Roynat Limited v. Minister of National Revenue, [1977] CTC 2481, 77 DTC 353

Delmer E Taylor:—This is an appeal from income tax reassessments for the years 1967, 1968, 1969 and 1970 in which the Minister of National Revenue increased the reported taxable income of the appellant by amounts of $78,999.53, $220,336.58, $224,398.37 and $80,860.46 respectively. The bases for the increases are as follows: The appellant relied upon subsection 8(3) and paragraph 139(1)(t) of the Income Tax Act, RSC 1952, c 148. The respondent relied, inter alia, upon sections 3, 4, paragraph 6(1)(b), subsection 8(3), section 28, paragraphs 139(1 )(e) and 139(1 )(t) of the said Act.

Facts

The following excerpt dealing with the powers of the appellant corporation was taken from supplementary letters patent made available to the Board:

(a) to conduct, carry on and engage in the business of providing financial assistance and consulting and advisory services to individuals, firms, companies or corporations engaged in any industrial or commercial business, trade or enterprise, provided, however, that the Company shall not have power to lend money on the security of freehold real estate or leaseholds or invest its funds in real estate in Canada for the production of income or in mortgages or hypothecs on real estate or leaseholds otherwise than by the acquisition as security or in ownership of bonds, debentures, debenture stock or other securities of a company or corporation that are secured wholly or in part by mortgage or hypothec upon real estate or leaseholds whether such securities be acquired from such company or corporation or otherwise;

Roynat (the company) during the times material carried on the business of lending money for medium and long-term (5 to 12 years) capital purposes to commercial and industrial enterprises, guaranteed in most cases by the borrower’s assets. The appellant also took minority equity positions in companies to which it had loaned money, and on other occasions held as security mortgage bonds granted by the borrowing companies. The gain from realization on the mortgage bonds and shares gave rise to part of this appeal, the other part being the interest on the income bonds held by the appellant as security for loans.

Contentions

The position of the appellant company was that:

—the shares held by Roynat were not publicly traded, and there was no expectation of early disposition;

—in many instances, the borrowers were newly incorporated and treasury shares were acquired by the appellant at the same price as acquired by other subscribers or, where a borrower had been Carrying on business for a number of years, appellant would acquire shares at their then fair market value;

—in exceptional circumstances, appellant had received shares from a borrower free of charge, in consideration for granting the loan, or had received an option to acquire such shares at a future date at the market value of the shares on the date of the loan;

—the acquisition of mortgage bonds, shares or options had always been treated as an investment and when disposed of for any reason, gains realized were treated as capital gains and losses were treated as capital losses;

—mortgage bonds, shares or options were never disposed of at the appellant’s instigation; the disposition thereof was always triggered by a decision outside of its control;

—interest receipts did not form part of the appellant’s taxable income as they were paid to appellant as deemed dividends within the meaning of subsection 8(3) of the Income Tax Act derived from income bonds as defined in paragraph 139(1)(t) of the said Act.

The respondent asserted that:

—the profit realized on the sale or redemption of shares and mortgage bonds, and release of options does not constitute capital gain as claimed by the appellant, but is income and has been properly taken into account in computing the appellant’s income;

—the interest income derived from the bonds has been properly taken into account in computing the appellant’s income, because such bonds do not qualify as income bonds as defined in paragraph 139(1)(t).

Evidence

Counsel for the appellant had agreed with counsel for the respondent that a group of documents covering the information basic to this hearing should be filed with the Board. This was indexed as Exhibit A-1 and included:

