister assessed Canfor on the difference
between the unprocessed cheques and the cash on hand, in the
amount of $25,000,000. The bank did not give Canfor cash in this
amount. Canfor was not required to pay interest on this amount.
There was no liability at this time to pay this amount to the
bank. They did have a line of credit in place.
[14] Exhibit A-2 was the agreement with
respect to the line of credit. It provided for Canfor to be able
to draw from the bank up to an agreed amount from the line of
credit on request. The line of credit was sufficient to cover all
outstanding cheques. The account was not in overdraft as of that
date. If it were, it would have shown up in the financial
statements from the bank. All of the statements of Canfor are
prepared in accordance with generally accepted accounting
principles ("GAAP").
[15] He did not include the difference in
the capital because he did not think that they had to be
included. They were not a loan or advance. In the years 1995,
1996 and 1997 he treated them differently. He included them in
capital because CCRA was looking at the years 1991, 1992 and 1993
and they were going to reassess the capital account. He included
them in capital until such time as he was able to get legal
advice, but he believed he was right. He treated the
1998 year as he had before and appealed the 1997
decision.
[16] He referred to a summary at Tab 8
of all of the amounts under appeal. If cash is in the bank then
the accounts are paid. If there is not sufficient cash they can
rely upon their temporary investments and if there are
insufficient funds there, they can call upon their line of credit
and a deposit will be made to the account to honour the
cheques.
[17] In cross-examination, he said
that when the cheques were issued, Canfor intended that they be
delivered and that they be payment for the invoices that were
presented. The unpresented cheques were issued in the normal
course of Canfor's business.
[18] He referred to Exhibit A-1,
Tab 4, and said that no temporary investments were cashed in
and deposited to cover any outstanding cheques. Then he said that
he could not say whether the credit amounts resulted from cashing
temporary investments or from payments for sales. None of the
cheques in issue were post-dated and none had any
conditions attached before they could be cashed.
[19] It was suggested to him that the
treasury people in Canfor "gambled", that not all of
the cheques would be cashed before the end of the fiscal year. He
would not agree that the word "gamble" was the correct
phraseology but he said that it was an educated guess (not a
certainty). He reiterated that it was normal to take 48 days
before a cheque is presented for payment but in the case of the
cheque referred to at Tab 2, was issued on
December 12, 1997 and not presented for payment until
January 2, 1998, which was about three weeks. If there
was to be a slow down it would be in December and the treasury
people would be aware of it. He considered the unpresented
cheques to be a liability to Canfor for accounting purposes and
they are shown as such in the financial statements. With respect
to the taxation years 1996 and 1997, he could not say how many
temporary investments were cashed by the bank to prop up the cash
position, if any.
[20] With respect to Exhibit A-2, he
said that there were no terms in the agreement that allowed the
bank to have access to the short-term assets. He referred
to Exhibit A-1 at Tab 7D, which was the balance sheet.
Cash and temporary investments were allowed to be settled against
the unpresented cheques as seen at Tab C.
[21] The document at Tab 7B breaks it
down to cash and temporary investments and the Minister allowed
the cash to be netted out against the unpresented cheques. None
of this was cash on hand in foreign currency.
[22] He was asked why the accountants
decided to split it up in 1996 and he said that he did not know.
He referred to Tab 7A. The assets were broken down and the
Minister allowed the taxpayer to offset the cash against the
unpresented cheques. None of the temporary investments were cash
on hand or foreign currency. The investments were bankers'
acceptance; commercial paper (promise to pay by another company).
These may be secured or non-secured, they are
short-term and they may sell at a discount to face value.
Only solid corporations can issue corporate paper. They may be
issued in a wide range of denominations and may be discounted or
interest bearing. They may be of non-existent value or
small secondary value.
[23] He referred to Exhibit R-1 and
said that he submitted this document at the time of discovery. It
was a summary of information with respect to short-term
investments dated December 31, 1997 for the 1997
year-end. The $85,372 was the balance sheet amount. Page two
showed a Bank of Montreal, bankers' acceptance in
the amount of $5,000,000 at maturity and Canfor paid $4,982,600
for it.
[24] Canfor is not committed to hold it
until maturity. If it does, it will sell it at market at that
day's price. It may be greater or less than the maturity
rate. The projected income for the maturity period would be less.
Wood Gundy holds it for Canfor. He referred to a United States
temporary investment in the amount of $1,000,000 and said that he
did not know what it was. It was similar to the short-term
investment referred to on pages 1 and 2. It was not cash.
The $4,500,000 figure on pages 1 and 2 was similar.
[25] The large corporation tax is found in
Part I.3 of the Act. There is a section for
investment allowance under subsection 181.2(4). The company
could not take advantage of this because it was of a type of
investment that was not eligible for the allowance. Temporary
investments may include eligible or non-eligible
investments. At Tab 7A, page 2, the reference to
$36,844,195 was to an investment allowance. He could not say what
was included in the figure of $17,912,009. When it was claimed
Canfor could have cashed it and claimed the credit that it was
entitled to.
[26] In redirect, he said that he could not
say how the cash amount got there. It did not come from the bank
because they did not have a bank advance there.
[27] Canfor's system of controlling cash
is a sophisticated one and includes a system to ensure that there
is enough money in the bank to cover cheques when they are
presented. The process for the 1997 taxation year was the
same.
Argument on Behalf of the Appellant
[28] In oral and written argument counsel
for the Appellant submitted that the Court should adopt the
ordinary meaning under the statute and that derived from the case
law. Under this definition, there was no loan because, in order
for there to be a loan, there must be liability created to the
bank. Such a liability was not created here until the cheque went
to the bank, the bank honoured it and advanced the money to
Canfor.
[29] In the case at bar no one received any
money, there was no advance and consequently no loan. The bank
gave no cash and Canfor was not indebted to the bank. Canfor
decided when the debt arose. To say that there was a loan or
advance was pure fiction. Canfor did not pay any interest with
respect to the amounts in question which the Minister asserts
constitutes a loan or advance.
[30] Part I.3 of the Act
describes what is known as the "Tax on Large
Corporations". This is imposed by subsection 181.1(1).
Tax is imposed on Canfor's "taxable capital that is
employed in Canada".
[31] The term "taxable capital employed
in Canada" is defined in subsection 181.2(2). "The
taxable capital of a corporation (other than a financial
institution) for a taxation year is the amount, if any, by which
its capital for the year exceeds its investment allowance for the
year".
