Jan Silden v. Minister of National Revenue, [1989] 1 CTC 2122, 89 DTC 75

Bonner, T.C.J.:—The appellant appeals from an assessment of income tax for the 1981 taxation year. On assessment the respondent, in reliance on subsection 15(2) of the Income Tax Act, added $55,000 to the appellant's declared income. Subsection 15(2) in the form relevant to this appeal read as follows:

Where a particular corporation, a corporation to which the particular corporation is related or a partnership of which either or both of the corporations is a member has in a taxation year made a loan to a person (other than a corporation resident in Canada) who is a shareholder of the particular corporation or who is connected with a shareholder of the particular corporation, the amount thereof shall be included in computing the income for the year of the person to whom the loan was made unless

(a) the loan was made

(i) in the ordinary course of the lender's business and the lending of money was part of its ordinary business,

(ii) to an employee of the lender or to the spouse of an employee of the lender to enable or assist the employee or his spouse to acquire a dwelling for his habitation,

(iii) where the lender is a corporation, to an employee of the corporation to enable or assist the employee to acquire from the corporation fully paid shares of the capital stock of the corporation, or to acquire from a corporation related to the corporation fully paid shares of the capital stock of the related corporation, to be held by him for his own benefit, or

(iv) to an employee of the lender to enable or assist the employee to acquire an automobile to be used by him in the performance of the duties of his office or employment,

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

(b) the loan was repaid within one year from the end of the taxation year of the lender in which it was made and it is established, by subsequent events or otherwise, that the repayment was not made as a part of a series of loans and repayments.

There was virtually no dispute about the facts. An agreed statement of facts and a supplement thereto were filed. In addition the appellant testified at the hearing. Prior to 1979 the appellant, a resident of Norway, was employed by a Norwegian company, O. Mustad & Sons A.S. (hereinafter called "Musnor"). It carried on the business throughout the world of manufacturing and supplying engines, fishing equipment and other goods for use in the fishing and shipping industries. It did so both directly and through subsidiary companies. Musnor decided to establish operations in Canada and with that end in view, O. Mustad and Son (Can.) Limited (hereinafter called "Muscan) was incorporated on June 27, 1979.

Upon the formation of Muscan the appellant acquired one-third of the issued shares of the company under an employee incentive plan. The remaining two-thirds were held by Musnor.

It was the policy of Musnor to offer housing assistance to its employees who were relocated. This policy applied to relocations both within Norway and elsewhere. Before the appellant moved to Canada, the policy was discussed with him and it was agreed that Musnor would assist him in acquiring a house in this country.

Discussions between the appellant and Musnor regarding the acquisition by the appellant of a house in Canada continued in the winter of 1980. In April of 1980 the appellant found a house. The property was encumbered by an existing mortgage bearing interest at a reasonable rate and providing for a penalty on prepayment. The appellant bought the house and assumed the mortgage. The exact form of the relocation assistance to be made available to the appellant was settled in June of 1981 after the house had been purchased. At that time Musnor wrote to the appellant and advised in part:

O. Mustad & Son A.S. (or OMSCAN) [1] will give you a loan of Can$ 55,000 to be paid back if you decide to take up an appointment outside our firm(s) or to terminate the loan for other reasons. This loan will have an interest of 7% p.a. to be paid to our account quarterly.

Practical details regarding this loan will be handled by lan Palmeter. We require a first morgage [sic] in your house as a security for our loan.

In August or September of 1981, Musnor advanced $55,000 to Muscan. It in turn advanced the funds to the appellant in September 1981. The loan was secured by mortgage. The appellant put the money in the bank and in the summer of 1982 used it to retire the mortgage which had been assumed.

The evidence, including correspondence sent in June and July of 1981, makes it quite clear that the loan arrangement was considered by Musnor, Muscan and the appellant to be a form of employee benefit. The arrangement was not dependent on the fact that the appellant held shares in Muscan.

It was the position of the appellant that:

(a) subsection 15(2) does not apply in respect of a loan to a person who only incidentally is an employee;

(b) the money in question here was advanced by Musnor, not by Muscan;

and

(c) the loan falls within the exception provided in subparagraph 15(2)(a)(ii).

The first submission on behalf of the appellant was that subsection 15(2) is aimed at taxing distributions to shareholders of corporate funds which, in order to avoid tax, are structured in forms other than a dividend. It does not apply, so the submission went, to cases where the borrower is both employee and shareholder and receives the loan by virtue of employment.

There is no doubt that generally speaking the objective of subsection 15(1) is, as counsel stated, the same as that of subsection 8(1) of the former Act. It was considered in some detail in Pillsbury Holdings Ltd. v. M.N.R., [1964] C.T.C. 294; 64 D.T.C. 5184. At page 299 (D.T.C. 5186) Cattanach, J. said the following:

Subsection (1) of section 8 is aimed at payments, distributions, benefits and advantages flowing from a corporation to a shareholder other than those referred to in the immediately preceding paragraph. 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.

At page 300 (D.T.C. 5187) his Lordship added:

. . . there are transactions between closely held corporations and their shareholders that are devices or arrangements for conferring benefits or advantages on shareholders qua shareholders and paragraph (c) clearly applies to such transactions. (Compare Robson v. M.N.R., [1952] 2 S.C.R. 223; [1952] C.T.C. 85.) It is a question of fact whether a transaction that purports, on its face, to be an ordinary business transaction is such a device or arrangement.

