Mogan,
T.C.J.:—The
appeals
of
Herbert
Liffman
and
David
Wolinsky
were
heard
together
on
common
evidence.
In
1980,
Central
Canadian
Properties
Ltd.
("CCP")
loaned
to
each
appellant
the
sum
of
$80,000.
Identical
promissory
notes
signed
by
the
appellants
provided
for
annual
principal
repayments
of
$8,000
plus
interestat
the
rate
of
11
per
cent
per
annum
payable
on
an
annual
basis.
The
appellants
did
not
make
any
payments
to
CCP
on
account
of
principal
or
interest
but
the
amounts
owing
each
year
with
respect
to
interest
were
capitalized
and
added
to
the
respective
debt
of
each
appellant.
The
issued
shares
of
CCP
were
owned
in
equal
portions
by
Mr.
Liffman,
Mr.
Wolinsky
and
an
uncle
of
Mr.
Wolinsky.
When
reassessing
the
appellants
for
the
1980
taxation
year,
the
respondent
included
the
full
amount
of
the
$80,000
loan
in
the
income
of
each
appellant
for
that
year.
The
respondent
relies
on
subsection
15(2)
of
the
Income
Tax
Act
which
at
that
time
stated
in
part:
15.
(2)
Where
a
particular
corporation
.
.
.
has
made
a
loan
to
a
person
.
.
.
who
is
a
shareholder
of
the
particular
corporation
.
.
.
the
amount
thereof
shall
be
included
in
computing
the
income
for
the
year
of
the
person
to
whom
the
loan
was
made
unless
(a)
the
loan
was
made
(i)
in
the
ordinary
course
of
the
lender's
business
and
the
lending
of
money
was
part
of
its
ordinary
business,
and
bona
fide
arrangements
were
made
at
the
time
the
loan
was
made
for
repayment
thereof
within
a
reasonable
time;
.
.
.
The
basic
issues
in
these
appeals
are
(i)
whether
the
$80,000
loans
to
the
appellants
were
made
in
the
ordinary
course
of
CCP's
business;
and
(ii)
whether
bona
fide
arrangements
were
made
at
the
time
of
the
loans
for
their
repayment
within
a
reasonable
time.
The
respondent
admits
that
the
lending
of
money
was
part
of
CCP's
ordinary
business.
There
is
a
secondary
issue
concerning
capitalized
interest
which
the
respondent
included
in
the
appellants'
incomes
for
1981
and
1982.
The
secondary
issue
will
be
considered
later
in
these
reasons.
The
appellants
are
lawyers
who
practise
together
in
a
small
partnership.
Mr.
Wolinsky,
upon
his
call
to
the
bar
in
1965,
joined
his
father
in
the
practice
of
law.
Mr.
Liffman
was
called
in
1967
and
joined
the
Wolinskys
in
1972.
By
1980,
the
appellants
were
the
only
active
partners
and
Mr.
Wolinsky's
father
was
semi-retired.
CCP
was
incorporated
in
1970
to
engage
in
the
business
of
lending
money.
The
persons
who
borrowed
from
CCP
were
primarily
businessmen
and
land
developers
who
were
clients
of
the
appellants’
law
firm.
On
some
loans
CCP
would
have
a
mortgage
as
security;
on
others
CCP
would
have
a
deposit
of
title;
and
on
others
CCP
would
have
only
a
promissory
note.
Five
schedules
filed
as
exhibits
show
that
from
August
1,1975
to
July
31,
1980
CCP
had
nine
loans
each
secured
by
a
mortgage.
Interest
charged
on
eight
of
those
loans
was
in
the
range
of
14
A
per
cent
to
16
A
per
cent
and
interest
on
the
ninth
loan
was
prime
plus
1
/2
per
cent.
It
was
not
unusual
for
CCP
to
capitalize
all
or
a
portion
of
the
interest
on
those
nine
loans.
Most
of
those
loans
were
repaid
within
two
years.
There
is
no
evidence
to
show
who
borrowed
from
CCP
by
delivering
a
deposit
of
title
or
by
delivering
only
a
promissory
note;
there
is
no
evidence
to
show
the
interest
charged
on
such
loans;
and
there
is
no
way
of
determining
whether
the
interest
charged
on
secured
loans
was
lower
or
higher
than
interest
charged
on
unsecured
loans.
There
is
no
evidence
of
other
loans
providing
for
a
ten-year
repayment.
The
secured
loans
described
in
the
five
schedules
apparently
all
started
as
short-term
loans
even
though
some
of
them
dragged
on
for
a
number
of
years
because
the
borrower
could
not
repay
in
the
short
term.
On
April
15,
1980,
CCP
loaned
$160,000
to
the
appellants:
$80,000
to
Mr.
Liffman
and
$80,000
to
Mr.
Wolinsky.
