Cooper v. The Queen, 88 DTC 6525, [1989] 1 CTC 66 (FCTD)

Rouleau, J.:—The plaintiff is appealing by way of trial de novo the reassessment of his income tax returns for the 1981, 1982 and 1983 taxation years.

The plaintiff, who together with his mother was a co-executor of the estate of his late father, obtained an interest-free loan of $400,000 during 1981 from the residual trust created by the estate for the purposes of buying himself a home. This loan was not reflected in the plaintiff's returns for the taxation years in question, for in his view or that of his advisers, the terms of the loan did not attract any income tax liability.

The Minister of National Revenue ("the Minister") reassessed the plaintiff's returns for the taxation years in question and included as additional income a specified amount of interest for 1981, 1982 and 1983 namely $25,775, $62,827 and $41,972 respectively calculated pursuant to Regulation 4300(6) of the Income Tax Regulations. The reasoning employed by the Minister was that an interest-free loan from a trust conferred a benefit on the plaintiff within the meaning of section 105 of the Act which reads as follows:

105(1) The value of all benefits (other than a distribution or payment of capital) to a taxpayer during a taxation year from or under a trust, contract, arrangement or power of appointment, irrespective of when made or created, shall, subject to subsection (2), be included in computing his income for the year.

105(2) Such part of an amount paid by a trust out of income of the trust for the upkeep, maintenance or taxes of or in respect of property that, under the terms of the trust arrangement, is required to be maintained for the use of a tenant for life or a beneficiary as is reasonable in the circumstances shall be included in computing the income of the tenant for life or other beneficiary from the trust for the taxation year for which it was paid.

The plaintiff and his mother, as co-executors and trustees of the father's estate, jointly consented to the loan and the plaintiff executed a Release and Indemnity Agreement in favour of his mother releasing her from any and all liability which might arise due to the circumstances under which the loan was made. Under the terms of the will, which are largely not relevant to this action, the plaintiff's mother was entitled to receive an annual income from the estate for life from a spousal trust, and the plaintiff and his sister were beneficiaries of the trust set up from the residue of the estate.

The plaintiff and his sister were entitled to receive a distribution of one half of the residual trust when the plaintiff's sister attained the age of 25 and the balance of the estate was to be distributed in equal shares to the beneficiaries when the plaintiff's sister reached the age of 30.

When Mr. Cooper received the interest-free loan from the estate with the consent of his mother in 1981, his sister had not yet reached the age of majority and hence did not have the capacity to consent to the loan. The loan was repayable on demand and secured by a mortgage on the home purchased by the plaintiff with the funds.

The Minister took the position that had the plaintiff attempted to arrange a comparable loan on the money market during the taxation years in question, he would have been required to pay considerable interest on the principal. Because the plaintiff received the loan interest free, he had not incurred any interest charges, and according to the Department of National Revenue ("the Department"), the saving of this expense constituted a taxable benefit in the hands of the plaintiff.

The actual quantification of the benefit to the taxpayer was not based on current market value, but rather was made pursuant to the method set out in Regulation 4300(6) of the Income Tax Regulations. As this is one of the two major issues in dispute I have reproduced in full the paragraphs in the agreed statement of facts dealing with the means by which the Minister arrived at the quantum of the value of benefit to the plaintiff, as well as the paragraphs setting out the alternative means of calculation proposed by the plaintiff:

7. In so reassessing the plaintiff, the Minister of National Revenue calculated the value of the benefits to the plaintiff by reference to the rates of interest prescribed in subsection 4300(6) of the Income Tax Regulations as follows:

8. The interest rates prescribed in Regulation 4300(6) of the Income Tax Regulations are based on the average yields at the weekly competitive tender, for Government of Canada Treasury Bills with a maturity of approximately 3 months after their issue date. These Treasury Bill rates result from competitive bids submitted to the Bank of Canada by certain financial intermediaries such as chartered banks and other banks subject to the Bank Act, financial institutions subject to the Quebec Savings Bank Act, and investment dealers eligible to act as primary F.C.T.D.

				Interest
Loan		Days/Year		Rate	Benefit
					1981
$400,000	X	196/365	X	12%	$25,775.34
					1982
$400,000	X	90/365	x	16%	$15,780.82
$400,000	X	91/365	x	15%	$14,958.90
$400,000	X	183/365	X	16%	$32,087.67
					$62,827.39
					1983
$400,000	X	90/365	X	12%	$11,835.62
$400,000	X	275/365	X	10%	$30,136.99
					$41,972.61

distributors of new Government of Canada issues. All other short term market interest rates in Canada are fundamentally influenced by Government of Canada Treasury Bill rates due to their very high quality and liquidity.

