Citation: 2009 TCC 583
Date: 20091116
Docket: 2007-3870(IT)G
BETWEEN:
GENEX COMMUNICATIONS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
The appellant, a company
that carries on broadcasting activities under FM broadcasting licences, is
appealing from an assessment made on October 19, 2006, under the Income Tax
Act, R.S.C. (1985), c. 1 (5th Supp.), as amended (the Act). By that
assessment the Minister of National Revenue (the Minister) disallowed the
deduction of $329,543 as a non-capital loss carry-back claimed by the appellant
for its taxation year ending August 31, 2003.
[2]
The dispute essentially
turns on the concept of "commercial debt obligation," as defined in
subsection 80(1) of the Act, and the effects of a waiver by shareholders of
their right to claim repayment of advances granted to a company. What is
involved is determining this was a forgiveness or the settlement of a
commercial obligation.
[3]
The origin of the non-capital
losses claimed by the appellant was the balance of the non-capital-loss account
of Corporation Showbizznet (Showbizznet), a Canadian-controlled private
corporation, which operated an Internet site devoted to a performing arts
magazine.
[4]
Under an agreement entered
into on August 23, 2002, the appellant acquired all the shares of Showbizznet in
consideration of the sum of $1 and assumed all of its debts. Under that
same agreement, the shareholders of Showbizznet waived repayment of the advances
they had made to said company, which had not been repaid. As at August 23,
2002, those advances totalled $329,543 and Showbizznet's non-capital loss
balance was $1,130,985.
[5]
Following the acquisition
of all the shares of Showbizznet by the appellant, Showbizznet was liquidated. At
the hearing, counsel for the respondent conceded that the appellant continued
to actively carry on Showbizznet's business and that the conditions for the
application of subsection 88(1.1) and paragraph 111(1)(a) of the Act
were complied with. Accordingly, as of August 31, 2002, that is, the date of the
end of its fiscal year over the course of which the liquidation of Showbizznet took
place, the appellant had at its disposal Showbizznet's non-capital loss balance
as at August 23, 2002.
[6]
As the operations of Showbizznet
were in a deficit situation and Showbizznet was under-capitalized, the shareholders
made advances to it on a regular basis so that it could continue its activities.
Those advances were generally converted into Class "A" shares in Showbizznet's
capital stock. And that is what happened on April 1, 2002, when the
balance of the advances was $487,929: those advances were converted into Class
"A" shares in Showbizznet's capital stock.
[7]
The advances in the
amount of $329,543 forgiven by the shareholders had been made by them between April
1, 2002, and August 23, 2002, the date on which the appellant acquired all of Showbizznet's
shares.
[8]
Counsel for the
respondent conceded at the opening of the hearing that the advances forgiven
did not involve any legal obligation to pay interest and that, in fact, no
interest was paid on those advances even though certain corporate and financial
documents indicated that interest was payable on the advances. It was further conceded
that there was no agreement setting out the terms regarding repayment of the
principal amount of the advances.
Applicable statutory provisions
[9]
The first definition to
consider is, of course, that of "commercial obligation" found in
subsection 80(1) of the Act:
"commercial obligation"
“commercial obligation”
issued by a debtor means
(a) a commercial debt
obligation issued by the debtor, or
(b) a distress preferred share
issued by the debtor.
[10]
The concept of
"commercial debt obligation" to which the definition of "commercial
obligation" refers is also defined in subsection 80(1) of the Act:
"commercial debt
obligation" “commercial debt obligation” issued by a debtor means a
debt obligation issued by the debtor
(a) where
interest was paid or payable by the debtor in respect of it pursuant to a legal
obligation, or
(b) if
interest had been paid or payable by the debtor in respect of it pursuant to a
legal obligation,
an amount in
respect of the interest was or would have been deductible in computing the
debtor’s income, taxable income or taxable income earned in Canada, as the case may be, if this
Act were read without reference to subsections 15.1(2) and 15.2(2), paragraph
18(1)(g), subsections 18(2), (3.1) and (4) and section 21.
[11]
For the purposes of the
application of section 80 of the Act, "forgiven amount" in respect of a commercial obligation is the amount determined
by the formula A – B, where A is the lesser of the amount for which the obligation was
issued and the principal amount of the obligation (that is, in the
present case, $329,543) and B is the total of
the amounts listed in paragraphs (a) to (l) of the definition of "forgiven
amount" in subsection 80(1) of the Act. Since the amounts listed under
item B are not applicable to the present case, the forgiven amount of the
advances is the principal of the advances.
