La Compagnie Minière Québec Cartier v. M.N.R., 84 DTC 1348, [1984] CTC 2408 (TCC)

Tremblay, TCJ [TRANSLATION]:—This case was heard at Quebec City, Quebec on February 9, 1983. The Court took the case under advisement on March 28, 1983 after the last written pleading had been filed.

1. Point at issue

According to the notice of appeal and the reply to the notice of appeal, the question 1s, first, whether the appellant was correct in not treating as paid or deemed to be paid, within the meaning of the Income Tax Act, interest which would ordinarily have been payable in 1978, 1979, 1980, 1981 and 1982 under three loan agreements made in 1971 ($100,000,000), 1973 ($62,000,000) and 1975 ($180,000,000). These amounts were borrowed by the appellant from the United States Steel Corporation, its non-resident parent company doing business in the United States.

The appellant, under a clause in the loan agreements elected not to pay the said interest but to add it to the capital already borrowed, interest to be calculated in the future on this increased capital. If the interest is to be regarded as paid within the meaning of the Income Tax Act, the appellant should, pursuant to sections 212 and 215 of the Act, have paid the respondent an amount equal to 25 per cent because of the Canada-US Convention) of the amount of interest deemed to be paid, as tax on the income from Canada of non-resident persons.

The appellant maintained that application of the loan clause, regarding its election not to pay interest but add it to the capital, does not constitute a payment but is simply a compound interest formula, and in that case the formula in subsection 78(1) of the Act should be applied. This was in fact done and tax paid accordingly.

The respondent argued that the creditor company received a security in full payment of its interest pursuant to section 76 of the Act; that the said interest is deemed to have been paid on the date when the creditor received the security, pursuant to subsection 214(4); and that the 25 per cent tax provided for in paragraph 212(l)(b) should be payable by the appellant under subsection 215(1) (reduced to 15 per cent under the Canada-US Convention). The total tax involved amounts of over $6,900,000 in capital and interest.

Secondly, the question is whether the respondent was correct in imposing on the appellant a penalty equal to 10 per cent of the tax owed for 1978, 1979 and 1980 pursuant to subsections 227(8) and (9) of the Act, for failing to remit the tax owed in accordance with subsection 215(1). The penalty amounts to $356,965.99.

2. Burden of Proof

2.01 The appellant has the burden of showing that the respondent’s assessments are incorrect. This burden of proof results not from a particular section of the Income Tax Act, but from several judicial decisions including a judgment of the Supreme Court of Canada in Johnston v Minister of National Revenue, [1948] CTC 195; 3 DTC 1182.

The appellant disputed this burden of proof to begin with, but ultimately admitted it.

2.02 The facts assumed by the respondent are described in subparagraphs (a), (b) and (c) of paragraph 7 of the respondent’s reply to the notice of appeal. That paragraph reads as follows:

7. In assessing the appellant by the notices listed in para I of the notice of appeal, the respondent relied inter alia

(a) on the facts alleged in the notice of appeal, which he admitted in the preceding paragraphs;

(b) on the facts which he added in the preceding paragraphs;

(c) on the fact that for each year in which one or more elections were made in accordance with the provisions of clause II of the loan agreements, the appellant claimed to deduct the said interest in calculating its income and allocated the amount of the said interest (less the 15 per cent tax) to its account of the principal owed to the USSC.

3. Facts

A. Essentially, the facts are not in dispute.

3.01 Both the evidence admitted in the appeal proceedings and that given by the witnesses is well described by counsel for the parties in the written pleadings, each em; '.asizing the aspects pertaining to his client. These facts are as follows.

3.01.1 During the period of the development and construction of its mining project at Mont-Wright, Fermont, Quebec, between 1970 and 1976, the appellant obtained sizable loans to cover its financing, including the following loans from its parent company, United States Steel Corporation, non-resident in Canada and resident in the United States for the purposes of these loans.

(a) Loan agreement of December 17, 1971 (Exhibit A-1(1)):

- loan — $100,000,000;

- promissory note — $100,000,000, December 28, 1971 (Exhibit A- 2(1));

- repayable on demand, after 30 days’ notice on or after December 31, 1975;

- interest rate 4 per cent;

- interest payable semi-annually on April 1 and October 1.

