Date: 20010216
Docket: 1999-832-IT-G
BETWEEN:
ANTONIO F. DIENI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
McArthur J.
[1]
The Appellant appeals the decision of the Minister of National
Revenue to increase his income in the 1994 taxation year by
adding a capital gain of $655,000 pursuant to section 79 of the
Income Tax Act. On August 25, 1994, the Appellant
transferred a property on Côte-de-Liesse in
Montréal, Québec to Manufacturers Life Insurance
Company (ManuLife) by way of a Deed of Giving in Payment.[1]
[2]
The Minister submits that a transfer arose from the default of
the Appellant of the terms of a Deed of Loan to ManuLife and is a
surrender of property to which section 79 of the Act
applies. The Appellant submits that section 79 does not apply
because the Deed of Giving in Payment does not adequately
represent the substance of the transaction between the Appellant
and ManuLife but rather it was part of an overall settlement to
which section 80 of the Act applies.
[3]
The issue in this appeal is which one of the two sections
applies, section 79 dealing with surrender of property or section
80 which deals with forgiveness of debt.
[4]
Counsel for the Appellant suggests that the question in this
appeal is one of fact. I believe it is clearly a mixed question
of fact and law. Subsection 79(2) of the Act entitled
"Surrender of Property" provides as follows:
79(2) For the purposes of
this section, a property is surrendered at any time by a person
to another person where the beneficial ownership of the property
is acquired or reacquired at that time from the person by the
other person and the acquisition or reacquisition of the property
was in consequence of the person's failure to pay all or part
of one or more specified amounts of debts owed by the person to
the other person immediately before that time.
Subsection 80(2) provides in part:
80(2) For the purposes of
this section,
an obligation issued by a debtor is settled at any time where
the obligation is settled or extinguished at that time (otherwise
than by way of a bequest or inheritance or as consideration for
the issue of a share described in paragraph (b) of the
definition "excluded security" in subsection (1));
...
[5]
The purpose of section 79 is to deal with the acquisition of a
debtor's property by a creditor as a result of the default of
the debtor on a debt obligation owing to the creditor. Where the
section applies, the debtor is deemed to have realized proceeds
of disposition. As a result of the application of section 79, the
debtor may realize a capital or non-capital gain or loss
depending on the nature of the property surrendered. Section 79
applies when a property is surrendered such that the beneficial
ownership is acquired from the debtor in consequence of the
debtor's failure to pay a debt to the creditor. Action by a
mortgagee lender by way of foreclosure or Deed of Giving in
Payment is the most common application of section 79.
[6]
Section 80 applies when there is a forgiven amount in respect of
a commercial obligation that has been settled or extinguished.
Sections 79 and 80 were amended in 1994. While the Appellant
submits the former section applies and the Respondent opts for
the amended section, when all is said and done, both agree it
does not matter which applies. I will refer to the amended
version because it came into effect before the surrender or
forgiveness.
Facts
[7]
The Appellant immigrated to Canada from Italy in 1950 at the age
of 15. He became a successful real estate owner and developer who
personally or through Les Aménagements Dieni Inc. (the
Corporation)[2]
owned various residential and commercial buildings in
Montréal and area. On October 16, 1990, the Corporation
granted a first Deed of Loan and Hypothec to ManuLife for $3.3
million on a commercial property known as the Laird/Canora
property.[3] On
February 18, 1991, the Appellant granted a Deed of Loan and
Hypothec in the amount of $1.5 million on a 58-unit residential
apartment building (the Côte-de-Liesse property[4]). The fortunes of these
two properties were adversely affected by the recession of the
1990s. Twenty-five thousand square feet of the building on the
Laird/Canora property was vacated when Wabasso closed its plant
and Côte-de-Liesse suffered almost a 50%
vacancy after the National Film Board of Canada closed its
premises across the street. As a result, both loans fell into
serious arrears with ManuLife.
[8]
On June 14, 1993, ManuLife registered two 60-day notices,[5] one against the
Appellant in connection with the $1.5 million loan on the
Côte-de-Liesse property, and another against the
Corporation in connection with the $3.3 million loan on the
Laird/Canora property.
[9]
On December 23, 1993, the Appellant submitted a settlement
proposal which was not accepted by ManuLife. However, ManuLife,
the Corporation and the Appellant entered into an agreement dated
February 17, 1994 referred to by the Appellant as the
"Workout Agreement".[6]
[10] On
September 30, 1994, and further to the two aforementioned 60-day
notices, ManuLife filed two declarations[7] before the Superior Court of
Québec to take possession of the Côte-de-Liesse
property (Court file No. 500-05-013146-939), and of the
Laird/Canora property (Court file No. 500-05-013147-937).
ManuLife did, in fact, take possession of the two properties.
[11] The
Appellant has not established that all or part of the outstanding
debt on the Côte-de-Liesse property was settled or
extinguished. There was no evidence of the fair market value of
the property at the time of its transfer. Its value may well have
exceeded the outstanding debt.
[12] In
effect, only one hypothec was granted by the Appellant and that
was on the Côte-de-Liesse property. The Laird/Canora
property was owned by the Corporation and not the Appellant.
