Date: 20000218
Docket: 97-1185-IT-G
BETWEEN:
FEDERATED CO-OPERATIVES LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Mogan, J.T.C.C.
[1] This appeal is concerned with the special tax which is
levied on large corporations under Part I.3 of the Income Tax
Act. The charging provision states:
181.1.(1) Every corporation shall pay a tax under this Part
for each taxation year equal to 0.2% of the amount, if any, by
which
(a) its taxable capital employed in Canada for the
year
exceeds
(b) its capital deduction for the year.
The phrase "capital deduction" is defined in section
181.5 to be $10,000,000 to ensure that the tax in Part I.3 is
levied only on large corporations. Taxable capital is defined as
follows:
181.2(2) The taxable capital of a corporation (other than a
financial institution) for a taxation year is the amount, if any,
by which its capital for the year exceeds its investment
allowance for the year.
It can be seen that the definition of "taxable
capital" comprises a positive element (capital) and a
negative element (investment allowance). Each of these is a
defined term but, in this appeal, I am concerned primarily with
the definition of "investment allowance" which is found
in subsection 181.2(4):
181.2(4) The investment allowance of a corporation (other than
a financial institution) for a taxation year is the total of all
amounts each of which is the carrying value at the end of the
year of an asset of the corporation that is
(a) a share of another corporation,
(b) a loan or advance to another corporation (other
than a financial institution),
(c) a bond, debenture, note, mortgage or similar
obligation of another corporation (other than a financial
institution),
(d) ...
[2] In the course of the Appellant's business, it
frequently accumulates cash balances in excess of its immediate
cash requirements. It is the Appellant's policy to invest all
or a significant portion of such cash balances in commercial
instruments known as "bankers' acceptances". The
issue in this appeal is whether a bankers' acceptance
(referred to hereafter as a "BA") falls within
item (b) or (c) of the definition of
"investment allowance" set out above in
subsection 181.2(4). If a BA falls within the definition of
"investment allowance", then it will increase the
negative element in the definition of "taxable capital"
and reduce the tax payable under Part I.3 of the Act.
[3] The taxation years under appeal are 1992, 1993 and 1994.
At the end of each year, the Appellant had a significant amount
invested in BAs and deducted the respective amounts as part of
its "investment allowance" in the computation of
"taxable capital" for the purposes of Part I.3. The
Minister of National Revenue disallowed the deduction of all
amounts invested in BAs on the basis that such amounts were not
part of the Appellant's investment allowance. The amounts
invested in BAs and disallowed by the Minister; and the
corresponding tax under Part I.3 of the Act are as
follows:
|
|
Invested in BAs
|
Corresponding Tax at 0.2%
|
|
|
|
|
|
1992
|
$244,156,063
|
$488,312
|
|
1993
|
285,358,284
|
570,717
|
|
1994
|
282,538,905
|
565,078
|
[4] The only witness who testified in this appeal was Randall
Arthur Boyer, a chartered accountant who is a fulltime employee
of the Appellant as finance administration officer. Mr. Boyer has
held that position for 11 years. He has extensive knowledge of
the Appellant's policy of purchasing BAs and he also has
experience on the other side of the transaction with respect to
issuing BAs. His evidence is summarized below in paragraphs 5 to
15 inclusive.
[5] The Appellant is the central manufacturing and wholesaling
organization for the co-operative retail system in western
Canada. It procures on a wholesale basis goods which are sold
through the co-operative retail system. It also owns and operates
a number of manufacturing facilities throughout western Canada
including a refinery, a lumber mill and feed mills. The retail
co-operatives are the Appellant's shareholders. The Appellant
purchases BAs to earn a rate of return on its excess cash
balances. It buys BAs rather than commercial paper because the
credit risk associated with a BA is less than the credit risk
associated with commercial paper. The Appellant recognizes a
risk/return trade-off. Commercial paper yields a higher rate of
return than BAs but the credit risk is also higher.
