Lamarre
J.T.C.C.:—
Issue
These
are
appeals
under
the
informal
procedure
from
reassessments
made
by
the
Minister
of
National
Revenue
(hereinafter
the
''Minister")
in
respect
of
the
appellant's
1989
and
1990
taxation
years.
In
reassessing
the
appellant,
the
Minister
added
the
amounts
of
$3,782.18
for
the
year
1989
and
$4,168.12
for
the
year
1990
to
the
appellant's
taxable
income
as
benefits
conferred
on
a
shareholder.
The
Minister
relied
upon
subsections
15(1),
15(9)
and
80.4(2)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
Facts
The
appellant
was
the
sole
witness
at
the
hearing.
He
testified
that
he
owns
100
per
cent
of
the
issued
and
outstanding
shares
of
O’Neil
&
Co.
(the
"company")
of
which
he
is
the
president.
The
board
of
directors
is
composed
of
his
daughter,
a
former
employee
and
a
financial
advisor.
The
appellant’s
ex-spouse,
Mrs.
Mary
O'Neil,
is
a
registered
real
estate
broker
and
was
an
employee
of
the
company
during
the
marriage
and
little
after.
She
was
taking
care
of
the
financial
administration
of
the
company
which
operates
an
insurance
and
real
estate
business.
As
such,
she
had
a
signing
authority
for
the
company.
In
1987
and
1988,
she
borrowed
a
total
of
$30,875
(the
"loan")
from
the
company
on
an
interest-free
demand
basis.
Four
cheques
totalling
the
amount
of
the
loan
dated
respectively
October
1,
1987,
November
4,
1987,
November
9,
1987
and
January
1,
1988
were
issued
from
the
bank
account
of
the
company
and
signed
by
her.
These
cheques
were
filed
as
Exhibit
A-2
with
the
consent
of
counsel
for
respondent.
The
appellant
testified
that
she
used
the
proceeds
of
the
loan
to
invest
in
income
producing
properties
belonging
to
her
and
that
she
used
for
her
sole
benefit.
No
resolution
was
passed
in
the
books
of
the
company
to
approve
the
loan.
The
appellant
simply
said
that
he
was
made
aware
of
the
loan
and
approved
it
as
president
after
the
fact.
By
the
terms
of
a
separation
agreement
dated
April
18,
1988
between
the
appellant
and
his
spouse
which
was
filed
as
Exhibit
R-4,
the
appellant
agreed
inter
alia,
to
the
assumption
of
certain
obligations.
The
relevant
clauses
of
the
separation
agreement
read:
MATRIMONIAL
HOME:
6.
The
parties
acknowledge
that
the
matrimonial
home
is
owned
by
Mary
O'Neil.
7.
The
parties
further
agree
respecting
the
said
matrimonial
home
as
follows:
(a)
Mary
O'Neil
is
to
continue
as
the
sole
owner;
(b)
Mary
O’Neil
is
to
have
exclusive
possession;
(c)
Gerald
O’Neil
upon
execution
of
this
agreement
is
to
become
solely
liable
for
the
payments
and
eventual
discharge
of
the
mortgage
registered
against
the
matrimonial
nome
having
an
approximate
balance
of
$60,000;
(d)
Mary
O’Neil
shall
co-operate
and
upon
request
forthwith
execute
all
documentation
whatsoever
so
as
to
allow
Gerald
O'Neil
from
time
to
time
at
his
sole
discretion
to
register
mortgage
security
as
against
the
title
of
the
matrimonial
home
and
Gerald
O’Neil
shall
be
responsible
for
satisfying
the
requirements
of
the
mortgage
security
and
eventual
discharge
thereof
as
provided
for
hereinafter
in
paragraphs
7(f)
and
(g)
;
(e)
With
respect
to
the
security
referred
to
in
paragraphs
7(c)
and
(d)
herein,
Gerald
O’Neil
shall
indemnify
Mary
O’Neil
forthwith
for
any
claims
made
against
her
including
her
solicitor
and
client
costs
should
Gerald
O’Neil
fail
to
honour
all
or
part
of
his
obligations
relating
to
paragraphs
7(c)
and
(d)
;
(f)
Mary
O’Neil
shall
not
sell,
transfer,
dispose
of
or
otherwise
encumber
the
matrimonial
home
before
May
1,
1993,
and
shall
not
require
Gerald
O’Neil
to
discharge
the
aforesaid
encumbrances
or
their
successors
before
that
date;
(g)
Mary
O’Neil
at
anytime
after
May
1,
1993,
shall
be
at
liberty
to
sell
that
matrimonial
home,
in
an
arm's
length
sale,
and
Gerald
O’Neil
upon
60
days
written
notice
shall
discharge
all
encumbrances,
if
any,
registered
on
the
title
of
the
matrimonial
home
pursuant
to
the
provisions
of
this
agreement.
