Christie, A.C.J.T.C.: —The notice of appeal and the reply thereto regarding this litigation relate to two issues. First is the disallowance by the respondent of a portion of the reserve claimed by the appellant under subparagraph 20(1)(n)(i) of the Income Tax Act ("the Act"). Second is the addition by the respondent to the income of the appellant in the years under review of amounts of interest said to be deemed to have been received by it under subsection 17(1) of the Act.
At the outset of the hearing it was agreed that the presentation of evidence regarding the first issue would be put over to another day because there was a good prospect that it could be resolved by the parties. This occurred and a consent to judgment signed by counsel for the parties on this issue has been received by the Registrar. Judgment shall issue accord- ingly.
The second issue relates to the appellant's 1983, 1984 and 1985 taxation years. The amounts added to its income as interest deemed to have been received by it are $51,872, $53,154 and $168,483 respectively. There is no dispute about these amounts.
Subsection 17(1) of the Act provides:
17(1) Where a corporation resident in Canada has loaned money to a non-resident person and the loan has remained outstanding for one year or longer without interest at a reasonable rate having been included in computing the lender's income, interest thereon, computed at a prescribed rate per annum for the taxation year or part of the year during which the loan was outstanding, shall, for the purpose of computing the lender's income, be deemed to have been received by the lender on the last day of each taxation year during all or part of which the loan has been outstanding.
It is the position of the appellant that the amounts alleged to have given rise to the deemed interest just mentioned were not loaned by it to a nonresident person.
The evidence of the only witness to testify, Mr. Bruce S. Simmonds, C.A., Vice-president of Finance for the appellant, is this. The appellant was incorporated in 1950 and has its head office at Pickering, Ontario. It wholesales electronic equipment. The appellant and Dynacharge Canada Inc., also a Canadian corporation, are controlled by the same shareholders. Dynacharge Inc. ("Dynacharge U.S.”), an American corporation is a wholly- owned subsidiary of Dynacharge Canada Inc. The business of Dynacharge Canada Inc. is the importation, packaging and sale of rechargeable batteries and Dynacharge U.S. carried on the same business in the United States. The batteries were manufactured in Japan.
Dynacharge U.S. had been incorporated in the United States basically for the purpose of purchasing some assets of a bankrupt American corporation. It had no financial history and inadequate financial resources to establish sufficient bank credit. On the other hand the postion of the appellant was just the contrary. In the light of the interest of the shareholders of the appellant in seeing Dynacharge U.S. prosper, arrangements were made to accommodate Dynacharge U.S. in this manner. When it placed an order for batteries with a Japanese supplier the appellant would obtain the issue of a letter of credit addressed to the supplier that undertook to honour a demand for payment made by that supplier under stipulated conditions and in a specified amount that was the purchase price of the batteries ordered. When the supplier shipped the batteries it would obtain payment under the credit so established.
The amounts paid in respect of the letters of credit were reflected in the 1984 financial statements of the appellant filed with its return of income for that year in this way: in the balance sheet under current assets as "Due from affiliated companies". It was conceded by counsel for the appellant that the amounts indicated opposite that description included the sums paid by the appellant to the issuer of the letters of credit in respect of purchases by Dynacharge U.S. Also note 10 to those financial statements is headed "Related Party Transactions" and those sums are described as being “Due to" the appellant from Dynacharge U.S. and also as "Advances during year" to Dynacharge U.S. All of the financial statements relative to the period under appeal employed the same entries and terminology. Financial statements for Dynacharge U.S. for the period ended June 30, 1984 have this entry on the balance sheet under liabilities pertaining to money paid for the issue of letters of credit: 'Advances from related companies (note 2)". Note 2 reads: 'Advances from related companies are non-interest bearing and have no fixed date of repayment."
The foregoing is the whole of the relevant evidence placed before the Court.
I think, as acknowledged by Mr. Hodgson, that Dynacharge U.S. was indebted to the appellant in respect of the amounts paid by it with reference to the letters of credit. But this does not much advance the solution of the problem because a person may be financially indebted to another without the relationship of lender-borrower existing between them. In Vol. 26 of Corpus Juris Secundum this is said regarding debt at pages 1 and 2:
From the Latin "debere," meaning to owe, "debitum" meaning something owed. It is a word of large import, having several recognized meanings which vary greatly, according to the subject matter and the language in connection with which the word is used. It is a common-law word of technical meaning; but it has no fixed legal meaning, and it does not have a fixed or invariable signification. It takes shades of meaning from the occasion of its use, and color from accompanying use, and it is used in different statutes and constitutions in senses varying from a very restricted to a very general one. The word implies the existence of a debtor, legality of the obligation, the existence of a consideration, and execution or performance by the creditor.
I do not attach particular significance to the use of the word "advances" in the financial statements. Although an advance can be associated with a loan, it can also be a payment made that is to be accounted for later by a beneficiary thereof which is not a loan.
While a number of things can be the subject of a loan, subsection 17(1) is only concerned with money loaned. Definitions of a loan of money are to be found in a number of legal publications, but to my mind this definition in Black's Law Dictionary, 5th (1979) ed. is as useful as any: “Delivery by one party to and receipt by another party of a sum of money upon agreement, express or implied, to repay it with or without interest.” This is not, in my opinion, descriptive of the transactions involving letters of credit that are under consideration in this appeal. In M.N.R. v. T.E. McCool Ltd., [1949] C.T.C. 395; 4 D.T.C. 700 (S.C.C.) Mr. Justice Estey said at page 413 (D.T.C. 708) with reference to the relationship of lender and borrower that: “It is necessary in determining whether that relationship exists to ascertain the true nature and character of the transaction.”
The real substance of what the appellant did was to arrange with the issuer of the letters of credit to make the issuer's credit available to the Japanese suppliers under prescribed conditions and for specified amounts thereby vesting in the suppliers the contractual commitment of the issuer to pay for the goods sold to Dynacharge U.S. upon those conditions being met. There was also a contractual undertaking by the appellant to the issuer of the letters to pay for the amounts expended by it, plus interest and commissions. Finally there was a contractual liability on Dynacharge U.S. to reimburse the appellant for the expenses it incurred in arranging for the credits in favour of the suppliers that made it possible for Dynacharge U.S. to carry on business. I do not regard what was done by the appellant in establishing those credits and the benefits flowing from them to Dynacharge U.S. as constituting the creation of contracts between them whereby the appellant delivered sums of money to Dynacharge U.S. upon agreement by the latter to repay them without interest.
The appeal is allowed with costs.
Appeal allowed.