Newton v. R., [1997] 3 C.T.C. 2631

Christie A.C.J.T.C.:

1 These appeals are governed by the informal procedure provided for under section 18 and following sections of the Tax Court of Canada Act. The years under appeal are 1991 and 1992 and the amounts in issue are $1,881.00 and $22,366.00 respectively. The Notice of Appeal reads:

I hereby appeal against the Decision of the Minister made on the 27th day of May, 1996, and communicated to me shortly thereafter, a copy of which Decision is attached hereto.

I wish to proceed by the informal procedure set forth within your Rules.

That the ground of my appeal is that the loan transaction between Webster Field Holdings Limited and myself were bona fide and that at all times there was an agreement between the Company and me that the loans would be fully repaid. Further, that I did not at any time have voting control of Webster Field Holdings Limited and was not in any position to require the other Directors to make a loan to me other than one which was bona fide both for the Company and for myself. Further, that the loans are being repaid.

My Notice of Objection was dealt with by the Halifax Office of Revenue Canada.

I intend to represent myself in the matter of this appeal.

2 Paragraphs 1 to 7 of the Reply to the Notice of Appeal read:

1. He has no knowledge of the allegations of fact stated in paragraph 3 of the Notice of Appeal and puts the Appellant to the strict proof thereof.

2. He admits that Webster Field Holdings Limited (hereinafter referred to as the ‘lender’) made loans to the Appellant which were not fully repaid in the years in which they were made.

3. He further admits that the Appellant owed to the lender balances of these loans (hereinafter referred to as the ‘balances’) at the end of the Appellant's 1991 and 1992 taxation years.

4. By Notice of Reassessment dated June 21, 1995 the Minister of National Revenue (hereinafter referred to as the ‘Minister’) reassessed the Appellant's income by:

• a) including in the Appellant's 1991 income by virtue of subsection 15(2) the amount of $1,881.00 representing the balance of $11,881.00 owed by the Appellant for the 1991 taxation year less the amount of $10,000.00 which is the portion of the balance that is statute barred.

• b) including in the Appellant's 1992 income by virtue of subsection 15(2) the amount of $22,366.00 representing the balances of $13,242.00 and $27,314.00 owed by the Appellant for the 1992 taxation year less

  • i) the amount of $10,000.00 which is the portion of one of the balances that is statute barred, and

  • ii) the amount of $1,881.00 which was included in the Appellant's 1991 income by virtue of subsection 15(2), and

  • iii) the amount of $6,309.00 which was repaid within one year after the end of the taxation year of the lender in which the loan was made.

5. He admits that the Appellant filed a valid Notice of Objection and that by Notice of Confirmation dated May 27, 1996 the Minister confirmed the reassessments.

6. In assessing the Appellant, the Minister relied on, inter alia, the following assumptions:

• a) the facts admitted above;

• b) at all material times the Appellant was a shareholder and Director of the lender;

• c) the Appellant borrowed $10,000.00 from the lender in 1990. At the end of its 1991 taxation year the balance of the loan was $11,881.00. At the end of 1992 the balance of the loan was $13,242.00. $10,000.00 of the balance is statute barred.

• d) the Appellant borrowed $28,128.00 from the lender in 1992. At the end of its 1992 taxation year the balance was $27,314.00; $6,309.00 was repaid within one year.

• e) the loans were not made in the ordinary course of the lender's business; and

• f) no bona fide arrangements for repayment were made at the time that the loans were made.

B. Issue to be Decided

7. The issue to be decided is whether the balances owed by the Appellant should be included in the Appellant's income under subsection 15(2) of the Income Tax Act (‘the Act’) in respect of his 1991 and 1992 taxation years.

