Credit La Verendrye Ltée v. Minister of National Revenue, [1972] CTC 2404, 72 DTC 1344

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.