Kempo,
T.C.J.:—These
appeals,
on
consent
application,
were
joined
for
hearing
on
common
evidence
as
the
issues
are
interrelated.
Counsel
for
the
respondent
advised
the
Court
that
the
penalties
levied
against
each
appellant
pursuant
to
subsection
163(2)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act")
were
no
longer
being
pursued
and
that
this
matter
was
being
abandoned.
Issues
Uphill
Holdings
Ltd.
(“
Uphill
Holdings")
was
incorporated
for
the
principal
purpose
of
holding
Mr.
Nigel
Hill's
shares
in
a
public
company,
Develcon
Electronics
Ltd.
There
is
one
issue
raised
here.
For
its
1984
fiscal
period
ending
June
30,
the
respondent
disallowed
certain
amounts
claimed
as
deductions
from
income
for
legal
and
accounting
fees
on
the
basis
that
they
were
not
in
their
entirety
made
or
incurred
for
the
purpose
of
gaining
or
producing
income
from
business
or
property
pursuant
to
paragraph
18(1)(a)
of
the
Act.
Mr.
Hill’s
appeals
raised
three
issues.
The
first
one
is
a
consequence
of
the
one
just
described
in
that
the
amount
denied
to
Uphill
Holdings
was
added
into
his
own
income
for
his
1984
taxation
year
as
an
appropriation
pursuant
to
subsection
15(1)
of
the
Act.
The
second
concerned
the
denial
of
losses
arising
from
the
rental
of
property
during
1983
and
1984
for
the
reason
that
there
was
no
reasonable
expectation
of
profit
therefrom
during
that
period
of
time.
The
third
and
major
issue
concerned
Mr.
Hill’s
shareholder
loan
account
in
Uphill
Holdings
during
1983
and
1984
from
which
certain
amounts
were
added
by
the
respondent
into
Mr.
Hill’s
income
for
each
year
pursuant
to
subsection
15(2)
of
the
Act
on
the
basis
that
none
of
the
exempting
provisions
of
paragraphs
(a)
and
(b)
of
subsection
15(2)
were
applicable
to
exclude
these
amounts.
The
rental
property—Nigel
Hill:
1983,
1984
On
December
8,
1982
Mr.
Hill
acquired
a
0.45
acre
ocean
view
property
on
Salt
Spring
Island,
B.C.
with
a
two-bedroom
1,500
square
foot
home
located
thereon
for
$100,000.
A
two-year
mortgage
of
$75,000
at
14.25
per
cent
was
placed,
the
balance
being
paid
in
cash.
Mr.
Hill
said
that
after
making
some
inquiries
and
searching
through
local
papers
he
had
determined
a
net
rental
of
$300
per
month
(he
would
pay
for
the
insurance
only)
would
be
reasonable.
He
also
said
that
his
mother,
who
was
to
occupy
the
premises,
desired
the
arrangement
between
them
to
be
of
a
commercial
nature.
In
order
to
attract
a
significant
property
tax
reduction,
Mr.
Hill
entered
into
a
written
five-year
lease
with
his
mother
with
a
stated
rental
of
one
dollar
per
year.
This
figure,
he
said,
was
wrong
and
had
gone
unnoticed
by
him.
His
mother
actually
paid
$300
per
month
pursuant
to
their
earlier
verbal
arrangement
and
she
maintained
responsibility
for
all
costs
involving
upkeep,
maintenance
and
utilities.
The
1983
and
1984
losses
claimed
arose
essentially
out
of
the
shortfall
between
the
annual
rental
income
of
$3,600
and
the
interest
paid
on
the
mortgage
during
each
year
which
was
$10,772
for
1983
and
$6,174
for
1984.
The
mortgage
was
paid
out
on
December
3,
1984.
The
1985
situation
showed
a
profit
due
to
the
mortgage
debt
being
extinguished.
In
my
view
Mr.
Hill
has
not
shown,
on
the
balance
of
probabilities,
that
the
respondent
had
erred
in
this
matter.
