Steven Cooper v. Minister of National Revenue, [1987] 1 CTC 2287, 87 DTC 194

Christie, A.C.J.T.C.:—The appellant appeals to this Court from reassessments by the respondent in respect of his 1981, 1982 and 1983 taxation years. The question is whether an interest-free loan of $400,000 which the appellant received from trust property is a benefit, the value of which is to be included in computing his income for those years.

Upon his death the late Phillip Cooper was survived by his wife and two children, the appellant and his sister Marcia. In his will dated May 31, 1979 he appointed his wife and the appellant executors and trustees of his estate. All of his property was transferred to them upon certain trusts. It is unnecessary for present purposes to trace in detail all of the contingencies provided for in the will and the consequences to the disposition of the assets that would follow should one or more of them happen. They contemplate the possibility of grandchildren or others more remote becoming beneficiaries. No contingency has occurred. Apart from them, and simply put, the trustees were directed to pay three specified bequests involving $25,000 each and "to keep invested the residue of my estate”. From this source the deceased’s wife was to be paid $30,000 annually, this sum to be indexed. The $30,000 was substantially increased and the terms of the will amended in April of 1981 by order of the Surrogate Court for the County of Renfrew under section 65* [1] of the Succession Law Reform Act, S.O. 1977, c.

40. Upon Marcia attaining 25 years of age the residue of the estate is to be divided into two equal shares and one-half of one share paid or transferred to her and one-half of the other share paid or transferred to the appellant. This allocation excludes the stock in two corporations and the real property set aside in trust by order of the Court as the source of the increased payments to the deceased's widow. Up to the time of division the trustees are required to accumulate the net income of the residue. On attaining the age of 30, Marcia and the appellant are entitled to receive the remaining one- half of each share. Between the ages of 25 and 30, they are entitled to receive the net income from the undistributed one-half of each share. At the time of the hearing Marcia was said to be 21 years of age. The appellant is some years older. Upon the death of the appellant’s mother, the corporate stock and the real estate referred to will go to Marcia and the appellant in equal shares.

On June 18, 1981 the appellant received an interest-free loan from the residue to enable him to purchase a home in Toronto. The loan was repayable on demand and was secured by a mortgage. On December 24, 1981 three documents came into existence:

(1) a "consent” by the appellant and his mother as beneficiaries to their decision as trustees to lend the money;

(2) an exhaustive release by the appellant in favour of his mother "from all manner of actions, causes of action, suits, debts, dues, accounts, bonds, covenants, contracts, claims and demands whatsoever which against the said Trustee I ever had, now have, or which my heirs, trustees, administrators or assigns, or any of them, hereinafter can, shall or may have, for or by reason of the loan by the executors of the Estate of Phillip Cooper to me of the sum of Four Hundred Thousand Dollars ($400,000.00)''; and

(3) an undertaking by the appellant to indemnify his mother from any claims made against her in respect of the loan.

There is no evidence that Marcia Cooper was involved in the making of the loan. At this time she was not sui juris, being under the age of majority. On the application under section 65 she had been represented by the Official Guardian.

In reassessing, the respondent calculated the value of the benefit in each year to the appellant as described in paragraph 3(f) of the reply to the notice of appeal. It reads:

3. In reassessing the Appellant, in respect of the matter in issue, the Minister of National Revenue relied, inter alia, upon the following assumptions of fact:

(f) the value of the benefit to the Appellant was as follows, calculated by reference to the rates of interest prescribed in subsection 4300(6) of the Income Tax Regulations

				Interest
Loan		Days/ Year		Rate Rate	Benefit	Benefit
						1981
$400,000	x	196/365	X	12%	$25,775.34
						1982
$400,000	X	90/365	X	16%	$15,780.82
$400,000	X	91/365	X	15%	$14,958.90
$400,000	X	183/365	X	16%	$32,087.67
					$62,827.39
						1983
$400,000	X	90/365	X	12%	$11,835.62
$400,000	X	275/365	X	10%	$30,136.99
					$41,972.61

Subsections 104(1) and 105(1) of the Income Tax Act (“the Act”) read:

104(1) In this Act, a reference to a trust or estate (in this subdivision referred to as a “trust”) shall be read as a reference to the trustee or the executor, administrator, heir or other legal representative having ownership or control of the trust property.

105(1) The value of all benefits (other than a distribution or payment of capital) to a taxpayer during a taxation year from or under a trust, contract, arrangement or power of appointment, irrespective of when made or created, shall, subject to subsection (2),* [2] be included in computing his income for the year.

In support of the contention that the amounts listed in the fourth column of paragraph 3(f) of the reply to the notice of appeal are not benefits taxable in the hands of the appellant, his counsel made reference to these cases: Malkin v. M.N.R., [1942] C.T.C. 135; 2 D.T.C. 587 (No. 2); No. 359 v. M.N.R., 16 Tax A.B.C. 24; 56 D.T.C. 475; M.N.R. v. Pillsbury Holdings Limited, [1964] C.T.C. 294; 64 D.T.C. 5184; Wale v. M.N.R., 36 Tax A.B.C. 255; 64 D.T.C. 632 and Thompson v. M.N.R., [1982] C.T.C. 2187; 82 D.T.C. 1168.

