Harold Blize v. Her Majesty the Queen, [1995] 1 CTC 2245, 95 DTC 345

Bell J.T.C.C.:-This appeal was heard under the informal procedure of this Court in respect of the the 1988, 1989 and 1990 taxation years.

The issues in this case are:

1. whether amounts borrowed by the appellant were used to enable or assist him to acquire a dwelling,

2. whether bona fide arrangements were made, at the time the loan was made, for repayment thereof within a reasonable time, and

3. if the appellant succeeds in respect of (1) and (2) whether the appellant is deemed to have received interest benefits on the amounts pursuant to section 80.4 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the ’’Act”).

Although the respondent’s reply to the notice of appeal stated that one of the issues was,

whether the appellant, qua shareholder, became indebted to the corporation in the amounts referred to in paragraph 2, supra, as part of a series of loans or other transactions and repayments.

this was not raised by respondent’s counsel at the hearing.

A distillation of the facts, not an easy task, follows. The appellant was a shareholder and director of the corporation. His wife and his brother and his wife were also shareholders. These four persons and their accountant, Les Einarson ("Einarson”) met before April 30, 1986, to discuss the company’s year-end affairs. They also discussed the matter of a loan by the corporation to each of the appellant and Ronald Blize. The appellant stated that the maximum loan would be $75,000, taken out in instalments with repayment of ten per cent per year and that the purpose of such loan to him would be to complete a residence that he had started to build.

The appellant stated that in early 1984 he and his wife had purchased land, bought a Nelson Home package and started working with same. He testified that they built a basement, erected the package and that the house was roughed in by the fall of 1984. He said that they could not inhabit same since there was no heating, no wiring, and no gyproc and that the house was just roughed in. He stated further that in 1986 there were no cupboards, only partial heating, partial plumbing, and partial light facilities and that when they had the aforesaid meeting, the house was not habitable. He stated that an agreement was prepared by Einarson. The document to which he referred is entitled statement of transactions with shareholders and is dated April 30, 1986. It bears the letters T2S (11) and appears to have been prepared as a document attached to the corporation’s income tax returns. That document provides that,

Mr. H. Blize, a director, has acquired loans through the above corporation in order to acquire a new residence. The balance of this loan April 30, 1986 was $16,500, and is to be repaid in ten annual installments of $1,650.

It also provided that,

the above loans (the loan to appellant’s brother not being relevant here) are not to exceed $75,000 for any individual and advances were not to exceed $25,000 per year unless approved unanimously by the board of directors.

A summary of the amounts advanced to the appellant and the repayments in respect thereof:

[Not reproduced.]

A number of exhibits including bundles of receipts were entered into evidence. No clear picture emerged from the examination of both counsel respecting same.

The appellant stated that he moved into the house in September 1986, at which time there was still work to do with respect to exterior finish, eavestroughs, interior painting, basement work and landscaping work. He stated that the manner of repayment of the loan was discussed at the aforesaid 1986 meeting and the conclusion was that the amount of ten per cent per year should be paid. There was no provision for payment of interest on the loan. The appellant then stated that kitchen cabinets and bathroom cabinets were installed in 1986, that exterior finish including eavestroughs and brick work on the house and vinyl siding on the house were completed in 1987. He stated further that in 1988 additional doors, painting, nails, additional drywall, and odds and ends were completed but that some work was still to be done. The appellant also said that the annual payment of ten per cent obligation would remain constant. No agreement was entered into between the corporation and the appellant.

In argument, appellant’s counsel stated that there was a bona fide oral agreement that the company would loan money to the appellant for a residence and that an oral agreement can be valid and enforceable. He referred to the cases of Dunlop (W.D.) v. M.N.R., [1991] 2 C.T.C. 2246, 91 D.T.C. 948 (T.C.C.) which made reference to the fact that the cases of Altenhof (J.) v. M.N.R., [1973] C.T.C. 2303, 73 D.T.C. 239 (T.R.B.) and Massey-Ferguson Ltd. v. The Queen, [1977] C.T.C. 6, 77 D.T.C. 5013 (F.C.A.) both recognized the validity of verbal agreements and stated that the appellant was credible and should be believed, this Court having found in that case that the credibility of the appellant left much to be desired.

He then referred to the case of Charabin (K.) v. M.N.R., [1988] 1 C.T.C. 2419, 88 D.T.C. 1284 (T.C.C.) in which this Court dismissed the appeal of an appellant respecting a loan from his corporation for the purpose of constructing a swimming pool, office and rumpus room after the completion of a dwelling that was occupied by him and his family. He pointed out that the circumstances were different in that his house was not habitable until he spent the borrowed money on it. He also referred to the case of Corbett (B.) v. M.N.R., [1988] 2 C.T.C. 2291, 88 D.T.C. 1647 (T.C.C.) and distinguished the present case therefrom in that the transaction of purchase and sale was completed in 1975 and the loan in question from a corporation of which he was a shareholder was not made until 1978.

He referred to the aforesaid April 30, 1986, document and said that there was a constructive contract with the company to repay ten per cent per year and he also referred to the evidence of payment as set out in the schedule herein. He then referred to Perlingieri (G.) v. M.N.R., [1993] 1 C.T.C. 2137, 93 D.T.C. 158 (T.C.C.) to demonstrate that subsection 15(2) of the Act does not require a loan described in paragraph 15(2)(a) to bear interest. He also referred to the words of Rip J.T.C.C. at page 2139 (D.T.C. 160), namely,

It is section 80.4 that provides for the inclusion in income of an amount for reason that a loan by a corporation to a shareholder and employee bears no or low interest.