Losses
were
expected
to
occur
because
of
undercapitalization
with
only
some
vague
plan
on
his
part
that
some
time
in
the
future
the
mortgage
may
be
paid
down.
Further,
the
evidence
was
sparse
respecting
either
the
reasonableness
of,
or
the
fair
market
value
of,
the
rental
rate
obtained
or
obtainable.
The
facts
in
Paikin
v.
M.N.R.,
[1987]
1
C.T.C.
2041,
87
D.T.C.
6
(T.C.C.)
are,
in
my
opinion,
markedly
dissimilar
to
those
before
me
and
therefore
its
outcome
is
of
no
real
assistance.
The
D.T.C.
headnote
caption
of
the
decision
in
Paikin
reads:
Held:
The
taxpayer's
appeal
was
allowed.
The
Court
found
that
the
taxpayer
purchased
the
property
as
a
revenue-producing
asset
and
not
for
his
own
or
his
mother's
personal
benefit.
The
mother
had
agreed
and
was
expected
to
pay
rental
at
fair
market
value
while
in
possession.
Furthermore,
it
could
not
be
said
that
there
was
no
reasonable
expectation
of
profit.
The
evidence
established
that,
from
the
outset,
there
was
a
thoughtful,
well-researched
business
approach
to
the
investment.
Of
greater
significance
was
the
fact
that
the
taxpayer
subsequently
paid
off
his
share
of
the
mortgage
which
supported
the
taxpayer's
assertion
that
the
original
investment
was
part
of
a
well-orchestrated
plan
for
profit-making.
[Emphasis
added.]
In
Lorentz
v.
M.N.R.,
[1985]
1
C.T.C.
2144,
85
D.T.C.
131
(T.C.C.)
Christie,
A.C.J.T.C.
said
at
page
2145
(D.T.C.
132):
The
issue
must
be
determined
by
objective
testing.
In
order
to
discharge
the
onus
which
rests
upon
him
in
the
circumstances
of
this
case,
the
appellant
need
not
show
that
in
purchasing
the
property
he
acted
on
the
basis
of
some
unbiased
sophisticated
analysis
or
advice
regarding
the
prospects
of
rental
income
vis-a-
vis
rental
expenses.
Nevertheless,
he
must
place
evidence
before
the
Court
from
which
it
can
be
objectively
concluded
that
his
conduct
was
that
which
could
be
expected
of
a
reasonably
prudent
person
becoming
involved
in
a
commercial
undertaking
designed
to
extract
profit
from
renting
real
estate.
[Emphasis
added.]
Mr.
Hill
has
failed,
in
my
opinion,
to
satisfy
this
evidentiary
onus
and
therefore
this
aspect
of
his
appeal
fails.
The
professional
fees—Uphill
Holdings
and
Nigel
Hill—1984
During
1983
and
1984
the
assistance
of
expert
professional
advice
in
the
areas
of
corporate
law,
tax
law,
securities
law
and
matrimonial
property
law
were
required
by
both
Mr.
Hill
and
Uphill
Holdings
due
to
Mr.
Hill’s
marriage
breakdown.
Claims
to
marital
assets
were
being
advanced
by
Mrs.
Hill
and
there
is
little
doubt
but
that
Uphill's
affairs
and
assets
were
material
in
the
whole
matter.
Mr.
Hill
testified
that
the
law
firm
of
Goldstein
and
Goldstein
represented
himself
as
well
as
Uphill
Holdings
in
their
capacity
as
its
general
corporate
counsel.
The
two
law
firms,
McKercher
McKercher,
and
Lawson
Lundell,
were
retained
for
corporate,
tax
and
securities
purposes
and
the
chartered
accounting
firm
of
Peat
Marwick
for
tax
and
accounting
purposes.
It
was
the
evidence
of
Mr.
Hill
and
Mr.