North American Plastics Co Ltd

Deed of trust and mortgage dated March 25, 1966

Offer of finance dated January 20, 1966

Agristeel Ltd

Deed of trust and mortgage dated August 4, 1966

Offer of finance dated May 27, 1966

Form of guarantee dated August 2, 1966

Comeau’s Sea Foods Fishmeal Limited

Deed of trust and mortgage dated April 15, 1966

Offer of finance dated November 30, 1965

Springdale Mills (Ontario) Limited

Deed of trust and mortgage dated January 28, 1966

Offer of finance dated September 24, 1965

Supplemental offer of finance November 12, 1965

Crystal Beverages (1963) Limited

Deed of trust and mortgage dated October 14, 1966

Offer of finance dated July 7, 1966

Form of guarantee dated October 6, 1966

Speedway Express Ltd

Deed of trust and mortgage dated May 11,1966

Offer of finance dated January 28, 1966

Grocap Ltd

Letters patent dated January 31, 1962, May 2, 1962

Supplemental letters patent dated April 4, 1963, April 5, 1963, July

2, 1965, June 30, 1967, March 24, 1969

Through Mr John Durley, vice-president of the company, counsel also submitted the annual report of Roynat for the year 1970. Mr Durley also gave evidence from which the Board has noted:

—the company had taken equity positions, regarding the shares as a bonus where there was judged to be an “above average risk” in the loan:

—the company’s interest rate charged was somewhat flexible, depending substantially on the rate at which the company itself could secure funds, but also the rate bore some relationship to the risk involved;

—generally the interest rate charged when “bonus shares” were also received was slightly lower (about /4 to /2 of 1%) than for loans where no bonus shares were involved;

—these “income bonds” listed in Exhibit A-1 generally carried an interest rate lower than regular bonds, usually between /4 and /4 of 1 % ;

—all such “income bonds’’ had matured properly, and the company had not been required to call upon the third party guarantors;

—in his view a distinction should be made between the security for a loan held by the company in the way of bonds and real estate or chattel mortgages, and that represented by equity shares in a company which borrowed funds.

Counsel for the respondent introduced a series of documents, primarily letters between the appellant company and those other companies from which it accepted the “income bonds”. Mr Durley was prominently featured in several of these correspondence exchanges—and from cross-examination of him by counsel, it was evident that the company’s activity had included the receipt and holding of shares in borrower companies, the acceptance of bonus shares in connection with the granting of loans, and the receipt and sale of options to purchase shares for equity positions. One memo which may not be typical in all respects, nevertheless does provide a general perspective from which to view these transactions:

You have asked me to set out the rationale behind the “payout” figures requested from this company, in Mr Gibson’s letter of May 1st. The calculations are as follows:

Income Bond—Prepayment premium on outstanding balance of $600,000.

We have calculated that our net pre-tax yield on this 7% Income Bond is 7.75%, i.e. after taking into consideration the Income Tax benefits and after deducting our cost of funds. On the basis of this yield, we calculated that the revenue accruing from our outstanding investment during the first three years, plus the 6% prepayment premium that would apply at the beginning of the fourth year, bring a total of $163,400. This figure, if discounted to a present day value, by the discount factor of 6%, gives us an amount of $147,300. In other words, the total present day value of the revenue we would lose by accepting prepayment, would be $147,000., after deducting our cost of funds over the same period of time.

Apart from the fact that the Income Bond provides a very attractive yield, our calculation is based on the approach that prepayment of this investment results in a loss of all of the revenue, rather than saying that we could re-invest the funds at a reduced rate. We believe that this is valid, aS prepayment will result in the loss of this revenue. Obviously, the prepaid funds will be re-invested, however, it is a fact that the “alternative investment” will exist whether CHUM is prepaid or not.

We have requested a prepayment premium of $100,000., which is admittedly steep when compared to a Fixed Interest Investment, however, it is actually a concession from the revenue which we will earn if the Income Bond remains outstanding until our normal prepayment privileges apply.

1% Bonus—Common Shares of Radio Station CFRA Limited, plus 7% Option on Common Shares of Radio Station CFRA Limited

Mr Gibson requested a total consideration of $95,000. for the bonus and the option. As you know, Mr Waters had undertaken to pay us $100,000., in 10 annual instalments, if he is unable to effect the transfer of the CFRA shares to Radio CHUM by June 30, 1967. Mr Waters’ undertaking would seem to have been based on his value of the CFRA shares, and is therefore in line with the value we are asking for selling the bonus and option.