(b) Credit agreement of August 15, 1973 (Exhibit A-1(2)):

- loan of $62,000,000;

- promissory note for $62,000,000 on August 15, 1973 (Exhibit A-2(2));

- the other clauses are similar to the agreement of December 17, 1971,

except for Appendices B and C regarding subordinated debts.

(c) Credit agreement of April 29, 1975 (Exhibit A-1(3)):

- loan of $43,000,000;

- promissory note for $100,000,000 or amount borrowed, whichever is less, undated, but made on April 29, 1975 in accordance with clause II of the agreement (Exhibit A-2(3));

- repayable on demand after 30 days’ notice, on or after December 31, 1976;

- the other clauses are similar to those in the contract of August 15, 1973.

3.01.2 For each of the loans, a clause in the agreement (clause II) provided that the appellant could elect to add the interest to the principal of the debt when it became due.

This clause read as follows:

Interest shall be payable on April 1, 1972 and semi-annually on each October 1 and April 1 thereafter. At the option of QCM, QCM may elect on ten (10) days’ prior written notice given by it to USS, that interest due on any one or more of these dates shall be added to the principal amount borrowed hereunder, in which event such interest shall not be due and payable on said date but rather shall be thereafter considered part of the unpaid principal amount borrowed hereunder.

3.01.3 On June 15, 1978 the appellant was informed by its creditor US Steel that these three loan agreements had been transferred to US Steel Overseas Capital Corporation, a company affiliated with the appellant, non-resident in Canada and resident in the United States; these transfers did not alter the appellant’s obligations in any way (Exhibit A-1(4)).

3.01.4 On April 1, 1980 the three loan or credit agreements were amended to specify inter alia, a new interest rate of 6 per cent and a new schedule of annual repayments over five years, from October 1, 1986 to October 1, 1990 (Exhibit A-1(5), (6) and (7)).

A new promissory note was issued (Exhibit A-2(4) and (6)).

3.01.5 New promissory notes were issued to US Steel Overseas Corporation on April 1 and June 29, 1980, in the same amount as the original notes, which were cancelled and returned to the appellant (Exhibit A-2(4) and (6)).

3.01.6 On May 6, 1980 the appellant received a notice from US Steel Capital Corporation that the agreement of August 15, 1973, amended on April 1, 1980, had been transferred to United States Steel Corporation, the parent company; this transfer did not alter the appellant’s obligations in any way (Exhibit A-1(8)).

3.01.7 Under clause II of the loan agreements, the appellant elected not to pay interest on April 1 and October 1, advising its creditor(s) in writing ten days in advance that the interest would not be paid but would be added to the principal of the loan up to 85 per cent, that is, less the 15 per cent tax on non-residents eventually payable; we have filed the twenty-seven letters of notice to this effect for the period from April 1, 1978 to April 1, 1982 (Exhibit A-3).

3.01.8 At the end of each month, interest accrued during the month was calculated for each of the loans and claimed on the appellant’s books as a current expense; an equivalent accounting entry was then made in the accrued interest account (Exhibit 1-2).

3.01.9 On April 1 and October 1 of each of the taxation years at issue, the appellant capitalized the interest accrued during the six-month period immediately preceding these dates; to do this, the appellant debited the accrued interest account for amounts equivalent to the total interest expense for the six- month period preceding this date, and credited 85 per cent of this amount to the accounts for principal owed to its creditors (note payable USSC, note payable US Overseas) and 15 per cent of this same amount to the accounts for nonresident taxation (withholding tax) (Exhibit 1-3).

3.01.10 Every six months, the appellant’s account for principal owed to creditors accordingly increased by an amount equivalent to 85 per cent of interest accrued during the six-month period preceding the date of capitalization.

3.01.11 The 15 per cent non-resident tax which the appellant credited to a separate account each time the interest was capitalized was not paid to the Department of National Revenue until three years later.

3.01.12 In capitalizing interest, only 85 per cent of the interest accrued during the preceding period was added to the debt of the lending companies, and the latter were content for the other 15 per cent to be retained by the appellant to pay off its tax obligations to the Canadian government.