Terry
Grieve,
a
chartered
accountant,
that
all
of
the
professional
firms
were
instructed
to
ensure
their
accounts
designated
either
personal
or
corporate
matters
and
that
each
was
to
be
segregated
from
the
other
where
possible.
The
issue
at
hand
arose
because
of
the
particulars
stated
in
the
subject
professional
accounts.
Those
indicating
an
obvious
mixture
of
corporate
and
of
personal
services
were
allowed
by
the
respondent
as
to
50
per
cent
to
corporate
deductibility.
The
balance
was
determined
to
be
a
subsection
15(1)
appropriation
of
company
funds
and
therefore
added
to
Mr.
Hill’s
income.
His
counsel
suggested
that
a
greater
amount
ought
to
have
been
given
to
corporate-related
matters.
However
nothing
of
an
objective
substantive
nature
was
advanced.
With
respect
to
these
accounts
which
totalled
$26,282.08,
the
respondent's
50-50
allocation
has
not
been
shown
to
be
erroneous
in
any
particular
way
and
will
not
be
disturbed.
The
respondent
disallowed
corporate
deductibility
in
total
of
the
particular
McKercher
account
dated
25
October
1983
on
the
basis
that
it
related
solely
to
Mr.
Hill's
personal
matters.
Similarly,
this
sum
was
included
in
Mr.
Hill’s
income
as
a
subsection
15(1)
appropriation.
The
particulars
recited
therein
of
the
services
rendered
read
as
follows:
RE:
HILL
V.
HILL
To
all
attendances
involved
in
assisting
Mr.
Goldstein
to
prepare
for
trial,
and
subsequently
negotiate
a
settlement
of
outstanding
matters
between
Mr.
and
Mrs.
Hill
between
June
18,
1983
and
October
17,
1983
including:
To
review
of
pleadings;
To
review
of
examinations
for
discovery;
To
interviewing
client;
To
drafting
notice
of
motion
and
affidavit;
To
preparation
for
examinations
for
discovery;
To
conducting
examination
for
discovery
of
Mrs.
Hill;
To
conducting
legal
research;
To
preparing
draft
brief
of
law
for
trial;
To
attending
consultations
with
client;
To
attending
consultations
with
Mr.
Goldstein;
To
negotiating
settlement
with
Mrs.
Hill’s
lawyers;
To
assisting
in
drafting
settlement
documents
and
roll
over
agreements;
To
all
telephone
attendances;
To
all
correspondence;
To
all
miscellaneous
attendances
not
referred
to
above;
Mr.
Hill
expressed
surprise,
upon
reviewing
these
particulars,
that
that
firm
had
been
so
taken
up
with
the
personal
aspects
of
the
divorce.
This
account
had
been
directed
to
Uphill
Holdings
Ltd.
c/o
Goldstein
&
Goldstein
and
was
paid
in
early
1984
by
an
Uphill
Holdings
cheque.
Given
all
of
the
evidence,
I
find
no
error
on
the
part
of
the
respondent
in
any
of
the
aspects
of
the
professional
accounts
matters,
and
the
appeals
of
Mr.
Hill
and
Uphill
Holdings
fail
in
these
respects.
Shareholder
loan
account—Mr.
Hill
1983,
1984
The
crux
of
this
matter
is
found
in
the
pleadings.
The
respondent's
argumentative
position
is
reflected
in
clause
17
of
the
reply
to
notice
of
appeal
that
.
.
.
the
amounts
of
$756,053.88
and
$299,451.85
.
.
.
were
loans
from
the
corporation
to
the
appellant
in
the
1983
and
1984
taxation
years
and
none
of
the
exempting
provisions
of
paragraphs
(a)
and
(b)
of
subsection
15(2)
of
the
Act
were
applicable
to
exclude
the
said
amounts
from
the
computation
of
the
appellant's
income
in
his
1983
and
1984
taxation
years.