In order to fully appreciate Malkin (No. 2) it is desirable to review W. H. Malkin v. M.N.R, [1938-39] C.T.C. 128; 1 D.T.C. 456 (No. 1). The essential facts are that on November 29, 1934 the appellant, as settlor, and his four children entered into a trust agreement with the Toronto General Trusts Corporation, as trustee, whereby, inter alia, a residence known as “Southlands” was transferred to the trustee which undertook to provide for its upkeep from other income received by it from other trust property — in particular a large number of shares in W. H. Malkin Company Ltd., a wholesale grocer. At the time of the transfer the appellant’s interest in the residence was an undivided one-third and that of the children an undivided two-thirds. It had been the property of the appellant’s wife who died intestate, hence the division indicated. By letter dated April 5, 1935 the children authorized the trustee to permit the appellant to reside at Southlands without paying rent which he did in 1935, the year under review. One of the issues was whether the cost of the upkeep of the residence was personal and living expenses of the appellant and hence to be regarded as income in his hands.

The pertinent legislative provisions were paragraph 3(1)(e) and subsection 11(1) of the Income War Tax Act. They provided:

3. (1) For the purposes of this Act, “income” means the annual net profit or gain or gratuity, whether ascertained and capable of computation as being wages, salary, or other fixed amount, or unascertained as being fees or emoluments, or as being profits from a trade or commercial or financial or other business or calling, directly or indirectly received by a person from any office or employment, or from any profession or calling, or from any trade, manufacture or business, as the case may be whether derived from sources within Canada or elsewhere; and shall include the interest, dividends or profits directly or indirectly received from money at interest upon any security or without security, or from stocks, or from any other investment, and, whether such gains or profits are divided or distributed or not, and also the annual profit or gain from any other source including

(e) personal and living expenses when such form part of the profit, gain or remuneration of the taxpayer.

11. (1) The income, for any taxation period, of a beneficiary of any estate or trust of whatsoever nature shall be deemed to include all income accruing to the credit of the taxpayer whether received by him or not during such taxation period.

In allowing the appeal, MacLean, P. disposed of paragraph 3(e) in these words at 134-35 (D.T.C. 458-59):

It seems quite clear that s. 3(e) of the Act contemplates a situation where the taxpayer, for services rendered, receives as salary or remuneration (1) money, and

(2) something in addition to the money by way of either (a) a living allowance in money, or (b) the free use of premises for living purposes, or (c) some other allowance or perquisite, all or any of which may as a matter of sense and right be considered as part of the gain, salary or remuneration of the taxpayer. Southlands was owned only in part by the appellant before the trust deed was entered into. His use of it thereafter was permissive; he had no legal right to demand occupation of it and it could be sold or rented over his head at any time by the trustee and he would have no legal right to register an objection; nor was the trustee bound to furnish the appellant with another residence or a sum of money in lieu of Southlands. We must assume that Southlands had been owned by Mrs. Malkin for some time before her death — there is no evidence of how long — and there is no evidence that she had acquired it in any way other than by the expenditure of her own money; and there is no evidence that the appellant ever owned it. Because of the law of devolution of estates, the appellant, on the death of his wife, intestate, became the owner of an undivided one-third interest only in the property. There is nothing to show that he got possession of Southlands, or was allowed to live in it, because he was a salaried employee, manager or officer of the Malkin Company, or that, after the date of the trust deed, he got possession for any reason other than the good will of his children and the accession thereto of the trustee.

I do not think the appellant is taxable under s. 3(e) for his occupancy of Southlands during the taxation period in question. If justification to tax the appellant is sought in the word “emoluments” in the general definition of “income,” it cannot be said that such “emolument,” namely, the occupation of Southlands, is one “directly or indirectly received by any person from one office or employment, or from any profession or calling, or from any trade, manufacture or business.” The dictionaries define “emoluments” as fees, salary, reward, remuneration, perquisites, profit or gain, arising from station, office, employment or labour. Nowhere does the Canadian Act attempt to tax the property in, and the occupation of, land. And so I think all the debate arising from the occupancy of Southlands, and s. 3(e) of the Act, may be dismissed.

He went on at 137 (D.T.C. 460-61):

There then remains the question whether the appellant is taxable upon the trust income under any provision of the Act, other than s. 3(e). If the appellant is taxable it must be under the first part of s. 11 of the Act. A “beneficiary” is one for whose benefit property is held by trustees or executors, and I do not think it can be successfully urged that the appellant is a “beneficiary” in the sense intended by s. 11. The beneficiaries under the trust here are ascertained persons, the children of the settlor. I do not think that s. 11 is to be construed as authority to tax the income of a trust as part of the income of the settlor of the trust, where there are beneficiaries and they are ascertained. It seems to me impossible to hold that the appellant is a “beneficiary” under the trust and within the meaning and intention of the Act. The real purpose for enacting s. 11, ss. 1 was to make “income” include “all income” accruing to the credit of a beneficiary of an estate or trust whether received by him or not, for any taxation period.

