Citation: 2007TCC671
Date: 20071101
Docket: 2006-1382(IT)I
BETWEEN:
JIM BOERSEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the Bench on October 12, 2007, in London, Ontario)
Boyle, J.
[1] These are my reasons delivered orally in
London, Ontario in the case of the Appellant
Mr. Boersen’s 2003 taxation year.
[2] The facts are as follows: The taxpayer made
loans totalling more than $61,000 to a company owned by his uncle. The loans
were at 12 percent interest. The loans were evidenced in writing. The loans
went into default. In 1996, the taxpayer sued the debtor company and his uncle
for approximately $68,000. At that time, under any allocation of the payments
to date, the taxpayer creditor was owed more than $11,500 of principal.
[3] In 2002 I believe, in any event, before
2003, the taxpayer and the defendants entered into a written settlement
agreement. Under its terms, the defendants were to pay $10,000 in instalments
in full settlement of the debt. In fact, the taxpayer creditor received
payments totalling $11,500 in respect of the settlement for reasons that are
not clear.
[4] The settlement agreement is silent as to
the allocation of the settlement payments as between outstanding principal and interest.
The debtor company issued a T-5 to the taxpayer indicating the $11,500 was
interest. Presumably, the debtor company deducted the amount as interest for
tax purposes.
[5] The taxpayer testified that the only
payments he received after starting the lawsuit were the $11,500 and that he,
the taxpayer, treated it as a repayment of principal outstanding. This is
evidenced by his lawyer’s letter to the defendant’s lawyer promptly upon
receipt of the T-5 in question.
[6] The CRA reassessed the taxpayer based on the
T-5 having been issued to him. The Crown assumed in its Reply that prior to the
$11,500 payment in question, the debtor company, "had made full
restitution of loaned amount", which I took to mean the principal advances
of approximately $61,000 had also been repaid. The Crown led no evidence on
this or any other point.
[7] The taxpayer had testified clearly that no such
repayments had been made. The Crown did not challenge that in
cross-examination. I note that nothing in the agreed book of documents, which
included a CRA T-2020 in respect of a CRA telephone call with the debtor,
suggests CRA had anything evidencing a principal repayment beyond the debtor
saying he had it filed away somewhere.
[8] Neither side called the debtor. Neither
side introduced any cheques in evidence. The taxpayer did enter his accounting
records in respect of the advances and repayments in respect of the loan which
I accept for what they are. He also introduced his accounting records with
respect to payments from the debtor for unrelated services rendered that were
not related to the loans and advances.
[9] The Crown’s assumption that the principal
had separately been repaid has clearly been demolished in this case. Since the
facts are that the taxpayer was owed more than $11,500 of principal and
probably more than $11,500 of interest when the settlement amount of $11,500
was received in 2003, the question for the Court is whether it is to be
allocated to the outstanding interest as per CRA or to a recovery of principal
as per the taxpayer.
[10] I frankly cannot believe we are here today
with the present state of affairs. If the principal had been repaid, CRA should
have had some evidence of that or been able to cast some doubt on the taxpayer’s
evidence that it had not been repaid. If the question is merely does the
$11,500 get allocated to outstanding principal or outstanding interest, there
is clear Canadian debtor/creditor law which applies. Importantly, it would seem
irrelevant to argue about this in any event, since any additional interest
income should be offset by a corresponding income loss on the loan made for
interest-bearing purposes.
[11] Expressed simply, the payment is to be
allocated in accordance with the agreement under which it is made, if that agreement
specifies an allocation. The settlement agreement does not make any allocation.
If the agreement is silent, the debtor payor has the right as between himself
and the creditor to allocate a payment as between two or more debts or as
between principal and interest. There is no evidence that the debtor made any
such allocation to the creditor taxpayer upon making the payments. That the
debtor may subsequently have allocated it to interest internally and with CRA
for its tax purposes or any other third party is not sufficient to be an
allocation as between the debtor and the creditor. Absent allocation by the
debtor or the agreement, the creditor upon receiving it has the right to make
the allocation. In this case Mr. Boersen did that, although it is not clear
he ever communicated that to the debtor.
[12] Further, the taxpayer’s allocation to a
recovery of principal before accruing a profit from the loan is in accordance
with normal commercial practice and common sense. That is, lenders who are
losing money on their loans due to default in principal repayment would be
unlikely to persuade anybody they made any money in the form of interest on the
loans. As already stated, the Income Tax Act should make this tax
neutral in any event.
[13] For these reasons, I am allowing the
taxpayer’s appeal and referring the reassessment of the taxpayer’s 2003 year back
to the Minister for reconsideration and reassessment on the basis that the
$11,500 in question was a non-taxable repayment of principal and was not interest.
[14] In the circumstances, the taxpayer is
entitled to costs.
Signed at Ottawa, Canada, this 1st day of November 2007.
"Patrick Boyle"
CITATION: 2007TCC671
COURT FILE NO.: 2006-1382(IT)I
STYLE OF CAUSE: JIM BOERSEN AND HER MAJESTY THE QUEEN
PLACE OF HEARING: London, Ontario
DATE OF HEARING: October 12, 2007
REASONS FOR
JUDGEMENT BY: The Honourable Justice Patrick Boyle
DATE OF JUDGMENT: November 1, 2007
APPEARANCES:
|
Counsel for the Appellant:
|
Gerald
K. Culliton
|
|
Counsel for the Respondent:
|
Andrew Miller
|
COUNSEL OF RECORD:
For the Appellant:
Name: Gerald K. Culliton
Firm: Mountain
Mitchell LLP
Stratford, Ontario
For the
Respondent: John H. Sims, Q.C.
Deputy
Attorney General of Canada
Ottawa,
Canada
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