The Assistant Chairman:
1 These are the appeals of Oswald H New for the taxation years 1968 and 1969, and of Oswald H New & Co Ltd, William Arthur New and Eva Viola New for the taxation year 1969 from income tax assessments for the years in question.
2 There are two issues involved in the above appeals, one of which is common to all four cases, and the other being particular to the case of Mr Oswald H New. It was agreed that the case of Oswald H New would be heard first and the other three cases, involving identical issues and facts, would follow upon the decision rendered in the appeal of Mr. Oswald H New. Agreement was also reached between the parties that the amount of $21,496.13 which appears in the amended notice of appeal was the amount in issue in the appeal of Oswald H New & Co Ltd.
3 The issues in this appeal arise from the fact that, in the period from 1968 to 1970, the appellant Oswald H New, and Oswald H New & Co Ltd, a personal corporation, had borrowed sums of money from one of four companies owned and controlled by the New family. To repay the moneys borrowed, the personal corporation assigned to the creditor corporation a receivable which it had acquired as the result of the sale of assets to another of the four companies.
4 The Minister of National Revenue, in assessing the transaction, considered that the assignment of a receivable to the creditor corpor ation did not constitute repayment of the loans and contends that the loans made to Oswald H New and Oswald H New & Co Ltd were not repaid within the statutory time limit specified in subsection 8(2) of the Income Tax Act as it applied at that time, and were therefore deemed to be a dividend. Eva Viola New and William Arthur New, the wife and son, respectively, of Oswald H New, are involved simply as shareholders of the personal corporation, and if the loan made to the personal corporation is considered by the Board to be a dividend then, as shareholders, they would be, along with Oswald New, taxable on their respective shares of the deemed dividend received.
5 The principal issue of course is whether or not the assignment of a receivable could, under the circumstances which presented themselves in these cases, be considered as a legally valid repayment of loans for the purposes of subsection 8(2) of the Income Tax Act as it was applicable at the time.
6 The pertinent facts are as follows: Mr Oswald H New, one of the appellants herein, was president and managing director of Coastal Towing Co Ltd (hereinafter referred to as “Coastal Towing”) incorporated in 1937; Coast Ferries Limited (hereinafter referred to as “Coast Ferries”) incorporated in 1944; Andy's Bay Industries Ltd (hereinafter referred to as “Andy's Bay”) incorporated in 1950; and Oswald H New & Co Ltd, (hereinafter referred to as “New & Co”), the personal corporation incorporated in the late 1940's or early 1950's.
7 Andy's Bay, having sold its operation some years previously, served as a holding company. New & Co was incorporated to serve as a personal family corporation and its shareholders consisted solely of members of the New family.
8 The shareholders in Coastal Towing in the period from 1968 to 1970 were Andy's Bay, E Baxter, Coast Ferries, Mr A G Garrish, W K Morrison (now Sim), Mrs E V New, O H New, New & Co, E J Riordan and W A New (Exhibit A-1).
9 At the end of 1969 Oswald H New owned more than 50% of the voting shares in New & Co; New & Co owned more than 50% of the voting shares in Coastal Towing, and Coastal Towing owned more than 50% of the voting shares in Andy's Bay.
10 On April 6, 1970 New & Co sold 100,000 common shares of Coastal Towing to Andy's Bay for the sum of $150,000 on the basis of $75,000 in cash with the balance of $75,000 to be paid as and when funds became available over the next 10 years. (Minutes of this transaction were filed as Exhibits A-2, A-3 and A-4.)
11 The first $75,000 of the $150,000 proceeds of sale was paid in cash but the $75,000 balance owing had not yet been paid at the date of the hearing of these appeals, and was not secured by a mortgage as had originally been planned because Mr O H New, knowing the people involved and having worked with them for many years, did not consider the security of a mortgage necessary.
12 Oswald New, in explaining the reason for the transaction, stated that he was in the process of retiring and, rather than liquidate his assets on the open market, decided to allow Coastal Towing to continue under the direction of the group of persons, including his son, who had previously been involved with him in its operation.