In conclusion, we agree that our request for a total “prepayment premium’’ of $195,000. is large, at a glance. At the same time, it is equally apparent that our financing was fully acceptable to Mr Waters and our Income Bond feature was an added attraction, as the financing program consisted of the purchase of shares. That is, interest on our funds was not deductible for Income Tax purposes. Furthermore, we asked for and obtained, equity participation. All in all, we feel that our request for $195,000. is reasonable compensation for permitting prepayment of this investment.

Original signed by

R J DURLEY

R J Durley,

ASSISTANT SUPERVISOR RJD:an

Argument

Dealing with the share and option transactions, counsel for the appellant argued that Roynat had not accepted nor, where appropriate, sold shares in borrower companies, acting in the capacity of a trader or in the conduct of its regular business, which was the loaning of funds. In support of the proposition that any profit so received was on account of capital, he made reference to earlier case law, and the Board noted the following in particular: Foreign Power Securities Corporation Limited v MNP, [1966] CTC 23; 66 DTC 5012; affirmed by SCC [1967] CTC 116; 67 DTC 5084; Crédit Foncier Franco-Canadien v MNR, [1970] Tax ABC 950; 70 DTC 1609; Canada Permanent Mortgage Corporation v MNR, [1971] CTC 694; 71 DTC 5409.

Turning to the amounts held taxable by the respondent as interest receipts, counsel for the appellant contended that these amounts should not be so categorized since they were paid to the appellant as “deemed dividends’’ within the meaning of the Act. He viewed the income bonds which were part of the evidence filed with the Board as retaining that character notwithstanding the inclusion therein of varying forms of third party guarantees. Such inclusion did not, in his view, transform them from income bonds to regular mortgage bonds, providing thereby a basis for the income tax assessment made by the Minister. The main thrust of counsel’s argument on this point, however, was directed toward persuading the Board that any amounts payable under any set of circumstances resulting from the enforcement of the third party guarantees could not be considered interest. In support of this position on guarantees and interest, counsel referred the Board to the following:

Department of National Revenue, Taxation—Interpretation Bulletin IT-52R2, dated October 14, 1975, dealing with income bonds and debentures; Corpus Juris Secundum—A Complete Restatement of the Entire American Law as Developed by All Reported Cases by Donald J Kiser, LL D, volume XXXVIII; The Laws of England, being a Complete Statement of the Whole Law of England by the late The Right Honourable the Earl of Halsbury, volume 18; Hervé Roch, Traité de Droit Civil du Québec, volume 13, chapitre premier, “De la nature, de la division et de l’étendue du cautionnement’’ (Of the nature, division and extent of suretyship); Holder and Another v Commissioners of Inland Revenue, [1932] AC 624; In the Matter of a Reference as to the Validity of Section 6 of The Farm Security Act, 1944, of the Province of Saskatchewan, [1947] SCR 394; Lomax v Peter Dixon & Son, Ltd, 25 TC 353; Clarence W Lewis v MNR, 32 Tax ABC 154; 63 DTC 483; Donald Preston McLaws v MNR, [1970] CTC 420; 70 DTC 6289; [1972] CTC 165; 72 DTC 6149.

By way of illustration, counsel made special note of:

Holder v Inland Revenue Commissioners (Supra) at page 631 :

My Lords, I am of opinion that both contentions of the respondents are right, and that on a ground that is really common to both. Interest is the return given for the use of the advances and is due by the person who obtains the advances; the liability of the guarantor is direct to the creditor, and is an undertaking to indemnify him against loss. The creditor computes his loss by the amount of the failure of the principal debtor to pay him principal and interest. In paying the amount of the indemnity, whether limited or otherwise, I am of opinion that the guarantor cannot be said to be paying interest to the creditor, though he is making good the loss of interest. The terms of the specimen guarantee included in the stated case iS a guarantee for “all and every the sum or sums of money which shall at any time be owing to the bank’’, with a long list of how the debt may arise, including unpaid interest as a possible source of the indebtedness, and is in conformity with the view above expressed. I am therefore of opinion that s 36, sub-s 1, only relates to the person who has obtained the advances, and that a guarantor does not pay interest to the bank within the meaning of the section.

