Roland
St-Onge
(orally:
April
28,
1978):—The
appeal
of
Davalmar
Inc
came
before
me
on
April
27,
1978,
at
the
city
of
Montreal,
Quebec,
and
the
main
question
at
issue
is
whether,
during
its
1973
and
1974
taxation
years,
an
indemnity
of
$35,000
paid
by
the
appellant
company
constitutes
an
outlay
of
capital
nature
to
be
included
in
class
3
property
under
the
capital
cost
allowance
system
of
the
Income
Tax
Act
and
Regulations.
The
facts
are
well
spelled
out
in
the
reply
to
the
notice
of
appeal,
and
I
quote:
2.
(a)
On
August
28,
1972
the
appellant
(whose
name
was
then
“Centre
Laval
Inc’’)
was
granted
a
mortgage
loan
of
$5,000,000
by
Credit
Franco-
Canadien
for
the
purpose
of
enlarging
the
existing
shopping
centre;
(b)
The
rate
of
interest
for
the
said
loan
was
9
/2%
per
annum
and
the
term
was
14
years;
(c)
Clause
6
of
the
special
clauses
contained
in
the
document
dated
August
28,
1972,
whereby
the
appellant
accepted
the
conditions
of
the
loan
provides:
“6-An
amount
of
$40,000
shall
have
to
be
deducted
out
of
the
proceeds
of
the
loan,
it
being
understood
that
this
amount
includes
our
valuation
fees
and
the
lawyer’s
fees
.
.
.”,
(d)
Clause
8
of
the
said
special
clauses
contained
a
prepayment
privilege
whereby
the
appellant
could
repay
the
balance
of
the
loan
upon
receipt
by
the
lender
of
an
indemnity.
of
6
months
interest
on
the
balance;
(e)
In
the
account
dated
November
8,
1972,
submitted
by
Credit
Foncier
Franco-Canadien
to
the
appellant
the
said
amount
of
$40,000
is
broken-
down
as
follows:
|
Valuation
fee
|
$
2,500
|
|
Fees
for
examination
of
title
deeds
|
$
2,500
|
|
Indemnity
|
$35,000
|
(h)
From
the
proceeds
of
the
said
loan,
the
appellant
invested
$3,000,000
in
short-term
certificates
bearing
interest
at
a
rate
lower
than
the
9
/2%
rate
paid
for
the
mortgage
loan.
The
respondent
submits
at
paragraphs
4
and
5
of
the
reply
to
the
notice
of
appeal
the
following:
4.
.
.
.
that
the
appellant
paid
to
Credit
Foncier
Franco-Canadien
a
bonus
of
a
capital
nature
in
the
amount
of
$35,000
in
order
to
obtain
the
mortgage
loan
and,
consequently,
the
said
amount
has
been
properly
included
in
class
3
property
and
a
capital
cost
allowance
of
$1,750
in
1973
and
$1,662.50
in
1974
has
properly
been
allowed
in
the
computation
of
the
appellant’s
income;
5.
.
.
.
that
since
the
appellant
invested
$3,000,000
of
the
proceeds
of
the
loan
at
a
rate
of
interest
lower
than
the
9
2%
paid
for
the
mortgage
loan,
the
Canadian
investment
income
derived
from
the
said
investment
is
nil
and,
therefore,
the
appellant
is
not
entitled
to
the
dividend
refund
provided
for
in
section
129
of
the
Act;
At
the
hearing
counsel
for
appellant
stated
that
his
client
had
decided
to
withdraw
the
second
issue
of
his
appeal.
Consequently
the
appeal
on
this
issue’
is
dismissed
and
the
appellant
is
not
entitled
to
the
dividend
refund
provided
for
in
section
129
of
the
Income
Tax
Act.
Three
witnesses
were
heard
on
behalf
of
the
appellant:
Robert
Gagnon,
Chartered
Accountant
and
auditor
of
the
appellant
company
since
1965,
Claude
Charette,
Senior
Negotiator
for
Crédit
Foncier
since
1977
and
Harry
Glassman,
Secretary-treasurer
of
the
appellant
company
up
to
1972,
and
president
of
Centre
Laval
Inc.
