Dionne v. R., [1998] 3 CTC 2610, 98 DTC 1245

McArthur T.C.J.:

The appeals are from assessments by the Minister of National Revenue adding $89,200 to Armand Dionne’s income, $26,000 to Myriam Dionne’s income and $26,000 to Chantal Dionne’s income for the 1990 taxation year. The Minister also reduced the three appellants’ taxable benefits under section 80.4 of the Income Tax Act to nil.

For the sake of convenience, the three appeals were heard on common evidence. I will refer here only to Armand Dionne’s appeal. The appellant and the respondent prepared an agreed statement of facts.

The statement for the appellant Armand Dionne reads as follows:

[TRANSLATION]

THE PARTIES, through their undersigned counsel, admit the following facts in so far as they are admitted only for the purposes of this case and cannot be used against any party in any other circumstances, and in so far as the parties can adduce any other evidence that is relevant to this case but does not contradict this agreement.

1. Dionne Flying Service Limited (“the corporation”) is a business corporation that has been incorporated under the laws of New Brunswick since 1963. The corporation’s head office is in Grand Falls, New Brunswick. Armand Dionne is the corporation’s principal shareholder.

2. Armand Dionne Jr., the son of Armand and Léola Dionne, has been a shareholder of the corporation since March 30, 1990, and a director since May 5, 1990. (See Exhibits 1 and 2)

3. In 1991, Armand Dionne Jr. was a full-time student. He has been in school continuously since September 1991 and is now enrolled at Université de Moncton. He hopes to complete his university studies in April 1998.

4. On August 28, 1991, the corporation made an $89,200 loan to Armand Dionne Jr. so that he could purchase a residence at 50 Gaston Crescent in Moncton, New Brunswick. The deed of transfer recording the purchase of the residence by Armand Dionne Jr. was registered at the registry office in the county of Westmorland, New Brunswick, on August 30, 1991. (See Exhibit 3, the deed of transfer)

5. On August 28, 1991, Armand Dionne Jr. signed a promissory note in favour of the corporation (see Exhibit 4, the promissory note). The corporation advanced funds to him, and he used them to purchase a residence for himself. The amounts loaned to Armand Dionne Jr. appear in the corporation’s 1991 financial statements under the item “note receivable”. (See Exhibit 5)

6. In his income tax return for the 1991 taxation year, Armand Dionne Jr. included $2,193 as a taxable benefit under section 80.4 of the Income Tax Act. That amount represents the benefit he received because he did not pay any interest on the loan from the corporation. The corporation’s 1991 tax return likewise included an amount representing the interest calculated on the loan made to Armand Dionne Jr. (See Exhibit 6, Armand Dionne Jr.’s 1991 tax return)

7. By notice of reassessment dated January 19, 1995 (see Exhibit 7), the Minister of National Revenue (hereinafter “the Minister”) adjusted Armand Dionne Jr.’s tax liability by adding $89,200 to his taxable income for the 1991 taxation year and reducing the $2,193 taxable benefit he reported for that year to nil. The Minister also reduced the corporation’s income from interest on the loan to Armand Dionne Jr. to zero on the basis that the amount should not have been included in the corporation’s income because the loan did not meet the requirements of subsection 15(2) of the Income Tax Act. (See Exhibit 8, the letter by the Department of National Revenue dated July 27,1993)

8. By notice of objection dated March 20, 1995, Armand Dionne Jr. objected to the reassessment of January 19, 1995. (See Exhibit 9)

9. By notice of confirmation dated October 5, 1995, the Minister confirmed his decision with regard to the appellant’s tax liability. (See Exhibit 10)

10. On December 8, 1995, the appellant filed a notice of appeal with the Tax Court of Canada.

11. Armand Dionne Jr.’s notice of appeal was served on the Attorney General of Canada on December 20, 1995.

12. In the Reply to the Notice of Appeal filed on March 5,1996, the Deputy Attorney General of Canada maintained that the Minister had correctly adjusted Armand Dionne Jr.’s tax liability.

In the Reply to the Notice of Appeal, the respondent argued that at the time the loan was made, no bona fide arrangement was made for repayment thereof within a reasonable time, since the time within which the loan would be repaid could not be determined from the terms of the promissory note. The respondent also argued that the corporation’s loan to the appellant did not meet the criteria for the exception under subparagraph 15(2)(a)(ii) to apply.

