Rouleau,
J.:—The
plaintiff
is
appealing
by
way
of
trial
de
novo
the
reassessment
of
his
income
tax
returns
for
the
1981,
1982
and
1983
taxation
years.
The
plaintiff,
who
together
with
his
mother
was
a
co-executor
of
the
estate
of
his
late
father,
obtained
an
interest-free
loan
of
$400,000
during
1981
from
the
residual
trust
created
by
the
estate
for
the
purposes
of
buying
himself
a
home.
This
loan
was
not
reflected
in
the
plaintiff's
returns
for
the
taxation
years
in
question,
for
in
his
view
or
that
of
his
advisers,
the
terms
of
the
loan
did
not
attract
any
income
tax
liability.
The
Minister
of
National
Revenue
("the
Minister")
reassessed
the
plaintiff's
returns
for
the
taxation
years
in
question
and
included
as
additional
income
a
specified
amount
of
interest
for
1981,
1982
and
1983
namely
$25,775,
$62,827
and
$41,972
respectively
calculated
pursuant
to
Regulation
4300(6)
of
the
Income
Tax
Regulations.
The
reasoning
employed
by
the
Minister
was
that
an
interest-free
loan
from
a
trust
conferred
a
benefit
on
the
plaintiff
within
the
meaning
of
section
105
of
the
Act
which
reads
as
follows:
105(1)
The
value
of
all
benefits
(other
than
a
distribution
or
payment
of
capital)
to
a
taxpayer
during
a
taxation
year
from
or
under
a
trust,
contract,
arrangement
or
power
of
appointment,
irrespective
of
when
made
or
created,
shall,
subject
to
subsection
(2),
be
included
in
computing
his
income
for
the
year.
105(2)
Such
part
of
an
amount
paid
by
a
trust
out
of
income
of
the
trust
for
the
upkeep,
maintenance
or
taxes
of
or
in
respect
of
property
that,
under
the
terms
of
the
trust
arrangement,
is
required
to
be
maintained
for
the
use
of
a
tenant
for
life
or
a
beneficiary
as
is
reasonable
in
the
circumstances
shall
be
included
in
computing
the
income
of
the
tenant
for
life
or
other
beneficiary
from
the
trust
for
the
taxation
year
for
which
it
was
paid.
The
plaintiff
and
his
mother,
as
co-executors
and
trustees
of
the
father's
estate,
jointly
consented
to
the
loan
and
the
plaintiff
executed
a
Release
and
Indemnity
Agreement
in
favour
of
his
mother
releasing
her
from
any
and
all
liability
which
might
arise
due
to
the
circumstances
under
which
the
loan
was
made.
Under
the
terms
of
the
will,
which
are
largely
not
relevant
to
this
action,
the
plaintiff's
mother
was
entitled
to
receive
an
annual
income
from
the
estate
for
life
from
a
spousal
trust,
and
the
plaintiff
and
his
sister
were
beneficiaries
of
the
trust
set
up
from
the
residue
of
the
estate.
The
plaintiff
and
his
sister
were
entitled
to
receive
a
distribution
of
one
half
of
the
residual
trust
when
the
plaintiff's
sister
attained
the
age
of
25
and
the
balance
of
the
estate
was
to
be
distributed
in
equal
shares
to
the
beneficiaries
when
the
plaintiff's
sister
reached
the
age
of
30.
When
Mr.
Cooper
received
the
interest-free
loan
from
the
estate
with
the
consent
of
his
mother
in
1981,
his
sister
had
not
yet
reached
the
age
of
majority
and
hence
did
not
have
the
capacity
to
consent
to
the
loan.
The
loan
was
repayable
on
demand
and
secured
by
a
mortgage
on
the
home
purchased
by
the
plaintiff
with
the
funds.
The
Minister
took
the
position
that
had
the
plaintiff
attempted
to
arrange
a
comparable
loan
on
the
money
market
during
the
taxation
years
in
question,
he
would
have
been
required
to
pay
considerable
interest
on
the
principal.
Because
the
plaintiff
received
the
loan
interest
free,
he
had
not
incurred
any
interest
charges,
and
according
to
the
Department
of
National
Revenue
("the
Department"),
the
saving
of
this
expense
constituted
a
taxable
benefit
in
the
hands
of
the
plaintiff.
The
actual
quantification
of
the
benefit
to
the
taxpayer
was
not
based
on
current
market
value,
but
rather
was
made
pursuant
to
the
method
set
out
in
Regulation
4300(6)
of
the
Income
Tax
Regulations.
As
this
is
one
of
the
two
major
issues
in
dispute
I
have
reproduced
in
full
the
paragraphs
in
the
agreed
statement
of
facts
dealing
with
the
means
by
which
the
Minister
arrived
at
the
quantum
of
the
value
of
benefit
to
the
plaintiff,
as
well
as
the
paragraphs
setting
out
the
alternative
means
of
calculation
proposed
by
the
plaintiff:
7.
In
so
reassessing
the
plaintiff,
the
Minister
of
National
Revenue
calculated
the
value
of
the
benefits
to
the
plaintiff
by
reference
to
the
rates
of
interest
prescribed
in
subsection
4300(6)
of
the
Income
Tax
Regulations
as
follows:
8.
The
interest
rates
prescribed
in
Regulation
4300(6)
of
the
Income
Tax
Regulations
are
based
on
the
average
yields
at
the
weekly
competitive
tender,
for
Government
of
Canada
Treasury
Bills
with
a
maturity
of
approximately
3
months
after
their
issue
date.
These
Treasury
Bill
rates
result
from
competitive
bids
submitted
to
the
Bank
of
Canada
by
certain
financial
intermediaries
such
as
chartered
banks
and
other
banks
subject
to
the
Bank
Act,
financial
institutions
subject
to
the
Quebec
Savings
Bank
Act,
and
investment
dealers
eligible
to
act
as
primary
F.C.T.D.
|
Interest
|
|
Loan
|
|
Days/Year
|
|
Rate
|
Benefit
|
|
1981
|
$400,000
|
X
|
196/365
|
X
|
12%
|
$25,775.34
|
|
1982
|
$400,000
|
X
|
90/365
|
x
|
16%
|
$15,780.82
|
$400,000
|
X
|
91/365
|
x
|
15%
|
$14,958.90
|
$400,000
|
X
|
183/365
|
X
|
16%
|
$32,087.67
|
|
$62,827.39
|
|
1983
|
$400,000
|
X
|
90/365
|
X
|
12%
|
$11,835.62
|
$400,000
|
X
|
275/365
|
X
|
10%
|
$30,136.99
|
|
$41,972.61
|
distributors
of
new
Government
of
Canada
issues.
All
other
short
term
market
interest
rates
in
Canada
are
fundamentally
influenced
by
Government
of
Canada
Treasury
Bill
rates
due
to
their
very
high
quality
and
liquidity.
9,
Using
the
lowest
one
year
conventional
mortgage
rates
which
were
available
from
the
five
largest
chartered
banks
in
Canada,
the
value
of
the
benefits
to
the
Plaintiff
would
be
calculated
as
follows:
Interest
Loan
Days/Year
Rate
Benefit
Loan
Days/
Year
Rate
1981
$400,000
196/365
15.25%
$32,756.16
$400,000
X
196/365
X
15.25%
1982
$400,000
365/365
xX
12.5%
$50,000.00
$400,000
X
365/365
X
12.5%
1983
$400,000
365/365
10.25%
$41,000.00
$400,000
X
365/365
X
10.25%
The
plaintiff
appealed
the
Minister's
reassessments
to
the
Tax
Court
,
reassessments
to
the
Tax
Court
of
Canada.
