Joseph W Courtwright v. Minister of National Revenue, [1980] CTC 2632, [1980] DTC 1609

The Chairman:—This is the appeal of Mr Joseph W Courtright from an assessment in respect of the 1975 taxation year elated December 24, 1976 by which the respondent assessed the appellant for taxes by reducing the appellant’s declared interest income by $930.63 by reducing the deduction claimed for carrying charges by an amount of $887.02 and by reducing the appellant’s claim for an interest and dividend income deduction by the amount of $930.63.

The Minister’s assessment was based on the following assumptions:

(a) On December 5, 1975, the Appellant placed an order with his investment dealer Greenshields Incorporated, to purchase the bonds in question, 25,000 of Government of Canada, December 15, 1975, 7.25% (hereinafter referred to as the

“Bonds”);

(b) on December 15, 1975, the Appellant redeemed the said bonds;

(c) the Appellant never took delivery of the said Bonds,

(d) the said Bonds were not assigned or transferred to the Appellant;

(e) at all material times, no interest from the said Bonds was earned by the Appellant in 1975.

The Facts

There is no dispute as to the basic facts of this appeal. The appellant who for the period of 1970 to 1977 was an employee of Greenshields Incorporated, summarized the facts as follows:

The Facts regarding Acquisition.

On Dec 5, 1975 the appellant purchased from Greenshields Inc $25,000 par value Government of Canada Bonds. The purchase price was $99.98 per $190 of bond or $24,995.00 plus accrued interest of $878.94. Settlement date was December 9, 1975 a normal settlement period for bonds.

The appellant instructed Greenshields to deliver the bonds to his bank, the Bank of Montreal.

The bonds were duly delivered to the bank on December 9, 1975 against payment made by the bank on the instructions of the appellant.

A contract evidencing the purchase of the bonds and an advice from the bank indicating that delivery of and payment for the bonds took place is attached.

Appellant’s Submissions

The appellant’s position as stated in his notice of appeal and at the hearing Is:

Contention regarding acquisition

The appellant contends that the physical delivery of the bonds in negotiable form to his agent, the bank, clearly and unquestionably constitutes a legitimate and bona fide acquisition of the bonds.

The Facts regarding Disposition

The Government of Canada Bonds so acquired matured on December 15, 1975. The appellant instructed the bank to redeem the bonds on maturity and credit him with the proceeds. An advice indicating that this was done is attached.

Contention regarding Disposition

The appellant contends that the redemption on maturity of a bond constitutes a legitimate and bona fide disposition of the bond and cannot be considered otherwise.

Appeal

The appellant contends that having made legitimate and bona fide acquisition and disposition of the bonds he has incurred an interest expense equivalent to the accrued interest paid on acquisition of the bonds and that he is entitled to deduct this expense from his 1975 income pursuant to paragraph 20(14) of the Income Tax Act.

Respondent’s Submissions

The Respondent submits that the said Bonds were not assigned or transferred to the Appellant within the meaning of subsection 20(14) of the Income Tax Act.

The Respondent further submits that even if there was a transfer or assignment of the said bonds, the Appellant earned no interest from the ownership of the said bonds, but in fact all interest that accrued prior to the date of the assignment or transfer of the bonds to the Appellant was capital in the hands of the Appellant, and not interest within the meaning of paragraph 12(1)(c) of the Income Tax Act.

The Respondent submits further that no interest from the said Bonds was receivable by the Appellant in 1975, within the meaning of paragraph 12(1)(c) of the Income Tax Act and that therefore the Appellant is not entitled to a deduction pursuant to subsection 110.1 of the Income Tax Act.

At the hearing counsel for the respondent submitted that if the bonds were considered by the Board to have been validly transferred and assigned to the appellant, the amount of interest earned by the appellant pursuant to paragraph 12(1)(c) of the Income Tax Act, SC 1970-71-72, c 63, as amended, must be computed from the date of the assignment to the date the bonds matured, ie $32.08.

Finding of Facts

During the cross-examination of the appellant counsel for the respondent filed as:

Exhibit R-1

A purchase order by which the appellant purchased from Greenshields Incorporated on December 5, 1975, $25,000 par value Government of Canada Bonds at a cost of $24,995 plus accrued interest of $878.94, the settlement date of which was December 9, 1975.

Exhibit R-2

A Promissory Note, dated December 8, 1975 signed by the appellant in favour of the Bank of Montreal for $25,961.58 payable on the 15th day of December, 1975.