13 In the period between September 30, 1968 and September 20, 1970 New & Co had borrowed from Coastal Towing an amount of approximately $58,000 but, by September 1970, approximately $37,000 of this loan had been repaid and an amount of some $21,500 was still owing. In the same period of time, Oswald H New had personally borrowed moneys from Coastal Towing but, having repaid a portion of this loan in September 1970, still owed approximately $3,500 to Coastal Towing. Mr Harold Garrish, the comptroller and secretary-treasurer of Coast Ferries, Coastal Towing and Andy's Bay was well known to Oswald H New and had looked after that gentleman's personal affairs ever since he had become connected with the companies, an association dating back some 25 years. After prior discussion with Oswald New with reference to the repayment of his personal loan and that of New & Co to Coastal Towing within the time prescribed by law, but without any specific direction as to how the loans were to be repaid, Mr Garrish, in the absence of Oswald New, and on the basis that Andy's Bay owed New & Co a balance of $75,000 arising from the purchase of 100,000 common shares, transferred an amount of $25,000 on September 22, 1970 from New & Co's receivables to Coastal Towing and assigned this receivable to liquidate the liability of New & Co in the amount of $21,496.13 and Oswald New's personal liability of some $3,500 to Coastal Towing (Exhibits A-11 and A-12). From the evidence, such a consolidation of accounts had been made use of several times in the past 20 years and had not been questioned by the Department of National Revenue.
14 In his returns Oswald New ratified Mr Garrish's method of repaying the loan. The proper entries in respect of this transaction were made in the books of the companies concerned so that Mr New's personal loan and that of New & Co were allegedly repaid to Coastal Towing on or before September 30, 1970, and this was reflected in the financial statements of Andy's Bay for 1970 (Exhibit A-5). Because of other financial activities involving some $25,000 between Andy's Bay and Coastal Towing, the amounts receivable show an increase of only $500 between 1969 and 1970. However, the balance sheet of New & Co for 1970 (Exhibit A-13) shows that Andy's Bay owed New & Co a balance of $50,000, $25,000 less than the original balance receivable in payment for the Coastal Towing shares. Neither Oswald New personally nor New & Co is shown in the books of the companies to have been indebted to Coastal Towing at the end of 1970.
15 On reviewing the evidence in this case, I am satisfied that the entire set of circumstances concerning these appeals, namely, Oswald New's decision to keep his operations going through his son and associates instead of liquidating his assets on the open market in contemplation of his retirement; the sale by New & Co of 100,000 common shares of Coastal Towing to Andy's Bay as an important step leading up to Oswald New's retirement; the assignment to Coastal Towing of $25,000 in receivables to repay, within the prescribed time limit, loans that had been made by Coastal Towing to Oswald New personally and to the personal corporation, all were carried out in good faith and in the genuine belief that such a consolidation of funds and accounts between the companies would constitute a valid repayment of the loans made to Oswald New and New & Co by Coastal Towing. I am also satisfied, as indeed is the respondent, that the sum paid for the 100,000 shares of Coastal Towing was a reasonable price to pay in the circumstances and that their value could conceivably have been greater than the amount paid.
16 I have no trouble, from the evidence, in accepting the economic viability of Andy's Bay and its capability of paying, although it did not in fact do so, the amount of $25,000 to Coastal Towing, with the result that the issue in this appeal, stripped of any extenuating facts or circumstances, is simply whether the assignment by New & Co of $25,000 of its bona fide receivables to Coastal Towing can be considered as a repayment of loans or advances made by the assignee within the meaning of subsection 8(2) of the Act.
17 There is no disagreement whatever on the principle that repayment of loans can be legally made without the actual remittance of cash, and it is generally accepted that the exchange of other real assets in payment of loans will amortize the loans to the extent of the value of such assets.