The
facts
relied
upon
by
the
respondent
were
pleaded
in
clause
14(b)
of
the
reply
thusly:
(b)
With
respect
to
the
shareholders’
loan
account:
(i)
The
appellant
incorporated
Uphill
Holdings
Ltd.
(hereinafter
referred
to
as
the
corporation)
in
December
1980.
(ii)
The
appellant,
at
all
times
material
to
the
matters
herein,
maintained
a
shareholder
loan
account
with
the
corporation.
(iii)
The
taxation
year
end
of
the
corporation
was
June
30.
(iv)
From
June
30,
1982
to
June
30,
1985,
the
balances
outstanding
in
the
said
shareholder
loan
account
at
the
times
material
hereto,
were
in
a
debit
balance,
as
follows:
Date
|
Balance
|
June
30,
1982
|
|
Dec.
31,
1982
|
$42,257.41
DR
|
June
30,
1983
|
32,857.65
DR
|
Dec.
31,
1983
|
788,911.53
DR
|
June
30,
1984
|
1,088,363.38
DR
|
Dec.
31,
1984
|
1,210,152.78
DR
|
June
30,
1985
|
310,211.62
CR
|
(v)
The
corporation,
in
its
1983
and
1984
taxation
years,
made
loans
to
the
appellant,
as
shareholder
of
the
corporation,
in
the
following
amounts:
1983
|
$756,053.88
|
1984
|
299,451.83
|
(vi)
The
said
amounts
referred
to
in
paragraph
12(b)(v)
[sic]
herein
were
debts
to
the
corporation's
loan
account
and
were
for
personal
expenditures
of
the
appellant
and
accordingly,
were
properly
included
in
the
computation
of
the
income
of
the
appellant
in
his
1983
and
1984
taxation
years.
(vii)
The
indebtedness
referred
to
in
paragraph
12(b)(v)
[sic]
herein,
constituted
a
series
of
loans
and
repayments,
and
as
such
are
included
in
the
appellant's
income
in
the
year
the
indebtedness
occurred.
(viii)
As
at
June
30,
1985;
the
loan
balances
of
the
corporation
were
repaid
by
the
appellant
entitling
the
appellant
to
deduct
the
amount
of
loans,
being
$1,055,505.73
from
his
income
in
1985,
in
accordance
with
paragraph
20(1)(j)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
Mr.
Hill
expressed
his
position
in
his
notice
of
appeal
in
this
way:
B.
Treatment
of
“
Shareholders
Loan
Account”
1983,
1984,
1985
FACTS:
1.
In
December
of
1980
the
taxpayer
caused
to
be
incorporated
Uphill
Holdings
Ltd.,
a
Saskatchewan
incorporated
company
in
which
the
Taxpayer
was
sole
officer,
director
and,
in
effect,
shareholder.
Uphill
Holdings
Ltd.
acquired
from
the
taxpayer
the
shares
in
Develcon
Electronics
Ltd.
and
other
like
shares
and
investments.
2.
During
the
period
July
1,
1982
to
June
30,
1985
the
taxpayer
withdrew
funds
from
Uphill
Holdings
Ltd.,
but
in
each
case
these
funds
were
repaid
to
the
corporation,
by
the
end
of
its
fiscal
period,
either
by
way
of
dividends
declared
or
by
way
of
salary
paid
to
the
taxpayer.
3.
The
Minister
added
the
sum
of
$756,053.88
to
the
taxpayer's
income
for
1983
and
the
sum
of
$299,451.85
to
the
taxpayer's
income
for
1984.
He
deemed
these
sums
to
be
the
amount
of
shareholders
loans
unrepaid
at
the
end
of
the
taxpayer's
(calendar)
taxation
years
1983
and
1984,
and
therefore,
taxable
pursuant
to
subsection
15(2)
of
the
Act.
4.
Inasmuch
as
the
taxpayer
had
paid
back
these
sums
to
the
corporation
by
the
end
of
its
1985
fiscal
year
end,
June
30,
1985,
the
Minister
applied
paragraph
20(1)(j)
of
the
Act
and
deducted
from
the
taxpayer's
1985
income
the
total
of
the
said
sums,
$1,055,505.73.
