Claus Jensen, Heather G Jensen v. Minister of National Revenue, [1981] CTC 2308, 81 DTC 256

The Chairman:—The appeal of Mr Claus Jensen is from an income tax assessment with respect to the 1975 taxation year and was, by agreement, of the parties, heard on common evidence and simultaneously with that of Mrs Heather G Jensen.

The issue in both appeals concerns the purchase and disposal of certain Government of Canada bonds and the manner in which the transactions were reported in the appellants’ respective tax returns for 1975.

The facts and the submissions, as set out by Mr Claus Jensen in his notice of appeal, are identical with those of Mrs Heather G Jensen, other than the amounts and serial numbers of the Government of Canada bonds transacted by each of the appellants. The issue in both appeals is the same.

In his notice of appeal Mr Claus Jensen stated:

1. Claus Jensen, the taxpayer, is an individual.

The taxpayer filed an Individual Income Tax Return in respect of the 1975 taxation year.

In computing income and taxable income the taxpayer included in computing his net income interest income.

2. In 1975 the taxpayer entered into the following transaction for the purpose of earning interest income.

(a) In November the taxpayer purchased from the Bank of B.C., Government of Canada bonds with:

— serial numbers of F56 000450 and F56 000972

— combined face value $30,000

— accrued interest $977.26

— maturity date of December 15, 1975

(b) The taxpayer borrowed, from the Bank of B.C., by way of a demand promissory note, and secured by the above bonds, sufficient funds to purchase the bonds.

(c) The taxpayer paid interest on the demand loan.

(d) On December 15, the bonds matured and the taxpayer repaid the loan.

(e) The Bank of B.C. issued a T600 (Serial #13508678) to the taxpayer on account of interest paid to the taxpayer on the maturity of the Government of

Canada bonds.

3. In computing his income and taxable income the taxpayer:

(a) includes in his income $1,087.50 of bond interest received in respect of the Government of Canada bonds;

(b) deducted as interest expense $977.26 of accrued bond interest purchased:

(c) deducted $165 of interest paid on money borrowed to earn interest income;

(d) deducted an allowable capital loss of $3.50 on the maturity of the bonds.

(e) deducted $1,000 “interest deduction” in computing his taxable income.

4. In due course the Minister assessed the taxpayer’s 1975 return “as filed”; assessment number 53615567 dated May 14, 1976. The taxpayer concurs with this assessment.

5. Subsequent to his assessment, the Minister reassessed the taxpayer’s 1975 return; reassessment number 53615567 dated April 5, 1977. The taxpayer objects to this reassessment. In conjunction with the Notice of Reassessment the Minister mailed Form T7W-C wherein he set out his reasons for the reassessment; a copy of this form T7W-C is as follows:

“The basis for this reassessment is that there was no bona-fide acquisition and disposition of the bonds. Therefore, the transaction was not entered into as an investment or for the purpose of gaining or producing income. All entries

resulting from this transaction have been deleted.

1. Interest income reduced from $1,088 to NIL.

2. Carrying charges reduced from $1,299 to $157.

3. Interest/Dividend income deduction reduced from $1,000 to NIL.

4. Capital loss reduced from $3.50 to NIL.”

The statement of facts in the respondent’s reply reads as follows:

1. Except as hereinafter expressly admitted, he does not admit any allegations of fact or reasons contained in the Notice of Appeal.

2. He admits paragraphs 1, 3, 4, and 5 of that part of the Notice of Appeal entitled “FACTS” (“Statement of Facts”)

3. He admits the facts set out in paragraph 2 of the appellant’s Statement of Facts with the exception that he denies that the Appellant entered into the transaction therein described for the purpose of earning interest income.

4. In assessing the appellant as described in paragraph 5 of the Appellant’s Statement of Facts, the Respondent assumed that, inter alia’.

(a) the Government of Canada bonds were not assigned or transferred to the Appellant;

(b) the Appellant did not become entitled to interest from the bonds;

(c) interest from the bonds was not received or receivable by the Appellant in 1975;

(d) the transaction described in paragraph 2 of the Appellant’s Statement of Facts was not entered into as an investment or for the purpose of gaining or producing income from the bonds.

The appellants’ submissions are as follows:

(1) pursuant to paragraph 12(1 )(c) bond interest must be included in income;

(2) pursuant to paragraph 20(14)(b) accrued bond interest purchased may be deducted in computing income;

(3) pursuant to paragraph 20(1)(c) interest paid on borrowed money and used to earn income is deductible in computing income;

(4) pursuant to paragraph 3(e) an allowable capital loss less than $1,000 may be deducted in computing income;

(5) pursuant to section 110.1 up to $1,000 of qualified interest included in income may be deducted in computing taxable income;

(6) Such other reasons as the taxpayer, or his counsel, may advise.