[6] Each morning, the Appellant determines its cash position
and the amount of excess cash which is not required for a certain
number of days into the future. It then contacts several brokers
or money market desks to get offers on the BAs that they have
available. Those brokers and money market desks provide the
specific dates when the available BAs will mature and the
discount at which they are prepared to sell. The Appellant
evaluates the offers and decides which BAs it wishes to purchase.
It then calls back the particular broker or money market desk and
does the trade. The Appellant issues a draft in payment for one
or more BAs; the draft is delivered to the broker or money market
desk in exchange for the BAs which are held by the broker or
money market desk in safekeeping for the Appellant.
[7] The Appellant does not buy BAs every day but it is in the
market several times a week. Exhibit A-1 is a three-page schedule
of BAs owned by the Appellant at the end of the three taxation
years under appeal: October 31, 1992, 1993 and 1994. Each page of
Exhibit A-1 has nine columns which were identified and described
by Mr. Boyer. In this appeal, it is important not only to
characterize a BA as a particular commercial instrument but to
understand how it comes into existence. I shall therefore
summarize Mr. Boyer's description of Exhibit A-1 starting at
the left-hand column using the column heading with the Boyer
description:
1. Bank: The financial institution whose broker or money
market desk was the vendor of the specific BA.
2. Key: A symbol which the Appellant's computer program
uses to identify the vending bank in the first column.
3. Invoice date: The date when the Appellant purchased the
specific BA.
4. Expiry date: The maturity or due date of the specific
BA.
5. Guarantor: The financial institution which has
"accepted" or guaranteed payment of the specific
BA.
6. Rate: The yield that the Appellant would earn on the
specific BA from the date of purchase to its expiry/maturity due
date.
7. Amount: The discounted purchase price paid by the Appellant
for the specific BA.
8. Days: The number of days from the purchase date (column 3)
to the date of the schedule (Appellant's fiscal year end
– October 31).
9. Accrued Interest The interest that has accrued from the
purchase date (column 3) to the fiscal year end (October 31).
[8] The discounted purchase price in column 7 was explained as
follows. It is the nature of a BA that the amount of the discount
determines the yield and BAs are always sold at a discount. If
the face amount of the BA was one million dollars, the Appellant
would purchase it for less than $1 million. The difference
between the purchase price and $1 million, and the period from
purchase date to maturity date are relevant in determining the
yield.
[9] Mr. Boyer was a well informed witness because he was
familiar with the role of both the purchaser and the issuer of a
BA. Two corporations which are managed by the Appellant are
issuers of BAs. Those corporations are New Grade Energy Inc. and
Interprovincial Co-operative Limited. Mr. Boyer had personal
responsibility for the issuing of BAs by those two corporations.
He described the process as follows using New Grade Energy Inc.
("New Grade") as an example. New Grade would start by
establishing a credit facility with its bank which happened to be
the Canadian Imperial Bank of Commerce ("CIBC"). Once
established, that credit facility would permit New Grade to issue
a BA. The CIBC would provide a number of BA forms to New Grade
which would (i) sign them on the front like a cheque; (ii)
endorse them on the back; and (iii) return them with a blank
amount to the CIBC which would forward them to Toronto to be held
in safekeeping until New Grade decided to issue them.
[10] When New Grade decided to issue one or more BAs and
receive the proceeds as borrowed capital, it would inform the
CIBC of the amount and term of the BA. The CIBC would then take
one of the signed and endorsed BA forms held in safekeeping and
complete it by filling in the amount and maturity date. The CIBC
would then "accept" the security of New Grade by
endorsing its "acceptance" on the front of the form.
Exhibit A-2 is a photocopy of a paid BA in the amount of $100,000
issued by New Grade on May 22, 1996 and maturing 35 days later on
June 26. It was accepted by the CIBC on the left side of the
front of the form with two signatures. Although Exhibit A-2
(being a photocopy) has nothing on the back, the original BA of
which Exhibit A-2 is a copy would have been endorsed on the
back by New Grade with the same two signatures which appear on
the front as drawer. It is this endorsement on the back which
makes the BA a marketable security after its acceptance by the
bank.