REASONS:
1.
The
amounts
received
by
the
taxpayer
from
the
corporation
in
the
period
July
1,
1983
to
June
30,
1984
were
all
repaid
within
one
year
from
the
end
of
the
taxation
year
of
the
corporation
in
which
the
funds
were
advanced.
For
that
reason
alone
no
such
amounts
should
be
included
in
the
taxpayer's
income
for
1983
and
1984
pursuant
to
subsection
15(2)
of
the
Act.
2.
Advances
to
a
shareholder
should
be
considered
as
loans
only
at
the
end
of
the
financial
year
of
the
corporation.
It
is
then
that
amounts
owing
by
a
shareholder
might
be
considered
as
forming
“
part
of
a
series
of
loans
or
other
transactions
and
repayments".
At
the
end
of
each
of
the
corporation’s
taxation
years
there
was
no
amount
owing
by
the
taxpayer
to
the
corporation,
the
taxpayer
having
repaid
the
same
by
way
of
dividend
declared
or
salary
paid
to
him.
Such
dividends
or
salary
were
duly
declared
by
the
taxpayer
and
any
tax
liability
on
account
thereof
was
reported
and
paid
by
him.
3.
For
the
above
reasons
and
since
any
indebtedness
of
the
taxpayer
to
the
corporation
was
fully
repaid
by
the
end
of
the
corporation's
1985
fiscal
year
end,
the
amounts
included
in
the
taxpayer's
income
under
subsection
15(2)
in
1983
and
1984
should
be
deleted.
At
the
same
time
the
deduction
allowed
to
the
taxpayer's
income
in
1985
under
20(1)(j)
of
the
Act
should
be
reversed.
Mr.
Hill’s
1985
taxation
year
was
not
on
appeal
before
the
Court.
Mr.
Hill’s
chartered
accountant,
Terry
Grieve,
confirmed
that
Uphill
Holdings
had
very
few
stock
transactions,
and
that
his
services
had
not
extended
beyond
preparation
of
working
papers
reflective
of
these
matters
and
the
cash
advances
to
Mr.
Hill.
He
said
that
as
far
as
he
was
concerned
the
overall
plan
was
to
ensure
dividends
in
sufficient
amounts
would
be
declared
and
paid
to
Mr.
Hill
in
order
that
his
indebtedness
to
Uphill
Holdings
would
be
paid
in
full
at
the
appropriate
time.
He
emphasized
that
dividends
amounting
to
$300,000
paid
to
Mr.
Hill
out
of
the
capital
dividend
account
had
been
accepted
by
the
Minister
as
a
repayment
of
the
loan
account
because
of
the
deduction
applied
thereto
under
paragraph
20(1)(j)
of
the
Act
for
Mr.
Hill's
1985
taxation
year.
On
cross-examination,
Mr.
Grieve
confirmed
that
a
$1.2
million
transfer
from
an
affiliated
company
(Uphill
Investments
Ltd.)
into
Mr.
Hill’s
shareholder
loan
account
on
Uphill
Holdings’
year-end
date,
30
June
1984,
was
merely
a
book
entry
and
that
this
amount
was
then
retransferred,
again
by
book
entry,
to
that
affiliate
one
month
later.
He
agreed
that
it
was
really
a
non-event.
Apparently
the
respondent's
officials
had
similarly
viewed
this
transaction
as
a
non-event
as
is
shown
on
the
30
June
1984
entry
in
their
written
analysis:
(EXHIBIT
A-3,
Page
5)
ANALYSIS
OF
SHAREHOLDER'S
LOAN—NIGEL
HILL
1982-1985
|
Balance
|
Increase/Decrease
|
|
June
30,
1982
|
0
|
1982
|
1982
|
|
$
|
32,857.65
|
December
31,
1982
|
$42,257.41
DR.
|
$32,857.65
|
|
June
30,
1983
|
32,857.65
DR.