CCP
received
two
identical
promissory
notes
from
the
appellants
but
did
not
receive
any
mortgage,
deposit
of
title
or
other
property
as
security
for
the
loans.
In
my
view,
a
promissory
note
is
evidence
of
a
loan
and
its
terms
but
is
not
security
for
the
loan.
The
appellants
control
CCP.
Therefore,
it
should
have
been
easy
for
the
appellants
to
produce
documents
from
the
records
of
CCP
to
answer
the
following
questions:
(i)
to
whom
did
CCP
make
arm's
length
unsecured
loans
in
the
period
1979-1980-1981;
(ii)
did
any
of
those
loans
provide
for
a
ten-year
repayment;
(iii)
what
rate
of
interest
was
charged
on
those
loans;
(iv)
how
did
the
rate
of
interest
on
CCP's
unsecured
arm's
length
loans
compare
with
the
rate
of
interest
on
its
secured
loans;
(v)
did
CCP
borrow
$160,000
from
its
bank
on
April
15,
1980
to
make
the
$80,000
loans
to
the
appellants;
(vi)
what
rate
of
interest
was
paid
by
CCP
to
its
bank
on
its
line
of
credit
in
April
1980
and
over
the
preceding
twelve
months?
The
above
questions
are
all
factual.
The
answers
must
be
contained
in
the
books
and
records
of
CCP.
Answers
to
those
questions
are
necessary
to
determine
whether
it
was
reasonable
for
CCP
to
charge
11
per
cent
on
the
$80,000
loans
to
the
appellants
having
regard
to
the
rate
of
interest
charged
by
CCP
on
its
other
unsecured
loans
and
the
rate
of
interest
payable
by
CCP
to
its
bank
on
its
line
of
credit.
A
corporation
engaged
in
the
business
of
lending
money
will
not
ordinarily
make
a
loan
for
a
ten-year
term
at
a
fixed
interest
rate
which
is
close
to
prime
bank
rate
at
the
time
of
the
loan.
To
prove
that
the
loans
from
CCP
to
the
appellants
were
made
in
the
ordinary
course
of
CCP's
business,
it
was
essential
to
prove
the
prime
bank
rate
in
April
1980.
Neither
appellant
was
able
to
state
what
the
prime
bank
rate
was
in
April
1980.
Evidence
concerning
the
prime
bank
rate
in
the
period
1979-1980-1981
was,
at
best,
vague.
In
the
pleadings,
the
appellants
allege
that
the
$80,000
loans
were
made
in
the
ordinary
course
of
CCP's
business.
The
respondent
denies
that
allegation
and
puts
the
appellant
to
the
strict
proof
thereof.
On
this
question
of
fact,
the
onus
of
proof
was
on
the
appellants.
There
is
simply
not
enough
evidence
to
determine
whether
the
$80,000
loans
to
the
appellants
were
made
in
the
ordinary
course
of
CCP's
business.
I
therefore
find
that
the
appellants
have
failed
to
discharge
the
onus
of
proving
that
they
satisfy
the
conditions
in
subparagraph
15(2)(a)(i)
which,
subject
to
proving
bona
fide
arrangements
for
repayment,
could
have
excluded
the
$80,000
loans
from
income.
Having
decided
that
the
appellants
failed
to
satisfy
the
conditions
in
subparagraph
15(2)(a)(i),
I
am
not
required
to
decide
the
other
basic
issue
concerning
whether
there
were
bona
fide
arrangements
for
repayment
at
the
time
of
the
loans.
I
should
observe,
however,
that
the
evidence
of
such
arrangements
is
not
convincing.
The
fiscal
period
of
the
appellants’
law
firm
ends
on
the
last
day
of
February.
For
the
fiscal
period
ending
in
February
1980,
the
gross
fees
declined
from
$255,000
in
the
prior
year
to
$197,000;
expenses
increased
from
$138,000
to
$152,000;
and
profit
declined
from
$117,000
to
$45,000.
For
the
same
fiscal
period,
the
deficiency
in
the
appellants'
capital
accounts
in
their
partnership
increased
from
$30,000
to
$60,000
(approximate
amounts).
The
appellants
both
testified
and
stated
that
they
did
not
know
until
December
1980
(upon
receiving
the
audited
financial
statements
of
their
partnership
for
fiscal
1980)
how
they
had
performed
in
that
fiscal
period.
They
had
no
full-time
bookkeeper
and
the
partnership
financial
records
were
inadequate.
That
testimony
may
be
true
but
it
does
not
satisfy
the
condition
with
respect
to
bona
fide
repayment
arrangements.
When
the
loans
were
made
in
April
1980,
the
appellants'
law
firm
had
suffered
a
23
per
cent
decline
in
revenue
and
a
ten
per
cent
increase
in
expenses
in
the
fiscal
period
which
had
just
ended
45
days
previously.