3.01.13 The appellant did not amend its promissory notes to cover interest and issued no new note for interest (Exhibit A-2).

3.01.14 Between January 1, 1978 and April 1, 1982 the appellant only obtained one loan from its creditors, namely US Steel, in the amount of $62,000,000 on June 29, 1981.

3.01.15 From April 1 to May 15, 1980 the appellant repaid US Steel 162,000,000, that is the loan of August 15, 1973, and $8,728,000 in interest accrued before October 1, 1977, interest deemed to be transformed to a loan under section 78 and the agreements signed pursuant to form T-2048.

3.01.16 With its T-2 tax returns for 1975-1981, the appellant filed letters of agreement in accordance with form T-2047 pursuant to section 78 of the Act, for the interest deducted and unpaid for 1972-1978 (Exhibit I-1).

3.01.17 Revenue Canada accepted these T-2047 agreement forms for interest for 1972-1977, did not assess the appellant for Part XIII tax for these years, and the 15 per cent tax was paid annually by the appellant before February 15 of the third year following the year in which the unpaid interest had been deducted.

3.01.18 The appellant paid the 15 per cent non-resident tax on interest accrued on these agreements, but unpaid in 1978, that is an amount of US $1,216,800.43 tax on February 10, 1981, and on February 10, 1982 for interest accrued in 1979, that is an amount of US $1,097,379.17 in accordance with agreement T-2047.

3.01.19 The appellant and its creditors US Steel and US Steel Overseas Capital have always followed the accrual accounting system, in particular during 1978, 1979, 1980, 1981 and 1982.

3.01.20 The interest involved and accrued during each of these years was deducted as an expense by the appellant and credited to income by its non-resident creditors, even though it had not been paid.

B. Various exhibits were filed in support of the facts alleged

3.02 The appellant through its witnesses, filed Exhibits A-l to A-6 as follows.

3.02.1 Mr Jean G Chênevert filed Exhibits A-l and A-2. Exhibit A-l consists of eight documents numbered 1 to 8, which are loan agreements and notices of transfer:

1. loan agreement of December 17, 1971 with United States Steel Corporation (“US Steel”) in the amount of $100,000,000;

2. credit agreement of August 15, 1973 with US Steel in the amount of $62,000,000;

3. credit agreement of April 29, 1975 with US Steel in the amount of $180,000,000 ($43,000,000 borrowed);

4. notice of transfer of these three loan agreements dated June 15, 1978 from US Steel to US Steel Overseas Capital Corporation (“Overseas Capital”);

5. amendment of April 1, 1980 to the loan agreement of December 28 (December 17), 1971 (No 1);

6. amendment of April 1, 1980 to the credit agreement of August 15, 1973 (No 2);

7. amendment of April 1, 1980 to the credit agreement of April 29, 1975 (No 3);

8. notice of transfer dated May 6, 1980 of the credit agreement of August 15, 1973 (No 2) from Overseas Capital to US Steel.

Exhibit A-2 consists of six documents numbered 1 to 6, the promissory notes:

1. promissory note of December 28, 1971 to United States Steel Corporation (“US Steel”) in the amount of $100,000,000;

2. promissory note of August 15, 1973 to US Steel in the amount of $62,000,000;

3. promissory note of April 29, 1975 to US Steel in the amount of $180,000,000 or less ($42,000,000);

4. promissory note of April 1, 1980 to US Steel Overseas Capital Corporation (“Overseas Capital”) in the amount of $100,000,000 or less, which replaced the note in No 1;

5. promissory note of June 29, 1980 to US Steel in the amount of the loan and interest on the loan of August 15, 1973, amended on April 1, 1980, which replaced the note in No 2;

6. promissory note of April 1, 1980 to Overseas Capital in the amount of $180,000,000 or less, which replaced the note in No 3.

