The Queen v. Immobiliare Canada Ltd., 77 DTC 5332, [1977] CTC 481 (FCTD)

Addy, J:—The present appeal is against a judgment of the Tax Review Board which allowed an appeal by the taxpayer company, Immobiliare Canada Ltd, a Canadian resident company, against an assessment made on July 19, 1973 relating to the 1966 taxation year, for its alleged liability under subsections 106(1) and 109(1) and (5) of the Income Tax Act, RSC 1952, c 148 as amended, for failure to deduct and remit to the Department of National Revenue a 15% non-resident tax on the interest portion of bonds which it purchased from a foreign non-resident corporation, La Société Générale Immobiliare International Company (known as “SGI”).

The assessment involved tax in the amount of $71,212.43 and penalties and interest in the amount of $39,315.16 to the date of assessment, for a total of $110,527.29. The figures are not in dispute but the liability is.

The bonds were issued by a Canadian resident company, namely, Place Victoria St Jacques Co Inc (hereinafter referred to as “Place Victoria”) and were issued in the years 1960, 1962, 1965 and 1966. The total principal amount of the debenture was $16,000,000 and SGI held $7,615,850 of this amount. The amount of interest which was payable on the bonds in 1965 was $291,979.25 (representing interest for the full year) and the amount which was payable in 1966 was $182,770.25 (representing six months’ interest to June 15, 1966). However, by reason of a delay in constructing the building complex, which Place Victoria was incorporated to hold and administer, and by reason of the resulting complete lack of revenue in 1966, contrary to original expectations, Place Victoria decided, with the consent of SGI and the other debenture holders, that it would not pay those interest payments when due but would postpone them for two years. This decision to postpone was made and approved before the interest became payable. The interest accordingly was not paid when it would otherwise have been due and payable.

On October 1, 1966, and therefore before any of these payments of interest became payable. SGI sold all of its Place Victoria bonds to the defendant together with accrued interest thereon. The accrued interest at the time of sale, ie up to October 1, 1966, amounted to some $664,150 [sic] (this included some $474,749.50 of interest, which would have been payable previously had there been no postponement), also some $13,589.12 being interest on overdue interest. The difference of $155,855.72 represented interest which would not in any event have become payable at the time of sale.

The issue is whether a non-resident tax of 15% is payable on the sum of $474,749.50.

The following additional facts are, in my view, of some importance: the defendant Immobilière Canada Ltd, although a Canadian resident company, was a subsidiary of SGI, a foreign company. In payment for the transfer of the Place Victoria debentures, with accrued interest thereon, SGI accepted debentures of the defendant which the latter issued for that specific purpose. Place Victoria was also controlled by SGI. As to this latter fact. counsel for the defendant argued the contrary during his reply argument at trial and stated that no evidence had been led to establish that SGI held the majority of shares of Place Victoria, although there was some evidence that SGI held a substantial amount of them. However, on examining the statement of claim one finds that the plaintiff specifically pleaded in paragraph 3 that Place Victoria was controlled by SGI and the defendant in paragraph 1 of its defence admitted the facts alleged in paragraph 3 of the statement of claim. Thus. there would obviously be no necessity for the plaintiff to lead evidence on this issue and indeed, in the circumstances, it would have been improper to do so. The companies were therefore related and must not be deemed to have been dealing at arm’s length.

Many sections of the Act, as it existed in 1966. as well as certain articles of the Civil Code of the Province of Quebec, were referred to by counsel during argument. I do not intend to deal with all of these aS some are obviously inapplicable.

Counsel for the plaintiff stated that, although pleaded in the statement of claim, he was not relying on subsection 7(1). I agree that it has no application and will refrain from commenting on it. He also conceded that he was not relying on section 19A. I again agree that it had no application to taxation of a non-resident taxpayer under Part III of the Act as it existed in 1966, although it has now been made applicable to that Part of the Act by subsection 108(4a) enacted in 1971.

The Crown seeks to rest the assessment mainly on the provisions of paragraph 106(1)(b), subsection 108(7) and paragraph 137(2)(b). The relevant portions of paragraph 106(1)(b) read as follows:

106. (1) Every non-resident person shall pay an income tax of 15% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of,

(b) interest . . .