Subparagraph 15(2)(a)(ii) of the Act provides in part as follows:

Where a person is a shareholder of a corporation or is a member of a partnership, or a beneficiary of a trust, that is a shareholder of a corporation and the person has in a taxation year received a loan from the particular corporation, the amount of the loan or indebtedness shall be included in computing the income for the year of the person or partnership, unless

(1) the loan was made or the indebtedness arose to enable or assist the individual to acquire a dwelling; and

(2) bona fide arrangements were made, at the time the loan was made or the indebtedness arose, for repayment thereof within a reasonable time.

For her analysis, the respondent relied mainly on the Federal Court of Appeal’s decision in Silden v. Minister of National Revenue (1993), 93 D.T.C. 5362 (Fed. C.A.). In Silden, the taxpayer’s employer loaned him $55,000 to help him purchase a house, which was secured by a mortgage. The loan had to be repaid if the taxpayer left his employment or sold the property. The Minister considered the loan to be income under subsection 15(2).

The appeal raised three questions: first, whether it is necessary, for subsection 15(2) to apply, that the loan be made to a shareholder as a shareholder; second, whether the taxpayer was right in contending that the subsection was inapplicable in the circumstances because he was not a shareholder of the company ; and third, whether the exception or exceptions in paragraph 15(2)(a) excluded the loan from the provisions in issue.

The Court of Appeal noted that the trial judge had erred in finding that the requirement of payment within a reasonable time had been met. There was no certainty about when the loan would be repaid.

The exception in subparagraph 15(2)(a)(ii) was inapplicable and the amount had therefore been correctly assessed as income.

The Federal Court of Appeal stated that two conditions must be met for a loan to fall within the exception. First, the loan must be made to acquire a dwelling for habitation; there is no question that this condition was met in the case at bar. It is the second condition that is of concern: in Silden, supra, the Federal Court of Appeal went on to state that bona fide repayment arrangements must have been made at the same time as the loan, that is, arrangements for the repayment of the loan within a reasonable time.

In the final paragraph of Silden, supra, the Federal Court of Appeal stated that what the Act requires is that arrangements be made at the time the loan is made for repayment thereof within a reasonable time. The real question was therefore not whether the arrangements for the repayment of the loan were reasonable, but whether, pursuant to those arrangements, the loan was repaid within a reasonable time. That question could not be answered in the affirmative in Silden, since the arrangements made at the time of the loan did not make it possible to determine with any certainty when the loan would be repaid.

Counsel for the respondent presented the facts of Silden, supra, as being similar to those of this case. I cannot accept that argument; in Silden, the taxpayer’s employer encouraged him to remain with the company for the rest of his life. There was no intention to repay the loan within a definite or reasonable period of time.

The loans in the case at bar were presumably made to encourage the appellants to continue their studies. It is reasonable to foresee the completion of those studies with some certainty.

Common sense must be used. It can be concluded with reasonable certainty that their studies will end in the near future.

These loans are similar to the many loans made by the federal government to students in need of funds. I agree with the following passage from the appellants’ “Written submission”:

[TRANSLATION]

Written submission: the Federal Court of Appeal considered what interpretation should be given to the term “reasonable assistance’’ in the context of subsection 15(2).

When a statute describes a reasonable time or any other reasonable measure or conduct, one can be sure that what is meant is not something rigidly specific, eternal, universal or regulating, or even a verity. What is meant is the period of time that is reasonable in the circumstances. This concept is taken from Silden, supra, [1992] C.T.C. 533. The appellants added the following:

[TRANSLATION]

Not followed on appeal on other grounds. In this case, Dionne Flying gave the appellant some time to enable him to complete his studies. His status as a student is a circumstance that justifies a legitimate period of time, in addition to the fact that the repayment period is reasonable according to the standard set out in n’Hatuk [sic].

It should read Hnatuk. Repayment of the loan on an amortized basis is also consistent with business practice, that is, the deadlines are generally as they are in financial institutions for the financing of dwellings.

The appellant therefore legitimately relied on the exception set out in the Act, and the requirements described by the courts were met. In addition, the facts show that the appellant and the corporation acted in good faith. The appellant tried to claim the benefit the corporation had conferred on him by including an amount in his tax return in accordance with section 84.2 of the Act. The corporation also claimed interest income equal to the benefit of the loan to the appellant.

In Hnatuk (1996), 97 D.T.C. 674 (T.C.C.), the Tax Court of Canada held that the repayment over 25 years of a housing loan to a shareholder was reasonable. The question of what is a reasonable time for repaying a shareholder loan is a subjective question that depends in large part on the particular circumstances of the case: Kalousdian v. R. (1994), 94 D.T.C. 1722 (T.C.C.).

For these reasons, the three appeals are allowed with costs. The matters are referred back to the respondent for reconsideration and reassessment.

Appeal allowed.