[12]
Subsection 80(2) of the
Act specifies how the debt forgiveness rules must be applied. Paragraph (a)
of this subsection is particularly pertinent:
(a) [when
obligation settled] -- an obligation issued by a debtor is
settled at any time where the obligation is settled or extinguished at that
time (otherwise than by way of a bequest or inheritance or as consideration for
the issue of a share described in paragraph (b) of the definition “excluded
security” in subsection (1)).
[13]
The impact of the
settlement of a commercial obligation on non-capital losses is set out in subsection
80(3) of the Act:
(3) Reductions of non-capital losses -- Where a commercial obligation issued by a debtor
is settled at any time, the forgiven amount at that time in respect of the
obligation shall be applied to reduce at that time, in the following order,
(a) the debtor’s non-capital loss for each taxation year that ended before
that time to the extent that the amount so applied
(i) does
not exceed the amount (in subsection (4) referred to as the debtor’s “ordinary
non-capital loss at that time for the year”) that would be the relevant loss
balance at that time for the obligation and in respect of the debtor’s
non-capital loss for the year if the description of E in the definition
“non-capital loss” in subsection 111(8) were read without reference to the
expression “the taxpayer’s allowable business investment loss for the year”,
and
(ii) does
not, because of this subsection, reduce the debtor’s non-capital loss for a
preceding taxation year.
[14]
The deduction of
interest on borrowed money is provided for in subparagraph 20(1)(c)(i) of
the Act:
20 (1) Deductions permitted in computing income from business or
property -- 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
. . .
(c) Interest -- an amount paid in the year or payable in respect
of the year (depending on the method regularly followed by the taxpayer in
computing the taxpayer’s income), pursuant to a legal obligation to pay
interest on
(i) borrowed
money used for the purpose of earning income from a business or property (other
than borrowed money used to acquire property the income from which would be
exempt or to acquire a life insurance policy).
Analysis
[15]
Counsel for the appellant
submits that the advances made by the shareholders to Showbizznet are not a
commercial debt obligation owing to the fact that the shareholders had no legal
obligation to pay interest on the advances, that no interest was in fact paid
on the advances, and, lastly, that the intention of Showbizznet and its
shareholders was to convert the advances into Class "A" shares in
Showbizznet's capital stock. Accordingly, section 80 of the Act cannot be
applied in respect of the amount forgiven on the advances.
[16]
For her part, counsel
for the Respondent contends that even though there was no interest on the advances,
those advances were nevertheless a commercial debt obligation within the
meaning of the definition in subsection 80(1) of the Act because Showbizznet
could have claimed a deduction for the interest under paragraph 20(1)(c)
of the Act if interest had been paid or payable by Showbizznet under a legal obligation.
Counsel for the respondent refers, moreover, to the English definition of
"commercial debt obligation" in interpreting paragraph (b)
of the French version of that definition ("créance commerciale"),
which, according to her, deals with interest-free debt obligations, hence, debt
obligations for which there is no legal obligation to pay interest.
[17]
The main issue to be
determined is whether the definition of "commercial debt obligation" includes
advances entailing no legal obligation to pay interest.
[18]
Since no case law could
be found on interest-free loans in the context of the definition of
"commercial debt obligation" in subsection 80(1) of the Act, we
must therefore rely on a literal interpretation of the wording of the Act and on
legal writings.
[19]
The text of paragraph (b)
of the definition of "commercial debt obligation" is confusing
as to whether the legal obligation to pay interest is part of the legislator's
assumption or rather a requirement that must be met even if interest was not
paid or payable by the debtor. To facilitate understanding of the appellant's argument,
here again is paragraph (b):
(b) if interest had been paid or payable by the debtor in respect
of it pursuant to a legal obligation.
[20]
Reference to such an obligation
is obviously a reference to a legal obligation to pay interest under paragraph (a)
of the definition of "commercial debt obligation."
[21]
It should be noted here
that, in the French version of the definition of "commercial
debt obligation," the assumption concerning interest follows
immediately the introductory words of the definition, which means that the legislator's
assumption applies to both paragraph (a) and paragraph (b) of the
definition. Accordingly, the reference in paragraph (b) to such an obligation
mentioned in paragraph (a) is nonetheless subject to the
legislator's general assumption concerning interest, and no particular inference
can be drawn from the reference to a legal obligation to pay interest mentioned
in paragraph (a) of the definition of "commercial debt
obligation."