The
appeal
was
dismissed
in
a
decision
rendered
by
Associate
Chief
Judge
Christie
on
February
24,
1987
in
which
the
reassessments
of
the
Minister
were
confirmed.
The
plaintiff
seeks
by
this
action
in
the
Federal
Court
to
have
the
previous
decision
set
aside
and
to
have
the
three
assessments
of
the
plaintiff's
income
made
with
respect
to
the
taxation
years
1981,
1982,
1983
varied,
or
referred
back
to
the
Minister
for
reconsideration
and
reassessment.
In
the
alternative,
the
plaintiff
seeks
to
have
the
three
assessments
decreased
based
on
the
alternative
formula
of
calculation
proposed
by
him.
The
plaintiff's
position
is
that
the
interest-free
loan
made
to
him
from
the
trust
did
not
constitute
a
taxable
benefit;
and
if
it
did,
the
Minister
could
not
quantify
the
value
of
the
particular
benefit
for
taxation
purposes
by
applying
the
formulae
contained
in
Regulation
4300(6).
The
Minister
for
his
part
defends
both
the
positions
taken
by
the
Department
in
issuing
the
reassessments.
The
Tax
Court
of
Canada
held
that
the
value
of
the
benefit
received
by
the
plaintiff
in
enjoying
an
interest-free
loan
over
three
years
was
properly
included
into
his
income
under
section
105
of
the
Act.
Furthermore,
while
acknowledging
that
section
80.4
and
Regulation
4300(6)
of
the
Act
do
not
expressly
apply
to
the
plaintiff's
situation,
Judge
Christie
found
that
these
sections
provide
an
appropriate
measure
of
the
value
of
the
benefit
received
by
the
plaintiff
and
were
hence
properly
employed
by
the
Department
in
reassessing
the
plaintiffs
taxable
income.
Section
105
of
the
Act
is
not
of
recent
origin
and
it
Is
broadly
derived
f
\
several
provisions
of
the
Income
War
Tax
Act.
By
1952,
the
then
section
65
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
incorporated
all
of
the
terms
relevant
to
this
case
which
are
contained
in
the
present
section
105.
A
thorough
search
by
counsel
and
by
me
did
not
reveal
a
single
jurisprudential
authority
addressed
at
the
interpretation
of
the
term
"benefit"
in
section
105,
let
alone
any
authority
relating
to
the
treatment
of
interest-free
loans
disbursed
from
a
trust.
As
counsel
acknowledge
that
there
is
no
relevant
jurisprudence
relating
specifically
to
subsection
105(1)
of
the
Act,
their
argument
was
necessarily
based
on
a
reading
of
the
words
of
the
section
alone
as
well
as
on
analogy
to
cases
relating
to
other
sections
of
the
Act.
Counsel
for
the
plaintiff
for
his
part
also
argued
that
his
client’s
case
does
not
rest
on
a
simple
interpretation
of
section
105
but
that
some
examination
of
the
history
and
the
underlying
policy
implications
of
the
Act
are
necessary
in
order
to
give
full
effect
to
its
There
is
no
doubt
that
in
some
sense,
the
loan
made
to
the
plaintiff
constituted
a
substantial
benefit
to
him,
as
anyone
who
has
attempted
to
negotiate
an
interest-free
loan
may
attest.
In
addition,
the
loan
was
made
from
the
,
is
required
to
trigger
the
operation
of
subsection
105(1).
I
am
prepared
to
accept
however
that
simply
because
the
taxpayer
had
entered
into
an
arrangement
which
might
be
considered
to
be
a
"benefit
to
the
man
in
the
street,
it
does
not
inevitably
follow
that
the
taxpayer
has
received
a
taxable
benefit,
within
the
meaning
of
the
Income
Tax
Act.
The
plaintiff
argued
before
me
that
subsection
105(1)
of
the
Act
and
its
various
predecessors
have
never
been
used
to
impose
income
tax
on
the
value
of
an
interest-free
or
low
interest
loan
from
a
trust.
He
also
argued
that
interest-free
and
low
interest
loans
made
to
taxpayers
in
other
situations
such
as
to
shareholders
and
employees
have
historically
not
attracted
liability
for
income
tax
in
the
absence
of
specific
statutory
inclusion.
His
conclusion
hence
is
that
as
interest-free
and
low
interest
loans
from
a
trust
are
not
specifically
included
in
subsection
105(1)
or
elsewhere
in
the
Act,
they
do
not
constitute
a
taxable
benefit
within
the
meaning
of
this
section.
In
order
to
do
justice
to
the
plaintiff's
submissions,
it
is
necessary
to
examine
each
of
the
avenues
of
approach
to
which
he
made
reference.
One
of
the
cases
thoroughly
discussed
before
me
by
the
parties
and
also
addressed
at
some
length
in
the
decision
of
the
Tax
Court
was
the
case
of
^Nn'in'rh
,
^
-
'’
C.T.C.
35
(referred
to
as
Malkin
(No.
2)).
The
taxation
of
benefits
conferred
from
a
trust
was
considered
in
this
case,
a
decision
of
the
Exchequer
Court
of
Canada.
At
issue
were
paragraph
3(1)(e)
and
section
11
of
the
Income
War
Tax
Act
which
are
the
precursor
sections
of
section
105
of
the
Income
Tax
Act.
I
do
not
intend
to
review
this
case
in
any
great
detail.
A
perusal
of
the
decision
reveals
that
it
is
of
very
little
assistance
as
it
turns
very
much
on
its
specific
facts
and
on
an
interpretation
of
the
sections
under
consideration,
There
is
not
sufficient
correlation
between
these
sections
and
the
present
subsection
105(1)
to
warrant
a
closer
review.
There
is
however
one
general
fL
?
1
?
J
arises
out
of
the
decision
which
is
most
instructive,
namely
that
although
a
taxpayer
may
be
in
receipt
of
what
one
could
call
a
benefit
in
general
terms,
it
does
not
necessarily
follow
that
this
constitutes
a
taxable
benefit
within
the
purview
of
the
Act.
That
finding
can
only
follow
if
a
careful
review
of
the
taxing
provisions
reveals
that
it
was
intended
that
the
receipt
of
such
a
benefit
attract
liability
for
income
tax.
Without
the
guidance
of
any
specific
authority
on
the
status
of
interest-
free
loans
from
trusts,
in
order
to
get
an
historical
perspective
on
the
question,
the
plaintiff
argued
that
it
is
necessary
to
examine
the
treatment
attributed
in
the
past
to
such
loans
in
other
sections
of
the
Act.
The
parties
discussed
at
some
length
the
case
of
loans
made
to
shareholders
and
employees
at
zero
or
preferential
rates.
It
was
the
plaintiff's
contention
that
he
could
establish
that
before
1977,
there
was
a
practice
on
the
part
of
the
Minister
of
not
including
the
value
of
interest-free
or
low
interest
loans
into
the
income
of
employees
and
shareholders
based
on
sections
6
and
15
of
the
Income
Tax
Act
alone
and
that
this
practice
was
consistent
with
the
jurisprudence
on
the
subject.
The
plaintiff
further
contended
that
after
1977
a
specific
legislative
enactment
(section
80.4)
was
implemented
in
order
to
include
the
value
of
interest-free
and
low
interest
loans
into
the
income
of
shareholders
and
employees
and
that
hence
one
may
conclude
that
because
section
80.4
was
not
drafted
to
include
loans
made
from
trusts,
section
105
was
unaffected
and
that
these
loans
must
be
given
the
same
treatment
as
a
pre-1977
loan
to
a
shareholder
or
an
employee.
There
are
some
overall
comments
that
can
be
made
about
the
tax
treatment
accorded
to
these
“benefits”.
