Meredith v. The Queen, 94 DTC 1271, [1994] 1 CTC 2538 (TCC)

Kempo, J.T.C.C.:—These appeals concern the appellant's 1986, 1987 and 1988 taxation years.

Issues

Whistler Real Estate Co. (the "company") during all times material was engaged in the business of selling real estate, the appellant being employed by it as a commissioned salesman. The company advanced the amounts of $56,246 during 1986 and $41,983 during 1987 to the appellant in excess of his commission earnings which the Minister of National Revenue, Taxation ("the Minister") on reassessment added to his income for each of those years pursuant to section 3 and subsection 5(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") as “advances on account of future earnings".

During 1988 the company purportedly forgave $27,500.04 of these amounts and therefore the appellant included that sum into his income for that year. In keeping with his interpretation of the matter, the Minister by reassessment deleted this amount from the appellant's income for that year.

The core issue in these appeals relates to the true nature or characterization of the amounts advanced during 1986 and 1987. Respondent's counsel maintained they were income in the nature of advances on account of future earnings while appellant’s counsel maintained they were loans and not income. Thusly the issue was joined for 1986 and 1987. It must be noted at this point that if the Minister is shown to have erred respecting the characterization of these withdrawals for 1986 and 1987, the Court is nonetheless unable to increase the assessed tax for 1988 by adding back the $27,500.04 amount deleted by the Minister's reassessment for that year.

Facts

Oral evidence was given by the appellant and by Mr. Arv Pellegrin. Both were licensed real estate agents and directors of the company at all material times.

The company was incorporated in 1985 by its principal shareholder, Strath- eden Properties Ltd. ("Stratheden") through its owner/shareholder, Mr. Robin Crumley, who was a real estate developer and a personal friend of the appellant. Following incorporation Stratheden loaned $25,000 to the company to fund its operating capital and at the same time granted an option to the appellant and Mr. Pellegrin to purchase its shares in the company on condition that all moneys due to Stratheden under the loan agreement was paid.

The appellant testified that Stratheden was merely a financing vehicle for the company and that Mr. Crumley took no active part in its affairs save as an investor. The appellant and Mr. Pellegrin were made managing directors and both were responsible for the day-to-day operations and all financial matters of the company. The situation was structured this way because they were then bound by a noncompetition agreement with another realty company as well as by their respective Bankruptcy Act proposals which effectively precluded borrowings through traditional sources.

The option to purchase the company's shares was exercised by the appellant and Mr. Pellegrin on June 2, 1987 for $10,000 following which they became its sole shareholders (each as to a 50 per cent interest therein) with Mr. Crumley then resigning his positions of director and officer. At that time the appellant and Mr. Pellegrin were free of the non-competition agreement. They borrowed the option funds from the company.

The appellant confirmed that the economic conditions of the Whistler Resort area during 1985 and 1986 were recessionary and therefore real estate activity in the area was very slow. He said that of commission income earned, the company retained 40 per cent for its purposes, 60 per cent was payable to the particular agent who made the sale and that if he or Mr. Pellegrin had been that agent they had agreed the 60 per cent would be divided equally between them. During that time the company had a staff of ten sales agents and three administrative personnel.

As neither the appellant nor Mr. Pellegrin ever earned sufficient commission income to meet their personal expenses during 1985, 1986 or 1987, each resorted to withdrawing corporate funds on a continual basis throughout the year on an “as needed" basis. Apparently because of family needs, the appellant drew out more than Mr. Pellegrin. The appellant confirmed that his state of bankruptcy effectively precluded any possibility of obtaining loans from traditional sources to fund his living expenses, that neither were entitled to a fixed salary and that they took funds when they were available in the company’s bank account. Earned commission amounts were tallied at year end (December 31). The excess draws (i.e., the subject amounts of these appeals) were then handled as follows:

Q. Mr. Meredith, can you indicate to the Court when you would be in a position to know what your income for the year would be?

A. The end of December.

Q. Now, did you realize at any time that you were pulling out more money than you were making in direct commissions?

A. Yes.

Q. And as a result of that, what did you do?

A. We agreed that those amounts would be loans and would be repaid in the future when we were in a position to do so.

Q. And when you say, "we agreed”, who's "we"?

A. Arv Pellegrin and myself. [T. 16, I. 5-20]

On cross-examination, the appellant was unable to specify the month or period of time in which this purported agreement had taken place.