[32] The Act also defines in
subsection 181.2(3) what Canfor's capital is. Included
in that definition by virtue of paragraph (c) are
"the amount of all loans and advances to the corporation at
the end of the year". In the case at bar, the Minister says
that the difference in the amount between the total outstanding
cheques (unpresented) at year end less the actual cash on hand in
the bank account at year end [the net amount] represents a loan
or advance made to Canfor at the year end.
[33] On the law, counsel for the Appellant
said that the amounts in question do not constitute a "loan
or advance" for three reasons:
(a) they do not constitute a "loan or advance"
within the ordinary meaning of those terms;
(b) the context in which the phrase "loan or
advance" is used in the Act precludes the suggestion
that there has been a "loan or advance"; and
(c) the authorities suggest that there has been no loan
or advance in these circumstances.
[34] The terms "loans or advances"
are not defined in the Act. Consequently, it is useful to
consider the ordinary meaning of the terms by resorting to
dictionary terms.
[35] Black's Law Dictionary
(6th Edition) defines the terms "loan"
and "advance" as follows:
Advance. Payment before it is due -
payment or advance before time of payment.
Loan.
Lending is the delivery by one party and receipt by another party
of a sum of money upon agreement to repay.
[36] The New Lexicon Webster's
Encyclopaedic Dictionary of the English Language (Canadian
Edition) suggests similar definitions:
Advance. a payment of money before it
is due.
Loan.
something lent, usually money, on condition that it is returned,
with or without interest.
[37] Implicit in the ordinary meaning of
what constitutes a "loan or advance" is that there must
be an actual transfer of funds to, directly or indirectly, the
recipient of the loan or advance. The words "delivery and
return" and "payment and repayment" are used.
[38] The conclusion that the "loans and
advances" referred to in paragraph 181.2(3)(c)
suggest an actual transfer of funds is supported when those words
are considered in the context of the legislation in which they
are found. Subsection 181.1(1) imposes tax on "its
taxable capital employed in Canada for the year". The use of
the word "employed" is significant. The word implies
that the capital in question is used by the business. See
subsection 181.2(1).
[39] A reading of subsection 181.2(3)
indicates that the items enumerated under the definition of
"capital" are all items which represent resources
available to a corporation for the conduct of its business.
[40] Paragraph 181.2(3)(a) refers to
shareholder contributions and surpluses. Paragraphs
181.2(3)(d) and (f) refer to different kinds of
indebtedness, which imply receipt by the taxpayer of the funds.
Paragraphs 181.2(3)(b) and (e) refer to reserves
and unpaid dividends, again amounts available to Canfor in the
carrying on of its business.
[41] Consequently, in light of the context
in which the phrase "loans and advances" is found, it
is difficult to suggest that the "net amount of unpresented
cheques" represents a loan or advance for purposes of the
section since nothing has been transferred from the bank to
Canfor that could be employed or used by Canfor in the operation
of its business as at the year end.
[42] Counsel referred to the case of The
Grocery People Limited [1]where Sobier, J., when
discussing the term "loans and advances" said:
[1] ... there has to be an indebtedness created, a
liability of the taxpayer to its financial institution. No
liability has been created vis-à-vis the two of them. On
that basis, even though they have characterized it as bank
indebtedness, if it is not in fact bank indebtedness then calling
it so can't make it bank indebtedness.
[2] ... until such time as the bank accepts the cheque
for payment and allows the account to go into overdraft - the
mere presentation of a cheque by the taxpayer to its creditor
does not create a bank indebtedness and using the plain meaning
of the words "loans and advances", there is no loan or
advance until the bank says there is and the bank has not done so
in this case and I would allow the appeal.
[43] The question was again addressed in the
case of PCL Construction Management Inc.
[2]. As pointed out
in that case, the amounts relating to outstanding cheques were
conceded by the Crown at trial. The Court ruled in accordance
with that concession that the net amount of unpresented cheques
did not constitute a loan or advance for the purposes of
paragraph 181.2(3)(c).
[44] Counsel said that the Courts had not
addressed the issue of unpresented cheques directly but the
Courts have considered what is meant by a loan or advance both in
the context of Part I.3 and other provisions of the
Act.
[45] Authorities in the Tax Court have
clearly adopted the ordinary meaning of the term
"advance" as being a "payment" before payment
is "due".
[46] In
TransCanada Pipelines Limited [3]the Court adopted
the dictionary concept of an advance being a "payment made
beforehand". The cash must flow in order for there to be an
advance. In that case they received the money.
[47] This concept that an
"advance" represents an actual transfer of funds from
the advancer to the borrower was affirmed by the Federal Court of
Appeal in Oerlikon Aérospatiale Inc. [4]. This case was decided
under Part I.3 of the Act. In that case the Court
said at paragraph 32:
[32] The effect of an advance, be it in the sense of a payment
on account or a loan, is to make the amount of money it
represents available to the person or corporation which receives
it. ...
[48] Counsel opined that this means there
must be a transfer of cash and a debt created and that an advance
is an actual payment that is "received" and were part
of the financial resources of the firm.
[49] The conclusion that an
"advance" for purposes of paragraph 181.2(3)(c)
requires the actual payment of money rather than an anticipated
payment has also been adopted by the Courts when interpreting the
concept of an "advance" under different provisions of
the Act.
[50] In the case of David J.
Foster [5], the Court considered the concept of
"advance" for the purpose of subsection 83(3) to
conclude it meant "payment before due".
[51] In Manufacturers Life Insurance
Co. [6], the Court rejected the argument of the Minister, that
for capital tax purposes, a deferred portion of gains realized on
the disposition of bonds, stock, real estate and mortgages were
financial resources available to the Respondent and concluded
that the Minister's argument ignored precisely what was said
by Noël, J.A. in Oerlikon [7]:
[32] The effect of an advance, be it in the sense of a payment
on account or a loan, is to make the amount of money it
represents available to the person or corporation which receives
it. In the instant case, the advances were an integral part of
the financial resources available to the appellant at the end of
its 1989 fiscal year according to the financial statements it
filed, and nothing either in the legislation or the tax policy
which led to its enactment indicates that Parliament intended to
exclude advances from the tax under Part I.3.
In Manufacturers Life Insurance Co.