Respondent’s counsel stated that there was no indebtedness until the date of each advance and questioned the efficacy of any agreement in 1986 effecting a loan made in subsequent years. He stated that each of the advances was a loan and that no arrangements were made at the time of same. He also referred to the Corbett case, supra, and to the Dunlop case and to Wright (F.L.) v. M.N.R., [1986] 1 C.T.C. 2581, 86 D.T.C. 1415 (T.C.C.), in which Tremblay J.T.C.C. said at page 2590 (D.T.C. 1421),

It is my further view that since one of the parties to the arrangement was a corporation, there is more formality required (such as corporate resolutions, for example) than in the case of individuals and particularly where the details of a relationship are important as against third persons such as the Revenue. [Neudorf (P.), R. v., [1975] C.T.C. 192 at 196, 75 D.T.C. 5213 at 5215 (F.C.T.D.)]

The formality must be more strictly followed when the result in an advantage received by the main shareholder of the corporation because when the lack of a formality in the application is the mistake of the said shareholder, he has no excuse.

Appellant’s counsel referred to Fabry (J.) Sr. v. M.N.R., [1981] C.T.C. 2760, 81 D.T.C. 638 (T.R.B.) in which the appellant purchased a partially constructed house in 1975 and at that time, to finance the transaction, arranged to mortgage the house through his company. In 1975 and 1976 the company advanced funds which were applied as payment on the house but the taxpayer did not make any repayment on account of the principal or interest on the amounts advanced until 1978. This Court dismissed the appeal and found no payment on account of principal or interest constituted a departure from the original loan agreement. At page 2766 (D.T.C. 642), J.B. Goetz, Q.C., member of the Tax Review Board, said,

I consider that the words "bona fide" and "repayment thereof within a reasonable time" as contained in paragraph 15(2)(ii) of the Act must be read conjunctively. No interest was paid on either of the mortgages entered into by the appellant with Direct Lumber; no one made a demand for payment, or sought to force the appellant to abide by the terms of his mortgages. Minimal payments, when made, were not according to the terms of his mortgages nor were they made within a reasonable time.

I feel that the departure by the appellant from the terms of his original mortgage and subsequent documentation indicate to me that the arrangements made at the time the loan was made were not bona fide and repayment was certainly not made within a reasonable time.

On the basis of these authorities, respondent’s counsel requested the dismissal of the appeal. He said, however, that if this Court found the appellant to be successful with respect to the first two issues, he should be subject to assessment with imputed interest under subsection 80.4(2) of the Act. Counsel for the appellant agreed with this position.

A case not referred to by either counsel is Silden (J.) v. M.N.R., [1989] 1 C.T.C. 2122, 89 D.T.C. 75 (T.C.C.) in which case the taxpayer had acquired and moved into a house in 1980. In 1981 he received a loan from a corporation for the purpose of acquiring the dwelling. Bonner J.T.C.C. concluded that the proceeds from the loan had not been used to acquire a dwelling. On appeal to the Federal Court-Trial Division, [1990] 2 C.T.C. 533, 90 D.T.C. 6576, Muldoon J. found that subparagraph 15(2)(a)(ii) did not provide that the assistance to acquire a dwelling must be operative prior to or concurrently with the acquiring of the dwelling. He said that the section does not so provide. Although his decision was reversed by the Federal Court of Appeal, [1993] 2 C.T.C. 123, 93 D.T.C. 5362, the primary reason for such reversal was that there was no bona fide arrangements made for repayment of the loan. The Federal Court of Appeal was silent on the issue and as to the timing of the loan and the acquisition.

It seems to me that this issue has not been settled. However, in the instant case the circumstances are such that it is not necessary for me to reach a conclusion as to which of the opposing views in this regard is correct. The reason for that is my finding of fact that moneys were advanced during the construction process over a period of more than one year. Although it was not entirely clear as to how the borrowed funds were dispersed or applied, no evidence was adduced by the respondent to counter the appellant’s evidence in this regard.

With respect to the requirement that bona fide arrangements be made at the time the loan was made I accept the contention for the appellant that the amount of ten per cent of the sums advanced was to be repaid each year. This, in fact, happened in four of the years from 1986 to 1991. Although the statute uses the term "bona fide" in relation to arrangements, having regard to the experience of loan and repayment herein I conclude that the appellant has complied with the provisions of that section. Having found that the appellant succeeds with respect to the first two issues above stated, and having regard to the agreement of counsel respecting the third issue, it is clear that the provisions of subsection 80.4(2) should be applied in accordance with Schedule A attached to the reply to the notice of appeal, with which counsel for the appellant agrees.

Accordingly, the appeal is allowed on the basis that the corporation made the loan consisting of the amounts described herein as advanced to the appellant to enable or assist him to acquire a dwelling for his habitation and that bona fide arrangements were made at the time the loan was made for repayment thereof within a reasonable time, and on the basis that the appellant is subject to interest pursuant to subsection 80.4(2) as set out in above Schedule A.

Appeal allowed.