3.02.2 Mr D M McAvity filed as Exhibit A-3 the letters of notice provided for by clause II:

Twenty-seven letters of notice from Québec Cartier to US Steel and Overseas Capital pursuant to clause II of the three loan agreements dated:

3.02.3 Mr Benoît Couture filed Exhibit A-4, which consisted of a calculation of loans and cumulative interest from December 17, 1971 to April 1, 1982:

DEBT TO US STEEL AND OVERSEAS CAPITAL

LOANS AND CUMULATIVE INTEREST (85%)

(in thousands of $US)

CREDITOR		US STEEL	US STEEL	US STEEL
Date of loan		17-12-1971	15-08-1973	29-04-1975
AMOUNT BORROWED		100,000	62,000	43,000
Interest unpaid and added to principal (85%)
April 1	1972	878	—	—
October I	1972	1,715	—	—
April 1	1973	1,744	—	—
October 1	1973	1,774	—	—
April 1	1974	1,804	856	—
October I	1974	1,834	1,086	—
April I	1975	1,866	1,105	—
October 1	1975	1,898	1,105	644
April 1	1976	1,930	1,124	742
October 1	1976	1,962	1,143	755
April 1	1977	1,996	1,163	767
October 1	1977	2,030	1,182	780
March 16, 1978 —
loan repayment		( 66,000)
TOTAL DEBT TO
March 31, 1978:		$55,431	$70,728	$46,688
Interest unpaid and added to principal (85%)
April 1	1978	1,977	1,202	794
CREDITOR		OVERSEAS	OVERSEAS	OVERSEAS
		CAPITAL	CAPITAL	CAPITAL
October 1	1978	976	1,223	807
April 1	1979	992	1,244	821
October 1	1979	1,009	1,265	835
CREDITOR		OVERSEAS	US STEEL	OVERSEAS
		CAPITAL		CAPITAL
April 1	1980	1,027	1,286	850
October I	1980	1,566	359	1,295
Loan repayment
April 1, 1980 to May 15, 1980
Principal			( 62,000)
Unpaid interest:			(8,728)
TOTAL DEBT TO
October 1, 1980		62,978	6,578	52,090
Loan June 29, 1981:			62,000
Unpaid interest:
April 1, 1981		1,606	168	1,328
October 1, 1981		1,647	980	1,362
April 1, 1982		1,689	1,650	1,397
Loan repayment:
March 16, 1982			( 60,000)
TOTAL DEBT AT
April 1, 1982:		$67,920	$11,377	$56,177
Port-Cartier, February 3, 1983			(signed)
			Benoît Couture, assistant treasurer

3.02.4 Mr André Millette, CA, a tax expert for the appellant, filed an exhibit A-6 forms T-2047 and interest expense:

FORMS T-2047 AND INTEREST EXPENSE

1. Five Forms T-2047 “Agreement in respect of unpaid amounts” as required by section 79(1 )(b) between Quebec Cartier Mining Company (Debtor) and United States Steel Corporation (Creditor) and U.S.S. Overseas Capital Corporation (Creditor) for:

TAXATION YEAR	TAXATION YEAR
Debt incurred	filed or to be filed
1978 (2)	1981
1979 (1)	1982
1980 (2)	1983

2. Tables showing interest accrued and transferred to expenses of Quebec Cartier in 1978 and 1979, relating to the three US Steel loans at issue.

3. Two cheques in payment of non-resident tax pursuant to agreements T-247 covering the three loans:

DATE OF CHEQUE	INTEREST FOR	US$ AMOUNT
	THE YEAR
Feb 10, 1981 (0191)	1978	$1,216,800.43
Feb 10, 1982 (1195)	1979	$1,097,379.17

3.02.5 The assessments issued by the respondent are broken down as follows:

4, Act — Case Law — Analysis

4.01 Act

The sections of the Income Tax Act involved in the case at bar are 76(1) and (2) (French and English texts), 78(1), 212(l)(b), 214(1), (2) and (4), 215(1) and 227(8), (9) and (10). They read as follows:

76. (1) Lorsqu’une personne a reçu un titre ou un autre droit ou un certificat ou autre titre de créance, en totalité ou en partie, au titre ou en paiement intégral ou partiel d’une dette qui était alors remboursable et dont le montant serait inclus dans de calcul de son revenu si elle lui avait été remboursée, la valeur du titre, du droit ou de la créance, ou la partie voulue de ceux-ci, doit être incluse, nonobstant la forme ou des effets juridiques de l’opération, dans le calcul du revenu de cette personne pour l’année d’imposition au cours de laquelle elle l’a reçue.