In
any
event,
Gerald
O'Neil
shall,
no
later
than
May
1,
1998,
discharge
all
encumbrances
registered
on
the
title
of
the
matrimonial
home
pursuant
to
the
provisions
of
this
agreement.
LIABILITIES:
10.
In
addition
to
the
other
liabilities
heretofore
assumed
by
Gerald
O’Neil,
he
agrees
to
assume
the
following
liabilities:
(a)
A
liability
in
the
amount
of
$30,875
owed
by
Mary
O'Neil
to
O’Neil
&
Co.
(b)
Credit
cards
payable
not
to
exceed
a
total
amount
of
$1,500.
The
company
did
not
intervene
in
the
said
separation
agreement.
The
non-audited
financial
statements
of
the
company
for
the
years
ending
September
30,
1988,
September
30,
1989
and
September
30,
1990
were
filed
into
evidence
as
Exhibit
A-1.
A
loan
of
$30,875
is
shown
in
the
balance
sheet
under
“loan
receivable”
with
a
note
to
the
effect
that
this
loan
is
due
from
the
former
spouse
(in
1989
and
1990)
and
from
the
spouse
(in
1988)
of
the
controlling
shareholder
of
the
company.
Such
loan
is
on
a
demand
basis
and
bears
no
specific
rate
of
interest
or
repayment
terms.
According
to
the
appellant,
these
financial
statements
have
been
prepared
by
the
accountant
based
on
the
information
given
by
his
wife
until
her
severance
with
the
company
at
the
end
of
1988
and
after
by
an
employee
who
would
have
replaced
her.
The
appellant
testified
that
he
assumed
the
debt
on
the
loan
as
part
of
the
whole
settlement
with
his
wife.
He
reimbursed
the
loan
to
the
company
in
January
1991.
His
spouse
kept
the
income
producing
properties
that
she
bought
with
the
loan
after
the
separation.
As
a
result
of
clause
10
of
the
separation
agreement,
the
Minister
contends
that
the
company
has
conferred
a
benefit
on
the
appellant
by
virtue
of
his
shareholding
equal
to
the
amount
of
imputed
interest
on
the
loan
pursuant
to
subsection
80.4(2)
of
the
Act.
Appellant's
position
The
appellant
maintains
that
the
alleged
benefit
should
be
taxed
in
his
wife's
hands
as
there
was
never
any
transfer
of
tne
loan
on
the
books
of
the
company
and
the
company
was
not
a
party
to
the
separation
agreement.
Counsel
for
the
appellant
argued
that
the
appellant
did
not
receive
any
benefit
and
if
a
benefit
was
conferred,
it
was
not
conferred
on
the
appellant
in
its
capacity
as
a
shareholder.
Minister's
position
Counsel
for
the
Minister
advanced
a
position
premised
on
the
common-law
principle
of
novation.
Counsel
submits
that
the
appellant’s
assumption
of
the
loan
pursuant
to
the
separation
agreement
has
the
effect
of
extinguishing
the
original
indebtedness
of
the
spouse
and
replacing
it
with
the
indebtedness
of
the
appellant.
The
result
of
this
is
that
the
appellant
is
in
a
position
whereby
subsection
80.4(2)
deems
a
benefit
to
have
been
received
by
him.
Analysis
Subsection
80.4(2)
of
the
"Act"
states:
Where
a
person
(other
than
a
corporation
resident
in
Canada)
or
a
partnership
(other
than
a
partnership
each
member
of
which
is
a
corporation
resident
in
Canada)
was
(a)
a
shareholder
of
a
corporation,
(b)
connected
with
a
shareholder
of
a
corporation,
or
(c)
a
member
of
a
partnership,
or
a
beneficiary
of
a
trust,
that
was
a
shareholder
of
a
corporation,
and
by
virtue
of
such
shareholding
that
person
or
partnership
received
a
loan
from,
or
otherwise
incurred
a
debt
to,
that
corporation,
any
other
corporation
related
thereto
or
a
partnership
of
which
that
corporation
or
any
corporation
related
thereto
was
a
member,
the
person
or
partnership
shall
b*e
deemed
to
have
received
a
benefit
in
a
taxation
year
equal
to
the
amount,
if
any,
by
which
(d)
all
interest
on
all
such
loans
and
debts
computed
at
the
prescribed
rate
on
each
such
loan
and
debt
for
the
period
in
the
year
during
which
it
was
outstanding
exceeds
(e)
the
amount
of
interest
for
the
year
paid
on
all
such
loans
and
debts
not
later
than
30
days
after
the
later
of
the
end
of
the
year
and
December
31,
1982.