[11] After the bank had endorsed its acceptance, New Grade was
able to take the BA into the market to raise capital. New Grade
would call several brokers asking for bids on the particular BA
it was issuing. Generally, it would choose the best bid (highest
capital amount offered or lowest yield to purchase). Having made
the choice, New Grade would call back the broker who made the
best bid to accept the bid and the deal would be done. The broker
who made the best bid would then deliver a draft to the CIBC in
Toronto in exchange for the BA. New Grade would receive the
proceeds from the sale of the BA after the CIBC had deducted its
stamping fee which is like a commission for accepting or
guaranteeing the BA. Apart from the involvement of the CIBC in
establishing the initial credit facility for New Grade and later
accepting a particular BA, the CIBC is not involved in the
process of taking the BA to market and selling it at the best
price.
[12] When a BA issued by New Grade comes due, the holder of
that BA (through its broker) would present it for payment to the
CIBC which, in exchange for the BA, would pay to the holder the
face amount of the BA and then charge the account of New Grade
for that amount which the CIBC had disbursed on its behalf. While
the BA was outstanding from the date of its sale to the date of
its redemption, New Grade recorded the face amount of the BA as a
liability.
[13] The Appellant could not produce in Court any of the BAs
which it had purchased in the years under appeal because, at
maturity, each BA is exchanged for payment of its face amount and
the BA is stamped "paid" and returned to the issuer for
cancellation. The Appellant produced Exhibit A-2 as a
"paid" BA which had been issued in 1996 by its
subsidiary New Grade. Even when a particular BA was outstanding
and owned by the Appellant as an investment, the document itself
was held in Toronto for safekeeping by the Appellant's broker
or agent to facilitate its exchange for cash on the maturity
date. Mr. Boyer described it as a convenience because, in Canada,
all BAs are generally held in Toronto. Upon purchase, the
Appellant could have insisted on taking delivery of a particular
BA at its office in Saskatoon but it would have had to ship the
BA back to Toronto for exchange and settlement on the due
date.
[14] When the Appellant purchased a particular BA, it had no
knowledge of the credit arrangements between the bank which
"accepted" the BA and the bank's client which
issued the BA. In fact, when the Appellant purchased a BA in the
years under appeal, it did not even know the identity of the
person (almost always a corporation) which issued the BA. Mr.
Boyer explained the situation in these words:
Question: When Federated is purchasing a BA does Federated
know who the issuer of the BA is?
Answer: We do not know. We could know, but we do not. In these
specific BA notes, we did not.
Question: Why is that?
Answer: The main reason for that is, that because we are
purchasing the BA note based on the credit risk associated with
the guarantor of the note, which is the financial institution
that has accepted or stamped the note, there is really no need
for us to know who the issuing corporation is.
[Transcript page 19]
...
Question: Would it be fair to say that the investor or the
purchaser of a banker's acceptance is purchasing that
particular instrument on the strength of the bank that has
accepted it as opposed to the particular circumstances of the
drawer?
Answer: The endorsement by the financial institution is really
the credit risk that the purchaser of the BA note is ultimately
relying upon for payment of the note at maturity, although it is
issued by the drawer. [Transcript page 29]
[15] Although the Appellant did not know the identity of the
persons who issued the BAs, the Appellant was concerned to know
the bank which had accepted each BA. Mr. Boyer stated in
evidence:
Question: So, Federated does know who has accepted the note
when it buys it?
Answer: Yes, we do.
Question: Is that in any way relevant to Federated, does the
identity of the entity that is accepting the note or has accepted
the note, is that relevant to Federated?
Answer: It is relevant in that we would not want to hold 100
percent of our BA portfolio or BA notes, we would not want them
all guaranteed or accepted by the same financial institution. We
would like to have our credit risk associated with the financial
institutions that have guaranteed the notes spread out amongst
several of those financial institutions. [Transcript page
20]
[16] Having regard to the above summary of evidence, BAs have
been described as follows:
A bankers' acceptance is a bill of exchange drawn by a
customer upon a bank, payable at some specified future date and
accepted by the bank. It is called a bankers' acceptance to
distinguish it from a trade acceptance which is typically
accepted by the customer and represents an obligation arising
under a trading contract. Banks' acceptance of drafts drawn
on them by their customers has been judicially recognized as a
part of the business of banking for over a hundred years.