[13] Pursuant
to the terms of the Deed of Loan and Hypothec, the Appellant
entered into a Deed of Giving in Payment (Exhibit R-2) dated
August 25, 1994, wherein he transferred the Côte-de-Liesse
property to ManuLife. A portion of the preamble to this Deed sets
out the background from which the transfer was made as
follows:
WHEREAS the Loan Agreement further provides that, upon the
occurrence of an event of default, the Transferee can, after
giving to the registered owner of the written notice required by
law, become the absolute owner of the Immoveable Property,
...
WHEREAS the Transferee served upon the Transferor, on April 15,
1993, a Notice of Intention pursuant to Section 244(1) of the
Bankruptcy and Insolvency Act (Canada);
WHEREAS the Sixty-Day Notice was duly served upon the Transferor
on June 29, 1993, ...
WHEREAS the Transferor agrees to give the Immoveable property to
the Transferee in payment for the Debt and the accrued interest,
...
[14] The
Corporation entered into the Workout Agreement dated February 17,
1994 wherein it advanced the sum of $225,000 to ManuLife, the
balance of interest and costs owing was capitalized, and the term
of the loan was extended with interest to be calculated at
75/8% per annum.
[15] It is the
position of the Appellant that the transfer of the
Côte-de-Liesse property constituted a forgiveness of debt
with respect to the Laird/Canora property. It formed part of a
larger settlement between the Appellant, the Corporation and
ManuLife to which section 80 applies. Counsel for the Appellant
added that the context in which the parties executed the
Côte-de-Liesse Deed of Giving in Payment must be taken into
consideration finding a proper balance between the economic risks
that ManuLife was taking and the desire of the Appellant to
retain ownership of the Laird/Canora property. Counsel stated
that the Deed of Giving in Payment and the Agreement concerning
the Laird/Canora property cannot be interpreted in isolation. He
refers to the dictum of Dickson C.J. in Bronfman
Trust v. The Queen,[8] and states that the entire substance of a transaction
must be considered. He refers further to Interpretation 9313290
dated May 11, 1993, Alberta CICA Round Table.[9]
Analysis
[16] To accept
the Appellant's submissions, it must be proven that the Deed
of Giving in Payment for the Côte-de-Liesse property
(Exhibit R-2) is connected to the Workout Agreement (Exhibit R-1)
concerning the Corporation and the Laird/Canora property. There
is insufficient evidence to conclude that they are
interdependent. Neither document (Exhibits R-1 or R-2) refers to
the other. The Deed of Giving in Payment was clearly in
consequence of the Appellant's failure to pay all or part of
the Côte-de-Liesse debt. The documents do not reflect the
Appellant's testimony to the effect that his signing of a
Deed for the Côte-de-Liesse property was dependent on
ManuLife extending the Corporation's Deed of Loan on the
Laird/Canora property and reducing the interest rate.
[17] In
Hallbauer v. The Queen,[10] Rip J. discussed the meaning of the
phrase "in consequence of" at page 776:
The words "in consequence of" in section 79 have a
definite meaning, but the words are not defined in the
Act. Linden J.A. considered the words "Where a person
... receives a loan, ... because or as a consequence of ... a ...
office or employment ..." in subsection 80.4(1) of the
Act in A.G. of Canada v. Hoefele et al.;
Krull v. A.G. of Canada, 95 DTC 5602 at
5607-08. At page 5608 he stated:
... the phrases ... "because of" or "as a
consequence of" ... as well as ... "by virtue of"
... require a strong causal connection. I find little or no
difference between the meanings of the phrases "because
of", "as a consequence of" and "by virtue
of". Each phrase implies a need for a strong causal relation
between subject matters, and merely a slight linkage between
them.
The Shorter Oxford Dictionary On Historical Principles
("Oxford") defines the word
"consequence" as:
1. A thing or circumstance which follows as an effect or
result from something proceeding. 2. The action, or condition, of
so following; the relation of a result to its cause or antecedent
1656. A logical result or inference M.E.; logical sequence 1571
...
The French language version of section 79 uses the phrase
"par suite de" where the words "in consequence
of" are used in the English version. Le Petit Robert
Dictionnaire De La Langue Française, 1990, defines
"par suite de" as follows:
à cause de, en conséquence de. V. Grace
(à). "Par suite d'un refroidissement il lui vint
une angine" (FLAUB)
Black's Law Dictionary (1990 Edition)
(Black's) defines the word "consequence"
as
The result following in natural sequence from an event which
is adapted to produce, or to aid in producing, such a result; the
correlative of "cause". Board of Trustees of
Firemen's Relief and Pension Fund for City of Tulsa v.
Miller, 186 Okl. 586, 99 P. 2.ed 146, 147.
The word "consequence" in the phrase "in
consequence of" in section 79 demands that there be a strong
causal relation between the acquisition (or reacquisition) of the
beneficial ownership of the property by the taxpayer (i.e., the
creditor) and the failure by the other person (the debtor) to pay
all or any amount owing to the creditor. ...
