Guiseppe Perlingieri and Roma Construction (Niagara) Ltd. v. Minister of National Revenue, [1993] 1 CTC 2137, 93 DTC 158

Rip, T.C.C.J.:—All but one of the issues in Mr. Perlingieri's ("Perlingieri") appeals for 1984 and 1985 were settled at commencement of trial in his appeals and those of Roma Construction (Niagara) Ltd. ("Roma"). The only issue before me was whether, for 1985, an amount of $100,000 ought to be included in his income pursuant to subsection 15(2) of the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act").

At all relevant times in 1985 the appellant was a majority shareholder of both Niagara Shore Investments Ltd. ("Niagara") and Roma. He was also an employee of Roma at all relevant times.

Niagara acted as bare trustee for the appellant in holding title to a parcel of land in St. Catharines, Ontario. Roma was building a home for the appellant on the parcel of land. As at February 28, 1985, the year end for Roma, the appellant's shareholder loan account was in a debit position in the amount of $94,759. According to the respondent's assumptions a year-end journal entry was posted in the books of account of Roma crediting the appellant’s shareholder loan account in the amount of $100,000 and setting up an amount of $100,000 as a mortgage receivable from Niagara. A mortgage receivable from Niagara, dated March 22, 1985 and registered March 27, 1985, was given by Niagara on behalf of Perlingieri to Roma as security for the loan. The amount of $100,000 was payable on demand without interest. No payments were made during 1985 or 1986 against the $100,000.

On the day the appellant's appeals were first heard, February 7, 1992, he testified that at the time he incurred the debt from Roma a mortgage back of $80,000 on another property he had previously sold to a Mr. Wong was to be repaid in September 1986 and he intended to apply the proceeds of such payment in discharge of his mortgage to Roma. Mr. Wong ("Wong") discharged his mortgage on September 27, 1986. However, the appellant did not apply the funds to his mortgage with Roma until March, 1987; on receiving the funds from Wong the appellant invested the money in a thirty day term deposit with his bank and continued to reinvest the proceeds in additional term deposits until March, 1987 when he repaid Roma and discharged the mortgage.

Perlingieri was not represented by counsel when his appeal was heard in February 1992. The evidence indicated the date of repayment of his loan to Roma to be March, 1987. If the payment had been made in February, 1987 Perlingieri may not have been reassessed since he would have repaid the loan within one year from the end of Roma's 1986 taxation year. I had two questions which Perlingieri was unable to answer: firstly, when did he become indebted to Roma for the $100,000, in February, 1985 or March, 1985 and, secondly, when did he repay the loan to Roma? I thought the appellant was a little confused. I was not certain whether Roma had or had not been paid within the one year period required by subsection 15(2). I therefore adjourned the trial and suggested to the appellant that he consult with his lawyer and attempt to obtain any documentation that could assist me in arriving at a decision.

The appellant consulted with a lawyer, Glen W. McCann ("McCann"), a solicitor in St. Catharines. McCann advised the Court in writing that while he was not engaged by Perlingieri as solicitor of record for the appeals, he was retained for the purpose of making certain admissions of fact. The respond ent's counsel concurred with the admissions. These admissions of fact included: a) that the loan from Roma to the appellant arose in March, 1985; b) the mortgage receivable from Niagara, dated March 22, 1985 and registered March 27, 1985, was given by the appellant to Roma as security for the $100,000 loan in issue at the time the loan arose, and c) no repayment of the mortgage was made until April 10, 1987.

Subsection 15(2) reads as follows:

Where a person . . . is a shareholder of a particular corporation . . . and the person . . . has in a taxation year received a loan from or has become indebted to the particular corporation . . . the amount of the loan or indebtedness shall be included in computing the income for the year of the person. . . . unless

(a) the loan was made or the indebtedness arose .. . .

(ii) in respect of an employee of the lender or creditor . . . to enable or

assist the employee . . . to acquire a dwelling for his habitation . . .

and bona fide arrangements were made, at the time the loan was made or the indebtedness arose, for repayment thereof within a reasonable time; or

(b) the loan or indebtedness was repaid within one year from the end of the

taxation year of the lender or creditor in which it was made or incurred

When the trial reconvened in November, 1992, counsel for the respondent submitted the $100,000 must be included in the appellant's income for 1985 because no bona fide arrangements were made, at the time the loan was made or the indebtedness arose, for the repayment thereof within a reasonable time. The amount of the debt was payable on demand. She referred me to three reported cases: Wright v. M.N.R., [1986] 1 C.T.C. 2581, 86 D.T.C. 1415 (T.C.C.), Kanters v. M.N.R., [1992] 1 C.T.C. 2413, 92 D.T.C. 1508 (T.C.C.) and Dunlop v. M.N.R., [1991] 2 C.T.C. 2246, 91 D.T.C. 948 (T.C.C.). In all three cases the appellant was unsuccessful. In Wright the company passed a resolution in 1980 authorizing a loan it made to its shareholder in 1979 and the taxpayer signed a promissory note in the later year providing for repayment of the loan within ten years, without interest. Tremblay, T.C.C.]. rejected the argument of the taxpayer that he had made bona fide arrangements for repayment on the basis no arrangements had been made by him to repay the loan when the loan was made; the trial judge also doubted repayment without interest could be regarded as a bona fide arrangement to repay. Tremblay, T.C.C.J. disallowed the appeal in Dunlop because there was no documentation or any other formality setting out the repayment of the loan as such.