Typically, the customer draws a bankers' acceptance payable
to the customer's own order and receives it back form the
bank after acceptance. The customer then endorses the acceptance
either "generally", thus rendering it payable to bearer
or "specifically", making it payable to a named broker.
In either event, the acceptance will usually be sold to an
investor in the money market.
(Crawford and Falconbridge Banking and Bills of Exchange,
Eighth Edition, 1986 at pages 878)
[17] The Appellant claims that a BA falls within one or the
other of the following two items which are part of the definition
of "investment allowance":
(b) a loan or advance to another corporation (other
than a financial institution),
(c) a bond, debenture, note, mortgage or similar
obligation of another corporation (other than a financial
institution),
In argument, Appellant's counsel acknowledged that the
purchase of a BA by the Appellant was not a "loan" but
Mr. McKenzie did argue that the word "advance" was
broad enough to include a BA. The Appellant relies on the
decision of the B.C. Court of Appeal in Air Canada v. Minister
of Finance for British Columbia, [1981] 2 W.W.R. 97. The
appeal by Air Canada was under the Corporation Capital Tax
Act of the Province of British Columbia. The Province levied
a tax on "taxable paid-up capital" and the following
portion of subsection 12(1) had to be construed:
12(1) For the purpose of computing the taxable paid-up capital
of a corporation for a fiscal year, there may be deducted from
its paid-up capital as at the close of the fiscal year such of
the following amounts as are applicable ...
(c) The amount that equals that proportion of
paid-up capital remaining after the deduction of the amounts
provided by paragraphs (a), (b) and (d) which the cost of
the investments made by the corporation in the shares and bonds
of other corporations, in loans and advances to other
corporations and in the bonds, debentures and other securities of
any government, municipal or school corporation bears to
the total assets of the corporation remaining after the
deductions of the amounts provided in paragraphs (a), (b) and
(d), but cash on deposit with any corporation doing the
business of a savings bank ... shall be deemed not to be
loans and advances to other corporations.
[18] I have underlined those words which in my view make this
awkward legislation more comprehensible. Air Canada held four
kinds of bank paper: a certificate of deposit, a bearer deposit
term note, a swap deposit transaction and a bankers'
acceptance. The parties had agreed that a chartered bank was
"doing the business of a savings bank" within the
meaning of paragraph 12(1)(c). The Ministry of Finance
claimed that the cost of the four kinds of bank paper was
"cash on deposit" and therefore deemed not to be loans
or advances to other corporations. The B.C. Court of Appeal
concluded that the cost of the four kinds of bank paper
(including BAs) was not "cash on deposit" but was loans
and advances to other corporations. Air Canada was successful in
its appeal. This decision is clouded by the fact that the BAs
owned by Air Canada were only one of the four kinds of bank paper
which were lumped together for litigation purposes. Also, under
the B.C. legislation, financial institutions like banks were not
segregated from other corporations as they are in subsection
181.2(4) quoted above.
[19] In TransCanada Pipeline Limited v. Ontario Minister of
Revenue, [1993] 1 C.T.C. 277, the corporate taxpayer
("TCPL") under long-term supply contracts with gas
producers had agreed to purchase certain minimum quantities of
gas each year. If it was unable to take delivery of the agreed
minimum in any year, it was required to pay the producer the full
minimum purchase price but became entitled to a credit for such
payments against future purchases of gas within a limited period
of time. These were described as "take or pay"
payments. Under the capital tax provisions of the Ontario
Corporations Tax Act, the issue was whether the "take
or pay" payments could be deducted from TCPL's paid-up
capital in accordance with paragraph 54(1)(c) which
permitted the deduction of "investments ... in ...
advances to other corporations". In allowing the appeal of
TCPL, the Ontario Court of Appeal stated at page 279:
The second question is whether the take or pay payments were
"advances" within the meaning of the subsection.
