Tremblay-Lamer J.: — This is an appeal from the Tax Court of Canada allowing the appeal of all three defendants from the assessments under the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the “Act”) for their 1986 and 1987 taxation years.
1. The Facts
Parties have agreed on the following statements of facts for the three defendants.
The case of John M. Chambers
On November 19, 1986, the Defendant borrowed $30,000 from his selfdirected Registered Retirement Savings Plan (“RRSP”) No. 21-0050-1 and delivered to Yorkshire Trust Company, the trustee of that Plan, a demand promissory note in the amount of $30,000 for that loan. The promissory note was secured by a letter of guarantee in favour of Yorkshire Trust Company from Lloyds Bank Canada, a qualified financial institution.
On December 22, 1986, the Defendant borrowed $30,000 from Lloyds Bank Canada and using these funds on December 24, 1986 repaid the $30,000 promissory note outstanding to his RRSP No. 21-0050-1.
On repayment of the $30,000 loan to RRSP No. 21-0050-1 on December 24, 1986, Yorkshire Trust Company cancelled and returned the promissory note for this loan to the Defendant and cancelled and returned the letter of guarantee for the loan to Lloyds Bank Canada.
On January 12, 1987, the Defendant borrowed $30,000 from his RRSP No. 21-0050-1 and used these funds to repay the $30,000 he borrowed from Lloyds Bank Canada on December 22, 1986.
The Defendant gave Yorkshire Trust Company a demand promissory note in the amount of $30,000 for this loan from his RRSP No. 21-0050-1 and a letter of guarantee from Lloyds Bank Canada to secure the promissory note.
On May 1, 1987, the Defendant borrowed a further $70,000 from his RRSP No. 21-0050-1 and delivered to Yorkshire Trust Company a demand promissory note for $70,000. The Defendant also delivered a letter of guarantee in the amount of $100,000 in favour of Yorkshire Trust Company from Lloyds Bank Canada in substitution for the $30,000 letter of guarantee which had been given to Yorkshire Trust Company in January 1987.
On December 29, 1987, the Defendant borrowed $100,000 from Lloyds Bank Canada and using those funds on December 29, 1987, repaid the $30,000 promissory note and the $70,000 promissory note outstanding to his RRSP No. 21-0050-1.
The loans from the Defendant’s RRSP No. 21-0050-1 made to him by Yorkshire Trust Company were non-qualified investments within the meaning of paragraph 146(1 )(e) of the Income Tax Act.
In calculating and reporting his 1986 and 1987 income for tax purposes under the Income Tax Act, the Defendant included in income the amounts of all loans from RRSP No. 21-0050-1 as non-qualified investments and deducted the repayments of the promissory notes as disposition of non-qualified investments pursuant to subsections 146(1) and (6) of the Income Tax Act.
The case of Kenneth J. Wilson
On August 21, 1986, the Defendant borrowed $55,000 from his selfdirected Registered Retirement Savings Plan (“RRSP”) No. 21-0025-3 and $104,000 from his self-directed RRSP No. 21-0018-8.
The Defendant delivered to Yorkshire Trust Company, the trustee of both the RRSPs, two demand promissory notes in the amounts of $55,000 and $104,0000, respectively, for those loans, together with letters of guarantee securing those promissory notes in favour of Yorkshire Trust Company from Continental Bank of Canada, a qualified financial institution.
On December 22, 1986, the Defendant borrowed $159,000 from Lloyds Bank Canada, and using those funds on December 24, 1986:
(a) repaid the $55,000 promissory note outstanding to his RRSP No. 21-0025-3; and
(b) repaid the $104,000 promissory note outstanding to his RRSP No. 21-0018-8.
On repayment of the $55,000 promissory note to RRSP No. 21-0025-3 and the $104,000 promissory note to RRSP No. 21-0018-8, Yorkshire Trust Company cancelled and returned the letters of guarantee for those loans to Lloyds Bank Canada and showed those promissory notes as having been repaid. The actual promissory notes were inadvertently not returned to the Defendant by Yorkshire Trust Company, notwithstanding that the promissory notes had been repaid.
On January 12, 1987, the Defendant borrowed $55,000 from this RRSP No. 21-0025-3 and $104,000 from his RRSP No. 21-0018-8 and used those funds to repay the $159,000 he borrowed from Lloyds Bank Canada in December 1986.
The Defendant gave Yorkshire Trust Company letters of guarantee from Lloyds Bank Canada and authorized Yorkshire Trust Company to retain the promissory notes dated August 21, 1986 which had inadvertently not been returned to the Defendant, all as security for the loans.
