K D Wollin v. Minister of National Revenue, [1979] CTC 2827, 79 DTC 689

Delmer E Taylor:—This is an appeal heard in the City of Kingston, Ontario, on May 23, 1979, against an income tax assessment in which the Minister of National Revenue disallowed the amount of $900 claimed by the taxpayer in the year 1975 as an interest deduction. The respondent relied, inter alia, on sections 3 and 110.1, subsections 9(1) and 20(14), and upon paragraph 12(1)(c) of the Income Tax Act, RSC 1952, c 148 as amended by section 1, c 63 of SC 1970-71-72.

Background

The appellant is a chartered accountant in public practice in the City of Kingston.

Contentions

The appellant claimed that an amount of accrued interest of $867.95 was paid by him on December 18, 1975, on the acquisition of $20,000 of Ontario Hydro 9% bonds and that it should be a deductible expense; that he received $900 interest on the sale of these bonds on January 8,1976, and that this was income. In addition, he was entitled to the interest deduction as claimed.

The respondent asserted that the appellant had not purchased the bonds, that such bonds were not assigned or transferred to him, and that he neither received nor was entitled to consider as income or expense the amounts involved.

Evidence

The appellant gave evidence regarding his desire to develop an investment portfolio, his arrangements with the broker involved (N L Sandler & Co Limited), and filed as Exhibit A-2 the copy of the “purchase order” for the bonds received from that broker.

Argument

Written submissions were provided by counsel and warrant complete reproduction.

For the appellant:

1. In response to the question ‘Was there an assignment or transfer of the bonds to the appellant within the meaning of subsection 20(14) of the Income Tax Act? the appellant submits as follows:

Subsection 20(14) states “Where, by virtue of an assignment or other transfer of a bond, debenture or other security ..It is well established that words or phrases not otherwise defined in the Income Tax Act must be given their everyday, ordinary meaning unless there exists a legal definition of the term, in which event the legal meaning will apply in the interpretation of the statute. The term “assignment”, unlike “transfer”, has a definite legal connotation in that it relates to the conveyance of a chose in action. It is settled law that a transaction involving an assignment would be governed by the following tests:

(a) Any acts or words from which may be inferred on intention to pass the beneficial interest in a certain fund are sufficient to consititute an equitable assignment.

(b) An assignment of a legal or equitable chose in action which fails to meet the criteria of section 54 of the Conveyancing and Law of Property Act does not by virtue of that failure become unenforceable as an equitable assignment. The statutory provisions relate to procedural rules in enforcing the chose and do not impair the efficiency of equitable assignments.

(c) The subject matter of an assignment must be specifically identified.

(d) An equitable assignment of a future debt must be supported by valuable consideration.

(e) Notice of the debtor is not essential to the validity of the assignment as between assignor and assignee.

(The Canadian Encyclopedic Digest Ontario, 3rd ed, vol 4, title 25.)

It is respectfully submitted that the transaction in question conforms to these particular tests, especially having regard to the intention to pass, as evidenced by the broker’s acknowledgement of the transaction; the specific identification of the bonds in question and the adequacy of the consideration tendered by the appellant as evidenced by the payment of $1,000 being the amount required to secure the bonds on margin. In view of this conformity it is submitted that the bonds were conveyed to the appellant by “assignment or other transfer” on December 23, 1975.

In addition the custom of the trade is relevent in the determination of whether or not the bonds were assigned or transferred.

An acquisition of securities on margin involves certain undertakings by the broker and customer. The broker agrees to acquire the securities; to advance any funds beyond the amount deposited by the customer necessary to effect the purchase; to carry or hold such securities as long as the required margin is maintained; at all times to have in his name or under his control, ready for delivery, the securities purchased; to deliver such securities to the customer upon receipt of the advances and commissions accruing to the broker or to sell the security upon the order of the customer. The customer agrees to pay the required margin; to keep such margins good according to the fluctuations of the market; to take the securities so purchased on his order whenever required by the broker and to pay the difference between the amount advanced by him and the amount paid for the securities by the broker.

The broker may act as the agent of his customer, as creditor in advancing money for the purchase of sécurités and as pledgee insofar as he acquires a lien upon the securities at the time of the advance of funds.

As pledgee, the broker has the ordinary right to take title in his own name. Ordinarily, however, the title to stock bought by a broker for a customer, on margin or otherwise, whether purchased in his own name or not, vests in the customer, subject to a lien for payment of advances and commissions due to the broker. In ordinary dealings, then, the customer is the absolute owner of the security. The mere fact that it is the custom of brokers to treat securities held by them for customers as security for margin does not change the ownership of the security so pledged.

In summary it is submitted that the bonds were assigned to the appellant effective December 23, 1975, in view of the fact that the transaction complies with the characteristics of assignments in general as noted above and, perhaps more importantly, complied with the normal and usual custom of the trade applicable in the acquisition of any marketable security.