... In the temporal sense, these take or pay payments were
advance payments required to be made by the respondent when it
found itself unable to take delivery of the minimum quantity of
gas specified in its contract with a gas producer. At the time
they were made, the respondent expected and certainly hoped that,
in the fullness of time, it would call for the delivery of an
equivalent amount of gas for which it had so paid. While
subsequent events belied this expectation and this hope, they did
not, in our view, change the character of the take or pay
payments which, at the time they were made, fell within
dictionary definitions of "advance" as a "payment
[made] beforehand or in anticipation" and a "payment
made before ... the completion of an obligation for which it
is to be paid": Dictionary of Business and Finance
(1957), page 9.
[20] The decision of the Federal Court of Appeal in
Oerlikon Aérospatiale Inc. v. The Queen, 99 DTC
5318 is important because that Court was required to construe and
apply certain provisions of Part I.3 of the Act which is
the same Part that I am required to construe in this appeal. The
taxpayer in Oerlikon was a subcontractor required to
assemble and sell to a sister corporation ("WOB")
certain components of a defence system which WOB would supply to
the Canadian government. There was an agreement between Oerlikon
and WOB that the working capital of Oerlikon would be provided by
payments from WOB prior to the delivery or invoicing of product
from Oerlikon to WOB. At the end of its 1989 taxation year, the
amounts owing by Oerlikon to WOB and other customers were
approximately $244 million. In computing its income for 1989 for
purposes of Part I, Oerlikon included the $244 million under
paragraph 12(1)(a) but deducted the same amount as a
reserve under paragraph 20(1)(m). When computing its
"capital" for purposes of Part I.3, Oerlikon had to
apply the following statutory provision:
181.2(3) The capital of a corporation (other than a financial
institution) for a taxation year is the amount, if any, by which
the total of
(a) the amount of its capital stock (or, in the case of
a corporation incorporated without share capital, the amount of
its members' contributions), retained earnings, contributed
surplus and any other surpluses at the end of the year,
(b) the amount of its reserves for the year, except to
the extent that they were deducted in computing its income for
the year under Part I,
(b.1) the amount of its deferred unrealized foreign
exchange gains at the end of the year,
(c) the amount of all loans and advances to the
corporation at the end of the year,
(d) ...
[21] Oerlikon argued that amounts received from customers
prior to the delivery or invoicing of product were not
"loans and advances" within the meaning of paragraph
(c). In dismissing Oerlikon's appeal, the Federal
Court of Appeal stated at pages 5323 and 5324:
In the alternative, the appellant claims that the amount of
$244,492,173 does not constitute "loans and
advances" within the meaning of
paragraph 181.2(3)(c) and should therefore not be
included in the computation of its capital as such. It considers
that the word "advance" can have two meanings: an
"advance in the sense of a loan" which refers to a loan
in the literal sense of the word, and an "advance in the
sense of a payment on account" which refers to an amount to
be applied against the price of a contract paid before the
contract is performed. It contends that only the concept of
"advance in the sense of a loan" is contemplated in
paragraph 181.2(3)(c).
...
The Ontario Court of Appeal's decision in TransCanada
Pipelines v. Ontario (Minister of Revenue) is much closer to
the facts of the instant case. In that matter, the Court had to
determine whether various payments made by TCPL to natural gas
producers under long-term supply contracts could be deducted from
the computation of its paid-up capital under paragraph
54(1)(c) of the Corporations Tax Act.
...
TCPL attempted to deduct the surplus portion of these payments
as "loans and advances" to its suppliers under
paragraph 54(1)(c) of the Ontario legislation. The Ontario
Minister of Revenue issued assessments disallowing this
treatment. TCPL successfully challenged these assessments both at
first instance and on appeal. After a brief analysis, the Court
of Appeal emphasized the fact that the payments in question:
... fell within dictionary definitions of "advance"
as a "payment [made] beforehand or in anticipation" and
a "payment made before ... the completion of an obligation
for which it is to be paid": Dictionary of Business and
Finance (1957), p. 9.
and held that these amounts constituted, inter alia,
"advances" within the meaning of paragraph
54(1)(c).
