The Chairman (orally: March 21, 1975):
1 This is an appeal by Immobiliare Canada Limited against a reassessment of the Minister of National Revenue for the 1966 taxation year. The point at issue is whether or not a transaction in which the appellant was involved required the appellant to withhold 15% of certain moneys paid to a non- resident corporation.
2 Perhaps as I have just defined it, the issue is too simply stated, because it is a novel issue in respect of which no cases exactly on point have been cited, and I have not been able in my own research to find any jurisprudence that one might say is on all fours with the problem before us in this appeal. Perhaps, therefore, a brief outline of the facts and the positions of each party may be in order.
3 The whole issue arises out of the construction of what is now well known as Place Victoria in the heart of downtown Montreal, which is a complex housing stores and offices and, for those not completely familiar with it, might be compared with Place Ville Marie, which is perhaps a more famous landmark in Montreal. However, the construction and the setting-up of this complex were not without their difficulties. The building was completed in 1965 and went into operation in 1966, and the evidence of Mr Gorup, who was the secretary of the operating company, or at least an officer of the operating company, as well as secretary of this appellant, is that in its first year of operation, Place Victoria suffered a deficit of over three million dollars.
4 There were several shareholders, two of whom I am specifically interested in in arriving at this decision, namely, SGI International Company, and the operating company, Place Victoria-St Jacques Co Inc. The latter company issued debentures on a pro rata basis to its shareholders in the years 1960, 1962, 1965 and 1966. The two companies that I have mentioned, along with the appellant company, were related within the meaning of the Income Tax Act, RSC 1952, c 148 and amendments thereto. This is an admitted fact, and therefore the transactions that took place did not take place at arm's length.
5 Prior to 1965 the debenture holders received promissory notes for the interest on their debentures, and the withholding tax was remitted to the Receiver General in the proper fashion in 1965, or 1964. (It is not really relevant but I think it was perhaps in 1965.) The notes were redeemed and the debenture holders were asked, or one might say forceably asked, to abandon their interest on the debentures for the years 1965 and 1966. The shareholders and debenture holders, who were the same, agreed. SGI International, which I will refer to as SGI in the course of this judgment, was a non-resident corporation and was the largest holder of the debentures and shares of the company, holding 49% of the issued and outstanding shares and debentures. The appellant in this case was a wholly-owned subsidiary of SGI and was a resident corporation, as was the operating company, Place Victoria-St Jacques Company Inc.
6 In 1965 and 1966 no interest was paid by Place Victoria to SGI. Subsequent to 1965 and 1966, when Place Victoria did pay interest, it deducted the non-resident tax and remitted it in the proper fashion.
7 The problem at issue arises out of a transaction on October 1, 1966, when SGI sold its debenture holdings in Place Victoria to the appellant, who paid for the debentures by issue of its own debentures and the delivery of same to SGI, the said purchase price being $8,260,000. These figures sound impressive, and certainly are impressive, but the issue involved is not related, nor is the decision related, to the amount of money involved. In fact, my decision is based on what I believe to be the correct interpretation of the law at the material time rather than on the sum involved.
