Ronald Clement, Gerald Nadeau v. Minister of National Revenue, [1988] 2 CTC 2214, [1988] DTC 1556

Couture, C.J.T.C. [Translation]:—These appeals concern the 1979, 1980 and 1981 taxation years of each appellant.

In Ronald Cléments case there were two issues, and at the outset of the hearing, counsel for the respondent informed the Court that the respondent was consenting to judgment as regards the amounts of $1,008.40 for the 1980 taxation year and $908.40 for the 1981 taxation year. It appears from the assessments issued by the respondent that these amounts had been added to his income as a benefit for the use of an automobile provided by his employer.

The remaining issue is common to the two appellants and the relevant facts are identical for each except that the amounts are different. The facts can be summarized as follows:

During the 1979, 1980 and 1981 taxation years, the appellants were employed by Nadeau Electrix Inc. (hereinafter referred to as "the company"). The company had given each of them an interest-free loan in 1976 to purchase a house. These loans were in the following amounts during the taxation years in question:

The respondent added the following amounts to the appellants' income for the years in question:

Relying on the provisions of subsection 80.4(1) of the Income Tax Act (the Act), inter alia, the respondent maintained that a benefit had been conferred on them by the company equal to the interest they should have been charged on these loans at the rate prescribed by section 4300 of the Income Tax Regulations on the amounts indicated in the preceding paragraph.

Counsel for the appellants for his part maintained that the provisions of subsection 80.4(1) did not apply to loans made prior to November 16, 1978. Subsection 80.4(1) was added to the Act by Statutes of Canada 1977-78, c. 1, s. 35(1) (hereinafter referred to as S.C. 1978) applicable to the 1979 and subsequent taxation years. It read as follows:

80.4 (1) Where an individual

(a) is an officer or employee or is related to an officer or employee and has received a loan by virtue of his office or employment or the office or employment of a person to whom he is related, or

(b) is a shareholder of a particular corporation or is related to a shareholder of a particular corporation and has received a loan (other than an excluded loan) from the particular corporation, from a corporation related to the particular corporation or from a partnership of which the particular corporation or a corporation related to the particular corporation is a member,

he shall be deemed to have received a benefit in a taxation year equal to the amount, if any, by which the aggregate of

(c) the amount, if any, by which interest in respect of the taxation year on all housing loans received by him, computed at a prescribed rate per annum, exceeds the aggregate of

(i) interest in respect of the taxation year paid by him before the end of the immediately following taxation year on all such loans, and

(ii) the product obtained when the prescribed rate per annum is multiplied by $50,000, and

(d) the amount, if any, by which interest in respect of the taxation year on all loans described in paragraphs (a) and (b) (other than housing loans and excluded loans) received by him, computed at a prescribed rate per annum, exceeds the interest in respect of the taxation year paid by him before the end of the immediately following taxation year on all such loans,

exceeds

(e) $500.

(2) For the purpose of subsection (1),

(a) ''excluded loan" means

(i) the portion of any loan made by a corporation to an officer or employee of the corporation to enable or assist him to purchase fully paid shares of the capital stock of the corporation or of a corporation related to it to be held by him for his own benefit,

(ii) the portion of any loan included in computing the income of the individual to whom it was made, and

(iii) a loan made by an individual (other than a trust) to an individual with whom he was not dealing at arm's length;

(b) “housing loan" means the portion of any loan, made or guaranteed by an employer, to an officer or employee of the employer to enable or assist him to acquire a dwelling for his own occupation if the acquisition of that dwelling was made in the course of a change in his residence and he was (or would have been had he moved after 1971 and incurred moving expenses) entitled to a deduction under section 62 in respect of such expenses.

(2) This section is applicable to the 1979 and subsequent taxation years.

Paragraph 80.4(1)(c) was subsequently amended by S.C. 1978, still applicable to the taxation years 1979 et seq., by replacing the words "au taux annuel présent" by “au taux annuel prescrit". [1]

Under c. 5, s. 25(1) of Statutes of Canada 1979, assented to on December 6, 1979 (hereinafter referred to as “S.C. 1979"), subsection 80.4(1) was amended applicable to loans made after November 16, 1978 and this amendment provided as follows:

25.(1) All that portion of subsection 80.4(1) of the said Act following subparagraph (c)(i) thereof is repealed and the following substituted therefor:

(ii) the product obtained when the prescribed rate per annum is multiplied by

(A) in the case of an individual whose spouse with whom he resided in the taxation year had a housing loan, an amount (in this subsection referred to as his ''agreed amount”) equal to such portion of $50,000 as has, by agreement between the individual and his spouse, been allocated to him and that, when added to the agreed amount of his spouse, does not exceed $50,000, and

(B) in any other case, $50,000, and

(d) the amount, if any, by which interest in respect of the taxation year on all loans described in paragraphs (a) and (b) (other than housing loans and excluded loans) received by him, computed at a prescribed rate per annum, exceeds the interest in respect of the taxation year paid by him before the end of the immediately following taxation year on all such loans,

exceeds

(e) in the case of the individual referred to in clause (c)(ii)(A), that proportion of $500 that his agreed amount is of $50,000, and

(f) in any other case, $500.