On December 24, 1987, the Defendant borrowed $109,000 from Lloyds Bank Canada and using those funds:
(a) repaid the $55,000 promissory note outstanding to his RRSP No. 21-0025-3; and
(b) repaid $54,000 of the $104,000 promissory note outstanding to his RRSP No. 21-0018-8.
On repayment of the $55,000 loan to his RRSP No. 21-0025-3 in December 1987, Yorkshire Trust Company cancelled and return the promissory note in that amount to the Defendant and cancelled and returned the letters of guarantee to the Lloyds Bank Canada.
The loans from the Defendant’s RRSP No. 21-0025-3 and RRSP No. 21-0018-8 made to him by Yorkshire Trust Company were non- qualified investments within the meaning of paragraph 146(1 )(e) of the Income Tax Act.
In calculating and reporting his 1986 and 1987 income for tax purposes under the Income Tax Act, the Defendant included in income the amounts of all loans from his RRSP No. 21-0025-3 and RRSP No. 21-0018-8 as non-qualified investments and deducted the repayments on those loans as dispositions of nonqualified investments pursuant to subsections 146(10) and (6) of the Income Tax Act.
The case of Peter Foreman
In September 1986, the Defendant transferred $146,497.95 to his selfdirected Registered Retirement Savings Plan (“RRSP”) No. 21-0027-9.
In September 1986, the Defendant borrowed $130,000 from his selfdirected RRSP No. 21-0027-9 and delivered to Yorkshire Trust Company, the trustee of that Plan, two demand promissory notes in the amounts of $60,000 and $70,000 respectively, for those loans. The promissory notes were secured by letters of guarantee in favour of Yorkshire Trust Company from Continental Bank of Canada, a qualified financial institution.
On September 30, 1986 the Defendant transferred $16,497.35 from his RRSP No. 21-0027-9 to his self directed RRSP No. 21-0028-7.
In October 1986, the Defendant borrowed $16,000 from his self-directed RRSP No. 21-0028-7 and delivered to Yorkshire Trust Company, the trustee of that Plan, a demand promissory note for that loan. the promissory note was secured by a letter of guarantee in favour of Yorkshire Trust Company from Continental Bank of Canada.
From October to December 1986, the Defendant made 4 payments each in the amount of $2,167 on the promissory notes owing to his RRSP No. 21-0027-9 which payments totalled $8,668.
In December 1986, the Defendant borrowed $76,000 from Continental Bank of Canada, and using these funds:
(a) repaid the $60,000 promissory note outstanding to his RRSP No. 21-0027-9; and
(b) repaid the $16,000 promissory note to RRSP No. 21-0028-7.
On repayment of the $16,000 loan to RRSP No. 21-0028-7 and the $60,000 loan to RRSP No. 21-0027-9 in December 1986, Yorkshire Trust Company cancelled and returned the promissory notes for these loans to the Defendant and cancelled and returned the letters of guarantee for these loans to Continental Bank of Canada.
In January 1987 the Defendant borrowed $60,000 from his RRSP No. 21-0027-9 and $16,000 from his RRSP No. 21-0028-7 and used these funds to repay the $76,000 he borrowed from Continental Bank of Canada in December 1986.
The Defendant gave Yorkshire Trust Company demand promissory notes in those amounts for these loans from RRSP No. 21-0027-9 and RRSP No. 21-0028-7 and letters of guarantee from Continental Bank of Canada in the amount of these loans.
In December 1987, the Defendant repaid the $16,000 promissory note owing to RRSP No. 21-0028-7.
During 1987, the Defendant repaid $28,572 to RRSP No. 21-0027-9 on the $60,000 promissory notes by way of direct loan payments of $26,004 and by transferring shares to the plan with a fair market value of $2,568.
On repayment of the $16,000 loan in December 1987, Yorkshire Trust Company cancelled and returned the $16,000 promissory notes to the Defendant and cancelled and returned the letter of guarantee to the Continental Bank of Canada.
The Defendant reported a net income inclusion of $61,332 in respect of his RRSP No. 21-0027-9 in his 1986 T1 return of income calculated as follows:
Acquisition of non-qualified investments $130,000
Cash Repayment (8,668) (60,000)
Net Income Inclusion: $61,332
The Defendant reported a net income inclusion of $31,428 in respect of his RRSP No. 21-0027-9 in his 1987 T1 return of income as follows:
Acquisition of non-qualified investments: $60,000
Cash Repayment (26,004)
(2,568)
$31,428
The loans from the Defendant’s RRSP No. 21-0027-9 and RRSP No. 21-0028-7 made to him by Yorkshire Trust Company were all non-qualified investments within the meaning of paragraph 146(1 )(e) of the Income Tax Act.