The
Income
Tax
Act
has
long
contained
provisions
relating
to
shareholders
and
employees
requiring
that
the
value
of
any
benefit
conferred
on
them
by
their
employer
or
the
corporation
in
which
they
hold
shares
be
included
into
income.
The
relevant
sections,
namely
6
and
15
now
read
as
follows:
Inclusions
6(1)
Amounts
to
be
included
as
income
from
office
or
employment—There
shall
be
included
in
computing
the
income
of
a
taxpayer
for
a
taxation
year
as
income
from
an
office
or
employment
such
of
the
following
amounts
as
are
applicable:
(a)
value
of
benefits—the
value
of
board,
lodging
and
other
benefits
of
any
kind
whatever
received
or
enjoyed
by
him
in
the
year
in
respect
of,
or
by
virtue
of
an
office
or
employment.
.
.
[Emphasis
added]
15(1)
Appropriation
of
property
to
shareholder—
Where
in
a
taxation
year
(a)
a
payment
has
been
made
by
a
corporation
to
a
shareholder
otherwise
than
pursuant
to
a
bona
fide
business
transaction,
(b)
funds
or
property
of
a
corporation
have
been
appropriated
in
any
manner
whatever
to,
or
for
the
benefit
of,
a
shareholder,
or
(c)
a
benefit
or
advantage
has
been
conferred
on
a
shareholder
by
a
corporation,
otherwise
than
(d)
on
the
reduction
of
capital,
the
redemption,
cancellation
or
acquisition
by
the
corporation
of
the
shares
of
its
capital
stock
or
the
winding
up,
discontinuance
or
reorganization
of
its
business,
or
otherwise
by
way
of
a
transaction
to
which
section
88
applies,
(e)
by
the
payment
of
the
dividend
or
a
stock
dividend,
(f)
by
conferring
on
all
holders
of
common
shares
of
the
capital
stock
of
the
corporation
a
right
to
buy
additional
common
shares
thereof,
or
(g)
by
an
action
described
in
paragraph
84(1)(c.1)
or
(c.2),
the
amount
or
value
thereof
shall,
except
to
the
extent
that
it
is
deemed
to
be
a
dividend
by
section
84,
be
included
in
computing
the
income
of
a
shareholder
for
the
year.
[Emphasis
added]
These
sections
have
been
amended
and
amplified
from
time
to
time
but
subsection
15(1)
is
derived
from
subsection
8(1)
of
the
1948
Income
Tax
Act,
as
amended
by
1950,
c.
40,
s.
2;
paragraph
6(1)(a)
is
derived
from
paragraph
5(1)(a)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
and
from
that
time,
they
have
not
been
amended
in
any
respect
which
is
material
to
this
action.
Inasmuch
as
these
sections
purport
to
include
into
income
the
value
of
benefits
received
by
the
taxpayers
described
in
these
sections,
these
sections
could
be
seen
as
analogous
to
section
105.
Before
1977,
section
6
of
the
Act
provided
that
the
value
of
"benefits
of
any
kind
whatever"
were
to
be
included
into
the
taxpayer's
income
from
his
office
or
employment.
Up
until
April
18,
1977,
despite
the
existence
of
this
section
the
taxpayer
could
receive
a
low
interest
loan
from
his
employer
without
attracting
tax
liability
in
the
eyes
of
the
Minister.
Interpretation
Bulletin
IT-71
(dated
October
3,
1972)
was
issued
by
the
Department
to
assist
in
the
interpretation
of
this
section
and
it
provided:
Where
an
employer
lends
money
to
an
employee
without
interest,
or
at
an
unusually
low
rate
of
interest,
he
is
not
regarded
as
conferring
a
taxable
benefit
on
the
employee
within
the
meaning
of
section
6.
In
addition
to
paragraph
15(1)(c)
above
dealing
with
benefits
received
by
shareholders,
the
taxation
treatment
of
loans
made
to
shareholders
has
a
long
history.
Subsection
15(2)
of
the
Act,
with
its
origins
in
the
Income
War
Tax
Act,
and
formerly
subsection
8(2)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148,
provides
that
under
certain
circumstances,
the
entire
amount
of
a
loan
made
to
a
shareholder
will
be
deemed
to
be
included
into
the
taxpayer's
income.
An
examination
of
subsection
15(2)
and
its
predecessors
reveals
that
it
is
aimed
at
the
case
of
the
loan
which
does
not
make
provision
for
repayment
and
would
really
constitute
a
tax
free
dividend
from
the
corporation.
Subsection
15(2)
does
not
speak
of
"benefits"
as
does
paragraph
15(1)(c)
but
is
addressed
specifically
to
loans
made
to
shareholders.
There
are
several
loans
which
are
excluded
from
the
ambit
of
subsection
15(2)
namely
those
that
are
genuine
transactions
and
where
proper
provision
has
been
made
for
their
repayment.
A
predecessor
of
the
section
(1980-81-82-83,
c.
48,
subsection
7(2)
applicable
to
1979
taxation
year
and
following)
also
enumerated
several
categories
of
acceptable
loans
which
included
those
made
to
an
officer
or
servant
of
the
corporation
to
purchase
a
house
or
an
automobile.
There
would
not
appear
to
be
any
reason
why
the
section
would
accord
different
treatment
to
loans
offered
at
less
than
market
interest
rates.
I
find
it
very
interesting
to
note
that
subsection
15(2)
of
the
Act
and
its
predecessor
existed
independently
of
paragraph
15(1)(c).
The
treatment
of
loans
under
subsection
15(2),
is
not
worded
as
an
exception
to
any
general
rule
enunciated
with
respect
to
the
taxability
of
"benefits"
under
paragraph
15(1)(c).
As
to
the
interaction
of
the
two
sections,
there
has
been
no
instance
drawn
to
my
attention
where
a
low
interest
loan
was
excluded
under
the
provisions
of
subsection
15(2),
(e.g.
where
it
was
a
bona
fide
loan
to
an
officer
of
the
company
to
purchase
a
house
with
adequate
provision
for
repayment),
and
where
the
differential
in
interest
below
market
rate
was
nevertheless
assessed
as
a
taxable
benefit
under
the
provisions
of
paragraph
15(1)(c).
Before
1977,
most
of
the
literature
relating
to
this
area
of
the
law
pointed
out
the
economic
benefits
engendered
by
the
provision
of
loans
to
employees
and
shareholders.
Loans
were
often
offered
to
employees
to
assist
in
their
relocation
to
a
remote
area
in
Canada;
loans
were
also
offered
as
an
incentive
to
allow
ranking
officers
of
the
company
to
acquire
shares,
which
according
to
one
author
at
least
is
a
means
of
attracting
highly
qualified
personnel
to
Canadian
industry.
Despite
the
manifold
benefits
of
this
system,
several
moves
were
made
in
1977
to
radically
change
this
policy,
although
the
amendments
were
not
ultimately
made
effective
until
the
1979
taxation
year.
The
first
indication
of
change
came
when
Revenue
Canada
issued
an
amended
Interpretation
Bulletin
to
replace
IT-71,
which
was
previously
dis-
cussed.
The
amended
Bulletin,
released
on
April
18,
1977
under
number
IT-71R
simply
deleted
the
provision
relating
to
interest-free
loans
to
employees.
Apparently
the
Department
intended
to
reverse
its
policy
on
the
issue
and
henceforth
treat
interest-free
and
low
interest
loans
as
taxable
benefits
included
into
income
from
office
or
employment
pursuant
to
paragraph
6(1)(a)
of
the
Act.
On
May
11,
1977
Revenue
Canada
announced
that
the
standard
against
which
the
value
of
the
benefit
conferred
by
such
loans
on
a
taxpayer
would
be
eight
per
cent.