Mr
Gagnon
testified
that
when
he
prepared
the
appellant’s
income
tax
return
for
the
1972
taxation
year,
he
claimed
a
deduction
of
$40,000
as
an
expense
for
lawyer’s
and
valuation
fees.
At
the
hearing
he
filed
as
Exhibits
A-1
and
A-2
the
loan
application
as
well
as
appellant’s
acceptance
in
writing.
Referring
to
clause
2
of
Exhibit
A-1,
the
witness
said
that
the
$35,000
was
considered
as
prepaid
interest
for
a
loan
of
$5,000,000.
Also,
that
according
to
the
general
accounting
principles,
there
were
two
main
approaches
to
the
problem.
The
expense
of
$35,000
could
be
considered
rather
small
and
fully
deductible
in
the
year
it
was
paid,
or
substantial
and
amortized
over
a
period
of
three
years,
mainly
in
1973,
1974
and
1975.
He
also
stated
that
when
he
prepared
the
return
for
1973,
he
had
no
knowledge
that
the
shopping
center
was
to
be
sold
and
that
he
had
also
considered
the
$40,000
as
cost
of
borrowing
money
in
accordance
with
paragraph
20(1
)(e)
of
the
new
Income
Tax
Act.
Mr
Charette,
who
was
not
working
for
Crédit
Foncier
when
the
loan
was
made,
testified
with
the
help
of
information
obtained
from
the
file.
According
to
the
minutes,
the
loan
was
negotiated
and
approved
on
August
25,
1972
at
an
interest
rate
of
9
/2%
plus
$40,000
of
which
$5,000
went
for
lawyer’s
and
valuation
fees,
and
$35,000
as
an
indemnity.
Consequently,
Crédit
Foncier
kept
$40,000
and
gave
the
company
$4,960,000.
The
witness
testified
that
the
$35,000
was
prepaid
interest
and
could
neither
be
considered
as
a
payment
of
capital,
nor
a
commission
or
bonus;
that
9
/2%
was
an
interest
rate
inferior
to
what
Crédit
Foncier
was
asking
at
the
time,
namely
9
/4%;
but
after
negotiation
it
was
agreed
between
the
parties
that
the
appellant
would
pay
in
advance
$35,000
which
would
represent
an
interest
rate
of
9.61%
and
would
allow
the
appellant
to
pay
yearly
an
interest
rate
of
9
/2%
for
the
duration
of
the
loan.
Upon
cross-examination,
Mr
Gagnon
stated
that
this
practice
of
exacting
a
prepayment
of
interest
in
lieu
of
a
higher
rate
of
interest
was
normal
business
in
those
types
of
loans.
Mr
Harry
Glassman
explained
that
the
appellant
company,
as
owner
of
a
building,
was
not
ready
to
borrow
at
an
interest
rate
higher
than
9
/2%;
but
in
order
to
increase
the
appellant
company’s
cash
flow,
the
appellant
was
willing
to
pay
in
advance
$35,000
as
prepaid
interest
and
by
the
same
token
was
to
save
$10,000
per
year;
but
the
difference
in
the
interest
rate
would
increase
the
equity
in
the
shopping
centre
by
$175,000
(capitalized
value
equals
twelve
times
the
earning)
less
$40,000
for
a
net
gain
of
$85,000.
He
also
stated
that
the
payment
of
interest
in
advance
was
normal
practice
in
business
enterprises
and
also
a
part
of
the
appellant’s
expense
of
securing
a
loan;
that
this
sum
of
money
was
not.
(1)
a
prepayment
of
capital;
(2)
the
payment
of
a
commission
or
bonus;
(3)
a
commitment
fee,
but
a
payment
for
the
use
of
money.
Counsel
for
appellant
argued
that
the
payment
of
$35,000
was
a
normal
business
practice
to
obtain
a
reduction
in
interest
rate
and
a
better
equity
in
the
building.