9, Using the lowest one year conventional mortgage rates which were available from the five largest chartered banks in Canada, the value of the benefits to the Plaintiff would be calculated as follows:

Interest

Loan Days/Year Rate Benefit

Loan Days/ Year Rate

1981

$400,000 196/365 15.25% $32,756.16

$400,000 X 196/365 X 15.25%

1982

$400,000 365/365 xX 12.5% $50,000.00

$400,000 X 365/365 X 12.5%

1983

$400,000 365/365 10.25% $41,000.00

$400,000 X 365/365 X 10.25%

The plaintiff appealed the Minister's reassessments to the Tax Court , reassessments to the Tax Court of Canada. The appeal was dismissed in a decision rendered by Associate Chief Judge Christie on February 24, 1987 in which the reassessments of the Minister were confirmed. The plaintiff seeks by this action in the Federal Court to have the previous decision set aside and to have the three assessments of the plaintiff's income made with respect to the taxation years 1981, 1982, 1983 varied, or referred back to the Minister for reconsideration and reassessment. In the alternative, the plaintiff seeks to have the three assessments decreased based on the alternative formula of calculation proposed by him.

The plaintiff's position is that the interest-free loan made to him from the trust did not constitute a taxable benefit; and if it did, the Minister could not quantify the value of the particular benefit for taxation purposes by applying the formulae contained in Regulation 4300(6). The Minister for his part defends both the positions taken by the Department in issuing the reassessments.

The Tax Court of Canada held that the value of the benefit received by the plaintiff in enjoying an interest-free loan over three years was properly included into his income under section 105 of the Act. Furthermore, while acknowledging that section 80.4 and Regulation 4300(6) of the Act do not

expressly apply to the plaintiff's situation, Judge Christie found that these sections provide an appropriate measure of the value of the benefit received by the plaintiff and were hence properly employed by the Department in reassessing the plaintiffs taxable income.

Section 105 of the Act is not of recent origin and it Is broadly derived f \ several provisions of the Income War Tax Act. By 1952, the then section 65 of the Income Tax Act, R.S.C. 1952, c. 148 incorporated all of the terms relevant to this case which are contained in the present section 105. A thorough search by counsel and by me did not reveal a single jurisprudential authority addressed at the interpretation of the term "benefit" in section 105, let alone any authority relating to the treatment of interest-free loans disbursed from a trust.

As counsel acknowledge that there is no relevant jurisprudence relating specifically to subsection 105(1) of the Act, their argument was necessarily based on a reading of the words of the section alone as well as on analogy to cases relating to other sections of the Act. Counsel for the plaintiff for his part also argued that his client’s case does not rest on a simple interpretation of section 105 but that some examination of the history and the underlying policy implications of the Act are necessary in order to give full effect to its

There is no doubt that in some sense, the loan made to the plaintiff constituted a substantial benefit to him, as anyone who has attempted to negotiate an interest-free loan may attest. In addition, the loan was made from the , is required to trigger the operation of subsection 105(1). I am prepared to accept however that simply because the taxpayer had entered into an arrangement which might be considered to be a "benefit to the man in the street, it does not inevitably follow that the taxpayer has received a taxable benefit, within the meaning of the Income Tax Act.

The plaintiff argued before me that subsection 105(1) of the Act and its various predecessors have never been used to impose income tax on the value of an interest-free or low interest loan from a trust. He also argued that interest-free and low interest loans made to taxpayers in other situations such as to shareholders and employees have historically not attracted liability for income tax in the absence of specific statutory inclusion. His conclusion hence is that as interest-free and low interest loans from a trust are not specifically included in subsection 105(1) or elsewhere in the Act, they do not constitute a taxable benefit within the meaning of this section.

In order to do justice to the plaintiff's submissions, it is necessary to examine each of the avenues of approach to which he made reference.

One of the cases thoroughly discussed before me by the parties and also addressed at some length in the decision of the Tax Court was the case of

^Nn'in'rh , ^ - '’ C.T.C. 35 (referred to as Malkin (No. 2)). The taxation of benefits conferred from a trust was considered in this case, a decision of the Exchequer Court of Canada. At issue were paragraph 3(1)(e) and section 11 of the Income War Tax Act which are the precursor sections of section 105 of the Income Tax Act.

I do not intend to review this case in any great detail. A perusal of the decision reveals that it is of very little assistance as it turns very much on its specific facts and on an interpretation of the sections under consideration,

There is not sufficient correlation between these sections and the present subsection 105(1) to warrant a closer review. There is however one general

fL ? 1 ? J arises out of the decision which is most instructive, namely that although a taxpayer may be in receipt of what one could call a benefit in general terms, it does not necessarily follow that this constitutes a taxable benefit within the purview of the Act. That finding can only follow if a careful review of the taxing provisions reveals that it was intended that the receipt of such a benefit attract liability for income tax.

Without the guidance of any specific authority on the status of interest- free loans from trusts, in order to get an historical perspective on the question, the plaintiff argued that it is necessary to examine the treatment attributed in the past to such loans in other sections of the Act. The parties discussed at some length the case of loans made to shareholders and employees at zero or preferential rates.

It was the plaintiff's contention that he could establish that before 1977, there was a practice on the part of the Minister of not including the value of interest-free or low interest loans into the income of employees and shareholders based on sections 6 and 15 of the Income Tax Act alone and that this practice was consistent with the jurisprudence on the subject. The plaintiff further contended that after 1977 a specific legislative enactment (section 80.4) was implemented in order to include the value of interest-free and low interest loans into the income of shareholders and employees and that hence one may conclude that because section 80.4 was not drafted to include loans made from trusts, section 105 was unaffected and that these loans must be given the same treatment as a pre-1977 loan to a shareholder or an employee.