3 The evidence-in-chief of the appellant is brief. He readily admitted to being a director and a shareholder of Webster Field Holdings Limited (“the corporation”) and that it loaned him the funds that gave rise to this litigation. Under cover of a letter dated January 24, 1997 addressed to the Registrar of the Tax Court the appellant forwarded an affidavit which was sworn to by him on that date. At the hearing he confirmed under oath that the statements in the Affidavit are correct. He went on:

The important points in the Affidavit are first of all that I'm not related to any of the shareholders of the company and I'm not related to any of the partners of the law firm. We're not -- we are all at arm's length to one another. We have -- as I said in my Brief that I filed, we're not -- I'm not at non-arm's length with any of these people. I'm at full arm's length to all of them. We're not related by marriage or blood or in any respect whatsoever. Furthermore, the law firm, the partnership, Waterbury, Newton & Johnson, is not now and never has been a shareholder of Webster Field Holdings Limited, that they're separate and distinct. The partnership is not a shareholder in the corporation, which -- we'll get to that when we're looking at 15(2). So I'm not connected to any of the shareholders in the company, I'm not connected to any of the partners, and the partnership does not own or is not a shareholder in the corporation. All these are quite distinct. And also, one of the legitimate objects of the company is that -- I've referred to -- and it's on the -- in a Memorandum of Association, Exhibit ‘A’, the third page, section 2(C)(c) -- one of the objects of the company is:

To invest the monies of the company not immediately required in the business of the company in such manner as may from time to time be determined by the directors of the company.

So Webster Field Holdings Limited has a legitimate object, the power to invest money that it doesn't from time to time need. And as I said in my Brief, that does not preclude a loan to a director.

The law firm Waterbury, Newton & Johnson, I became a partner in the year 1969. Richard W. Johnson became a partner on February 1st, 1973. Eric O. Sturk became a partner on February 1st, 1980. Curtis C. Palmer became a partner on February 1st, 1986. Paul L. Walter became a partner on February 1st, 1987. And on February 1st, 1992 we admitted two partners, Trinda L. Ernst and John S. Fitzpatrick. And those -- all those persons are still partners with the exception of Mr. Johnson who is no longer with the firm. So my evidence, Your Honour, is no more than that. I did make the loans. I've indicated the rates of interest. I've indicated the amounts that have been repaid. And I've told the Court who the partners are and the shareholders. And beyond that I see there's no other evidence.

4 In cross-examination it was established that the appellant borrowed $10,000.00 from the corporation which was secured by a promissory note dated August 21, 1990 and later he borrowed an additional $25,000.00 from the corporation which was secured by a promissory note dated January 20, 1992. Both notes provided for the payment of interest. Neither loan was repaid within one year from the end of the corporation's 1990 and 1992 taxation years.

5 Subsection 15(2) of the Income Tax Act provides:

15(2) Where a person (other than a corporation resident in Canada) or a partnership (other than a partnership each member of which is a corporation resident I Canada) is a shareholder of a particular corporation, is connected with a shareholder of a particular corporation or is a member of a partnership, or a beneficiary of a trust, that is a shareholder of a particular corporation and the person or partnership has in a taxation year received a loan from or has become indebted to the particular corporation, to any other corporation related thereto or to a partnership of which the particular corporation or a corporation related thereto is a member, the amount of the loan or indebtedness shall be included in computing the income for the year of the person or partnerhsip, unless

• (a) the loan was made or the indebtedness arose

  • (i) in the ordinary course of the lender's or creditor's business and, in the case of a loan, the lending of money was part of its ordinary business,

and bona fide arrangements were made, at the time the loan was made or the indebtedness arose, for repayment thereof within a reasonable time;[FN1: <p>There are a number of other exceptions in subparagraphs 15(2)(<em>a</em>)(ii), (iii) and (iv) but, they need not be reproduced for the purposes of these reasons.</p>] or

• (b) the loan or indebtedness was repaid within one year from the end of the taxation year of the lender or creditor in which it was made or incurred and it is established, by subsequent events or otherwise, that the repayment was not made as part of a series of loans or other transactions or repayments.