In Kanters the trial judge found no specific dates for repayment of the loan were agreed upon when the agreement was made and no payments of interest or principal were in fact made: thus he dismissed the appeal.

Subsection 15(2) does not require a loan described in paragraph 15(2)(a) to bear interest. 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. Subsection 15(2) states that in addition to the loan qualifying under paragraph (a) if bona fide arrangements are made, at the time the loan is made or the indebtedness arose, for repayment within a reasonable time, the employee will not have the amount of the loan included in his income. In my view interest or lack of same, is not a factor in determining whether bona fide arrangements have been made for repayment of a loan within a reasonable time. In Cooper v. The Queen, [1989] 1 C.T.C. 66, 88 D.T.C. 6525 (F.C.T.D.), Rouleau, J. discussed whether an interest free loan or low interest loan may be considered a benefit and thus taxable under one of several provisions of the Act: sections 6, 15 and 105. He concluded at page 81 (D.T.C. 6535) that "[a]ny loan which escapes inclusion into income under subsection 15(2) must be understood to have escaped entirely whether interest-free or not, otherwise the purpose of the section is in part defeated”.

The issue is whether a loan payable on demand is a bona fide arrangement for repayment of the loan within a reasonable time.

The terms "demand loan", "on demand" have been defined as follows:

Demand Loan: Loan which may be called by lender at any time because there is no fixed maturity date. A loan payable upon request by the creditor rather than on a specific date. (Black’s Law Dictionary, 6th ed.)

On Demand: A promissory note expressed to be payable "on demand” is mature on the day it is given. . . . (Encyclopedia of Words and Phrases Legal Maxims, 1925 to 1985, Vol. 3, 4th ed.)

On Demand: (1) In general, where money is payable on demand, the law holds that the debtor is bound to find out the creditor and pay him” (per Blackburn, J., Toms v. Wilson, 32 L.J.Q.B. 37; see also Jackson v. Ogg, Johns, 397); and this the debtor is liable to do at once. Therefore a promissory note payable“ on demand" is payable the instant the note is made; no demand is necessary prior to bringing an action, and the statute of limitations will run from its date (Norton v. Ellam, 6 L.J. Ex. 121, see also Malb v. Murrells, 29 L.J. Ex. 377, Re Bethell 37 Ch. D. 566) (Stroud's Judicial Dictionary of Words and Phrases, 5th ed.)

L'Heureux-Dubé, J. wrote in Houle v. Canadian National Bank, [1990] 3 S.C.R. 122, 74 D.L.R. (4th) 577 at page 168 (D.L.R. 608) that:

It is not contested by either party that the bank had the right to recall the loan on demand. By advancing money in the form of "promissory notes”, the bank effectively provided itself with a means of recalling the loan on demand. As Louis Payette, in “ Prise de possession: demande de paiement et délai raisonnable”, in Meredith Memorial Lectures 1981, New Developments in Commercial Lending (1982), 129, notes at page 135:

No grace period is given by the Bills of Exchange Act, R.S.C., 1985, c. B-4, for payment of a bill payable on demand. Refusal to pay immediately gives rise to a remedy. The demand promissory note becomes payable as soon as it is made and the obligor must pay as soon as the first demand is made.

[Translation]

A demand loan provides for the possible requirement for the debtor to repay the loan at once. However is this the "arrangements" for repayment contemplated by subsection 15(2)?

The Shorter Oxford Dictionary translates "bona fide" to mean "in good faith” and defines the term as"[a]cting or done in good faith; genuine”. The French version of paragraph 15(2)(a) contains the words:

. . . et si des arrangements ont été conclus de bonne foi, à la date à laquelle le prêt a été consenti . . . pour que le prêt . . . soit remboursé. . . .

Arrangements to repay the loan must be made in good faith at the time the loan was made. At the time the loan is made the creditor and the debtor must be aware of the arrangements made between them for the repayment of the loan. The debtor must know when he must repay the loan at the time the loan is made. Because a demand loan is open ended with respect to repayment, at the time the loan is made the creditor may or may not know when he will demand payment and the debtor does not know when he will have to make payment. Hence no bona fide arrangement — indeed no arrangement at all — has been made at the time of the demand loan for its repayment.

The appeals will be allowed, without costs, and the assessments for 1984 and 1985 will be referred back to the respondent for reassessment in accordance only with the settlement between the parties.

Appeals allowed in part.