Date: 19991124
Docket: 96-4040-IT-G
BETWEEN:
GERALD C. GOREHAM,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Sarchuk J.T.C.C.
[1] These are appeals by Gerald C. Goreham (the Appellant)
from assessments with respect to his 1991, 1992 and 1993 taxation
years. In assessing the Appellant, the Minister of National
Revenue (the Minister) added $217,000 to his income for the 1991
taxation year on the basis that he received a housing loan in
that amount from Island Pride Fisheries Limited (the Company) at
which time bona fide arrangements were not made for
repayment thereof within a reasonable time in accordance with
paragraph 15(2)(a) of the Income Tax Act (the
Act). As well, in computing the Appellant's income for
the 1992 and 1993 taxation years, respectively, the Minister
deducted $21,950 and $7,000 pursuant to
paragraph 20(1)(j) of the Act.
Facts
[2] The Appellant was the owner of 50% of the issued and
outstanding shares of the Company which operates the Island
Pride, a herring purse Seine vessel of which he was the captain.
The remaining shares were held by Brian Blades (Blades) with 49%
and Susan Goreham, the Appellant's wife, 1%, with her
shareholding endorsed to Blades. The Company's fiscal period
ended on April 30th of each year. The Appellant in his
capacity as captain was responsible for the day-to-day operations
of the Seiner while the long-term decisions for the Company were
made jointly by the Appellant and Blades.
[3] The Appellant and his wife, Susan, resided in a home they
owned at Clark's Harbour which they listed for sale December
1988 at a price of $162,000. In April 1989, Susan purchased a lot
in Centreville upon which she and the Appellant intended to
construct a new residence although, she said, not necessarily
immediately. No offers had been received by the time the listing
expired in June 1989, and in fact Susan testified that no one had
even come to see the house. The listing was not renewed but they
personally continued their efforts to sell the property. Susan
testified that in November 1990, she was approached by one of her
customers who:
A. ... wanted to buy our home but they had to sell their
home. ...
Q. Okay.
A. And they thought they did have a buyer for their –
well, they did have a buyer.
Q. Yes.
A. But the guy that was going to buy their home couldn't
get the mortgage, so that fell through.
Q. So they weren't able to sell their home.
A. Right.
Q. And did that affect their ability to ---
A. Yes.
Q. --- buy yours?
A. That's why they couldn't buy ours.
It was her recollection that it was January 1991 when they
were advised of this fact.
[4] At some point of time during this same period, they
decided to commence the construction of their new home in
Centreville. She testified that they believed that they could
sell their property personally and to that end, erected a for
sale sign with an asking price of $125,000 in mind. The Appellant
for his part made inquiries about obtaining a mortgage at the
bank to finance the construction.
[5] In December 1990 or January 1991, the Appellant in the
course of a discussion with Blades, made reference to his plan to
finance the construction by way of a mortgage. Further discussion
led to an arrangement whereby the Company would advance funds
(the loan) to the Appellant as necessary to enable him to pay the
construction costs. In turn, the Appellant was to repay the loan
from the proceeds of the eventual sale of his residence and
through his captain's bonus for operating the Island Pride.
The possibility of using dividends, should the Company ever
declare them, to repay the loan was also discussed. In
furtherance of this arrangement, the Company advanced the amount
of $150,000 to the Appellant in January 1991 and a further
$67,000 in June 1991.
[6] In 1992, Blades instructed the Company's solicitor to
prepare a written agreement regarding the Appellant's housing
loan. This agreement, which was signed in late June 1992 by the
Company and Goreham provided as follows:
1. The Company agrees to made advances as necessary to pay for
the construction of the new residence.
2. Goreham agrees to repay to the Company, and the Company
agrees to accept as repayment of the advances, the following:
(A) on the sale of Goreham's existing residence at
Clark's Harbour, the full net proceeds from the sale shall be
applied to the loan;
(B) from Goreham's captain's share of income earned by
the Company from the fishing activities of the vessel
"Island Pride" the full captain's share, after
deductions, shall be applied towards the repayment of the said
advances;
(C) in the event that any dividends are declared and paid by
the Company to shareholders, Fifty Percent (50%) of the net
dividend payable to Goreham shall be applied to the repayment of
the loans and advances.