8 From the documentary evidence adduced, it is clear that SGI was entitled to interest, if there had been any interest paid, and was deprived of it by its own consent to the postponement as aforesaid. The appellant, when it issued its own debentures for the $8,260,000, did not deduct 15% withholding tax on delivery of the debentures to SGI. The point to be determined is, therefore: should the appellant, in accordance with section 106 of the Income Tax Act as it then existed, have made such a deduction as the Minister now claims, and remitted it to the Receiver General on behalf of SGI? If the company should have and did not, and it is admitted that it did not, then, of course, the appellant itself is liable for the payment of the tax pursuant to the Act. It is almost facetious to put the issue so simply because of the magnitude of the amount involved, but perhaps it may be more readily understood if a minimum of verbiage is used to put the issue in focus. The appellant simply says that it bought $8,260,000 worth of capital assets by issuing its own debentures to pay for them. The Minister says that the $8,260,000 included a payment in lieu of, or instead of, interest in the amount of $644,194.41. Further, the appellant says that to find otherwise than in accordance with the appellant's argument would result in double taxation, for the appellant had to pay tax when the interest was eventually paid, I believe in the year 1967. The Minister argues that section 24 of the Income Tax Act as it then applied, gives the appellant the right to deduct the tax paid from its own taxable income. The answer seems simple, but to me it is difficult. Both counsel have been most persuasive in their arguments. However, it seems to me that the respondent has confused the transaction between two third parties, although related, with the company dealing with the issue of the debentures, namely, Place Victoria-St Jacques Co Inc. As has been pointed out by counsel for the appellant, there was no capital gains tax involved in 1966 and the price for the sale of Place Victoria debentures was fixed and was paid. So far as Place Victoria was concerned, this was a transaction between two third parties, related though they may be. The appellant was then entitled, under the terms of the Place Victoria debenture, to be registered as the owner and to receive the principal and interest under the debentures when paid. It was also entitled, if one may use that term, to pay the tax on the income that it received under the debentures, and this it did when the payment was made.
9 On reviewing all the evidence and the documents filed, I cannot see any income to SGI that was taxable simply because the selling price included accrued interest. It seems to me that the Treasury received its rightful tax when the interest on the debentures was finally paid and tax assessed against the appellant on that interest, as the respondent was entitled to do.
10 Several cases have been cited to me, including Wigmore v. Thomas Summerson & Sons Limited, [1926] 1 K.B. 131, 9 TC 577, which was followed in No 729 v. MNR, 26 Tax A.B.C. 107, 61 D.T.C. 137. The respondent cites Groulx v Minister of National Revenue, [1968] S.C.R. 6, [1967] C.T.C. 422, 67 D.T.C. 5284, and also Hall v Minister of National Revenue, [1970] C.T.C. 510, 70 D.T.C. 6333. Respondent also cites Article 1141 of the Quebec Civil Code. I have read all the afore-mentioned and I do not find any real assistance to me in this case, except perhaps the principle in the Wigmore case, that simply says that any accretion to the value of a security sold is an accretion on account of capital and not taxable by the Crown as income. However, generally speaking, the Wigmore case, although it is the most useful, appears to have been rendered less helpful, if not completely overturned, by the insertion into the Income Tax Act in 1952 of section 19A, which was made applicable to the 1953 and subsequent taxation years.
11 The reference to the Civil Code again leads me to the conclusion that the Minister has not recognized that this was a separate and distinct transaction between SGI and the appellant, but rather has in some way inserted Place Victoria-St Jacques Co Inc as a party to that type of transaction.
12 I have read and tried to digest many sections of the Act such as paragraph 6(1)(b), sections 19A, 24, 106, 108 and 109, and I can find nothing in the Act to change my view that what took place between the appellant and SGI, as distinct and separate from any transactions with Place Victoria-St Jacques Co Inc was this purchase and sale of a capital asset. In short, my reason for allowing the appeal is that I cannot find that any payment was made instead of interest, but rather that there was a completed capital purchase made by a third party from SGI, although it is true that the two companies were not dealing at arm's length within the meaning of the Act, and the rights to interest on the debentures purchased accrued to the appellant and to no one else. This being so, there was no deduction to be made by the appellant with respect to its purchase from SGI. In my view, there was no payment in lieu of, or instead of, interest, and I can find no provision in the Act, as I have said, that makes it necessary, or made it necessary at the material time, for the appellant to make the 15% deduction and remit it to the Crown.
13 After reviewing the documents filed and hearing the testimony of the only witness and having listened to the arguments of both counsel, I come to no other conclusion than that the appeal must be allowed and that it was a simple capital transaction, as I have said, between SGI and the appellant. Appeal will be allowed and the assessment vacated.
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