By Statutes of Canada 1939, c. 46, s. 3, paragraph (e) of subsection (1) of section 3 of the Income War Tax Act was repealed and the following substituted. The opening words of the paragraph as previously cited remained unaltered:

(e) personal and living expenses when such form part of the profit, gain or remuneration of the taxpayer or the payment of such constitutes part of the gain, benefit or advantage accruing to the taxpayer under any estate, trust, contract, arrangement or power of appointment, irrespective of when created. [Emphasis added.]

By section 21 of the same amending enactment, subparagraph 2(1 )(r)(i) was added to the interpretation provisions of the Act. It read:

2. (1) In this Act, and in any regulations made hereunder, unless the context otherwise requires,

(r) “personal and living expenses” shall include inter alia —

(i) the expenses of properties maintained by any person for the use or benefit of any taxpayer or any person connected with him by blood relationship, marriage or adoption, and not maintained in connection with a business carried on bona fide for a profit and not maintained with a reasonable expectation of a profit.

These amendments were made applicable to 1938 and subsequent periods. The emphasized words in paragraph 3(1 )(e) and subparagraph 2(1)(r)(i) were enacted in direct consequence of the decision in Malkin No. 1. In Malkin No. 2 the appellant had been reassessed in respect of his 1938 taxation year. Included in the reassessment was additional income in respect of the appellant's occupation of Southlands. The question was whether the amend- ments had resulted in setting aside the decision in Malkin No. 1. In allowing the appeal on this point MacLean, P. said at 141-42 (D.T.C. 589-90):

I should perhaps make it clear that the appellant occupied Southlands in 1938 under precisely the same terms and for the same reasons that obtained in 1935, and as explained in my judgment in the other appeal.

It is to be pointed out that the new subs. (r) of s. 2 of the Act, the Interpretation section of the Act, would appear to have been intended only to define what “personal and living expenses” shall include, and accordingly it does not say when, or in what state of facts, such “personal and living expenses” would be included as annual net profit or gain and therefore taxable income; in fact one would not expect to find any such provision in the Interpretation section of the Act, but one would look for something to that effect in sec. 3 of the Act, and there we find that s. 3(e) provides when “personal and living expenses” constitute taxable income. It is difficult to say what meaning is to be ascribed to certain words found in this amending section, s. 2(r), and I have particular reference to the words beginning with “or any person connected with” and then on to the end of both subsections (i) and (ii) of s. 2(r), and which appear as they stand to be not only confusing but incomplete. Any attempt to construe those words literally and without some further statutory provision would appear to lead to some strange results, results which one can hardly believe could ever have been contemplated by the legislature. Then, when we find in the very next section of the Act, s. 3(e), a provision as to when “personal and living expenses” shall constitute taxable income it becomes all the more difficult to regard or construe s. 2(r) as being intended for any other purpose than a definition of terms, or to read it as a provision enacting when such “personal and living expenses” are to be included as taxable income.

Sec. 3 of the Act is the one which defines in general terms what is “income”, and it is only “income” as so defined that is taxable, but of course there are other provisions in the Act which exempt certain incomes from the tax, and which provide for certain deductions and exemptions. The annual net profit or gain made subject to the income tax by s. 3, are made, by the amended subs. (e) thereof, to include the following: “personal and living expenses when such form part of the profit, gain or remuneration of the taxpayer, or the payment of such constitutes part of the gain, benefit or advantage accruing to the taxpayer under any estate, trust, contract, arrangement or power of appointment, irrespective of when created”. Sec. 3(e) thus purports to enact when and under what state of facts, “personal and living expenses” constitute taxable income. Now, I think it is clear that the appellant is not here taxable under s. 3(e) of the Act, first, because the expenses of the maintenance of Southlands, or the payment of the insurance premiums under the Trust Settlement, do not form part of the profit, gain or remuneration of the appellant, and in the second place, because the payment of such expenses by the trustee under the Trust Settlement does not constitute part of any gain, benefit or advantage “accruing to the taxpayer under any estate, trust, contract . . .” Now if I am correct as to that, and that would seem to be fairly clear, then there is no provision in the Act which specifically enacts what, or when, “personal and living expenses” are taxable as income. It seems to me therefore that it is only “personal and living expenses” which fall within the terms of sec. 3(e) of the Act that are taxable as income. I do not think therefore that the appellant can be held liable for the particular item of tax assessment under discussion, and which was levied against him. It is quite manifest that it was one of the purposes of the amending statute to capture the tax assessed in this case,* [3] but I think the draftsman has not succeeded in doing so. At least that is the conclusion which I have reached and therefore, I think, in so far as this particular item of the appeal is concerned the appellant must succeed.