76. (2) Lorsqu’une personne a reçu un titre ou un autre droit ou un certificat ou un autre titre de créance, en totalité ou en partie au titre ou en paiement intégral ou partiel d’une dette avant qu’elle ne fût payable, mais que cette dette n’était pas payable ou remboursable avant son échéance, le titre est, aux fins du paragraphe (1), réputé avoir été reçu lorsque la dette est devenue payable par celui qui la détenait à cette date.

76. (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, in lieu of payment of, or in satisfaction of, a debt that was then payable, the amount of which debt would be included in computing his income if it had 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.

(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, 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.

78. (1) Where an amount in respect of a deductible outlay or expense that was owing by a taxpayer to a person with whom the taxpayer was not dealing at arm’s length at the time the outlay or expense was incurred and at the end of the second taxation year following the taxation year in which the outlay or expense was incurred, is unpaid at the end of that second taxation year, either

(a) the amount so unpaid shall be included in computing the taxpayer’s income for the third taxation year following the taxation year in which the outlay or expense was incurred, or

(b) where the taxpayer and that person have filed an agreement in prescribed form on or before the day on or before which the taxpayer is required by section 150 to file his return of income for the third succeeding taxation year, for the purposes of this Act the following rules apply:

(i) the amount so unpaid shall be deemed to have been paid by the taxpayer and received by that person on the first day of the said third taxation year, and section 153, except subsection (3) thereof, is applicable to the extent that it would apply if that amount were being paid to that person by the taxpayer; and

(ii) that person shall be deemed to have paid a loan to the taxpayer on the first day of the said third taxation year in an amount equal to the amount so unpaid minus the amount, if any, deducted or withheld therefrom by the taxpayer on account of that person’s tax for the said third taxation year.

212. (1) Every non-resident person shall pay an income tax of 25% 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 except . . .

214. (1) The tax payable under section 212 is payable on the amounts described therein without any deduction from those amounts whatever.

(2) Where subsection 16(1) would, if Part I were applicable, require a part of a payment to be included in computing the recipient’s income because it can reasonably be regarded as a payment of interest, that part of the payment shall, for the purpose of this Part, be deemed to have been a payment of interest.

(4) Where, if section 76 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.

215. (1) When a person pays or credits or is deemed to have been paid or credited an amount on which an income tax is payable under this Part, he shall, notwithstanding any agreement or any law to the contrary, deduct or withhold therefrom the amount of the tax and forthwith remit that amount to the Receiver General on behalf of the non-resident person on account of the tax and shall submit therewith a statement in prescribed form.

227. (8) An person who has failed to deduct or withhold any amount as required by this Act or a regulation is liable to pay to Her Majesty

(a) if the amount should have been deducted or withheld under subsection 153(1) from an amount that has been paid to a person resident in Canada, or should have been deducted or withheld under section 215 from an amount that has been paid to a person not resident in Canada, 10% of the amount that should have been deducted or withheld, and

(b) in any other case, the whole amount that should have been deducted or withheld,

together with interest thereon at a prescribed rate per annum.

227. (9) Every person who has failed to remit or pay

(a) an amount deducted or withheld as required by this Act or a regulation, or

(b) an amount of tax that he is, by subsection 116(5) or by a regulation made under subsection 215(4), required to pay,

is liable to a penalty of 10% of that amount or $10.00, whichever is the greater, in addition to the amount itself, together with interest on the amount at the rate per annum prescribed for the purposes of subsection (8).

(10) The Minister may assess any person for any amount payable by that person under Part XIII, this section or section 235 and, upon his sending a notice of assessment to that person, Divisions I and J of Part I are applicable mutatis mutandis.