3. This loan shall not bear interest.[1]
...
[7] The Appellant and Blades agree that the full proceeds of
the sale of the Clark's Harbour residence were to be applied
against the loan. They also agree that one-half of any dividends
paid by the Company would be applied against the loan, and, as it
turned out, that was the case with respect to the only dividend
which was paid during the relevant period of time. There is
however substantial disagreement regarding the second method of
repayment i.e. the application of the Appellant's
captain's bonus to the loan.
[8] The substance of the Appellant's testimony regarding
the January 1991 verbal agreement was that, to the best of his
recollection, only a portion of the captain's bonus
was required to be paid against the loan. He also said that it
was up to him to decide how much of it was to be used for this
purpose and that it was left to him to give instructions to the
Company accountant to that effect. In so doing he followed his
understanding of the verbal agreement with Blades and the
Company. The Appellant also asserted that the language used in
the written agreement did not, in his view, represent a change of
his understanding that only a portion of the captain's bonus
was to be applied against the loan.
[9] Blades testified that the verbal agreement reached was
subsequently reduced to writing and correctly reflected the fact
that the Appellant's full captain's bonus was to be
applied in payment of the loan. He further said that the
Appellant was entitled to a captain's bonus every time he
sailed with the Island Pride and it was only if he was not on
board the vessel when it sailed that he would be disentitled to
it. Blades would not in the normal course of events have seen the
settlement slips and was not aware at the time that the Appellant
on occasion had not taken his captain's bonus. Nor was he
able to advance any reason why the bonus was not being taken. He
confirmed that when the Appellant did not take his bonus this had
the effect of increasing the "boat share" which in turn
had the effect of increasing the amount of money that was
channelled to the company.[2]
[10] The initial advance of $150,000 was made by the Company
to the Appellant in January 1991, followed by the second advance
of $67,000 in June 1991. A series of settlements made to the
end of December 1990 disclose that the Appellant, with one
exception, took his full captain's bonus. For the year ending
April 30, 1992, there were six settlements. The Appellant took
the captain's bonus only on the first settlement. For the
year ending April 30, 1993, the Appellant took a captain's
bonus on three of the four settlements and for the year ending
April 30, 1994, on four of six.[3] For those three years, the Appellant was
entitled to receive a captain's bonus on a total of 16
settlements and only took it on eight. With respect to those
eight, the following chart reflects those bonuses and the portion
applied to the housing loan.
|
Date
|
Captain's Bonus
|
Applied to Housing Loan
|
|
May 1991
|
$3,404.70
|
$0
|
|
June-July 1992
|
10,498.10
|
5,200
|
|
July-October 1992
|
24,039.48
|
12,000
|
|
November 1992
|
7,122.37
|
3,500
|
|
July August 1993
|
2,968.78
|
0
|
|
Aug., Sept., Oct., 1993
|
13,870.94
|
7,000
|
|
Oct. Nov. 1993
|
6,305.39
|
0
|
|
January 1994
|
3,687.09
|
0
|
The first repayment of the advances made by the Company took
place following Seine settlement no. 2 for the period June 19
– July 24, 1992 which was approximately 18 months after the
verbal agreement was in place and was the first settlement
following the execution of the written agreement.