The
following
description
of
what
occurred
thereafter
is
taken
from
the
1977
report
of
the
Tax
Foundation
of
Canada
entitled,
Tax
Conference,
1977
Tax
Changes—Implications
for
Individuals
and
Businesses
Haines,
R.A.,
Hogg,
R.D.,
Carr,
M.,
and
Harris,
E.C.
at
page
375:
In
response
[to
the
Revenue
Canada
announcement],
a
number
of
briefs
were
submitted
to
RCT
and
the
Department
of
Finance.
The
Compensation
Research
Centre
of
the
Conference
Board
in
Canada
conducted
a
survey
of
employee
loan
practices
in
Canada.
A
sample
size
of
294
Canadian
companies
revealed
that
employee
relocation
is
a
widespread
practice
in
Canada.
The
responding
firms
reported
16,000
relocations
in
1976.
Of
the
95%
of
the
responding
firms
that
relocated
employees,
53%
offered
low
interest
or
interest-free
loans
to
assist
transferred
employees.
That
the
Government
of
the
day
was
aware
of
the
need
to
balance
the
legitimate
aims
of
economic
assistance
for
relocation
with
what
was
perceived
as
a
potential
area
of
abuse
of
the
income
tax
system
is
best
illustrated
by
the
text
of
the
notice
of
ways
and
means
motion
to
amend
the
Income
Tax
Act
dated
October
21,1977.
It
states
in
part:
Employee
and
Shareholder
Loans
The
longstanding
administrative
tax
practice
has
been
to
ignore
the
benefit
on
low
interest
and
interest-free
loans
extended
by
companies
to
employees
and
shareholders.
However,
the
absence
of
tax
has
resulted
in
an
increasing
number
of
such
loans
being
used
as
a
means
of
providing
a
tax-free
form
of
compensation.
To
curtail
abuse,
the
benefit
of
loans
made
at
favourable
interest
rates
to
employees
and
shareholders
will
be
taxable
(Resolutions
9
and
29).
To
encourage
labour
mobility
in
Canada,
and
to
recognize
the
growing
need
for
some
incentive
to
encourage
employees
to
move
to
remote
areas,
relocation
loans
of
up
to
$50,000
made
by
an
employer
to
facilitate
the
purchase
of
a
home
by
an
employee
will
be
excluded.
In
addition,
loans
by
a
corporation
to
enable
an
employee
to
acquire
its
shares
will
be
excluded.
This
recognizes
that
such
loans
do
not
result
in
any
tax
avoidance
because
in
any
event,
interest
that
an
employee
pays
would
be
deductible.
Such
loans
help
develop
and
retain
executive
business
executive
talent
in
Canada
.
.
.
Resolution
9:
Shareholder
loans
That
for
loans
made
after
March
31,
1977,
(other
than
loans
to
a
corporation
resident
in
Canada
or
to
a
related
foreign
affiliate)
the
rules
in
subsection
15(2)
of
the
Act
requiring
a
loan
to
a
shareholder
of
a
corporation
to
be
included
into
the
shareholder's
income
be
extended
to
cover
loans
made
by
the
shareholder,
or
to
a
person
with
whom
he
does
not
deal
at
arms
length,
by
the
corporation,
a
related
corporation,
a
related
corporation
or
a
partnership.
Resolution
29:
Employee
and
Shareholder
Loans
That
for
the
1979
and
subsequent
taxation
years,
the
Act
be
amended
to
require
an
employee,
shareholder
or
related
person
to
include
in
his
income
the
amount
by
which:
a)
interest
for
the
year
computed
at
a
prescribed
rate
on
loans
from
an
employer
or
a
corporation
(other
than
loans
to
purhase
shares
of
an
employer
corporation
or
house-purchase
loans
to
a
maximum
of
$50,000
on
the
relocation
of
an
employee)
exceeds
b)
the
aggregate
of
$500
and
the
interest
actually
paid
by
him
for
the
years
on
such
loans.
The
concrete
expression
of
this
statement
of
intention
was
the
then
Bill
C-11
which
included,
with
some
minor
amendments,
section
80.4
of
the
Income
Tax
Act,
infra,
which
is
really
the
linchpin
of
the
plaintiff’s
argument.
Section
80.4
as
it
then
read
gave
effect
to
Resolution
29.
It
has
undergone
numerous
amendments
since
its
introduction
in
the
1979
taxation
year
as
1977-1978,
c.
1,
s.
35
when
it
read
as
follows:
LOANS
TO
OFFICER,
EMPLOYEES
AND
SHAREHOLDERS
80.4(1)
Where
an
individual
(a)
is
an
officer
or
employee
or
is
related
to
an
officer
or
employee
and
has
received
a
loan
by
virtue
of
his
office
or
employment
or
the
office
or
employment
of
a
person
to
whom
he
is
related,
or
(b)
is
a
shareholder
of
a
particular
corporation,
or
is
related
to
a
shareholder
of
a
particular
corporation
and
has
received
a
loan
(other
than
an
excluded
loan)
from
the
particular
corporation,
from
a
corporation
related
to
the
particular
corporation
or
from
a
partnership
of
which
the
particular
corporation
or
a
corporation
related
to
the
particular
corporation
is
a
member,
he
shall
be
deemed
to
have
received
a
benefit
in
a
taxation
year
equal
to
the
amount,
if
any,
by
which
the
aggregate
of
(c)
the
amount,
if
any,
by
which
interest
in
respect
of
the
taxation
year
on
all
housing
loans
received
by
him,
computed
at
a
prescribed
rate
per
annum,
exceeds
the
aggregate
of
(i)
interest
in
respect
of
the
taxation
year
paid
by
him
before
the
end
of
the
immediately
following
taxation
year
on
all
such
loans,
and
(ii)
the
product
obtained
when
the
prescribed
rate
per
annum
is
multiplied
by
(A)
in
the
case
of
an
individual
whose
spouse
with
whom
he
resided
in
the
taxation
year
had
a
housing
loan,
an
amount
(in
this
subsection
referred
to
as
his
"agreed
amount”)
equal
to
such
portion
of
$50,000
as
has,
by
agreement
between
the
individual
and
his
spouse,
been
allocated
to
him
and
that,
when
added
to
the
agreed
amount
of
his
spouse,
does
not
exceed
$50,000,
and
(B)
in
any
other
case,
$50,000,
and
(d)
the
amount,
if
any,
by
which
interest
in
respect
of
the
taxation
year
on
all
loans
described
in
paragraphs
(a)
and
(b)
(other
than
housing
loans
and
excluded
loans)
received
by
him,
computed
at
a
prescribed
rate
per
annum,
exceeds
the
interest
in
respect
of
the
taxation
year
paid
by
him
before
the
end
of
the
immediately
followng
taxation
year
on
all
such
loans,
exceeds
(e)
in
the
case
of
the
individual
referred
to
in
clause
(c)(ii)(A),
that
proportion
of
$500
that
his
agreed
amount
is
of
$50,000,
and
(f)
in
any
other
case,
$500.
The
“excluded
loans”
and
"housing
loans"
referred
to
in
this
section
were
loans
which
enabled
officers
of
corporations
to
purchase
shares
of
the
company
and
financial
assistance
of
up
to
$50,000
given
to
employees
to
permit
the
purchase
of
a
house
on
relocation
anywhere
in
Canada.
Section
80.4
has
been
amended
in
some
material
respects
since
its
enactment
in
1977-1978
(most
notably
in
the
gradual
phasing
out
of
the
$50,000
housing
loan),
but
its
purpose
has
remained
basically
unchanged.
