Florence Epstein v. Minister of National Revenue, [1982] CTC 2147, 82 DTC 1168, [1982] CTC 2152, [1982] DTC 1164

Assistant Chairman:—Florence Epstein has appealed to this Board from an assessment of income tax for the 1975 taxation year. For that year, the respondent added to her income the sum of $11,200. The issue is whether or not that sum was correctly added. There is no dispute as to the amount if the assessment is correct. If the assessment is incorrect, then nothing should have been added.

In 1975 Mrs Epstein was the annuitant of a registered retirement savings plan (“RRSP”) and the Guaranty Trust Company of Canada (“Guaranty”) was the trustee of that RRSP. In 1975 Guaranty took an assignment of a then existing mortgage and held it for the said RRSP. The respondent was of the view that that mortgage, in the circumstances to be recounted, was not a qualified investment for the trust as it was prohibited from being so considered by Regulation 4900(1 )(g) of the Income Tax Regulations (as it was in 1975) in as much as the “mortgagor” was “a person with whom the annuitant does not deal at arm’s length”. The appellant’s position is that she did deal at arm’s length with the mortgagor.

To understand the respective positions of the parties one must virtually search the title of the property which is mentioned in the mortgage. There is no dispute as to the following facts:

— The property is situate in Ontario.

— In 1964 David and Diane Opie sold the property to Emerald Isle Motel Limited (“Emerald Isle”).

— In 1965 Emerald Isle mortgaged the property to Crédit Foncier Franco- Canadien (“Crédit Foncier”) in the amount of $132,000. The mortgage called for monthly payments, and became due and payable on May 1, 1975. (This is the mortgage in question.)

— In July 1970 Emerald Isle sold the said property to Black Prince Holdings Limited (“Black Prince”). According to the Affidavit, Land Transfer Tax Act, the purchase price was $410,000 and it was satisfied by $126,000 cash, $182,000 mortgage under this transaction and balance of existing mortgage of $102,000 (the mortgage in question). The mortgage under the above transaction was from Black Prince to Emerald Isle with Marcel Maufrange and Olga Maufrange as Guarantors of the third part.

— In 1970 Black Prince mortgaged the land to one, Snider, which mortgage was discharged in 1971.

— By document dated September 5, 1975, and registered in the registry office on March 12, 1976, Crédit Foncier assigned the mortgage to Guaranty. At this time there was owing on the mortgage the sum of $63,220.98. This is the mortgage which in part was acquired for the RRSP of the appellant.

— By document dated March 15, 1976, but never registered, an agreement was entered into between Guaranty and Black Price extending the mortgage in question to September 5, 1980. The extension called for yearly payment starting on September 5, 1976. Interest was to be computed from September 5, 1975.

— By assignment of mortgage in 1979, Guaranty assigned the mortgage to Vanguard Trust of Canada Limited, trustee of the said RRSP. It was stated that Vanguard replaced Guaranty as trustee.

There was also filed as an exhibit a mortgage from Black Prince to Her Majesty the Queen in Right of Canada, represented by the Minister of National Revenue (called “Black Prince and The Queen”) to secure the tax indebtedness of the appellant’s husband, who incidentally acted for the appellant at the hearing of this appeal. It should be pointed out that he was similarly assessed and also appealed to this Board. He stated, and counsel for the Crown agreed, that the decision in this appeal would apply to his appeal.

Two very important facts which were admitted were:

1. the appellant was the wife of Alexander Epstein, and

2. Alexander Epstein, at all times material to the appeal, controlled Black Prince.

There was no dispute that the appellant and Black Prince did not deal with each other at arm’s length within the meaning of the Income Tax Act.

The issue to be decided is whether or not the mortgagor of the mortgage in question, at least in 1975, is a person with whom the annuitant (the appellant) deals at arm’s length.