According
to
him,
this
expense
is
deductible
either
as
interest
pursuant
to
paragraph
20(1)(c)
or
as
cost
of
borrowing
money
pursuant
to
paragraph
20(1
)(e)
of
the
new
Income
Tax
Act.
He
referred
the
Board
to
various
decisions
in
order
to
find
a
definition
of
the
word
interest.
In
“Words
and
Phrases’’,
volume
3
of
Richard
De
Boo
Ltd
at
page
185:
“Interest”,
when
considered
in
relation
to
money,
denotes
the
return
or
consideration,
or
compensation
for
the
use
or
retention
by
one
party
of
a
sum
of
money
or
other
property
belonging
to
another.
It
may
take
the
form
of
a
lump
sum
payment
or
periodical
payments
at
a
rate
per
cent.
Another
definition
at
the
same
page
was
quoted:
“Interest”,
which
by
subsection
91(19)
of
the
BNA
Act
is
expressly
reserved
to
the
Parliament
of
Canada,
is
not
a
technical
term
and
is
not
restricted
in
any
sense
.
.
.
This
definition
was
quoted
from
page
187:
“Interest”
is
money
paid
for
the
use
of
money
at
a
fixed
rate.
“Fixed
rate”
as
used
here
does
not
necessarily
mean
a
“stated
rate”
per
cent
per
annum.
Where,
for
a
present
loan
of
$10,000,
the
borrower
agrees
to
repay
the
sum
of
$12,000
at
the
expiry
of
two
months,
the
difference
of
$2,000
is
“interest”
within
the
above
definition.
The
sums
of
$10,000
and
$2,000
are
“principal”
and
“interest”
on
a
mortgage
so
as
to
justify
the
court
in
enquiring
whether
there
has
been
“blending”
thereof
so
as
to
render
necessary
the
statement
required
in
the
case
of
“blending”
by
the
Interest
Act.”
Then
he
referred
the
Board
to
two
Supreme
Court
judgments.
1)
In
the
matter
of
a
reference
as
to
the
validity
of
section
6
of
the
Farm
Security
Act,
1944,
of
the
prov
of
Sask
(1947)
SCR
394
at
411,
Rand,
J
states
as
follows:
Interest
is,
in
general
terms,
the
return
or
consideration
or
compensation
for
the
use
or
retention
by
one
person
of
a
sum
of
money,
belonging
to,
in
a
colloquial
sense,
or
owed
to,
another
.
.
.
2)
Asconi
Building
Corporation,
plaintiff,
and
J
Paul
Vermette
(plaintiff
by
continuance
of
suit),
appellant,
and
Dominique
Vocisano
(defendant),
respondent
(1947)
SCR
358
at
367,
Rand,
J
states
as
follows:
Interest
in
its
original
sense
is
the
consideration
for
the
use
of
money,
and
strictly
considered,
the
payment
of
interest
in
advance
necessarily
abstracts
from
the
sum,
the
use
of
which
is
intended
to
be
paid
for
.
.
.
He
also
argued
that,
according
to
two
witnesses,
the
$35,000
was
not
a
commission
or
a
bonus
and
referred
the
Board
to
a
Federal
Court
decision,
MNR
v
Yonge-Eglinton
Building
Ltd
(1974)
CTC
214;
74
DTC
6180,
in
which
some
definitions
are
given.
Commission:
.
.
.
is
a
pro-rata
remuneration
for
work
done
as
agent
.
.
.
Bonus:
.
.
.
a
boon
or
gift
over
and
above
what
is
normally
due,
a
premium
for
services
rendered
or
expected
.
.
.
Most
of
the
jurisprudence
cited
by
counsel
for
respondent
was
with
respect
to
decisions
rendered
prior
to
1972
and
had
to
do
with
bonuses
paid
to
obtain
second
and
third
mortgages
or
premiums
paid
in
the
course
of
repaying
borrowed
capital.
It
had
nothing
to
do
with
the
use
of
money
and
consequently
it
could
not
be
deducted
as
interest
payments.
In
the
case
at
bar,
the
$35,000
was
agreed
upon
to
cover
the
difference
between
the
interest
rates
of
9
/2%
and
9
/4%
which
constitutes
a
payment
for
the
use
of
money.