In calculating and reporting his 1986 and 1987 income for tax purposes under the Income Tax Act, the Defendant included in income the amounts of all loans from his RRSP No. 21-0027-9 and RRSP No. 21-0028-7 as non qualified investments and deducted the repayments on the promissory notes as dispositions of non-qualified investments pursuant to subsections 146(10) and 146(6) of the Income Tax Act.
After hearing the evidence, the Plaintiff withdrew his argument that there was no disposition of a non-qualified investment as prescribed in subsection 146(6) of the Act. There was no evidence to support the contention that there was an oral or written arrangement whereby the Defendant would repay the loans at the end of one taxation year and re- borrow the money at the beginning of the following year.
Therefore, the only issue in the case at bar is whether these disbursements unduly or artificially reduce the Defendant’s income under s.245(l) of the Act.
2. Decision of the Tax Court
In the Tax Court, the learned Judge was of the opinion that Parliament had provided for the situation where an RRSP trust acquires a nonqualified investment and subsequently disposes of it. The legislature chose not to concern itself with a series of transactions involving acquisitions and dispositions of non-qualified investments made by an RRSP trust. Since the consequences flowing from the acquisition and subsequent disposition of non-qualified investments were permitted, the judge saw no justification for the application of subsection 245(1).
Furthermore, for subsection 245(1) to be applicable, the Tax Court reiterated that the taxpayer must have incurred an expense or disbursement that would unduly or artificially reduce his or her income. The Court considered the decision in Irving Oil Ltd. v. R. (sub nom. Canada v. Irving Oil Ltd.), [1991] 1 C.T.C. 350, (sub nom. R. v. Irving Oil Ltd.), 91 D.T.C. 5106 at 360 (D.T.C. 5114) (F.C.A.), leave to appeal to S.C.C. refused (sub nom. Irving Oil Ltd. v. M.N.R. (1991), 136 N.R. 320 (S.C.C.) in which Mahoney J. affirmed the Court of Appeal’s earlier conclusions in Spur Oil Ltd. v. R. (sub nom. Spur Oil Ltd. v. The Queen), [1981] C.T.C. 336, 81 D.T.C. 5168 at 343 (D.T.C. 5173 (F.C.A.) in which it defined “undue” as meaning excessive and “artificial” as being “simulated” or “fictitious”. In this case, the Court was of the opinion that the disbursement to the RRSP was neither excessive nor fictitious as the Appellants gave value for value.
The Tax Court concluded as follows:
The overriding considerations, in my view, are that a) Parliament has specifically provided for particular income tax consequences in the event of an acquisition and disposition by an RRSP trust of a non-qualified investment and b) the disbursements made here by the Appellants on the dispositions of non-qualified investments by the RRSP trusts do not result in an artificial or undue reduction of income within the purview of subsection 245(1) of the Act, but reflects a concrete situation and a business reality.
3. Analysis
Subsection 245(1) provides:
245(1) Artificial transactions — In computing income for the purpose of this Act, no deduction may be made in respect of a disbursement or expense made or incurred in respect of a transaction or operation that, if allowed, would unduly or artificially reduce the income.
In order for subsection 245(1) to apply, the disposition of the nonqualified investment has to be a disbursement or expense.
Black’s Law Dictionary^ defines disbursements as follows:
To pay out, commonly from a fund. To make payment in settlement of a debt or account payable.
It is clear, in my view, that the Appellants made a disbursement when they paid out money to the RRSP trusts in settlement of their debt.
The question remains, however, whether the disbursements unduly or artificially reduced the income?
In a recent decision of the Court of Appeal, Fording Coal Ltd. v. R., [1996] 1 C.T.C. 230, 95 D.T.C. 5672, Strayer J. elaborates upon the principles to apply in order to make this determination. In that case, there was a question as to whether or not a seeding transaction to obtain “tax pools” for deductions against income was contrary to the object and spirit of the Act and whether deductions made by Fording Coal, as a “successor corporation”, were part of a tax avoidance scheme falling within the ambit of section 245 of the Act.