There are some overall comments that can be made about the tax treatment accorded to these “benefits”. The Income Tax Act has long contained provisions relating to shareholders and employees requiring that the value of any benefit conferred on them by their employer or the corporation in which they hold shares be included into income. The relevant sections, namely 6 and 15 now read as follows:

Inclusions

6(1) Amounts to be included as income from office or employment—There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(a) value of benefits—the value of board, lodging and other benefits of any kind whatever received or enjoyed by him in the year in respect of, or by virtue of an office or employment. . .

[Emphasis added]

15(1) Appropriation of property to shareholder— Where in a taxation year

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,

(b) funds or property of a corporation have been appropriated in any manner whatever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

otherwise than

(d) on the reduction of capital, the redemption, cancellation or acquisition by the corporation of the shares of its capital stock or the winding up, discontinuance or reorganization of its business, or otherwise by way of a transaction to which section 88 applies,

(e) by the payment of the dividend or a stock dividend,

(f) by conferring on all holders of common shares of the capital stock of the corporation a right to buy additional common shares thereof, or

(g) by an action described in paragraph 84(1)(c.1) or (c.2),

the amount or value thereof shall, except to the extent that it is deemed to be a dividend by section 84, be included in computing the income of a shareholder for the year.

[Emphasis added]

These sections have been amended and amplified from time to time but subsection 15(1) is derived from subsection 8(1) of the 1948 Income Tax Act, as amended by 1950, c. 40, s. 2; paragraph 6(1)(a) is derived from paragraph 5(1)(a) of the Income Tax Act, R.S.C. 1952, c. 148 and from that time, they have not been amended in any respect which is material to this action. Inasmuch as these sections purport to include into income the value of benefits received by the taxpayers described in these sections, these sections could be seen as analogous to section 105.

Before 1977, section 6 of the Act provided that the value of "benefits of any kind whatever" were to be included into the taxpayer's income from his office or employment. Up until April 18, 1977, despite the existence of this section the taxpayer could receive a low interest loan from his employer without attracting tax liability in the eyes of the Minister. Interpretation Bulletin IT-71 (dated October 3, 1972) was issued by the Department to assist in the interpretation of this section and it provided:

Where an employer lends money to an employee without interest, or at an unusually low rate of interest, he is not regarded as conferring a taxable benefit on the employee within the meaning of section 6.

In addition to paragraph 15(1)(c) above dealing with benefits received by shareholders, the taxation treatment of loans made to shareholders has a long history. Subsection 15(2) of the Act, with its origins in the Income War Tax Act, and formerly subsection 8(2) of the Income Tax Act, R.S.C. 1952, c. 148, provides that under certain circumstances, the entire amount of a loan made to a shareholder will be deemed to be included into the taxpayer's income. An examination of subsection 15(2) and its predecessors reveals that it is aimed at the case of the loan which does not make provision for repayment and would really constitute a tax free dividend from the corporation.

Subsection 15(2) does not speak of "benefits" as does paragraph 15(1)(c) but is addressed specifically to loans made to shareholders. There are several loans which are excluded from the ambit of subsection 15(2) namely those that are genuine transactions and where proper provision has been made for their repayment. A predecessor of the section (1980-81-82-83, c. 48, subsection 7(2) applicable to 1979 taxation year and following) also enumerated several categories of acceptable loans which included those made to an officer or servant of the corporation to purchase a house or an automobile. There would not appear to be any reason why the section would accord different treatment to loans offered at less than market interest rates.

I find it very interesting to note that subsection 15(2) of the Act and its predecessor existed independently of paragraph 15(1)(c). The treatment of loans under subsection 15(2), is not worded as an exception to any general rule enunciated with respect to the taxability of "benefits" under paragraph 15(1)(c). As to the interaction of the two sections, there has been no instance drawn to my attention where a low interest loan was excluded under the provisions of subsection 15(2), (e.g. where it was a bona fide loan to an officer of the company to purchase a house with adequate provision for repayment), and where the differential in interest below market rate was nevertheless assessed as a taxable benefit under the provisions of paragraph 15(1)(c).

Before 1977, most of the literature relating to this area of the law pointed out the economic benefits engendered by the provision of loans to employees and shareholders. Loans were often offered to employees to assist in their relocation to a remote area in Canada; loans were also offered as an incentive to allow ranking officers of the company to acquire shares, which according to one author at least is a means of attracting highly qualified personnel to Canadian industry. Despite the manifold benefits of this system, several moves were made in 1977 to radically change this policy, although the amendments were not ultimately made effective until the 1979 taxation year.

The first indication of change came when Revenue Canada issued an amended Interpretation Bulletin to replace IT-71, which was previously dis- cussed. The amended Bulletin, released on April 18, 1977 under number IT-71R simply deleted the provision relating to interest-free loans to employees. Apparently the Department intended to reverse its policy on the issue and henceforth treat interest-free and low interest loans as taxable benefits included into income from office or employment pursuant to paragraph 6(1)(a) of the Act.