Counsel was unable to refer to any authority directly on point in relation to the question whether subsection 15(2) applies, by reason only of the fact that the borrower is a shareholder, to a loan made to that borrower qua employee. He did, however, refer to the respondent's ruling #TR-98 which dealt with the tax treatment of loans made by an employer to employees to assist them to purchase shares of the employer company under an employee share purchase and loan program. In that case the respondent ruled that no amount would be included in income under subsection 15(2) on the basis that the loans were made to the participants in their capacity as employees and not as shareholders. If that ruling reflects a long-standing administrative practice or policy then it could be of some assistance in construing the subsection 15(2) words ”. . . to a person . . . who is a shareholder .. .”. In Harel v. Deputy Minister of Revenue [2] de Grandpre, J. speaking for the Court said:

Once again, I am not saying that the administrative interpretation could contradict a clear legislative text, but in a situation such as I have just outlined, this interpretation has real weight and, in case of doubt about the meaning of the legislation, becomes an important factor.

When an administrative practice or policy is invoked as an aid to the construction of unclear statutory language some care should be taken to ascertain that the administrative practice in question is one of long standing. It should be noted that in Harel, the Court was called upon to interpret a provincial statute which had been modelled on a much older federal statute. At the time of enactment the provincial legislature was familiar with the wording and interpretation of the federal Act. That same interpretation was consistently applied to the provincial statute for some 14 years following its enactment. In Hare/ the Court referred to two decisions, Commissioners for Special Purposes of the Income Tax v. Pemsel, [1891] A.C. 531, and Protestant Old Ladies' Home v. Provincial Treasurer of Prince Edward Island, [1941] 2 D.L.R. 534. The passages referred to emphasize the relevance of a sudden departure from an established administrative practice. Neither longstanding practice nor sudden departure can be found in this case. There is no basis in this one isolated ruling for a conclusion that any long-standing administrative practice exists.

Furthermore, the ruling on which the appellant relies was apparently made in 1980, only a few years after a significant change in the relevant statutory language. Prior to 1978, the opening words of subsection 15(2) were:

Where a corporation has in a taxation year made a loan to a shareholder, the amount thereof shall be included in computing the income of the shareholder for the year unless . . ..

That wording was amended by 1977-78, c. 1, subsection 8(3) to read:

Where a particular corporation, a corporation to which the particular corporation is related or a partnership of which either or both of the corporations is a member has in a taxation year made a loan to a person (other than a corporation resident in Canada) who is a shareholder of the particular corporation or who is connected with a shareholder of the particular corporation, the amount thereof shall be included in computing the income for the year of the person to whom the loan was made unless . . ..

Prima facie, at least, the legislature by substituting the words "to a person who is a shareholder" for the words "to a shareholder” must be taken to have intended to effect a change in meaning. The general rule is that a deliberate change of expression must be taken prima facie to import a change of intention. [3] In my view, the language now used points more clearly than the former statutory language to a legislative intention to include all loans to persons who are shareholders whether made to them in that capacity or not. Furthermore, the legislature, by creating exceptions in subparagraphs 15(2)(a)(ii), (iii) and (iv), for loans to “an officer or servant" of the lender makes it clear that loans to persons who are shareholders and who also fall in the category of officer or servant are within the ambit of the opening words of the subsection. If the general rule had been intended to call for tax only on loans to shareholders qua shareholders and to ignore loans to shareholders qua employees there would have been no need to create the exceptions in subparagraphs (ii), (iii) and (iv). In my view, the change in the statutory language and a reading of subsection 15(2) as a whole and in context point clearly to a conclusion that the appellant's first submission must be rejected.

The second argument on behalf of the appellant was that the loan was advanced to him by Musnor (a company in which he was not a shareholder) using Muscan as a conduit only. Counsel emphasized that the correspondence outlining the terms of the loan, the instructions to solicitor and all other communication came directly from the parent company. In fact, the commitment by Musnor to provide housing assistance, as stated in paragraph 2B of the agreed statement of facts, was made prior to the incorporation of the subsidiary company in which the appellant later became a shareholder.

Counsel relied on Zatzman v. M.N.R., 23 Tax A.B.C. 193; 59 D.T.C. 635. That case does not turn on any principle which has application here. Certainly it is not authority for the proposition that every time the actions of a subsidiary company are dictated and directed by a parent company in order to achieve some objective desired by that parent, the subsidiary's activities will be considered to be undertaken as an agent of the parent. That proposition was rejected in Denison Mines Limited v. M.N.R., [1971] C.T.C. 640 at 662; 71 D.T.C. 5375 at 5388-9. In the present case it was Muscan which loaned the money to the appellant. It was Muscan which was mortgagee. Nothing in the evidence suggests that Musnor was the appellant's creditor in respect of the loan. This argument therefore fails.

Finally, the appellant submits that if subsection 15(2) is applicable, then the loan qualifies as an excluded loan under subparagraph 15(2)(a)(ii). Due regard must be had for the statutory language. In this case the word "acquire" is of critical importance. Nothing in the statutory context suggests that it ought to be given anything other than its ordinary meaning. In M.N.R. v. Wardean Drilling Limited, [1969] C.T.C. 265; 69 D.T.C. 6194, the Exchequer Court considered the meaning of the word "acquired" in connection with paragraph 20(5)(e) of the former Act, a provision relating to the undepreciated capital cost of depreciable property. At page 271 (D.T.C. 5197) Cat- tanach, J. said:

In my opinion the proper test as to when property is acquired must relate to the title to the property in question or to the normal incidents of title, either actual or constructive, such as possession, use and risk.

It seems clear that the appellant acquired the house in April of 1980. It cannot, in my view, be said that the loan made in September of 1981 enabled or assisted the appellant to acquire the house. The acquisition had by then been made. It is significant that the purchase of the house was made in April of 1980 prior to any decision that relocation assistance would take the form of a loan to the appellant. The third argument therefore fails.

For the foregoing reasons the appeal will be dismissed.

Appeal dismissed.