The respondent’s submissions are as follows:

5. The respondent relies upon inter alia, Sections 3 and 110.1, subsections 9(1), 20(14) and 245(1) and upon paragraphs 12(1 )(c) and 20(1 )(c) of the Income Tax Act, c. 63, S.C. 1970-71-72, as amended.

6. The respondent submits that the Government of Canada bonds were not assigned or transferred to the appellant within the meaning of subsection 20(14) of the Income Tax Act, nor was the appellant entitled to interest within the meaning of subsection 20(14) and that therefore the appellant could not take a deduction pursuant to that subsection.

7. The respondent submits further that no interest from the Government of Canada bonds was received or receivable by the appellant in 1975 within the meaning of paragraph 12(1 )(c) of the Income Tax Act and that therefore the appellant was not entitled to a deduction pursuant to paragraph 110.1(1)(b).

8. The respondent submits further that the transaction was not entered into as an investment or for the purpose of gaining or producing income from the Government of Canada bonds and that accordingly the deductions and allowable capital loss claimed are prohibited by virtue of subsection 245(1 ) of the Income Tax Act.

At the commencement of the hearing, Mr Jensen produced a letter from the Bank of British Columbia dated May 15, 1980, to which was attached a series of photocopies of the bank’s records, Exhibit A-1. He also produced an ownership certificate from Revenue Canada Taxation dated December 15, 1975 (Form T-600), Exhibit A-2.

Exhibit A-1 reads as follows:

May 15, 1980

Mr. C. Jensen,

1020 King Georges Way,

West Vancouver, B.C., V7S 1S5.

Dear Mr. Jensen:

Reference: Purchase of Canada Savings Bonds In 1975.

In response to your letter of May 6, 1980, we confirm the following transactions relative to the subject bond purchase:

November 26, 1975	Loan advanced for the purchase of
	Government of Canada Bonds
	Heather Jensen		$15,495.38
	Claus Jensen		$30,984.01
November 27, 1975	Government of Canada Bonds (Bearer)
	Lodged in support of loan
	Heather Jensen	Serial #F56 000969
			#F56 000970
			#F56 000971
	3 @ $ 5,000.00
	Claus Jensen	Serial #F56 000972
			#F56 000450
	1 @ $ 5,000.00
	1 / $25,000.00
December 15, 1975	Above bonds redeemed and loan retired
	from proceeds.

We trust this information, as well as the enclosed photocopies of our records, will be of assistance to you.

	Yours truly,
	A.C. Lockyer,
ACL.Imd	Administration Manager.

The facts and the issue in these appeals are clearly set out in the pleadings. On reviewing Mr Jensen’s argument, I find that there are weaknesses in his interpretation of some sections of the Income Tax Act basic to the issue which distort what would otherwise be a logical conclusion.

The major points of contention are in the interpretation of the words “Transfer and assignment” in subsection 20(14) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

It is the appellants’ submission that the word “transfer”, as used in subsection 20(14) of the Act, has a very broad meaning and should be used in its general dictionary sense which was defined at the hearing as “a shift from one position or receptacle to another”; “make over possession of (property, ticket etc. conferring rights)”. The Oxford dictionary also defines the verb “transfer” as to “convey, remove, hand over.” The non “transfer” is also defined in the Oxford dictionary as “conveyance of property or right,”. “Assignment” is defined as “allotment; legal transference;”. Both these terms are given specific technical meanings. Used side by side in the context of subsection 20(14) of the Act, it is the technical sense common to both terms which in my view must be used in interpreting the section.

That view has been consistently held by the courts and the Board and, as pointed out by counsel for the respondent, it was clearly stated by my learned colleague, Mr D E Taylor, CA, in Frank Tyrala v MNR, [1978] CTC 2905: 78 DTC 1659, where he says at 2914 and 1665:

The determination that there was no assignment or transfer is based on the clear requirements outlined by the legislation and case law in the careful and professional presentation on behalf of the Minister, as these terms should be applied for income tax purposes.

The transfer or the assignment of bonds to the taxpayer must be technically legal. In the instant appeals the evidence is that the Government of Canada bonds were bearer bonds. For the transfer of bearer bonds to be legal and within the meaning of subsection 20(14) of the Act, they would have had to have been delivered to the appellants as the new owners of the bonds or to a bona fide agent who acted on behalf of the new owners.