This
purpose
is
evidently
to
deem
a
taxable
benefit
in
the
case
of
interest-
free
and
low
interest
loans
made
to
a
shareholder
or
employee.
I
do
not
agree
with
His
Honour
Judge
Christie
that
the
amendments
brought
about
by
section
80.4
only
serve
to
quantify
a
benefit
that
was
already
caught
for
the
purposes
of
income
tax
liability
by
sections
6
and
15
discussed
above.
In
my
view
the
wording
of
the
section
itself
as
well
as
the
amendments
to
sections
6
and
15
which
serve
to
include
this
deemed
benefit
into
their
respective
calculations
allows
for
no
other
interpretation.
To
accept
that
section
80.4
only
describes
the
measure
of
a
benefit
which
pre-existed
in
sections
6
and
15
would
mean
that
these
sections
could
presumably
encompass
low
interest
and
interest-free
loans
which
are
specifically
excluded
from
section
80.4.
An
example
of
this
would
be
loans
made
to
resident
Canadian
corporate
shareholders.
Apart
from
the
inefficiency
of
taxation
by
implication,
this
would
also
mean
that
there
was
no
legislative
meter
to
quantify
the
benefit
to
the
shareholders
in
this
case,
as
no
prescribed
measure
of
valuation
would
be
available
such
as
is
referred
to
in
section
80.4.
The
interpretation
given
to
the
section
by
the
Tax
Court
thus
creates
uncertainty
and
unnecessary
imprecision.
Based
simply
on
an
examination
of
the
wording
of
the
sections
and
more
particularly,
their
histories,
it
would
appear
that
before
the
enactment
of
section
80.4,
interest-free
and
low
interest
loans
did
not
attract
tax
liability
despite
the
existence
of
sections
6
and
15
which
specifically
provide
that
the
value
of
any
benefit
conferred
on
shareholders
and
employees
was
required
to
be
included
into
income.
The
record
does
reveal
that
as
far
as
the
Department
of
National
Revenue
was
concerned,
this
lack
of
tax
liability
was
a
result
of
the
policy
of
the
Department
and
not
from
the
wording
of
the
Act.
By
simply
amending
Interpretation
Bulletin
IT-71
the
Department
made
an
attempt
to
tax
interest-free
and
low
interest
loans
to
shareholders
and
employees
and
issued
a
rate
of
interest
applicable
to
the
value
of
the
benefit.
Nevertheless,
this
unilateral
action
was
followed
by
specific
legislative
action
which
took
effect
over
a
year
and
a
half
following
the
Department's
amendment
of
Interpretation
Bulletin
IT-71.
In
my
view
there
are
two
possible
analyses
which
can
be
made
of
this
situation.
The
first
is
that
the
wording
of
paragraphs
15(1)(c)
and
6(1)(a)
always
had
the
effect
of
including
interest-free
and
low
interest
loans
into
income
but
that
for
policy
reasons,
the
Department
decided
not
to
take
action
on
this
tax
liability
until
1977
when
a
change
of
policy
occurred
prompted
by
the
abuses
of
the
system
by
shareholders
and
employees.
The
second
possible
interpretation
is
that
interest-free
and
low
interest
loans
were
never
intended
to
attract
tax
liability
under
paragraphs
15(1)(c)
and
6(1)(a)
but
that
in
1977
it
was
decided
that
under
certain
circumstances,
abuses
of
the
system
would
have
to
be
corrected
by
creating
income
tax
liability
subject
to
certain
exceptions
where
the
taxpayer
was
acting
bona
fide.
Therefore,
legislative
action
was
taken
to
specifically
delineate
the
circumstances
under
which
interest-free
and
low
interest
loans
should
attract
tax
liability
to
shareholders
and
employees
and
to
prescribe
a
means
whereby
the
value
of
the
benefit
to
the
taxpayer
could
be
quantified.
Intuitively,
the
second
option
is
more
attractive.
It
promotes
greater
certainty
for
tax
liability
and
does
not
create
any
of
the
problems
referred
to
above,
namely
with
respect
to
the
necessary
implication
that
section
80.4
would
not
be
exhaustive
in
its
treatment
of
interest-free
loans
to
shareholders
and
employees
and
that
reference
must
still
be
had
to
paragraphs
15(1)(c)
and
6(1)(a)
to
determine
whether
or
not
there
is
a
benefit
to
the
taxpayer
in
the
circumstances.
In
order
to
round
out
the
examination
of
the
question
of
loans
to
employees
and
shareholders,
it
is
helpful
to
examine
the
cases
which
have
been
decided
under
paragraphs
6(1)(a)
and
15(1)(c)
and
their
predecessors
prior
to
the
1977
amendments.
These
cases
were
addressed
at
some
length
in
argument
before
me.
The
plaintiff
suggests
that
the
weight
of
previous
authority
shows
that
the
granting
of
an
interest-free
or
low
interest
loan
to
employees
and
shareholders
was
not
considered
to
be
a
benefit
to
the
taxpayer
prior
to
the
enactment
of
section
80.4
of
the
Act.
The
first
of
the
decisions
under
discussion
emanated
from
the
Income
Tax
Appeal
Board
in
1956
under
the
style
No.
359
v.
M.N.R.,
Tax
A.B.C.
24;
56
D.T.C.
475.
In
that
case,
the
Board
engaged
in
the
construction
of
several
provisions
of
the
Income
Tax
Act,
c.
148,
R.S.C.
1952,
namely
paragraph
8(1)(c)
which
is
the
forerunner
of
paragraph
15(1)(c)
as
well
as
a
predecessor
paragraph
of
6(1)(a),
namely
paragraph
5(1)(a).
The
taxpayer
in
question,
both
a
shareholder
and
an
employee
of
the
lender
corporation,
had
received
an
interest-free
loan
from
the
corporation
to
buy
out
the
shares
of
a
retiring
majority
shareholder;
the
question
before
the
Board
was
the
determination
of
whether
such
a
loan
was
caught
by
the
provisions
of
paragraph
8(1)(c)
(the
predecessor
of
paragraph
15(1)(c)
discussed
above).
Board
member
Fisher
stated
conclusively
at
page
27
(D.T.C.
477)
of
his
decision:
After
consideration,
I
am
of
the
opinion
that
neither
the
provisions
of
subsection
(1)
of
section
8
nor
the
provisions
of
section
5(a)
of
the
Income
Tax
Act
are
applicable
in
the
circumstances
disclosed
by
this
appeal.
In
my
opinion,
the
provisions
of
subsection
(1)
of
section
8
are
not
applicable,
nor
were
they
intended
to
be
applicable,
in
a
situation
such
as
we
find
here,
and
I
am
of
the
opinion
that
no
benefit
was
conferred
on
the
appellant
by
the
Blank
Company
in
the
said
years
1952
and
1953.
Apart
from
specific
legislation
in
a
taxing
statute,
I
know
of
no
law
which
imposes
an
obligation
upon
a
lender
to
demand
the
payment
of
interest
in
connection
with
a
loan
granted
by
the
lender
to
a
borrower,
and
if
the
lender
does
not
require
the
payment
of
interest,
the
borrower
is
under
no
obligation
to
pay
interest.
Judge
Christie,
in
reviewing
No.
359
noted
that
he
found
this
reasoning,
to
the
extent
that
it
reflects
Mr.
Fisher’s
view
that
a
low
interest
loan
does
not
confer
a
benefit
on
the
taxpayer,
to
be
"a
non
sequitur".
Judge
Christie
was
of
the
view
that
the
fact
that
there
is
no
legal
obligation
on
a
lender
to
charge
interest
does
not
affect
the
question
of
a
benefit
arising
out
of
an
interest-
free
or
low
interest
loan.