Strayer J. recognized that subsection 245(1) applies even in cases where the deductions are otherwise permitted by the Act. Otherwise, there would be no purpose for this section. This view was also expressed by the Federal Court of Appeal in R. v. Alberta and Southern Gas Co., [1977] C.T.C. 388, 77 D.T.C. 5244 at page 396 (D.T.C. 5248) (F.C.A.), affirmed [1979] 1 S.C.R. 36, [1978] C.T.C. 780, 78 D.T.C. 6566:
In my view, considering it in its context in the scheme of the Act, section 245(1) is applicable to every class of deductible expenses. Even if, reading the Act as a whole, I came to a different conclusion, I should feel constrained to hold that section 245(1) does apply to deductions such as those otherwise permitted by section 66 by my reading of Harris v. Minister of National Revenue, [1966] S.C.R. 489 per Cartwright, J., as he then was, delivering the judgment of the Supreme Court of Canada, at page 505.
In the present case, as in Fording Coal, it is clear that the deductions are permitted by the Act. However, in order for subsection 245(1) to apply, the jurisprudence indicates that first, it has to be outside the spirit or scope of the section permitting the scheme and, second, it has to reduce the income unduly or artificially.
The scope and spirit of the scheme
RRSP provisions were designed to afford taxpayers the opportunity to plan for the future by allowing a deduction from income to provide for a retirement income. Certain situations are permitted in the management of a RRSP, one being the acquisition of a non-qualified investment. The consequences of acquiring a non-qualified investment are specifically addressed in subsection 146(10).
146(10) Where acquisition of non-qualified investment by trust. - Where at any time in a taxation year a trust governed by a registered retirement savings plan
(a) acquires a non-qualified investment, or
(b) uses or permits to be used any property of the trust as security for a loan, the fair market value of
(c) the non-qualified investment at the time it was acquired by the trust, or
(d) the property used as security at the time it commenced to be so used, as the case may be, shall be included in computing the income for the year of the taxpayer who is the annuitant under the plan at that time.
The learned Tax Court Judge canvassed the scheme as follows:
A number of possible situations are considered in the management of a registered retirement savings plan. One of these events has to do with the acquisition by an RRSP trust of a non-qualified investment or with the use of the property of a trust as security for a loan. The consequences of an RRSP trust acquiring a non-qualified investment are spelled out in subsection 146(10) of the Act. It is set out in this subsection that the fair market value of the non-qualified investment at the time it was acquired by the trust shall be included in computing the income for the year of the taxpayer who is the annuitant under the plan at that time. If the trust makes an investment that is a non-qualified one, it constitutes income to the annuitant. It is a kind of penalty since under the ordinary principles of the Income Tax Act, the making of such a non-qualified investment will not in itself be income. An express statutory enactment was required to achieve this result. Also, part of the scheme, Parliament provided in subsection 146(6) that when an RRSP trust disposes of what was a non-qualified investment at the time of its acquisition, the annuitant under the plan is entitled to deduct in computing his income the lesser of a) the amount originally included by virtue of subsection 146(10) in respect of the acquisition of such investment and b) the proceeds of disposition of such property. As a result of the combined operation of subsection 146(10) and 146(6) it follows that if both the acquisition and disposition of the same property take place in the same taxation year, the net result might be in many instances, but no necessarily in all, a nil addition to income or, so to speak an in/out situation.
There is one other consequence (under Part I of the Income Tax Act) affecting the annuitant with respect to the taxation year during which an RRSP trust disposes of a non-qualified investment. This consequence is set out in subsection 146(5) of the Act. In effect, it is laid down that the maximum amount deductible by an annuitant as a premium is reduced by the amount deductible under subsection 146(6) in respect of the disposition of a nonqualified investment. This reduction in the maximum amount of premiums provided in the concluding portion of subsection 146(5) is in the nature of a penalty imposed on the annuitant in respect of the year in which an RRSP trust disposes of a non-qualified investment. Of course, this consequence adversely affects the annuitant only if in the particular year in which the disposition of a non-eligible investment takes place, the annuitant would have otherwise made, and been allowed to make, a contribution to an RRSP that is in part or totally wiped out by the amount deductible in respect of the disposition of a non- eligible investment.
It is evident that Parliament wanted to discourage taxpayers from acquiring non-qualified investments by specifically providing for an adverse income tax consequence for such an acquisition. In doing so, it wanted to discourage an annuitant from holding insecure investments.
In the case at bar, Mr. Brigg testified that the trust company would not have accepted to make these investments without the letter of guarantee given by the Bank. Therefore, I find it difficult to conclude that it was an insecure investment.