Counsel for the Crown argues that the words ‘‘a person” are to be taken to apply to any person whatsoever and not necessarily the debtor or a person who owes the interest or any other person acting on his behalf and that, therefore, the payment made by the defendant to SGI was taxable even though the interest was owed by Place Victoria and not by the defendant and even though the payment did not in any way discharge Place Victoria from paying the interest.

The word “interest” in that section means interest owing on the bonds, charge, debt or obligation and not that part of the purchase price paid by a third party to the holder of same for a transfer of the right to the accrued interest. The general principle of Wigmore v Thomas Summerson & Sons, Limited; Commissioners of Inland Revenue v Sir John Hubert Oakley, [1926] 1 KB 131, applies. I quote from page 143 of that report:

The truth is that the seller does not receive “interest” from the buyer, and it is interest which is the subject matter of the taxation. He received. the price of the expectancy of interest, and that is not the subject matter of the taxation. The whole contention on behalf of the Crown depends upon the fallacy that the price of the expectation of interest is interest.

There is nothing in subsection 106(1) nor in any other section of the Act which might prevent subsection 106(1) from being so interpreted. The defendant also relies on Commissioners of Inland Revenue v Henderson’s Executors, [1931] SC 681; Commissioners of Inland Revenue v Paget, [1938] 2 KB 25; and Monks v Executors of Sir G W Fox, [1928] 1 KB 351.

It is, of course, dangerous to rely on cases dealing with the interpretation of a particular section in a foreign taxation statute as so much depends on the exact wording of the section itself, on the accompanying interpretation sections of the particular statute, on the other interpretation statutes of general application in that jurisdiction as well as on the particular context where the section under consideration is found. However, all of the last-mentioned cases, like the Wigmore case, seem to have been decided on the basis of a general principle that, in default of any statutory provision to the contrary, where a person purchases a debt or obligation from a creditor on which there is accrued interest owing, the payment to the transferor of an amount required to purchase the right to the accrued interest does not constitute payment of interest to the transferor because the transferee is purchasing an expectancy to receive interest and not interest.

The Crown relied heavily on the case of Coleman E Hall v MNR, [1970] CTC 510; 70 DTC 6333, which was affirmed without reasons by the Supreme Court of Canada in [1971] CTC 401; 71 DTC 5217. The taxpayer in this case sold matured interest coupons and the amount received therefore was held to be interest within the meaning of paragraph 6(1)(b) but at page 516 [6336] of the first-mentioned report the learned judge clearly distinguishes the Wigmore case (supra) on the grounds that, in the latter case, the interest was not yet payable. In some of the English cases this distinction of whether the interest was payable at time of sale does not seem to have been universally recognized. In the Paget case, for instance, we find at page 35 of the above-mentioned report:

The purchase price received by Miss Paget was not income arising from the bonds at all. It arose from contracts of sale and purchase whereby Miss Paget sold whatever right she had to receive such income in the future as well as her right to take what was offered by the defaulting debtors.* [1] It is, in my opinion, quite impossible to treat this as equivalent in any sense to ‘income arising from” the bonds.

In the present case, however, the question does not really arise as the interest was not payable at the date of sale, in any case.

I must therefore conclude that the assessment cannot be justified on the basis of subsection 106(1).

Subsections 108(7), 24(1) and 24(2) read as follows:

108. (7) Where, if section 24 were applicable in computing a non-resident person’s income, that section would require an amount to be included in computing his income, that amount shall, for the purpose of this Part, be deemed to have been, at the time he received the security, right, certificate or other evidence of indebtedness, paid to him on account of the debt in respect of which he received it.

24. (1) Where a person has received a security or other right or a certificate of indebtedness or other evidence of indebtedness wholly or partially as or in lieu of payment of or in satisfaction of an interest, dividend or other debt that was then payable and the amount of which would be included in computing his income if it has been paid, the value of the security, right or indebtedness or the applicable portion thereof shall, notwithstanding the form or legal effect of the transaction, be included in computing . his income for the taxation year in which it was received; and a payment in redemption of the security, satisfaction of the right or discharge of the indebtedness shall not be included in computing the recipient’s income.

(2) Where a security or other right or a certificate of indebtedness or other evidence of indebtedness has been received by a person wholly or partially as, or in lieu of payment of or in satisfaction of a debt before the debt was payable, but was not itself payable or redeemable before the day on which the debt was payable, it shall, for the purpose of subsection (1), be deemed to have been received when the debt became payable by the person holding it at that time.