In No. 359 the appellant had been reassessed by adding to his income for 1952 and 1953 the sums of $2,840 and $2,720 respectively. The appellant who was a minority shareholder in Blank Company borrowed $97,000 from it in 1949 to enable him to purchase the shares of the principal shareholder in the company. The contract did not stipulate for the payment of interest. The respondent relied on paragraph 8(1)(c) (now para. 15(1)(c)) and paragraph 5(1)(a) (analogous to present para. 6(1)(a)). They provided:

8. (1) Where, in a taxation year,

O(c) a benefit or advantage has been conferred on a shareholder by a corporation

otherwise than

(i) on the reduction of capital, the redemption of shares or the winding- up, discontinuance or reorganization of its business,

(ii) by payment of a stock dividend, or

(iii) by conferring on all holders of common shares in the capital of the

corporation a right to buy additional common shares therein,

the amount or value thereof shall be included in computing the income of the shareholder for the year.

5. (1) Income from a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by the taxpayer in the year plus

(a) the value of board, lodging and other benefits . . . received or enjoyed by him in the year in respect of, in the course of or by virtue of the office or the employment.

In allowing the appeal W.S. Fisher, Q.C., of the Income Tax Appeal Board said at 27 (D.T.C. 477):

The crux of this appeal is whether a “benefit” had actually been conferred on the taxpayer shareholder by the Blank Company in the circumstances outlined above. The respondent alleges that there had, and has fixed the amount or value thereof, in the years in question, at 4% of the balance outstanding on the loan in the respective years. The appellant denies that any advantage, within the meaning of the Acts, was conferred on him in the years under appeal, and states further that, if any benefit was conferred, it was conferred in the year 1949 when the loan was made, and that this was not a continuing benefit conferred in either of the taxation years under appeal within the meaning of the provisions of subsection (1) of section 8.

After consideration, I am of the opinion that neither the provisions of subsection (1) of section 8 nor the provisions of section 5(a) of the Income Tax Act are applicable in the circumstances disclosed by the evidence in this appeal. In my opinion, the provisions of subsection (1) of section 8 are not applicable, not were they intended to be applicable, in a situation such as we find here, and I am of the opinion that no benefit was conferred on the appellant by the Blank Company in the said years 1952 and 1953. Apart from specific legislation in a taxing statute, I know of no law which imposes an obligation upon a lender to demand the payment of interest in connection with a loan granted by the lender to a borrower, and if the lender does not require the payment of interest, the borrower is under no obligation to pay interest.

M.N.R. v. Pillsbury Holdings Limited, supra, also involved a loan, but not an interest-free loan. On October 14, 1952 the respondent borrowed $500,000 from X Corporation and $560,000 from Y Corporation and used the money to purchase all of the shares of X except those that belonged to Y and over 99 per cent of the shares of Y. Interest was fixed at four and one-half per cent payable semi-annually. On June 30, 1953 the boards of directors of X and Y adopted resolutions permanently waiving the interest due on May 31 of that year. On May 10, 1954 the board of directors of X adopted a resolution accepting $500,000 in full payment of its loan and waiving its right to interest from May 31, 1953Jo the date of payment. The respondent had undertaken to repay the loan on or before May 31, 1954. The following day the board of directors of Y adopted the same resolution in respect of its $560,000 loan. The sole question was whether paragraph 8(1)(c) required that the relinquished interest be included in computing the respondent's income in its 1953 and 1954 taxation years.

Mr. Justice Cattanach ruled in favour of the respondent. In order to readily appreciate the following quotation from his reasons for judgment I reproduce the whole of subsection 8(1):

8. (1) Where, in a taxation year,

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,

(b) funds or property of a corporation have been appropriated in any manner whatsoever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

otherwise than

(i) on the reduction of capital, the redemption of shares or the winding- up, discontinuance or reorganization of its business,

(ii) by payment of a stock dividend, or

(iii) by conferring on all holders of common shares in the capital of the

corporation a right to buy additional common shares therein,

the amount or value thereof shall be included in computing the income of the shareholder for the year.

He said at 298-99 (D.T.C. 5186-87):

The normal payments and distributions by a corporation to a shareholder qua shareholder are

(a) dividends during the lifetime of the corporation,

(b) payments and distributions in respect of reductions in capital during the lifetime of the corporation, and

(c) payments and distributions on the occasion of the winding-up of the corporation.

Provisions in the Income Tax Act, other than section 8, govern the taxability of such payments and distributions when made in the orthodox way. In the remainder of this judgment, when referring to dividends, I intend to refer to any of these payments or distributions referred to in this paragraph.

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. This is true of paragraph (a) of subsection (1). A corporation normally makes payments to its shareholders as dividends unless the payment is pursuant to a bona fide business transaction, in which event it is not a payment accruing to the shareholder qua shareholder. If a payment is made to a shareholder qua shareholder, paragraph

(a) requires that it be brought into the shareholder’s income whether or not it is made as a dividend. Similarly, as for as paragraph (b) of subsection (1) is concerned, the normal method whereby a corporation appropriates funds or property to, or for the benefit of, its shareholders is by a declaration of dividend payable in cash or in kind. If funds or property are appropriated to or for the benefit of a shareholder qua shareholder in any other way, paragraph (b) requires that they be brought into his income.

