Selwyn Chamberlain, Terrence Robertson, Romano Giusti v. Minister of National Revenue, [1982] CTC 2772, 82 DTC 1781

John B Goetz:—This is an appeal with respect to the 1977 and 1978 taxation years of the appellant Selwyn Chamberlain. It was agreed that the appeals of Romano Giusti and Terrance Robertson would be heard at the same time and counsel agreed the case was to be heard on common evidence. Mr. Giusti and Mr. Robertson, as well as Mr. Chamberlain, all were called as witnesses.

Appellant’s counsel agreed to the facts set out in paragraphs 3 and 4(a) to (i) inclusive of the reply to notice of appeal:

3. In answer to the allegations of fact contained in paragraph 2 of the Notice of Appeal he says that:

(a) On April 18, 1977 a trust governed by an R.R.S.P. under which the Appellant was the annuitant loaned $17,500 at the request of the Appellant to Terrance Robertson, an unrelated person, secured by a second mortgage against 1261 Duchess Ave., West Vancouver, B.C., rental property owned by Terrance Robertson.

4. In so assessing the Appellant, the Respondent acted upon, inter alia, the following assumptions of fact;

(a) The Appellant, Terrance Robertson and a Romano Giusti were all partners in the same law firm, had the same firm of accountants, and had self administered registered retirement savings plans with Guaranty Trust Company of Canada Ltd., hereinafter referred to as “Guaranty”.

(b) In March of 1977, Romano Giusti instructed “Guaranty” to increase an existing 3rd mortgage of $8,000 to Selwyn Chamberlain to $17,500. The $8,000 mortgage was discharged and a new 3rd mortgage for $17,500 was registered against the same property, 8648 Armstrong Rd., Langley, B.C. the residence of the Appellant.

(c) On April 17, 1977, Terrance Robertson instructed “Guaranty” to loan $17,500 to Romano Giusti secured by a second mortgage against 6351 Buckingham Dr., Burnaby, B.C., the residence of Romano Giusti.

(d) In May of 1978, $17,500 mortgage against the Armstrong Road property was discharged when the Appellant sold the property.

(e) In September 1978, Romano Giusti instructed “Guaranty” to loan $17,500 to the Appellant by way of a second mortgage registered against 10109-10111 144th, St., Surrey, B.C., a rental property owned by the Appellant.

(f) The mortgages referred to in paragraphs 3(a) and 4(b), (c), (e) between the Appellant, Terrance Robertson and Romano Giusti were identical in terms at an interest rate of 10%, with monthly payments of $175 for a term of 5 yrs. with no penalty, notice or bonus for an early payout.

(g) The existing market rate for conventional first mortgages in April and May 1977 was 10%%.

(h) At various times, the monthly payments by the Appellant, Terrance Robertson and Romano Giusti were in arrears.

(i) The Appellant, Terrance Robertson and Romano Giusti were all shareholders in Randean Management Co., a holding company for their law practice, and Harter Investments Ltd., an investment company.

This agreement, however, was subject to the contention of counsel for the appellant that various documents referred to relating to Chamberlain, Robertson and Giusti, should include their wives whose names indeed were on the mortgage documents as joint tenants. The facts as set out, and agreed to, are graphically displayed in a chart prepared by counsel for the respondent and the same is attached and made part of this judgment.

The appellant’s position was that the dealings between the parties were at arm’s length and that the investment from their RRSP Plans did not constitute a non-qualified investment within the meaning of paragraph 146(1 )(i) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

The Minister, on the other hand, relied inter alia, upon sections 146 and 251 of the Income Tax Act, SC 1970-71-72, c 63, as amended and Regulation 4900 of the Income Tax Regulations. The Minister further contended:

6. He submits that the Appellant’s, Terrance Robertson and Romano Giusti’s establishment of “mutual” mortgages for equal amounts with identical terms through their Registered Retirement Savings Plans does not set up a bona fide investment for purposes of s. 146 because at all material times the Appellant, and Terrance Robertson did not deal at arm’s length within the maeaning of the restriction provided in Regulation 4900(1 )(h) (sic).

7. He also submits that there is properly added into the income of the Appellant for the 1977 and 1978 taxation years the amount added back pursuant to s. 146(10) as the cost minus the amount of repaid principal of a “non-qualified investment” to the Registered Retirement Savings Plan of which the Appellant was the annuitant.

