Sylvio Marchand v. Minister of National Revenue, [1976] CTC 2024, 76 DTC 1030

The Assistant Chairman:—The appeal of Sylvio Marchand from a tax assessment concerning the 1972 taxation year and dated July 27, 1973 was heard in Quebec City on June 4, 1975.

In his notice of assessment the respondent disallowed the $90 deduction claimed by appellant for the 1972 taxation year, maintaining that in accordance with paragraph 18(1)(b) of the Income Tax Act, the $90 spent by appellant to acquire shares in the Grand-Mére Caisse d’Entraide Economique constituted a non-deductible capital outlay.

For his part, the appellant maintains that the amount of $90 was invested for the purpose of earning income in the form of taxable interest, and that this amount may be justifiably and legally deducted under the Income Tax Act.

It was explained to the Board that, although the amount in dispute is very small, an important point of law concerning payment of costs to the Caisses d’Entraide is involved here.

This is apparently the first time the point of law raised by the respondent regarding the application of paragraph 18(1)(b) of the Income Tax Act in relation to the costs required of subscribers for shares in the Caisses d’Entraide Economique du Québec has come before the courts. In the absence of any previous authority dealing specifically with this question, a motion was submitted asking that both the reasons for the decision and the decision itself be published.

Before commencing these reasons, I think it would be useful to describe as best I! can the organization of the Caisses d’Entraide Economique du Québec. There are 44 Caisses d’Entraide Economique in Quebec, belonging to a federation of these bodies and comprising 100,000 members. In general, the organization and operation of the Caisses d’Entraide Economique comply with the provisions of the Savings and Credit Unions Act (RSQ 1964, c 293, including amendments assented to on July 17, 1970 (Exhibit A-1)). However, it appears that an Act respecting the Caisses d’Entraide was passed by the Government of Quebec on April 9, 1974, although only the bill was submitted to the Board by the respondent, and sections of this bill were cited by the two parties concerned as though it were an Act which had been assented to (Exhibit R-5). The by-laws of internal management of the Caisses d’Entraide Economique (Exhibit R-4) and the by-laws of internal management of the Fédération des Caisses d’Entraide Economique du Québec (Exhibit R-3) were also submitted, and several sections of these by-laws were cited during the hearing.

As I understand it, the case turns on the nature and utilization of the costs that must be paid by persons wishing to acquire what the appellant regards as shares—(“parts sociales” rather than “actions”) in the Caisses d’Entraide Economiaue.

With regard to the “parts sociales”, translated in English by “shares”, the appellant referred the Board to section 28 of the Savings and Credit Unions Act (Exhibit A-1), which reads as follows:

28. The capital stock of a union shall consist of the shares subscribed for administrative costs be paid at the outset of subscription, and that the amount of the costs be divided as follows:

2% to the income of the local Union:

2% to the recruitment service of the local Union:

to join the Bar, or from brokers’ commissions for the purchase of shares at the Stock Exchange, and so on.

One of the points which the respondent particularly emphasized was that subscribers for shares in a Caisse d’Entraide pay 4%2% costs for the sole purpose of becoming members of the union, and he refers to the association form (Exhibit R-2) and to several subsections of the Act and by-laws respecting the Caisses d’Entraide Economique which deal with the rights and duties of their members.

In my opinion, whether or not contributors to these Caisses d’Entraide are members of these organizations does not really indicate the nature of the payment of 4 /2% costs required. While it is true that costs are required for participation in the Caisses d’Entraide, we have had no indication so far that these costs are not paid for the purpose of gaining income.

Even though there may not be sufficient information to warrant a decision in such an important case, at first sight it seems to me that a person who pays 414% costs for the sole purpose of receiving 10% interest on his shares has, to my mind, laid out money in order to gain income. What is the difference between paying 4 /2% costs in order to receive 10% interest, which the respondent in this case regards as a capital payment, and paying interest which is admitted to be deductible on any bank loan assumed for the purpose of gaining income from the amounts borrowed?