The
law
firm
owed
the
bank
about
$170,000.
The
funds
borrowed
from
CCP
were
immediately
injected
into
the
law
firm.
An
arm's
length
lender
of
$160,000
in
April
1980
would
surely
have
required
current
information
concerning
the
partnership
fiscal
period
which
had
just
ended.
A
superficial
review
of
the
billings
would
have
disclosed
the
23
per
cent
decline
in
revenue
and
the
60
per
cent
decline
in
profits.
The
amount
(principal
plus
interest)
which
each
appellant
was
required
to
pay
to
CCP
in
the
first
year
of
the
loan
exceeded
the
income
of
each
appellant
from
their
partnership
for
fiscal
1980.
In
these
circumstances,
CCP
and
the
appellants
should
have
doubted
their
ability
to
repay
the
$80,000
loans
in
accordance
with
the
terms
of
the
promissory
notes.
Soon
after
obtaining
the
loans,
the
appellants
lost
money
in
an
airport
car
rental
business
and
in
some
rental
properties.
Also,
Mr.
Wolinsky
lost
money
in
an
Orange
Julius
franchise.
These
losses
were
probably
not
foreseeable
in
April
1980
and
they
help
to
explain
the
appellants’
failure
to
make
any
payments
of
principal
or
interest
on
the
$80,000
loans.
The
fact
remains,
however,
that
the
appellants
caused
CCP
to
lend
them
$160,000
when
the
borrowing
power
of
their
law
firm
was
stretched
to
the
limit
and
their
available
capital
was
invested
in
other
businesses
and
properties.
In
other
words,
they
had
virtually
no
personal
liquidity
at
the
time
of
the
loans.
These
facts
should
have
contributed
to
any
doubts
they
might
have
had
concerning
their
ability
to
pay
down
the
loans
with
the
income
from
their
law
firm.
When
asked
why
they
made
no
payments
in
respect
of
principal
or
interest
on
the
loans,
they
stated
that
they
simply
did
not
have
the
funds,
and
any
available
cash
went
to
creditors
who
exerted
greater
pressure
than
CCP.
This
evidence
is
directed
to
the
bona
fide
of
the
repayment
arrangements
and
raises
the
question
as
to
whether,
in
April
1980,
CCP
was
always
going
to
be
the
last
creditor
to
be
paid.
Without
deciding
this
other
basic
issue,
I
will
simply
repeat
that
the
evidence
as
to
bona
fide
arrangements
for
repayment
at
the
time
of
the
loans
is
not
convincing.
By
notices
of
reassessment,
the
respondent
added
the
following
amounts
to
the
appellants'
reported
incomes
for
the
taxation
years
1981
and
1982.
|
1981
|
1982
|
H.
Liffman
|
$7,690.95
|
$8,800
|
D.
Wolinsky
|
Nil
|
$8,800
|
The
above
amounts
represent
interest
owing
on
the
$80,000
loans.
The
interest
was
not
paid
by
either
of
the
appellants
but
was
capitalized
in
the
books
and
records
of
CCP.
Through
the
respondent's
oversight,
no
amount
was
added
to
Mr.
Wolinsky's
income
for
1981.
The
respondent,
did,
however,
add
the
amount
of
$5,512.73
to
Mr.
Wolinsky's
1982
income
with
respect
to
interest
owing
in
a
loan
identified
as
"Lindale"
but,
during
the
hearing,
counsel
agreed
that
the
amount
of
$5,512.73
should
be
deleted
from
Mr.
Wolinsky's
1982
income
without
regard
to
the
Court's
disposition
of
the
other
issues.
The
secondary
issue,
therefore,
is
whether
the
amounts
of
capitalized
interest
should
be
included
in
Mr.
Liffman’s
income
for
1981
and
in
the
incomes
of
both
appellants
for
1982.
The
respondent
relies
on
subsection
15(1)
of
the
Income
Tax
Act
for
Mr.
Liffman’s
1981
taxation
year
and
on
subsection
15(2)
for
the
appellants’
1982
taxation
year.
The
respondent
also
relies
on
section
80.4.
In
my
view,
section
80.4
cannot
apply
to
1981
or
1982
because
the
$80,000
principal
amounts
of
the
loans
were
correctly
included
in
computing
the
respective
incomes
of
the
appellants
for
1980.
For
1981,
subparagraph
80.4(2)(a)(ii)
defined
"excluded
loan”
to
include
"the
portion
of
any
loan
included
in
computing
the
income
of
the
individual
to
whom
it
was
made".
And
under
paragraph
80.4(1)(b),
the
deemed
benefit
did
not
apply
to
a
shareholder
who
received
an
excluded
loan.
For
1982,
section
80.4
had
been
amended
to
provide
in
paragraph
(3)(b)
that
the
deemed
benefits
in
subsections
(1)
and
(2)
did
not
apply
in
respect
of
any
loan
that
was
included
in
computing
the
income
of
a
person
under
the
Act.
