Norris v. The Queen, 94 DTC 1478, [1994] 1 CTC 2495 (TCC)

Brulé, J.T.C.C.:— This is an appeal wherein the Minister of National Revenue increased the appellant’s income for the 1986 taxation year by the amount of $140,437, being $135,000 as an “Employee Loan Forgiven” and $5,437 as a "Deemed Interest Benefit". The appellant appeals this inclusion.

Facts

The appellant was employed by Imperial Oil Ltd. as a member of senior management. He was encouraged by Robillard, the owner of Sunys International Inc. ("Sunys" and later “Romar’’), to take an early retirement, become a consultant and to help Robillard run his company.

A contract was entered into between Sunys and Petroleum Marketing Corporation ("PMC"), which was the name used for the appellant’s corporation, 482997 Ontario Inc., a corporation incorporated by the appellant to provide services to Sunys, for the sum of $160,000 per year for five years and an immediate payment of $200,000. This contract included the following provisions which appear relevant to the case at bar:

2. Petroleum Marketing shall perform the function of a general manager of the company's petroleum retail activities on a day to day basis. Without limiting the generality of the foregoing the services to be provided to the company by Petroleum Marketing shall be:

(a) After prior consultation with the chairman of the board of directors of the company to employ and dismiss all employees of the company save and except all officers of the company;

(b) After prior consultation with the chairman of the board of directors of the company to retain and dismiss all retail dealers retained by the company to operate retail gasoline outlets on behalf of the company;

(c) To place and market the company's products;

(d) To make the usual contracts necessary to carry on the business of the company in the ordinary course thereof including ordering of goods required for the business of the company;

(e) To report monthly to the chairman of the board of directors of the company and to report quarterly to the board of directors of the company on the affairs of the company.

3. The said Petroleum Marketing shall not have authority to:

(a) Commit the company to expenditure of funds in excess of $20,000 without the prior consent of the company's board of directors;

(b) Commit the company to the lease or purchase of any sites for the establishment of a retail gasoline bar or outlet which has not had the prior written approval of the chairman of the board of directors of the company;

(c) Commit the company to any supply contracts for the supply of gasoline products or motor fuels without the consent in writing of the chairman of the board of directors of the company.

5. Petroleum Marketing shall carry out all lawful orders given to them by the board of directors of the company and they shall carry out and obey all lawful by-laws of the company which have been communicated to Petroleum Marketing.

6. In the performance of its duties under the terms of the within agreement Petroleum Marketing shall supply a minimum of one full time senior knowledgeable employee to the company, or in the event that several employees are supplied the services of such employees shall be at least equivalent to such one senior knowledgeable employee. .. . .

The agreement also provided for the use of a car by the employees of PMC and to reimburse PMC for all expenses incurred in the operation of the car and all other reasonable and necessary expenses incurred by PMC in the performance of its duties for and in connection with Sunys' business. It must be noted that Sunys issued a T-4 slip to the taxpayer for the use of the car and the taxpayer included the “employee benefit” in income in the year under appeal, instead of including it in the income payment to the appellant's company, PMC. The agreement provided for restrictions on the future involvement of PMC, its shareholders, officers, and directors, to act as an agent or employee of other retail gasoline sales businesses within limited areas of Sunys.

The taxpayer found himself in financial difficulty as a result of marital problems, in 1983, at a time that was crucial to the business of Sunys (now Romar). There were negotiations to sell the assets of Sunys and Robillard wanted the appellant "to stay interested and do a good job”. As Robillard needed the appellant before any sale was completed ne arranged for Sunys to advance the appellant $135,000 as a non-interest bearing loan.

In 1983, Sunys had sold most of its service stations, but continued to fulfil its obligation under the contract, with the appellant performing some services. In 1986 Romar called the loan, the appellant denied having the ability to repay and Romar forgave the amount and deducted it for tax purposes as a bad debt. The calling of the loan was done at a time when Sunys was still under obligation to PMC (there was still five months left under the contract and still approximately $67,000 to be paid pursuant to the contract), but no repayment terms were asked for at that time.

In evidence it was stated that the appellant and Robillard were not personal friends and therefore the forgiveness was not motivated by friendship.

Issue

The sole issue involved is whether or not the amount under appeal was a bona fide loan, employment income or a gift.

Appellant's position

The appellant relied on the following arguments in support of his position:

1. The forgiveness of the loan by Sunys was not a benefit to the appellant under paragraph 6(1)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") for the following reasons:

(a) the appellant was not an employee of Sunys, and therefore could not have received a benefit in respect of employment with Sunys;

(b) the appellant was an employee of his management company, but paragraph 6(1)(a) does not require the appellant to include in his employment income a benefit received by him by virtue of services provided by his management company;

(c) the forgiveness of the loan had no relationship or nexus to any employment relationship.