Lomax v Peter Dixon & Son, Ltd (Supra) at page 363:

I refer to these problems, not for the purpose of attempting to solve them, but in order to show that there can be no general rule that any sum which a lender receives over and above the amount which he lends ought to be treated as income.

Lewis v MNR (supra) at page 157 [485]:

Counsel for the respondent pointed out that “Interest on Money” is defined in Halsbury’s Laws of England, 2nd ed, Volume 23, page 174, paragraph 253, as follows:

“Interest, when considered in relation to money, denotes the return or consideration, or compensation for the use or retention by one party of a sum of money or other property belonging to another, and may arise from a loan, or investment of money, or as a result of money or property belonging to one party being retained or unrepaid by another.”

He referred also to the reasons for judgment of Rand, J, in the Supreme Court of Canada in the matter of a reference as to the validity of Section 6 of the Farm Security Act, 1944, of the Province of Saskatchewan, reported in [1947] SCR 394, where, at p 411, he states:

“Interest is, in general terms, the return or consideration or compensation for the use or retention by one person of a sum of money, belonging to, in a colloquial sense, or owed to, another.”

In the light of the above definitions, respondent’s counsel submitted that borrowing has to be done by the person paying the interest and, in the circumstances of the present appeal, the borrower was the limited company Clarence W Lewis & Son Limited, and not the appellant or his son who merely gave guarantees in respect of the amount borrowed by the company. Later, when they were called upon to make payment to the bank, they were not paying interest, but were in reality paying off a liability in respect of a capital commitment which they had made to the bank under their guarantees.

On behalf of the respondent, reference was also made to two decisions of this Board, namely, McLeish v MNR, 9 Tax ABC 278 [53 DTC 437], and Beaty v MNR, 19 Tax ABC 452 [58 DTC 435], where amounts paid in respect of guarantees to banks on loans to companies of which the appellants were employees or officers and which the appellants therein were eventually called upon to pay, were held not to be allowable as deductions as they were payments of a capital nature.

As the circumstances of the present appeal are not distinguishable from those dealt with in those previous decisions of this Board, I am of the opinion that the appellant cannot bring these payments within the provisions of paragraphs (c) or (ca) of subsection (1) of Section 11 of the Act and that, in the result, the payments have been properly disallowed in the assessment appealed against.

McLaws v MNR, [1972] CTC 165 at 171; 72 DTC 6149 at 6153:

The interest paid by the appellant and which he claims should be allowed as a deduction is not, in my view, an amount paid pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income. The interest paid by the appellant was not on an advance made to him but was paid on the principal sum remaining unpaid under his guarantee. As Viscount Dunedin said in Commissioners of Inland Revenue v Sir H C Holder, Bart and J A Holder, 16 TC 540 at 564:

66 . . It is true that he pays a sum which pays all interest due by the person to whom the advance is made, but his debt is his debt under the guarantee, not a debt in respect of the advance made to him. . . .”

Counsel for the respondent, on the first question before the Board, requested consideration be given to a review of the following cases: Atlantic Sugar Refineries Ltd v MNR, [1949] CTC 196; 4 DTC 602; Stuyvesant-North Limited v MNR, [1958] CTC 154; 58 DTC 1092; MNR v Louis W Spencer, [1961] CTC 109; 61 DTC 1079; Irrigation Industries Limited v MNR, [1962] CTC 215; 62 DTC 1131; Associated Investors of Canada Ltd v MNR, [1962] CTC 510; 62 DTC 1315; West Coast Parts Co Ltd v MNR, [1964] CTC 519; 64 DTC 5316; Mortimer Investment Corporation v MNR, 41 Tax ABC 433; 66 DTC 539; Associated Investors of Canada Ltd v MNR, [1967] CTC 138; 67 DTC 5096; Vicmar Corporation v MNR, [1967] Tax ABC 585; 67 DTC 431; Freesil Management Ltd v MNR, [1968] Tax ABC 526; 68 DTC 435; Daniel L Marcus v Her Majesty the Queen, [1974] CTC 435; 74 DTC 6346; Lunham & Moore Limited v Her Majesty the Queen, [1975] CTC 183; 75 DTC 5131.

