Juttian Development Inc v. Minister of National Revenue, [1983] CTC 2259, 83 DTC 220

D E Taylor:—This is an appeal heard in Montreal, Quebec, on December 6, 1982, against an income tax assessment for the year 1979 in which the Minister of National Revenue demanded remittance of the 15% non-resident tax under the Income Tax Act. The notice of appeal dated June 3,1981 read:

Re: Juttian Development Inc

Appeal of assessment #A61440

I. FACTS

1.1 Juttian Development Inc (“JUTTIAN”) is a Canadian corporation.

1.2 Juttian acquired a property in Kansas City in May 1978.

1.3 Upon Acquisition, Juttian assumed an existing mortgage loan (herein referred to as the “Loan”) from the Federal Land Bank Association Lee’s Summit (the “Bank”).

1.4 The Loan has the following features:

(a) the principal assumed was $70,000;

(b) due in 2004;

(c) annual instalments of $6,932 including interest;

(d) interest rates are flexible.

1.5 The Loan was originally granted in 1974 to a Mr E Van Arsdale, the Vendor of the property acquired by Juttian.

1.6 When Juttian attempted to withhold 15% from interest payments the Bank refused to comply, claiming its non-taxable status in the US as a reason.

1.7 Juttian then contended that the interest payments are exempt by virtue of subparagraph 212(1 )(b)(vii) (herein referred to as (vii) ).

1.8 The Minister rejected this contention (please see II below) per Notice of Assessment A61440. Upon the filing of a Notice of Objection by Juttian, this rejection was confirmed by the Chief of Appeals, Montréal District Office, on April 6,1981.

II. MINISTER’S REASONS FOR REJECTION

2.1 The Minister appears to be satisfied that all requirements of (vii) have been complied with, except for one, ie, that the date of the issuance of the evidence of indebtedness was not May/78, as claimed by Juttian, but rather July/74. Please see photocopy of letter of 15/11/79, written by the Montreal office of Revenue Canada, Taxation. The date “July/74” referred to is the date when the Bank lent $74,500, secured by the Kansas property, to the original owner of that property, Mr E Van Arsdale.

2.2 In support of this point of view, the Minister refers to paragraph (6) of Interpretation Bulletin IT-361 (copy of excerpt enclosed).

III. TAXPAYER’S (JUTTIAN’S) OBJECTIONS

3.1 Juttian complies with (vii) and, specifically, with the requirement that the “evidence of indebtedness” be “issued after June 23, 1975”. In this case it was issued by the Bank in May 1978, and not before.

3.2 IT-361 (6) does not apply to this case:

The purpose of this paragraph was apparently to prevent taxpayers from circumventing the law by “recycling” an old obligation, ie, by forcing a non-qualifying loan to comply with (vii). Such is of course not the case here.

3.3 The Minister’s attempt to disqualify Juttian on the basis of IT-361 (6) is founded on an incorrect interpretation of the words contained in that paragraph, particularly in the first sentence.

(a) The word “renegotiated” (contained in phrase “where an obligation is renegotiated at a time after its original issue . . .”) implies that the parties involved were the same in both instances, in 5/78 and in 7/74. This is of course not the case as Juttian was not a party to the 1974 negotiations.

(b) “Obligation” means a contract between a lender and a borrower. When the borrower is no longer the same, could it still be referred to as the same? Or is it not now a new obligation? The fact that the security for the Loan was the same in 1978 as it was in 1974 does not, ipso facto, mean that it is the same obligation.

3.4 Juttian clearly complies with the provisions of (vii) which contemplates that a new Loan be created in favour of the taxpayer. This is the case here: Juttian assumed a brand new loan; the fact that the lender transferred it from another borrower and used the same security is irrelevant. The Income Tax Act is only concerned with the taxpayer.

3.5 The purpose of the cut-off date, June 23, 1975, is to prevent retroactivity of a “budget-date” announcement. This principle of retroactivity would not be violated here, since Juttian did not owe any money to the Bank before it assumed the Loan, in May/78, and certainly not before 23/6/75.