2. The forgiveness of the loan cannot be regarded as having conferred a benefit on the appellant for the purposes of subsection 245(2) of the Act.

3. The forgiveness of the loan cannot be regarded as income of the appellant from a source other than an office or employment.

In support of the above certain cases were cited to the Court, some of which are discussed below.

Counsel for the appellant said that there are three tests that must be met if paragraph 6(1 )(a) of the Act is to apply:

1. there must be a benefit,

2. there must be an office or employment, and

3. the benefit must be received or enjoyed “in respect of, in the course of, or by virtue of that office or employment".

It was said that the third test is a requirement that a relationship or nexus must exist between the first two.

Paragraph 6(1 )(a) of the Act read as follows in 1986:

6(1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(a) the value of board, lodging and other benefits of any kind whatever received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment. . . .

The second test of employment in paragraph 6(1 )(a) is not met. There is no argument that the appellant was not an employee of Sunys.

In support of the position that the appellant was not an employee of Sunys the Court was referred to the cases of M.N.R. v. Cameron, [1974] S.C.R. 1062, [1972] C.T.C. 380, 72 D.T.C. 6325, and The Queen v. Parsons, [1984] C.T.C. 354, 84

D. T.C. 6447 (F.C.A.). These cases supported the position that the Court could not ignore PMC as a separate corporate entity and deeming the appellant to be an employee of Sunys.

Counsel suggested that the distinction between the wording of paragraph 6(1 )(a) and subsection 80.4(1) of the Act must be noted. The relevant part of subsection 80.4(1), as it read in 1986, is as follows:

Where a person or partnership received a loan or otherwise incurred a debt by virtue of the office or employment or intended office or employment of an individual or by virtue of the services performed or to be performed by a corporation carrying on a personal services business (within the meaning assigned by paragraph 125(7)(d)), the individual or corporation, as the case may be, shall be deemed to have received a benefit in a taxation year. . . .

Counsel also maintained that Sunys did not confer a benefit on the appellant in accordance with the provisions of section 245 of the Act. At the same time the forgiveness of the loan can only be income from an office or employment and not from any other source as is provided in paragraph 3(a) of the Act.

Respondent's position

Counsel for the respondent took the position that the forgiveness of the loan in 1986 constituted a benefit under paragraph 3(a) and paragraph 6(1 )(a) of the Act, in relation to the numbered company (carrying on as PMC). He quoted to the Court, among others, the cases of Waffle v. M.N.R., [1968] C.T.C. 572, 69 D.T.C. 5007 (Ex. Ct.) and Philp v. M.N.R., [1970] C.T.C. 330, 70 D.T.C. 6237 (Ex. Ct.), both of which are mentioned below.

The question as to the benefit conferred on the appellant by the forgiveness of the loan was directed to the loan being made in a business context as opposed to a personal context. Authority for this is found in The Queen v. Savage, [1983] 2 S.C.R. 428, [1983] C.T.C. 393, 83 D.T.C. 5409, a decision of the Supreme Court of Canada. The Court also found that paragraph 6(1 )(a) of the Act to be of extreme breadth.

In evidence Robillard said that he needed the services of the appellant at the time the loan was made. The loan was granted to ease the appellant's financial burden caused by his personal problems. Further suggesting that the loan was for business reasons there is the evidence found in Exhibit R-7 given to the Court by Romar in reply to an Audit Query Sheet—T-2 Return.

While the appellant was not an employee of Sunys he presented himself to the public as if he were. He worked from Sunys' office, he had a vehicle provided to nim by Sunys and he was carrying out the duties of his numbered company in line with the agreement with Sunys. He was really carrying out the duties of president of Sunys.

As to subsection 80.4(1) of the Act, Counsel said that the provision dealt not with the forgiveness of the loan but with low interest loans.

Analysis

The appellant’s principal argument was that he was not an employee of Sunys and this is borne out by the contract between Sunys and PMC. The courts, however, have held that a person need not be the employee of the payee in order to receive a benefit from employment.

In Waffle, supra, at page 576 (D.T.C. 5010), Cattanach, J., said:

I do not accede to the proposition that it follows from the fact that the person paying the cost is not the employer of the recipient, that such payment does not accrue to the recipient in respect of, in the course of, or by virtue of his office or employment.

Cattanach, J., then referred to Goldman v. M.N.R., [1953] 1 S.C.R. 211, [1953] C.T.C. 95, 53 D.T.C. 1096, wherein the Supreme Court of Canada held that the payee of a sum which eventually went to the appellant, in that case, was only a "conduit pipe" between the company and the appellant Goldman.