Only
Mr.
Liffman
has
appealed
the
1981
taxation
year
when
subsection
15(2)
provided
in
part
as
follows:
15.
(2)
Where
a
particular
corporation
.
.
.
has
in
a
taxation
year
made
a
loan
to
a
person
who
is
a
shareholder
of
the
particular
corporation,
.
.
.
the
amount
thereof
shall
be
included
in
computing
the
income
for
the
year
of
the
person
to
whom
the
loan
was
made
unless.
.
.
.
For
1981,
there
is
no
amount
to
include
in
the
income
of
a
shareholder
under
subsection
15(2)
unless
the
corporation
has
"made
a
loan”.
There
is
a
real
distinction
between
"loan"
and
“debt”.
A
loan
requires
delivery
of
a
sum
of
money
from
a
lender
to
a
borrower.
A
debt
is
simply
a
sum
of
money
owing
from
one
person
to
another.
A
debt
can
arise
under
contract
without
any
loan
as,
for
example,
a
purchaser's
failure
to
pay
the
purchase
price.
Mr.
Liffman’s
failure
to
pay
annual
interest
on
the
$80,000
amount
in
1981
did
not
cause
CCP
to
"make
a
loan"
to
Mr.
Liffman
but
it
did
cause
Mr.
Liffman
to
become
indebted
to
CCP
under
the
terms
of
his
promissory
note.
The
concept
of
a
shareholder
becoming
"indebted"
to
his
corporation
did
not
appear
in
subsection
15(2)
until
the
1982
taxation
year.
Therefore,
subsection
15(2)
does
not
support
the
respondent's
assessment
of
Mr.
Liffman
for
1981.
The
respondent
also
relies
on
subsection
15(1)
to
support
his
assessment
of
Mr.
Liffman
for
1981.
It
must
be
remembered
that
the
amount
under
appeal
for
1981
is
interest
at
11
per
cent
in
the
amount
of
$7,690.95
which
was
not
paid
but
was
Capitalized.
In
my
view,
subsection
15(1)
does
not
apply
to
the
amount
of
interest
capitalized
in
1981
for
the
following
reasons.
Under
paragraph
15(1)(a),
CCP
did
not
make
any
payment
to
Mr.
Liffman.
Under
paragraph
15(1)(b),
no
funds
or
property
of
CCP
were
appropriated.
Rather,
the
amount
of
interest
which
Mr.
Liffman
should
have
paid
in
1981
was
not
paid
but
was
capitalized
and
added
to
the
principal
amount
of
his
debt.
And
under
paragraph
15(1)(c),
no
benefit
or
advantage
was
conferred
because
Mr.
Liffman’s
liability
to
CCP
was
increased
by
the
amount
of
capitalized
interest.
Therefore,
subsection
15(1)
does
not
support
the
respondent's
assessment
of
Mr.
Liffman
for
1981.
For
1982
and
subsequent
years,
subsection
15(2)
was
amended
to
provide
in
part
as
follows:
15.
(2)
Where
a
person
.
.
.
is
shareholder
of
a
particular
corporation
.
.
.
and
the
person
.
.
.
has
in
a
taxation
year
received
a
loan
from
or
has
become
indebted
to
the
particular
corporation,
.
.
.
the
amount
of
the
loan
or
indebtedness
shall
be
included
in
computing
the
income
for
the
year
of
the
person
.
.
.,
unless
.
.
.
.
The
above
wording
is,
without
doubt,
broad
enough
to
support
the
respondent's
reassessments
for
the
1982
taxation
year
in
which
capitalized
interest
of
$8,800
was
added
to
the
reported
income
of
each
appellant.
The
requirement
to
pay
annual
interest
at
11
per
cent
was
one
of
the
terms
of
the
promissory
notes.
The
failure
to
pay
annual
interest
on
the
loans
and
the
capitalization
of
such
interest
may
not
have
caused
either
appellant
to
"receive
a
loan”
from
CCP
with
respect
to
such
interest
but
it
certainly
caused
each
appellant
to
"become
indebted”
to
CCP
under
the
terms
of
his
promissory
note.
Therefore,
both
appeals
concerning
the
$8,800
amounts
in
1982
are
dismissed.
In
conclusion,
I
would
allow
Mr.
Liffman's
appeal
for
1981
but
dismiss
his
appeal
for
1980
and
1982.
I
would
allow
Mr.
Wolinsky's
appeal
for
1982
with
respect
to
the
amount
of
$5,512.73
but
dismiss
it
with
respect
to
the
amount
of
$8,800.
And
I
would
dismiss
Mr.
Wolinsky's
appeal
for
1980.
There
will
be
no
order
as
to
costs.
Appeal
allowed
in
part.