[22]
The English definition of
"commercial debt obligation" differs somewhat from the French version
and is, by and large, clearer and more precise. The expression "commercial
debt obligation" is defined as follows:
“commercial debt obligation” issued by a debtor means a debt obligation issued by the debtor
(a) where interest was paid or payable by the debtor in
respect of it pursuant to a legal obligation, or
(b) if interest had been paid or payable by the debtor in
respect of it pursuant to a legal obligation,
an amount in respect of the interest was or would have been
deductible in computing the debtor's income, taxable income or taxable income
earned in Canada, as the case
may be, if this Act were read without reference to subsections 15.1(2) and
15.2(2), paragraph 18(1)(g), subsections 18(2), (3.1) and (4) and
section 21.
[23]
This wording is clearer
and more precise because the assumption concerning interest only applies with
respect to paragraph (b), which is complete in itself. Paragraph (a)
deals with cases where interest was actually paid or payable under a legal obligation,
whereas paragraph (b) deals with the assumption that interest was
paid or payable under a legal obligation.
[24]
Given the ambiguity of
the wording of the Act in the French version, it is quite appropriate to
consider the English version of the same text to seek Parliament's intent. It should
certainly be noted that the Act is a bilingual document and that both the English
and French versions thereof are equally authoritative: see Canada Act 1982,
1982, c. 11 (U.K.), R.S.C. 1985, Appendix II, No. 44, as amended,
and An Act respecting the
status and use of the official languages of Canada, R.S.C. 1985, c. 31 (4th Supp.). The effect of this
principle is that one version of the Act is not a translation of the other and
that, in order to interpret the Act, it is necessary to look at both versions of
it. Each version is regarded as an original and is supposed to convey the same
meaning as the other. To conclude on that point, it is appropriate to refer to
the principles of interpretation of bilingual statutes set out by the Supreme Court
of Canada in Medovarski v. Canada (M.C.I.), [2005] 2 S.C.R. 539, at
pages 550 and 551:
In
interpreting bilingual statutes, the statutory interpretation should begin with
a search for the shared meaning between the two versions: P.-A. Côté, The
Interpretation of Legislation in Canada (3rd ed. 2000), at p. 327. In Daoust,
Bastarache J. held for the Court that the interpretation of bilingual
statutes is subject to a two-part procedure.
First, one must apply the rules of statutory interpretation to
determine whether or not there is an apparent discordance, and if so, whether
there is a common meaning between the French and English versions.
“[W]here one of the two versions is broader than the other, the common meaning
would favour the more restricted or limited meaning”: Schreiber, at
para. 56, per LeBel J. Schreiber concerned a discrepancy
between the French version of s. 6(a) of the State Immunity Act,
R.S.C. 1985, c. S‑18, which stated that the exception to state immunity
is narrowly “décès” or “dommages corporels”, compared to the
broader English “death” or “personal injury”. Given the conflict between
the two provisions the Court adopted the clearer and more restrictive French
version. The common meaning is the version that is plain and not
ambiguous. If neither version is ambiguous, or if they both are, the
common meaning is normally the narrower version: Daoust, at paras. 28-29.
Second, one must determine if the common meaning is consistent with
Parliament’s intent: Daoust, at para. 30.
[25]
In order to avoid the
ambiguity of paragraph (b) in the French version, Parliament should have
used the verb "auraient" rather than "avaient" to indicate
that the paragraph made an assumption. Furthermore, Parliament could have added
the following words to the introductory portion of the definition of "créance
commerciale" ("commercial debt obligation") after the word
"déductible": "ou auraient été déductibles, le cas
échéant," to take into account the situation covered by paragraph (b),
namely that in which interest had not been paid or payable under a legal
obligation.
[26]
Paragraphs (a)
and (b) of the French version of the definition of "commercial debt
obligation" are drafted in practically the same way. Considering that
Parliament does not speak for nothing, it is quite reasonable to believe that
in paragraph (b) it intended to cover a situation different from that dealt
with in paragraph (a). It is therefore plausible to think that paragraph (a)
contemplates loans with interest, whereas paragraph (b) contemplates
interest-free loans. Parliament appears to have wanted to include in the definition
of commercial debt obligation advances on which no interest is paid or payable
under a legal obligation.
[27]
According to the authors who have spoken on
the issue, the definition of commercial debt obligation includes interest-free
loans as, in their view, what is important to determine is whether, in cases where
interest would have been payable, that interest would have been deductible in
computing the debtors' income.
[28]
Contrary to the
appellant's position, I do not believe that there must necessarily be a legal obligation
to pay interest in order for a debt obligation to qualify as a commercial debt
obligation. The fact that the advances to Showbizznet were not subject to any
repayment agreement does not therefore in any way change the situation, contrary
to the appellant's submissions.
