Ralph W Goldsilver v. Minister of National Revenue, [1979] CTC 2805

M J Bonner:—The appellant appeals from an assessment of income tax for his 1975 taxation year. The respondent, on assessment, disallowed the interest income deduction claimed by the appellant under section 110.1 of the Income Tax Act. It was the appellant’s position that as a result of the purchase by him in November of 1975, either from or through Richardson Securities of Canada (an investment dealer), of $34,000 in Government of Canada bonds, the sum of $1,073.79 in accrued interest was required by subsection 20(14) of the Income Tax Act to be included in the computation of his income.

Bonds of the series in question in this appeal bore interest at 71/4 % per annum, matured December 15, 1975, and were issued in two forms; bearer form with coupons attached, and, fully registered form with interest payable by cheque. Interest on such bonds was payable December 15 and June 15.

The disallowance of the deduction was on the basis that there was no bona fide acquisition or disposition of the bonds.

The appellant, a chartered accountant, approached Richardson Securities of Canada (hereinafter called “Richardson”) on November 18, 1975. He opened an account. He placed an order for the purchase of $34,000 (principal amount) of bonds of the series in question. On November 19, 1975, he placed an order with Richardson for the sale of the bonds. The value date on the purchase was November 20 and, on the sale, November 21.

The appellant received a statement from Richardson showing a purchase and a sale. He also received an information slip issued by Richardson in respect of interest showing the sum of $1,073.79.

The appellant stated that the employee of Richardson with whom he dealt had indicated that the bonds purchased or intended to be purchased were in Richardson’s inventory when the order was placed. The appellant stated also that he had no reason to believe that Richardson did not take delivery of the bonds. Richardson at no time delivered bonds to the appellant. The appellant did not pay for the bonds. In fact, all the appellant knew for certain was that he placed the purchase and sale orders, received the statement of account from Richardson showing the financial result of purchases and sales of Government of Canada bonds (the sale price being 8¢ per $100 less than the purchase price) and that he received from Richardson a written confirmation of a purchase and a sale.

The appellant admitted that he entered into the transaction to obtain a deduction under section 110.1 of the Income Tax Act. Persons who engage in transactions of the type in issue in this appeal should remember the following statement made by Mr Justice Urie in Atinco Paper Products Limited v Her Majesty the Queen, [1978] CTC 566; 78 DTC 6387 at 577 [6395:]

It is trite law to say that every taxpayer is entitled to so arrange his affairs as to minimize his tax liability. No one has ever suggested that this is contrary to public policy. It is equally true that the Court is not the watch-dog of the Minister of National Revenue. Nonetheless, it is the duty of the Court to carefully scrutinize everything that a taxpayer has done to ensure that everything which appears to have been done, in fact, has been done in accordance with applicable law. It is not sufficient to employ devices to achieve a desired result without ensuring that those devices are not simply cosmetically correct, that is correct in form, but, in fact, are in all respects legally correct, real transactions. If this Court, or any other Court, were to fail to carry out its elementary duty to examine with care all aspects of the transactions in issue, it would not only be derelict in carrying out its judicial duties, but in its duty to the public at large. It is for this reason that I cannot accede to the suggestion, sometimes expressed, that there can be a strict or liberal view taken of a transaction, or series of transactions which it is hoped by the taxpayer will result in a minimization of tax.

It was incumbent on the appellant here to establish that in fact an assignment or transfer of bonds took place with the result that he became entitled to interest which, by virtue of subsection 20(14) of the Act, was required to be included in computing his income.

Evidence was given by Ron I Thomas, officer manager of Richardson. He identified a “bond buy ticket’’ and a “bond sell ticket’’ prepared as a result of the appellant’s dealings with Richardson. To each there was attached a computer printout. The printout on the appellant’s purchase read:

SOLDT 34M GOVT OF CANADA 7 1/4/DEC 15/75 CL 100 TDB 100 VD NOV 20/75 TD 70399-12 TDB 34M 100 100

The printout on the appellant’s sale read:

BOTF 34M GOVT OF CAN 7 1/4/DEC 15/75 CL 99.92 TDB 100 VD NOV 21/75 TD 70399-12 TDB 34M 99.92 100

Mr Thomas explained that Richardson was obliged, if the customer requested, to make “good delivery’’ of the security on the value date. He was unable to say whether Richardson had the bonds in question in inventory at any time.

The evidence did not establish that Richardson had, or that it acquired as a result of the appellant’s order to purchase, any bond of the series in question. It should be noted that the sell order was placed before the day on which Richardson became obliged, as a result of the purchase order, to deliver any bonds to the appellant. The appellant admitted that he did not intend to hold the bonds he ordered. It appears that the Richardson employee with whom the appellant dealt was also aware of the appellant’s intention. Whatever the contractual obligations were in November of 1975 as between Richardson and the appellant, the state of such obligations does not lead, in the circumstances which I have outlined, to any inference that in fact there was an assignment or transfer of a bond to the appellant. I cannot conclude, as a matter of fact, that any bearer bond was delivered to or held by Richardson as trustee or agent of the appellant. There was, of course, no suggestion that any bond was registered in the appellant’s name.

Because I have been unable to find that there was any assignment or other transfer of a bond to the appellant, no question of entitlement to interest arises. It is not necessary to consider whether subsection 20(14) has any application to an assignee or transferee who does not thereafter continue to hold a debt obligation until the day upon which interest becomes payable.

The factual premise upon which the appellant’s case rests has therefore not been established and the appeal must be dismissed.

Appeal dismissed.