Edward C Sargent v. Minister of National Revenue, [1983] CTC 2639

J B Goetz:—This is an appeal by the appellant with respect to his income tax assessments for the taxation years 1975, 1976, 1977 and 1978.

The parties to the appeal filed an agreed statement of facts with one minor amendment in the figure for the year 1979 to read $88,785. The agreed statement of facts reads as follows:

AGREED STATEMENT OF FACTS

1. Edward Sargent, the appellant, was reassessed by the Honourable the Minister of National Revenue, as follows:

Year	Date of Reassessment	Additional Tax
1975	March 18, 1980	$ 8,954.66
1976	March 18, 1980	12,696.40
1977	March 18, 1980	3,686.50
1978	March 18, 1980	311.40

2. The appellant filed Notices of Objection with respect to these reassessments under date of June 9, 1980.

3. The Honourable the Minister of National Revenue, the respondent, confirmed the reassessments by a notice dated October 10, 1980.

4. The appellant filed a Notice of Appeal to the Tax Review Board on November 25, 1980.

5. The appellant is a shareholder of Eddie Sargent Promotions Ltd.

6. The appellant’s shareholder’s loan account showed the following balances at the fiscal year end of Eddie Sargent Promotions Ltd viz, June 30, and at the calendar year end, for the years 1974 through 1979;

Year	June 30	December 31
1974	$ 49,287.00	$ 75,162.00
1975	87,860.00	109,380.00
1976	135,745.00	154,796.00
1977	83,533.00	113,049.00
1978	93,369.00	109,671.00
1979	88,785.00

7. The appellant’s 1974 year was statute-barred from reassessment by the respondent.

8. The increase of $34,218 in the shareholder’s loan balance at December 31, 1975 over the balance in the loan account at December 31, 1974 was included in the appellant’s 1975 income by reassessment.

9. The increase of $26,365 in the shareholder’s loan balance at June 30, 1976 over the balance at December 31, 1975 was included in the appellant’s 1976 income by reassessment.

10. The increase of $9,836 in the shareholder’s loan balance at June 30, 1978 over the balance at June 30, 1977 was included in the appellant’s 1977 income by reassessment.

11. The decrease in the balance of the appellant’s shareholder’s loans of $52,212 between June 30, 1976 and June 30, 1977 represents repayments of shareholder’s loans. The accountant for the appellant and Eddie Sargent Promotions Ltd requested that the 1977 repayments be applied to the 1976 loans.

I can only embellish the facts to a minor degree and say that the appellant was the sole shareholder of Eddie Sargent Promotions Ltd (hereinafter referred to as “the Company”). The appellant was engaged in many endeavours and activities including the purchase, renovations and rental of old buildings, various advertising and promotional schemes, operation of hotels, publishing of newspapers and printing businesses and in the development and exportation of moving message signs. He did all of this mainly in his personal capacity and required injections of capital with various ventures. To say the least, his company is well named because, I would clearly conclude, the appellant was indeed a promoter. The funds that he required for these numerous activities were borrowed from the Company over a period of years. The appellant made repayments of these loans from the Company, but the respondent took the position that as the taxation year ending December 31, 1974, was statute-barred, no repayments on account of outstanding shareholder’s loan balances would be applied prior to December 31, 1974, but merely carried forward as loans outstanding into the relevant taxation years. It is to this action on the part of the Minister of National Revenue that the appellant objects and appeals.

In assessing the appellant, the respondent relied, inter alia, upon sections 3, 15(2) and 20(1)(j) of the Income Tax Act, SC 1970-71-72, c 63, as amended. The appellant relied upon sections 15(2) and 20(1 )(j) of the Income Tax Act.

It was not disputed that all shareholder’s loans made to the appellant by the Company were reported and disclosed in the books of account of the Company and its shareholder’s loan account as of December 31, 1974 stood at $75,162. In its reassessment, the respondent applied $52,312 to 1974 and prior statute-barred years. The respondent then included in the appellant’s income the sum of $70,419 for his 1975 taxation year until the end of the fiscal period June 30, 1979. Although, as contended by the appellant, if the Crown had applied or allocated payments on the loan balance in 1977 to the 1976 taxation year as of June 30, 1979, the shareholder’s loan balance would only have been $13,207, provided, of course, that the $52,312 had been excluded.