On May 11, 1977 Revenue Canada announced that the standard against which the value of the benefit conferred by such loans on a taxpayer would be eight per cent. The following description of what occurred thereafter is taken from the 1977 report of the Tax Foundation of Canada entitled, Tax Conference, 1977 Tax Changes—Implications for Individuals and Businesses Haines, R.A., Hogg, R.D., Carr, M., and Harris, E.C. at page 375:

In response [to the Revenue Canada announcement], a number of briefs were submitted to RCT and the Department of Finance.

The Compensation Research Centre of the Conference Board in Canada conducted a survey of employee loan practices in Canada. A sample size of 294 Canadian companies revealed that employee relocation is a widespread practice in Canada. The responding firms reported 16,000 relocations in 1976. Of the 95% of the responding firms that relocated employees, 53% offered low interest or interest-free loans to assist transferred employees.

That the Government of the day was aware of the need to balance the legitimate aims of economic assistance for relocation with what was perceived as a potential area of abuse of the income tax system is best illustrated by the text of the notice of ways and means motion to amend the Income Tax Act [1] dated October 21,1977. It states in part:

Employee and Shareholder Loans

The longstanding administrative tax practice has been to ignore the benefit on low interest and interest-free loans extended by companies to employees and shareholders. However, the absence of tax has resulted in an increasing number of such loans being used as a means of providing a tax-free form of compensation.

To curtail abuse, the benefit of loans made at favourable interest rates to employees and shareholders will be taxable (Resolutions 9 and 29). To encourage labour mobility in Canada, and to recognize the growing need for some incentive to encourage employees to move to remote areas, relocation loans of up to $50,000 made by an employer to facilitate the purchase of a home by an employee will be excluded. In addition, loans by a corporation to enable an employee to acquire its shares will be excluded. This recognizes that such loans do not result in any tax avoidance because in any event, interest that an employee pays would be deductible. Such loans help develop and retain executive business executive talent in Canada . . .

Resolution 9: Shareholder loans

That for loans made after March 31, 1977, (other than loans to a corporation resident in Canada or to a related foreign affiliate) the rules in subsection 15(2) of the Act requiring a loan to a shareholder of a corporation to be included into the shareholder's income be extended to cover loans made by the shareholder, or to a person with whom he does not deal at arms length, by the corporation, a related corporation, a related corporation or a partnership.

Resolution 29: Employee and Shareholder Loans

That for the 1979 and subsequent taxation years, the Act be amended to require an employee, shareholder or related person to include in his income the amount by which:

a) interest for the year computed at a prescribed rate on loans from an employer or a corporation (other than loans to purhase shares of an employer corporation or house-purchase loans to a maximum of $50,000 on the relocation of an employee)

exceeds

b) the aggregate of $500 and the interest actually paid by him for the years on such loans.

The concrete expression of this statement of intention was the then Bill C-11 which included, with some minor amendments, section 80.4 of the Income Tax Act, infra, which is really the linchpin of the plaintiff’s argument. Section 80.4 as it then read gave effect to Resolution 29. It has undergone numerous amendments since its introduction in the 1979 taxation year as 1977-1978, c. 1, s. 35 when it read as follows:

LOANS TO OFFICER, EMPLOYEES AND SHAREHOLDERS

80.4(1) Where an individual

(a) is an officer or employee or is related to an officer or employee and has received a loan by virtue of his office or employment or the office or employment of a person to whom he is related, or

(b) is a shareholder of a particular corporation, or is related to a shareholder of a particular corporation and has received a loan (other than an excluded loan) from the particular corporation, from a corporation related to the particular corporation or from a partnership of which the particular corporation or a corporation related to the particular corporation is a member,

he shall be deemed to have received a benefit in a taxation year equal to the amount, if any, by which the aggregate of

(c) the amount, if any, by which interest in respect of the taxation year on all housing loans received by him, computed at a prescribed rate per annum, exceeds the aggregate of

(i) interest in respect of the taxation year paid by him before the end of the immediately following taxation year on all such loans, and

(ii) the product obtained when the prescribed rate per annum is multiplied by

(A) in the case of an individual whose spouse with whom he resided in the taxation year had a housing loan, an amount (in this subsection referred to as his "agreed amount”) equal to such portion of $50,000 as has, by agreement between the individual and his spouse, been allocated to him and that, when added to the agreed amount of his spouse, does not exceed $50,000, and

(B) in any other case, $50,000, and

(d) the amount, if any, by which interest in respect of the taxation year on all loans described in paragraphs (a) and (b) (other than housing loans and excluded loans) received by him, computed at a prescribed rate per annum, exceeds the interest in respect of the taxation year paid by him before the end of the immediately followng taxation year on all such loans,

exceeds

(e) in the case of the individual referred to in clause (c)(ii)(A), that proportion of $500 that his agreed amount is of $50,000, and

(f) in any other case, $500.

The “excluded loans” and "housing loans" referred to in this section were loans which enabled officers of corporations to purchase shares of the company and financial assistance of up to $50,000 given to employees to permit the purchase of a house on relocation anywhere in Canada.