The 1986 financial statements of the company identify the subject withdrawals as current assets, the amount of $134,126 being described in the notes as net advances receivable from directors. These amounts include the withdrawals taken by both the appellant and Mr. Pellegrin. The 1987 financial statements reflected $210,361 under current assets as net advances receivable from directors. For 1988 the amount was $189,343 with note 3 therein describing them as “loans to the Directors, a spouse of a director and a former Director. The advances are without interest and are being repaid on an agreed basis".

The appellant acknowledged he was aware of the wording used in the notes to the financial statements to describe these withdrawals and that he did not know why the word "receivable" was used in 1986 and 1987 while the word "loan" was used in 1988. To him receivable meant due and owing. He testified, respecting his understanding as to the pay-back of the withdrawals ( at T. 23 I. 18 to T. 24 .7):

Q. Did you and Mr. Pellegrin enter into any discussion with respect to the repayment of any of these amounts, this excess, back in 1985?

A. It was understood by both of us that those amounts would be repaid when we were in a position to do so.

Q. Did you enter into any directors resolution to that effect?

A. No.

Q. Or promissory note.

A. No.

Q. Why not?

A. We worked very closely together. We were very good friends. And it just, well, it didn't appear to be necessary.

As noted earlier, the company’s shares were acquired by the appellant and Mr. Pellegrin in late June 1987. Two to three months later Mr. Pellegrin communicated his desire to be merely a sales agent as he no longer wanted to oe burdened by the running of the company. Discussions ensued respecting a buy-out and the unpaid advances. A written agreement dated January 1, 1988 (Exhibit A-1, tab #12) was executed between the appellant, Mr. Pellegrin and the company. Its preamble reads:

WHEREAS MEREDITH and PELLEGRIN are indebted to the company in the amounts set opposite their names as follows:

(As at June 26, 1987)	Rice Howard Drew Meredith	$110,666
	Arv Pellegrin	$ 99,694

AND WHEREAS the company intends to forgive the indebtedness in an orderly fashion.

Thereafter the agreement purports to forgive these amounts on a monthly basis at a set sum until fully forgiven provided each individual continued in the active employment of the company.

By written agreement stated to be made as of February 26 1988, the appellant purchased all of Mr. Pellegrin’s shares in the company for $75,000. In its preamble it was acknowledged that Mr. Pellegrin relied upon the company's unaudited financial statements as at December 31 1987. By its terms it was warranted, inter alia, that:

3.13 Since December 31, 1987;

3.14 There has not been any material adverse change in the financial position or condition of the company or any damage, loss or other change in circumstances materially affecting the business or property of the company or its right or capacity to Carry on business;

3.15 The company has not waived or surrendered any right of material value;

3.16 The company has not discharged or satisfied or paid any lien or encumbrance or obligation or liability other than current liabilities in the ordinary course of business.

3.35 The company has not experienced nor is it aware of any occurrence or event which has had, or might reasonably be expected to have, a materially adverse affect on its business or the results of its operations;

3.41 All material transactions of the company have been promptly and properly recorded or filed in or with its respective books and records. . . .

Thus far, then, the situation was that while both the appellant and Mr. Pellegrin were aware of the forgiveness, the sale document was structured to reflect a December 31, 1987 situation which was warranted to have remained substantively unchanged.

With respect to the company's 1988 fiscal year, the appellant acknowledged that at the time its 1988 financial statements were prepared the loan forgiveness agreement had been operative for at least 12 months. Respecting the phraseology employed in the notes to the 1988 financial statements that the advances were being "repaid" on an agreed basis, he initially averred that he did not distinguish between "repaid" and “forgiven” because to him they were the same thing. The following interchange on cross-examination is pertinent (at T. 38 I. 1 to T. 39 1.22):

Q. Well, my question is insofar as note 3 of the 1988 financial statements, insofar as the explanation there applies to your so-called advances or loans, that it wouldn't be correct to say that those amounts are being repaid on an agreed basis because, by agreement dated January 1988, those amounts are being forgiven?

A. Yes.

Q. You would agree with me?

A. I agree with you.

Q. Now, is it within your understanding that an asset, like a collectible loan owned by a company, it is an asset of that company? Is that within your understanding?

