Brian Corbett v. Minister of National Revenue, [1988] 2 CTC 2291, 88 DTC 1647

Bonner, T.CJ.:— This is an appeal from an assessment of income tax for the appellant's 1978 taxation year. On assessment the respondent added to the declared income the sum of $20,000 as an "unrepaid shareholder's loan". In doing so the respondent relied on subsection 15(2) of the Income Tax Act, a provision which, in its application to loans made after March 31, 1977, read as follows:

Where a particular corporation . . . has in a taxation year made a loan to a person .. . . who is 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 . . .

(ii) to an officer or servant of the lender to enable or assist him to purchase or erect a dwelling house for his own occupation,

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

In order to succeed with his appeal the appellant must establish:

(a) that a loan made to him by Montcor Holdings Ltd. ("Montcor") was made to enable or assist him to purchase or erect a dwelling house and

(b) that bona fide arrangements were made at the time the loan was made for the payment thereof within a reasonable time.

There is virtually no dispute as to the facts. Mr. Corbett is a lawyer who was called to the bar in 1973. He then commenced to practice law in partnership with Paul Montgomery. In 1973, the two partners incorporated Montcor as a management company for purposes of the law practice. The appellant stated that in 1975 he and his partner agreed to cause the company to lend money to each of them to enable them to build houses. The understanding between them was that the loan would be interest free and would be repaid on a regular basis. No agreement was made as to a specific loan amount. The two loans were to be limited by the amount that the company was capable of borrowing for re-loan to the individuals.

In April of 1975 the appellant as purchaser entered into an agreement for the purchase of a house from Anzil Construction Limited ("Anzil"). The appellant was to pay $30,000 in cash, assume an existing first mortgage and give a second mortgage back to the vendor for the balance of the purchase price. The second mortgage was to be for a term of three years, to bear interest at 10 per cent per annum and to call for payments on a 25 year amortization plan.

The appellant explained that Montcor did not lend him any money in 1975 when he agreed to buy from Anzil because, at that time, Montcor was not in a financial position either to lend money or to borrow money with a view to re-lending it. He admitted that at that time he had no idea when Montcor might become able to lend the money. The financial position of the law practice and of Montcor improved between 1975 and 1978. On April 15, 1978, Montcor loaned $30,000 each to the appellant and his partner. The loans were interest-free and were secured by mortgages on the homes of the borrowers.

The mortgage given by the appellant to Montcor provided for repayment in the event either of sale or of transfer of title to the property. No other repayment provision was made in the mortgage document itself. A memorandum dated March 28, 1978, written by the appellant to the law firm's bookkeeper called for repayment of the money borrowed by the appellant at the rate of $500 a month. The memorandum contains the following:

(1) The third week’s draw in each month in Corbett & Montgomery payable to Paul E. Montgomery and R. Brian Corbett shall be paid to the individuals in one cheque apiece, each cheque being $500.00.

(2) Paul E. Montgomery and R. Brian Corbett shall on the 15th of each month pay $500.00 each to Montcor Holdings Limited as payment on account of the principal balance of their respective mortgage loans.

(3) The $1,000.00 is to be deposited to Montcor Holdings Limited and credit is to be given to Paul E. Montgomery and R. Brian Corbett on their mortgage ledger cards maintained by David Gittens for Montcor Holdings Limited, thereby reducing the principal balance that Paul E. Montgomery and R. Brian Corbett will give to Montcor.

(4) The Royal Bank of Canada will automatically debit Montcor's bank account monthly for the required monthly payment (principal and interest) on the $60,000.00 loan.

Mr. Montgomery gave evidence which corroborated that given by the appellant.

Counsel for the appellant argued that there is nothing in subsection 15(2) which stipulates that the assistance to the officer or servant cannot follow the time of the purchase or erection of the dwelling. He submitted that the loan arrangements that were completed in 1978 were made to assist in paying for the house. In the absence of any authority directly on point he referred to paragraph 21 of an Interpretation Bulletin No. IT-119R2, which reads as follows:

Whether a loan has been made to “enable or assist” the borrower to purchase or erect a dwelling house is a question of fact. The Department considers that a loan made for the purpose of refinancing a dwelling house is not made to enable or assist the borrower to purchase or erect a dwelling house unless at the time of the original purchase or at the commencement of the erection commitments were made between the two parties to the effect that the lender would provide the financing. In determining whether such commitments were made, all relevant facts and evidence will be considered including: formal documentation of the commitment; the nature of the original financing which should have the characteristics of usual interim financing, e.g. demand bank loan; the time lag between the date of the original financing and the date of the loan; and, the reasons why the original financing was not by the lender.

He submitted that at the time of the original purchase by the appellant from Anzil there existed an agreement between the appellant and Montcor calling for the latter to provide the financing.

The French version of subparagraph (ii) applicable in 1978 was as follows:

à un cadre ou à un employé du prêteur pour lui permettre d'acheter ou de faire construire une maison d’habitation destinée à son propre usage.

If the English version is in any way unclear the French version is not. Due weight must be given to the verb "permettre". Subparagraph (ii) creates an exception to the general rule laid down by subsection 15(2) only for loans which in some way facilitate the purchase or construction of a dwelling intended for occupation by the taxpayer. The evidence in this case does not disclose any way in which the loan made by Montcor served that function. That loan was not made until 1978. The transaction of purchase and sale between the appellant and Anzil was completed in 1975. By the time the loan was made the appellant had owned and occupied the dwelling for about three years. The arrangement between the appellant and his partner does not appear to have had any bearing on the purchase of the home. It is difficult to imagine how the appellant's decision to buy could in any way have rested on an arrangement that Montcor would, if possible, lend some unspecified amount at some unspecified time in the future. It is not necessary to have recourse to the Interpretation Bulletin to reach a conclusion in this case. The statutory language is sufficiently clear that aids to construction are not required. Because the appellant has failed to meet the "enable or assist” test it is not necessary to consider whether the repayment arrangements qualify. For the foregoing reasons the appeal will be dismissed.

Appeal dismissed.