Particular reference was made to quotations from certain judgments:

Associated Investors of Canada Ltd v MNR, [1967] CTC 138 at 144; 67 DTC 5096 at 5099:

A profit arising from an operation or transaction that is an integral part of the current profit-making activities must be included in the profits from the business.

Atlantic Sugar Refineries Ltd v MNR (supra) at page 201 [603]:

The Company was not investing idle capital funds nor was it disposing of a capital asset. In no sense may it be said that the operations were unconnected with the appellant’s business and it is at least an added circumstance that the speculation was made in raw sugar. Even if it were the only transaction of that character, it should be held, in the light of all the evidence, that it was part of the appellant’s business or calling and therefore a profit from its business within section 3 of the Act.

Stuyvesant-North Limited v MNR (supra) at page 164 [1097]:

For, even assuming that the rights were bonuses or premiums and were given and received to compensate for the capital risks involved in making the two loans and could, on that account, be regarded as capital if the loans were mere investments, such bonuses or premiums could not be so regarded if they were obtained in the course of the operation of the appellant’s business.

In summary, on this point counsel stressed:

Dans le cas qui nous occupe les profits réalisés par Roynat dans toutes ces transactions, quelle qu’en soit la forme, résultent de transactions tellement étroitement reliées et intrinsèquement reliées à son entreprise, qu’ils constituent du revenu imposable.

Turning to the second problem, counsel pointed out the fact that paragraph 139(1)(t) of the Act dealt with interest payable, not just interest paid (subsection 8(3) of the Act). His main argument, however, was that the “guarantors” under the various agreements at issue (described by the appellant as “income bonds”) had assumed a position of greater significance than that held to be the case by the appellant—the guarantors had effectively accepted an obligation to indemnify the appellant under any circumstances, not merely in the eventuality that the borrower company could but did not pay the interest according to the following analysis by counsel:

Dans ce cas je soutiens qu’on n’est pas en présence d’un caution ou “guarantor” au sens du code civil ou du “common law’’. Et sur la base de cette thèse je pense que la cotisation est fondée, c’est-à-dire que le ministère n'aurait jamais désalloué les “Income Bonds” de Roynat s’il en était venu à la conclusion que l’obligation des tiers se limitait simplement à payer l’intérêt payable par la compagnie si elle ne payait pas.

Le ministère a désalloué les “income bonds” pour le motif que même dans les éventualités ou la compagnie n’a aucune obligation de payer l’intérêt, des tierces parties se sont engagées, quant à eux, en vertu des actes de fiducie auxquels ils sont parties, de payer l’intérêt même si l’emprunteur n’a aucune obligation de payer l'intérêt.

Et c’est à ce titre, je pense, que la jurisprudence citée par mon confrère en matière de “guarantee” ou de caution est très peu pertinente dans la mesure ou il cherchait à établir que la somme versée ne peut constituer de l’intérêt lorsqu’elle est payée par un “guarantor”, par une caution.

Je soutiens ici que les tiers étaient à la fois “guarantors” et contractaient de plus une obligation additionnelle et complètement distincte que celle de garantir, de cautionner que celle de payer et il s’agissait alors d’une obligation principale.

Counsel reviewed the various cases cited in support of the appellant and provided the Board with his contrasting views on the interpretations given to them by counsel for the appellant. From the agreements filed, counsel quoted two typical forms of guarantee:

From Speedway:

Notwithstanding the foregoing provisions of this section and in the event that the Company fails to pay interest on Income Bonds on the interest payment date hereinabove mentioned, the said Guarantor agrees to pay the interest at the rate thereunder plus an additional interest added unto of 2 /2%.

From North American:

The guarantors herein do further agree that if at any time the interest on the $450,000.00 of Income Bonds is not paid as scheduled the guarantors therein will pay the interest.

