Michael a Steeves v. Minister of National Revenue, [1979] CTC 2445, 79 DTC 378

Roland St-Onge:—The appeal of Michael A Steeves came before me on April 2,1979 at the City of Toronto, Ontario and the issue is whether the appellant can claim the interest and the dividend deduction of $1000 by virtue of section 110.1 of the Income Tax Act in his 1975 taxation year. At the time of hearing, the respondent had not filed any reply to the notice of appeal and the appellant used numbers 7 and 8 of the Tax Review Board Rules of Practice and Procedure to ask that his allegation of facts contained in his notice of appeal be considered as true.

Counsel for respondent did not ask to file a reply to the notice of appeal and agreed that the decision of the Board should be rendered as if the allegation of facts made by the appellant were true. Consequently, for the purpose of this judgment, the notice of appeal is reproduced as follows:

1. Statement of Facts

(a) In his 1975 income tax return, the taxpayer reported interest income of $1,000.14, claimed a deduction for interest expense of $933.84, and claimed the interest and dividend deduction of $1,000.

(b) Certain of the above amounts break down as follows:

(c) On arbitrary re-assessment, the reported interest income was reduced by $906.25, the interest expense claimed was reduced by $933.84, and the interest and dividend income deduction was reduced by $906.11, all on the alleged grounds that a bona fide acquisition or disposition of the Government of Canada bonds due December 15, 1975, did not take place.

(i) Interest income
Government of Canada Bonds due December 15,1975	$906.25
Canada Savings Bonds and Credit Union Deposits	93.89
	$1,000.14
(ii) Interest expense
Government of Canada Bonds due December 15,1975	893.84
Canada Savings Bonds obtained through payroll deduction	40.00
	$933.84

2. Grounds

(a) There was a bona fide acquisition of Canada Savings Bonds through the payroll system of the taxpayer’s employer, Canadian General Electric Company Limited, for which interest was charged and paid in the amount of $40.

(b) There was a bona fide acquisition and disposition of the Government of Canada bonds due December 15, 1975, as the taxpayer purchased and paid for the bonds in a binding legal transaction under which title to the bonds passed to the taxpayer, as evidenced by the attached photocopy of the taxpayer’s cheque, payable to Merrill Lynch, Royal Securities Limited in settlement of their invoice to him, copy attached.

(c) The bonds were delivered to the taxpayer’s account at Merrill Lynch, Royal Securities Limited, and were capable of being disposed of by him.

(d) The interest income of $906.25 was paid by the Government of Canada to the taxpayer’s agent, Merrill Lynch, Royal Securities Limited, on the date of the maturity of both the interest coupons and the bonds themselves.

(e) The payment of interest is evidenced by Form T5 Supplementary, attached to the taxpayer’s return, and is income subject to tax under paragraphs 12(1)(c) and 20(14)(a) of the Income Tax Act.

(f) The interest expense of $933.84, referable to both the purchase by the taxpayer of Government of Canada Bonds due December 15, 1975, and Canada Savings Bonds, and claimed by the taxpayer, is deductible in computing income under paragraphs 20(1)(c) and 20(16)(a) of the Income Tax Act.

(g) The taxpayer is entitled to claim the interest and dividend deduction by virtue of subsections 110.1(1) and 110.1(2) of the Income Tax Act.

3. Tyrala v MNR

The Minister rejected taxpayer’s notice of objection on the grounds that the Tax Review Board had decided against a taxpayer in an allegedly similar case, Tyrala v MNR, [1978] CTC 2905; 78 DTC 1659. This case decided the following:

(a) The “interest” paid or received was not interest but rights to interest;

(b) The “purchase” and “sale” of the bonds was not synonymous with an assignment or transfer; and

(c) Bonds were not delivered to the taxpayer.

On the basis of the facts presented above, the taxpayer in the instant case must distinguish himself from Tyrala v MNR as follows:

(a) The taxpayer’s agent received interest on the maturity date of the coupons of the bonds, and received the principal of the bonds on the maturity date of the bonds.

(b) A bona fide transfer of the bonds took place through payment by the taxpayer of the full amount invoiced to him; and

(c) The bonds were delivered to his account by his agent and taxpayer could, and did, dispose of them.

As may be seen, on December 15,1975, the appellant purchased C bonds at a total cost of $25,918.85, which included accrued interest amounting to $906.25. The said bonds matured three days later.

In calculating his income for the 1975 taxation year, the appellant included $906.25 as interest income, deducted carrying charges of $893.84 and claimed the interest deduction provided for by section 110.1 of the Act.

The Minister reassessed the appellant on the basis that he had received no interest income and had not incurred any interest expenses and, accordingly, was not entitled to claim the interest deduction provided by section 110.1 of the Act.

At the hearing, the appellant argued that the accrued bond interest was paid to him because it was received by his agent, that because it was received before the relevant section was amended and also because the amendment was not retroactive, he was entitled to benefit from section 110.1 of the Act.

Counsel for respondent referred the Board to the two following cases:

1. Frank Tyra la v MNR, [1978] CTC 2905; 78 DTC 1659,

2. Yonge-Eglinton Building Limited v MNR, [1972] CTC 542; 72 DTC 6456.

He explained that the appellant had earned only three days of interest and could not get the benefit of section 110.1 of the Act; that the intent of the section was to allow a taxpayer to deduct up to $1000 of interest earned; that the appellant did not receive more than $12.41 of interest from his Government of Canada bonds; and that the Board, in order to interpret the relevant section of the Act, should stick to the strict definition of the word interest, which is essentially a compensation for the use or retention of money for a period of time; Yonge-Eglinton Building Limited case at 544, [6458].

According to the evidence adduced, it appeared that the appellant received only $12.41 from the buying and selling of C bonds and the remainder of the accrued interest was received by somebody else. Paragraph 12(1 )(c) says that “amounts to be included as income from business or property is any amount received by the taxpayer in the year or receivable by him in the year (depending upon the method regularly followed by the taxpayer in computing his profits)”. There is no evidence to show whether the appellant was on a cash or accrual basis, but it is obvious that the total accrued interest was never received by or receivable for the appellant because the latter did not own the bonds long enough to earn the said accrued interest and there is no evidence to show that the appellant’s agent held the bonds for the appellant for more than three days.

In a few words, interest is income. Income has to be earned. The appellant never earned the accrued interest except to the extent of $12.41.

Consequently, the appellant cannot report as income more than what he earned as interest. However, the appeal must be allowed in part because counsel agreed that:

1) $12.41 was the interest for three days;

2) $40 was a valid expense.

Consequently, the appeal is allowed to this extent.

Appeal allowed in part.