The respondent compared the 4 /2% costs relating to the Caisses d’Entraide to brokerage fees, and in this regard he cited Wharton v MNR, 1 Tax ABC 93; 49 DTC 36 and No 233 v MNR, 12 Tax ABC 200; 55 DTC 110.

Both these decisions concern brokerage fees in connection with the purchase of shares on the stock exchange. I do not believe that payment of brokerage fees can be compared to payment of the fees required by the Caisses d’Entraide, for two reasons: first, the acquisition of “actions” (shares) on the stock exchange is surely a capital investment and these shares may be sold or transferred and give rise to the possibility of a capital gain. “Parts sociales” (shares), on the other hand, can neither be transferred nor sold, and can in no way give rise to a capital gain. So how can one regard the 414% costs as a Capital outlay?

Secondly, brokerage fees are paid to an agent and have nothing to do with the value of the shares so purchased, and they have no effect on the capital gain which the purchaser may hope io realize by a later resale of his shares. No part of the brokerage fees is paid into the revenue of the stock exchange, whereas the 4%2% costs are charged on shares of the Caisses d’Entraide and 4% of this amount is paid directly into the revenue of each union and, in my opinion, contributes to the 10% interest payments to the shareholder.

In this regard, the respondent maintains that there is no connection between the 4%2% costs required by the unions and the 10% interest paid on the shares. He produced a letter in support of his view from the Fédération des Caisses d’Entraide Economique du Quebec to the chief assessor, Mr Paquet, dated May 24, 1972 (Exhibit R-1). Gn page 2 of this letter, we read the following:

(Translation) As regards the connection between the dividend paid and administrative costs: the 4 /2% for administration must be paid whatever the dividend paid at the end of the year, depending on the transactions of the union.

The appellant has acknowledged and the respondent has admitted that the word “dividend” may have been used incorrectly, and that it was instead a question of interest paid at the end of the year. Nevertheless, I do not think that this passage can be taken to mean that there is no connection between the 4 /2% costs required by the union and the 10% interest payment on the shares.

I think one must instead refer to subsection 38:11 of the by-laws of the Fédération des Caisses, which stipulates that an amount of 2% shall be provided for interest payments on shares by the Union. Another amount of 2% is allocated to the membership recruitment service and is used to increase the membership as well as the income of the union. This also contributes directly to interest payments. To my mind, there is an unquestionable link between the 4% costs required by the unions and the amount of interest paid by them.

The /4 of 1% paid into the Federation as a stabilization fund enables some unions that would not be able to pay 10% interest through the year to receive from the Federation the amount of money necessary in order to continue to pay interest at the rate of 10%. The financial assistance thus received by the unions in the Federation is not a loan, nor must it be repaid, since it is a kind of grant which is also paid into the revenue of the union requiring it. Thus it seems to me that, even though /4 of 1% of the costs is paid to the Federation by subscribers for shares, this percentage quite ingeniously helps to ensure that they receive an interest rate which seems to be higher than the interest rate paid by comparable organizations. The by-laws of the Federation require payment of /4 of 1% for its administrative costs. The role of the Federation in the operations of each of its unions is very important, and it is through the Federation that each union is guaranteed the means of paying a 10% interest rate on its members’ shares (“parts sociales”).

Respondent maintains that the subscriber for shares has nothing to do with the allocation of the costs which he pays in order to belong to the Caisses d’Entraide, and that what constitutes income to the receiver is not necessarily a deductible expense for the payer. This may undoubtedly be true in many circumstances where entrance fees, membership fees, or registration fees are required and paid into the reserve fund of an organization but, in the case at bar, not only is the exact allocation of the various amounts of the costs known by the subscribers, it is also mandatory under the by-laws of the Fédération des Caisses that these costs be paid into the revenue of the unions, which is not the case in other organizations.

In accordance with my interpretation of the facts as they were presented to the Board, I conclude that the subscriber for shares is not simply incurring an expense in order to realize income, but is also, by paying the costs, participating, as it were, in the administration and operation of the Caisses d’Entraide; and that the obligatory payments of costs into the revenue of the unions are directly related to the payment of the interest received by him.