Counsel
for
respondent
argued
that
the
$35,000
was
an
expense
of
capital
nature
and
that
it
was
quite
different
from
interest
which
accrues
and
runs
from
day
to
day.
He
referred
the
Board
to
the
following
articles
of
the
Civil
Code
of
the
province
of
Quebec.
Article
449:
Civil
fruits
are
the
rent
of
houses,
interest
of
sums
due
and
arrears
of
rents.
Article
451:
Civil
fruits
are
considered
to
be
acquired
day
by
day,
and
belong
to
the
usufructuary
in
proportion
to
the
duration
of
his
usufruct.
On
the
other
hand,
the
decision
in
Asconi
Building
Corporation
and
Vermette
suggests
that
interest
can
be
paid
in
advance
and
that
nothing
in
the
French
Civil
Law
is
contrary
to
these
views.
Then,
in
Lloyd
v
Williams
(1772)
96
ER
465,
at
466,
Blackstone,
J
is
reported
to
have
.
.
.
conceived
that
interest
may
as
lawfully
be
received
before-hand
for
forbearing
as
after
the
term
is
expired
for
having
forborne
.
.
.
In
the
present
appeal
three
witnesses
testified
to
the
effect
that
the
$35,000
was
a
prepayment
of
interest
and
not
a
commission
or
a
bonus.
In
fact,
there
is
no
indication
in
the
evidence
adduced
that
this
amount
of
money
was
paid
for
work
done
as
agents
or
as
a
gift
or
premium
for
services
rendered
or
expected.
Crédit
Foncier
did
not
act
as
an
agent,
not
did
it
render
any
services
to
the
appellant
except
to
lend
it
$5,000,000
at
a
negotiated
interest.
There
is
nothing
in
the
Income
Tax
Act
to
prevent
the
taxpayer
from
using
this
method
of
prepayment’of
interest
in
a
lump
sum
in
order
to
increase
its
equity
in
a
building
by
having
to
pay
a
lower
rate
of
interest
over
a
certain
period
of
time.
It
appears
from
the
documentary
evidence
that
when
Crédit
Foncier
received
interest
in
a
lump
sum,
it
used
the
expression
“indemnity”.
Indeed
in
Exhibit
A-3
the
lender
for
the
privilege
of
repaying
the
balance
of
the
loan
as
at
April
30,
1978,
mentions
an
indemnity
of
six
months’
interest,
and
with
respect
to
the
$40,000,
it
is
written:
.
.
.
An
amount
of
$40,000
to
be
deducted
out
of
the
proceeds
of
the
loan,
including
our
valuation
fees
and
our
lawyer’s
fees
of
$5,000
giving
a
net
indemnity
of
$35,000
.
.
.
According
to
the
jurisprudence
cited
by
counsel
for
appellant,
it
appears
that
a
lump
sum
of
interest
paid
in
advance
does
not
lose
the
character
of
being
interest.
As
to
the
method
of
deducting
such
interest,
it
seems
that
the
second
one
suggested
by
the
chartered
accountant
would
be
the
proper
one
to
adopt:
namely
the
$35,000
would
be
deducted
in
1973
and
1974,
and
the
unamortized
part
would
be
written
off
in
1975,
the
year
of
the
sale
of
the
shopping
center.
This
method
would
be
more
equitable
by
allowing
(in
a
certain
proportion)
the
matching
of
expenses
with
income.
According
to
the
evidence
adduced,
it
appears
that
there
was
no
necessity
to
pay
a
bonus
to
obtain
a
loan,
nor
was
the
$35,000
a
premium
paid
in
the
course
of
repaying
borrowed
capital.
On
the
contrary,
it
was
a
readjusting
of
interest
and
therefore
a
payment
for
the
use
of
money
obtained
from
Credit
Foncier.
For
these
reasons,
the
appeal
is
allowed
in
part
and
the
matter
referred
back
to
the
minister
for
reassessment
accordingly.
Appeal
allowed
in
part.
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