The appellant was unable to show how the advances at issue in
this case were distinguishable from the advances the Ontario
Court of Appeal considered in TCPL. Both cases dealt with
payments made in advance for the eventual performance of the
resulting reciprocal obligation.
[22] The above decisions in TransCanada Pipelines and
Oerlikon support the proposition that, when construing the
phrase "loans and advances", there is a real difference
between a "loan" and an "advance". An
"advance" in the context of that phrase is an amount
paid before the completion of an obligation for which it is to be
paid; or an amount paid before the performance of a resulting
reciprocal obligation. In that sense, an amount paid by the
Appellant for the purchase of a BA is the cost of an investment
and not an advance to another corporation. I place little weight
on the decision of the B.C. Court of Appeal in Air Canada
because (i) four kinds of bank paper (including BAs) were lumped
together for litigation purposes; (ii) when characterizing the
bank paper, the Court was forced to choose between "loans
and advances to other corporations" and "cash on
deposit"; and (iii) under the awkwardly worded B.C.
legislation, financial institutions like banks were not
segregated from other corporations as they are in subsection
181.2(4).
[23] In Les Technologies Industrielles SNC Inc. v. Le
sous-ministre du Revenu du Québec, [1998] J.Q. no.
3738 (QL), the Minister of Revenue of Quebec assessed the
taxpayer corporation for a capital tax under the Loi sur les
impôts which levies a tax similar to the tax under Part
I.3 of the federal Income Tax Act. It appears that
the corporation had issued certain BAs which were accepted and
then purchased by two banks. They were issued on November 30,
1987 and due on February 29, 1988. Because the Quebec capital tax
provision did not expressly include a bankers' acceptance
within the capital of a corporation, the issue was whether
bankers' acceptances are "loans and advances"
within the meaning of section 1136 of the Loi sur les
impôts. Desmarais J. of the Quebec Superior Court
concluded that bankers' acceptances do not fall within the
meaning of section 1136:
Peu importe par ailleurs dans le présent litige la
definition acceptée. Si l'avance est “ un
paiement par anticipation d'une somme due ”, cette
définition ne cadre pas avec la définition de
l'article 1136 paragraphe d), puisque l'argent
provenant de Nationale et Royale le 30 novembre 1987, est le
produit d'une vente d'effet de commerce et non un
paiement anticipé sur l'acceptation bancaire du
29 février 1988.
UNOFFICIAL TRANSLATION
It does not matter which definition is accepted in the case at
bar. If an advance is "a payment in advance of an amount
owing", this definition is not consistent with the one found
in paragraph 1136(d), as the money received from the
National Bank of Canada and the Royal Bank of Canada on November
30, 1987, constituted the proceeds from a sale of commercial
paper and not an advance on the banker's acceptance of
February 29, 1988.
[24] In my opinion, the cost of a BA to the Appellant is not
an "advance" to another corporation within the meaning
of paragraph 181.2(4)(b) of the Act. If I should be
wrong in this opinion and if the cost of a BA is an
"advance", I would then conclude that it is an advance
to the accepting bank (i.e. a financial institution) and not an
advance to the drawer of the BA (i.e. another corporation). As
stated in paragraph 17 above, the Appellant's counsel
acknowledged in argument that the purchase of a BA was not a
"loan" within the meaning of paragraph
181.2(4)(b). Therefore it remains to be determined whether
a BA falls within any of the words in paragraph
181.2(4)(c):
(c) a bond, debenture, note, mortgage or similar
obligation of another corporation (other than a financial
institution),
[25] The Appellant does not claim that a BA could be
characterized as "a bond, debenture or mortgage" but it
does claim that a BA is a "note" or obligation similar
to a note. Basically, I am required to interpret the word
"note" as used in paragraph 181.2(4)(c). In
Friesen v. The Queen, 95 DTC 5551, the Supreme Court of
Canada quoted with approval at page 5553 the following statement
by E.A. Driedger on statutory interpretation:
Today there is only one principle or approach, namely, the
words of an Act are to be read in their entire context and
in their grammatical and ordinary sense harmoniously with the
scheme of the Act, the object of the Act, and the
intention of Parliament.