With
respect,
I
find
Mr.
Fisher’s
approach
to
be
a
logical
first
step
towards
the
defining
of
where
a
benefit
has
been
conferred.
As
was
apparent
from
the
decision
of
Mr.
Justice
Cattanach,
in
the
Pillsbury
Holdings
case,
infra,
the
definition
of
the
benefit
which
attracts
tax
liability
under
the
Act
must
have
some
limits.
For
example,
the
mere
fact
that
an
employee
purchases
goods
from
his
employer
does
not
create
a
benefit.
The
mere
fact
that
the
employee
who
purchases
a
significant
amount
of
goods
may
get
a
discount
rate
which
is
also
offered
to
other
bulk
purchasers,
is
also
probably
not
a
benefit
caught
by
the
section.
The
problem
that
Mr.
Fisher
was
attempting
to
address
was
simply
that
not
all
benefits
necessarily
constitute
a
taxable
benefit
under
the
Act.
Judge
Christie
on
the
other
hand
was
not
prepared
to
accept
that
because
there
is
no
obligation
on
a
lender
to
charge
interest
for
a
loan
that
this
constitutes
a
universal
rule
that
is
applicable
to
all
benefit
situations;
under
certain
circumstances,
it
is
evident
that
even
without
the
waiving
of
a
legal
right
it
is
possible
that
a
benefit
has
been
conferred.
There
is
for
example,
no
obligation
on
a
vendor
to
charge
any
purchase
price
for
goods,
but
clearly
the
dispensing
of
free
goods
or
services
to
employees
or
shareholders
from
a
company
dealing
in
such
goods
or
services
would
under
most
circumstances
be
caught
under
the
relevant
“benefit”
taxing
provisions.
It
is
interesting
to
note
that
the
relationship
between
8(1)(c)
and
8(2)
(compare
with
the
present
15(1
)(c)
and
15(2)
referred
to
above)
was
obviously
raised
in
argument
in
No.
359,
but
not
specifically
addressed,
probably
in
part
because
subsection
8(2)
was
then
only
to
take
effect
in
the
taxation
year
following
the
year
in
dispute.
Mr.
Fisher
stated
at
page
27(D.T.C.
477)
of
the
decision:
It
was
argued
on
behalf
of
the
appellant
that,
since
there
was
a
specific
provision
in
the
legislation
dealing
with
the
taxation
of
loans
by
a
corporation
to
its
shareholders,
inclusio
unius
est
exclusif)
alterius
should
apply.
Unfortunately,
Mr.
Fisher
did
not
go
on
to
examine
this
argument
in
any
detail
but
in
my
view,
it
appears
that
his
decision
was
influenced
in
part
by
this
consideration.
There
were
several
other
authorities
cited
to
me
by
the
plaintiff
which
purported
to
follow
No.
359,
supra.
On
closer
examination,
I
was
not
satisfied
that
any
of
these
cases
in
fact
rested
solely
on
the
ratio
of
No.
359,
but
they
did
not
overturn
the
principle
enunciated
therein.
The
decision
of
the
Federal
Court,
Trial
Division
in
the
1964
Pillsbury
case
for
example,
(M.N.R.
v.
Pillsbury
Holdings
Limited,
[1964]
C.T.C.
294;
64
D.T.C.
5184)
turned
entirely
on
an
analysis
of
paragraph
8(1)(c),
supra,
and
the
adequacies
of
the
manner
in
which
the
Crown
phrased
its
notice
of
appeal.
Mr.
Justice
Cattanach
dismissed
the
Crown's
appeal
but
the
facts
of
the
case
and
his
reasoning
must
be
appreciated
before
any
conclusions
may
be
drawn.
The
taxpayer
borrowed
large
sums
of
money
from
two
separate
companies
in
order
to
purchase
all
or
substantially
all
of
the
shares
of
the
lending
companies.
The
loans
were
made
on
a
demand
basis
with
a
stipulated
rate
of
interest.
The
borrower
encountered
some
financial
difficulties
and
its
ability
to
repay
the
principal
and
interest
was
in
doubt.
The
lenders
first
agreed
to
waive
a
portion
of
the
interest
owing
in
the
first
year
and
then,
as
an
inducement
to
the
borrower
to
repay
a
large
portion
of
the
capital
immediately,
the
lenders
ultimately
agreed
in
the
second
year
to
waive
all
interest
payments.
The
Minister
attempted
to
include
into
the
taxpayer's
income
the
value
of
the
interest
payments
waived
by
the
corporate
lender.
Before
the
Income
Tax
Appeal
Board,
the
matter
was
resolved
in
the
favour
of
the
taxpayer
in
a
brief
decision
(at
19
Tax
A.B.C.
431;
58
D.T.C.
428)
based
on
No.
359,
supra.
When
the
matter
came
before
the
Exchequer
Court
on
appeal,
Mr.
Justice
Cattanach
was
of
the
view
that
section
8
of
the
Act
only
had
relevance
where
the
transaction
entered
into
by
the
parties
was
not
a
bona
fide
one.
His
Lordship
writes
that
the
Minister
failed
to
raise
this
issue
in
its
notice
of
appeal
and
barring
any
such
allegation,
the
section
did
not
come
into
operation.
He
stated
at
page
303
(D.T.C.
5189)
of
the
decision:
In
any
event,
as
far
as
the
second
round
of
waivers
are
concerned,
they
were
expressed
to
be
settlements
negotiated
by
a
borrower
with
its
lender
under
the
terms
of
which
immediate
payment
of
a
large
amount
of
principal
was
to
be
made
in
consideration
of
interest
being
cancelled.
There
is
no
allegation
that
this
quite
ordinary
type
of
transaction
between
a
debtor
and
lender
is
a
mere
subterfuge
whereby
the
lender
corporation
is
conferring
a
benefit
or
advantage
on
the
borrower
qua
shareholder
and,
in
the
absence
of
any
issue
having
been
made
by
the
Minister
of
that
question
of
fact,
I
cannot
so
find.
I
have
more
difficulty,
as
far
as
the
first
round
of
waivers
is
concerned,
inasmuch
as
it
does
seem
improbable
that
the
lender
would
have
cancelled
the
interest
outright,
instead
of
merely
giving
time
for
payment,
on
a
claim
by
the
borrower
that
it
was
in
difficulties,
were
it
not
for
the
fact
that
the
borrower
owned
practically
all
the
shares
in
the
lender
corporation.
However,
there
was
no
allegation
that
the
waiver
was
anything
other
than
what
it
purported
to
be,
that
is,
a
lender
granting
relief
to
a
borrower
in
difficulties.
Had
the
transactions
been
attacked
in
the
Notice
of
Appeal
and
at
trial
as
being
a
device
or
arrangement
for
conferring
a
benefit
on
the
respondent
qua
shareholder,
it
might
well
have
been
difficult
for
the
respondent
to
have
resolved
the
attack.
However,
no
such
attack
was
made
and
the
assessment
cannot
therefore
stand.
Mr.
Justice
Cattanach
did
not
directly
consider
the
applicability
of
paragraph
15(1)(c)
to
interest-free
or
low
interest
loans.
This
is
simply
because
the
case
appeared
to
turn
on
a
consideration
of
whether
or
not
the
cancellation
of
a
previously
expressed
obligation
to
pay
interest
between
related
companies
was
a
colourable
attempt
to
conceal
a
flow
of
benefits
between
the
parties
which
should
otherwise
have
been
taxable
under
the
normal
rules
of
taxation.
The
Pillsbury
case
thus
does
not
stand
for
the
proposition
that
an
interest-free
loan
cannot
constitute
a
benefit
to
a
shareholder
within
the
meaning
of
paragraph
8(1)(c)
of
the
Act
as
it
then
read.