15(2.1) For the purposes of subsection (2), a person is connected with a shareholder of a particular corporation if that person does not deal at arm's length with the shareholder and if that person is a person other than

• (a) a foreign affiliate of the particular corporation; or

• (b) a foreign affiliate of a person resident in Canada with which the particular corporation does not deal at arm's length.

6 The Memorandum of Association of the corporation provides that it is authorized: “To invest the moneys of the Company not immediately required in the business of the Company in such manner as may from time to time be determined by the Directors of the Company.” But this does not substantiate that the loans were made in the ordinary course of the corporation's business and that the lending of money was part of the corporation's ordinary business.

7 The substance of the appellant's argument is that even though he was a shareholder of the corporation he does not come within the ambit of subsection 15(2) because the evidence is that he was not connected with a shareholder of the corporation and was not a member of a partnership that was a shareholder of the corporation. He contends that these additional components are necessary to bring him within the ambit of subsection 15(2). Perhaps the best way to depict the appellant's position is to quote from what he said in argument at the hearing:

As I understand this assessment that was made, it has to live or die under section 15(2) of the Income Tax Act. And in that memorandum which I submitted to the Court, of course I've provided a full text of all of the wording of 15(2). But as I did in my brief, I believe you can eliminate some of the wording and get down to the -- there's wording in there that doesn't apply to this factual situation and that I believe this includes the relevant wording:

Where a person is a shareholder of a particular corporation, is connected with a shareholder of a particular corporation, or is a member of a partnership that is a shareholder of a particular corporation, and the person has in a taxation year received a loan from the particular corporation, the amount of the loan or indebtedness shall be included in computing the income for the year of the person unless...

And then there are the exceptions. But I submit with respect, Your Honour, that we don't have to look any further than this because -- a person is a shareholder. Yes, I am a shareholder of a particular corporation, Webster Field Holdings. But if that person is connected with a shareholder of a particular corporation. I am not. I am not connected with a shareholder. That -- you'd have to look to 15(2.1) for a definition. And under 15(2.1) by that definition I'm not connected with any shareholder in the corporation. So: ‘Where a person is a shareholder of a particular corporation, is connected with a shareholder of a particular corporation...’

Well, I'm not. I am not connected with any shareholder of this particular corporation, Webster Field Holdings Limited.

His Honour: Yes. But don't you have to read that --

Mr. Newton: But I have to go on, Your Honour.

His Honour: Okay.

Mr. Newton: ‘...or is a member of a partnership that is a shareholder of a particular corporation...’

Well, the partnership is not a shareholder of a particular corporation. It is not and never has been a shareholder of Webster Field Holdings Limited. And then it goes on: ‘...and the person has in the taxation year received a loan...’

Well, yes, I have received a loan. But it does not matter. Those facts must exist. I as a shareholder of Webster Field have to be either connected with another shareholder, which I am not, or the partnership has to be a shareholder of that corporation, and it is not. There is nothing that my learned friend can say, there's nothing in these facts. It is an absolute certainty, it is a 100% certainty that I am not connected with any shareholder and it is certainty that the partnership is not a shareholder in Webster Field Holdings. Those two are immutable facts which no amount of arguing can change. And so therefore this transaction that I made with the company does not come under 15(2) and therefore that loan does not, under 15(2), become included in computing my income for that year. You can't change those facts. You know, rocks are rocks and seawater is seawater. I mean, those are absolute facts. No matter what kind of spin you want to put on them, those are the criteria of whether I am connected with -- I've met that absolutely, I'm not connected with them -- and the partnership is not a shareholder in the corporation. Those facts must exist for the loan to become computed as income. Those facts do not exist. End of story. If either of those facts did exist, it's still a straightforward business loan, lawfully made, at interest, under normal terms.

8 With respect I do not agree that this is the correct way in which to interpret subsection 15(2). The evidence clearly establishes that he borrowed the money in issue from the corporation when he was a shareholder of it and that he does not come within any of the exceptions set out in paragraphs 15(2)(a) or (b). That is sufficient to justify the reassessments. It follows that these appeals cannot succeed and judgment shall issue dismissing them.