K R Ranches LTD v. Minister of National Revenue, [1973] CTC 2049, 73 DTC 49

Roland St-Onge:—This appeal is from a reassessment dated October 31, 1966, wherein a tax in the sum of $320,517.39 plus interest of $1,687 was levied in respect of income for the appellant’s 1965 taxation year.

At the hearing of this appeal counsel for the appellant presented a motion to the effect that the evidence adduced in the case of Ronald K Banister v MNR [p 2036] heard by me be used in the present appeal, and that the testimony of Mr John Cressey, vice-president at one time of all the companies involved, also apply herein. This was granted.

Banron Construction (formerly known as “Banister Construction”), a company incorporated on February 4, 1960 under The Companies Act (Alberta), made some advances of money to an associated company called Banister Corporation which advances as at December 1, 1963 amounted to $750,161.32. At this point it is to be noted that Banister Corporation was a non-resident corporation being a United States company.

In December 1963 Banister Construction sold all its assets as a going concern to Banister Construction (1963) Ltd, now known as K R Ranches Ltd, the appellant herein. During the 1964 and 1965 taxation years the appellant made additional advances of money to Banister Corporation in the amount of $401,688.12.

The respondent contended that all material times there has never been any written document between the appellant and Banister Corporation as to the payment of interest on the borrowed money and that consequently the appellant should not be allowed to claim a reserve for doubtful debts in the amount of $11,721 for its 1965 taxation year. The amount of interest represents 100% of the total interest deemed to have been received by the appellant under the provisions of subsection 19(1) of the Income Tax Act.

Counsel for the respondent argued that because the interest under review was only deemed to have been received under subsection 19(1) of the Act, it could not be regarded as non-receivable for the purpose of paragraph 11 (1)(e) of the Act since the said section was enacted for a taxpayer who computes his income on an accrual basis and sets up a reserve for doubtful debts. In the present appeal the appellant is deemed to have received the interest and consequently it cannot claim a contingent reserve for interest not received. He also contended that the financial statements issued subsequent to the advances of money were prepared by the same group of people and that they are not sufficient to be construed as the written agreement required by subsection 11(1) of the Act. According to said counsel, there is no legal commitment to pay interest and nothing in the nature of a binding effect exists between the parties.

Alternatively he argued that the amount of the reserve is not reasonable since the evidence adduced shows clearly that in 1964 and 1965 the appellant company had reasons to believe that the said advances were to be reimbursed and, if not, such advances could not be deductible because they were not incurred “for the purpose of gaining or producing income”. He referred the Board to, among other cases, New St James Ltd v MNR, [1966] Ex CR 977; [1966] CTC 305; 66 DTC 5241.

Counsel for the appellant argued that the respondent cannot rest his case on the New St James decision (supra) because in that matter there was no transfer of property, whereas in the present appeal the interest is an accessory to the advances of money effectively made for business reasons and later repaid in the form of preferred shares of the capital stock of the debtor since the latter was not in a financial position to proceed otherwise.

From the evidence adduced it is clear that at all material times there was never any written document between the appellant and Banister Corporation as to the payment of interest or rate thereof. On the contrary, everything in the records shows that the interest mentioned was deemed interest under subsection 19(1). Therefore the appellant cannot claim a reserve for interest he is not entitled to claim because of the absence of a binding agreement between the parties concerned. The reserve of paragraph 11 (1)(e) was not enacted to take care of the deemed dividend of subsection 19(1) but to deal with cases where there is a definite element of a doubtful collection of debts such as would be the case of a taxpayer in the money-lending business. Furthermore, since the taxpayer claims the total amount of the deemed dividends, and paragraph 11(1)(e) mentions that a reasonable amount should be claimed as a reserve, it is self-evident that the said section should not be used by the appellant to create a reserve. The fact that the parties were not dealing at arm’s length shows without any doubt that the interest might never be paid, and:as a matter of fact the said subsecion 19(1) was enacted to prevent a non-resident subsidiary company from using, free of interest, the money of another resident subsidiary company. The fact that the interest is deemed to have been received under subsection 19(1) prevents the appellant from claiming a reserve under paragraph 11(1 )(e), otherwise subsection 19(1) would be superfluous. For the above reasons, the appeal is dismissed.

Appeal dismissed.