In assessing the appellant for the 1979 taxation year, the respondent relied, inter alia, upon the following presumptions of facts:

(a) During the year under appeal, the Appellant was a corporation resident in Canada;

(b) During the year under appeal, the Appellant paid to the Federal Land Bank Association an amount of $7,043.56 as interest on a mortgage loan;

(c) During the year under appeal, the Federal Land Bank Association was not resident in Canada;

(d) On May 2, 1978, the Appellant bought a farm situated in Kansas City, United States, from a Mr Van Arsdale for a total price of $500,000.00;

(e) As part of the purchase price, the Appellant, the vendor and the Federal Land Bank Association agreed to transfer to the Appellant the Federal Land Bank Loan #361780-2-0 owed by the vendor and secured by a mortgage registered on the above mentioned farm property;

(f) The above mentioned mortgage loan was granted to the vendor by the Federal Land Bank Association in July 1974, at the time of the Appellant’s acquisition of the farm, the balance still owing on the loan amounted to $70,000.00;

(g) During the year under appeal, the Appellant failed to deduct from the payment of interest made to the Federal Land Bank Association the amount of the tax provided in the Act;

(h) The Appellant has never remitted to the Receiver General any money on behalf of the Federal Land Bank Association on account of the tax payable by it.

The respondent further relied, inter alia, on paragraph 212(1 )(b) and section 215 of the Income Tax Act, SC 1970-71-72, c 63, as amended, and on the Income Tax Application Rules, 1971, and submitted that the appellant had been property assessed in accordance with the provisions of paragraph 212(1 )(b), and subsections 215(1) and 215(6) of the Income Tax Act.

Findings

There was no dispute between the parties as to the basic facts, and several relevant documents were filed by common consent as Exhibits for the Board to review. Simply stated, it was the position of the appellant that the term “any obligation where the evidence of indebtedness was issued by that corporation after June 23, 1975 . . .” exempted Juttian from the deduction and remittance provisions of section 212 of the Act since no obligation had been assumed by the appellant until the year 1978, and then only by the transfer of that obligation from the original debtor (Van Arsdale) to Juttian, even though the obligation had been one of Van Arsdale since 1974. The directly relevant article is found in subparagraph 212(1 )(b)(vii) of the Income Tax Act and reads:

(b) Interest—interest except

(vii) interest payable by a corporation resident in Canada to a person with whom that corporation is dealing at arm’s length on any obligation where the evidence of indebtedness was issued by that corporation after June 23, 1975 and before 1983 if, under the terms of the obligation or any agreement relating thereto, the corporation may not, under any circumstances, be obliged to pay more than 25% of,

(A) where the obligation is one of a number of obligations that comprise a single debt issue of obligations that are identical in respect of all rights (in equity or otherwise, either immediately or in the future and either absolutely or contingently) attaching thereto, except as regards the principal amount thereof, the aggregate of the principal amount of those obligations, or . . .

In contending as it did, the appellant selected one particular document (Exhibit A-4) entitled “Land Bank Loan Transfer” as representing the “evidence of indebtedness” (see quotation from 212(1 )(b)(vii) above). The Minister contended that the “evidence of indebtedness” was that filed as Exhibit A-1, entitled “The Federal Land Bank of St Louis — Deed of Trust”.

Exhibit A-4 (relied upon by the appellant) is a document specifically between the vendor of the property Van Arsdale and the purchaser Juttian. There is no association therein with, or concurrence by the Federal Land Bank of St Louis. Aside from the normally expected terms, Exhibit A-4 contains the following:

(we)* [1] do hereby assume and agree to pay the unpaid balance of the indebtedness evidenced by the above described mortgage to the Federal Land Bank of St Laouis

Conversely, Exhibit A-1 referenced by the Minister states:

This deed of trust secures a promissory note delivered concurrently herewith in the principal sum of $74,500.00 . . . bearing interest as therein specified, payable in installments over an amortization period ending March 1, 2004 and all renewals and extensions thereof, all subject to an interest rate variable at option of said bank as in said note provided.

As I see it, the “evidence of indebtedness” would be the promissory note referenced as Exhibit A-1 and not the obligation of Van Arsdale to pay that promissory note assumed by internal transfer with Juttian (Exhibit A-4). In order for the Board to accept the position of the appellant in this matter it would be necessary to read subparagraph 212(1 )(b)(vii) in the following way: . on any obligation where the evidence of indebtedness was issued or assumed by that corporation . . . after June 23, 1975 . . Parliament, in its wisdom, did not see fit to legislate in that manner, and I can find no basis in the words of the Act which lead me to interpret the section in a manner to permit a taxpayer to escape from the provisions of section 212 by virtue of the transfer or assignment of an obligation, the evidence of indebtedness for which existed prior to June 23, 1975.

The appeal is dismissed.

Appeal dismissed.