Section 80.4 has been amended in some material respects since its enactment in 1977-1978 (most notably in the gradual phasing out of the $50,000 housing loan), but its purpose has remained basically unchanged. This purpose is evidently to deem a taxable benefit in the case of interest- free and low interest loans made to a shareholder or employee. I do not agree with His Honour Judge Christie that the amendments brought about by section 80.4 only serve to quantify a benefit that was already caught for the purposes of income tax liability by sections 6 and 15 discussed above.

In my view the wording of the section itself as well as the amendments to sections 6 and 15 which serve to include this deemed benefit into their respective calculations allows for no other interpretation. To accept that section 80.4 only describes the measure of a benefit which pre-existed in sections 6 and 15 would mean that these sections could presumably encompass low interest and interest-free loans which are specifically excluded from section 80.4. An example of this would be loans made to resident Canadian corporate shareholders. Apart from the inefficiency of taxation by implication, this would also mean that there was no legislative meter to quantify the benefit to the shareholders in this case, as no prescribed measure of valuation would be available such as is referred to in section 80.4. The interpretation given to the section by the Tax Court thus creates uncertainty and unnecessary imprecision.

Based simply on an examination of the wording of the sections and more particularly, their histories, it would appear that before the enactment of section 80.4, interest-free and low interest loans did not attract tax liability despite the existence of sections 6 and 15 which specifically provide that the value of any benefit conferred on shareholders and employees was required to be included into income. The record does reveal that as far as the Department of National Revenue was concerned, this lack of tax liability was a result of the policy of the Department and not from the wording of the Act. By simply amending Interpretation Bulletin IT-71 the Department made an attempt to tax interest-free and low interest loans to shareholders and employees and issued a rate of interest applicable to the value of the benefit. Nevertheless, this unilateral action was followed by specific legislative action which took effect over a year and a half following the Department's amendment of Interpretation Bulletin IT-71.

In my view there are two possible analyses which can be made of this situation. The first is that the wording of paragraphs 15(1)(c) and 6(1)(a) always had the effect of including interest-free and low interest loans into income but that for policy reasons, the Department decided not to take action on this tax liability until 1977 when a change of policy occurred prompted by the abuses of the system by shareholders and employees.

The second possible interpretation is that interest-free and low interest loans were never intended to attract tax liability under paragraphs 15(1)(c) and 6(1)(a) but that in 1977 it was decided that under certain circumstances, abuses of the system would have to be corrected by creating income tax liability subject to certain exceptions where the taxpayer was acting bona fide. Therefore, legislative action was taken to specifically delineate the circumstances under which interest-free and low interest loans should attract tax liability to shareholders and employees and to prescribe a means whereby the value of the benefit to the taxpayer could be quantified.

Intuitively, the second option is more attractive. It promotes greater certainty for tax liability and does not create any of the problems referred to above, namely with respect to the necessary implication that section 80.4 would not be exhaustive in its treatment of interest-free loans to shareholders and employees and that reference must still be had to paragraphs 15(1)(c) and 6(1)(a) to determine whether or not there is a benefit to the taxpayer in the circumstances.

In order to round out the examination of the question of loans to employees and shareholders, it is helpful to examine the cases which have been decided under paragraphs 6(1)(a) and 15(1)(c) and their predecessors prior to the 1977 amendments. These cases were addressed at some length in argument before me. The plaintiff suggests that the weight of previous authority shows that the granting of an interest-free or low interest loan to employees and shareholders was not considered to be a benefit to the taxpayer prior to the enactment of section 80.4 of the Act.

The first of the decisions under discussion emanated from the Income Tax Appeal Board in 1956 under the style No. 359 v. M.N.R., Tax A.B.C. 24; 56 D.T.C. 475. In that case, the Board engaged in the construction of several provisions of the Income Tax Act, c. 148, R.S.C. 1952, namely paragraph 8(1)(c) which is the forerunner of paragraph 15(1)(c) as well as a predecessor paragraph of 6(1)(a), namely paragraph 5(1)(a).

The taxpayer in question, both a shareholder and an employee of the lender corporation, had received an interest-free loan from the corporation to buy out the shares of a retiring majority shareholder; the question before the Board was the determination of whether such a loan was caught by the provisions of paragraph 8(1)(c) (the predecessor of paragraph 15(1)(c) discussed above).

Board member Fisher stated conclusively at page 27 (D.T.C. 477) of his decision:

After consideration, I am of the opinion that neither the provisions of subsection

(1) of section 8 nor the provisions of section 5(a) of the Income Tax Act are applicable in the circumstances disclosed by this appeal. In my opinion, the provisions of subsection (1) of section 8 are not applicable, nor were they intended to be applicable, in a situation such as we find here, and I am of the opinion that no benefit was conferred on the appellant by the Blank Company in the said years 1952 and 1953. Apart from specific legislation in a taxing statute, I know of no law which imposes an obligation upon a lender to demand the payment of interest in connection with a loan granted by the lender to a borrower, and if the lender does not require the payment of interest, the borrower is under no obligation to pay interest.

