Reekie v. MNR, 80 DTC 1447, [1980] CTC 2502 (T.R.B.)

D E Taylor:—This is an appeal heard in the City of Edmonton, Alberta, on March 19, 1980 against an income tax assessment for the year 1976 in which the Minister of National Revenue included an amount of $65,772 in the income of the appellant. In assessing, the respondent relied, inter alia, upon subparagraph 15(2)(a)(ii) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

History

At all material times the appellant was an officer and shareholder of a Canadian-controlled private corporation known as Atlas Electric Supply Ltd. (“Atlas” or the “Company”). Commencing in 1976, a condominium dwelling was constructed for which the appellant acquired title. During the course of construction, Atlas advanced an amount of $65,772.

Contentions

For the appellant:

—The funds were advanced by Atlas so that the appellant could acquire the condominium on completion.

—The appellant made bona fide arrangements at the time the loan was made to him for repayment thereof within a reasonable time and, inter alia, signed a letter dated January 11,1977 addressed to Atlas confirming the loan and, pursuant to the arrangement thus made, executed a promissory note in favour of Atlas on November 2, 1977.

—The said loan is within the provisions contained in subparagraph 15(2)(a)(ii) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

For the respondent:

—Atlas advanced monies on behalf of the appellant by the year ended November 30, 1976 in the following amounts:

—The letter dated January 11, 1977 and the promissory note dated November 2, 1977 did not constitute a “bona fide arrangement” and neither were such arrangements “made at the time the loan was made”;

—The letter dated January 11, 1977 and the promissory note dated November 2, 1977 did not constitute “repayment thereof within a reasonable time”.

Evidence

Mr Reekie gave testimony regarding his assertions and presented the note dated November 2, 1977 (the note) as Exhibit A-1 and the letter dated January 11, 1977 (the letter) as part of Exhibit A-3. Certain reasons were advanced by the appellant for a degree of confusion in the correspondence related to the construction and acquisition of the condominium unit, as to whether it belonged to the appellant or the company at any one point in time. The difficulties experienced in financing, registering and conveyancing in connection with condominiums were also related. The letter and the note read as follows:

January 11, 1977

Willetts Macmahon & Company

1901 Toronto Dominion Tower

Edmonton Centre

Edmonton, Alberta

T5J 2Z1

Dear Sirs:

This letter is to confirm that Atlas Electrical Supply Ltd has advanced funds to me for the purpose of purchasing a dwelling for my own occupation. The balance owing to me to the company as as November 30, 1976 amounted to $65,772. This loan will be documented by promissory note and repayment terms will be decided upon when possession of the dwelling has been completed.

Yours very truly,

PR:mtp P Reekie

FOR VALUE RECEIVED Peter Reekie promises to pay to Atlas Electrical Supply Ltd at Edmonton, Alberta, the sum of $65,000, in equal annual installments of $2,600 each, commencing on November 30, 1978, to and including November 30, 2002, the said amount to bear no interest, and, notwithstanding the payment schedule aforesaid, the sum of $65,000 or so much thereof as remains unpaid from time to time to be immediately payable upon demand of Atlas Electrical Supply Ltd.

	PROMISSORY NOTE
$65,000	Date: November 2, 1977

The parties thereto, endorses and guarantors hereof, severally waive demand and presentment for payment, notice of non-payment, protest and notice of protest of this Promissory Note.

	)
(Signature)	)	(Sgd) Peter Reekie
Witness	)	Peter Reekie

It was explained that the letter had been addressed to the accounting firm responsible for the appellant’s affairs, and Mr John Pirot, CA, gave evidence in relation to its requirement and purpose.

Argument

Counsel for the appellant noted that the note had been prepared as soon as title to the property could be taken in the name of the appellant, and that the record was clear at all times that the funds had been expended on behalf of the appellant’s purpose to purchase a house for his own occupation.

Counsel for the respondent pointed out that even if the Minister followed an assessment practice of considering “the time the loan was made’’ to be the end of the 1976 company fiscal year (November 30) rather than the precise dates the three separate advances were made, the appellant still had not fulfilled the condition in subparagraph 15(2)(a)(ii).

Findings

The relevant section of the Act is herein quoted:

Section 15(2)

Loan to shareholder. Where a corporation has in a taxation year made a loan to a shareholder, the amount thereof shall be included in computing the income of the shareholder for the year unless

(a) the loan was made

(ii) to an officer or servant of the corporation to enable or assist him to purchase or erect a house for his own occupation,

and bona fide arrangements were made at the time the loan was made for repayment thereof within a reasonable time, or

(b) the loan was repaid within one year from the end of the taxation year of the corporation in which it was made and it is established, by subsequent events or otherwise, that the repayment was not made as a part of a series of loans and repayments,

and, where the shareholder is a corporation, the amount so included in computing its income for the year shall be deemed to have been received by it as a dividend.

Section 15 of the Act makes available to certain taxpayers a benefit not available to all taxpayers—effectively access to and use of company funds for personal reasons. It can be argued (which is the essential point in this case) that when subparagraph 15(2)(a)(ii) was drafted in 1952, the legislators did not have in mind the varied mechanisms and processes for home acquisition to be seen in today’s business and personal arrangements. However, in my view, there is no room for flexibility, option or change of purpose in that section. It is a decision of the taxpayer to borrow company funds, and that decision must be visibly accompanied by strict adherence to the rules. I would make reference to the decision of the Estate of Thomas James Johnston v MNR, 35 Tax ABC 18; 64 DTC 204, in which the matter is examined. In addition, the decision of Kenneth E Heal v MNR, [1980] CTC 2199; 80 DTC 1169, has some relevance to the instant appeal. As I see it, the only determination required from the Board is whether or not the letter of January 11, 1977 from the appellant to his accountants represents bona fide arrangements for the repayment of the loan made at the time the loan was made. It fails on both counts.

Decision

The appeal is dismissed.

Appeal dismissed.