A. Yes.

Q. And I guess you would accept then that any agreement on the part of the company to forgive a collectible loan would, in fact, restrict the value of that company's assets to that degree?

A. Yes.

Q. And I take it that you would agree that an agreement to forgive somewhere in the neighbourhood of a $200,000 debt would restrict the value of the company’s assets to the tune of about $200,000?

A. Yes.

Q. But that amount, and that fact, isn't covered in the 1988 financial statements, is it?

A. I'm sorry, could you rephrase that question?

Q. Show me, if you can, where in the 1988 financial statements there is a reference to the forgiveness of about $200,000 in debt that jeopardizes or undermines the company's assets to the tune of about $200,000?

And, for the record, when I use the figure $200,000, Mr. Meredith, I am referring roughly to the two amounts contemplated in the forgiveness agreement, so-called forgiveness agreement, entered into between the company and you, and Mr. Pellegrin, which was reproduced at Tab 12 of the grey book.

A. Yes.

Q. Where does that appear in the 1988 financial statements?

A. If I understand your question, you're saying where does the — do the 1988 financial statements reflect a devaluation of the company as a consequence of the forgiveness of those loans?

Q. That's correct.

A. They don't.

and again (at T. 44 I. 13 to T. 45 I. 9):

Q. Well, why didn't they forgive the debt in one year? Why didn't they do it right there in 1988?

A. I don't know.

Q. Well, wouldn't one of the reasons be that to include $110,000 in your income in one fell swoop would have cost you a lot of money in income taxes that year?

A. Yes.

Q. And that by spreading it out over a period of four years it would spread out the tax burden over, at least, that period?

A. Yes.

Q. And, of course, in that January 1988 agreement there's no reference to any interest that either you or Mr. Pellegrin had to pay on the indebtedness of about $210,000.

A. That's correct.

Q. How was it in the best interests of the company to forgive a $200,000 loan?

A. Because there was — Arv Pellegrin was leaving the company and it wasn't in the — in anyone's best interest to have these outstanding debts continued.

The company’s reported net income and current assets for its respective taxation years (rounded out) was:

The appellant maintained adamantly that the forgiveness of the $210,360 advances for both himself and Mr. Pellegrin was neither a significant event nor of any impact whatsoever on either the value or financial Tite of the company notwithstanding that they represented over 50 per cent of the company's assets at that time. He conceded there were no corporate resolutions describing or establishing the nature or characterization of the advances, that no promissory notes had been executed by himself or Mr. Pellegrin, that collection proceedings by the company against them “would not happen" and that the advances were interest free. No deemed interest benefit amount in accordance with section 80.4 of the Act respecting these purported loans had been included in his reported income, the explanation advanced being that he was unaware of this provision. However he confirmed that a chartered accountant was retained and had prepared both the company’s financial statements as well as his own personal returns based on the information provided.

The appellant’s reported income was $31,075 for 1986, $73,900 for 1987 and $221,608 for 1988. He maintained he could not afford to make any payments on his advances and confirmed his awareness that the company was reassessed for its 1986, 1987 and 1988 taxation years in a similar view whereby identical amounts were deducted from its income for those years by the Minister on the premise they were advances on account of future earnings. The company objected and the assessments were confirmed. No formal appeal was launched for the reason that there is no jurisdictional authority in the Court to increase a tax liability.

Mr. Pellegrin testified that he was a long-term friend of the appellant's and that in 1985 they became co-managers of the company. He too was under a noncompetition clause and confirmed his bankruptcy situation was like the appellant's. When he approached the appellant during the early fall of 1987 concerning his desire to leave the company, he said he then addressed the matter of the unpaid advances because he knew neither of them had that kind of money to repay these amounts and that they then agreed they should be forgiven. Accounting advice was received. As he understood it, the forgiveness would be a taxable benefit to each and therefore a formal agreement was to be drawn up with a "repayment" schedule being implemented even though they were not actually paying the moneys back to the company. He said he wanted a clean break and that the sale price of his shares to the appellant would have been more than $75,000 if the $210,360 in advances had remained outstanding.

