Roland
St-Onge:—At
the
start
of
the
hearing
of
this
appeal
at
Rouyn,
Province
of
Quebec
on
April
28,
1971
by
the
Tax
Appeal
Board,
now
the
Tax
Review
Board,
it
was
agreed
between
the
parties
that
the
evidence
adduced
in
this
appeal
would
apply
to
the
appeals
filed
by
Boutin
Transport
Ltée,
Campbell
Transport
Ltée
and
Northern
Quebec
Transport
Ltd.
The
question
at
issue
is
whether
these
companies
were
associated
and
whether
the
interest
paid
on
certain
loans
was
deductible
during
the
taxation
years
1963,
1964,
1965
and
1966.
Before
September
30,
1963
the
Continental
Discount
Corp
(hereinafter
called
“Continental”),
a
finance
company
which
held
27,000
shares
of
Credit
La
Vérendrye
Ltée,
decided
to
turn
to
American
sources
of
credit
in
order
to
continue
or
expand
its
activities.
The
lending
company
required
that
Continental
divest
itself
of
all
the
shares
it
held
in
Crédit
La
Vérendrye,
and
in
fact
it
was
only
on
this
condition
that
it
obtained
the
sum
of
two
and
one-half
million
dollars.
The
shares
were
sold
to
the
main
shareholders
of
Crédit
La
Vérendrye
Ltée
without
first
being
offered
to
the
public.
In
his
Reply
to
the
Notice
of
Appeal,
the
respondent
contends,
inter
alia,
that:
(TRANSLATION)
(a)
Out
of
the
41,100
shares
issued
and
paid
up,
Continental
Discount
Corporation
held
27,000
class
“B”
shares
with
voting
rights,
and
controlled
Crédit
La
Vérendrye
Ltée;
(b)
In
June
1963,
Continental
Discount
Corporation
sold
the
said
shares
but
the
majority
of
those
shares
were
sold
to
its
main
shareholders,
and
the
two
companies
came
under
the
control
of
the
same
group
of
persons;
(c)
The
group
of
class
“B”
shareholders
holding
a
controlling
interest
in
Crédit
La
Vérendrye
Ltée
and
the
group
of
class
“D”
shareholders
holding
a
controlling
interest
in
Continental
Discount
Corporation
are
as
follows:
(There
follow
the
names
of
the
shareholders
and
the
numbers
of
shares
held.)
Evidence
at
the
hearing
confirmed
these
allegations.
The
appellant
whose
main
activity
was
the
granting
of
mortgage
loans,
decided
to
acquire
control
of
Brazeau
Transport
Ltée,
Campbell
Transport
Ltée
and
Northern
Quebec
Transport
Ltd.
In
September
1970
the
appellant
changed
its
name
and
became
an
investment
trust.
A
witness
for
the
appellant
explained
that
from
the
very
beginning
the
appellant
had
purchased
trucking
companies
so
that
its
assets
consisted
equally
in
shares
of
such
companies
and
in
mortgage
loans.
On
August
31,
1962
Continental
owed
the
appellant
$142,500,
and
in
1963
it
loaned
on
note
to
the
appellant
the
sum
of
$412,000
for
the
purchase
of
Brazeau
Transport
Ltée.
Another
explanation
was
given
in
connection
with
that
purchase.
The
appellant
apparently
demanded
that
Continental
repay
the
$142,500
and
asked
it
for
a
loan
of
$269,500.
Mr
Léo
Vanasse
testified
that
in
1962
the
shares
of
Boutin
Transport
Ltée
were
exchanged
for
shares
of
Brazeau
Transport
Ltée;
that
at
that
point
Brazeau
Transport
Ltée
was
controlled
by
the
appellant;
and
that
the
Boutin
group
comprised
Messrs
Boutin,
Gagnon
and
Vanasse,
who
were
all
involved
in
trucking
and
are
still
directors
of
Brazeau
Transport
Ltée
and
all
the
other
trucking
companies
concerned.
Mr
Yvan
Dessureault,
managing
director
of
Corporation
Gestion
La
Vérendrye,
filed
tables
he
had
prepared
(Exhibit
A-6)
which
showed
the
holdings
of
the
shareholders
of
Credit
La
Vérendrye
from
December
31,
1962
until
December
31,
1965.
He
admitted
that
he
had
no
accounting
experience
other
than
that
acquired
while
in
the
appellant’s
employ.
When
he
was
examined
as
to
how
the
appellant’s
funds
had
been
utilized,
counsel
for
the
appellant
objected,
contending
that
the
witness
was
not
in
the
company’s
employ
when
the
transactions
took
place.
Such
a
witness
was
not
very
helpful,
especially
when
we
consider
that
the
appellant
had
to
prove
that
the
respondent’s
assessment
was
unfounded
in
fact
and
in
law.