The relevant sections involved are paragraph 146(1 )(e), subsection 146(6), subsection 146(10) and section 251 of the Income Tax Act, SC 1970-71-72, c 63, as amended, and Regulation 4900(1 )(g) of the Income Tax Regulations:

Section 146(1 )(e)

(1) In this section

(e) “Non-qualified investment”.—“non-qualified investment” in relation to a trust governed by a registered retirement savings plan means property acquired by the trust after 1971 that is not a qualified investment for such trust;

Section 146(6)

(6) Disposition of non-qualified investment. Where in a taxation year a trust governed by a registered retirement savings plan disposes of a non-qualified investment, the cost of which to the trust was included by virtue of subsection (10) in computing the income of the taxpayer who is the annuitant under the plan, there may be deducted, in computing the income of the taxpayer for the taxation year, an amount equal to the lesser of

(a) the cost so included in computing the taxpayer’s income, and

(b) the proceeds of disposition of the non-qualified investment.

Section 146(10)

(10) Where acquisition of non-qualified investment by trust. Where in a taxation year a trust governed by a registered retirement savings plan

(a) acquires a non-qualified investment, or

(b) uses or permits to be used any property of the trust as security for a loan,

the cost to the trust of the non-qualified investment or the fair market value, at the time the property is used as security, of the property so used, as the case may be, shall be included in computing the income for the year of the taxpayer who is the annuitant under the plan.

Section 251 Arm’s length

(1) For the purposes of this Act,

(a) related persons shall be deemed not to deal with each other at arm’s length;

and

(b) it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm’s length.

4900. (1) Pursuant to subparagraph 146(1 )(g)(iv) of the Act, each of the following investments is hereby prescribed to be a qualified investment for a trust (in this subsection referred to as the “savings plan trust”) governed by a registered retirement savings plan:

(g) a mortgage, or interest therein, secured by real property situated in Canada and acquired by the savings plan trust, other than a mortgage in respect of which the mortgagor is the annuitant under the plan governing the savings plan trust or a person with whom the annuitant does not deal at arm’s length.

The issue, nevertheless, resolves itself on the basis of the facts agreed upon as to whether Chamberlain, Giusti and Robertson were dealing at arm’s length within the meaning of the restriction provided in Regulation 4900(1)(g).

I place no weight on the objection that the “mutual mortgage” documents included the wives of the respective appellants who were mere joint tenants, which is the usual way husbands register their residential property.

The question as to whether parties are dealing at arm’s length has been dealt with in many cases, the following being cited by the appellant:

1. MNR v Sheldon’s Engineering Ltd, [1955] CTC 174; 55 DTC 1110;

2. Pender Enterprises Limited v MNR, [1965] CTC 343; 66 DTC 5202;

3. Gatineau Westgate Inc v MNR, 41 Tax ABC 440; 66 DTC 560;

4. MNR v Estate of Thomas Rodman Merritt, [1969] CTC 207; 69 DTC

5159;

5. Swiss Bank Corporation et al v MNR, [1971] CTC 427; 71 DTC 5235;

6. Swiss Bank Corporation et al v MNR, [1972] CTC 614; 72 DTC 6470:

7. G Sayers v MNR, [1981] CTC 2871; 81 DTC 790.

In addition to the above, the appellant advised the Registrar of the Decision of Epstein v MNR [1982] CTC 2147; 82 DTC 1164, which case held that a mortgagor was a person with whom the taxpayer was dealing at arm’s length and, accordingly, the mortgage was a “qualified investment”. Counsel for the appellant in forwarding this decision pointed out the fact that because some of the mortgages expired on different dates, that in itself was sufficient proof that the parties were dealing at arm’s length.

Counsel for the respondent on the other hand, in reply to this contention of the appellant, stated that the Epstein case (supra) was not relevant in that the Board had to determine in that case if the non-arm’s length party was the mortgagor or owner of the equity of redemption. There are no assumptions or assignments in mortgages in the present appeals and there are simply legal mortgagors dealing through Guarantee Trust with respect to each other’s respective RRSP’s, of which of course they were the annuitants. Counsel further pointed out that Exhibits A-1 and A-2 (for Mr and Mrs Chamberlain and Mr and Mrs Giusti) were both executed on March 7, 1977, both expired on March 1, 1982. Mr Robertson’s mortgage (Exhibit A-3) was executed one month later on April 6, 1977 and expired on April 1, 1982. When the Chamberlains sold their home in 1978, another mortgage (Exhibit A-4) was executed with respect to the new property on September 1, 1978, with exactly the same terms, namely $17,500 for five years, at 10%, with payments of $175 per month until September 1, 1983.