4.02 Case law

The case law to which the Court was referred:

By the appellant

1. Watson Construction Limited v MNR, [1979] CTC 2516; 79 DTC 528;

2. The Queen v Immobiliaire Canada Ltd, [1977] CTC 481; 77 DTC 5332;

3. No 668 v MNR, 7 Tax ABC 110; 60 DTC 17;

4. MNR v John Thomas Burns, [1958] CTC 51; 58 DTC 1028; 59 DTC 1028;

5. Manitou-Barvue Mines Limited v MNR, 37 Tax ABC 199: 65 DTC 45; [1965] CTC 534; 66 DTC 5001;

6. The Queen v Melford Developments Inc, [1982] CTC 330; 82 DTC 6281;

By the Respondent

7. The Bank of Nova Scotia v The Queen, [1980] CTC 57; 80 DTC 6009; [1981] CTC 162; 81 DTC 5115;

8. Edward T Berry v MNR, [1981] CTC 2253; 81 DTC 224;

9. The Canada Southern Railway Company v The Queen, [1982] CTC 278; 82 DTC 6244;

10. Solomon Hart Green v MNR, 2 Tax ABC 218; 50 DTC 320;

11. Harry R Jones v MNR, 13 Tax ABC 456; 55 DTC 541;

12. Aleksander Muni v MNR, [1980] CTC 2391; 80 DTC 1343;

13. The Queen v Jack Harvie Quinn, [1973] CTC 258; 73 DTC 5215;

14. Giulio Ravasi v MNR, [1979] CTC 2808; 79 DTC 473;

15. Robert Stephen, Jr v MNR, 2 Tax ABC 309; 50 DTC 375;

16. Report of proceedings of the twenty-sixth tax conference, 11-12-13 November 1974, “Income Tax consequences of inter-company non-arm’s length financing transactions”, p 172;

17. Canada Tax Service, “Income from Canada of Non-Resident”, Application;

18. Canadian Tax Reports, 1976, pp 24,126 and 24,171;

19. Ernest G Stickel v MNR, [1972] CTC 210; 72 DTC 6178;

20. Fred Padfield Ltd v MNR, [1976] CTC 2249; 76 DTC 1195.

4.03 Analysis

4.03.1 In the pleadings, the respondent clearly described the general point at issue:

The only point at issue between the parties in the case at bar is as to whether the interest which was added to the principal of the apapellant’s debt on April 1 and October I of each of the years at issue constitutes an amount that a person resident in Canada pays or credits to a non-resident person, or is deemed by Part I to pay or credit, to him, within the meaning of ss 212(1) and 215(1) of the Income Tax Act. To the extent that this question can be answered in the affirmative, that is, to the extent that the appellant paid or credited, or under Part 1 is deemed to have paid or credited, interest to its non-resident creditors, the latter become liable for Canadian tax under s 212(1), and the appellant is then required to deduct and remit to the Receiver General forthwith the tax deducted on behalf of the non-resident person, in accordance with the provisions of s 215(1) of the Income Tax Act.

4.03.2 The respondent subsequently made certain concessions that limited the point at issue:

In the case at bar, the respondent does not intend to argue that by capitalizing the interest the appellant paid it, or is deemed under Part I to have paid or credited it, to its non-resident creditors. However, the Department respectfully submits that by electing to capitalize the interest owed to its creditors instead of paying it when it was due, the equivalent to the interest accrued at April 1 and October 1 of each of the taxation years at issue.

The evidence showed that on each of those dates, the appellant debited the accrued interest account with an amount equal to the interest accrued for the six preceding months, and credited an equivalent amount, less the 15 per cent non-resident tax, to the accounts of its non-resident creditors. The Department accordingly maintains that this is the meaning that must be given to the word “credit” as it is used in ss 212(1) and 215(1) of the Income Tax Act.

In support of his argument, counsel for the respondent maintained that “credit” means nothing more “than an entry in someone's account”. The Income Tax Act does not define “credit”, so counsel referred to several definitions of this word, primarily:

Credit: “enter in someone’s credit account what is owed him or what he has supplied”

(Petit Larousse Illustré, 1978, p 269)

Credit: “make someone creditor of a certain amount which is credited to his account — by extension, to credit an account with such an amount”.

