Robert L Thompson, Evelyn M Thompson v. Minister of National Revenue, [1982] CTC 2187, 82 DTC 1168

D E Taylor:—These appeals heard in Edmonton, Alberta, on February 8, 1982 against income tax assessments in which the Minister of National Revenue assessed each appellant to an amount of $2,729.47 and $3,831.33 for the years 1977 and 1978 respectively. The respondent relied, inter alia, upon subsections 15(1) and 245(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Reference is made to the appeal of Garneau Marine Co Ltd, [1982] CTC 2191, in which certain information is relevant to these appeals. Any mathematical differences in the amounts involved may result from the fact that the year-end of Garneau is September 30 rather than December 31.

It was the position of counsel for the appellants in this matter, based upon the testimony provided by Mr Thompson, that irrespective of any decision to be given by the Board in Garneau, there was no basis for the personal accounts’ assessment against these appellants — no benefit had been conferred upon them by the company.

In support of the appeals, counsel for the appellants cited the case of Edward Lloyd Wale v MNR, 36 Tax ABC 255; 64 DTC 632, in which the appeal was allowed, based directly on the perception of the Board in the decision of MNR v Pillsbury Holdings Ltd, [1964] CTC 294; 64 DTC 5184. In particular, counsel quoted from 256 and 632 respectively of the Wale deci-

sion: “that there was no law obliging a lender to charge interest to the borrower and that, consequently, no benefit was obtained . . . ”, Since the appeal in Wale (supra) had been allowed and that decision was not appealed by the Minister, it was the view of counsel for the appellants herein that the Board was required to follow the reasoning noted above.

It was the position of counsel for the respondent that the $100,000 funds borrowed from the Bank of Montreal by Garneau were used by the company only to produce a property — the “non-interest paying” loan to Mr Thompson and his wife, and it was the testimony of Mr Thompson that the purpose of the company loan to him had been to acquire a residence. Nothing could be clearer and the Board had no alternative but to dismiss the appeal. While counsel argued that the decision in Wale (supra) was not correct, counsel did not offer any jurisprudence or rationale which could assist the Board in coming to the same conclusion.

The section of the Act at issue here, while time-worn already from citation, must be brought into the context once more:

15. Appropriation of property to shareholder.—(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 whatever to, or for the benefit of, a shareholder, or

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

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

I am not persuaded that the argument of counsel for the appellants in this matter represents the proper interpretation of the Pillsbury judgment (Supra), irrespective that counsel’s interpretation appears to be that given in the Wale decision (supra). I would contend that the distinction to be made is that in Pillsbury (supra), there was no specific provision of the Act under which the lender-borrower arrangements at issue between Pillsbury as the borrower, and Renown Mills Limited and Copeland Flour Mills as the lenders, (see Pillsbury (supra)) depended directly upon the position of Pillsbury as a shareholder in Renown and Copeland — in other words, in its capacity as a “qua shareholder”. The loan at issue in this matter arose out of the qualifications the Thompsons had, fulfilling the specific conditions in paragraph 15(2)(a) of the Act as (1) “shareholder”, (2) “officer or servant” and (3) “to purchase a dwelling house”. It is only by virtue of meeting these conditions in particular condition (3) above, that the Thompsons avoided the inclusion of the total $150,000 In their income for the year under paragraph 15(2)(b) of the Act, as I see the situation. Such an inclusion would have been the result because they were shareholders and had borrowed funds from the company which were not repaid within one year.

The borrowers in the present appeals can only claim immunity from the provisions of paragraph 15(2)(b) under the provisions of paragraph 15(2)(a) of the Act — and that requires again that they be shareholders in addition to being “officers or servants”, and using the funds “to purchase a dwelling house”. Mr Thompson in his testimony made it perfectly clear that the reasons for the rapid “in and out” transaction of the $100,000 through the company’s bank account was purely because of professional advice made available to him, which advice was that, in this manner, he could qualify for the loan from the company. The utilization of the company bank account was precisely for the purpose of respecting the provisions of paragraph 15(2)(a) of the Act — again one of those provisions is that he should be a shareholder. As I read Pillsbury (supra), there was no such requirement between the parties, and indeed the Court found that the arrangement which may have conferred a benefit, did not confer a benefit on the appellant as a shareholder, but merely as a borrower.