1983
|
1983
|
|
$
756,053.88
|
December
31,
1983
|
788,911.53
DR.
|
1,055,505.73
|
|
June
30,
1984
|
1,088,363.38
DR.
1984
|
1984
|
|
$
299,451.83
|
December
31,
1984
|
1,210,152.78
DR.
|
(1,088,363.38)
|
|
June
30,
1985
|
310,211.62
CR.
|
|
1985
|
|
$(1,088,363.38)
|
*The
June
30,
1984
balance
has
been
adjusted
to
exclude
the
journal
entry
reducing
the
shareholder's
loan
by
$1,200,000.
This
entry
was
made
at
year
end
and
reversed
immediately
afterwards.
As
such,
we
cannot
accept
this
as
a
bona
fide
repayment
since
this
is
a
series
of
loans
and
repayments.
|
SUMMARY
|
|
|
1982
1983
1983
|
1984
1984
|
1985
1985
|
Change
|
$32,85
7.65
|
$756,053.88
|
$299,451.85
|
$(1,088,363.38)
|
|
32,857.65
|
Subsection
15(2)
|
Subsection
15(2)
|
32,857.65
|
|
0
|
Adjustment
|
Adjustment
|
$(1,055,505.73)
|
|
Paragraph
20(1)(j)
|
|
deduction
|
Note
1:
|
|
The
1982
balance
is
statue
[sic]
barred
for
reassessing
purposes.
See
separate
schedule
for
subsection
80.4(2)
interest
benefit
calculation
until
repayment.
Note
2:
Part
of
the
1985
repayment
can
be
applied
to
1984
but
this
will
result
in
a
subsection
80.4(2)
interest
benefit
until
repayment.
The
testimony
of
both
Mr.
Hill
and
Mr.
Grieve
confirmed
the
particulars
of
the
many
cash
advances
made
through
Mr.
Hill’s
shareholder
loan
account
for
and
on
his
personal
behalf.
For
Mr.
Hill's
1983
calendar
year
they
included
many
diverse
miscellaneous
matters
as
well
as
a
$66,000
mortgage
payout
on
a
house,
$10,000
for
personal
legal
fees,
$20,000
on
a
cattle
venture,
$41,500
to
a
personal
bank
account
and
$565,000
to
his
wife
respecting
the
divorce
settlement.
For
his
1984
calendar
year
the
amounts
totalled
$75,500
to
his
own
personal
account,
$527,000
to
his
wife
pursuant
to
their
settlement,
$16,000
for
furniture,
around
$15,000
for
the
cattle
operation
and
$75,426.85
for
the
mortgage
payout
on
the
Salt
Spring
Island
rental
property.
With
respect
to
payments
made
by
Mr.
Hill
into
this
account,
the
evidence
was
as
follows:
(1984)
|
Cr.$
|
9,000
|
—
June
30,
1984
dividend
paid
on
preferred
shares
out
of
|
Cr.$
|
27,860
|
Capital
Dividend
Account
|
|
—
June
30,
1984
dividend
paid
on
common
shares
out
of
|
Cr.$
|
272,140
|
Capital
Dividend
Account
|
|
(1985)
|
Cr.$
|
2,570.60
|
—
personal
tax
refund
deposited
in
Uphill
Holdings
Ltd.
termCr.$
|
24,200.56
|
deposit
|
|
—
June
29,
1985
dividend
paid
on
preferred
shares
out
of
|
Cr.$
|
27,860
|
Capital
Dividend
Account
|
|
—
June
29,
1985
dividend
paid
on
common
shares
out
of
|
Cr.$
|
1,472,140
|
Capital
Dividend
Account
|
|
Without
the
purported
$1.2
million
book
entry
transfer
from
an
affiliate
on
30
June
1984
noted
earlier
there
would
have
been
a
debit
balance
of
$1,108,363.38
in
the
shareholder
loan
account
at
that
time.
