The Queen v. Silden, 93 DTC 5362, [1993] 2 CTC 123 (FCA)

Pratte, J.A.:—This is an appeal from a judgment of the Trial Division allowing an appeal from a decision of the Tax Court of Canada dismissing the respondent's appeal from his 1981 income tax assessment.

That assessment was made on the basis that a sum of $55,000, being the amount of a loan made to the respondent during the taxation year in question, was to be included in computing his income for that year pursuant to subsection 15(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") as it then read. [1]

The appeal raises three questions: (1) whether it is necessary, in order for subsection 15(2) to apply, that the loan be made to a shareholder of the particular corporation in question as a shareholder; (2) whether the respondent is right in contending that subsection 15(2) has no application in the circumstances of this case by reason of the fact that the respondent was not a shareholder of the company which, according to the Trial Division, lent him the $55,000; and (3) whether the exemptions or exceptions provided for in paragraph 12(2)(a) exclude the loan made to the respondent from the charging provision of subsection 15(2).

These three questions are easily answered.

First, when subsection 15(2) is read in its entirety, it is apparent from the list of the exceptions contained in paragraph 15(2)(a) that the subsection applies not only to loans made to shareholders as shareholders but also to loans made in the ordinary course of business to employees who happen to be shareholders. As stated by Judge Bonner in this case, [l]f the general rule had been intended to call for tax only on loans to shareholders qua shareholders and to ignore loans to shareholders qua employees there would have been no need to create the exceptions in subparagraphs (ii), (iii) and (iv)". In our opinion, the text of the subsection is so clear that the rulings of the Department of National Revenue giving it a different interpretation should be ignored.

According to the Trial Division, the loan of $55,000 was made to the respondent by a Norwegian company, referred to as Musnor, which was related to a Canadian company, referred to as Muscan, of which the respondent was a shareholder. On the basis of that finding, the respondent argues, and this is the second issue to be resolved, that the requirements for the application of subsection 15(2) are not met in this instance since he was not a shareholder of Musnor, the company that lent the money. Simply put, this contention amounts to saying that subsection 15(2) does not apply unless the taxpayer received a loan from a particular company of which he was a shareholder. This proposition cannot be reconciled with the text of the provision. Under subsection 15(2), the taxpayer must be a shareholder of a particular company and must have received a loan either from that company or from another company related to it. The subsection does not require a taxpayer to be a shareholder of the lender; he must be a shareholder either of the lender or of a company related to it.

The last question to be resolved is whether the Trial Division correctly held that, in any event, the loan to the respondent falls within the exception provided for in subparagraph 15(2)(a)(ii). In order for the exception to apply, two general conditions need to be met. First, the loan must be made "to an employee of the lender. . . to enable or assist the employee . . . to acquire a dwelling for his habitation” and, second, bona fide arrangements must have been "made at the time the loan was made for repayment thereof within a reasonable time”. It is the appellant's contention that, in this instance, neither condition was met since, on the one hand, the loan that was allegedly made to enable the respondent to acquire a house was made more than a year after the respondent had purchased that house and since, on the other hand, the arrangements made at the time of the loan merely provided that it should be repayable if and when the respondent left his employment or ceased to be the owner of the house.

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 besides 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.

The appeal will be allowed, the decision of the Trial Division will be set aside and the decision of the Tax Court of Canada will be restored. The appellant shall be entitled to her costs in the Trial Division as well as in this Court.

Crown's appeal allowed.