Deckelbaum v. MNR, 82 DTC 1636, [1982] CTC 2659 (T.R.B.)

D E Taylor:—This is an appeal heard at Montreal, Quebec, on May 3, 1982, against an income tax assessment for the taxation year 1974, in which the Minister of National Revenue assessed to tax amounts advanced to the appellant by “Zeus Corp”, which he controlled. In assessing the appellant, the respondent relied inter alia, upon subsection 15(2) and paragraph 20(1 )(j) of the Income Tax Act, SC 1970-71-72, c 63, as amended. The main contention of the appellant was “that the loan qualifies under subparagraph 15(2)(a)(ii), that the terms of repayment were met, and the loan is as of today (March 3, 1981) fully repaid”. The Minister submitted “that no bona fide arrangments were made between the appellant and “Zeus Corp” at the time the loan was made for repayment thereof within reasonable time”.

It had been the practice of the appellant for many years prior to the taxation year in question to borrow funds from and make repayments to “Zeus”, in a disorganized and sporadic manner, a situation which well might equate to a “series of loans and repayments” under the Act, thereby adding to the appellant’s difficulty. However, this facet of the matter is not directly under review in this appeal. A document, entitled by the appellant as Exhibit A-2, is that upon which he relied as evidence of the arrangements for repayment of the particular amount at issue in this appeal, and the bona fide requirements under subparagraph 15(2)(a)(ii) of the Act. The only feature which distinguishes the amount under appeal (and its component parts) from the other loan amounts within the total loan and repayment spectrum which was portrayed at the hearing, was the same Exhibit A-2. Therefore, unless Exhibit A-2 does what it purports to do, and what the appellant candidly admitted it was intended to do — shelter the amount at issue by virtue of subparagraph 15(2)(a)(ii) of the Act, then the appellant’s case is in serious jeopardy. Exhibit A-2 reads as follows:

MINUTE OF A SPECIAL MEETING OF THE BOARD OF DIRECTORS OF ZEUS CORPORATION

held at the head office of the Company in the City and District of Montreal on December 15, 1972 at 10:00 am.

PRESENT:	JOSEPH DECKELBAUM
	MRS HANNAH DECKELBAUM
	MISS RACHEL RESNICK

being all of the Directors of the Company.

The following Waiver of Notice and Consent signed by all of the Directors of the Company, was then produced and read:

WAIVER OF NOTICE AND CONSENT

We, the undersigned, being all of the Directors of

ZEUS CORPORATION

do hereby waive notice of the time, place, and purposes of a Meeting of the Board of Directors of the Company to take place at the head office of the Company in the City and District of Montreal on December 15th, 1972, at the hour of 10:00 am, and we herewith consent that the said Meeting be deemed to have been validly called and held.

MONTREAL, DECEMBER 15, 1972
JOSEPH DECKELBAUM	MRS HANNAH DECKELBAUM
MISS RACHEL RESNICK

Upon motion, duly proposed and seconded, Mr Joseph Deckelbaum took the Chair, and Mrs Hannah Deckelbaum acted as Secretary of the Meeting.

The Minutes of the last Meeting of the Board of Directors were read, and upon motion, duly proposed and seconded, were unanimously approved.

The Chairman advised the Meeting that it was necessary for the Board to entertain a proposal whereby Mr Joseph Deckelbaum would borrow from the Company and the Company would lend Mr Joseph Deckelbaum the sum of $60,000 so that the latter may purchase a home for his personal use and that of his family in Jerusalem, Israel.

The terms and conditions of the loan were discussed at length.

It was thereupon moved, seconded and unanimously RESOLVED:

That Mr Joseph Deckelbaum be, and he is hereby permitted to borrow from the Company the sum of SIXTY THOUSAND DOLLARS ($60,000) so that the said Mr Joseph Deckelbaum may purchase a home for himself and for his family in Jerusalem, Israel, for personal occupany, and that the loan be repaid in annual instalments without interest in the sum of TEN THOUSAND ($10,000), commencing January 30, 1978.

There being no further business to transact, the Meeting then adjourned.

CHAIRMAN:	SECRETARY:
JOSEPH DECKELBAUM	MRS HANNAH DECKELBAUM

Exhibit A-2 is as detailed a record for purposes of the company minute book as I would normally expect to find. By the testimony of the appellant, it can be concluded that the corporate resolution was meticulously prepared under his direction and, if there had been anything further he might have added or included therein for purposes of sheltering the funds he wanted to withdraw, I am quite sure he would have done so. The appellant proposes that a corporate resolution, certainly one as complete as the one in evidence here, should be sufficient to fulfill that all important consequential requirement of paragraph 15(2)(a): “and bona fide arrangements were made at the time the loan was made for repayment thereof within a reasonable time.. .”.