Indeed,
in
the
second
paragraph
cited
above,
Mr.
Justice
Cattanach
appears
to
have
assumed
that
such
a
loan
could
constitute
a
benefit.
In
His
Lordship's
view
however,
whether
or
not
such
a
benefit
was
taxable
was
a
question
of
fact
in
each
case,
and
no
hard
and
fast
rule
could
be
stated
to
cover
all
cases.
I
further
note
that
whereas
the
Income
Tax
Appeal
Board
decision
in
the
Pillsbury
case
(19
Tax
A.B.C.
431;
58
D.T.C.
428)
specifically
relied
on
the
No.
359
case,
Mr.
Justice
Cattanch
did
not
mention
it
at
all
in
his
judgment.
Similarly,
the
decision
of
the
Income
Tax
Appeal
Board
in
Wale
v.
M.N.R.,
36
Tax
A.B.C.
255;
64
D.T.C.
632
and
that
of
the
Tax
Appeal
Board
in
the
case
of
Bartley
v.
M.N.R.,
42
Tax
A.B.C.
237;
66
D.T.C.
752
which
purported
to
rely
on
the
Pillsbury
decision
in
the
Exchequer
Court
also
reiterated
the
No.
359
test
relating
to
the
lack
of
a
legal
obligation
to
charge
interest.
This
ratio
is
not
in
fact
found
in
the
decision
of
Mr.
Justice
Cattanach,
and
has
no
part
of
the
Pillsbury
decision
in
the
Exchequer
Court.
My
review
of
the
balance
of
the
cases
proposed
by
the
parties
as
authority
for
the
question
of
whether
or
not
an
interest-free
loan
constitutes
a
“benefit”
under
the
Act
reveals
that
in
each
case,
as
in
Pillsbury,
the
issue
at
hand
is
really
an
interpretation
of
a
particular
section
of
the
Act,
and
not
in
any
global
meaning
of
the
term
“benefit”
itself.
I
am
not
satisfied
that
there
is
any
overall
meaning
to
the
term
which
can
apply
to
all
sections
of
the
Act,
other
than
one
which
derives
from
the
principles
of
common
sense
and
statutory
interpretation.
The
plaintiff
also
discussed
the
cases
Thompson
et
al.
v.
M.N.R.,
[1982]
C.T.C.
2187;
82
D.T.C.
1168
(T.R.B.)
and
Laxton
v.
The
Queen,
[1988]
1
C.T.C.
19;
88
D.T.C.
6008
(F.C.T.D.),
in
order
to
distinguish
them
from
the
case
before
me.
Thompson
was
a
decision
under
a
successor
to
subsection
8(1)
discussed
above,
namely
subsection
15(1)
(Income
Tax
Act,
S.C.
1970-71-72,
c.
63).
The
taxpayers
who
were
shareholders
in
a
corporation
received
the
sum
of
$200,000
as
an
interest-free
loan
from
the
corporation.
The
latter
had
in
turn
borrowed
$150,000
of
the
money
from
a
bank
at
regular
commercial
rates,
whereas
the
balance
of
the
loan
came
from
the
operating
funds
of
the
company.
The
Court
found
that
the
taxpayers
had
received
a
"benefit"
with
respect
to
the
portion
of
the
loan
which
had
been
borrowed
by
the
corporation
at
regular
commercial
rates.
The
Minister
had
not
however
assessed
the
taxpayers
for
the
value
of
the
interest
on
that
portion
of
the
loan
which
came
out
of
the
operating
funds
of
the
corporation
and
the
Board
indicated
that
this
question
was
moot.
The
treatment
which
the
Tax
Review
Board
would
have
given
an
assessment
of
the
second
portion
of
the
loan
would
have
been
helpful
to
the
resolution
of
this
case,
but
I
find
it
significant
that
the
Department's
treatment
of
the
$50,000
was
different.
There
is
a
considerable
difference
between
the
situation
where
the
lender
himself
must
go
out
and
borrow
funds
at
a
specified
rate
of
interest
and
then
turns
around
and
offers
a
loan
to
a
shareholder
interest
free,
and
the
case
where
the
loan
comes
out
of
operating
capital
already
held
by
the
lender.
The
difference
in
the
treatment
accorded
to
the
two
portions
of
the
loan
in
the
Thompson
case
is
in
perfect
accord
with
what
I
understand
to
be
the
reason
for
the
existence
of
section
80.4
which
includes
low
interest
and
interest-free
loans
into
income.
When
a
corporation
by
its
own
volition
creates
an
expense
for
itself
and
thereby
reduces
its
taxable
revenue,
it
is
only
logical
that
the
shareholder
who
is
the
recipient
of
the
loan
and
the
cause
of
the
depletion
of
the
corporation's
profits
be
held
liable
for
the
resulting
shortfall
in
taxable
income.
There
is
no
duty
on
a
corporation
to
generate
profit,
but
only
to
pay
tax
with
respect
to
the
profit
actually
earned,
so
the
Department
did
not
assess
as
a
benefit
the
value
of
the
interest
free
loan
in
the
amount
of
$50,000
which
was
disbursed
out
of
operating
capital.
As
a
further
example,
may
I
suggest
that
where
the
employees
of
an
architectural
firm
obtain
free
the
services
of
the
firm,
the
profits
of
the
employer
are
reduced
and
a
taxable
benefit
could
result.
As
in
the
Thompson
case,
it
is
this
form
of
benefit
which
both
the
benefit
taxing
sections
and
section
80.4
are
designed
to
catch.
In
the
Laxton
case,
supra,
Madam
Justice
Reed
of
this
court
included
into
income
the
value
of
a
benefit
to
the
plaintiff
taxpayer
in
the
form
of
an
interest-free
loan.
In
Her
Ladyship's
view,
as
the
loans
were
received
by
the
taxpayer
as
remuneration
for
services
performed
by
him
pursuant
to
an
agreement
which
explicitly
provided
for
the
payment
of
the
loans,
liability
for
income
tax
could
not
be
avoided.
The
benefit
was
found
as
arising
simply
from
the
broad
wording
of
sections
3
and
248
of
the
Act.
Again
however,
the
funds
were
borrowed
by
the
lender
on
an
interest-bearing
basis
which
was
not
passed
on
to
the
taxpayer
pursuant
to
his
employment
agreement.
It
must
be
remembered
after
completing
a
review
of
the
jurisprudence
raised
by
the
parties
that
each
case
is
based
on
a
consideration
of
a
section
very
different
from
that
relating
to
trusts
found
in
section
105.
As
discussed
by
Mr.
Justice
Cattanach
in
the
Pillsbury
decision
the
purpose
of
these
sections
relating
to
benefits
to
shareholders
or
employees
is
to
prevent
the
flow
of
benefits
under
an
arrangement
which
has
the
appearance
of
a
bona
fide
commercial
transaction,
but
is
actually
a
device
to
avoid
the
payment
of
income
tax.
No
such
limitation
appears
in
subsection
105(1).
I
therefore
conclude
that
although
there
may
have
been
an
implicit
recognition
in
obiter
in
the
Pillsbury
case,
supra,
that
an
interest-free
loan
could
constitute
a
"benefit"
under
certain
circumstances,
there
is
nothing
in
the
jurisprudence
which
leads
me
inevitably
to
the
conclusion
that
an
interest-free
loan
was
a
benefit
taxable
under
sections
6
and
15
or
their
predecessors
before
the
enactment
of
section
80.4.
The
relevant
provisions,
including
section
105,
have
been
in
existence
without
affecting
interest-free
loans
for
too
long
to
assume
that
these
sections
can
be
read
as
originally
intending
to
sweep
in
the
value
of
an
interest-free
loan
into
taxable
income.