Having reached the conclusion above (that the granting of the loan by the company to the Thompsons for the purpose of acquiring a residence was predicated on their position as shareholders), the Board could hardly accede to the argument of counsel that any benefit which may be found in that transaction did not accrue to them as shareholders. I am unable to see in what way Wale (supra) is of direct assistance to the appellants, since my reading of Pillsbury (supra) does not lead me to the conclusion that they meet the criteria noted in that case. I would also quote from 303 and 5188 in Pillsbury (Supra):

The Minister, according to his Notice of Appeal, in each case assumed, in making the assessment, that the interest was waived (paragraph 6 of the Notice of Appeal) and concluded that the lender conferred a benefit or advantage within paragraph (c), (Section B of the Notice of Appeal). In effect, the Minister takes the position that waiver of interest payable by a borrower who happens to be a shareholder of the lender is the conferring of a benefit or advantage within paragraph (c) regardless of the circumstances surrounding the waiver. In my view, the mere fact of waiver, even if legally effective to cancel the debt, is not sufficient of itself to bring the transaction within paragraph (c). To come within that paragraph, it must be an arrangement or device whereby a corporation confers a benefit or advantage on a shareholder qua shareholder. The Minister does not allege that he assumed, in making the assessments, that the waiver was an arrangement or device adopted by the corporation to confer a benefit or advantage on the respondent as a shareholder. 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. It may be that the Minister’s appeal should be dismissed on that ground.

In Pillsbury (supra) the Minister failed to show that the arrangement for reversing the interest had been a device intended to confer any such benefit, not merely on the borrower Pillsbury, but on the shareholder, Pillsbury. There is no such requirement on the Minister in this matter to make the direct connection btween the loan and the shareholder; it is accomplished automatically by virtue of the provisions of subsection 15(2) of the Act under which the Thompsons have already sheltered the loan itself from consequent inclusion in income. The only matter at issue, therefore, is whether there was a benefit conferred by the loan being granted “interest free” — since that aspect of the matter is not equally sheltered simply by virtue of subsection 15(2) of the Act.

On this point, it was noted by counsel for the respondent that the Minister was not “imputing” an interest charge on the portion of the loan ($50,000) which apparently came from operating funds of the company rather than from the specific bank loan which had been the source of the balance ($100,000). While it was not raised at the hearing, the Board would note for the record that it is a moot question whether or not the $50,000 noted above did come from the operating funds of the company, since there is every indication that at all material times the company was indebted to the bank either in the form of alleged “operating” loans or by way of “bank overdraft”

— both of which would be carrying some form of interest charge. It might well be argued that, generically, there is no distinction to be made between the $50,000 amount and the $100,000 amount. However, the Board is not required in this matter to further review that question. The sole point remaining at issue is whether the absorption by the company, as an operating expense, of the interest charge on the specific $100,000 loan from the Bank of Montreal, provides the foundation for the Minister’s assessment that “a benefit or advantage has been conferred on a shareholder by a corporation”.

Pillsbury (Supra) does not use the precise words of Wale (supra) “that there was no law obliging a lender to charge interest to the borrower and that, consequently, no benefit was obtained”, and it is therefore not necessary for the Board in this matter to examine that comment. Nevertheless, where the borrower in his role must base his entitlement to the loan in his role “qua shareholder”, I would view it as incumbent on that borrower to demonstrate that a distinction should be made between his entitlement to the loan as shareholder and his entitlement in some other capacity in order to be relieved of paying interest on that loan, if he seeks to escape the result evident in this assessment. As I recall it, counsel for the appellants in this matter did indicate that perhaps the provision of interest-free corporation funds for the dwelling house of the appellants would make them “happier” persons and more likely to exert themselves in the interest of the corporation. I am unable to fit such appellant euphoria into the conditions laid down in Pillsbury (supra) on 303 [5187] as an acceptable rationale for the transaction at issue here:

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, in 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.

As I see it, this cannot be described as “an ordinary business transaction between a corporation and a shareholder”, given the detailed examination quoted above. There is nothing “ordinary” whether between a corporation and a shareholder or between a corporation and any other party, about a transaction under which the corporation loans interest-free funds it has borrowed at a regular rate of interest, for the specific purpose of making that interest-free loan. It 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.

The appeals are dismissed.

Appeals dismissed.