(2) Paragraph 80.4(2)(b) of the said Act is repealed and the following substituted therefor:

(b) “housing loan” means the portion of any loan made to an officer or employee or to his spouse, by virtue of his office or employment, to enable or assist him or his spouse to acquire a dwelling for his habitation if the acquisition of that dwelling was made in the course of a change in his residence and he was (or would have been had he moved from a location in Canada after 1971 and incurred moving expenses) entitled to a deduction under section 62.

(3) Subsection (1) is applicable with respect to loans made after November 16, 1978.

(4) Subsection (2) is applicable to the 1979 and subsequent taxation years.

[Emphasis added.]

Counsel for the appellants submitted that owing to subsection 25(3) of S.C. 1979, reproduced above, they are not taxable on the deemed benefit since the loans in question had been made to them by virtue of their employment prior to November 16, 1978.

Counsel for the respondent for his part maintained the contrary. In his reply to the notice of appeal, in paragraph 6, he submitted the following, inter alia:

6(a) during the 1979, 1980 and 1981 taxation years, the appellant was a shareholder and employee of Nadeau Electrix Inc., holding the office of President;

(b) during the 1976 taxation year Nadeau Electrix Inc. gave an interest-free loan to the appellant, who was employed by the said company at the time;

(c) the said interest-free loan was given to the appellant by virtue of his employment, so that he could purchase a house.

[Emphasis added.]

In paragraph 8 of this document he stated the following:

8. He maintains that the appellant received a taxable benefit from his employer during the 1979, 1980 and 1981 taxation years by virtue of the fact that he received an interest-free loan, the whole pursuant to the provisions of subsections 15(9) and 80.4 of the Income Tax Act.

Subsection 15(9), applicable to the 1979, 1980 and 1981 taxation years, read as follows:

(9) Where an amount in respect of a loan is deemed by subsection 80.4(1) to be a benefit received in a taxation year by an individual referred to in paragraph (b) thereof, that individual shall be deemed for the purposes of subsection (1) to be a shareholder of the corporation and the benefit shall be deemed to be a benefit conferred on a shareholder by the corporation.

Since he admitted that the respondent had issued his assessments on the basis that the loan had been granted to them by virtue of their employment, the provisions of subsection 15(9) are not applicable since subsection 6(9) deals specifically with the treatment of a deemed benefit under subsection 80.4(1) from an office or employment. This subsection read as follows:

6(9) Where an amount in respect of a loan is deemed by subsection 80.4(1) to be a benefit received in a taxation year by an individual described in paragraph (a) thereof, the amount thereof shall be included in computing the income of the individual for the taxation year as income from an office or employment. [2]

Even though the loans were used by the appellants to purchase houses, they did not qualify as “housing loans” as defined in paragraph 80.4(2)(b). They were therefore simply interest-free loans made to employees by virtue of their office or employment provided for in paragraph 80.4(1)(a) and were not subject to the provisions of clause (c)(ii)(A) in force at the time.

What interpretation should be given to the legislation applicable to the 1979, 1980 and 1981 taxation years having regard to the deemed benefit provided for in paragraph 80.4(1)(a) in view of the amendments referred to above?

It is clear that in enacting subsections 80.4(1), (2) and (3) of S.C. 1978, Parliament was legislating exclusively with respect to the taxation of certain loans well described in these provisions and subsection (1) as made to employees by virtue of their office or employment. It specifically indicated in what circumstances this type of loan constituted a taxable benefit for such an employee.

The effect of subsection 80.4(1) as put into effect by S.C. 1978 was not to provide that an interest-free loan made to an employee was deemed to be a taxable benefit but that a benefit was deemed to have been received by him in a taxation year equal to the amount of interest paid on such a loan that was less than an amount of interest at the rate prescribed under the Income Tax Regulations. It is only pursuant to subsection 6(9) that the amount representing this benefit had to be included in computing this employee's income and so became taxable.

S.C. 1978 also provided that subsections 80.4(1) and 6(9) applied to the 1979 and subsequent taxation years.

Under this legislation a taxpayer who had received a deemed benefit as provided in 1979 or a subsequent year was thus taxable on the amount of this benefit regardless of the year during which the loan had been made to him.

Furthermore, the provisions of subsection 25(1) of S.C. 1979 repealed all that portion of subsection 80.4(1) of the Act following subparagraph (c)(i) (old text) and replaced it by a new provision on housing loans and by an identical provision for other loans.

The provisions of subsection 25(3) of these Statutes indicated that the new subsection 25(1) applied to loans made after November 16, 1978. As I interpret this legislation, loans made before November 16, 1978 remained subject to the provisions of subsection 80.4(1) as implemented by S.C. 1978, and those made after November 16, 1978 became subject to the provisions of subsection 25(1), implemented by S.C. 1979.

In other words, the effect of the new legislation of S.C. 1979 was not to cancel the application of 80.4(1) to loans made before November 16, 1978, as counsel for the appellants suggests, simply to make loans made after that date subject to the new legislation.

For these reasons, the appeals of Ronald Clément for 1980 and 1981 are allowed and the assessments referred back to the respondent so that he may make reassessments reducing income for the said years by $1,008.40 and $908.40 respectively.

The appeals of Ronald Clément and Gérald Nadeau are dismissed in all other respects. The appellants shall not be entitled to costs.

Appeals dismissed.