Janet Jens v. Minister of National Revenue, [1986] 1 CTC 2061, 86 DTC 1061

Goetz, T.C.J.:—This appeal relates to the appellant’s 1978, 1979, 1980 and 1981 taxation years. The appellant sought to deduct certain insurance premiums on the life of her husband, which premiums were paid in each of the taxation years. The respondent has disallowed the said insurance premiums expenses and relies upon, inter alia, subparagraph 20(1)(e)(ii) of the Income Tax Act, S.C. 1970-71-72, c. 63 as amended.

Facts

It was agreed that Rudolph Jens, husband of the appellant, (hereinafter sometimes referred to as “Rudy Jens”) would give evidence on her behalf. Rudolph Jens is president of Canada Learjet Ltd. which company was incorporated in 1973 and at all relevant times Rudolph Jens owned 75 per cent of the shares and his spouse, the appellant, owned 25 per cent of the shares. Rudy Jens is very active in the aircraft business. In 1967 he formed Highland Helicopters Ltd. Canada Learjet Ltd. is engaged in charter operations throughout Canada and the United States. It is now the owner of three Learjet aircraft.

in 1975, the appellant and her husband purchased a Learjet aircraft Model #35 for the sum of $1,169,826. On December 17, 1975, they signed jointly two promissory notes each in the amount of $584,913.15. This aircraft was registered in their name on April 22, 1976. The appellant and her husband dealt with the Royal Bank of Canada (the "Bank”) with whom they were jointly and severally liable on a number of loans relating to the three aircraft corporations hereinbefore referred to.

Rudolph Jens apparently had discussed the purchase of the Learjet aircraft and the Bank, by way of letter addressed to Mr. Rudy Jens, c/o Executive Air Craft Ltd., and dated November 12, 1975, wrote Mr. Jens as follows:

November 12, 1975

PERSONAL

Mr. Rudy Jens

c/o Executive Air Craft Ltd.

438 Agar Drive

International Airport

South Vancouver, B.C.

Dear Mr. Jens:

We confirm our recent discussion wherein we advised that a line of credit has now been authorised to assist with the purchase of an aircraft from Learjet and in accordance with our original discussions, when these facilities were first requested, we would now appreciate if you would arrange to obtain term insurance on your life in the amount of $750,000 with either your estate or Mrs. Jens being the beneficiary. Please advise when this coverage is in effect.

Yours truly,

(Signature)

R. B. Thurston

Manager.

The appellant was owner and beneficiary of the policy and she paid the premiums.

On April 22, 1976, Rudolph and Janet Jens purchased a Learjet aircraft Model #35 C-G P U N and as of May 17, 1976, Mr. and Mrs. Jens were advised that their bank loans stood at $2,286,267.28. The insurance policy was dated November 7, 1975, and Mr. Jens said it was used to set up his line of credit with respect to both his aircraft operations and all his personal financing. Mr. and Mrs. Jens leased their Learjet aircraft to Canada Learjet Ltd. and it was on this basis that the appellant sought to deduct the insurance premiums as an expense arising from the carrying on of a business.

In 1982, Mr. Jens says that he was advised by telephone by his insurance company that his policy would expire in 1986 unless he increased his annual premiums to $27,000 as of November 22, 1982. This he did because he was able to get a whole life policy. He never advised the Bank that the term policy had been turned into a whole life policy.

The appellant filed a lease agreement between herself and her husband and Canada Learjet Ltd. with respect to the Learjet aircraft Model #35, serial number 040 and registered as C-G G Y V. As of May 12, 1976, “Lear Jet 35” with registration marks "CC-G P U N’ was registered as follows: "Worldways Airlines Ltd. on lease from Canada Learjet Ltd. on lease from Rudy Jens and J. Jens.”

On May 28, 1979, Mr. and Mrs. Jens received a letter from the Royal Bank of Canada relating to a Learjet aircraft Model #35, registration number C-G PUN, and to certain loans at the Bank, one whereby the appellant was jointly and severally liable with her husband for $600,000 and another $500,000 in the name of Rudy Jens. The chattel mortgage directed that any loss payable be to the Royal Bank of Canada and R. Jens and J. Jens as their interest appeared.

Rudolph Jens says that between 1976 and 1979 he had loans up to $6 million with the Bank, which loans related to his three aircraft companies. He had given personal guarantees on all loans.

On November 14, 1979, the Royal Bank of Canada, wrote Mr. R. Jens, president of Canada Learjet Ltd. relative to Canada Learject Ltd. loans which were all guaranteed by Rudy Jens. There was no mention of an insurance policy, term or otherwise, in this letter.

On March 4, 1982, the Royal Bank of Canada again wrote Mr. Rudy Jens, President of Canada Learjet Ltd. relative to Canada Learjet Ltd. loans from the Bank in the amount of $6,500,000. In the letter it appears that the security consisted of a guarantee in the amount of U.S. $3 million signed Rudolph Jens, a general assignment of book debts and three chattel mortgages. Again there was no mention of any insurance policy. Rudy Jens says he filed a net worth statement each year with the Bank, which statement would include his wife’s insurance policy on his life to obtain, obviously, a large line of credit on the basis mainly of his personal guarantees.