Because I am required to read the words in paragraph
181.2(4)(c) in their entire context and in their
grammatical and ordinary sense, I propose to review the
dictionary meanings of the four specific words in paragraph
(c) using Black's Law Dictionary, Seventh Edition,
1999:
Bond: an obligation; a promise; a written promise to pay money
or do some act if certain circumstances occur or a certain time
elapses. (page 169)
Debenture: a debt secured only by the debtor's earning
power, not by a lien on any specific asset.
(page 408)
Note: a written promise by one party (the maker) to pay money
to another party (the payee) or to bearer. (page 1085)
Mortgage: a conveyance of title to property that is given as
security for the payment of a debt or the performance of a duty
and that will become void upon payment or performance according
to the stipulated terms. (page 1026)
[26] Each of the above four words is evidence of an obligation
to pay an amount of money or to do some act. Each word indicates
an amount owing by a debtor to a creditor. Each word indicates a
two-party transaction. In legal and commercial language, the word
"note" is used interchangeably with "promissory
note". Subsection 176(1) of the Bills of Exchange
Act, Statutes of Canada, Chapter B-4, defines a promissory
note as follows:
176(1) A promissory note is an unconditional promise in
writing made by one person to another person, signed by the
maker, engaging to pay, on demand or at a fixed or determinable
future time, a sum certain in money to, or to the order of, a
specified person or to bearer.
One distinction between a note and a BA is that a note is a
two-party instrument while a BA is a three-party instrument (i.e.
the drawer, the acceptor and the holder in due course). The
Appellant's counsel argued that, in substance, the
Appellant's funds on the purchase of a BA would flow through
the accepting bank to the drawer of the BA; and that the drawer
and Appellant were analogous to the maker and payee of a note. I
cannot accept that argument because it ignores not only the
important but the essential presence of the accepting bank in the
transaction.
[27] It is the acceptance by the bank which gives the BA value
in the money market. The Appellant as a purchaser of BAs did not
even know the identity of the issuers/drawers. I will repeat here
a portion of the evidence of Mr. Boyer quoted above in paragraph
14:
... we are purchasing the BA note based on the credit
risk associated with the guarantor of the note, which is the
financial institution that has accepted or stamped the note,
there is really no need for us to know who the issuing
corporation is. ... The endorsement by the financial
institution is really the credit risk that the purchaser of the
BA note is ultimately relying upon for payment of the note at
maturity, although it is issued by the drawer.
In paragraph 16 above, there is a description of a BA from a
prominent Canadian textbook on bills of exchange. The same author
makes the following comment on a BA:
... It is clear both in principle and on authority that
there is no borrowing upon the issue of a bankers'
acceptance. The investor or ultimate purchaser of the acceptance
does not make a loan to the drawer; he acquires an investment
security in a transaction or purchase and sale. The bank does not
lend money to the drawer; it lends its credit by accepting the
order to pay as an accommodation to its customer, and pays the
acceptance at maturity as its own obligation. The customer does
not "repay" the bank at maturity; he may provide it
with the funds required to discharge the acceptance, or he may
indemnify it if it pays its own funds before calling upon him.
Therefore it may be seen that there is no borrowing or lending by
anyone. ...
Crawford and Falconbridge Banking and Bills of Exchange,
Eighth Edition, 1986 at page 879
[28] Paragraph 181.2(4)(c) is concerned only with
obligations having the character of a debt. According to the
passage quoted above, there is no borrowing or lending by anyone
upon the sale of a BA. A BA is not a debt instrument. In my
opinion, the word "note" in paragraph
181.2(4)(c) cannot be construed to include a BA. Indeed,
there would be an unreasonable distortion in the ordinary meaning
of the word "note" (as a commercial instrument) to hold
that it means or includes a BA.