Appellant's Position
[11] The Appellant contends that the originally agreed upon
terms of repayment are relevant to the determination of the
bona fides of the arrangements and that normal commercial
practices should be looked to in determining whether the time
allowed for repayment was reasonable. The Appellant submits that
subsequent events such as the reduction of fishing quotas and
declining prices for their catch as well as their inability to
sell their previous residence due to a depressed housing market
do not affect the intention of the parties at the time the
bona fide arrangements were made. The Appellant also
contends that the fact that the Company did not enforce repayment
of the loan from the Appellant's captain's bonus does not
affect the bona fides of the arrangement since this too
reflected the unanticipated economic circumstances affecting his
ability to pay.[4]
Conclusion
[12] The issue in these appeals is whether at the time the
loan was made, bona fide arrangements had been made
for its repayment within a reasonable time within the meaning of
paragraph 15(2)(a) of the Act.
[13] The relevant portions of subsection 15(2) of the
Act read:
15(2) Where a person ... is a shareholder of a particular
corporation ... and the person ... 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
(a) the loan was made or the indebtedness arose
...
(ii) in respect of an individual who is an employee of the
lender ... to enable or assist the individual to acquire a
dwelling ... where the dwelling is for the individual's
habitation,
...
and bona fide arrangements were made, at the time the
loan was made or the indebtedness arose, for repayment thereof
within a reasonable time; or ...
Thus, a taxpayer such as the Appellant who falls within
subsection 15(2) of the Act must include the amount of the
loan in his income unless he can bring himself within the
exception. In the present appeals, there is no dispute that the
loan was made to enable the Appellant to acquire a dwelling for
his habitation. The only issue is whether there were bona
fide arrangements at the time the loan was made for repayment
thereof within a reasonable time.
[14] The Appellant contends that the issue of bona
fides is to be addressed as of the time when the advances in
question were made, in this case, as of January and June, 1991.
Counsel for the Appellant argued that the fact that payments on
the loan were not made as originally agreed is irrelevant unless
it puts in question the original intention of the parties.
Reference was made to the decision of Mogan J. in Kalousdian
v. The Queen.[5] In that case, the taxpayer and another individual each
owned one-half of the issued shares of the corporation. The
taxpayer had received a loan from the corporation for the
acquisition of a dwelling house and in return, provided the
corporation with a promissory note indicating repayment of the
loan in five years by annual instalments. In fact, pursuant to a
subsequent oral agreement between the shareholders and the
corporation, no principal repayments were paid for six years.
With respect to the oral agreement, Mogan J. stated:
... In my view, the need for formality is greater when an
individual owns all of the issued shares or is the controlling
shareholder of the corporation. There may not be as much need for
formality if the shares of a corporation are held in equal
portions by two or more persons who deal at arm's length. In
those circumstances, if only one shareholder has received a loan
from the corporation on terms which are not reduced to writing,
and if all of the shareholders are in agreement with respect
to the oral terms of the loan, the conflicting commercial
interests of the arm's length non-borrowing shareholders will
ordinarily cause them to ensure that the loan is repaid within a
reasonable time. ...
Emphasis added
[15] This judgment has limited application to the present
appeals since there is a substantial disagreement as to one of
the terms of the loan. The respective recollections of the
Appellant and Blades regarding the application of the
captain's bonus in payment of the loan are contradictory. In
Massey-Ferguson Ltd. v. The Queen,[6] Urie, J. speaking for the Federal
Court of Appeal stated at page 5017:
The whole development of commercial law over the centuries is
replete with examples of the Courts recognizing that business men
do not always depend on expert documentation to prove the true
characterization of their transactions. Rather, they tend to
achieve their desired ends, particularly when the relationships
between them are close, in informal and expeditious ways which
perhaps are abhorrent to lawyers. In doing so they ran [run] the
risks inherent in such a practice of determining their respective
rights. Frequently no difficulties ensue, but if they do, in
the absence of contracts or other documents, Courts must
determine the intention of the parties and the nature of the
obligations imposed on them by reference to credible evidence of
another kind. ... Emphasis
added
What is the evidence available to the Court? Blades testified
that he instructed the Company lawyer to draw up the written