On the demand from the Department of Transport, the appellant sold a Learjet aircraft Model #35, registered as C-G P U N, to Canada Learjet Ltd., for the price of $2,194,100, effective as of January 1, 1979. The appellant received from Canada Learjet Ltd., among other things, preferred Class A shares in the value of $462,500, representing her interest in the aircraft. On the taking over of ownership of the aircraft by Canada Learjet Ltd., the Bank deducted interest charges on the purchase of the aircraft and same from the account of Canada Learjet Ltd. Rudy Jens says that the Bank advised them that it had deducted interest from his and his wife's personal accounts up to August 1979, but from September 1979, the loans were carried as loans of Canada Learjet Ltd.

At the time of transfer of ownership of the Learjet aircraft Model #35 (C-G PUN) the sum of approximately $600,000 was outstanding with respect to the purchase thereof by Mr. and Mrs. Jens. This is referred to in a letter from the Royal Bank of Canada dated November 14, 1979.

A senior manager who specialises in executive accounts for the Royal Bank of Canada, described Rudolph Jens as a very valuable client and indicated that on April 12, 1983, she wrote a letter on behalf of the Bank to Rudolph Jens as president of Canada Learjet Ltd. requesting a formal assignment to the Bank of the $750,000 so-called term insurance policy on Ru- dolph Jens' life. This executive officer indicated that she first came in contact with Rudolph Jens’ account in 1979. When questioned about this request, she stated that the assignment of the insurance policy would give “additional comfort to the Bank.” She stated that the letter between the Bank and Mr. and Mrs. Jens would not necessarily include reference to “comfort" insurance in the amount of $750,000. This witness indicated that because there are different types of clients, most of whom would make arrangements with respect to insurance as security for loans and would be formalized immediately by way of assignment, whereas Mr. Jens was of the category that as long as the Bank knew that there was insurance on his life they would be satisfied. It was treated purely in a discretionary manner. She admitted that she was aware of the policy as of 1979 and that the Bank had no right to get at the policy but relied on Rudolph Jens' reputation.

The reason given for the demand for a formal assignment of the insurance policy was that Mr. Jens had had a heart attack, his business was down and due to the economic conditions the policy of the Bank had changed whereby all “comfort" arrangements were formalized in firm legal positions.

Findings

The appellant seeks to deduct as an annual expense the payment of insurance premiums on the life of her husband on a policy which she owned and which was payable to her as beneficiary. The deduction is sought under subparagraph 20(1)(e)(ii) of the Income Tax Act which reads as follows:

20 (1). Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(e) an expense incurred in the year

(ii) in the course of borrowing money used by the taxpayer for the purpose of earning income from a business or property (other than money used by the taxpayer for the purpose of acquiring property the income from which would be exempt), ...

It is apparent that the appellant was in the business of leasing Learjet aircraft to Canada Learjet Ltd. She and her husband, Rudy Jens, co-signed promissory notes payable to the Royal Bank of Canada in the total sum of $1,169,826. The loans were secured by way of guarantees by Rudy Jens and a chattel mortgage on the aircraft. Rudy Jens stated that because of the extensive borrowing by him from the Bank with respect to the financing of his three aircraft companies, it was suggested to him by the Royal Bank in November 1975 that “. . . we would now appreciate if you would arrange to obtain term insurance on your life in the amount of $750,000 with either your estate or Mrs. Jens being the beneficiary ..." The proceeds of this policy would not necessarily accrue to the Bank but rather to the estate of Rudolph Jens. It was a term policy but converted into a whole life policy in 1982 without the Bank being informed of the change. The Bank treated the insurance policy as “comfort" and it was not until 1983, because of the decline of the financial market, that this “comfort" was asked to be formalized by way of a formal assignment of the policy to the Bank. This is the first time that the insurance policy was treated as firm security relative to the loans granted to the appellant for the purpose of purchasing a Learjet aircraft. The relationship of the life policy on Rudy Jens' life to the loan relating to the purchase of the Learjet aircraft is too tenuous to be considered as collateral security for the loan. In the annual letter from the Bank to Rudolph Jens relating to his extensive loans from the Bank mention of all security was made such as guarantees, chattel mortgages, etc. but no mention was made of the life insurance policy on Rudolph Jens' life.

The Learjet aircraft for the purchase of which deductions are sought, became the property of Canada Learjet Ltd. as of January 1, 1979, and was no longer an income earning asset of the appellant. As of September 1979, the Learjet aircraft was considered an asset of Canada Learjet Ltd. by the Bank and was treated as such thereafter. Counsel for the appellant has argued that the change of the income earning asset, namely the aircraft, to preferred shares, did not change the appellant’s right to deduct the insurance premiums as an expense because, as he says the aircraft asset was turned into a preferred shares asset which produced income. This contention is not tenable. Once the aircraft became the property of Canada Learjet Ltd. that company was responsible for the payments of the premiums as an expense of the company and this, in fact, was done.

If the appellant were entitled to deduct the payment of the insurance premiums as an expense on an income earning asset, she would only be able to do so up to September 1979. In any event, I find that the expense of payment of the insurance premiums on the life of Rudolph Jens cannot be deducted by the appellant as an expense relating to an income earning asset.

For the above reasons, I dismiss the appeal.

Appeal dismissed.