I concur with the comments made in dismissing the appeal of Petrus J J Hendriks v MNR, [1981] CTC 3020; 81 DTC 935, respecting the bona tides of the alleged arrangements in that case, and I quote from 3033 and 943 respectively regarding these arrangements:

Discussion were [sic] alleged to have taken place between the appellant and Mr McLellan with respect to the financial capacity of HVS to grant a $28,000 loan in 1975 and in accordance with the verbal agreement arrived at, the repayment of the loan could be made from the appellant’s share of the company’s future dividends.

There is however no promissory note to that effect and no other documentary evidence which might confirm that definite arrangements, which clearly set out the specific amounts of the payments and the time in which the loan was to be repaid, were made at the time the loan was granted.

I emphasize particularly that there was no “promissory note . . . or other documentary evidence” which would effect the repayment noted above in Hendriks (supra). As I read it, in Hendriks the Board did not regard the quoted reference to “corporate resolutions” from Neudorf, [1975] CTC 192; 75 DTC 5213, as having direct and final bearing on the Hendriks case. In Neudorf (supra), the point at issue was the ownership of a building, and the learned judge sought without success to find some official corporate confirmation of the assertion of the appellant. In my view, even if it can be conceded that such a “corporate resolution” could have been of great assistance to Neudorf, the Board did not accept the position that a corresponding corporate resolution would have had the effect of establishing “bona fide arrangements” in Hendriks (supra). I am prepared to put forward that while a corporate resolution such as Exhibit A-2 in this appeal is of great aid to an appellant in a situation such as this, its simple existence does not equate with arrangements for repayment of any kind, let alone bona fide arrangements. At the time (1972) when Mr Deckelbaum was so carefully constructing Exhibit A-2, there had long been in existence a noted case Layden v MNR, 28 Tax ABC 33; 61 DTC 623, in which the Board’s rejection of a simple corporate resolution as being tantamount to “bona fide arrangements for repayment” had been detailed on 41 and 625 respectively:

Nevertheless, neither before that date, nor at the time of the loan, nor afterwards, did the Appellant undertake to repay those advances. When the loan was made he signed no obligation, note or acknowledgment of loan. Nor did he agree to any mortgage for the purpose of guaranteeing that Northeast Theatres Ltd would recover its funds. And yet, when he borrowed $13,000 from the Sun Life, at the same time, he did not hesitate to grant a mortgage to the latter.

Faced with that illustration, the route or choice of routes by which Mr Deckelbaum might ensure his objective was obvious — promissory note, mortgage, etc. His failure to do so to the limit of the guidance available in the jurisprudence leaves him exposed to attack by the Minister.

In my view, the highest legal level to which the corporate resolution in this matter (Exhibit A-2) could possibly aspire, would be as a commitment from Zeus to loan the relevant funds to Deckelbaum, and the basis for repayment which the company was prepared to accept. There is no indication therein, or thereon, of the acceptance of these terms and conditions, or of subsequent implementation and formalization as implied by the term “arrangement ... for repayment” by Deckelbaum in his personal capacity. An arrangement is an accord or agreement between parties and where the purpose of that arrangement is the conscious avoidance of income tax otherwise payable, it behooves the parties affected to be meticulous in the extreme. The more so when the term “arrangement” in this relevant section is qualified by the flashing red light “bona fide” — a term which, simply because it lacks precision, should be approached with the greatest of caution. It is difficult for the Board to accept that an arrangement for repayment of a loan from a shareholder to his personally held corporation, should be regarded as “bona fide” when it is less stringent than that which the same shareholder would insist his corporation impose on an unrelated third party. I am not persuaded that Zeus would have loaned a third party the $60,000 in question on the basis of Exhibit A-2 alone.

The underlying view of Mr Deckelbaum was that subsection 15(2) of the Income Tax Act is designed to provide access to corporation funds for shareholders, while the view of the Minister was that the same subsection was designed to prevent such access, or certainly prohibit abuses of such access. I would think that the Minister’s position is more secure. Section 15 of the Act deals with the inclusion of income as taxable (subject to certain restraints), it is not an exclusion of income or deduction section. The amount at issue in this appeal does not fulfill the conditions outlined in that section to exempt it from tax — no bona fide arrangements were made for its repayment.

The appeal is dismissed.

Appeal dismissed.