[8], the Court
concluded that unamortized, realized gains were not shown as
financial resources available to the Respondent according to its
financial statements and these were accepted by the
Superintendent of Financial Institutions.
[52] As in the case at bar there was no loan
or advance on the financial statements.
[53] Counsel maintained that the authorities
also suggested that there is no liability (loan) between the
taxpayer (the borrower) and the lender (the bank) as (the
financial institution) until such time as the unpresented cheques
are actually presented at the bank and funds are advanced by the
bank to cover them. It is at this time that the bank has made
available to the borrower the use of the funds. [9]
[54] The Courts have considered the
application of the Part I.3 tax in a number of cases albeit
none directly on point with the issue here today. However, the
cases appear to support the conclusion in The Grocery
People Limited [10], that no liability between
the taxpayer and the bank occurs until such time as the cheques
are presented to the bank and honoured by an actual draw on the
line of credit.
[55] In Autobus Thomas
Inc. [11], the Court sought to determine whether the
relationship between the taxpayer was one of
"vendor/purchaser" or one of
"creditor/debtor". If the latter, there would be a loan
or advance for purposes of paragraph 181.2(3)(o). The Tax
Court had no difficulty in concluding that there was a loan in
these circumstances between the bank and the taxpayer. In doing
so it adopted Black's Law Dictionary concept that
there must be actual creation of a debit by the advance of money
for a loan to be created.
[56] At the Federal Court of Appeal it was
concluded that the parties intended to create security for a
loan. The Court of Appeal drew a distinction between a "line
of credit" which it concluded was only a "loan
commitment" not an actual loan. The "line of
credit" or "loan commitment" may or may not have
been acted on. The Court also concluded that the money did not
have to be directly handed over to the taxpayer for there to be a
loan. However, the key conclusion to be drawn from this case is
that for there to be a loan or advance for purpose of the
section, the funds taxed must be transferred to the taxpayer or
to someone on the taxpayer's behalf. It is this actual
transfer of funds which converts the commitment of a loan into a
"loan or advance" covered by
paragraph 181.2(3)(c).
[57] In
A. C. Simmonds & Sons Limited
[12],
the Court dealt with the deemed interest provision of
subsection 17(1) of the Act. This subsection imposes
deemed interest liability on a Canadian resident taxpayer who
loans funds to a non-resident. Christie, A.C.J. concluded
that there was no loan between the taxpayer and the non-resident
because a loan requires the actual delivery and receipt of money
under an agreement. The Court concluded that for a loan to exist
there must be a movement of consideration under the agreement so
as to create the creditor/debtor relationship. This did not exist
even though the Court concluded that the United States company
was indebted to the taxpayer. The indebtedness was not the
consequence of a loan or a "debtor/creditor"
relationship.
[58] The conclusion that there must be a
transfer of consideration between the lender to the borrower for
a loan to arise was also reached in the case of
Walter Crassweller [13], where it was held that the
amounts were not "loans or advances" within the meaning
of section 18 of the Income War Tax Act
[14]. The board
dealt with the issue as to whether the distribution of funds out
of capital surplus could be taxed as a dividend under
section 3 or as a "loan or advance" and therefore
a deemed dividend under section 18.
[59] In summary he said it was difficult to
see how the "net amount: of unpresented cheques" can be
characterized as a "loan or advance" to the Appellant
from the bank.
[60] On the date in question:
(a) the Appellant had not
"received" any money from the bank nor had the bank
advanced any money on the Appellant's behalf;
(b) the unpresented cheques were under the
full control of the Appellant until they reached the bank;
(c) the taxpayer decided how the cheques
would be honoured:
(i) via line of credit;
or
(ii) cashing in temporary
investments;
(d) the bank had:
(i) no cause of action or legal right to recover
the net amounts of unpresented cheques simply because it had
never advanced these amounts to the Appellant; and
(ii) the Appellant was under no obligation to pay
interest with respect to these amounts.
[61] The reality is that there was no
"advance" or "loan" by the bank to the
Appellant on the day at issue in the amounts at issue.
[62] The appeals should be allowed, with
costs.
Argument on behalf of the Respondent
[63] In oral and written argument counsel
for the Respondent indicated that the issues are agreed upon and
there is no issue with respect to the facts. The primary issue in
this case is whether cheques that had been issued by Canfor and
recorded in Canfor's balance sheet as current liabilities but
unpresented to the bank by the recipient before the end of the
fiscal period ("unpresented cheques") should be
included in the computation of capital for the purposes of
Part I.3 of the Act?
[64] Specifically, are unpresented cheques
"loans or advances" within the meaning of paragraph
181.2(3)(c) and Part I.3 of the Act?
[65] A secondary issue in this case is
whether Ministerial policy that allows corporations to offset
cash balances against unpresented cheques can be judicially
expanded to include short-term investments. Counsel argued
that there must be a legal basis to allow this offset and there
is none existent. Therefore, the Court has no jurisdiction on
this issue.
[66] The amounts of unpresented cheques in
dispute for 1995, 1996 and 1997 are: $10,141,827, $16,770,897 and
$24,508,399 respectively. The Appellant's line of credit with
the bank was, at all material times, a "revolving facility
for general operating requirements in the normal course of
business".
[67] All the unpresented cheques were issued
in the normal course of the Appellant's business and would
have been honoured by the bank once presented for payment. There
was no provision in the Appellant's agreement with the bank
to allow the bank any access to the short-term investments.
That is, in the event that the Appellant chose to liquidate any
of its short-term investments to satisfy any indebtedness
to the bank, the Appellant would have had to take the necessary
steps to "cash in" or liquidate them, the bank having
no authority or ability to do so.
[68] The credit agreement in place between
the bank and the Appellant required that all payments to be made
by the Appellant to the bank pursuant to the credit agreement
were payable in the same type of currency in which the borrowing
was denominated. Further, the agreement stated at paragraph 3 of
Exhibit A-2:
... all payments to be made by the Borrower pursuant to
this Agreement are to be made in freely transferable, immediately
available funds and without set-off, withholding or deduction of
any kind whatsoever except to the extent required by applicable
law. If any such set-off, withholding or deduction is so required
and is made the Borrower will, as a separate and independent
obligation to the Bank, pay to the Bank all such additional
amounts as may be required to fully indemnify and save harmless
the Bank from such set-off, withholding or deduction.