[18] It is not
clear which debt the Appellant is relying on as being the debt
that was forgiven but, it is not in respect to the
Côte-de-Liesse property. The forgiveness of debt would
appear to be the reduction of the interest rate on the
Corporation's $3.3 million loan on the Laird/Canora property.
Although my decision is not dependent upon it, I am not satisfied
that there was a debt forgiveness to the Corporation with respect
to the Laird/Canora loan. The original rate was fixed in October
1990 at 123/8%. There was no evidence with respect to
the original term. The rate in the February 1994 Workout
Agreement was fixed at 75/8% from April 1, 1994 to
March 1, 1997. This appears to be a reasonable rate during that
period.
[19] Paragraph
16 on page 4 of the Workout Agreement states that all terms and
conditions of the original loan agreement remain in force. The
preamble refers to a Deed of Loan and Hypothec executed by the
Appellant, as borrower, although the Corporation owned the
Laird/Canora property and not the Appellant. The Appellant signed
as surety only. There was no evidence by ManuLife or anyone other
than the Appellant that the two documents complement each other
and are to be read together. In fact an opposite conclusion is
more logical for the following reasons: (a) the documents are
dated six months apart - Exhibit R-1 is February 17, 1994 and
Exhibit R-2 is August 25, 1994; (b) Exhibits R-1 and R-2
were prepared by counsel for ManuLife who did not give evidence;
(c) there is clearly no forgiveness of debt for the Appellant
with respect to the Côte-de-Liesse property; (d) if there
was a forgiveness of debt for the Laird/Canora property, it was
in favour of the Corporation; (e) there is no reference to the
Laird/Canora property in the Côte-de-Liesse document nor is
there reference to the Côte-de-Liesse property in the
Laird/Canora document; (f) Exhibit A-3 is a memorandum of
settlement prepared by Shahir Guindi on behalf of the
Appellant and sent to counsel for ManuLife. This is of no
assistance to the Appellant. It was not accepted and the counsel
involved did not give evidence; and (g) ManuLife took legal
action to realize on its security of the Côte-de-Liesse
property.
[20] We have a
separate agreement or contract for each property. The only
connection between the two is the uncorroborated evidence of the
Appellant to the effect that a reduction of the interest rate for
the Corporation's Laird/Canora Deed of Loan and Hypothec was
dependent on his surrender of the
Côte-de-Liesse property. This is not sufficient
to offset the evidence to the contrary contained in the Deed of
Giving in Payment.
[21] Section
80 of the Act only applies when there is a forgiven amount
in respect of a commercial obligation that has been settled or
extinguished. In Arcade Construction Ltd. v. The Queen,[11] Bonner J. set
out clearly and simply what is required for a debt to be settled.
At page 656, he stated:
... It seems to me that in ordinary English usage a debt
or obligation is settled when creditor and debtor deliberately
agree to fix or vary their existing rights and obligations.
...
ManuLife and the Appellant did not fix or vary their existing
rights and obligations with respect to the Côte-de-Liesse
property. ManuLife took the property in accordance with the
strict terms of their Deed of Loan. Section 80 does not
apply.
[22] As a
consequence of his failure to pay his creditor, the Appellant
surrendered the Côte-de-Liesse property to the creditor.
Clearly, section 79 of the Act applies and it has priority
over section 80. Counsel for the Appellant acknowledges that
section 79 has priority over section 80 and it does not serve a
purpose to review the scheme of the Act.
[23] In the
Reply to the Notice of Appeal, the Minister correctly stated that
the Deed of Giving in Payment was published on August 25, 1994.
By the publication, the third parties, like the Minister, were
bound by the terms of the Agreement according to article 2941 of
the Civil Code of Québec (articles 2082 and 2083 of
the Civil Code of Lower Canada). There was no reference to
article 2941 in argument.
[24] The
appeal is dismissed, with costs.
Signed at Ottawa, Canada, this 16th day of February, 2001.
"C.H. McArthur"
J.T.C.C.
COURT FILE
NO.:
1999-832(IT)G
STYLE OF
CAUSE:
Antonio F. Dieni and
Her Majesty the Queen
PLACE OF
HEARING:
Montréal, Québec
DATE OF
HEARING:
December 5, 2000
REASONS FOR JUDGMENT BY: The
Honourable Judge C.H. McArthur
DATE OF
JUDGMENT:
February 16, 2001
APPEARANCES:
Counsel for the Appellant: Nicolas Cloutier
Counsel for the
Respondent:
Nathalie Labbé
COUNSEL OF RECORD:
For the
Appellant:
Name:
Nicolas Clouthier
Firm:
Goodman Phillips & Vineberg
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-832(IT)G
BETWEEN:
ANTONIO F. DIENI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on December 5, 2000, at
Montréal, Québec, by
the Honourable Judge C.H. McArthur
Appearances
Counsel for the
Appellant:
Nicolas Cloutier
Counsel for the
Respondent:
Nathalie Labbé
JUDGMENT
The
appeal from the assessment of tax made under the Income Tax
Act for the 1994 taxation year is dismissed, with costs.
Signed at Ottawa, Canada, this 16th day of February, 2001.
J.T.C.C.
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