The net result of Revenue Canada’s allocation of loan repayments from 1975 onward leaves a balance of $52,312 in loans payable which were allocated to 1974 and earlier periods. The total difference between the increase in the shareholder’s loans from December 31, 1974 to June 30, 1979, and the amounts assessed thereto, was $57,212.

Appellant’s Contention

Counsel for the appellant presented a careful argument but it contained gratuitous statements to which I shall refer later in this judgment.

The key to the argument was that the option to allocate repayment of loans rests with the debtor. See Clayton’s Case (1816), 35 ER 781 at 792:

This state of the case has given rise to much discussion, as to the rules by which the application of indefinite payments is to be governed. Those rules we, probably, borrowed in the first instance, from the civil law. The leading rule, with regard to the option given, in the first place to the debtor, and to the creditor in the second, we have taken literally from thence. .. From these cases, I should collect, that a proposition which, in one sense of it, is indisputably true, — namely, that, if the debtor does not apply the payment, the creditor may make the application to what debt he pleases, — has been extended much beyond its original meaning, so as, in general, to authorise the creditor to make his election when he thinks fit, instead of confining it to the period of payment, and allowing the rules of law to operate where no express declaration is then made... There are but two grounds on which these decisions could proceed; — either that the application was to be made to the oldest debt, or that it was to be made to the debt which it was most for the interest of the debtor to discharge.

Basically, this presumption of fact, as ancient as it may be, permits the debtor when making a payment, to appropriate to any debt he pleases, and the appropriation is binding on the creditor who must apply the payment accordingly, but if the debtor does not appropriate, the creditor may appropriate as he pleases.

Clayton’s Rule, it would seem, is quoted with approval in The Agricultural Insurance Company and Amelia Sargeant (1895), 26 SCR 29, at 36:

For what is that rule? It is laid down thus in City Discount Co v McLean by Blackburn J (LR 9 CP 700), and expressed by Lord Selborne in Re Sherry (25 Ch D 702), in somewhat similar language:

“It has been considered a general rule since Clayton’s case that when a debtor makes a payment he may appropriate it to any debt he pleases and the creditor must apply it accordingly. If the debtor does not appropriate it the creditor has a right to do so to any debt he pleases and that not only at the instant of payment but up to the very last moment as was decided in Mills v Fowkes (5 Bing NC 455).

See also: The Queen v Ogilvie (1898), 29 SCR 299: Thomson v Stikeman (1913), 29 OLR 146; affirmed 30 OLR 123 (CA); A R Williams Machinery Company Ltd v Moore & Murphy, [1926] SCR 692; Paradis & Sons, Limited v Silesse, 1931,3 MPR 565 (NB); Netting v Hubley (1894), 26 NSR 497 (CA).

Although a great amount of arithmetic and figures were quoted throughout argument, the figures can be readily determined from the agreed statement of facts as filed.

Counsel for the appellant concluded that if the Board observes the Clayton Rule this would result in the amount of $13,207 being included in income in the relevant period under reassessment.

Respondent’s Argument

Counsel for the respondent premised his argument on the basis that if the Crown is in a position that it cannot reassess in a statute-barred taxation year, the Board must take into consideration the fact that there may be a loss of tax revenue. He quoted two cases: Quebec North Shore Paper Company v The Queen, [1978] CTC 628; 78 DTC 6426, and BSC Footwear Ltd v Ridgway (Inspector of Taxes) (1972), AC 544.

In Queen North Shore Paper Company v The Queen, (Supra), a decision of the Federal Court, Trial Division, Dubé, J, at 635 and 6431 respectively, quotes Lord Reid in BSC Footwear Ltd v Ridgway (Inspector of Taxes), (Supra), at 555:

.. .It is a fundamental principle of income tax law that the same sum shall not be taxed twice. It may be that in the present case if the Crown are successful the appellants will escape from a considerable amount of tax which they will have to pay if they succeed. That does not appear to affect the minds of either party to this case. The Crown want a uniform system and the appellants will continue to present their accounts to their shareholders framed by their existing method because they think it gives a better picture of their results. But in my judgment this House ought to avoid if possible a decision which results in taxable profits escaping taxation.

The Crown counsel says that, of course, the 1974 taxation year is barred and that the shareholder’s loans that were not paid by the end of the company’s taxation year (June 30, 1975) would normally have been brought into income, but, in fact, they were not.