Mr. Pellegrin confirmed the commission arrangement as described by the appellant, that he too was unable to effectively survive on his commission income, that he had no bank accounts and that if additional moneys were needed he too would just “borrow the money from the company". In particular, the testimony as to the nature of the withdrawals was (T. 88 1.14 to 23):

A.. . . they were loans. They were to be repaid when things improved. And, effectively, we would obviously share 50-50 in any repayment or, if they were repaid in a lump sum, for example, I was protected in that respect as well. [T. 75 I. 25 to T. 76 I. 4]

Q. Now, I take it you heard Mr. Meredith give his evidence with respect to the fact, first, that there were no promissory notes, no directors' minutes of meeting, no resolutions, no terms of repayment, no interest, and no paperwork with respect to the alleged loan. Is that correct?

A. That's correct.

Q. And you would agree with what he said on those issues?

A. Yes.

He, like the appellant, believed the words used in the 1986 and 1987 financial statements "net advances receivable from directors" meant that they had borrowed the money and that the company was owed those moneys. He confirmed his advances had also always exceeded his commission earnings, that neither had the financial resources to repay it at the time he wanted out of the company, and that they both were looking for the most expeditious way of his leaving the company with a clean break.

Unlike the appellant, Mr. Pellegrin did not appeal his reassessment respecting the inclusion of the advances into his income for the 1986 and 1987 taxation years. His reasons were that the mathematical difference in the tax costs when added to the legal fees made it uneconomical to fight the reassessments, and that in any event he simply wanted peace of mind. He too had not included a deemed interest benefit respecting the purported loans in his reported income for 1986 or 1987 pursuant to section 80.4 of the Act.

Positions of the parties

Counsel for the appellant submitted that the oral and documentary evidence, taken as a whole, substantiates the characterization of the advances as being in the nature of loans and not income from employment. The company's financial statements had reflected the amounts as a receivable for 1986 and 1987 and as a loan for 1988 which the appellant believed were really the same thing. The advances here were loans and were acknowledged as such by the written loan forgiveness agreement itself. All the documents produced were drawn up in the normal course of events and not in response to or after the inquiries of the Minister. Additionally, Mr. Pellegrin’s concerns occasioned by his departure from the company as to share value and debt repayment confirms that an obligation to repay had existed at all times material for both individuals.

The evidence in its totality serves to show that the company, the appellant and Mr. Pellegrin had all acted in accordance with the existence of a debt or loan which was subsequently forgiven as then being in the best interest of the company.

The advances to the appellant and Mr. Pellegrin were made qua employees to meet their personal obligations which, at year end, were calculated and paid by means of set-off of their earned commissions, the excess amount unpaid being formally accounted for as a loan. The failure to evidence the situation by means of promissory notes or corporate resolutions is not fatal. Rather, informal dealings such as happened here are more the norm in small, closely held companies. The issue and matter is one of fact, and the appellant has met his onus in this respect.

Authorities noted: McClain Industries of Canada, Inc. v. The Queen, [1978] C.T.C. 511, 78 D.T.C. 6356 (F.C.T.D.) and Brum v. M.N.R., [1980] C.T.C. 2651, 80 D.T.C. 1607 (T.R.B.).

Counsel for the respondent urged that the factual situation here encompassed a tax deferral arrangement constituting retroactive or retrospective tax planning in that the evidence fully supported the Minister’s factual assumptions set out in paragraph 6(b) of the reply to notice of appeal that the appellant “was in a position to control the company, and together with other shareholders, was in a position to advance commissions to himself at will” which, when taken together with the want of appropriate corroborative documentation, no repayment or collection efforts, continuing interest-free debit balances, dealings in the advance accounts like a private bank resource, failure to report an interest benefit, and the oral testimony being principally self-serving and of questionable credibility, all collectively lead to the conclusion that the amounts in question were “advances on account of future earnings” as assessed.

The loan forgiveness agreement was no more than a self-serving post facto document with little weight in the determination of true nature of the advances. Adverse inferences may Pe drawn from the absence of the accountant who was not called to testify. His reconciliation working papers (tab 11 of Exhibit 1) were drawn long after the events and the change of wording in the financial statements from "net advances receivable from directors" as shown in 1986 and 1987 to that of “loans to the directors. . .” in 1988 suggest that the advances were not seen to be loans until the early part of 1989 when the 1988 year end statements were being done which was long after these alleged loans were purportedly forgiven.