[69] Had the unpresented cheques been
presented for payment to the bank prior to the Appellant's
fiscal year ends, the Appellant did not have sufficient cash on
hand and would, unless other arrangements were made, have had to
use its line of credit with the bank.
[70] None of the unpresented cheques were
post-dated or subject to any condition limiting or
predetermining the time that they could be presented for payment
by the recipients.
[71] The unpresented cheques were delivered
to and received by the recipients.
[72] Against the amounts of unpresented
cheques in 1996 and 1997 the Appellant now wishes to offset other
amounts described as "short term" investments such as
GICs and other similar financial instruments in the amounts of
$90,958,112 and $85,372,482, respectively.
[73] Part I.3 tax on large corporations
was specifically enacted to reduce the federal deficit and to
ensure that all large corporations pay federal taxes and
contribute to the deficit reduction.
[74] Part I.3 tax is determined on an
annual basis by applying a specified rate to the capital tax base
of a corporation. Liability is based upon the capital tax base of
the corporation and is independent of whether it is earning
profits or incurring losses in a given year.
[75] Section 181.2 deals with
corporations that are not financial institutions and are resident
in Canada.
[76] The application of Part I.3
requires the use of a balance sheet prepared in accordance with
GAAP (subsection 181(3) of the Act). The balance
sheets in question were prepared in accordance with these
principles.
[77] Pursuant to paragraph
181.2(3)(c) of the Act, the amount of all
"loans and advances" to the corporation at the end of
the year are included in the capital tax base of the
corporation.
[78] According to the Minister's
interpretation: a loan is generally defined as delivery by one
party, and receipt by another party, of a sum of money upon
agreement, expressed or implied to repay with or without
interest. The carrying value of a loan - whether secured or
unsecured, long or short-term, and whether owed to related or
non-related entities - is included in the capital tax base. The
current portion of a loan is also included in the capital tax
base.
[79] The term "advance" often
means simply "pay" or "pay money before it is
due" and, therefore, has a broad scope. Generally, any
amount received by a corporation that is not included in income
will constitute an advance and will be required to be included in
the capital tax base.
[80] The following are some of the amounts
that must be included in the capital tax base as loans and
advances according to the Minister:
1. line or letter of credit, to the extent drawn
upon;
2. deferred revenue represented by cash;
3. bank overdrafts;
4. insurance policy loans; gold loans;
5. outstanding cheques issued, to the extent that
they exceed funds on deposit, in all jurisdictions governed by
common law;
6. outstanding cheques honoured by the
corporation's bank, to the extent they exceed funds on
deposit, in the civil law jurisdiction of Quebec;
7. take-or-pay amounts;
8. prepaid amounts including rent received;
9. customer and security deposits;
10. contract advances;
11. proceeds from the sale of gift certificates, to the extent
they are not included in income;
12. forgivable loans;
13. inter-company loans between a parent corporation and its
wholly-owned subsidiaries pursuant to a cash management
system agreed to by a bank (generally referred to as a mirror
accounting system) where overdrafts of subsidiaries are regularly
transferred to the parent's account; and
14. drawings from a partnership, except to the extent they
represent a distribution of a corporate partner's partnership
capital included in its capital tax base.
[81] The outstanding cheques in issue here
exceeded funds on deposit.
[82] The following amounts would not be
included in the capital tax base as loans or advances:
1. advance billings not received in cash where the
service has been rendered;
2. loans legally defeased, provided no amount is
reflected in the balance sheet in respect of the defeased debt;
and
3. the mere granting or provision of credit
facilities by a supplier, creditor or lender. (This without more
would not be enough.) Here she referred to IT-532,
Part I.3 - Tax on Large Corporations.
[83] It was also submitted that the
Act does not define loans or advances. She referred to
Black's Law Dictionary which defines "loan"
as "a delivery by one party to and receipt by another party
of a sum of money upon agreement, express or implied, to repay it
with our without interest". The definition continues to
include, among other things, "(1) the creation of a debt by
the lender's payment of or agreement to pay money to the
debtor or a third party for the account of the debtor; (2) the
creation of a debt by a credit to an account with the lender upon
which the debtor is entitled to draw immediately".
[84] "Advance" has been accepted
as being broader than "loan". It may mean "advance
in the sense of a loan" or "advance in the sense of a
payment on account" or instalments. [15]
[85] An advance may include a payment made
in return for the agreement of the recipient to provide goods or
services in future. [16]
[86] In the case at bar, the bank has
promised to make money available to the Appellant by way of a
line of credit or overdraft. A line of credit is an arrangement
by which a bank or supplier extends a specified amount of credit
to a specified borrower for a specified time period. It is an
agreed overdraft facility to deal with fiscal fluctuations and is
a binding promise to lend funds. See Autobus Thomas
Inc. [17]at paragraph 5:
[5] ... At law, the establishment of a line of credit can
only be construed as loan commitment, and the various steps
detailing the use of that line of credit can only be interpreted
as formal requirements for meeting the commitment. Those steps
can be described separately - sending of invoices, payment on the
purchaser's behalf, drafting and signing of an instalment
sales contract, assignment of that contract, entry in a special
account, calculation of interest at the variable rate in effect,
repayment by instalments [sic] periodic cumulative reports
- but cannot be considered in isolation or out of context.
[87] Given the requirement to refer to
balance sheet items, the wording of the provisions in paragraph
181.2(3)(c) is to be interpreted by reference to
"the language accountants speak". [18]
Cheques
[88] She said that the legal effect of the
delivery of a negotiable instrument by one person to another
constitutes payment depending on their circumstances and their
intentions both real and inferred. In the case of pre-existing
debt, the cheque operates presumably as conditional payment only.
If the cheque is honoured after presentment for payment, the
payment of the debt becomes absolute as of the time of the making
of the cheque. [19]
[89] At the time the Appellant issued and
delivered the unpresented cheques to the recipients the Appellant
intended to effect and perfect payment. In common law
jurisdictions delivery of a cheque constitutes payment at that
time.
[90] The writing of a cheque on a bank
account is considered to constitute a draw upon that account
where that cheque represents payment. At common law delivery of a
cheque constitutes conditional payment. It was submitted that a
conditional payment, where a line of credit or overdraft
agreement is in place, creates a loan or advance for the purposes
of Part I.3.
[91] The principle of conditional payment is
well established in common law jurisdictions. In Marreco v.