Rejecting the main argument made for the appellant (that the payments could not be considered interest at all), counsel noted:

L’argument de mon confrère tente de laisser entendre qu’un paiment ne devrait pas constituer de l’intérêt lorsqu’il est payé par une partie qui n’a pas pu utiliser l’argent, qui n’a pas reçu l’avance de fonds.

Je ne pense pas qu’on puisse restreindre le sens d'intérêt à ce seul cas et je soutiens que même si une tierce partie qui n’a pas reçu d'intérêt, de l’argent ou des fonds avancés, même si cette partie n'a pas reçu d’argent et paie un intérêt en vertu d’une obligation qu’elle a de payer de l’intérêt, elle paie néanmoins de l’intérêt dans le sens légal du terme intérêt.

Alors, pour résumer ma pensée je soutiens que l'obligation additionnelle prise par les tierces parties qui agissent de fait comme “Guarantors” et l’obligation additionnelle qu'ils prennent n’est pas prise à titre de garantie mais à titre d’obligation principale et ils sont les débiteurs de Roynat d’un intérêt pour lequel ils se sont portés garants à leur compte personnel et non pour le compte de la compagnie. C’était pour eux-mêmes.

The Board accepted written supplementary argument from counsel on this precise point and, in deference to the effort expended, the Board believes the full benefit of these submissions should be provided in this decision:

For the respondent:

Suite à l’argumentation de (’Appelante, fondée sur la décision Holder and Another v Commissioners of Inland Revenue, [1932] AC 624, telle qu’elle fut articulée devant la Commission de Révision de l’impôt lors de l’audition de l'affaire ci-haut mentionnée, nous avons jugé important de soumettre des commentaires additionnels. Nous sollicitons auprès de la Commission de Révision de l’impôt la permission de soumettre les commentaires suivants et faisons tenir copie de la présente à notre confrère, Me Thomas S Gillespie.

D’une part, l’Appelante s’appuyait sur la décision Holder pour soutenir que l’intérêt payé par une caution ne constitue pas strictement de l’intérêt au sens de l’article 139(1)(t) de la Loi de l’impôt sur le revenu (SRC 1952, ch 148).

Nous avons alors souligné que la Chambre des Lords dans l’arrêt Holder avait alors interprété un texte de loi en particulier et qu'il ne convenait pas d’appliquer cette “ratio” à tout autre texte sans discernement. A l’appui de cette proposition, nous référons la Commission à un extrait des motifs de Lord Denning dans Westminster Bank v National Bank of Greece, [1969] 3 WLR 468, pp 475-476:

“I must say that when the guarantors pay under the guarantee, I think they pay “interest.” They pay the interest due under the bonds which they have guaranteed. But the bondholder says that they do not. He says that when the guarantors pay under their guarantee, the indebtedness changes its character. He agrees that when the principal debtors pay the interest, it is truly interest of money: but he says that when the guarantors pay under their guarantee, they pay the like amount, but it is not then a payment of interest. It is payment of a debt due under the guarantee. The bondholder relies for this proposition on Inland Revenue Commissioners v Holder, [1931] 2 KB 81; [1932] AC 624, and particularly on the observation of Romer LJ in the Court of Appeal, at p 101:

‘I must now consider . . . whether . . . the respondents can truly be said to have paid interest to the bank. In my opinion they cannot. What they paid to the bank was the debt due from them under the guarantees. The debt became due, no doubt, because the company has failed to discharge its own indebtedness to the bank, and part of that indebtedness consisted of interest. But the respondents owed no interest to the bank.’

I do not accept the bondholder’s contention. Holder’s case was a decision on the words in section 36(1) of the Income Tax Act, 1918: *. . . the person by whom the interest is paid.’ It is not an authority on the words ‘interest of money’ in sections 123, 169 and 170 of the Act of 1952. Rather than follow Romer LJ, I would follow Lord Atkin, in Holder’s case in the House of Lords, [1932] AC 624, who said, at pp 628-629:

*. . . there can be no doubt, I think, that, as the result of the sum of money paid by the guarantor, the interest due from the principal debtor was in fact paid, and that if the principal debtor were sued he could support a plea of payment.’