Judge Christie, in reviewing No. 359 noted that he found this reasoning, to the extent that it reflects Mr. Fisher’s view that a low interest loan does not confer a benefit on the taxpayer, to be "a non sequitur". Judge Christie was of the view that the fact that there is no legal obligation on a lender to charge interest does not affect the question of a benefit arising out of an interest- free or low interest loan. With respect, I find Mr. Fisher’s approach to be a logical first step towards the defining of where a benefit has been conferred. As was apparent from the decision of Mr. Justice Cattanach, in the Pillsbury Holdings case, infra, the definition of the benefit which attracts tax liability under the Act must have some limits. For example, the mere fact that an employee purchases goods from his employer does not create a benefit. The mere fact that the employee who purchases a significant amount of goods may get a discount rate which is also offered to other bulk purchasers, is also probably not a benefit caught by the section.

The problem that Mr. Fisher was attempting to address was simply that not all benefits necessarily constitute a taxable benefit under the Act. Judge Christie on the other hand was not prepared to accept that because there is no obligation on a lender to charge interest for a loan that this constitutes a universal rule that is applicable to all benefit situations; under certain circumstances, it is evident that even without the waiving of a legal right it is possible that a benefit has been conferred. There is for example, no obligation on a vendor to charge any purchase price for goods, but clearly the dispensing of free goods or services to employees or shareholders from a company dealing in such goods or services would under most circumstances be caught under the relevant “benefit” taxing provisions.

It is interesting to note that the relationship between 8(1)(c) and 8(2) (compare with the present 15(1 )(c) and 15(2) referred to above) was obviously raised in argument in No. 359, but not specifically addressed, probably in part because subsection 8(2) was then only to take effect in the taxation year following the year in dispute. Mr. Fisher stated at page 27(D.T.C. 477) of the decision:

It was argued on behalf of the appellant that, since there was a specific provision in the legislation dealing with the taxation of loans by a corporation to its shareholders, inclusio unius est exclusif) alterius should apply.

Unfortunately, Mr. Fisher did not go on to examine this argument in any detail but in my view, it appears that his decision was influenced in part by this consideration.

There were several other authorities cited to me by the plaintiff which purported to follow No. 359, supra. On closer examination, I was not satisfied that any of these cases in fact rested solely on the ratio of No. 359, but they did not overturn the principle enunciated therein. The decision of the Federal Court, Trial Division in the 1964 Pillsbury case for example, (M.N.R. v. Pillsbury Holdings Limited, [1964] C.T.C. 294; 64 D.T.C. 5184) turned entirely on an analysis of paragraph 8(1)(c), supra, and the adequacies of the manner in which the Crown phrased its notice of appeal. Mr. Justice Cattanach dismissed the Crown's appeal but the facts of the case and his reasoning must be appreciated before any conclusions may be drawn.

The taxpayer borrowed large sums of money from two separate companies in order to purchase all or substantially all of the shares of the lending companies. The loans were made on a demand basis with a stipulated rate of interest. The borrower encountered some financial difficulties and its ability to repay the principal and interest was in doubt. The lenders first agreed to waive a portion of the interest owing in the first year and then, as an inducement to the borrower to repay a large portion of the capital immediately, the lenders ultimately agreed in the second year to waive all interest payments. The Minister attempted to include into the taxpayer's income the value of the interest payments waived by the corporate lender.

Before the Income Tax Appeal Board, the matter was resolved in the favour of the taxpayer in a brief decision (at 19 Tax A.B.C. 431; 58 D.T.C. 428) based on No. 359, supra. When the matter came before the Exchequer Court on appeal, Mr. Justice Cattanach was of the view that section 8 of the Act only had relevance where the transaction entered into by the parties was not a bona fide one. His Lordship writes that the Minister failed to raise this issue in its notice of appeal and barring any such allegation, the section did not come into operation. He stated at page 303 (D.T.C. 5189) of the decision:

In any event, as far as the second round of waivers are concerned, they were expressed to be settlements negotiated by a borrower with its lender under the terms of which immediate payment of a large amount of principal was to be made in consideration of interest being cancelled. There is no allegation that this quite ordinary type of transaction between a debtor and lender is a mere subterfuge whereby the lender corporation is conferring a benefit or advantage on the borrower qua shareholder and, in the absence of any issue having been made by the Minister of that question of fact, I cannot so find.

I have more difficulty, as far as the first round of waivers is concerned, inasmuch as it does seem improbable that the lender would have cancelled the interest outright, instead of merely giving time for payment, on a claim by the borrower that it was in difficulties, were it not for the fact that the borrower owned practically all the shares in the lender corporation. However, there was no allegation that the waiver was anything other than what it purported to be, that is, a lender granting relief to a borrower in difficulties. Had the transactions been attacked in the Notice of Appeal and at trial as being a device or arrangement for conferring a benefit on the respondent qua shareholder, it might well have been difficult for the respondent to have resolved the attack. However, no such attack was made and the assessment cannot therefore stand.

Mr. Justice Cattanach did not directly consider the applicability of paragraph 15(1)(c) to interest-free or low interest loans. This is simply because the case appeared to turn on a consideration of whether or not the cancellation of a previously expressed obligation to pay interest between related companies was a colourable attempt to conceal a flow of benefits between the parties which should otherwise have been taxable under the normal rules of taxation.

