Marvin L Hannem v. Minister of National Revenue, [1980] CTC 2089, 80 DTC 1091

M J Bonner:—The appellant appeals from assessments of income tax for the 1974 and 1975 taxation years. The respondent, in assessing, denied reserves claimed by the appellant under subsection 64(1) of the Income Tax Act.

The facts are not in dispute. Pursuant to four agreements dated February 1, 1974, the appellant sold resource properties to Mead Petroleums Ltd (hereinafter called “Mead”) for a consideration totalling $84,828.75. Other properties sold pursuant to the agreements brought the total consideration to $95,000. The purchaser delivered to the vendor a promissory note for $95,000 as follows:

February 1, 1974

$95,000

ON DEMAND after date MEAD PETROLEUMS LTD promises to pay to the order of MARVEN SYLVESTER HANNEM at Virden, Manitoba, NINETY-FIVE THOUSAND—($95,000)—Dollars

With NO interest

MEAD PETROLEUMS LTD for value received.

(Signed M S Hannem)

Per

(Signature illegible)

Per

The following amounts were paid by Mead to the appellant in respect of the $84,828.75:

The evidence did not indicate on what basis the amounts and times of payment were selected.

The appellant, in his tax return for 1974 and 1975, claimed reserves under subsection 64(1) in respect of the unpaid balances. In short, it was his position that the unpaid balances were amounts that were . . not due until a day that is after the end of the current year..

The Minister assumed that “the said demand note was due and payable on delivery on the first day of February, 1974”, and thus that section 64 did not permit a reserve. The appeal was argued on the premise that, in fact, no demand was ever made.

Counsel for the appellant argued first that it was the intention of both the appellant and Mead to so arrange matters that the appellant would be entitled to the reserve in question. Undoubtedly, that was the case. The financial statements of Mead showed the unpaid balances as long-term liability of the company. However, I cannot see how such intention bears on the question whether an entitlement to a reserve exists. That entitlement depends on the question whether the legal relationship arising from the transaction was such that the debt was or was not “due” at the relevant time. It does not depend on any analysis of intention.

The appellant submitted further that the note was payable in accordance with its tenor and that not only was a demand a condition precedent to the note being due, but also a demand at Virden.

Subsection 64(1) of the Act was amended by SC 1974-75, c 26 (applicable to taxation years ending after November 18, 1974) to substitute the words “not due” for the words “not receivable”.

“Due” is a somewhat imprecise word. A debt may be said to be due to a creditor before the time for payment has arrived so long as a fixed amount is owing to the creditor. That is one of the ordinary meanings of the word. However, that is also one of the meanings of the word “receivable”. Parliament, by substituting the word “due” for “receivable”, clearly expressed an intention to point to the time when “the amount or part thereof” is required to be paid. This meaning is consistent, not only with a reading of the word in the context of the subsection as amended, but also with the normal assumption that, in the absence of some indication to the contrary, Parliament does not intend tax to attach simply on the creation of a liability*. [1] By section 59, tax on amounts receivable is, in plain words, triggered by the disposition, but any hardship thus occasioned is diminished by section 64 which permits the creation of a reserve in respect of that part of the receivable which is beyond the grasp of the taxpayer because it is not due. I must observe that on this reasoning there is no compelling logical support for the position of a taxpayer who seeks section 64 relief in circumstances where he can, at will, demand full payment. In any event I have concluded for the reasons set forth hereafter that, because the appellant could successfully have sued Mead on the note even without prior demand, the unpaid balances were “due” on delivery of the note.

Where a demand promissory note is not, in the body of the note, made payable at a particular place the Courts have held that presentment for payment is not essential before action against the maker. Although the commencement of action has been regarded as a rather forceful way of demanding payment, that is not the basis on which it has been found that presentment is unnecessary. In Royal Bank v Hogg, [1930] 2 DLR 488, Riddell, JA, stated at 489:

Then, coming down to the note on demand, while no formal demand was made, it has been law certainly for nearly a century, since Norton v Ellam (1837), 2 2M & W 461, 150 ER 839, and probably for centuries before, that a promissory note on demand is due as soon as it is delivered.

It was strongly argued by the primary debtor that it was only for the purpose of determining whether an action could be brought without demand that the rule was established that a demand note was due at all times after its delivery, as the institution of an action was considered equivalent to a formal demand; but such cases as Norton v Ellam, 2 M & W 461; Re Brown, [1893] 2 Ch 300, at 304; Edwards v Walters, [1896] 2 Ch 157, at 162, Boulton v Langmuir (1897), 24 AR (Ont) 618, at 622, show that a demand note matures for all purposes as soon as it is delivered: consequently, this demand note had matured and was due before action begun, and the original note could be sued on.

Orde, J A, stated at 491:

No formal demand for payment of a demand note has ever been a preliminary condition of the right to sue the maker. When the note is payable at a particular place, failure to present at that place may entitle the defendant to costs in the discretion of the Court. As against the maker, as was said in Rumball v Ball (1711), 10 Mod 39, 88 ER 616, the promise is a promise to pay at any time, and the debt is “plainly precedent to the demand.’’ The latter case of Norton v Ellam, 2 2M & W 461, is to the same effect. Parke, B, says (p 463):—

“It is quite clear that a promissory note, payable on demand, is a present debt, and is payable without any demand.”

This statement of the law is in effect embodied in s 183(2) of the Bill of Exchange Act, RSC 1927, c 16.

Counsel for the appellant stressed, however, that the note in question here was, in the body, made payable at a particular place, Virden, and he submitted that subsection 183(1) of the Bill of Exchange Act makes presentment necessary before action.

The Courts do not appear to have been entirely unanimous in dealing with section 183. The conflicting decisions were noted by Lamont, J, in giving the judgment of the Saskatchewan Court of Appeal in Canadian Bank of Commerce v Bellamy (1915), 9 WWR 587. The Court held that demand at the place specified was not necessary to the success of an action against the maker. The failure to make a demand was viewed as a matter which went only to costs. Again, in Royal Bank of Canada v Dwigans, [1933] 1 WWR 672, the Appellate Division of the Supreme Court of Alberta unanimously dismissed an appeal from a judgment against the maker of a demand note made payable at a particular place. The defence was that no demand was made and the action was therefore premature. McGillivray, JA, expressed the view that it was settled law that a promissory note payable on demand is payable immediately. He followed the decision of the Saskatchewan Court of Appeal in Canadian Bank of Commerce v Bellamy (supra). Other decisions to the same effect include:

Spencer Investments Ltd v Hansford, 48 DLR (3d) 474, and

Belows et al v Dalmyn and Dalco Contractors Ltd and Toronto-Dominion Bank, [1978] 4 WWR 630.

The cases to which I have referred correctly reflect, in my view, the present state of the law. Reference may be made to Falconbridge on Banking and Bills of Exchange, Seventh Edition, pp 897 to 900.

The appeals are therefore dismissed.

Appeal dismissed.