So here the guarantors unconditionally guaranteed the due payment of the principal moneys and interest. When they pay under the guarantee, they pay the interest which the principal debtor should have paid. The indebtedness for interest is then discharged. So the payment is truly payment of “interest’.”

De plus, nous soumettons que la “ratio” énoncée par le Juge Hall dans l’affaire McLaws v MNR, [[1972] CTC 165] 72 DTC 6149, p 6153, alors que ce dernier faisait référence à la décision Holder, doit aussi être restreinte à l’interprétation de l’article 11 (1)(c)(i) de la Loi de l’impôt sur le revenu (SRC 1952, ch 148) qui précisait la condition de déductibilité de l’intérêt. Il nous apparaît que la Cour Suprême s’attachait davantage à interpréter le sens des mots “borrowed money used for the purpose of earning income” pour refuser la déductibilité de l’intérêt pour le motif qu’il n’avait pas été payé sur des fonds utilisés par le contribuable en vue de gagner un revenu. La Cour n’a pas nécessairement nié de façon absolue qu'il pouvait s’agir d'intérêt.

D’autre part, nous référons la Commission à la décision de la Chambre des Lords dans Riches v Westminster Bank Ltd, [1947] AC 390, pp 399-400, ou Lord Wright définissait l’intérêt dans les termes suivants:

“The Appellant’s contention is in any case artificial and is in my opinion erroneous because the essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had had the use of the money, or conversely the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation. From that point of view it would seem immaterial whether the money was due to him under a contract express or implied or a statute or whether the money was due for any other reason in law. In either case the money was due to him and was not paid, or in other words was withheld from him by the debtor after the time when payment should have been made, in breach of his legal rights, and interest was a compensation, whether the compensation was liquidated under an agreement or statute, as for instance under s 57 of the Bills of Exchange Act, 1882, or was unliquidated and claimable under the Act as in the present case. The essential quality of the claim for compensation is the same and the compensation is properly described as interest.”

ll nous apparaît qu’une telle definition ne limite nullement le concept de l’intérêt à la compensation payée par l’emprunteur. Elle peut aussi bien englober l’intérêt payé par la caution ou une tierce partie peu importe les raisons pour lesquelles elle verse cette compensation au prêteur.

For the appellant:

My confrère has called to your attention the judgment of Lord Denning in Westminster Bank v National Bank of Greece, [1969] 3 WLR 468. In interpreting the words ‘‘interest of money” as found in the UK Income Tax Act of 1952, he held that the payment by a guarantor was truly payment of interest.

I wish to make the following observations with respect to Lord Denning’s judgment:

1. He bases his authority on Lord Atkin’s judgment in the Ho/der case. Lord Atkins opinion was not in agreement with the majority whose judgments were cited at trial in the present instance. Indeed, the passage of Lord Atkin’s judgment cited by Lord Denning was preceded by the following:

‘‘My Lords, I understand that the majority of your Lordships are of opinion that the guarantor in such a case cannot be said to have paid the interest within the meaning of the section. I confess to feeling doubts on this point, for there can be no doubt, . . .”

2. Lord Denning expresses some doubt as to his conclusion that the payment by a guarantor is truly interest. After holding that payment by a guarantor is truly the payment of interest, he goes on to hold that even if he were wrong in his conclusion, he feels his judgment is justified on other grounds.

3. Of more importance in the present instance is the fact that the Canadian courts have cited with approval and remained bound by the Holder case and have ignored Lord Denning’s judgment. Specifically, the Federal Court of Canada cited with approval the judgments of Lord Thankerton, Lord Macmillan and Viscount Dunedin in the McLaws case [[1970] CTC 420] 70 DTC 6289 at page 6294 (referred to at trial). Moreover, the opinion of Viscount Dunedin in the Holder case was cited with approval by the Supreme Court of Canada [[1972] CTC 165] 72 DTC 6149 at page 6154 (also referred to at trial). The Supreme Court judgment in the McLaws case was rendered three years after the Westminster Bank case was reported and ignored Lord Denning’s judgment.