Richardson [20], Farewell, L.J. stated:
... the giving of a cheque for a debt is payment
conditional on the cheque being met, that is, subject to a
condition subsequent, and if the cheque is met it is an actual
payment ab initio and not a conditional one.
[92] In Moody [21], at page
1054, the Exchequer Court stated:
In the absence of some special circumstance indicating a
contrary conclusion such as, for example, post-dating or an
arrangement that the cheque is not to be used for a specified
time, a payment made by cheque, although conditional in some
respects, is nevertheless presumably made when the cheque is
delivered, ...
[93] The principle enunciated in
Marreco [22], and confirmed in
Moody [23], has been applied without exception in
cases involving the Act. [24]
[94] This principle is not altered by the
fact that the underlying liability between the original debtor
and creditor is not generally discharged until the cheque is
honoured by the respective bank nor whether the bank can charge
interest on the amount of the cheque between the date of delivery
and the day the cheque is presented to the bank.
[95] The common law principle establishes
the conditional payment date as the time of delivery of the
cheque. The subsequent presentation of the cheque to the bank,
will not alter in law the payment date unless the cheque is not
honoured. Where the cheque results in indebtedness or a negative
bank balance on the balance sheet, this amounts to a loan or
advance within the meaning of Part I.3 as, by granting the
line of credit or overdraft, the bank has tacitly acknowledged or
agreed to the overdraft.
[96] In the civil law jurisdiction of the
province of Quebec the law is different on this point. The civil
code stipulates that the date of payment is the date on which the
bank honours the cheque and delivery is irrelevant to that
determination. [25]
[97] While the unpresented cheques in
themselves do not constitute an indebtedness of the corporation,
the bank indebtedness reflected in the balance sheet resulting
from outstanding cheques constitutes a loan or advance where the
delivery of the cheques by a debtor to a creditor operates as
payment.
[98] By contractually agreeing to extend the
line of credit to the Appellant the bank has tacitly acknowledged
or agreed in advance to the overdraft.
[99] Here, the Appellant intended payment,
the recipient expected payment and the bank had bound itself to
extend credit to cover the payment thereby anticipating the
condition subsequent.
[100] In a decision in an Informal Procedure appeal,
The Grocery People Limited [26], Sobier, T.C.J.
held that unpresented cheques do not create an indebtedness
between the taxpayer and the bank such that there is a loan or
advance within the meaning of paragraph 181.2(3)(c).
This decision is unhelpful for the purposes of resolving these
appeals for the following reasons:
(a) no reasons for judgment are given such that there is
no articulation of the facts, discussion of any case law or any
reference to any authorities;
(b) the legal basis for the Respondent's position as
expressed herein was not presented to the Court and not
considered;
(c) the issue was decided strictly upon an argument that
indebtedness has not in fact been created by the mere existence
of an outstanding cheque;
(d) there is no indication of whether the cheques had
actually been delivered or not;
(e) the decision was heard in the Informal Procedure and
given the lack of written reasons and section 18.28 of the
Act, the decision is certainly not binding, and is also,
it is submitted, not to be accorded weight in the instant
appeals.
[101] Counsel said that the case of the The Grocery
People Limited [27], was wrongly decided. She
argued that delivery of a cheque from a debtor to a creditor is a
conditional payment at the time it was delivered. The payment is
conditional upon it being honoured for payment at the
debtor's financial institution. At law, for there to be a
conditional payment, where there is a line of credit in place
between the debtor and the bank and where, had the cheque been
presented for payment within the same fiscal period, the debtor
would not have had sufficient cash on hand with that bank to
cover the cheques and without more, the overdraft or line of
credit would be triggered, then, says the Respondent, there is a
loan or advance for the purposes of Part I.3.
[102] The fact that payment effected by cheque is
conditional and subject to a condition subsequent (the honouring
of the cheque by the bank) does not alter the legal date of
payment (the date of delivery) unless the cheque is not honoured.
By granting overdraft privileges in the line of credit the bank
has removed the condition subsequent.
[103] Once there is an agreed overdraft facility in
place between the customer and the bank, such as the line of
credit in these appeals, even where that line is subject to an
express term of the banking contract that the bank might reduce
the line of credit at any time, the bank is under an implied duty
to give notice in writing of the decision to reduce the line of
credit. For example, where a bank invoked the provision and
dishonoured a cheque with the ultimate result that the customer
was forced into bankruptcy, the bank was held liable for
negligent misrepresentation to the customer. [28]
[104] Once a cheque has been delivered to the creditor
or recipient as consideration for goods or services received, the
debtor becomes civilly and criminally liable. Because cheques are
payable on demand and the debtor is not in control of when the
creditor or recipient presents the cheque for payment, once the
cheque is delivered to the recipient the debtor triggers its
liability. [29]
[105] In Canada, issuing a cheque that is not honoured
when presented for payment at a bank or other financial
institution is an indictable offence unless the accused can show
that he believed on reasonable grounds that the cheque would be
honoured when presented for payment. [30]
[106] By operation of law the writing of a cheque on a
bank account or line of credit or overdraft is a draw upon that
account where the cheque represents payment. In common law
jurisdictions delivery of a cheque that is not post-dated
or subject to special circumstances is payment or conditional
payment. By executing the agreement as to the line of credit the
bank has tacitly accepted to honour the cheques written on the
account and thereby fulfilled in advance or removed
anticipatorily the condition subsequent (honouring the cheque for
payment).
[107] Counsel for the Appellant submitted that wherever
the terms "loans and advances" are used, the Court must
consider the case on its own individual facts, but counsel for
the Respondent said that Part I.3 of the Act is
different. One must look at the definition of "loans"
and "advances" in the context of Part I.3, in a
different way. At law, the establishment of a line of credit is
only a commitment. That it is a legally binding agreement with
effects if default is made. However, considering Part I.3,
you must look at the financial documents with new glasses.
[108] She referred to Autobus Thomas
Inc. [31], in support of her position that the Court should use
accounting meanings when dealing with a case under Part I.3.
She referred to Manufacturers Life Insurance
Co. [32], and stated that under Part I.3 the terms
"advances" and "loans" should be looked at
differently. This is a technical argument but nonetheless it is
there. Part I.3 is special. On the balance sheet these
cheques are set out as liabilities. The section is meant to
tax liabilities.