Exhibit R-3

An acknowledgement by the Bank of Montreal dated December 12,1975 of having received $25,000 Government of Canada Bonds at 7 A % due December 15, 1975, held by the bank as collateral for the appellant’s loan account.

Exhibit R-4

A Notice from the Bank of Montreal dated December 15, 1975 advising that the said Bonds were redeemed.

Exhibit R-5

A Notice from Bank of Montreal dated December 15, 1975 advising that the proceeds of disposal of the Bonds was $25,000 plus $906.25 in interest which was credited to the appellant’s account.

The appellant who represented himself, was an employee of the brokerage firm of Greenshields Incorporated and very knowledgeable in stock and bond transactions. He stated that the Government of Canada Bonds which he purchased and paid for, were bearer bonds which bear no serial numbers and are difficult to identify, (Exhibit R-1). He contended however, that the bonds were physically transferred and delivered from the brokerage house to the bank to his credit account where they were held as collateral against a loan which the appellant had obtained from the bank. (Exhibits R-2 and R-3)

On December 15,1975 the bank redeemed the bonds, and credited the appellant’s account, (Exhibit R-4). On the same day the bank issued an interest advice indicating an interest amount of $906.25. (Exhibit R-5)

Counsel for the respondent cited the case Ralph W Goldsilver v MNR, [1979] CTC 2805; 79 DTC 694, as being on all fours with the facts of the instant appeal. I find it very difficult to come to that conclusion. In that case Mr Goldsilver placed an order for a bond purchase from Richardson Securities of Canada on November 18, 1975 and a sale order of the bonds on the very next day. The bonds were not paid for and they did not leave the brokerage firm and were never in the possession of Mr Goldsilver.

In the instant appeal the bonds were paid for by the appellant; they were assigned, transferred and delivered to the appellant’s account at the Bank of Montreal. The fact that the appellant borrowed the funds to purchase the bonds and that the bonds were used by the bank as collateral does not make the appellant any less the owner of the bonds. In my view the instant appeal is distinguishable on its facts from the Goldsilver (supra) case, and I am of the opinion that the appellant has established in this instance that there was a valid assignment and transfer of the bonds from Greenshields Incorporated to the appellant.

The first question that arises is whether the validity of the bond transfer or the assignment of itself gives rise to the deduction provided for in subsection 20(14) of the Income Tax Act, which reads as follows:

Accrued Bond interest. Where, by virtue of an assignment or other transfer of a bond, debenture or similar security (other than an income bond or an income debenture), including for greater certainty an assignment or other transfer after June 18, 1971, of a bill, note, mortgage, hypothec or similar obligation, the transferee has become entitled to interest in respect of a period commencing before the time of transfer and ending after that time that is not payable until after the time of transfer, an amount equal to that proportion of the interest that the number of days in the portion of the period that preceded the day of transfer is of the number of days in whole period

(a) shall be included in computing the transferor’s income for the taxation year in which the transfer was made, and

(b) may be deducted in computing the transferee’s income for a taxation year in the computation of which there has been included

(i) the full amount of interest under section 12, or

(ii) a portion of the interest under paragraph (a).

It appears to me that subsection 20(14) of the Act expresses the elementary principle of not taxing the same interest twice, viz in the hands of the transferor and in those of the transferee. For the section to apply it must be read and interpreted as a whole and paragraph 20(14)(b) of the Act can, in my view, only be applied if paragraph 20(14)(a) of the Act has been complied with. In-the appeal at bar there is no evidence that the accrued interest was included in the transferor’s income and it cannot be deducted by the transferee notwithstanding the validity of the assignment of the bonds.

The second question is what exactly did the appellant acquire from Greenshields Incorporated on December 5, 1975? As I see it, the appellant purchased bonds whose face value was $25,000 and the right to an amount of $878.94 in interest when it became due on December 15, 1975. The appellant’s bank loan did not earn any of the interest accrued to December 5, 1975. The appellant purchased a capital asset whose value was $25,873.94 as of that date. The only amount that can be considered as valid interest for purposes of this appeal is that which accrued to the appellant from December 5, 1975 to the date of maturity on December 15, 1975. That interest in the amount of $32.08 would, pursuant to paragraph 12(1)(c) of the Act, be included in the appellant’s income but would be deductible by virtue of section 110.1 which, in my opinion, is applicable to that extent.

The appeal is therefore allowed and the matter referred back to the Minister for reassessment on the basis that the only interest income accru- ing to the appellant from the bonds from December 5, 1975 to December 15, 1975 was in the amount of $32.08. In all other respects, the appeal is dismissed.

Appeal allowed in part.