18 The position of counsel for the respondent, if I understand it correctly, is that, although he is satisfied that Andy's Bay had transferred money or money's worth to Coastal Towing to pay the loans, and although he believes that Oswald New genuinely considered that the loans had thus been repaid, he questions whether the creditor, Coastal Towing, considers it has been fully repaid by the assignment of receivables of $25,000 to cover the loans. In reaching the conclusion that Coastal Towing, had it been dealing at arm's length in this transaction, would not have considered the loans repaid, counsel for the respondent, basing his opinion on decisions in certain other cases, contends that the moneys obtained by means of the loans made by Coastal Towing were still in the pockets of Oswald New and New & Co; that the assignment of the $25,000 in receivables to Coastal Towing was merely a conditional payment; and that the debt still remained and would only be repaid when actual cash was received by Coastal Towing in payment of the loans.
19 The first case on which counsel for the respondent relies is that of Roger Gauthier v. MNR, 19 Tax A.B.C. 442, 58 D.T.C. 425, in which the taxpayer controlled two companies. Having borrowed some $26,000 from the first company, and in order to avoid the application of section 8, he assigned his debt to the second company and secured it with a promissory note. W S Fisher, Esq, QC, then Member of the Tax Appeal Board, who rendered the judgment of the Tax Appeal Board in that case, after pointing out the taxpayer's control over both companies, held, and rightly so in my opinion, that the assignment by the former company to Roger Motors (1952) Limited, the second company, of the debt owing by Mr Gauthier to the former company did not constitute a repayment of the loan.
20 In the appeals presently before us, it is not so much the fact that a debt was assigned from one company to another, it is rather that there was an assignment to the creditor company of $25,000 in bona fide receivables sufficient to cover the loans from a company which the taxpayers also controlled and that owed the said taxpayers $75,000. Counsel for the respondent's reason for citing the Gauthier case (supra) is, I presume, to emphasize the obvious control that the taxpayer, Oswald New, had over both companies concerned and to support the presumption that, if the transaction had taken place at arm's length, Coastal Towing would not have considered the loans to have been repaid by the assignment of receivables.
21 It seems to me that the assignment of a debt from one company to another without the debtor giving up anything in satisfaction of the debt, though perhaps legal and accepted in accounting practice, does not for the purposes of subsection 8(2) of the Income Tax Act, necessarily constitute the repayment of a loan. However, it depends on the circumstances under which the assignment took place and the bona fide nature of the receivable and its acceptance in payment by the assignee. The assignment of receivables from a financially sound company to which receivables the borrowers gave up their rights and which were indeed transferred to the lender as legal consideration for the loans, is not only legal and in accordance with accepted accounting practices but can, in my opinion, be considered as a repayment of the loans within the meaning of section 8 of the Act.
22 The fact that the companies involved are interrelated and are controlled by Oswald New does not make them any less distinct legal entities, and since counsel for the respondent himself admitted that there was no evidence of sham or fraud in the transaction, there is no call to look behind the corporate veil and, in my opinion, the transaction should be accepted on its face value. Whether or not a completely independent company would have accepted the receivables as repayment of the loans is, in my view, a hypothetical question and immaterial to the issue in these appeals. The fact is that Coastal Towing did accept, in consideration for and in repayment of the loans, the legal right to the amount assigned to it. Whether or not Coastal Towing chooses to enforce that right is a business decision which the company alone can make in the light of the existing circumstances and its own best interest.
23 In my view, the appeals before us must be distinguished from the Gauthier case in that the borrowers in the present instance did give up and assign to the lender a value, which the respondent recognizes to be a bona fide assignment of receivables worth $25,000, whereas in the Gauthier case, a debt was assigned from one company to an other without any real value being transferred. Since a loan can, for the purposes of section 8, be repaid by money's worth as well as by cash, I cannot see why, in the circumstances of these appeals, the assignment by the borrowers of $25,000 in receivables to Coastal Towing should not be considered as a repayment of the loans totalling $25,000 made by it to the taxpayers Oswald New and New & Co.
24 In the case of Timothy Bass v. MNR, [1967] Tax A.B.C. 6, 67 D.T.C. 49, to which counsel for the respondent also referred, that taxpayer had borrowed some $19,500 from a company which he controlled and the repayment of the loan was allegedly affected by a third party, a company also controlled by the taxpayer. R S W Fordham, Esq, QC, then Assistant Chairman of the Tax Appeal Board, who decided the appeal in favour of the Minister of National Revenue, stated at page 9 [51] of the decision:
... Furthermore, there was no evidence to show that the appellant was really the creditor of Providence or why that company should assume liability for him. Frankly, I am not impressed by the position said to prevail and think that it lacks reality or genuineness and could continue indefinitely.