Paragraph (c) of subsection (1) of section 8 may be expected, therefore, to apply to cases where benefits or advantages have been conferred on a shareholder in such circumstances that the effect is, in substance, equivalent to the payment of a dividend to the shareholder. Where a corporation, for example, is in a business of providing services for a fee or other charge, and performs its services for one or more of its shareholders free of charge, the effect is, assuming that such shareholders would have used such services in any event, that the revenues of the corporation are less than they would be if such shareholders paid on the same basis as other customers and consequently there are less profits available for distribution to the shareholders by normal methods. Such a provision of services by a corporation to its shareholders, is one way whereby a corporation might confer a benefit or advantage on shareholders within the intent of paragraph (c). Similarly, a corporation that rents or lets property, real or personal, in the course of its business, might rent or let its property to a shareholder for nominal amounts. While I have referred to a corporation that does not charge a shareholder anything, or only charges a shareholder a normal amount for something it does in the course of its business for customers other than shareholders, any corporation might resort to similar methods for conferring a benefit or advantage on shareholders even if it were not in the business of providing services or letting or hiring property.

By way of contrast, in my view, there can be no conferring of a benefit or advantage within the meaning of paragraph (c) where a corporation enters into a bona fide transaction with a shareholder. For example, Parliament could never have intended to tax the benefit or advantage that accrues to a customer of a corporation, merely because the particular customer happens to be a shareholder of the corporation, if that benefit or advantage is the benefit or advantage accruing to the shareholder in his capacity as a customer of the corporation. It could not be intended that the Court go behind a bona fide business transaction between a corporation and a customer who happens to be a shareholder and try to evaluate the benefit or advantage accruing from the transaction to the customer.

His Lordship said that whether extinguishing the interest debt was the conferring of a benefit on the respondent under paragraph 8(1)(c) must be considered as a question of fact. He found that it had not been alleged or established that in making the assessments the Minister assumed that waiver of the interest was an arrangement or device adopted by A and B to confer a benefit or advantage on the respondent qua shareholder, and: “There was no onus on the respondent to disprove that fact, which is essential to its being taxable, unless the Minister assumed that fact when assessing” (at 303: D.T.C. 5189). He went on on the same page:

In any event, as far as the second round of waivers are concerned, they were expressed to be settlements negotiated by a borrower with its lender under the terms of which immediate payment of a large amount of principal was to be made in consideration of interest being cancelled. There is no allegation that this quite ordinary type of transaction between a debtor and lender is a mere subterfuge whereby the lender corporation is conferring a benefit or advantage on the borrower qua shareholder and, in the absence of any issue having been made by the Minister of that question of fact, I cannot so find.

When this case was before the Income Tax Appeal Board (19 Tax A.B.C. 431; 58 D.T.C. 428) R.S.W. Fordham, Q.C., in allowing the corporation's appeal relied on No. 359. Cattanach, J. made no reference to No. 359 in his reasons for judgment.

Wale v. M.N.R., supra, involved an interest-free loan. The appellant was a shareholder of Lloyd Wale Plumbing & Heating Limited. The company borrowed $15,000 and on June 30, 1957 it loaned the money to the appellant free of interest. He had the use of it for the rest of the year. In reassessing in respect of the appellant's 1957 taxation year the respondent added to the appellant’s income interest on the $15,000 at six per cent as a benefit under paragraph 8(1)(c). In terse reasons for judgment, Mr. Fordham allowed the appeal. In doing so he simply relied on Pillsbury Holdings.

In Thompson and Thompson reference is made to the related case of Garneau Marine Co. Ltd. v. M.N.R., [1982] C.T.C. 2191; 82 D.T.C. 1171, to which resort is made for the relevant facts. Garneau Marine Co. Ltd. (“the company") loaned a substantial sum free of interest to the appellants who were husband and wife and shareholders of the company. The appellants were reassessed on the basis that this interest-free loan represented a benefit to each of them of $2,729 and $3,831 in their 1977 and 1978 taxation years respectively under paragraph 15(1)(c) of the Act which, as previously noted, is the successor to paragraph 8(1 )(c). Taylor, T.C.J., in his then capacity as member of the Tax Review Board, dismissed the appeals. In doing so he followed the Pillsbury Holdings approach but, unlike Cattanach, J., he found as a fact that the interest-free loan was made to the appellants in their capacity as shareholders. He said at 2190 (D.T.C. 1171): "It (the loan) qualifies as well as anything of which I can conceive as ‘a method, arrangement or device, for conferring a benefit' and since, in this case, the party benefitting is a shareholder, paragraph 15(1)(c) of the Act applies".

In order to complete the review of the arguments made by the appellant I mention his reference to section 80.4 of the Act as enacted “in the early 1980s". Having regard to what was said in this regard I am satisfied the reference was being specifically directed to subsection 80.4(2) as amended by S.C. 1980-81-82-83, c. 140, ss. 44(1). What is relevant therein for present purposes reads:

Where a person was a shareholder of a corporation and by virtue of such shareholding that person received a loan from that corporation the person shall be deemed to have received a benefit in a taxation year equal to the amount by which the amount of interest for the year on all such loans computed at such prescribed rates as are in effect from time to time during the period in the year that the loans were outstanding exceeds the amount of interest for the year paid on all such loans and debts not later than 30 days after the later of the end of the year and December 31, 1982.