The
respondent,
on
the
other
hand,
called
two
witnesses:
an
auditor
employed
by
the
tax
department,
who
explained
that
he
had
disallowed
the
deduction
of
the
interest
paid
on
a
loan
of
$269,500,
being
the
difference
between
$412,000
and
the
$142,500
that
had
been
used
for
the
purchase
of
the
shares
of
Brazeau
Transport
Ltée,
while
he
had
deducted
the
interest
paid
and
claimed
on
$350,000
used
for
the
purchase
of
a
mortgage
portfolio;
the
other
witness,
an
experienced
accountant
with
a
master’s
degree
in
commerce,
commented
on
Exhibit
A-6
and
said
that
the
shareholders’
holdings
were
increased
to
$199,000
by
an
operating
surplus
and
that
Mr
Dessureault
had
deducted
that
amount
from
$412,000
arriving
at
a
plus
difference
of
$212,000
between
the
cost
of
the
shares
and
the
shareholders’
holdings.
As
a
result
of
this
calculation,
the
appellant
claimed
a
deduction
for
interest
in
the
amount
of
$11,888.79
in
1962-63,
$3,142.34
in
1963-64
and
nothing
in
1964-65.
According
to
the
accountant,
this
calculation
is
wrong
since
it
determines
the
yield
from
an
investment
and
cannot
be
used
for
determining
the
interest
that
the
appellant
could
deduct
if
the
provisions
of
the
Income
Tax
Act
had
entitled
him
to
do
so.
He
summarized
and
explained
his
thinking
in
this
way:
the
appellant
paid
interest
on
a
loan
of
$269,500
and
not
on
$212,000;
such
interest
may
be
deductible
depending
on
how
the
borrowed
money
is
used,
if
the
loan
was
not
used
to
earn
income,
the
interest
must
be
charged
to
the
company’s
Operations
and
cannot
be
regarded
as
a
deductible
expenditure
for
tax
purposes.
Three
prospectuses
published
on
December
26,
1962,
December
18,
1964,
and
March
6,
1965
respectively
announced
that
Fernand
Doyon
and
Bernard
David
of
La
Sarre,
Abitibi,
owned
51%
of
the
common
shares
issued
and
that
they
were
in
a
position
to
elect
a
majority
of
the
directors
of
Continental.
Mr
Doyon
testified
that
under
a
notarized
agreement
Mr
David
and
he
had
agreed
never
to
vote
against
each
other.
Counsel
for
the
appellant
argued
that
control
is
usually
held
by
the
shareholders
who
have
the
power
to
vote
in
elections
of
directors,
but
that
this
rule
can
be
modified
by
by-laws
or
agreements
binding
on
the
company.
He
admitted
that
the
agreement
between
Messrs
Doyon
and
David
was
not
binding
on
the
company
since
it
was
not
a
party
to
the
contract.
However,
he
contended
that
the
company
accepted
this
commitment
when
it
published
the
names
of
those
who
control
the
companies
in
its
prospectuses.
According
to
him,
the
group
which
controls
Continental
does
not
actually
control
the
one
which
controls
Crédit
La
Vérendrye
Ltée,
since
the
two
groups
of
shareholders
agreed
to
restrict
their
respective
powers
over
the
issuance
of
shares,
the
payment
of
dividends,
and
the
hiring,
dismissing
and
remuneration
of
the
staff.
He
affirmed
that
the
appellant
was
bound
by
that
agreement,
which
he
likened
to
company
articles
of
association
or
by-laws,
and
that
the
said
agreement
removed
from
the
majority
group
of
shareholders
the
control
which
would
normally
permit
them
to
have
the
directors
elected
and
to
control
ail
the
trucking
companies.
He
referred
the
Board
to
the
following
cases:
MNR
v
Dworkin
Furs
(Pembroke)
Ltd
et
al,
[1967]
SCR
223;
[1967]
CTC
50;
67
DTC
5035;
Consolidated
Holding
Co
Ltd
v
MNR,
[1969]
CTC
633;
69
DTC
5429;
Yardley
Plastics
of
Canada
Ltd
v
MNR,
[1966]
Ex
CR
1027;
[1966]
CTC
215;
66
DTC
5183;
and
Donald
Applicators
Ltd
et
al
v
MNR,
[1969]
CTC
98;
69
DTC
5122.
It
is
impossible
for
the
Board
to
regard
the
agreement
concluded
between
the
two
groups
of
shareholders
as
being
part
of
the
company’s
by-laws.
After
a
scrupulous
examination
of
the
jurisprudence
cited
by
the
appellant,
the
Board
finds
absolutely
nothing
to
support
its
contention.
If,
as
is
admitted,
the
two
corporations
have
come
under
the
control
of
the
same
group
of
persons,
an
agreement
among
them
cannot
change
a
company’s
by-laws,
still
less
the
laws
governing
such
companies,
which
have
been
passed
by
our
governments
to
protect
not
only
the
interests
of
the
individual
but,
first
and
foremost,
those
of
the
public.
As
for
the
interest
claimed
by
the
appellant,
the
evidence
has
shown
that
the
sum
of
$269,500
was
borrowed
for
the
purchase
of
Brazeau
Transport
Ltée;
that
such
a
purchase
represented
a
capital
expenditure
and
that
consequently
the
interest
paid
on
that
loan
cannot
be
regarded
as
a
deductible
expenditure
for
tax
purposes.
For
these
reasons,
the
appeal
is
dismissed
in
respect
of
the
taxation
years
1963,
1964,
1965
and
1966.
Appeal
dismissed.