[Emphasis
added.]
The
purpose
of
subsection
80.4(2)
is
to
include
in
income
the
benefit
enjoyed
by
a
shareholder
as
a
result
of
interest-free
or
low-interest
loans
or
other
forms
of
indebtedness.
The
benefit
calculated
under
subsection
80.4(2)
is
included
in
income
under
subsection
15(1)
by
virtue
of
subsection
15(9).
It
is
crucial
to
note
that
subsection
80.4(2)
will
apply
only
if
the
loan
or
debt
has
been
received
or
incurred
by
virtue
of
the
shareholding
of
the
shareholder.
Whether
a
loan
or
debt
has
been
received
or
incurred
by
virtue
of
such
shareholding
will
be
a
question
of
fact.
The
submission
of
counsel
for
the
Minister
is
premised
upon
the
common-law
doctrine
of
novation.
Novation
as
a
principle
of
law
has
very
stringent
requirements.
Its
effect
is
to
substitute
for
an
existing
contract
a
new
contract
between
the
same
or
different
parties,
the
consideration
for
which
is
the
mutual
discharge
of
the
old
contract.
To
bring
about
a
novation:
.
.
.
three
things
must
be
established:
first,
the
new
debtor
must
assume
the
complete
liability;
second,
the
creditor
must
accept
the
new
debtor
as
a
principal
debtor,
and
not
merely
as
an
agent
or
guarantor;
third,
the
creditor
must
accept
the
new
contract
in
full
satisfaction
and
substitution
for
the
old
contract;
one
consequence
of
which
is
that
the
origina
debtor
is
discharged,
there
being
no
longer
any
contract
to
which
he
is
a
party,
or
by
which
he
can
be
bound.
Counsel
for
the
respondent
relied
on
the
principle
that
a
promisor
cannot
assign
his
liabilities
under
a
contract
without
the
consent
of
the
promisee;
or,
conversely
a
promisee
cannot
be
compelled,
by
the
promisor
or
by
a
third
party,
to
accept
any
but
the
promisor
as
the
person
liable
to
him
on
the
promise.
In
fact,
both
parties
admit
that
there
was
a
true
and
enforceable
loan
from
the
company
to
Mrs.
O’Neil.
However,
there
is
an
absence
of
evidence
that
the
company
accepted
the
new
debtor
or
that
the
company
accepted
the
new
contract
in
full
and
final
satisfaction
of
the
old.
The
alleged
new
debtor
is
sole
shareholder
of
the
creditor
company,
but
this
relationship
in
itself,
is
insufficient
to
satisfy
the
requirements
for
novation
as
established
above.
A
company
and
its
shareholders
are
separate
legal
entities
(Salomon
v.
Salomon
(1897),
A.C.
22
(H.L.)).
There
must
be
some
evidence
indicating
the
company's
acceptance
of
the
new
arrangement.
I
do
not
accept
the
position
taken
by
counsel
for
respondent
that
the
company
implicitly
agreed
with
the
transfer
of
the
indebtedness.
I
rather
agree
with
counsel
for
the
appellant
that
the
appellant
assumed
the
loan
to
the
company
the
same
way
he
assumed
the
mortgage
payments
on
the
house
without
the
creditor
(Canada
Trust)
being
advised,
and
without
the
spouse
being
discharged
or
released
from
such
indebtedness.
On
the
books
of
the
company
the
primary
debtor
is
the
spouse.
There
are
no
documents
indicating
a
release
from
liability
of
the
spouse.
No
corporate
resolutions
authorizing
or
accepting
the
assignment
of
the
loan
were
presented
in
evidence.
The
company
is
not
a
party
to
the
separation
agreement.
Considering
the
evidence
the
requirements
for
novation
have
not
been
satisfied.
The
appellant,
pursuant
to
the
terms
of
the
separation
agreement,
has
assumed
payment
of
the
loan
by
undertaking
to
make
payments
on
account
of
the
indebtedness
for
the
original
debtor.
In
this
respect
the
appellant
has
not
become
indebted
to
the
company.
He
rather
became
indebted
to
his
ex-spouse.
The
company
did
not
have
any
recourse
against
him.
Even
if
it
had
been
the
case,
the
operation
of
subsection
80.4(2)
is
grounded
upon
the
proposition
that
a
person,
be
it
a
shareholder
or
a
person
connected
to
a
shareholder,
has
received
a
loan
or
has
become
indebted
to
a
company
by
virtue
of
such
shareholding.