2. In response to the question, ‘‘Was the appellant entitled to interest of $900 on the bonds on December 31, 1975?”, the appellant submits as follows:

The use of the word “entitled” bears a connotation of an actionable right to the interest which can be made effective against all the world and which, if enforced, will give the holder of that right unqualified use and enjoyment of the interest. This same connotation is referred to by Kearney, L in MNR v Colford Contracting Co, Ltd, [1960] CTC 178 at 186; 60 DTC 1131 at 1135 in connection with the meaning of the word “receivable”.

Interest has been defined as

. . the return, or compensation, for the use or

retention by one party of a sum of money or other property belonging to another

(Halsbury’s Laws of England, 2nd ed, vol 23, p 174, para 253)

It is a aright capable of being conveyed with the debt to which it relates. However, an amount received for the conveyance of such a right between interest payment dates does not constitute interest for income tax purposes. This distinction is drawn from a leading English case (Wigmore v Summerson & Sons Ltd (1926), 1 KB 131) in which payment for such a right, when conveyed with the underlying security, was held to be in the nature of a capital amount and the purchaser, therefore, was not entitled to any deduction in respect of the amount paid for the right (ie interest is the amount received from the debtor, not the amount received by virtue of the assignment). This decision was followed in No 729 v MNR (26 Tax ABC 107; 61 DTC 137). Subsection 20(14) (and its predecessor, paragraph 6(1)(b)) exists solely to remedy potential inequities inherent in the Wigmore decision.

Referring back to our comments in connection with the custom of the trade, the appellant submits that his relationship with the broker after execution of the margin agreement was one of principal and agent. In that regard, the broker is entitled only to his usual commission and expenses incurred in connection with the carrying out of his duties as agent. Although the interest payable on December 31, 1975, was in fact paid to N L Sandler & Co, Limited, the appellant submits that under the terms and conditions of the margin agreement only he was “entitled” to the interest so paid and that N L Sandler Co, Limited acted only in its capacity as collection agent. If there had been default in the payment, the appellant submits that any action launched by him to enforce payment as owner of the bonds would have been sustainable in a court of law.

It is, therefore, submitted that the appellant was the only person “entitled to interest” as required by subsection 20(14) of the Income Tax Act and that the amount was “receivable” on December 31,1975 as the right to enforce payment of the interest rested with the person who owned the bond on that date.

3. In response to the question, “Is the $868 an amount properly deductible from the appellant’s income under subsection 21(14)?” the appellant submits as follows:

It is well established that income from a source for income tax purposes is the net income as determined under the provisions of the Income Tax Act (see, for example, sections 3, 4, and 9). It is necessary, however, to disclose in a return of income the nature of the elements comprising the profit from a particular source. Paragraph 12(1)(c) requires the inclusion of interest in computation of profit while sections 18 to 37 inclusive provide rules to determine expenditures deductible in computing profit from that source.

The income from the ownership of the bonds, then, is determined only after deduction of the expenditures necessary to “earn” the interest. for administrative purposes, these amounts are shown separately on the appellant’s return of income.

The amount deductible in computing taxable income under the provisions of subsection 110.1(1) (as it reads in its application to the 1975 taxation year) is expressed as “... (i) The amount of interest included in computing the taxpayer’s income for the year ..Clearly, the amount eligible for exclusion is the gross amount of interest. This view is supported, albeit informally, by the comments made in paragraph 1 of Interpretation Bulletin 333R.

It is submitted then that the question of netting the amount receivable as interest is not material in this case.

The description of the amount, as provided in the item “other deductions’’ on page 2 of the 1975 income tax return referred to accrued interest paid in respect of the bond purchase. Although there is substantial doubt as to the technical accuracy of the description, it is commonly used in the commercial world to describe the amount paid for the right to interest. Even without the reference to the specific provision relied upon for relief, the use of such a common phrase should alert the Minister to the exact nature of the deduction claimed, and any question as to the deductibility of the amount should be determined by reference only to the facts and substance of the transaction.

In summary it is submitted that the appellant is entitled to invoke both subsection 20(14) and subsection 110.1(1) in computing his amount taxable for the 1975 taxation year.

For the respondent:

Issue No 1

Was there an assignment or other transfer of the subject bonds to the appellant within the meaning of subsection 20(14) of the Income Tax Act RSC 1952 c 148 as amended by s 1 of c 63 SC 1970-71-72.