The
June
29,
1985
payments
into
the
account
as
shown
above
resulted
in
a
credit
balance
of
$310,261.62.
The
purported
plan
to
draw
on
the
account
for
personal
needs
and
to
actually
repay
it
in
full
at
Uphill
Holdings’
fiscal
year
end
did
not
happen
in
1984.
The
formulated
plan
to
draw
down
and
then
repay
at
the
appropriate
time
has
been
ongoing
since
Uphill
Holdings'
incorporation
in
December
of
1980.
No
records
were
introduced
respecting
particulars
of
pre-1983
advances
and
repayments.
The
law
Paragraph
15(2)(b),
with
the
appropriate
deletions,
provides
as
follows:
15(2)
Where
a
person.
.
.
is
a
shareholder
of
a
particular
corporation
.
.
.
and
.
.
.
has
in
a
taxation
year
received
a
loan
from
or
has
become
indebted
to
the
particular
corporation
.
.
.
the
amount
of
the
loan
or
indebtedness
shall
be
included
in
computing
the
income
for
the
year
of
the
person
.
.
.
unless
(b)
the
loan
or
indebtedness
was
repaid
within
one
year
from
the
end
of
the
taxation
year
of
the
lender
or
creditor
in
which
it
was
made
or
incurred
and
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.
Paragraph
20(1
)(j)
was
also
raised.
It
reads:
20(1)
Notwithstanding
paragraphs
18(1)(a),
(b)
and
(h),
in
computing
a
taxpayer’s
income
for
a
taxation
year
from
a
business
or
property,
there
may
be
deducted
such
of
the
following
amounts
as
are
wholly
applicable
to
that
source
or
such
part
of
the
following
amounts
as
may
reasonably
be
regarded
as
applicable
thereto:
(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
that
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;
Submissions
of
the
parties
Counsel
for
the
respondent
submitted
that
this
case
was
the
classic
example
of
a
"running"
or
a
“drawings”
account
situation.
Mr.
Hill
did
not
take
any
salary
or
bonuses.
There
was
a
pattern
of
advances
and
repayments
which
constitutes
a
series
of
loans
or
others
transactions
and
repayments
within
the
meaning
of
paragraph
15(2)(b).
The
object
and
purpose
of
the
provision
is
to
prohibit
a
loan
account
from
being
used
by
a
shareholder
as
a
running
or
drawings
account
for
the
purpose
of
deferring
taxable
income.
Further,
payment
being
made
in
full
at
the
end
of
the
series,
in
this
case
June
30,
1985,
does
not
mean
a
series
had
not
existed
up
to
that
point
of
time.
The
application
of
paragraph
20(1)(j)
respecting
Mr.
Hill's
1985
taxation
year
concerning
his
June
30,
1985
shareholder's
loan
payment
was
solely
a
matter
of
departmental
practice
at
that
time.
It
is
not
an
answer
to
the
statutory
applicability
of
paragraph
15(2)(b)
during
Mr.
Hill's
1983
and
1984
taxation
years
as
aforenoted.
Counsel
for
the
appellant
conceded
there
was
no
issue
as
to
the
subject
amounts
being
advanced
or
lent,
that
they
had
been
recorded
and
treated
as
loans,
and
that
they
were
personal
expenses.
The
frequency
of
the
advances
is
immaterial.
The
key
is
the
repayment.
Parliament
has
granted
a
repayment
period
within
which
the
advances
must
be
paid.
The
mischief
paragraph
15(2)(b)
seeks
to
preclude
is
perpetual
tax
deferral
by
the
taking
of
new
loans
or
advances
to
pay
off
the
current
one.
That
is
the
series.
The
June
30,
1985
payment
by
Mr.
Hill
via
his
dividends
was
bona
fide.
That
its
source
was
out
of
Uphill
Holdings'
capital
dividend
account,
and
was
thus
non
taxable,
is
irrelevant.