Furthermore,
the
fact
that
the
specific
enactment
dealing
only
with
the
case
of
interest-free
and
low
interest
loans
to
shareholders
and
employees
was
implemented
(section
80.4),
after
lengthy
discussion
and
submissions
from
the
Tax
Foundation
and
the
concerned
public,
and
the
preparation
of
the
explicit
policy
statement
found
in
the
October
21,
1977
notice
of
the
ways
and
means
motion,
supra,
without
any
reference
to
loans
disbursed
from
a
trust,
cannot
result
in
the
taxation
by
inference
of
such
benefits.
In
coming
to
this
conclusion
I
do
not
make
reference
to
the
principles
of
law
applicable
to
trustees
referred
to
by
the
defendant.
A
well
established
principle
of
income
tax
law
states
that
the
illegality
(if
any)
of
actions
of
the
taxpayer,
in
this
case
the
payment
to
the
plaintiff
in
relation
to
the
terms
of
the
trust,
is
irrelevant
in
the
assessment
of
tax
liability.
The
obligation
of
the
trustees
to
place
the
money
loaned
to
the
plaintiff
in
income-generating
investments
is
not
a
factor
in
my
decision.
I
do
not
believe
that
the
“benefit”
lost
by
the
trust
through
the
actions
of
the
plaintiff
has
any
relation
to
the
value
of
the
“benefit”
which
must
be
included
into
income
under
subsection
105(1),
if
any.
The
Trust
was
under
no
obligation
to
lend
money
at
a
specific
rate,
nor
did
it
have
to
borrow
money
to
make
such
a
loan
which
might
have
created
an
expense,
as
was
done
in
the
Thompson
case,
supra.
Had
the
residual
trust
of
Mr.
Cooper's
father's
estate
lent
him
the
money
at
three
per
cent
interest,
could
the
Department
apply
the
quantifying
Regulations
which
specifically
relate
to
section
80.4
in
order
to
assess
a
benefit
to
the
plaintiff's
income
tax
return?
Could
this
be
extended
even
further
to
allow
the
Minister
to
police
the
investments
made
by
trustees
to
ensure
that
only
the
highest
income
generating
investments
are
made
then
impose
a
deemed
benefit
in
a
case
where
the
investment
falls
short
of
the
level
considered
acceptable
by
the
Minister?
I
do
not
think
so.
The
Minister
has
no
interest
in
the
proper
administration
of
trust
funds.
This
is
the
function
of
the
provincial
court
system,
more
particularly
in
this
case
the
Probate
Court,
and
any
questions
regarding
the
propriety
of
the
actions
of
Mr.
Cooper
and
his
mother
as
trustees
should
be
raised
in
that
forum
alone.
My
conclusion
is
instead
based
on
the
other
factors
discussed
above,
including
the
co-existence
of
subsections
15(1)
and
15(2)
of
the
Act.
In
my
view,
it
is
illogical
to
assume
that
these
sections
could
be
applied
together
without
creating
a
perverse
result.
Any
loan
which
escapes
inclusion
into
income
under
subsection
15(2)
must
be
understood
to
have
escaped
entirely
whether
interest-free
or
not,
otherwise
the
purpose
of
the
section
is
in
part
defeated.
Furthermore,
the
later
enactment
of
section
80.4
serves
to
confirm
the
fact
that
prior
to
1977,
loans
to
shareholders
and
employees
described
in
the
section
did
not
attract
income
tax
liability.
I
am
mindful
of
the
fact
discussed
by
Judge
Christie
that
pursuant
to
section
11
of
the
Interpretation
Act
an
enactment
does
not
speak
to
the
state
of
the
law
as
it
stood
before
its
coming
into
force.
However,
where
a
certain
interpretation
of
a
new
enactment
would
create
confusion
where
none
existed
previously,
reference
may
be
made
to
the
scheme
of
the
Act
and
the
history
of
the
sections
relevant
to
the
new
enactment
in
order
to
give
better
effect
to
the
intention
of
Parliament
in
making
the
new
law.
Section
80.4
created
new
tax
liability
in
the
case
of
interest-free
and
low
interest
loans
to
shareholders
and
employees.
A
careful
method
of
the
calculation
of
the
value
of
this
benefit
was
spelled
out
in
the
section.
It
was
open
to
Parliament
to
include
the
value
of
low
interest
loans
from
or
under
a
trust
into
the
ambit
of
this
section,
but
after
many
years
of
deafening
silence
with
respect
to
these
“benefits”,
no
word
of
direction
was
addressed
to
the
trust
situation
and
more
particularly,
section
105.
The
Department
itself
acknowledged
in
IT-71
that
the
same
or
similar
wording
in
another
section
did
not
attract
tax
liability,
and
although
this
could
merely
be
seen
as
a
longstanding
policy
of
not
enforcing
a
section
of
the
Act,
I
prefer
an
interpretation
of
the
section
which
would
allow
me
to
conclude
that
the
power
to
legislate
with
respect
to
low
interest
loans
to
employees
and
shareholder
had
simply
not
been
exercised.
In
the
course
of
coming
to
this
conclusion,
I
reviewed
the
decision
of
the
Supreme
Court
of
the
United
States
in
the
case
of
Dickman
et
al.
v.
Commissioner
of
Internal
Revenue
[465
U.S.
330]
and
found
the
reasoning
of
the
Court
to
be
interesting
but
by
no
means
determinative,
as
it
must
be
read
in
the
light
of
the
statutory
enactment
being
considered
by
that
Court.
In
the
Dickman
case,
the
United
States
Supreme
Court
held
that
a
gratuitous
interest-free
demand
loan
gave
rise
to
gift
tax
liability.
A
closer
examination
of
the
case
reveals
that
the
enactment
in
question
had
been
previously
construed
to
be
broad
enough
to
impose
liability
for
tax
on
the
value
of
the
rent-free
occupation
of
a
dwelling.
Subsection
105(2)
clearly
indicates
that
in
Canada,
the
situation
is
very
different.
Only
upkeep
and
maintenance
charges
incur
tax
liability
on
a
party
living
rent-free
in
a
dwelling
owned
by
a
trust.
The
Dickman
case
is
predicated
on
different
considerations
and
I
do
not
intend
to
apply
it.
Sections
6
and
15,
and
their
respective
predecessor
sections,
until
1977
dealt
strictly
with
benefits
arising
from
employee
and
shareholder
loans.
Until
1977,
the
value
of
interest-free
and
low
interest
loans
was
not
a
taxable
benefit
to
these
taxpayers.
The
situation
changed
when
section
80.4
was
implemented
in
1979
and
the
value
of
interest-free
and
low
interest
loans
was
specifically
included
into
the
income
of
shareholders
and
employees.
While
a
legitimate
comparison
may
be
made
between
section
105
of
the
Act
and
paragraphs
6(1)(a)
and
15(1)(c)
as
they
read
before
1977,
the
sections
are
in
fact
totally
unrelated
and
the
amendment
brought
into
effect
by
section
80.4
did
not
contain
any
reference
to
section
105
and
could
not
affect
its
interpretation
or
the
policy
considerations
relevant
to
benefits
conferred
from
trust.
The
plaintiff
is
entitled
to
the
relief
sought.
I
intend
to
set
aside
the
three
reassessments
in
question
and
I
direct
the
Minister
to
reconsider
the
matter
and
issue
further
reassessments
for
the
taxpayer's
1981,
1982
and
1983
taxation
years
in
keeping
with
my
decision.
The
plaintiff
is
also
awarded
his
costs.
Appeal
allowed.