As to subsection 24(1) the debt must have been “then payable” and it was not in the present case. Furthermore, the payment must have been ‘in lieu of or in satisfaction of an interest, dividend”, etc. Surely the payment by the defendant cannot be “in lieu of or in satisfaction of” any part of the accrued interest owed by Place Victoria. The latter still owed every penny of the interest. As to subsection 24(2), although there is no requirement as in the case of subsection 24(1) that the debt or interest be payable at the time of transfer, the same condition exists to the effect that the payment made must in some way be made wholly or partially in lieu of or in satisfaction of a debt. Furthermore, subsection 24(1) provides that the payment (ie, made to SGI) shall be deemed to have been received (by it) at the time the debt became payable. No part of the debt of Place Victoria became payable in 1966 by reason of the previous arrangement made with SGI and other bondholders and therefore no payment of interest can be deemed to have been received by SGI during that year by virtue of the payment made to it by the defendant. Subsection 108(7) cannot therefore support the assessment.

The relevant portions of paragraph 137(2)(b) on which the Crown also relies read as follows:

137. (2) Where the result of one or more . . . transactions of any kind whatsoever is that a person confers a benefit on a taxpayer, that person shall be deemed to have made a payment to the taxpayer equal to the amount of the benefit conferred notwithstanding the form or legal effect of the transactions . . . and . . . the payment shall . . . be

(b) deemed to be a payment to a non-resident person to which Part III applies, or

Subsection 137(3) provides that where the transaction is at arm’s length and bona fide, no party shall be regarded as having conferred a benefit. In view of my finding that SGI controls both Place Victoria and the defendant company, the latter cannot invoke the protection of subsection 137(3) since the transaction was not at arm’s length.

The precise nature of the benefit conferred upon SGI, if any, is not easy to determine. SGI received from the defendant in 1966 the money equivalent of the full capital debt and of the accumulated interest to which it would ultimately have been entitled. It also received of course the sum for the sale of the interest portion of the debt without having to pay the normal 15% non-resident tax on that amount.

The immediate receipt by SGI of the proceeds representing the full capital amount of the loan, especially where the capital would bear interest at a current rate (ie, 6% and 7%) if not received and therefore be productive of income, does not in any way constitute a benefit.

As to the prepayment of a sum equivalent to the accrued interest which SGI would have been entitled to receive in 1968 in any event, if the accelerated receipt of interest did constitute a benefit, the determination of the money value of same would be highly speculative to say the least. Furthermore, interest was payable on all arrears of interest as in the case of capital. In any event, no assessment was made on the basis of an accelerated receipt of interest. Thus, no onus can be considered as having been cast upon the taxpayer to rebut it. More importantly, I feel that this is not the type of benefit which is contemplated by that section; the benefit must be of a. more tangible and identifiable nature.

As to the receipt of the full value of the accumulated interest, without having deducted therefrom 15% of same for non-resident tax, this, in my view, constitutes a definite, tangible, identifiable and measurable benefit which SGI received in 1966 and which the defendant conferred upon it, for, without the purchase by the defendant, the vendor SGI at some time in the future would otherwise be obliged to suffer a 15% reduction of total amount of interest to which it would have been entitled.

The only benefit conferred is therefore the tax saving of 15% of the interest and since that benefit, by virtue of paragraph (b) of subsection 137(2) quoted above is “deemed to be a payment to a non-resident person [ie, SGI] to which Part III applies’’, the defendant could be assessed for 15% of the benefit or tax saving, in other words, 15% of 15% of the total accrued interest of $644,150 at the time of sale.

It is to be noted that the application of paragraph 137(2)(b) in the particular circumstances of this case brings about an assessment which is different both as to the rate of assessment and as to the amount of accrued interest to which the rate is applied. The rate is 15% of 15% of the interest involved as opposed to a straight 15% as assessed by the plaintiff and the period includes all accrued interest to the date of sale (October 1, 1966) or $644,150 as opposed to $479,749.50 being interest which would have actually become payable by the end of 1966 had the postponement not been agreed upon (the last interest gale date in 1966 being June 15).

The assessment will accordingly be referred back to the Minister for reconsideration and reassessment.

Under the circumstances I am not awarding any costs.