The appellant’s credibility is questionable in view of substantial factual inaccuracies, misstatements and omissions concerning the true state of affairs in the share sale agreement wherein the company represented it had not waived or surrendered any right of material value, warranted that all material transactions had been promptly and properly recorded or filed in or with its respective books or records and omitted any disclosure of the purported loan forgiveness agreement. The evidence here falls short of establishing the relationship between the company and the appellant as that of lender and borrower. The advances were made on account of future earnings which are income pursuant to subsection 5(1) of the Act.

Authorities noted: Park v. M.N.R. (1950), 1 Tax A.B.C. 391, 50 D.T.C. 162, Ferszt v. M.N.R., [1978] C.T.C. 2860, 78 D.T.C. 1648 (T.R.B.), Laberge v. M.N.R. (1965), 38 Tax A.B.C. 361, 65 D.T.C. 424, Randall v. M.N.R., [1987] 2 C.T.C. 2265, 87 D.T.C. 553 (T.C.C.), Rose v. M.N.R., [1973] CTC 74, 73 D.T.C. 5083 (F.C.A.), Taylor v. M.N.R., [1987] 2 C.T.C. 2178, 87 D.T.C. 475 (T.C.C.), The Queen v. Neudorf, [1975] C.T.C. 192, 75 D.T.C. 5213 (F.C.T.D.), and Bomag (Canada) Ltd. v. The Queen, [1984] C.T.C. 378, 84 D.T.C. 6363 (F.C.A.).

Analysis

The resolution of the issue in this case lies within its own facts. The jurisprudence noted by counsel are of limited assistance essentially because they each turn on their own particular facts and issues. For example there were fixed salary arrangements in the cases of McClain Industries, Park, Laberge and Randall, all supra, to which legal entitlement, for one reason or another, had been postponed, deferred or advanced and therefore timing was the essential substantive issue. While this was not the situation in the Ferszt case, supra, the reasons for judgment are devoid of any meaningful analysis supporting the Board’s conclusion that the taxpayer's commission advances amounted to an income receipt.

In Brum, supra, the taxpayer regularly withdrew funds for personal needs from the corporation which he controlled which amounts were entered into his shareholder's loan account. After corporate year-end when profitability had been determined, it would set up a bonus and credit that amount to an accrued salary payable account. The accounting evidence established that the accrued salary payable would be paid only if fhe corporation had cash available. The Court determined that the entry therein was merely an expression of corporate expectation to pay if or when cash became available and that (at page 2652 (D.T.C. 1608)):

An examination of Exhibit R-1, the accrued wages account, and Exhibit A-2, the shareholder’s loan account, indicates that the company must always have found enough cash exactly one year after the making of each accrued salary payable entry. The amounts credited to accrued salary payable each June 30 were debited one year later and transferred to the shareholder's loan account.

The Court further determined this was the taxpayer's entire compensation and that there was no agreement for payment of any predetermined or basic salary. The timing of the receipt of that income was the substantive issue for each of the years under appeal as the assessment had been made on the basis (at page 2652 (D.T.C. 1608)):

. . . that the amounts in fact withdrawn by the appellant through the shareholder's loan account in a calendar year were income for that year to the extent that, at the time of withdrawal, there were accrued wages “payable” by the company to the appellant.

Given all of the circumstances of the case, including the absence of corporate minutes authorizing loans (which the taxpayer said these were), no promissory notes, no repayment arrangements nor any interest to be charged, the Court determined (at page 2653 (D.T.C. 1609)):

The company did not owe the appellant anything in respect of entries made at the previous fiscal year-end in the accrued salary payable account. Thus. . . the withdrawals could only have been advances and not payments of salary. . . .

. . . What was received here was borrowed money, not salary.

The Brum case, supra, is instructive in that the Court was not deterred by the lack of written documentation evidencing the debt emanating from the taxpayer or the corporation at the time and from time to time as the advances were made. The documentation that was on hand was noted (at page 2653 (D.T.C. 1609)) to be “useful only to the extent that they record or reflect reality” and that they do not create reality. Counsel for the respondent urged that since the real issue in Brum was one of timing, its impact should be so confined. I disagree. The timing matter was resolvable only after characterization of the advances had been determined.