Netting of Temporary Investments Policy
[109]With respect to this issue she argued that this is
only relevant in the years 1996 and 1997. In 1994 and 1995 the
accounts were only cash even though they were called "cash
and temporary investments". She indicated that there is no
provision in the Act for any off-setting. The
Minister's policy was to allow an off-setting of cash on hand
from unpresented cheques. That is the policy and that is what the
Appellant was allowed to do.
[110] The Minister assessed on the basis that the
Appellant was entitled to net amounts of cash but not
short-term investments. There was no provision or policy
for allowing this to be done for short-term investments.
This is not unfair. The Act does allow for deduction of
investment allowances under
subparagraph 181.1(7)(a)(i). If the company had met
these requirements, it would have been able to deduct the
investment allowance from its taxable capital under
Part I.3. The taxpayer claimed all of the investment credits
that it was entitled to for all years.
[111] The case of Federated Co-operatives
Limited [33], stands for the proposition that Parliament
knew what it was doing when disallowing bankers' acceptances
in its investment allowance under Part I.3. Temporary
investments are not cash (and bankers' acceptances are
not).
[112] With respect to the argument on the
re-characterization of financial statements by the
Minister, counsel said that the amounts are shown as a liability
on the financial statements. The statements are made according to
GAAP. Therefore it is not an issue of re-characterization
of the financial statements but the Minister is entitled to do
that anyway.
[113] The appeals should be dismissed with costs.
[114] In rebuttal counsel for the Appellant conceded the
second issue.
[115] On the main issue he said that the Act says
that only certain things are capital. It does not matter that
they are treated as liabilities or not. Why should we look at
these amounts through different eyes. Accountants have looked at
them as "liabilities" and not as loans or advances.
[116] The Respondent has confused the relationship
between Canfor and its suppliers. A cheque is a bill of exchange.
Therefore, as between Canfor and the supplier, it is a payment.
It is a payment to the payee. There is no relationship there to a
loan and there is no lender/borrower relationship between the
bank and Canfor. It is a fiction to suggest that there is a
loan.
[117] The Respondent has suggested that because there is
a line of credit there is a draw on the bank. Not one case
suggested that. Counsel referred to the case of
Fowlis [34], and said that there the question was whether
or not there was a payment. In Piché
[35], the Court
pointed out that there is a difference between the acceptance of
a cheque by its payee and the banking operation by which monies
are deposited to the credit of the bearer. It is the drawing down
of the line of credit that creates the loan. [36]
[118] He also referred to CIP Inc. v. Toronto
Dominion Bank [37], where the Court stated, "An overdraft is
money lent: 'A payment by a bank under an arrangement by
which the customer has an overdraft is a lending by the bank to
the customer of the money'." That is not the case
here.
[119] The Minister is operating under a fiction that all
the cheques were coming due on the same day and they did not or
would not come due that way. The Minister is confusing the
relationship between the payee and Canfor and the relationship
between the bank and Canfor. If this interpretation is correct,
there could be double taxation.
Analysis and Decision
[120] The Court agrees with both counsel in this matter
that there is very little dispute with respect to the facts.
There are also two issues very well defined by both counsel. The
second issue can be dealt with rather quickly and the Court will
consider it first.
[121] The secondary issue, so-called, was whether the
Minister's administrative policy that allows corporations to
offset cash balances against unpresented cheques can be
judicially expanded to include short-term investments. The Court
is satisfied that the answer to this question is no.
[122] It was argued by counsel for the Respondent that
there must be a legal basis for the Court to intervene in the
matter to allow offsetting and the Court concludes that no such
legal basis exists.
[123] What has been invoked in this matter during the
1996 and 1997 years comes under the all-embracing,
all-inclusive completely undefined phrase, "administrative
policy", but there is no provision in the Act
allowing any offsetting. The Minister's policy is to allow
offsetting of cash amounts against unpresented cheques for the
purposes of Part I.3 tax calculations, but the Court has no
jurisdiction in that regard. This policy is restricted to cash on
account, either domestic or foreign and the short-term
investments at bar are not cash.
[124] Counsel for the Respondent pointed out that this
would not appear to be unfair under the circumstances since the
Act does allow for deductions of investment allowances
under subparagraph 181.1(7)(a)(i). Providing the company
met the requirements of the section it would have been able
to deduct the investment allowance from its taxable capital gain
made under Part I.3. Apparently the taxpayer did claim all
of the investment credits to which it was entitled in all years
in dispute.
[125] With respect to the secondary issue then, the
appeal will be dismissed and the Minister's action
disallowing the offsetting will be confirmed.
[126] This leaves for consideration the more difficult,
significant and contentious issue as to whether or not the
unpresented cheques constitute "loans and advances" to
the corporation, within the meaning of paragraph
181.2(3)(c) of the Act. If they are loans and
advances to the corporation at the end of the year, then they
would constitute capital under section 3 and be subject to
so-called "tax on large corporations" under
Part I.3 of the Act.
[127] This is a rather onerous provision and counsel for
the Respondent indicated that when introduced its purpose was to
reduce the federal deficit and to ensure that all large
corporations pay federal tax and contribute to the deficit
reduction. However, regardless of how lofty the aims of the
provision, in order for it to apply against the taxpayer in this
case, it must come within the four corners of the provision.
Simply put, the Court must be satisfied that the unpresented
cheques in 1996 and 1997 were "loans or advances"
within the meaning of paragraph 181.2(3)(c).
[128] It is trite to say that there is no definition in
the provision for any of these terms. This leads the Court to
conclude that Parliament intended that the meaning to be
subscribed to these terms is that which is normally employed in
common parlance, in everyday use, in definitions found in the
dictionary and what is commonly understood in commercial
practice, when those terms are used.
[129] At first blush, one would conclude that the task
should be relatively simple. Both counsel have advanced their
definitions of what the terms mean. Suffice it to say that a loan
is generally defined as "a delivery by one party, and
receipt by the other party, of a sum of money upon agreement,
express or implied to repay with or without interest". Those
were the definitions referred to by the Respondent.
[130] On the other hand, counsel for the Appellant
referred to the "ordinary meaning" as set out in
various dictionaries defining an "advance" as a payment
before it is due; payment or advance before time of payment and a
"loan", as delivery by one party and receipt by another
party of a sum of money upon agreement to repay. Further a
"loan" is something lent, usually money on condition
that it is returned with or without interest.