[29] Counsel for both parties referred me to certain
provisions of the Bills of Exchange Act and, in
particular, to sections 127, 128 and 129.
127 The acceptor of a bill by accepting it engages that he
will pay it according to the tenor of his acceptance.
128 The acceptor of a bill by accepting it is precluded from
denying to a holder in due course
(a) the existence of the drawer, the genuineness of his
signature and his capacity and authority to draw the bill;
(b) in the case of a bill payable to drawer's
order, the then capacity of the drawer to endorse, but not the
genuineness or validity of his endorsement; or
(c) in the case of a bill payable to the order of a
third person, the existence of the payee and his then capacity to
endorse, but not the genuineness or validity of his
endorsement.
129 The drawer of a bill by drawing it
(a) engages that on due presentment it shall be
accepted and paid according to its tenor, and that if it is
dishonoured he will compensate the holder or any endorser who is
compelled to pay it, if the requisite proceedings on dishonour
are duly taken; and
(b) is precluded from denying to a holder in due course
the existence of the payee and his then capacity to endorse.
[30] As I understand the above legislation and the passage
from Crawford and Falconbridge quoted in paragraph 16 above, a BA
is a bill of exchange and the accepting bank is the party
primarily liable to a holder in due course. The drawer of the BA
is secondarily liable. If the Appellant as purchaser of a BA is a
holder in due course, the Appellant's first claim for payment
is against the accepting bank. This appears to be not only
consistent with the provisions of the Bills of Exchange
Act but is also the precise understanding of Mr. Boyer, the
Appellant's only witness.
[31] Appellant's counsel cited the decision in Recalma
et al. v. The Queen, 96 DTC 1520 (Tax Court of Canada)
and 98 DTC 6238 (Federal Court of Appeal) in which a BA is
described as " ... a short-term note issued by a third
party which the bank selling the note is primarily responsible
for (or guarantees) repayment". See page 6239. The issue in
Recalma was whether certain investment income was situate
on a reserve for purposes of the Income Tax Act and the
Indian Act. The Court in Recalma was not required
to consider the character of a BA and whether it was a
"note". I regard the sentence quoted above from page
6239 as a casual description of a BA for illustrative purposes
and not intended to be a technical legal description. Even if I
were to apply the above description in Recalma, I would
conclude from Mr. Boyer's evidence that the Appellant
regarded the BA as a "note" of the accepting bank (as a
financial institution) and therefore disqualified from paragraph
181.2(4)(c).
[32] The Appellant attempted to make a "double
taxation" argument. Under paragraph 181.2(3)(d), the
issuer/drawer of a BA is required to include in the computation
of its capital the amount of all indebtedness represented by
bonds, notes, BAs, etc. If the Appellant is not permitted to
deduct the year end carrying value of its BAs as part of its
investment allowance under subsection 181.2(4), the Appellant
claims that Revenue Canada will be able to tax twice the amount
of that value. There is no merit in this argument. First, upon
the purchase of a particular BA, the purchaser would not
ordinarily know the identity of the issuer/drawer and would not
know if the issuer/drawer was a large corporation taxable under
Part I.3 of the Act. Second, the Appellant's year end
carrying value of a particular BA would be an amount different
from the issuer/drawer's recorded liability with respect to
that BA. And third, it is a fundamental principle of double
taxation that the same person must be taxed twice. In Barnes
v. Hutchinson, [1940] A.C. 81, Lord Wright stated at page
97:
... Whatever the precise scope of the rule against double
taxation, it must at least involve that it is the same income,
that it is the same person in respect of the same piece of income
that is being doubly taxed, whether directly or indirectly, and
that the double taxation is by British assessment.
[33] Notwithstanding the able argument put forward by
Appellant's counsel, I am satisfied that a bankers'
acceptance cannot be brought within paragraph (b) or
(c) of subsection 181.2(4) of the Act. The
appeals for the 1992, 1993 and 1994 taxation years are dismissed,
with costs.
Signed at Ottawa, Canada, this 18th day of February, 2000.
"M.A. Mogan"
J.T.C.C.
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