Subsection 5(1) of the Act provides that ‘’a taxpayer’s income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by him in the year". The assessment underlying this appeal was predicated on the amounts received being characterized in the nature of “advances on account of future income". That phrase does not appear in subsection 5(1) of the Act and is, in my opinion, itself replete with ambiguity.

The Shorter Oxford English Dictionary defines "advance" thusly, inter alia:

Advance: Il. To move forward in time. 1. To make earlier. 2. To pay before due; and hence, to pay or lend on security of future reimbursement. . . . 3. Payment in anticipation, or on security; hence, a loan.

In Black's Law Dictionary (6th ed.) the following appears:

Advance: To move something forward in position, time or place. To pay money or render other value before it is due; . . .to loan; . . .to pay money before it is due; to furnish money for a specific purpose understood between the parties, the money or sum equivalent to be returned; to furnish money or goods for others in expectation of reimbursement.

Money or commodities furnished on credit. A loan, or gift or money advanced to be repaid conditionally; may be equivalent to "pay". See also "Advances".

Advances: Moneys paid before or in advance of the proper time of payment; money or commodities furnished on credit; a loan or gift, or money advanced to be repaid conditionally. . . .

Where there is no measurable degree of certainty concerning the earning and receipt of the future income, the advances made may indeed be more accurately characterized as a loan. For the advances here to be considered income receipts, the Court must be able to find that under and by virtue of his contract of employment the appellant was entitled to commission based income and to advances on possible future earnings from time to time repayable solely out of that source which is to say that the future income if earned was to be the source and security for repayment with no liability to repay if it proved to be inadequate. If the latter represented the true situation then the recipient would enjoy receipt of these advances as a form of wages, salary or other remuneration within the meaning of subsection 5(1) of the Act.

It seems to me that if a commissioned salesperson may be expected to earn commission income in the future, and to help out in the meantime the employer pays advances in anticipation that sale events will happen, those amounts may appropriately be treated as short term loans. This was noted to be an accurate description of that kind of situation in Associated Investors of Canada Ltd. v. M.N.R., [1967] C.T.C. 138, 67 D.T.C. 5096 (Ex. Ct.) at pages 145-46 (D.T.C. 5100). In my view it is just as easy as not to say of an advance received made by an employee that it may be had as a loan accompanied by an implied understanding that if the future commission sales do not occur then it must otherwise be repaid

The financial statements for 1986 and 1987 do reflect an indebtedness by the appellant to the company notwithstanding the ambiguous nomenclature employed of "advances receivable". The loan forgiveness agreement has manifested that reality. That the appellant and Mr. Pellegrin occupied the position of being able to call the advances anything they wanted qua the company as employer, and qua themselves as employees, merely attracts evidentiary concerns.

With respect to the appellant's testimony, while one may question or disagree with his beliefs that advances necessarily meant loans, that loan forgiveness was a form of repayments and that the loan forgiveness had no major impact on the company's affairs, they do not necessarily, in my view, mandate wholesale dis- creditation of his oral testimony. In small closely held companies informality is the norm which, inevitably in tax cases, imposes a heavy evidentiary burden of proof and there is little doubt but that the appellant is the author of his own present difficulties in this respect. However, the fact that there may have been opportunity here to attempt to alter, post facto, the nature of the advances does not necessarily mean that is what had happened.

I was impressed by Mr. Pellegrin’s testimony as a whole, and I accept as credible his belief, ab initio, that the subject advances were loans to be repaid at a time they were able to. Of particular note was his awareness that he felt he was well protected against any of the appellant's possible withdrawal excesses because they were sharing earned commissions equally which firstly had to be fully utilized through set off against advances previously made to either, and further that it was he who had raised the whole matter when communicating an early desire to leave the company because he had always believed them to be personal liabilities.

The non-arm's length relationship between the company and the appellant presented nuances not normally found in third party commercial agreements between a traditional lender and borrower. Nonetheless, the situation here in sum and substance was that the appellant’s receipt of the advances rendered him indebted to the company.

I believe the Minister’s auditor was justifiably suspicious of the whole matter, particularly because the 1988 financial statements had misrepresented the advances as being repaid on an agreed basis when in fact they were being forgiven on that basis. However, the full impact arising out of any negative inferences that may be drawn therefrom is diminished by the appellant’s reporting of the amount forgiven in 1988 into his income for that year. The inconsistency was disclosed for all to see.