The following cases were cited by counsel for the respondent:

1. MNR v Estate of Thomas Rodman Merritt, [1969] CTC 207; 69 DTC 5159;

2. Godfrey G S Moulds v Her Majesty the Queen, [1977] CTC 126; 77 DTC 5094;

3. MNR v Kirby Maurice Company Limited, [1958] CTC 41 ; 58 DTC 1033;

4. MNR v Sheldon’s Engineering Ltd, [1955] CTC 174; 55 DTC 1110;

5. G Sayers v MNR, [1981] CTC 2871; 81 DTC 790;

6. Swiss Bank Corporation et al v MNR, [1971] CTC 427; 71 DTC 5235;

7. Swiss Bank Corporation and Swiss Credit Bank v MNR, [1972] CTC 614; 72 DTC 6470.

Findings

Counsel for the appellant placed great weight on the Sheldon’s Engineering Ltd case (supra), a decision of the Supreme Court of Canada. Unfortunately for the appellant, that case lends no assistance to his argument.

Each case must be determined on its own facts. It is clear to me that the three appellants who were all equal legal partners in a law firm and who had a common interest in two companies, acted in concert in order to effect the result that they accomplished. They required each other in order to bring about that result. Counsel for the respondent stated that the graph chart clearly showed the benefit of the funds going from one to the other. The inter-relationship was the granting of the mortgages around the circle to each other.

The RRSP was administered by the Guarantee Trust who acted on the directions of the annuitants of the RRSP Plans. All the appellants had a mutual and common interest which directed them as one mind. They acted in concert whereby they all obtained a flow of money on paper, one to the other in a circle or triangle, in the amount of $17,500.

I think the most relevant case in which the facts are virtually on all fours with the case at bar is the G Sayers case (supra), wherein my learned collègue, Mr Michael Bonner, found that a taxpayer who was annuitant under an RRSP trust caused the Trust to make a loan to a business and social acquaintance and, upon default by the friend (and there was default in the case at bar), the loan was increased to cover the amount of the default. A loan with the same subsequent increase and the same amount in terms was given by the acquaintance back to the taxpayer and the Minister added the amount of the loan as an increase to the income of the taxpayer on the basis that the amounts were cost of “non-qualified investments” governed by an RRSP of which the taxpayer was an annuitant within the meaning of subsection 146(10) and I quote from 792 of that judgment:

Each must have been constrained by the thought that what he demanded of the other he also demanded of himself. The agreement freed the Appellant and Mr McCracken to fix terms without regard to what would otherwise have been acceptable having regard to the mortgage market. Nothing in any of the authorities referred to by counsel suggests that, in relation to a transaction such as this, the parties could be said to deal with each other at arm’s length. The mind which dictated the actions of each man was the mind of the two acting in concert.

In Swiss Bank Corporation et al v Minister of National Revenue, 71 DTC 5235, Thurlow, J, as he then was, said at page 5241:

To this I would add that where several parties — whether natural persons or corporations or a combination of the two — act in concert, and in the same interest, to direct or dictate the conduct of another, in my opinion the ‘mind’ that directs may be that of the combination as a whole acting in concert or that of any one of them in carrying out particular parts or functions of what the common object involves.

In the case at bar, we have a third party involved in an arrangement whereby three law partners, through their RRSP’s of which they were annuitants, gave one to the other mortgages for the same amount and for the same terms. There was no flow of cash and the three partners’ interests were identical and inter-dependent one with the other. They were clearly acting in concert and were of one mind, as each had the same interest, the same responsibility and the same obligation one to the other.

For the above reasons, I find that Mr Chamberlain was not acting at arm’s length in his dealings with the other appellants. I would so rule as against the appellants Romano Giusti and Terrance Robertson.

The appeal is dismissed.

Appeal dismissed.