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.
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