Facts

The facts bearing on this issue are:

—on December 18,1975, the appellant placed with N L Sandler & Co an order to purchase $20,000 worth of Ontario Hydro 9% bonds, due in 1995 (transcript, page 9);

—the settlement date of the transaction was December 23, 1975 (transcript, page 10, line 21);

—the appellant paid $1,000 to N L Sandler & Co as a deposit on the fully- margined transaction and the bonds were held by the dealer as security for the balance of the purchase price (transcript, pp 9 & 10, Exhibit A-1);

—the dealer sent to the appellant a trade slip, dated December 18, 1975, which is Exhibit A-2;

—the dealer sent to the appellant a statement of his account as of December 31, 1975, which is Exhibit A-3;

—the dealer sent to the appellant a “Summary of investment income” for the year 1975, which is Exhibit A-4;

—The appellant “sold” the bonds in January of 1976, the settlement date being January 8 (transcript, page 15, lines 17-23);

—according to the testimony of the appellant, the securities in question were bearer bonds (transcript, page 23, lines 7-9 & 24-25);

—the bonds were not delivered to the appellant but were instead retained by the dealer (transcript, page 23, lines 10-13);

— no other steps were taken to transfer the bonds to the appellant (transcript, page 23, line 27 to page 24, line 9).

Submissions

1. The Minister, in assessing the appellant, made the assumption that the bonds were not assigned or transferred to the appellant. The appellant had the burden of proving the contrary.

2. The appellant testified that to the best of his knowledge the bonds were bearer bonds. No further documentary evidence was submitted to either support or contradict that assertion. Exhibit A-2, the trade slip from N L Sandler & Co, shows that the bonds allegedly purchased were purchased from the broker as principals.

3. In Boultbee v Gzowski (1899) 29 SCR 54, Girouard, J at p 89 stated:

... and to my mind the word ‘settlement’ must mean everything that is necessary to complete the transaction, that is the payment of the purchase money, the transfer of the shares and its acceptance either by the broker or his principal, who must be disclosed not later than on the day of the settlement, if the broker wishes to free himself from any personal responsibility.

4. It is submitted that a transfer of bearer bonds is accomplished only by physical delivery.

In Fraser and Stewart, Company Law of Canada, 6th ed p 395 it is stated: “Bearer bonds are transferable by delivery”, (as distinguished from registered bonds for which mere delivery is not sufficient).

In describing bearer debentures, Richards, CJ in Geddes v Toronto Street Railway (1864), 14 UCCP 513 at 520 states:

I think we may properly construe the legal effect of the debentures to be, to pay the moneys therein mentioned to the individual to whom they were delivered, and who was thus constituted the bearer; and he would thus be the payee (grantee) named in the bonds.

Duff, J in Union Investment Co v Wells (1908), 39 SCR 628 at p 630 states:

The characteristics which the law recognizes as marking negotiable instruments

are, first, such instruments when payable to the bearer or indorsed in blank are transferable from hand to hand so that the right to maintain an action upon the instrument passes by delivery of the instrument only. . . .

Furthermore, Exhibit A-2 contains a condition that ‘Purchases or sales are made with the distinct understanding that the actual delivery is contemplated’.

The evidence before the Board is that the bonds were to be held as security for the purchase price but at no time did the appellant take physical delivery of the bonds (Transcript p 23, 11 10-13). It is submitted, therefore, that at no time was there a transfer of the bonds.

5. It is submitted that the evidence before the Board supports a finding that what actually happened was that N L Sandler & Co Limited acquired as principal a trading block of $100,000 of the Ontario Hydro bonds and then as princiapl failed in its purported transfer of $20,000 thereof to the appellant (Transcript p 22, 11.23-30, Exhibit A-2).

Exhibit A-2 on its own does not support a transfer in law of the bonds even though it reads: ‘We confirm the following transaction for your account:

Bought
$20,000	Ontario Hydro
	9% June 30/95’

(see Thorson, P in Horse Co-operative Marketing Association, Limited v MNR, [1956] CTC 115 at 135; 56 DTC 1064 at 1074:

It does not follow from the fact that members received a document called a ‘Purchase Voucher’ when they delivered horses to the appellant that they sold them to the appellant for the ‘price per lb’ stated in it . . . . The document must be read as a whole and also looked at in the light of surrounding circumstances. It is the substance and the reality of the transaction that should be considered, rather than the form in which it was expressed).

Issues Nos 2 and 3

Both these issues raise the questions of Mr Wollin’s entitlement to the interest accruing on December 31, 1975, and the deductibility under the provisions of subsection 20(14) of the Income Tax Act of an amount of $867.95 which represent the interest portion accruing from June 30, 1975, to the date of purchase, that is, December 18, 1975.

Under this branch of the argument, it is assumed that this Honourable Board is satisfied that there was, in law, a transfer or assignment of the bonds to the appellant on December 18, 1975.