agreement to reflect his understanding of the verbal arrangement,
i.e. that the full amount of the captain's bonus would be
utilized in repayment of advances. Blades has been a business
associate of the Appellant for a number of years and it was
evident that he was well disposed towards him. Furthermore, he
has no interest whatsoever in the outcome of this appeal. On
balance, his testimony with respect to this issue was clear and
unequivocal and I accept it in preference to that of the
Appellant. It is also of some significance that when the
Appellant signed the agreement, which was couched in plain and
straightforward language, he took no exception to paragraph 2(B)
thereof which provided that "the full captain's
share", was to be applied towards the loan.[7]
[16] For two reasons, I am unable to conclude that at the time
of the advances arrangements had been made for the loan to be
reimbursed within a reasonable time. First, the Appellant and his
wife assert that there was a definite expectation that their
former residence would be sold. I have serious reservations
regarding that testimony. The Appellant and his wife knew, at the
very latest in January 1991, that their property would not
be sold. It is also a fact that it had been on the market for
approximately 25 months, that they had received no offers and
that indeed, during the course of the original listing, no one
had even bothered to look at the property. After June 1989, they
personally attempted to sell it with no interest being shown by
anyone until November 1990 at which time they were obliged to
reduce the asking price from $162,000 to $125,000 and to accept a
rather nebulous conditional oral offer. Susan's testimony
made it crystal clear that they were aware of the downturn in the
housing market during that period of time and that there were
few, if any, buyers. It is also evident that they were prepared
to proceed with the construction of a new residence regardless of
that knowledge.[8]
Given these facts, it is difficult to accept the Appellant's
contention that the agreement with the Company was such that the
loan was to be reimbursed within a reasonable time. The decision
relied upon by the Appellant, Dionne v. The Queen,[9] is in my view
distinguishable since on the evidence before me, it is not
possible to conclude with reasonable certainty when the
Appellant's residence might be sold.
[17] The second reason flows from my rejection of the
Appellant's testimony that only a portion of the
captain's bonus was to be applied in payment of the loan.
However, even if I had not made that determination, it would not
have been possible to conclude that arrangements were in place to
have the loan repaid within a reasonable time. The
Appellant's view of the agreement was that the repayment was
variable at his option. Since the decision to take the
captain's bonus was also in his complete control it permitted
him to pay as little as he chose or to defer making any payment
at all if he were so inclined (as indeed occurred on several
occasions). I do not mean to imply bad faith on the part of the
Appellant but merely to point out the extent to which the
agreement failed to provide a recognizable and reasonable
termination date for payment of the loan.
[18] The evidence as a whole raises a serious question as to
whether the conditions for repayment were sufficient for the
purposes of subsection 15(2) of the Act. In The Queen
v. Silden,[10] the taxpayer held shares in the Canadian subsidiary
of his Norwegian parent employer. The Norwegian corporation
advanced funds to the taxpayer with respect to a house that he
had acquired approximately one and one-half years earlier. Upon
acquisition of the house, the taxpayer had assumed the existing
mortgage which had a penalty clause for early repayment. The
funds advanced by the parent corporation were secured by a
mortgage on the property and the loan was to be repaid if the
taxpayer left the corporation's employment or resold or
transferred the property. In commenting on the need for certainty
as to the time of repayment, Pratt J.A. stated:
... What the statute requires is that arrangements be
made "at the time the loan [is] made for repayment thereof
within a reasonable time". The real question therefore is
not whether the arrangements relating to the repayment of the
loan were reasonable but whether, pursuant to those arrangements,
the loan was to be reimbursed within a reasonable time. That
question cannot, in this instance, be answered in the affirmative
since the arrangements that were made at the time of the loan did
not permit to determine with any certainty the time within which
it had to be reimbursed. Emphasis added
Given the circumstances in the present appeal, it is not
possible to conclude that the agreement, as perceived by the
Appellant, would provide any certainty as to the time within
which the advances made to him by the Company were to be
reimbursed. Accordingly, the appeals are dismissed, with
costs.
Signed at Ottawa, Canada, this 24th day of November, 1999.
"A.A. Sarchuk"
J.T.C.C.
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