The Pillsbury case thus does not stand for the proposition that an interest-free loan cannot constitute a benefit to a shareholder within the meaning of paragraph 8(1)(c) of the Act as it then read. Indeed, in the second paragraph cited above, Mr. Justice Cattanach appears to have assumed that such a loan could constitute a benefit. In His Lordship's view however, whether or not such a benefit was taxable was a question of fact in each case, and no hard and fast rule could be stated to cover all cases.

I further note that whereas the Income Tax Appeal Board decision in the Pillsbury case (19 Tax A.B.C. 431; 58 D.T.C. 428) specifically relied on the No. 359 case, Mr. Justice Cattanch did not mention it at all in his judgment. Similarly, the decision of the Income Tax Appeal Board in Wale v. M.N.R., 36 Tax A.B.C. 255; 64 D.T.C. 632 and that of the Tax Appeal Board in the case of Bartley v. M.N.R., 42 Tax A.B.C. 237; 66 D.T.C. 752 which purported to rely on the Pillsbury decision in the Exchequer Court also reiterated the No. 359 test relating to the lack of a legal obligation to charge interest. This ratio is not in fact found in the decision of Mr. Justice Cattanach, and has no part of the Pillsbury decision in the Exchequer Court.

My review of the balance of the cases proposed by the parties as authority for the question of whether or not an interest-free loan constitutes a “benefit” under the Act reveals that in each case, as in Pillsbury, the issue at hand is really an interpretation of a particular section of the Act, and not in any global meaning of the term “benefit” itself. I am not satisfied that there is any overall meaning to the term which can apply to all sections of the Act, other than one which derives from the principles of common sense and statutory interpretation.

The plaintiff also discussed the cases Thompson et al. v. M.N.R., [1982] C.T.C. 2187; 82 D.T.C. 1168 (T.R.B.) and Laxton v. The Queen, [1988] 1 C.T.C. 19; 88 D.T.C. 6008 (F.C.T.D.), in order to distinguish them from the case before me.

Thompson was a decision under a successor to subsection 8(1) discussed above, namely subsection 15(1) (Income Tax Act, S.C. 1970-71-72, c. 63). The taxpayers who were shareholders in a corporation received the sum of $200,000 as an interest-free loan from the corporation. The latter had in turn borrowed $150,000 of the money from a bank at regular commercial rates, whereas the balance of the loan came from the operating funds of the company.

The Court found that the taxpayers had received a "benefit" with respect to the portion of the loan which had been borrowed by the corporation at regular commercial rates. The Minister had not however assessed the taxpayers for the value of the interest on that portion of the loan which came out of the operating funds of the corporation and the Board indicated that this question was moot. The treatment which the Tax Review Board would have given an assessment of the second portion of the loan would have been helpful to the resolution of this case, but I find it significant that the Department's treatment of the $50,000 was different. There is a considerable difference between the situation where the lender himself must go out and borrow funds at a specified rate of interest and then turns around and offers a loan to a shareholder interest free, and the case where the loan comes out of operating capital already held by the lender.

The difference in the treatment accorded to the two portions of the loan in the Thompson case is in perfect accord with what I understand to be the reason for the existence of section 80.4 which includes low interest and interest-free loans into income. When a corporation by its own volition creates an expense for itself and thereby reduces its taxable revenue, it is only logical that the shareholder who is the recipient of the loan and the cause of the depletion of the corporation's profits be held liable for the resulting shortfall in taxable income. There is no duty on a corporation to generate profit, but only to pay tax with respect to the profit actually earned, so the Department did not assess as a benefit the value of the interest free loan in the amount of $50,000 which was disbursed out of operating capital. As a further example, may I suggest that where the employees of an architectural firm obtain free the services of the firm, the profits of the employer are reduced and a taxable benefit could result. As in the Thompson case, it is this form of benefit which both the benefit taxing sections and section 80.4 are designed to catch.

In the Laxton case, supra, Madam Justice Reed of this court included into income the value of a benefit to the plaintiff taxpayer in the form of an interest-free loan. In Her Ladyship's view, as the loans were received by the taxpayer as remuneration for services performed by him pursuant to an agreement which explicitly provided for the payment of the loans, liability for income tax could not be avoided. The benefit was found as arising simply from the broad wording of sections 3 and 248 of the Act. Again however, the funds were borrowed by the lender on an interest-bearing basis which was not passed on to the taxpayer pursuant to his employment agreement.

It must be remembered after completing a review of the jurisprudence raised by the parties that each case is based on a consideration of a section very different from that relating to trusts found in section 105. As discussed by Mr. Justice Cattanach in the Pillsbury decision the purpose of these sections relating to benefits to shareholders or employees is to prevent the flow of benefits under an arrangement which has the appearance of a bona fide commercial transaction, but is actually a device to avoid the payment of income tax. No such limitation appears in subsection 105(1).