(Robert, Paul, Dictionnaire alphabétique et analogique de la langue française, 1976)

Credit: “to enter on the credit side of an account”

(Little, Fowler, Coulson, The Shorter Oxford English Dictionary on Historical Principles, vol I, A-M, 3rd ed, p 420)

Credit: “in accounting, as a noun, an entry on the right-hand side of an account. As a verb, to make an entry on the right-hand side of an account

(Black, Henry Campbell, Black’s Law Dictionary, 1979, p 331)

Credit: “a sum credited on the books of a company to person who appears to be entitled to it” — Coons v Home Life Ins Co of New York, 291 III App 313, 9 NE 2d 419, 421

(Black, Henry Campbell, Black’s Law Dictionary, 1968, p 440)

Debit — Credit: “to debit an account means only to enter an amount on the left-hand side, while to credit an account means entering an amount on the right-hand side”.

(Pyle, White, Larson, Zin, Colette, Initiation à la comptabilité financière et administrative, 1980, Irwin-Dorsey, p 59)

Credit: “to record a credit entry in books of account”

(Terminology for Accountants, The Canadian Institute of Chartered Accountants, rev ed, p 29)

Credit: “a book-keeping entry recording the deduction or elimination of an asset or an expense, or the creation of or addition to a liability or item of networth or revenue; an entry on the right side of an account; the amounts so recorded. Compare with debit”.

(Kohler, Eric L, A Dictionary for Accountants, 5th ed, pp 147, 345-346)

Based on these definitions, counsel for the respondent concluded:

That the ordinary, or the ordinary commercial, meaning of the word “credit” is used, and we must conclude that the latter means nothing more than making an entry in someone’s account.This is exactly what the appellant did when it elected to capitalize the interest instead of paying it to its creditors.

4.03.3 Both in its pleadings and in its reply to the respondent’s pleadings, the appellant referred to the following definitions:

Credit: ‘‘a sum placed at a person’s disposal in the books of a bank, etc upon which he may draw to the extent of the amount”

(The Canadian Law Dictionary, 1980, p 100)

Credit: “an operation by which someone puts a sum of money at the disposal of someone else”

(Le Petit Robert)

The appellant further referred to the definition given by Revenue Canada in its Information Circulars:

In Information Circular No 77-16 of July 25, 1977, “Non-resident Income Tax”, Revenue Canada gave its interpretation of the word “credit” in para 10:

10. The words “credits” and “credited” imply that the Canadian resident debtor has set aside and made unconditionally available to the non-resident creditor an amount due to the non-resident. This would be so where

(a) A tenant or agent deposits rent in a bank account on behalf of the nonresident landlord;

(b) A bank credits interest to the savings account of a non-resident;

(c) An insurance or trust company deposits a pension or annuity payment in the bank account of a non-resident;

(d) [trust]. ..

In circular 77-16R, issued on May 4, 1981, In para 5, “credits” and “credited” are defined as follows:

5. The words “credits” and “credited” cover any situation where a Canadian resident debtor has set aside and made unconditionally available to the non-resident creditor an amount due to the non-resident such as where

(a) A tenant . . .

(b) A bank . . .

(c) An insurance . . . company . . .

4.03.4 The parties cited a long list of precedents. A number of these apply in the context of the admissions made by the respondent in establishing the point at issue.

As the latter is limited to the interpetation of “credit” in subsection 212(1), the case which applies directly to the interpretation of these words is Berry, decided by the former Tax Review Board. The evidence in that case was not clearly established. What is clear is that the appellant received amounts from a trust of which he was an officer and with which he was co-executor in his brother’s estate. Further, the trust credited to the appellant an amount owed personally to him by the estate.

Mr Bonner held that paying and crediting should be regarded as two different things because of the disjunctive form used in subsection 212(1) of the Act, and because no argument had been presented to the contrary.