[131] He suggested further that the use of the word
"employed" in subsection 181.1(1) of the provision
is significant. That word, according to him, suggests and implies
that capital in question is used by the business. That section
reads as follows:
181.1(1) Every corporation shall pay a tax under this
Part for each taxation year equal to 0.225% of the amount,
if any, by which
(a) its
taxable capital employed in Canada for the year
exceeds
(b) its
capital deduction for the year.
It is also significant as argued by counsel that a reading of
subsection 181.2(3) indicates that the items enumerated
under the definition of "capital" are all items, which
represent resources available to a corporation for the conduct of
its business. That section reads as follows:
181.2(3) The capital of a corporation (other than a financial
institution) for a taxation year is the amount, if any, by which
the total of
(a) the
amount of its capital stock (or, in the case of a corporation
incorporated without share capital, the amount of its
members' contributions), retained earnings, contributed
surplus and any other surpluses at the end of the year,
(b) the
amount of its reserves for the year, except to the extent that
they were deducted in computing its income for the year under
Part I,
(c) the
amount of all loans and advances to the corporation at the end of
the year,
(d) the
amount of all indebtedness of the corporation at the end of the
year represented by bonds, debentures, notes, mortgages,
bankers' acceptances or similar obligations,
(e) the
amount of any dividends declared but not paid by the corporation
before the end of the year,
(f) the
amount of all other indebtedness (other than any indebtedness in
respect of a lease) of the corporation at the end of the year
that has been outstanding for more than 365 days before the end
of the year; and
(g) where the
corporation was a member of a partnership at the end of the year,
that proportion of the total of all amounts (other than amounts
owing to the member or to corporations that are other members of
the partnership) that would be determined under this paragraph
and paragraphs (b) to (f) in respect of the
partnership at the end of its last fiscal period ending at or
before the end of the year (if the references in paragraphs
(b) to (f) to "corporation" were read as
references to "partnership") that the member's
share of the partnership's income or loss for that period is
of the partnership's income or loss for that period, exceeds
the total of
(h) the
amount of its deferred tax debit balance at the end of the
year,
(i) the
amount of any deficit deducted in computing its shareholders'
equity at the end of the year, and
(j) any
amount deducted under subsection 135(1) in computing its
income under Part I for the year, to the extent that the
amount can reasonably be regarded as being included in the amount
determined under any paragraphs (a) to (g) in
respect of the corporation for the year.
This would appear to be a rather exhaustive list and
counsel's arguments thereto are not insignificant.
[132] There is nothing in the paragraph which would seem
to leave much wiggle room for including anything else unless it
comes within the provisions and it would appear that "the
taxable capital employed in Canada of a corporation for the
taxation year" is a limiting provision or a modifying
provision and cannot be regarded as being insignificant.
[133] At first blush, looking at the terms
"loans" and "advances" used in the context of
the complete provision, considering the terms from a common sense
or ordinary use point of view and further considering the cases
that have been referred to, the following terms appear to be
significant: liability; the borrower or recipient; the advancer;
the lender.
[134] With respect to "advance", the claim
that is made before payment is due; an actual transfer of funds
from the advancer to the borrower; a transfer of cash and the
creation of a debt; some situation where a payment is made and
received and the amount becomes part of the financial resources
of the firm.
[135] With respect to an "advance" there must
be an actual payment of money rather than an anticipated payment.
An advance is something made before it is actually due.
[136] With respect to "loan", there is a
liability created between the lender and the borrower resulting
from the advancing and use of the funds. There must be a
relationship of "creditor/debtor" created. There must
be more than a loan commitment that has not been acted upon.
There must be a transfer to the taxpayer on the taxpayer's
behalf.
[137] From a common sense point of view, from the point
of view of ordinary parlance and ordinary commercial activity, it
would appear that these definitions must be met in order for
there to be a "loan" or "advance" as
envisaged by the appropriate provision of the Act. The
Respondent appears to be arguing that when you are considering
terms in the context of paragraph 181.2(3)(c) you
should not look at them from the common sense point of view, from
the dictionary definition point of view or the normal commercial
use of the terms. You should look at them from a different point
of view and the provisions should be interpreted by reference to
"the language accountants speak".
[138] She purports that you may look at the terms
through a different glass, through a microscope, through the eyes
of an accountant from a balance sheet point of view since these
items are shown as a liability on the financial statements of the
taxpayer. Further, these financial statements are made in
accordance with GAAP and therefore, if they are shown as a
liability then they should be characterized as such.
[139] She also placed considerable reliability upon the
fact that cheques are negotiable instruments under the Bills
of Exchange Act which provides that the delivery of a
negotiable instrument by the one person to another constitutes
payment. In the case at bar at the time that the Appellant issued
and delivered the unpresented cheques to the recipients the
Appellant intended to effect and perfect payment.
[140] In common law jurisdictions delivery of the cheque
constitutes payment at that time. Presumably then, the argument
is that the liability was created at that time.
[141] Counsel argued that the writing of the cheque on
the bank account by the Appellant constituted a draw upon that
account where that cheque represents a payment. Here, since there
was a line of credit or overdraft agreement in place, this
presentation of the cheque to the creditors was a conditional
payment, loan or advance, for the purposes of Part I.3. In
her estimation, this principle is not altered by the fact that
the underlying liability between the original debtor and the
creditor is not generally discharged until the cheque is honoured
by the respective bank or whether the bank can charge interest on
the amount of the cheque between the date of delivery and the
date the cheque is presented to the bank. Whether or not the
cheque results in indebtedness or a negative bank balance on the
balance sheet, the amounts are "loans or advances"
within the meaning of Part I.3.
[142] By granting the line of credit or overdraft, (by
agreement) the bank has tacitly acknowledged or agreed to the
overdraft in advance. The unpresented cheques in themselves do
not constitute an indebtedness to the corporation but the bank
indebtedness reflected in the balance sheet resulting from
outstanding cheques constitutes a "loan or advance"
where the delivery of the cheque by a debtor to a creditor
operates as payment.
[143] The Appellant intended payment, the recipient
expected payment and the bank had bound itself to extend credit
to cover the payment thereby anticipating the conditions
subsequent.
[144] Again, counsel for the Respondent argued that her
interpretation is a technical argument but nonetheless it is
there. Part I.3 is special and you have to wear special
glasses when you are looking at it. On the balance sheet these
cheques are set out as liabilities and the section is meant to
tax liabilities.