The scheme under section 146 also provides clearly that, if one disposes of the non-qualified investment in the same taxation year, there is a deduction equal to the amount of the income included. Because a taxpayer avails himself of that deduction knowingly within the same year or in the following years does not bring it, in my view, outside the scope of the statutory scheme.
When Parliament intended to disallow a transaction to happen in series, it included a provision to that effect. For example, the superficial loss provision under section 40(2)(g)(i) of the Act which specifically provides that a taxpayer’s loss from the disposition of the property, if it is a superficial loss, is nil. A superficial loss is defined at section 54 as a series type transaction:
“superficial loss” of a taxpayer means the taxpayer’s loss from the disposition of a property in any case where
(a) the same or identical property...was acquired, during the period beginning 30 days before the disposition and ending 30 days after the disposition, by
the taxpayer....
In the case at bar, Parliament had considered the acquisition and disposition of non-qualified investments. The Act specifically and in detail provides for a penalty for the disposition. The federal legislature did not see fit to include anything concerning a series type transaction. Therefore, I fail to see how it can be said to be outside the scope of subsection 245(1). As pointed out by McDonald J., dissenting in Fording Coal, supra, at page 5681:
Judges must be careful when engaging in an object and spirit analysis. It must not become a means by which every loophole or omission in the Act is rectified to the detriment of the taxpayer by a judiciary agreeable to the Minister’s frequent argument that such an interpretation of the section could not have been what Parliament intended. The judiciary is not to do the job of Parliament.
The deductions being within the object of the section, it cannot be said to reduce the income artificially, supra, at p. 5249.
However, even if the disbursement would be found to be outside the scope and spirit of the statutory scheme, that would not in itself be enough to decide that subsection 245(1) automatically applies. The disbursement must also reduce the income unduly or artificially.
Artificiality of the reduction
The disbursement in question must reduce the income unduly or artificially. As expressed by Estey J. in Stubart Investments Ltd. v. R., [1984] 1 S.C.R. 536, (sub nom. Stubart Investments Ltd. v. The Queen), [1984] C.T.C. 294, 84 D.T.C. 6305 at page 580 (C.T.C. 317, D.T.C. 6324):
(c) “the object and spirit” of the allowance or benefit provision is defeated by the procedures blatantly adopted by the taxpayer to synthesize a loss, delay or other tax saving device, although these actions may not attain the heights of “artificiality” in section 137 [now subsection 245(1)].
[Emphasis added.]
From this wording, I believe that the standard required in Stubart is an onerous one.
The Federal Court of Appeal in Spur Oil Ltd. v. R., supra, refers to the definition in the dictionary to find the meaning of the word “artificial” and stated that “when used in this context” it signifies “simulated” or “fictitious”. Counsel for the Plaintiff argues that “artificial” means something different than fictitious. However, the french version of the text uses precisely the words “de fa*on factice”. Therefore, I find it difficult to suggest that the word artificial means something else than fictitious. In the present case, the Appellants gave value for value. There is nothing fictitious to pay off indebtedness to their RRSP trusts.
Furthermore, if the deductions permitted under 146(6) are denied under 245(1) this would bring an absurd result that could not have been intended by Parliament. An annuitant could instruct the RRSP to advance the same as a loan, generating year after year a series of acquisitions of nonqualified investments without benefiting of the reduction in respect of the disposition of those non-qualified investments. As an example, with the use of one million by way of a loan and repayment before the end of the year, if an annuitant does the same thing, three years in a row, he would have an inclusion in its income of three million but with no deduction. As stated by Pigeon J. in Commerce & Industry Insurance Co. v. West End Investment Co., [1977] 2 S.C.R. 1036 at page 1045:
For such an interpretation of the Act to prevail, the legislator’s intention of imposing this inequitable result would have to be abundantly clear.
The mere fact that no interest were paid to the RRSP is not sufficient in my opinion to conclude that the disbursement is artificial or fictitious. Parliament has specifically contemplated the disposition of a non- qualified investment. It did not specify a minimum rate of return. The annuitant is getting rid of a bad investment. It is directly proportionate to the amount of the income inclusion. I fail to see how these actions could obtain the heights of artificiality suggested by Estey J. in Stubart, supra.
Consequently, the Appellants are entitled to the deduction provided by subsection 146(6) of the Act for the disposition during the 1986 and 1987 taxation years of non-qualified investments in the amounts included under subsection 146(10). The appeals are dismissed with costs.
Appeals dismissed.