Paragraph 6(1 )(a) requires an employee to include in his income the ”. . . value of board, lodging and other benefits of any kind whatever received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment. . .". The first question to be determined in each case is the character of a payment to an employee: is it made to him as an employee, or in his capacity as an employee, or in his capacity as a person? To put the question another way, is the payment made to the person in his capacity as a person or is it a benefit conferred on him by virtue of his employment? If the payment is made in his Capacity as an employee, was the payment an income receipt or a loan, such that there is a debtor-creditor relationship? Such was held by the Supreme Court of Canada in M.N.R. v. McCool Ltd., [1950] S.C.R. 80, [1949] C.T.C. 395, 4 D.T.C. 700.

The appellant did not argue that the payment was initially a gift but submits that the payment was a loan which, in 1986, was converted into a gift by virtue of Robillard’s decision to “write-off the bad debt". In order for a loan to exist, the intention that the money will be repaid should exist at the time the loan is made, i.e. there should be evidence of the bona fide of the loan.

According to the evidence at trial there was no loan documentation; the loan was interest-free, and at no time were any arrangements made for repayment. Both the appellant and Robillard were businessmen who had previously been conscious enough to put the contract between PMC and Sunys in writing. It seems odd that a loan of such magnitude did not warrant a written agreement.

The issue seems to turn on whether the benefit received by the taxpayer was by virtue of his employment. The evidence shows that the reason the loan was made to the taxpayer initially was so that the taxpayer would be able to clear his mind of his financial worries, and focus his attention on the business transaction that was at hand for Romar. That transaction was a large one, by virtue of which Romar stood to make a large sum of money.

Reference should be made to the Supreme Court of Canada decision in Savage, supra, wherein the Court found paragraph 6(1 )(a) of the Act to be of extreme breadth.

During the course of the appellant’s argument, a lot of emphasis was put on subsection 80.4(1) of the Act. Paragraph 6(1)(a) of the Act, according to the appellant, is of no application to him since he did not receive a benefit “in respect of, in the course of, or by virtue of an office or employment".

In my opinion, subsection 80.4(1) does not apply to the case under review for two reasons. Firstly, the loan that previously existed was extinguished by its forgiveness in 1986. Secondly, the mechanism under the Act purports that any amount of a loan that is forgiven is included in income under section 6 and any loan bearing an interest rate lower than the prescribed rate is a benefit under subsection 80.4(1). From a reading of subsection 80.4(1) and from the analysis of its purpose, it is clear that this subsection only applies to benefits received from interest-free or low interest-bearing loans.

In the case under review, although a loan existed at one point in time, it no longer existed when the loan was forgiven in 1986. When the loan was forgiven, the appellant was no longer liable to pay back the sum of money borrowed. In the absence of a loan, it is my opinion that subsection 80.4(1) does not apply.

I will now deal with the question of whether paragraph 6(1)(a) applies to the appellant. In essence, the appellant argues that the forgiveness of the loan is not a benefit received “in respect of, in the course of, or by virtue of an office or employment". He argues that there is no nexus between his employment and Sunys since he is an employee of his management company and not of Sunys.

Case law has given the application of paragraph 6(1 )(a) a wide-reaching scope. It is noteworthy that the phrase "in respect of" has been given a very broad definition. The Supreme Court in Nowegijick v. The Queen, [1983] 1 S.C.R. 29, [1983] C.T.C. 20, 83 D.T.C. 5041, at page 39 (C.T.C. 25 (D.T.C. 5045), although not an employment benefit case, stated the following on the scope of the term:

The words "in respect of" are, in my opinion, words of the widest possible scope. They import such meanings as “in relation to”, “with reference to" or “in connection with". The phrase “in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters.

The fact that the benefit is conferred not by the employer but by a third party does not change the characteristic of an amount received as a benefit. The Nowegijick, supra, case words “with reference" have application here. Therefore a benefit received by virtue of employment is taxable regardless of the source of the benefit. Authority for this is found in the cases of Waffle and Goldman, both supra.

In Waffle the Court held that the mere fact that the payor is not the employer of the recipient, does not preclude such payment accruing to the recipient "in respect of, in the course of, or by virtue of his office or employment".

Similarly in Philp, supra, Thurlow, J., referring to Waffle wherein it was held that there was a benefit within the meaning of paragraph 5(1)(a) of the Act (now 6(1 )(a)) said at page 339 (D.T.C. 6243): that it ”. . . was, I think, clearly something of value in an economic sense and was so regarded by the Court".

Conclusion

Pursuant to case law, the amount forgiven should be included in the appellant's income regardless of the source of the benefit. In addition, in light of the far- reaching definition given to the term "in respect of", it can be said that the appellant would not have benefited from a loan granted by Sunys had he not been an employee of his own management company.

The forgiveness of the loan must be seen at least as an indirect benefit of employment by virtue of section 6 of the Act and the jurisprudence arising out of the case law. It is not necessary that the appellant be found to be an employee of Sunys/Romar in order to have received a benefit from employment under the Act.

The appeal is dismissed with costs to the respondent.

Appeal dismissed.