Counsel for the respondent had opined the appellant was attempting an unacceptable tax deferral scheme whereby annual remuneration income was purportedly converted into loans, the fiscal consequences of which were in turn to be deferred over a forgiveness period of some five years. With respect to the first matter, I have already found that the advances were loans and as to the second, any perceived unpalatable fiscal deferral opportunities is for Parliament to cure and not the courts.

At the Court's invitation, submissions were advanced by both counsel respecting a possible subsidiary issue as to whether the nature of the advances here encompassed the requisite quality of income in the hands of the appellant so as to be taxable as income from an office or employment. As the Court has determined on the evidence that the advances were in the nature of loans, the resolution of this issue is no longer imperative.

However if the determination had been that the advances were not loans, and given that the situation here concerned an overriding employer/employee relationship (no issue whatever being raised respecting the appellant's shareholder status), the Court's finding would be that the advances encompassed the requisite quality of income characteristics to the appellant so as to be taxable in his hands in the year of receipt pursuant to subsection 5(1) of the Act.

In Kenneth B.S. Robertson Ltd. v. M.N.R., [1944] C.T.C. 75, 2 D.T.C. 655 (Ex. Ct.), Thorson, J. identified the requirements at page 91 (D.T.C. 661) thusly:

Is his right to it absolute and under no restriction, contractual or otherwise, as to its disposition, use or enjoyment? To put it another way, can an amount in a taxpayer's hands be regarded as an item of profit or gain from his business, as long as he holds it subject to specific and unfulfilled conditions and his right to retain it and apply it to his own use has not yet accrued, and may never accrue?

If the advances were not loans, the appellant's rights to their disposition, use or enjoyment was absolute, under no restrictions and unfettered because on the facts of the case as presented his liability to repay them inferentially rested on future commission income in fact being earned, such liability being crystallized only by way of set off. Expressed another way, the evidence here is supportive of a finding that the contractual relationship included an implied term that the liability to repay was contingent on future earnings because of the mutual understanding that repayment would be made when the appellant (and Mr. Pellegrin) were in a position to do so. In this sense the liability would have been merely executory, and thus the amounts received as advances were utilizable by the appellant within the Kenneth Robertson Ltd. principles aforenoted.

Counsels’ efforts in this respect were laudable, however upon analysis of the case law submitted in support of their respective positions on the applicability of this principle, it became apparent that each authority was essentially factually driven. Authorities noted included Brown v. Helvering (1934), 291 U.S. 193; Dominion Taxicab Association v. M.N.R., [1954] S.C.R. 82, [1954] C.T.C. 34, 54 D.T.C. 1020; M.N.R. v. Atlantic Engine Rebuilders Ltd., [1967] S.C.R. 477, [1967] C.T.C. 230, 67 D.T.C. 5155; The Queen v. Poynton, [1972] C.T.C. 411, 72 D.T.C. 6329 (Ont. S.C.); Buckman v. M.N.R., [1991] 2 C.T.C. 2608, 91 D.T.C. 1249 (T.C.C.); and M.N.R. v. St. Catharines Flying Training School Ltd., [1955] S.C.R. 738, [1955] C.T.C. 185, 55 D.T.C. 1145.

Conclusion

Having found on the evidence that the subject amounts advanced to the appellant were loans, the appeals for his 1986 and 1987 taxation years are allowed and the matter referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that amounts of $56,246.00 for 1986, and $41,983.00 for 1987, respectively, were not includable into income pursuant to subsection 5(1) and section 3 of the Act.

Respecting the 1988 taxation year, the Court cannot deliver a judgment requiring the Minister of National Revenue to reconsider a reassessment resulting in a higher tax liability to the appellant; c.f. Harris v. M.N.R., [1964] C.T.C. 562, 64 D.T.C. 5332 (Ex. Ct.) at page 571 (D.T.C. 5337), and Cohen v. M.N.R., [1988] 2 C.T.C. 2021, 88 D.T.C. 1404 (T.C.C.) at page 2023 (D.T.C. 1406). The 1988 appeal is dismissed.

The appellant is entitled to his costs respecting the 1986 and 1987 appeals on a party-to-party basis.

Appeals allowed in part.