In Heward v MNR, 8 Tax ABC 180; 53 DTC 160, which the respondent also cited, the point at issue was whether a $1,000 payment as the cost of admission to membership in the stock exchange is deductible. I do not believe that the $1,000 payment to become a member of the stock exchange in Heward can be compared to the costs required by the Caisses d’Entraide, for the reasons which I have already given in my comments on Wharton and No 233. When giving the reasons for his decision, Mr Fabio Monet, who dismissed the Heward appeal, cited passages by the President of the Exchequer Court in Daley v MNR, [1950] Ex CR 516; [1950] CTC 254; 50 DTC 877.

The passage from Daley quoted by the respondent, which is to be found on pages 184 and 162 respectively of Heward and refers to the words of the President of the Exchequer Court on page 523 (Ex CR), reads as follows:

The call and admission for which the fee was paid is not like a depreciable asset. It does not lend itself to an annual write-off and no one could reasonably apportion it over any given period of time. There is no portion of it that could have any relationship to the appellant’s practice in any one year. The fee is not the kind of disbursement or expense that could properly enter into the ascertainment of his ‘‘annual net profit or gain”.

However, Mr Fabio Monet also included in his reasons for judgment another citation of the President of the Exchequer Court from page 522 (Ex CR) of Daley, and quoted on pages 183 and 162 respectively of Heward. This citation reads as follows:

In the first place, the fee of $1,500 which he paid for his call to the Bar and admission as a solicitor in Ontario was an expenditure that was anterior to his right to practise law in Ontario and earn an income therefrom. Except that it was nearer in point of time it was no more related to the operations, transactions or services from which he earned his income in 1946, or in any year, than the cost of his legal education would have been or, for that matter, the cost of his general education or any cost or expense involved in bringing him to the threshold of his right to practise.

lt seems to me that, when the President of the Exchequer Court says “The fee is not the kind of disbursement that could properly enter into the ascertainment or estimation of his annual net profit or gain”, he is making an automatic distinction between the fees in Heward and Daley and costs required by the Caisses d’Entraide, since the amount of these costs contributes directly to interest payments to union shareholders. When the President says: “Except that it was nearer in point of time it was no more related to the operations, transactions or services from which he earned his income in 1946 or in any year than the cost of his general education . . .”, he is further emphasizing the distinction which should be made between Heward and Daley and the 4%% costs paid by the subscribers, which are payable immediately whenever they purchase shares in the Caisses d’Entraide.

I believe that we are concerned here with a financial organization which has introduced a new business formula even more co-operative in nature than that of the Caisses Populaires, which apparently enables shareholders to actively participate, through payment of costs which are spent on the unions, in the operation and administration of the Caisses d’Entraide. This ensures them a high interest rate, on which clearly they must pay tax.

It seems to me that account must be taken of the rapid and sometimes ingenious changes which occur in the business world in an effort to handle the economic problems of a new era. Even though this can cause some difficulties and irregularities from the point of view of accounting, I do not believe that efforts to find new solutions to substantive economic problems should be discouraged or suppressed by an unvarying, rigid and wholesale application of decisions rendered earlier, under entirely different circumstances, at a time when no one had even dreamt of these new business concepts. If the Income Tax Act is to continue to be applied fairly and impartially in the future, it must, in my opinion, evolve at the same pace as the business world. To my mind, its application under new circumstances should be based above all on the fundamental and essential principles of taxation contained in the Income Tax Act, rather than on an attempt to solve modern problems of taxation by forcing the application of jurisprudence which has never been seized of such problems and which refers to different facts and different circumstances altogether.

In summary, I consider that the operation of the Caisses d’Entraide and, more specifically, the manner in which the costs required in connection with the purchase of shares in this financial organization are paid and distributed, are quite different from those of the Caisses Populaires, the stock exchange or social clubs.

I conclude that the amount of $90 paid by appellant in connection with his purchase of shares in the Grand-Mère Caisse d’Entraide is closely linked to the taxable interest that he received, and constitutes for him an outlay made for the purpose of gaining income in accordance with paragraph 18(1)(a) of the Income Tax Act.

The appeal is therefore allowed.

Appeal allowed.