For the purpose of the present argument, it is respectfully submitted that this Board ought to make, on the evidence, the following findings of fact:

(a) the evidence does not disclose whether in making the $1,000 deposit on the transaction or at any time thereafter, the appellant was purchasing or acquiring the right to the interest (as distinct from the right to the principal amount of the bonds) which had accumulated from June, 1975, until the date of purchase;

(b) these were bearer bonds with the consequence that the interest coupons were payable and receivable by their holder N L Sandler & Co Ltd;

(c) Exhibit A-4 does not, it is submitted, properly reflect the form or the substance of the transaction. At no time was the amount of $867.95 (which represents the interest portion accruing day by day from June, 1975, until the date of purchase) ever paid by the appellant to the previous holder. At no time was the amount of $900 ever paid to or receivable by the appellant.

(d) paragraph 3 of the notice of appeal makes it clear that the . . amount of $868 was paid to the previous holder of the bonds on account of interest accrued from June 30, 1975, to the date of purchase” and, in turn, paragraph 4 does indicate that the total interest accrued at the date of maturity was paid to N L Sandler & Co Ltd.

On the basis of these findings of fact, it is respectfully submitted that (on the assumption that there was a valid transfer or assignment) in receiving the $900 interest, N L Sandler & Co Ltd was under an obligation to remit to the previous holder of the bond (the evidence does not disclose its name) the amount of $867.95. At no time did N L Sandler & Co Ltd ever become obliged to pay the said sum to the appellant.

The appellant had the burden of establishing that he became entitled to receive, as interest, an amount of $900. It is submitted that he has failed to do so and that the only amount “receivable” by him, as interest, was an amount of $32.05, that is to say, the interest portion accruing from day to day from the date of purchase until December 31, 1975, ($900 - $867.95).

See: Steeves v MNR, [1979] CTC 2445; 79 DTC 378;

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

Conclusions

1. There was no transfer or assignment of the bonds to the appellant within the meaning of subsection 20(14) of the Act.

2. If there was an assignment or transfer (which is not admitted by the respondent), then the greatest amount that was ‘received . . . or receivable’ by the appellant as of interest within the meaning of paragraph 12(1)(c) of the Act was $32.05. Furthermore, the appellant did not become “entitled to interest” equal to the amount of $867.95, within the meaning of subsection 20(14) of the Act, but rather to $32.05.

Findings

This case is similar in nature to that of Frank Tyrala v MNR, [1978] CTC 2905; 78 DTC 1659, with one notable exception—interest came due and was payable on December 31, 1975 on the Hydro bonds. In the Tyrala matter, all else aside, there was no way of accepting that in advance of the legitimate interest due date (in that case February 15 of the year following the taxation year in the appeal), the appellant had any entitlement to any interest. In this appeal, the various owners of the total issue of the Hydro bonds were entitled to interest at December 31. Counsel for the appellant relied to a substantial degree upon the custom of the securities trade to support the contention that “an assignment or other transfer” had occurred and that the appellant should be included in that group of “owners”. In view of the fact that the Hydro securities were “bearer” bonds, I am not aware of any manner other than physical delivery in which the beneficial ownership of the bonds could be transferred to the appellant, and no such physical delivery and acceptance took place. Using the tests detailed for an assignment in the appellant’s own submission (quoted above), it would be my view that the business arrangements between Mr Wollin and Sandler, as evidenced by the broker’s trade slip (purchase order) of December 18, 1975 (Exhibit A-2) and the testimony of the appellant, do not fit point (c): “The subject matter of an assignment must be specifically identified”. At best, the “purchase order” from Sandler represents an agreement between the broker and this appellant concerning $20,000 of some Ontario Hydro 9% bonds due in 1995. The legitimate subject of an assignment, as I would understand point (c) above, would entail at the minimum a description of the specific bond documents in question, not merely a general description of the bond issue from which identifiable, but as yet unidentified bonds would be or could be provided. The fact that the appellant proposes he had a legal binding contract with Sandler as a result of Exhibit A-2, and could require completion of the transaction, does not in my view have any bearing on the issue before the Board. That which he was entitled to enforce (upon full payment and perhaps other conditions) was transfer or assignment (if applicable) of the bonds, and that he did not do. There was no transaction that can be interpreted as either transfer or assignment, thereby placing the appellant in the position of owner of any bonds, and accordingly he had no entitlement to “interest”as at December 31, 1975.

Conclusion

As in the case of Tyrala (supra), that for which the appellant became obligated under certain conditions on December 18,1975 ($867.95) by virtue of the purchase order with Sandler was not interest he had paid, and that with which his account was credited on or after December 31, 1975 ($900) was not interest to which he was entitled. In passing, I note for the record that it is not entirely certain in my mind that in the circumstances of this case, even the amount of $32.05 was “receivable” by the appellant as noted by counsel for the respondent:

It is submitted that he has failed to do so and that the only amount “receivable” by him, as interest, was an amount of $32.05, that is to say, the interst portion accruing from day to day from the date of purchase until December 31, 1975, ($900 -$867.95).

Decision

The appeal is dismissed.

Appeal dismissed.