It is said that this subsection infers that prior to its enactment the law regarding interest-free loans to shareholders was accepted as being that they were not regarded as benefits. If, in the absence of legislation like subsection 80.4(2), interest-free loans to shareholders were not benefits then, in the absence of analogous legislation applicable to subsection 105(1) of which there is none, an interest-free loan from a trust to a taxpayer is not to be regarded as a benefit.

Counsel for the respondent said that there was a legal obligation on the trustees to require payment by the appellant of interest at commercial rates and that failure to do so constituted a breach of trust.* [4] This obligation it is said distinguishes the case at bar from pronouncements or arguments that an interest-free loan is not a benefit conferred on the recipient thereof because there is no obligation on the lender to require payment of interest and therefore no requirement that the borrower pay interest.

The second branch of her argument is that even if there was no obligation on the trustees to require payment of interest, the $400,000 interest- free loan was a benefit from a trust to the appellant within the meaning of subsection 105(1) of the Act. Included among the authorities cited by her is the judgment of the Supreme Court of the United States in Esther C. Dickman et al. v. Commissioner of Internal Revenue, 465 U.S. 330 (1984). Chief Justice Burger delivered the opinion of the Court. He summarized the facts at 332:

Paul and Esther Dickman were husband and wife; Lyle Dickman was their son. Paul, Esther, Lyle, and Lyle’s wife and children were the owners of Artesian Farm, Inc. (Artesian), a closely held Florida corporation. Between 1971 and 1976, Paul and Esther loaned substantial sums to Lyle and Artesian. Over this 5-year interval, the outstanding balances for the loans from Paul to Lyle varied from $144,715 to $342,915; with regard to Paul’s loans to Artesian, the outstanding balances ranged from $207,875 to $669,733. During the same period, Esther loaned $226,130 to Lyle and $68,651 to Artesian. With two exceptions, all the loans were evidenced by demand notes bearing no interest.

Paul Dickman died in 1976, leaving a gross estate for federal estate tax purposes of $3,464,011. The Commissioner of Internal Revenue audited Paul Dickman’s estate and determined that the loans to Lyle and Artesian resulted in taxable gifts to the extent of the value of the use of the loaned funds. The Commissioner then issued statutory notices of gift tax deficiency both to Paul Dickman’s estate and to Esther Dickman.

The issue was whether an interest-free demand loan is a taxable gift under the American Internal Revenue Code of 1954. The answer is yes. Burger, C.J. said at pages 337-38:

The right to the use of $100,000 without charge is a valuable interest in the money lent, as much so as the rent-free use of property consisting of land and buildings. In either case, there is a measurable economic value associated with the use of the property transferred. The value of the use of money is found in what it can produce; the measure of that value is interest — “rent” for the use of the funds.

The right to use money is plainly a valuable right, readily measurable by reference to current interest rates; the vast banking industry is positive evidence of this reality. Accordingly, we conclude that the interest-free loan of funds is a “transfer of property by gift” within the contemplation of the federal gift tax statutes.

When the loan of $400,000 was made in June of 1981 the trustees were required to invest the net income of the estate. At that time, apart from being a trustee, the appellant’s interest in the residue of the trust property was, having regard to the amendments to the will made by the Surrogate Court in April 1981, contingent in relation to both capital and income. During the years under review the appellant was not entitled to the payment or transfer of income or capital by way of distribution from the residue of the trust under the will as originally worded nor was he entitled to such payment or transfer during that time under the amended will. The only right the other trustee had was her entitlement to the annuity.

There is eminent authority for the assertion that a person who is vested with a fiduciary power to direct the investment of trust property is required to stipulate for a commercial rate of interest in respect of any loan made from that property and failure to do so would be a breach of trust: Vestey's (Lord) Executors and another v. C.I.R., [1949] 1 All E.R. 1108 (H.L.) at pages 1132, 1138 and 1141. Of course an interest-free loan is not an investment. As Lord Morton so aptly put it at page 1131 of his speech in the case just cited: “Such a loan would no more be an 'investment' than would be the placing of cash in a stocking". Be that as it may, for reasons that follow, I find it unnecessary to rule on the issue of whether the trustees were required to make it a term of the loan to the appellant that interest be paid and that it be fixed at commercial rates. Even if the loan was unauthorized, and I expressly refrain from deciding this, it could have no bearing on the determination of the appellant’s liability to tax. In Mitchell Byke and Mary Byke, executors of the Will of jacob Byke, deceased v. The Queen, [1974] C.T.C. 763; 74 D.T.C. 6585, Mr. Justice Mahoney, citing M.N.R v. Eldridge, [1964] C.T.C. 545; 64 D.T.C. 5338, and R. v. Poynton, [1972] C.T.C. 411; 72 D.T.C. 6329, said at 770 (D.T.C. 6591):

If a benefit was conferred on the Plaintiffs wihin the meaning of section 8(1), the taxability of that benefit is in no way affected by its having been conferred illegally.* [5]

This observation is equally applicable to subsection 105(1) of the Act.