Very shortly stated, counsel for the appellant stated that the appellant does not deal at arm’s length with Black Prince, but that Black Prince never was a mortgagor of the property; that person was Emerald Isle. He continued that the word “mortgagor” is not defined in the Income Tax Act, RSC 1952, c 148 as amended, nor is it defined in the Interpretation Act, RSC 1970, c I-23. His submission continued that one must then use the normal English meaning of the word and he referred the Board to the definition of “mortgagor” as contained in the listed publications, as follows:

Black’s Law Dictionary, 4th Ed., 1163

One who, having all or some part of title to property, by written instrument pledges that property for some particular purpose such as security for a debt.

Wharton’s Law Lexicon, 574

He that gives a mortgage as security for a loan.

Jowitt’s Dictionary of English Law, Vol. 2, 1206

He who gives a mortgage as security for a loan.

Oxford English Dictionary, Vol. VI, 677

A person who mortgages or makes over property as a security for debt.

Counsel for the appellant continued that, in the circumstances of this case, the only person who satisfies each definition is Emerald isle, and Emerald Isle remained the mortgagor until the mortgage was discharged. He contended that, such being the case, the appellant at all times dealt at arm’s length with Emerald Isle and so the assessment was incorrectly made.

He continued that, while the property in question is situate in the Province of Ontario, the Ontario law, in considering the federal Income Tax Act and its Regulations, has no application notwithstanding the definition of “mortgagor” in The Conveyancing and Law of Property Act, RSO 1970, c 85, at paragraph 1(1 )(f) and The Mortgages Act, RSO 1970, c 279 at paragraph 1(d). Both of those Acts are for provincial matters, not federal, and in addition, in both Acts section 1 starts off with the words: “In this Act”.

Counsel referred to the mortgage between Black Prince and The Queen, and clause 13 therein which in part stated:

. .. “the Mortgagor” . . . shall include heirs, executors, administrators, successors and assigns of the Mortgagor. ..

Counsel continued that that definition indicated that the Minister of National Revenue did not consider that the word “mortgagor” itself covered making Black Prince, in this case, a mortgagor. If that mortgage need a special definition clause and the word “mortgagor” alone was not sufficient to include Black Prince, why should it be held that the word “mortgagor” of itself in the Regulations, in the circumstances of this case, was sufficient?

Counsel for the Crown agreed with counsel for the appellant that the word “mortgagor” was not defined in either the said Income Tax Act or the said Interpretation Act. He continued however that that very word, as stated by counsel for the appellant, was defined in the two Ontario Acts. Counsel continued that if the word is not defined in the said federal Acts and Regulations and the property in question is situate in Ontario, then the Ontario statutes pertaining to real property are to be used to determine the meaning of the word. There was no suggestion by him that he had searched all federal public statutes and never found the word “mortgagor” defined. I am left to wonder, if a definition of the word has been found, whether it would have been used to the exclusion not only of the common English language meaning of the word, but also the defined meaning of the word in two provincial statutes relating to real property of the Province in which the land is situate. Counsel, relying on the two said provincial statutes, submitted that Black Prince is the mortgagor. If the submission that those two statutes applied were accepted as being legally correct, there would be no dispute or no appeal. Counsel referred to the mortgage by Black Prince to Emerald Isle at the time of the purchase by Black Prince of the equity of redemption of Emerald Isle and to the third last “Provided” clause which reads as follows:

PROVIDED the mortgagor, its successors and assigns shall have the privilege of prepaying any part of the principal sum at any time or times without notice or bonus, and the further privilege of renewing or replacing the existing First Mortgage at any time for the principal balance then outstanding in priority to this Mortgage.

He continued that, as between those two parties, Black Prince is considered the mortgagor “and it can renew or replace the existing first mortgage”. Reference was made as well to the extending agreement between Guaranty and Black Prince. It must be realized that this document is extending the mortgage which Emerald Isle gave to Crédit Foncier and was assigned by Crédit Foncier and was referred to as “Balance of existing encumbrances with interest owing at date of transfer” by the Affidavit, Land Transfer Tax Act, at the time of sale by Emerald Isle to Black Prince.