The
affiliated
company
transaction
of
$1.2
million
on
30
June
1984
(the
"non-event"
transaction)
is
also
irrelevant
because
the
sole
material
and
operative
time
was
June
30,
1985
which
was
when
all
the
advances
had
been
paid
in
full.
The
June
30,
1985
repayment
itself
was
not
part
of
a
series
of
loans
and
repayments.
It
was
not
sourced
in
reborrowings
giving
rise
to
a
series
of
loans
and
repayments.
Paragraphs
15(2)(b)
and
20(1)(j)
are
symmetrical.
Each
disallows
a
loan
repayment
deduction
if
it
was
made
as
a
part
of
a
series
of
loans
or
other
transactions
and
repayments.
If
the
20(1)(j)
prohibition
was
satisfied
on
these
selfsame
facts
for
Mr.
Hill’s
1985
taxation
year,
then
the
identical
prohibition
in
15(2)(b)
is
similarly
satisfied
for
his
1983
and
1984
taxation
years.
Analysis
In
my
opinion,
the
submissions
of
counsel
for
the
appellant
are
persuasive
and
ultimately
are
determinative
of
these
appeals.
I
agree
that
the
object
of
15(2)(b)
is
to
prevent
the
use
of
a
shareholder
loan
account
for
indefinite
tax
deferral
purposes
through
loans,
advances
and
other
transactions
followed
by
repayments
involving
reborrowings.
As
noted
in
counsel's
submissions,
which
I
believe
to
be
the
essence
of
the
whole
matter,
if
the
repayment
in
question
was
itself
part
of
a
series
of
loans
or
other
transactions,
then
the
purpose
of
15(2)(b)
is
offended
and
the
preclusion
becomes
operative.
I
also
concur
with
appellant-counsel's
submissions,
for
the
reasons
he
advanced,
that
the
repayment
source
being
a
tax-free
dividend
and
the
30
June
1984
related
company
transaction
are
each
irrelevant.
Neither
offends
the
essential
mischief
to
which
15(2)(b)
is
directed.
While
the
case
of
Joel
Attis
v.
M.N.R.,
[1992]
1
C.T.C.
2244,
92
D.T.C.
1128
(T.C.C.)
did
raise
double
taxation
concerns
because
the
advances
there
were
paid
within
the
15(2)(b)
statutory
time
frame
by
way
of
bonuses
and
dividends,
I
fail
to
see
why
the
payment
source
being
tax
free
should
make
any
difference.
As
determined
earlier,
the
repayment
source
is
material
when
it
arises
directly
or
indirectly
through
or
out
of
the
shareholder's
company
which
forms
part
or
a
continuum
of
loans
and
repayments.
Payment
by
way
of
a
bonus,
a
taxable
dividend
or
a
non-taxable
dividend
does
not
partake
or
this
effect.
The
above
interpretation
is
countenanced
within
the
words
of
15(2)(b)
which
mandates
that
the
repayment
itself
is
not
to
be
part
of
a
series
of
loans
and
repayments.
Mr.
Hill's
payment
on
25
June
1985
was
not
that
kind
of
repayment.
His
appeals
on
this
issue
succeed.
Decision
The
appeals
of
Nigel
T.
Hill
for
his
1983
and
1984
taxation
years
are
allowed,
with
costs,
and
the
assessments
are
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
on
the
basis
that
the
amounts
included
in
his
income
for
each
such
taxation
year
pursuant
to
subsection
15(2)
of
the
Income
Tax
Act
are
to
be
deleted
and
that
the
subsection
163(2)
penalties
assessed
for
the
appellant's
1984
taxation
year
are
to
be
deleted.
The
appeal
of
Uphill
Holdings
Ltd.
for
its
1984
taxation
year
is
allowed,
without
costs,
and
the
assessment
is
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
on
the
basis
that
the
penalties
levied
pursuant
to
subsection
163(2)
of
the
Act
be
deleted.
Appeal
allowed
in
part.