4.03.5 Did the legislator in fact, in using the word “credit”, intend to give it the meaning given in an accounting system? In the second edition of Accounting: the Basis for Business Decisions, by WB Meigs, CE Johnson, RF Meigs and F Sylvain, the concepts of debit and credit in a double-entry accounting system are described at 42 and 43:

An amount recorded on the left or debit side of an account is called a debit, or a debit entry; an amount entered on the right or credit side is called a credit, or a credit entry. Accountants also use the words debit and credit as verbs. The act of recording a debit in an account is called debiting the account; the recording of a credit is called crediting the account . . . Students beginning a course in accounting often have preconceived but erroneous notions about the meanings of the term debit and credit. For example, to some people unacquainted with accounting, the word credit may carry a more favorable connotation than does the word debit. Such connotations have no validity in the field of accounting. Accountants use debit to mean an entry on the left-hand side of an account, and credit to mean an entry on the right-hand side. The student should therefore regard debit and credit as simple equivalents of left and right, without any hidden or subtle implications.

(Emphasis by the Court.)

And as another author says, credit on the right and debit on the left:

This is a convention: the credit can be put on the left and the debit on the right, so long as the practice followed is consistent.

(Frère Irénée, CGA, CA)

The primary guides for entering a figure on one side or the other are the items making up the assets and liabilities in the balance sheet. Asset items (cash, land and so on) and their increase are entered on the left (debit) side, and any reduction is entered on the right (credit) side. On the other hand, liability items (accounts payable, and so on) and their increase are entered on the right (credit) side, while their decrease is entered on the left (debit).

In a single-entry accounting system, there is no question of left and right sides, of debit or credit. In the single-entry accounting system, the business is not considered to be a separate entity from its owner, which is the basis of the double-entry accounting system. This is what enables an owner to know exactly the financial status of his business. The latter, identified by the accountant, owes the amounts invested by the owner (the debit). It owes them to the owner in the capital account (the credit) as follows:

Double-entry accounting consists, first, of keeping an account of active assets, given to the accountant (or business) and second, to whom those assets are owed.

(Frère Irénée, La Comptabilité Supérieure)

From all these basic principles it can be seen that accounting systems are only methods of bookeeping designed to determine the status of a business, and enable managers to take informed decisions.

In The Royal Trust Company v MNR, [1957] CTC 32; 57 DTC 1055, the Court held that accounting principles should be used as a basis for interpreting the Income Tax Act, unless specifically provided to the contrary in the said Act. In the case at bar, did the legislator intend, by using the word “credit” in subsection 212(1), to apply this principle? Did he intend to link taxation of nonresidents to the double-entry non-resident accounting system? — and if the latter had only a single-entry accounting system, or no accounting system at all?

The Court regards an accounting system as a means of describing commercial transactions. Was the legislator in using “credit” inisisting on this form? — or was he more concerned with substance?

The Court is inclined to accept the second alternative: and the substance of “credit” seems to be “an operation by which someone puts a sum of money at the disposal of someone else”.

Such a meaning must have existed even before the existence of double-entry accounting systems. The Court considers that this substance is also what is referred to in Information Circulars 77-16 and 77-16R.

The important words in s 212(1) of the Act are:

. . . pays or credits . . . to him as, on account or in lieu of payment of, or in satisfaction of. . . interest except . . .

In French:

. . . lui paie ou porte à son crédit . . . au titre ou en paiement intégral ou partiel . . . d’intérêts, sauf . . .

The words “as, on account or in lieu of payment of, or in satisfaction of . . . interest” taken together with the word “credits” seems to me to confirm that the word “credit” make available to, must be given the meaning “make available to” [sic].

“Replacing a debt of interest” by an acknowledgment of debt as, on account or in lieu of payment of, or in satisfaction of interest seems to me to be more the application of a compound interest formula than crediting “as, on account or in lieu of payment of, or in satisfaction of interest” [sic].

In short, the Court is of the view that a strict interpretation of paragraph 212(l)(b) leads to interpreting the word “credit” according to its substance, “making available to”, and not according to the form of making an entry “on the right side of an account”.

Paragraph 212(l)(b) is a taxing section. If such a section were ambiguous, it ought to be interpreted in favour of the taxpayer and against the taxing authority.

In the case at bar, in my humble opinion, the meaning is clear and it should be interpreted in accordance with the argument of the appellant.

4.03.6 This part of the appeals being allowed, the penalties cannot therefore be upheld.

5.0 Conclusion

The appeals are allowed and the whole is referred back to the respondent for reassessment in accordance with the foregoing reasons for judgment.

Appeals dismissed.