Returning to the appellant’s submissions, I cannot construe subsection 80.4(2) of the Act as implying that prior to its enactment an interest-free loan was regarded in law as not being a benefit. The subsection does not address itself only to interest-free loans, but includes any loans that do not require payment of interest at prescribed rates. It does not deem a loan, interest free or otherwise, to be a benefit; it deems what the amount of the benefit is regarding loans described therein. Also with respect to an argument of this kind, subsection 37(3) of the Interpretation Act, R.S.C. 1970, c. I-23, should be borne in mind. It provides:

37. (3) The repeal or amendment of an enactment in whole or in part shall not be deemed to be or to involve any declaration as to the previous state of law.

Malkin No. 1 was not relied on by the appellant and I only say in passing that the relevant legislation then before the Court made no mention of the word “benefit”. In Malkin No. 2 the Court considered amended paragraph 3(1)(e) and subparagraph 2(1 )(r)(i) and both included that word. I can find nothing in the reasons for judgment that suggest that the rent-free use of Southlands was regarded as not being a benefit to the appellant. The whole tenor of the reasons is that that was accepted. The disposition of the appeal turned on whether the amendments had succeeded in their object of making that kind of a benefit liable to attract tax. Further, there is the question whether the interpretive approach adopted by the Court would be regarded as acceptable today because of its apparent inconsistency with what has been said by both Parliament and the Supreme Court of Canada. It is expressly acknowledged in the reasons for judgment that one of the objects of the 1939 amendments was to require that the value of a benefit like the rent-free use of Southlands be taken into account in computing income. Instead of giving effect to this object, the Court focussed on a constricted analysis of what it regarded to be inept draftsmanship. Subsections 3(1) and 2(1) and section 11 of the Interpretation Act, R.S.C. 1970, c. 1-23, provide:

3. (1) Every provision of this Act extends and applies, unless a contrary intention appears, to every enactment, whether enacted before or after the commencement of this Act.

2. (1) In this Act

“Act” mens an Act of the Parliament of Canada;

“enactment” means an Act or regulation or any portion of an Act or regulation.

11. Every enactment shall be deemed remedial, and shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects.

In Stubart Investments Limited v. The Queen, [1984] C.T.C. 294; 84 D.T.C. 6305, Mr. Justice Estey speaking for the majority of the Supreme Court said at 316 (D.T.C. 6323):

While not directing his observations exclusively to taxing statutes, the learned author of Construction of Statutes, 2nd ed., (1983), at 87, E. A. Dreidger, put the modern rule succinctly:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

In Pillsbury Holdings, the Court again did not concern itself with the question whether forgiveness of the interest debt was a benefit to the appellant. There is nothing in the reasons for judgment that directly or by implication suggests that it was not. The debate was concerned with whether the benefit was conferred on the appellant in its capacity as a shareholder. There can be no doubt that when the appellant in the appeal at hand received the $400,000 loan he was a "taxpayer” which is the description of the class of recipient in subsection 105(1) of the Act. Subsection 248(1) states that: "taxpayer includes any person whether or not liable to pay tax”. Wale adopted and followed Pillsbury Holdings. Thompson & Thompson also involved the same type of question as was posed in Pillsbury Holdings, i.e. whether the interest-free loan was conferred on the appellants qua shareholder, not whether the loan was a benefit. The only fundamental difference between these cases that is relevant to the appeal at hand is that Taylor, T.C.J. came to a different factual conclusion than the one arrived at by Cattanach, J. As previously noted Taylor, T.C.J. held that the benefit had been conferred on the appellants in their capacity as shareholders.

This leaves No. 359. A careful reading of the reasons given for the result in that case can, I think, lead only to the conclusion that Mr. Fisher was of the opinion that the interest-free loan was not a benefit within the meaning of the then subsection 8(1) because there was no obligation on the lender to require the payment of interest and consequently the borrower was under no obligation to pay interest. The appellant invokes this rationale in support of the appeal now before me.

While I do not consider myself bound under the doctrine of stare decisis by decisions of the Tax Appeal Board or its successor the Tax Review Board, my view is that I should not lightly depart from the reasons or principles upon which they have decided appeals. A large and useful body of precedents was created by these tribunals and much reliance has been placed on it. If, however, I am fully satisfied that what was said by a member of those tribunals is wrong, then I believe I must be guided by my judgment of what is correct. I regard the deduction in the ratio decidendi of No. 359 that an interest-free loan is not a benefit as a non sequitur that, with respect, I cannot adopt and apply.