Contrary to the appellants’ contention that transfers or assignments of bonds referred to in subsection 20(14) of the Act should be loosely interpreted, the Domestic Bonds of Canada Regulations cited by counsel for the respondent clearly establishes that it is in their strict technical sense that the terms must be read.

Section 6(1) of the Domestic Bonds of Canada Regulations reads as follows:

Where, in accordance with these Regulations, the name of a person has been entered in the register by the Bank as owner of a bond as to principal or as to principal and interest, the entry in the register shall, except as otherwise provided in these Regulations, be conclusive evidence as against the Government of Canada that that person is owner of that bond.

Section 12(3) of the Domestic Bonds of Canada Regulations reads as follows:

The execution of an instrument of transfer does not transfer or confer any right under the bond against the Government of Canada or the Bank until the Bank has given effect to the instrument by making the appropriate entry in the register.

It is the entry in the Register which establishes legal ownership of the bonds and not Revenue Canada Form T600 produced as Exhibit A-2.

According to Mr Jensen’s evidence, the Government of Canada bonds were left in bearer form and were not registered by the bank. The appellants vis-à-vis the Government of Canada were not therefore the registered owners of the bonds and could not legally enforce payment from the Government or indeed from the bank.

There is no evidence before the Board that the bonds were transferred to the appellants; that they took delivery of them or were in possession of them at any time nor is there evidence that the bank who purchased and redeemed the bonds for the appellants ever took delivery of the bonds.

Although paper transactions may be legally acceptable under certain circumstances, they are not sufficient for the legal transfer of bearer bonds which require their physical delivery.

In the appeal of Frederick Tim Smye v MNR, [1980] CTC 2372; 80 DTC 1326, my learned colleague Mr DE Taylor, CA, stated at 2377 and 1330:

The Board recognizes the difficulty, possibly even the dilemma of the parties in these appeals with respect to the term “assignment or other transfer”. However, in my opinion, no evidence of fact, or argument of law, has been proposed to the Board whereby that term can or should be adapted to the exigencies of the practice of either the trade or the Minister for purposes of subsection 20(14), while at the same time leaving the same term, or the individual words “assignment” or “transfer” with their historically developed meaning (as detailed in Tyrala (supra)) for other purposes of the Income Tax Act.

Further Mr Taylor concluded:

Therefore, when no evidence of registration or physical delivery of the security itself has been presented to the Board, the appeal must be dismissed.

I agree with counsel for the respondent’s contention that even if the bank had taken delivery of the bonds of which there is no evidence and notwithstanding that it may have purchased and redeemed the bonds at the request of the appellants, the bank was not the agent of the appellants. The bank’s role as a bona fide “agent” for the appellants was in my view invalidated by the role the bank also played in loaning the appellants the purchase price of the bonds and accepting the bonds as collateral for the loans, Exhibit A-1.

In the case of Fred S Wagman v MNR, (unpublished), Mr M Bonner, a member of this Board, in dismissing the taxpayer’s appeal stated:

In this case, there was evidence only that the appellant placed an order with his broker and received a confirmation of that order which was a purchase order and that he placed an order to sell and received a confirmation of the sale. That evidence of a transaction between the appellant and his broker does not, in my view, establish that there was an actual assignment or other transfer of a bond, nor does it establish that the appellant became entitled to interest. An assignment or other transfer contemplates a change in property in the bond.

The reasoning of Mr Bonner in the Wagman case is in my view applicable a fortiori to the series of events in the instant appeals with respect to the ownership as well as to the alleged transfer of the bonds to the appellants.

In the Smye case, the concept of what constitutes a bona fide “agent” for purposes of these appeals was also effectively dealt with.

Mr DE Taylor stated at 2378 and 1330 the following:

On the “trustee” or “agent” aspect proposed, the designation of an arrangement can be termed an “agency” only if the circumstances surrounding it demonstrate in fact and in law the claim that an agency exists. The implied agency arrangements proposed by some appellants failed to take into account the major consideration (the financial obligation) in any way. In my view, the Board cannot accept the “agency” assertion where there was any impediment whatsoever to the appellant himself accepting delivery (transfer) of the securities. The lack of payment in full to the “purchasing agent” (whether the same party or a different party than that proposed as the “holding trustee or agency”) would constitute such an impediment and leave the transaction outside the parameters of the term “assignment or other transfer”.

On the basis of the evidence, the pertinent sections of the Act and case law, I find that the bearer bonds, the subject of these appeals, were not physically delivered to the appellants; that the bank was not the “agent” of the appellants and there was no valid transfer or assignment of the bonds to the appellants or to the bank within the meaning of subsection 20(14) of the Income Tax Act.

These appeals are therefore dismissed.

Appeals dismissed.