He continued that by the extending agreement, Black Prince is responsible for payment of the mortgage. The parties agree to “extend to the party of the second part (Black Prince) time for payment of the said principal money”. It must be paid September 5, 1980. In addition, while dated March 15, 1976 (there are no Affidavits of Execution or no registration) the document is effective prior to this date as interest is “to be computed from the 5th day of September 1975”. It was also stressed that, if otherwise Black Prince was not the “mortgagor”, the following clause in the extension agreement makes it the mortgagor:

THE SAID party of the Second Part doth hereby covenant with the said party of the First Part to pay said principal money and interest at the rate and in manner hereinbefore mentioned, and to well and truly keep, observe, perform and fulfil all the covenants, provisos and agreements in said mortgage contained, and to keep the said principal money until the expiration of the said extended term

The same extension agreement at 2 contains the following clause:

PROVIDED that the mortgagor shall have the privilege of paying the whole or any part of the principal sum hereby secured at any time or times without notice or bonus.

Counsel also drew the Board’s attention to section 19 of The Mortgages Act, RSO 1970, c 279, subsection (2) of which in effect states that the mortgagee has the right to look to the grantee of the equity of redemption for the amount which the grantee is obligated to indemnify the mortgagor.

Counsel also referred to prior cases in this respect. While none referred to a mortgage, his submission was that in federal income tax matters this Board and the courts look to provincial statutes to determine the issue.

The first case referred to was No 336 v MNR, 15 Tax ABC 18; 56 DTC 180. The issue was whether or not the appellant had an inventory of canned salmon at the end of the year. The presiding member stated that the issue was whether or not the appellant had purchased the salmon in question. Placing reliance on the Sale of Goods Act (British Columbia), the Board held that title had passed and the appellant did have an inventory. As I view that decision, it did not use a provincial statute to define the meaning of a word in the Income Tax Act; it used a provincial statute to ascertain whether or not the appellant owned goods. That is not the use being attributed in the instant appeal.

The second case referred to was MNR v Turpentine & Rosin Products Corp Ltd and Consolidated Industrial Chemical Corp Ltd, [1961] CTC 503; 62 DTC 1060. The Crown seized property allegedly belonging to Turpentine & Rosin Products Corp Ltd (“Turpentine”) in satisfaction of a Judgment debt. Consolidated Industrial Chemical Corp Ltd (“Consolidated”) filed an opposition contending it owned the property in question. The question for the Court to decide was, who owned the property, and, to do this reference was made to the Quebec Civil Code. In so doing the Court was not using the Code to determine the meaning of a word in the federal Income Tax Act but to ascertain who, as between Turpentine and Consolidated, owned the property in question.

The case of MNR v Shields, [1962] CTC 548; 62 DTC 1343, is similar. The question here was what the respondent’s income was. He contended it was only one-half of the profit of the business because the business was operated in partnership with his son. The Court held that there was no partnership. The Court was not using a provincial statute to define a word in a federal Act, but rather was determining what the business was — a proprietorship or a partnership — and once deciding that, applied the federal law.

The case of Derby Development Corporation v MNR, [1963] CTC 269; 63 DTC 1171, is really the reverse of the Shields case (supra). The Minister assessed on the basis that there was a partnership but the taxpayer contended there was not. The Court agreed with the taxpayer and so determined the income of the appellant accordingly.

As submitted by counsel for the appellant, the meaning of the word “mortgagor” is clear and it does not include one who is not the mortgagor but would fall within the meaning of the words “the owner of the equity of redemption”. To so extend the meaning of the word “mortgagor” to include “the owner of the equity of redemption”, one would be usurping a function of Parliament. Parliament, had it seen fit, could readily have inserted after the word “mortgagor” in Regulation 4900(1 )(g) “or the owner of the equity of redemption”. That clearly would have prohibited the mortgage in question from being a qualified investment in the circumstances of the case.

Judgment will go allowing the appeal and referring the assessment back to the respondent for variation to reduce the appellant’s income by the sum of $11,200.

Appeal allowed.