In
this
case
the
indebtedness
of
the
appellant
was
by
virtue
of
a
separation
agreement,
not
his
shareholding.
I
therefore
conclude
that
subsection
80.4(2)
is
inapplicable
to
the
current
facts,
and
that
there
is
no
deemed
benefit.
It
has
also
been
suggested
that
this
transaction
is
akin
to
an
appropriation
of
corporate
funds,
in
that
the
result
is
the
same
as
if
the
appellant
borrowed
funds
from
the
company
and
paid
the
funds
directly
to
his
spouse.
However
this
is
not
what
occurred
and
the
Court
must
only
concern
itself
with
what
actually
transpired
(The
Queen
v.
Bronfman
Trust,
[1987]
1
S.C.R.
32,
[1987]
1
C.T.C.
117,
D.T.C.
5059).
In
fact,
no
evidence
was
made
that
there
was
an
appropriation
to
the
appellant
of
the
assets
of
the
company
to
discharge
a
liability
imposed
on
him
as
a
former
spouse.
Finally,
I
do
not
believe
that
a
benefit
has
been
conferred
on
the
appellant
in
such
a
way
that
subsection
15(1)
would
require
its
inclusion
in
income.
Subsection
15(1
)
states:
Where,
in
a
taxation
year,
a
benefit
has
been
conferred
on
a
shareholder,
or
on
a
person
in
contemplation
of
his
becoming
a
shareholder,
by
a
corporation
otherwise
than
by
(a)
the
reduction
of
the
paid-up
capital,
the
redemption,
cancellation
or
acquisition
by
the
corporation
of
shares
of
its
capital
stock
or
on
the
winding-up,
discontinuance
or
reorganization
of
its
business,
or
otherwise
by
way
of
a
transaction
to
which
section
88
applies,
(b)
the
payment
of
a
dividend,
(c)
conferring,
on
all
owners
of
common
shares
of
the
capital
stock
of
the
corporation
a
right
to
buy
additional
shares
thereof,
or
the
amount
or
value
thereof
shall,
except
to
the
extent
that
it
is
deemed
by
section
84
to
be
a
dividend,
be
included
in
computing
the
income
of
the
shareholder
for
the
year.
Subsection
15(1)
is
analogous
to
old
section
8
in
the
1952
Act.
In
addressing
this
section
Mr.
Justice
Cattanach
of
the
Exchequer
Court
in
M.N.R.
v.
Pillsbury
Holdings
Ltd.,
[1964]
C.T.C.
294,
64
D.T.C.
5184
(Ex.
Ct.)
commented
at
page
299
(D.T.C.
5186)
that:
While
the
subsection
does
not
say
so
explicitly,
it
is
fair
to
infer
that
Parliament
intended,
by
section
8,
to
sweep
in
payments,
distributions,
benefits
and
advantages
that
flow
from
a
corporation
to
a
shareholder
by
some
route
other
than
the
dividend
route
and
that
might
be
expected
to
reach
the
shareholder
by
the
more
orthodox
dividend
route
if
the
corporation
and
the
shareholder
were
dealing
at
arm's
length.
.
.
.
To
determine
if
a
benefit
or
advantage
was
conferred
on
a
shareholder
by
a
corporation,
it
was
established
in
the
said
decision
that
there
must
be
an
arrangement
or
device
whereby
a
corporation
conferred
a
benefit
or
advantage
on
a
shareholder
qua
shareholder.
In
the
present
case,
the
loan
was
made
to
the
spouse
of
the
appellant.
She
used
the
money
to
invest
in
income
earning
properties.
The
properties
were
in
her
name
only
and
remained
her
property
after
the
separation.
The
appellant
did
not
derive
any
benefit
or
gain
any
advantage
from
the
loan
or
its
use.
Nor
do
I
think
the
transaction
in
question
is
an
attempt
by
the
company
to
distribute
capital
to
the
appellant
in
such
a
manner
to
activate
the
provisions
of
subsection
15(1)
of
the
Act..
The
respondent
also
raised
an
argument
based
on
subsections
56(4.1)
and
74.1(1)
of
the
Act
in
the
amended
reply
to
the
notice
of
appeal.
This
was
not
pleaded
at
the
hearing
and
in
any
case,
I
do
not
believe
it
is
applicable
in
the
present
instance.
For
these
reasons,
the
appeal
is
allowed
with
costs
to
the
appellant
as
provided
for
in
section
18.26
of
the
Tax
Court
of
Canada
Act
and
sections
11
and
12
of
the
Tax
Court
of
Canada
Rules
(informal
procedure).
Appeal
allowed.
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