Vernon G M Fitzgerald v. Minister of National Revenue, [1980] CTC 2402, 80 DTC 1351

D E Taylor:—This is an appeal heard at the City of Victoria, British Columbia, on January 23, 1980, against an assessment for the year 1975 in which the Minister of National Revenue gave the following explanation for changes:

Your interest income has been reduced by $1,033

Your carrying charges have been reduced by $1,022

Your interest and dividend income deduction has been reduced by $940 as there was no bona fide acquisition or disposition of the bonds.

In assessing, the respondent relied, inter alia, upon sections 9, 12, 18, 20, 110.1 and 245 of the Income Tax Act, SC 1970-71-72, c 63, as amended. In so assessing, the respondent had permitted other interest income of $60 to remain, had allowed an amount of $112 as other interest expense, and allowed a deduction of the above $60 under section 110.1 of the Act.

Background

The appellant is a chartered accountant. He was at all times relevant one of the five members of an investment club—Consolidated Canadian Investors Group (“CCIG”). On December 2, 1975, CCIG placed an order for a Government of Canada bond bearing interest at 9 Z> % per annum, maturing on June 15, 1994, for a total price of $100,502.74. On January 14,1976, CCIG sold the bond for a total price of $98,280.82. As a result of the above transactions, the amounts at issue were included in the appellant’s tax return by using the following calculations:

Contentions

The appellant submitted:

—There was a bona fide acquisition of the said bonds. The said bonds were purchased for the account of CCIG by the broker. At the time the broker purchased the said bonds on behalf of CCIG, CCIG had a legal liability to the broker for the amount of the purchase price plus accrued interest.

— Each member of the club, including the appellant, was jointly and severally liable for this obligation.

—CCIG and the bank had also entered into an agreement to finance a portion of the purchase of the said bonds. Both parties complied with the Agreement. The bank provided the loan to cover the excess of the cost of the said bonds over the funds available in the club.

—The said bonds were delivered to the bank by the broker at the direction of the appellant and held by the bank as security for its loan. CCIG paid interest to the bank for the period the loan was outstanding. Each of the club members was jointly and severally liable for the amount of the loan. CCIG and its members placed their money at risk to obtain ownership of the said bond.

—CCIG had ownership of the bond during the period that the bond was placed with the bank as security for its loan. The rights and obligations created under the agreements between CCIG (and its members) and the other parties, the broker and the bank, were the rights and obligations which the parties intended to create and which all parties complied with in accordance with the terms of their respective agreements.

—There was a bona fide disposition of the security in the 1976 taxation year. The said bonds were delivered by the bank to the broker on January 14, 1976. The appellant was entitled to receive proceeds from the broker from the sale of these bonds.

— In accordance with the agreement between CCIG and the bank, the proceeds from the sale were applied to eliminate the bank loan in accordance with its terms and the balance of the proceeds were deposited in CCIG’s bank account.

The position of the respondent was as follows:

—The bond was not assigned or transferred to CCIG or the appellant within the meaning of subsection 20(14) of the Income Tax Act, and CCIG and the appellant were not entitled to interest within the meaning of subsection 20(14) and accordingly, the appellant is not entitled to a deduction pursuant to that section.

— No interest from the bond was received or receivable by CCIG or by the appellant in 1975 within the meaning of paragraph 12(1)(c) of the Income Tax Act and accordingly the appellant is not entitled to a deduction pursuant to subsection 110.1(1).

—The transaction was not entered into as an investment or for the purpose of gaining or producing income and accordingly the claimed deductions are prohibited by virtue of subsection 245(1) of the Income Tax Act.

Evidence

The appellant stated that the investment club had been formed with an initial investment of $3,000 each, making $15,000. A further amount of $86,000 had been borrowed from the bank on December 5, 1975 to provide the funds for the purchase in question. He was not certain of the mechanics of the delivery of the bond to the bank, nor whether the proceeds of the interest coupon due December 15, 1975 had been received directly by the bank or by the group. Some other minor investments occurred in the year 1976 but due to employment relocation of some of the members, the group wound up in August 1976.