Counsel for the respondent further states:

It is a principle of law, I submit, in taxation matters, that taxable profits ought not to go untaxed where it is within the law to avoid that decision. [Italics mine.]

He contends that:

.. .section 20(1 )(j) is written in the context of the foreseen application of section 15(2) and not merely existing in isolation, I would submit, of section 15(2).

Findings

Crown counsel asks that I read the Income Tax Act in the spirit and intention of Parliament, that is, what they intended to do and the possible contra- diction between subsection 15(2) and paragraph 20(1)(j) as interpreted by the Crown. These sections, read in the context of the whole Income Tax Act, In my view, are not contradictory.

Subsection 15(2) of the Act reads as follows:

15. (2) Loan to shareholder. Where a corporation has in a taxation year made a loan to a shareholder, the amount thereof shall be included in computing the income of the shareholder for the year unless

(b) the loan was repaid within one year from the end of the taxation year of the corporation in which it was made and it is established, by subsequent events or otherwise, that the repayment was not made as a part of a series of loans and repayments, [Italics mine.].

Loans made by the company to the appellant in 1974, therefore, would be taken into his income for his 1974 taxation year.

Dealing with the Clayton Rule (a presumption of fact) once the creditor (in this case the Department of National Revenue) makes an appropriation, the debtor then loses his right to make a different appropriation but up until that incident happens, the debtor has the right to do so to the very end. If no appropriation is made by either the debtor or the creditor, the payment will be presumed to apply to the earliest and the most onerous debt.

Under section 20 of the Act, the taxpayers are entitled to make certain deductions, one of which is under paragraph 20(1)(j) which reads as follows:

20. (1) Notwithstanding paragraphs 18(1 )(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(j) Repayment of loan by shareholder.—such part of any loan repaid by the taxpayer in the year as was by subsection 15(2) required to be included in computing the income of the taxpayer for a previous year (except to the extent that the amount of the loan was deductible from the taxpayer’s income for the purpose of computing his taxable income for that previous year), if it is established by subsequent events or otherwise that the repayment was not made as part of a series of loans and repayments; [Italics mine.]

In argument counsel for the appellant stated that the appellant undertook repayment of the statute-barred balance and deducted by him under paragraph 20(1 )(j) but this was not followed through. Further, such undertaking is not mentioned in the agreed statement of facts. In essence, paragraph 20(1 )(j) permits as a deduction by a taxpayer, the repayment of a loan that was required to be included in his income pursuant to the provisions of subsection 15(2). Subsection 15(2) makes it mandatory that any amounts advanced to a taxpayer as loans shall be included in his income for his taxation year. Consequently, the statute-barred loans in this case were required to be included in Mr Sargent’s income, although he did not do so.

The only evidence I have before me is the agreed statement of facts. The appellant relies completely on the Clayton Rule — namely, the allocation by the debtor as to which loan repayments are made to his creditors, in this case Eddie Sargent Promotions Ltd. There was no evidence whatsoever with respect to allocations of repayments by the borrower to the lender, other than the fact that the appellant’s accountants requested the Minister of National Revenue to apply the repayments in 1977 to the appellant’s 1976 loans. According to the notice of appeal this request was made ex post facto the reassessments by the Minister of National Revenue who allocated the repayments as set out in the agreed statement of facts. Hence, the so-called Clayton Rule has no effect other than to support the right of the respondent to allocate the repayments as he did.

In drafting and agreeing to a statement of facts, counsel are thereby confined in evidence thereto as is this Board. Nevertheless, I am entitled to make certain observations and inferences from the agreed statement of facts. Clearly from 1974 forward there was a series of loans up to and including 1978. Neither party addressed this point in argument. Further, there was no evidence of a bona fide arrangement at the time the loans were made for repayment of same in a reasonable time although, in fairness to the appellant, he did make periodic repayments over the years as he was able.

If I am wrong in my conclusions heretofore reached, the appellant would fall under the provisions of subsection 15(2) of the Act which would give the Minister the right to assess as he did.

I agree with the submission of counsel for the Crown and on the basis of the agreed statement of facts, the respondent was correct in assessing the appellant as he did.

The appeal is dismissed.

Appeal dismissed.