In The Queen v. Savage, [1983] C.T.C. 393; 83 D.T.C. 5409 (S.C.C.) one of the questions before the Court was whether $300 received by the respondent from the insurance company that employed her must be included in computing her income for 1976 under paragraph 6(1)(a) of the Act* [6] as a benefit received by her in respect of her employment. Mrs. Savage had voluntarily taken and successfully completed three courses offered by the company designed to improve her knowledge in the field of life insurance. She received $100 for each course. There was no issue regarding whether these payments were benefits. This was presumed. The question was whether the $300 was received or enjoyed by her in respect of, in the course of, or by virtue of her employment within the meaning of paragraph 6(1)(a). It was answered in the affirmative. The Court, however, went on to find that the appellant was exempt from paragraph 6(1 )(a) because the $300 was a prize that did not exceed $500 under subparagraphs 56(1)(n)(i) and (ii). They read:

56. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(n) the amount, if any, by which

(i) the aggregate of all amounts received by the taxpayer in the year, each of which is an amount received by him as or on account of a scholarship, fellowship or bursary, or a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer,

exceeds

(ii) $500.

The Queen v. Houle, [1983] C.T.C. 406; 83 D.T.C. 5430 (F.C.T.D.), involved a reassessment for the personal use by the shareholder of a 37-foot yacht owned by the company. No one questioned whether this was a benefit. The only issue was the method of calculating the quantum of the benefit. In Youngman v. The Queen, [1986] 2 C.T.C. 475; 86 D.T.C. 6584 (F.C.T.D.), a corporation constructed a luxury residence which was occupied by shareholders. Mr. Justice McNair readily found it was a benefit. He said at 479 (D.T.C. 6587): "There is no definition of 'benefit' or ‘advantage’ in the Act and the words are thus capable of the broadest possible interpretation". He went on to conclude that the shareholders had undervalued the benefit in computing their income. Other authorities could be referred to.

As already said, in reassessing the respondent fixed the value of the benefit to the appellant in 1981, 1982 and 1983 as $25,775, $62,827 and $41,973 respectively. In doing so he relied on the interest rates prescribed in subsection 4300(6) of the Income Tax Regulations. They relate to loans to employees and others described in subsection 80.4(1) and have no statutory link to subsection 105(1). Nevertheless, as they are designed to reflect favourable rates in the market place, I believe that they constitute a reasonable yardstick to resort to in establishing a commercial rate of interest upon which to calculate the value of the benefits to the appellant from the residue of the trust. In the absence of deeming legislation, a commercial rate of interest is not an absolute number. It is something that can vary within limits provided it relates to current domestic commercial reality in this re- gard.

At the hearing counsel informed the Court that in the event the appellant failed on the basic issue they were in agreement to the substitution, as a package, of this method of ascertaining the value of the benefits for that set out in paragraph 3(f) of the reply to the notice of appeal (supra):

Using the lowest one year conventional mortgage rates which were available from the five largest chartered banks in Canada, the value of the benefit to the Appellant would be calculated as follows:

Loan		Days/Year		Interest Rate Benefit
					7987
$400,000	X	196/365	X	15.25%	$32,756.16
					1982
$400,000	X	365/365	X	12.5 %	$50,000.00
					1983
$400,000	X	365/365	X	10.25%	$41,000.00

This would decrease the total amount of the reassessments by $6,819 or 5.2 per cent, but increase the reassessment in respect of the 1981 taxation year by $6,980.82. The latter, I believe, is beyond the Court's jurisdiction. Subsection 171(1) of the Act provides:

171. (1) The Tax Court of Canada may dispose of an appeal by

(a) dismissing it, or

(b) allowing it and

(i) vacating the assessment,

(ii) varying the assessment, or

(iii) referring the assessment back to the Minister for reconsideration and reassessment.

To make an order of dismissal could not give effect to the proposed exchange. On the other hand, if the appeal for 1981 were allowed then, having regard to the conjunctive nature of the relationship between allowing an appeal and subparagraphs (i), (ii) or (iii), it would be necessary to proceed further and vacate, vary or refer the reassessments back to the respondent. It would be a contradictory act to allow a taxpayer's appeal for a taxation year and couple it with an order, the effect of which is to increase his liability to tax. Such a course of action is not within the proper interpretation of subsection 171(1). It has been described as tantamount to allowing the Minister to appeal his assessment or reassessment: Louis J. Harris v. M.N.R., [1964] C.T.C. 562 at 571; 64 D.T.C. 5332 at 5337 (Ex. Ct.); Shiewitz v. M.N.R., [1979] C.T.C. 2291 at 2293; 79 D.T.C. 340 at 341 (T.R.B.) and Boyko et al. v. M.N.R., [1984] C.T.C. 2233 at 2237; 84 D.T.C. 1233 at 1237 (T.C.C.).

Further the Tax Court of Canada being a Court vested with limited statutory jurisdiction, it cannot acquire jurisdiction by the consent of litigants appearing before it. In Essex County Council v. Essex Incorporated Congregational Church Union, [1963] A.C. 808, Lord Reid said at pages 820-21:

In my judgment, it is a fundamental principle that no consent can confer on a court or tribunal with limited statutory jurisdiction any power to act beyond that jurisdiction, or can estop the consenting party from subsequently maintaining that such court or tribunal has acted without jurisdiction.

As indicated, the proposed substitution was put forward as an aggregate. Under the circumstances the appeal is dismissed.

Appeal dismissed.