I therefore conclude that although there may have been an implicit recognition in obiter in the Pillsbury case, supra, that an interest-free loan could constitute a "benefit" under certain circumstances, there is nothing in the jurisprudence which leads me inevitably to the conclusion that an interest-free loan was a benefit taxable under sections 6 and 15 or their predecessors before the enactment of section 80.4. The relevant provisions, including section 105, have been in existence without affecting interest-free loans for too long to assume that these sections can be read as originally intending to sweep in the value of an interest-free loan into taxable income. Furthermore, the fact that the specific enactment dealing only with the case of interest-free and low interest loans to shareholders and employees was implemented (section 80.4), after lengthy discussion and submissions from the Tax Foundation and the concerned public, and the preparation of the explicit policy statement found in the October 21, 1977 notice of the ways and means motion, supra, without any reference to loans disbursed from a trust, cannot result in the taxation by inference of such benefits.

In coming to this conclusion I do not make reference to the principles of law applicable to trustees referred to by the defendant. A well established principle of income tax law states that the illegality (if any) of actions of the taxpayer, in this case the payment to the plaintiff in relation to the terms of the trust, is irrelevant in the assessment of tax liability. The obligation of the trustees to place the money loaned to the plaintiff in income-generating investments is not a factor in my decision. I do not believe that the “benefit” lost by the trust through the actions of the plaintiff has any relation to the value of the “benefit” which must be included into income under subsection 105(1), if any.

The Trust was under no obligation to lend money at a specific rate, nor did it have to borrow money to make such a loan which might have created an expense, as was done in the Thompson case, supra. Had the residual trust of Mr. Cooper's father's estate lent him the money at three per cent interest, could the Department apply the quantifying Regulations which specifically relate to section 80.4 in order to assess a benefit to the plaintiff's income tax return? Could this be extended even further to allow the Minister to police the investments made by trustees to ensure that only the highest income generating investments are made then impose a deemed benefit in a case where the investment falls short of the level considered acceptable by the Minister? I do not think so. The Minister has no interest in the proper administration of trust funds. This is the function of the provincial court system, more particularly in this case the Probate Court, and any questions regarding the propriety of the actions of Mr. Cooper and his mother as trustees should be raised in that forum alone.

My conclusion is instead based on the other factors discussed above, including the co-existence of subsections 15(1) and 15(2) of the Act. In my view, it is illogical to assume that these sections could be applied together without creating a perverse result. Any loan which escapes inclusion into income under subsection 15(2) must be understood to have escaped entirely whether interest-free or not, otherwise the purpose of the section is in part defeated. Furthermore, the later enactment of section 80.4 serves to confirm the fact that prior to 1977, loans to shareholders and employees described in the section did not attract income tax liability.

I am mindful of the fact discussed by Judge Christie that pursuant to section 11 of the Interpretation Act an enactment does not speak to the state of the law as it stood before its coming into force. However, where a certain interpretation of a new enactment would create confusion where none existed previously, reference may be made to the scheme of the Act and the history of the sections relevant to the new enactment in order to give better effect to the intention of Parliament in making the new law.

Section 80.4 created new tax liability in the case of interest-free and low interest loans to shareholders and employees. A careful method of the calculation of the value of this benefit was spelled out in the section. It was open to Parliament to include the value of low interest loans from or under a trust into the ambit of this section, but after many years of deafening silence with respect to these “benefits”, no word of direction was addressed to the trust situation and more particularly, section 105.

The Department itself acknowledged in IT-71 that the same or similar wording in another section did not attract tax liability, and although this could merely be seen as a longstanding policy of not enforcing a section of the Act, I prefer an interpretation of the section which would allow me to conclude that the power to legislate with respect to low interest loans to employees and shareholder had simply not been exercised.

In the course of coming to this conclusion, I reviewed the decision of the Supreme Court of the United States in the case of Dickman et al. v. Commissioner of Internal Revenue [465 U.S. 330] and found the reasoning of the Court to be interesting but by no means determinative, as it must be read in the light of the statutory enactment being considered by that Court.

In the Dickman case, the United States Supreme Court held that a gratuitous interest-free demand loan gave rise to gift tax liability. A closer examination of the case reveals that the enactment in question had been previously construed to be broad enough to impose liability for tax on the value of the rent-free occupation of a dwelling. Subsection 105(2) clearly indicates that in Canada, the situation is very different. Only upkeep and maintenance charges incur tax liability on a party living rent-free in a dwelling owned by a trust. The Dickman case is predicated on different considerations and I do not intend to apply it.

Sections 6 and 15, and their respective predecessor sections, until 1977 dealt strictly with benefits arising from employee and shareholder loans. Until 1977, the value of interest-free and low interest loans was not a taxable benefit to these taxpayers. The situation changed when section 80.4 was implemented in 1979 and the value of interest-free and low interest loans was specifically included into the income of shareholders and employees. While a legitimate comparison may be made between section 105 of the Act and paragraphs 6(1)(a) and 15(1)(c) as they read before 1977, the sections are in fact totally unrelated and the amendment brought into effect by section 80.4 did not contain any reference to section 105 and could not affect its interpretation or the policy considerations relevant to benefits conferred from trust.

The plaintiff is entitled to the relief sought. I intend to set aside the three reassessments in question and I direct the Minister to reconsider the matter and issue further reassessments for the taxpayer's 1981, 1982 and 1983 taxation years in keeping with my decision. The plaintiff is also awarded his costs.

Appeal allowed.