25 Those circumstances do not obtain in the present appeals. Counsel for the respondent does not question the reality or the genuineness of the assignment of the receivables. The following facts, namely, that the taxpayers had borrowed $25,000 from Coastal Towing; that New & Co sold shares of Andy's Bay for $150,000, $75,000 of which remained as a receivable to New & Co; and that $25,000 of those receivables were assigned to Coastal Towing in payment of the $25,000 loan, are admitted by the respondent. Each step of the transaction is based on legal consideration being given for value received. The fact that New & Co was a bona fide creditor of Andy's Bay is not in dispute in the appeals before us.
26 Dealing with the question as to whether the giving of a promissory note by a debtor to his creditor constitutes repayment of a loan, Mr Fordham said, at page 8 [51] of the Bass decision (supra):
... It is well-settled law that the giving of a promissory note by a debtor to his creditor operates as a conditional payment only and not as satisfaction of the debt unless the parties agree so to treat it.[FN1: <p>The italics are mine.</p>]
27 In my view, there is a considerable difference between a promissory note in payment of a debt by a third party whose liability has in no way been established, and the assignment to the creditor of receivables of a financially sound company which recognizes its legal liability and obligation to both assignor and assignee as in the present instance. Furthermore, if the giving of a promissory note can, by agreement of the parties concerned, constitute satisfaction of a debt, as stated by Mr Fordham in the Bass case, then the assignment of receivables can, a priori, in the circumstances of these appeals, constitute satisfaction of the debt by agreement of the parties and this, as I understand the facts, is what was done.
28 Counsel for the respondent, in argument, stated: “If I were Coastal Towing and not controlled by Oswald New, I would definitely say, ‘Well, as far as I am concerned, I have a receivable here, but I am not paid until I actually receive the cash’.”
29 I do not believe that the respondent can have it both ways. According to case law and the Department of National Revenue's Interpretation Bulletin, and as counsel for the respondent himself admitted, for purposes of section 8, money's worth can be considered as a valid repayment of a loan. If that is so, then whether or not, in the absence of fraud or sham, the companies are related and controlled by one person, and whether or not the recipient chooses to convert his “money's worth” into cash, the money's worth, once accepted by its creditor, must in my opinion be considered as a valid repayment of the loan within the meaning of subsection 8(2) of the Act.
30 In the case of the Estate of Thomas James Johnston v. MNR, 35 Tax A.B.C. 18, 64 D.T.C. 204, where the former Tax Appeal Board dealt with the giving of a mortgage as repayment of a loan, J O Weldon, Esq, QC restated the established principle that security for payment is not payment.
31 No one, of course, would argue with that principle. However, in the case before us, we are not dealing with the giving of security for loans. We are dealing, in my view, with the repayment of loans by means of money's worth in the form of assigned receivables which the creditor has accepted in repayment of the loans and the assignment of which conferred upon the creditor the undisputed right to receive $25,000 from Andy's Bay to which Oswald New and New & Co previously had a legal right which they gave up to the creditor in order to repay the loans.
32 J O Weldon, Esq, QC, at page 29 [211] of the Johnston Estate decision, states:
... It is my view that the statute requires repayment in money or money's worth but, where repayment is being made in money's worth, the burden is on the taxpayer to prove the sufficiency in all respects of such repayment.
33 In my view, the facts of these appeals clearly establish that the assignment of $25,000 to the creditor was sufficient to repay the taxpayers' loans and the assignment of the receivables was made within the time limit prescribed by the Act.
34 For all these reasons, I hold that the assignment of receivables by the taxpayers to their creditor in the circumstances of these appeals constitutes repayment of the loans within the meaning of subsection 8(1) of the Income Tax Act; that the repayment of the loans was made within the prescribed time limit, and that the amount of the loans made by Coastal Towing should not be deemed to have been paid to the shareholders of New & Co as a dividend.
35 The appeals are therefore allowed.
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