4. As was pointed out at trial, the Income Tax Act of Canada, 1952, as amended, differentiated between payments of interest as set forth in paragraph 139(1)(t) and payments of interest ‘‘or on account or in lieu of, or in satisfaction of interest”—paragraphs 6(1)(b) and 106(1)(b). It is submitted that if the expression “on account or in lieu of payment of, or in satisfaction of interest’’ had existed in the UK Income Tax Act, Lord Denning would have held that the payment by a guarantor was on account or in lieu of payment of, or in satisfaction of interest rather than payment of interest itself.

The Riches v Westminster Bank Ltd case, also cited by my confrère, is of no assistance in the present instance. The question to be resolved in the Riches case was whether a sum of money awarded under the Law Reform Act as interest was “interest of money’’ or damages. The case did not deal with payment by a third party guarantor.

I wish to reaffirm Appellant’s position that paragraph 139(1)(t) cannot apply to disqualify the income bonds in question as it is established in Canadian jurisprudence that interest can only be paid by the debtor and Appellant’s appeal should be maintained.

Findings

With respect to the first question before the Board, it would appear to me that for the appellant to successfully maintain a position that the gain realized on the transactions involving mortgage bonds, shares or share options with borrower companies, was beyond the normal course of business of Roynat, and should be classified as on account of capital rather than income, would require a distinction of substantial proportions. That distinction is difficult to perceive in any of the evidence before the Board and the case law cited does not provide great support for the appellant. In Crédit Foncier (supra) and Canada Permanent (supra) the transactions allowed as on capital account reflected the results of the investment by those respective appellants of available surplus funds which had accumulated from their main business operations. In the instant appeal, the acceptance of corporate shares as a part of the total consideration for granting a loan was integrated with the main business activity of the appellant—the loaning of funds. In Foreign Power (supra) the appeal involved a Subsidiary corporation and, in my mind, does not have any application here. Conversely, the case law carefully selected and cited for the Board by counsel for the respondent appears eminently applicable in the matter at issue. Without being required to make the specific distinction the Board is satisfied that the appellant conducted the acquisition and sale of its shareholdings in borrower companies, either as a trader with a clear anticipation and expectation of profit, or as a regular part of its normal business activities.

The second question, however, dealing with the matter of the income bonds containing forms of guarantee clauses presents a very different problem. It is emphasized that the amounts received by Roynat under these agreements all came from the borrower companies, none from any of the guarantors. The question therefore is whether the very existence of these forms of guarantees as part of or supplementary to the agreements so altered the characteristics of the income bonds as to deny the appellant any benefit available under paragraph 139(1)(t) of the Act. I do not perceive the argument' of counsel for the respondent related to the distinction between “paid” and “payable” in this case as being the substantive point. I do accept his view that the guarantees do not appear to limit any liability of the guarantors merely to a situation where the borrower company is able to pay but decides not to pay the interest amounts due. I do not see, however, this liability of the guarantors as placing them in the role of principal debtors to the appellant company. The guarantors had pledged to meet an obligation to the appellant in the event that the borrower companies did not meet such obligation. That obligation was for interest on loans.

Many definitions regarding “interest” are available but one of the simplest is to be found in The Living Webster Encyclopedic Dictionary of the English Language, 1973-74 edition—“money paid for the use of money borrowed”. There is no indication that the guarantors had borrowed the money or that they had used the money. These vital characteristics of the transactions were fulfilled by the borrower companies. Accordingly, I cannot conclude that any funds which the guarantors might have been called upon to provide could be characterized as “interest”. In my view, the argument of counsel for the appellant, borne out by the case law cited, is persuasive on this point.

Decision

The appeal is therefore allowed in part to permit the amounts of $74,999.53, $122,336.58, $91,548.37 and $56,866.80 for the years 1967, 1968, 1969 and 1970 respectively to be treated by the appellant as interest on income bonds and this part of the appeal is referred back to the Minister of National Revenue for reconsideration and reassessment. In all other respects the appeal is dismissed.

Appeal allowed in part.