[145] The Court can detect nothing in its reading of
subsection 181.2(1) which would require it to look at the
section in a particular way. It does not see why it should
look at it with special glasses or should look at it differently
because the Appellant has recorded outstanding cheques as
liabilities on the balance sheet in accordance with GAAP. The
section itself does not refer to balance sheets prepared in
accordance with GAAP. Even if it did, the recording of an item on
a balance sheet as a liability does not change something that was
not a "loan" or "advance" under the
definition, into a "loan or advance" because it is set
out in the balance sheet as a liability.
[146] Outstanding cheques are set out in the balance
sheet as liabilities because as between the payor and the issuer
they are liabilities from the time the cheque was written. That
is the relationship between the issuer of the cheque and the
payee of the cheque and it has nothing whatsoever to do with the
relationship between the bank and the issuer of the cheque. The
liability of the issuer of the cheque to the bank under the line
of credit does not result from the cheque being issued but rather
from the cheque being drawn down and only if there are
insufficient funds in the accounts to meet the requirements at
any particular time. There was no evidence introduced to indicate
that this happened in the years in issue.
[147] The Court is satisfied that the Respondent has
misconstrued the legal effect of the issuing of the cheque under
the legislation with respect to bills of exchange as between the
issuer of the cheque and the payee and the legal relationship
between the issuer of the cheque and the bank. That legislation
did not create, through some process of osmosis or otherwise, a
similar type of liability vis-à-vis the bank and
the issuer of the cheque. These are two different commercial
transactions. The fact that the cheque is a bill of exchange does
nothing to create between the bank and the issuer of its cheque
the liability suggested by counsel for the Respondent.
[148] The Court does not accept the argument that
because the Appellant intended the cheque to be payment to the
supplier, the recipient expected payment and the bank had bound
itself by its separate contract to extend credit when called upon
to do so, that this created a "loan or advance" as
suggested by the Respondent.
[149] As the Court indicated at the beginning of these
reasons for judgment, the section in issue is a very onerous
one and appears to contain an exhaustive list as to what amounts
are to be included as capital at the taxpayer's year end. If
the Parliament of Canada intended to include in that list
unpresented cheques at year end, they would only have had to say
so. As far as the Court is concerned it would be stretching the
bounds of credulity to conclude that Parliament had so intended
without specifically saying so in a provision that otherwise
would appear to be quite precise and exhaustive of what was
intended to be included therein.
[150] Counsel for the Respondent in her written
submissions was prepared to admit that the unpresented cheques in
themselves did not constitute an indebtedness to the corporation
but argued that because the bank's indebtedness was reflected
in the balance sheet resulting from the outstanding cheques, this
constitutes a loan or advance. However, the Court considers this
to be a non sequitur.
[151] In written argument, counsel for the Respondent
indicated that according to the Minister's interpretation,
outstanding cheques issued, to the extent that they exceed funds
on deposit, in all common law jurisdictions are considered to be
included in the capital tax base. The Court is not bound by that
interpretation and indeed the Court finds that such an
interpretation is not based upon anything found in the
appropriate provision to say the least.
[152] With respect to the loftiness of the
Minister's intentions, this would not dictate that one should
expand any section beyond the purposes for which it was
intended in accordance with the plain meaning interpretation of
the provision.
[152] Counsel referred to the case of The Grocery
People Limited [38]. She asked the Court to take
into account the fact that this was a decision in an informal
procedure appeal and that the case for the Minister may not have
been so particularly well advanced as it is here. Some of the
facts may not have been set out as there was no written decision.
In the end she concluded that it was wrongly decided.
[153] Regardless of whatever the perceived shortfalls
therein may have been in this reasoning, as set out in the text
available, the Court is satisfied that Sobier, J. correctly
indicated the difference between the legal relationship created
between the creditor and the debtor, i.e. the issuer of the
cheque and the recipient of the cheque and the state of the
account between the debtor i.e. the issuer of the cheque and its
bank. There, Sobier, J. took the plain meaning of the words
"loans" and "advances" as this Court does and
concluded that there has to be an indebtedness created, a
liability of the taxpayer to its financial institution.
[154] He found that no such liability had been created
vis-à-vis the two of them. On that basis, even
though it was characterized as bank indebtedness, it was not in
fact bank indebtedness and calling it so would not make it bank
indebtedness.
[155] This Court is prepared to accept the finding that
no liability exists between the bank and its customer, the
taxpayer in this case, until such time as the bank accepts the
cheque for payment or the account goes into overdraft and the
taxpayer is required to call upon the line of credit to honour
these cheques. The mere presentation of a cheque by the taxpayer
to its creditor does not create bank indebtedness when using the
plain meaning of the words "loans and advances". There
is no "loan" or "advance" until the bank says
there is and the bank has not done so in this case.
[156] In A. C. Simmonds & Sons
Limited [39], Christie, A.C.J. accepted the
definition in Black's Law Dictionary,
5th (1979) edition, as a useful definition
where it defined it as any: "Delivery by one party to and
receipt by another party of a sum of money upon agreement,
express or implied, to repay it with or without interest."
He did not equate this to being descriptive of the transactions
involving letters of credit that were under consideration in that
appeal.
[157] In the case at bar, there was an agreement in
existence between the bank and the taxpayer. The agreement had
provided for delivery and receipt of money in the event that the
line of credit was called upon but it was not. In
A. C. Simmonds & Sons Limited
[40], as
here, there was no debtor/creditor relationship created.
[158] Counsel for the Appellant pointed out that under
the circumstances that existed here the bank had no cause of
action or legal right to recover the net amounts of unpresented
cheques simply because it had never advanced these amounts to the
Appellant and the Appellant was under no obligation to pay
interest with respect to these amounts. These are some of the
hallmarks of "loans" or "advances".
[159] In the end result then, the reality is that there
were no "advances" or "loans" by the bank to
the Appellant on the date at issue in the amounts at issue.
[160] The appeals in that regard will be allowed and the
matter is referred back to the Minister for reassessment and
reconsideration based upon these findings.
[161] The Appellant has been substantially successful
and will be entitled to its costs to be taxed on a party and
party basis.
Signed at Ottawa, Canada, this 1rst day of June,
2004.
Margeson, J.
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