A record of the trading through the stockbroker Midland Doherty Limited was submitted and since it is significant, the essential information is reproduced herein:

MIDLAND DOHERTY LIMITED

Account with: Account No

CONSOLIDATED CANADIAN 50-2840-7-1655 DEC 31, 1975 INVESTORS GROUP

213 DOUGLAS AVE

TORONTO, ONT

M5M 1G9

				Amount debit
	Bought or Sold or			unless marked
Date	received delivered Description		Price	Credit
NOV 28		BALANCE FORWARD		0.00
DEC 05	100000	CANADA 9’/z% JUNE 15/94 $96.00		100,502.74
DEC 05		CDA 9'/ 6 15 94 TRA 502	DEP	100,502.74CR
DEC 05		100000 CANADA 9 JUNE 15/94	DEL
		BALANCE		0.00

MIDLAND DOHERTY LIMITED

Account with:			Account No
CONSOLIDATED CANADIAN			50-2840-7-1655 JAN 30, 1976
INVESTORS GROUP
213 DOUGLAS AVE
TORONTO, ONT
M5M 1G9
					Amount debit
	Bought or	Sold or			unless marked
Date	received	delivered	Description	Price	Credit
DEC 31			BALANCE FORWARD		0.00
JAN 14		100000	CAN 9-1/2% JUNE 15/94	$97.50	98,280.82CR
JAN 14			CHQ No. 0010441 TRA055	CHQ	98,280.82
JAN 14	100000		CAN 9-1/2% JUNE 15/94	REC
			BALANCE		0.00

I addition, the demand loan was filed with the Board and it stipulated:

. interest .. . payable monthly at the rate of 10-1/4 per centum annum . . The receipt for the bond from the bank to CC/G, also dated December 5, 1975, was filed with the Board, and it gave the security number as A2125-5.

Argument

Counsel for the appellant noted two cases dealing with this issue— Frank Tyrala v MNR, [1978] CTC 2905; 78 DTC 1659, and K D Wollin v MNR, [1979] CTC 2827; 79 DTC 689. He pointed out, however, that a distinction should be made with both these cases. In Tyrala (supra) the transactions involved had only been separated by one day and, in his view, should not qualify as bona fide for the purpose of earning income from property, whereas the activity of CCIG had transpired over almost a full year. With respect to Wollin (supra), counsel’s distinction was that CCIG had participated in several transactions in efforts to establish the club, whereas Wollin had only the one single transaction. Counsel noted the point that the bank had acted as agent for the appellant should also be considered by the Board, but he advanced no particular argument in support of that proposition.

Counsel for the respondent asserted that the prerequisite condition for “assignment or transfer” dealt with in Tyrala (supra) and Wollin (supra) had not been met by the appellant. At the most, the appellant might be entitled to an interest deduction calculated according to the time the bond was allegedly owned by CCIG, and in this connection reference was made to the recent decision of Michael A Steeves v MNR, [1979] CTC 2445; 79 DTC 378.

Findings

The Board makes reference to the recent decisions in Frederick Tim Smye v MNR and in John R White v MNR.

In my view, counsel for the appellant has not distinguished the essential facts of this case from those in either Tyrala (supra) or Wollin (supra). The Minister has not pursued the argument that the transactions of CCIG “were not entered into as an investment for the purpose of gaining or producing income’’, so the length of time of the club’s activity or the number of transactions can hardly have any relevance (although one might seriously question the rationale of borrowing funds at 10-1/4% and investing them at 9-1/4%). The critical issue is that of “assignment or other transfer”. In my view, the “agent” argument noted but not pursued by counsel for the appellant is the only one open. It is of considerable interest to note that in the December 31,1975 statement from Midland Doherty reproduced above, the term “delivered” is specifically used, and I would assume the shortened form “del” also means the same thing. The evidence available to the Board supports the conclusion that the bank in this case was able to act in the capacity of “holding agent” since there were no known impediments to such delivery—the broker had received payment in full. The appellant has met the major condition in subsection 20(14) of the Act (transfer) permitting him to deduct “accrued interest” at the date of acquisition as an expense.

However, as I see it, there is another point. reference was made in Smye (supra) to Interpretation Bulletin IT-396, and the bases upon which interest may be (or should be) included in income, particularly when interest coupons are not yet due and payable. While the accrued interest received by the appellant ($156.16) on the sale of the bond in 1976 may be income in that year under subsection 20(14) of the Act, it is difficult for me to see how it can be prorated between the years 1975 ($83.29) and 1976 ($72.87). However, that particular point was not raised by the Minister, and the Board has not had the benefit of any opinion, whether pro or con, on it. Accordingly, the Board will not dismiss that portion of the appeal in this case.

Decision

The appeal is allowed. The entire matter is referred back to the respondent for reconsideration and reassessment accordingly.

Appeal allowed.