[29]
That is also the case
with the shareholder's intention to convert their advances into shares in
Showbizznet's capital stock. Regardless of the parties' intention, the tax
consequences must apply to the facts as they actually were. This principle arises
out of numerous decisions by our courts. See in this regard the following
excerpt from Linden J.'s decision in Friedberg v. Canada (F.C.A.), [1991] F.C.J. No. 1255 (QL):
In tax law, form matters. A mere subjective intention, here as
elsewhere in the tax field, is not by itself sufficient to alter the
characterization of a transaction for tax purposes. If a taxpayer arranges his
affairs in certain formal ways, enormous tax advantages can be obtained, even
though the main reason for these arrangements may be to save tax (see The Queen
v. Irving Oil 91 D.T.C. 5106, per Mahoney J.A.). If a taxpayer fails to take
the correct formal steps, however, tax may have to be paid. If this were not
so, Revenue Canada and the
courts would be engaged in endless exercises to determine the true intentions
behind certain transactions. Taxpayers and the Crown would seek to restructure
dealings after the fact so as to take advantage of the tax law or to make
taxpayers pay tax that they might otherwise not have to pay. While evidence of
intention may be used by the Courts on occasion to clarify dealings, it is
rarely determinative. In sum, evidence of subjective intention cannot be used
to 'correct' documents which clearly point in a particular direction.
[30]
The following extracts
from the decisions rendered by the Supreme Court of Canada in Bronfman Trust
v. The Queen, [1987] 1 S.C.R. 32, at pages 54 and 55, and in Shell
Canada Ltd. v. Canada, [1999] 3 S.C.R. 622, at paragraphs 39 and 40, are
also very pertinent:
Bronfman Trust, Dickson C.J.
Before concluding, I wish to address one final
argument raised by counsel for the Trust. It was submitted -- and the Crown
generously conceded -- that the Trust would have obtained an interest deduction
if it had sold assets to make the capital allocation and borrowed to replace
them. Accordingly, it is argued, the Trust ought not to be precluded from an
interest deduction merely because it achieved the same effect without the
formalities of a sale, and repurchase of assets. It would be a sufficient
answer to this submission to point to the principle that the courts must deal
with what the taxpayer actually did, and not what he might have done: Matheson
v. The Queen, 74 D.T.C. 6176
(F.C.T.D.), per Mahoney J. at p. 6179.
Shell Canada Ltd., McLachlin J.
[39] This Court has
repeatedly held that courts must be sensitive to the economic realities of a
particular transaction, rather than being bound to what first appears to be its
legal form: Bronfman Trust, supra, at pp. 52-53, per
Dickson C.J.; Tennant, supra, at para. 26, per Iacobucci
J. But there are at least two caveats to this rule. First, this Court has never
held that the economic realities of a situation can be used to recharacterize a
taxpayer's bona fide legal relationships. To the contrary, we have held
that, absent a specific provision of the Act to the contrary or a finding that
they are a sham, the taxpayer's legal relationships must be respected in tax
cases. Recharacterization is only permissible if the label attached by the taxpayer
to the particular transaction does not properly reflect its actual legal
effect: Continental Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298, at
para. 21, per Bastarache J.
[40] Second, it is
well established in this Court's tax jurisprudence that a searching inquiry for
either the "economic realities" of a particular transaction or the
general object and spirit of the provision at issue can never supplant a
court's duty to apply an unambiguous provision of the Act to a taxpayer's transaction. . . .
[31]
On the basis of the
principles set out above, I am of the view that the legal reality must be
respected regardless of whether the intention of Showbizznet and its
shareholders was to convert the advances into Showbizznet shares as they had
previously done on several occasions.
[32]
In order to determine
whether the interest that would have been paid or payable on the advances under
a legal obligation would have been deductible in computing Showbizznet's income
under paragraph 20(1)(c) of the Act, it is necessary to look at the
debtor's situation and consider whether such interest would have been paid on money
borrowed for the purpose of earning income from a business or property.
[33]
In paragraph 1.1 of Section
C of the Notice of Appeal, it is clearly indicated that the shareholders of Showbizznet
advanced funds to it on a regular basis so that it could continue its activities.
Since the advances allowed Showbizznet to carry on operating its business, those
advances were used for the purpose of earning income from a business; hence,
the requirement concerning the deductibility of the interest found in the
definition of "commercial debt obligation" is met.
[34]
In light of the
foregoing, the conditions for the application of section 80 of the Act have
been fulfilled. Accordingly, it is appropriate to consider whether the debt
represented by the advances has been either settled or extinguished. Subsection 80(3)
of the Act provides that where a commercial
obligation issued by a debtor is settled at any time, the forgiven amount at
that time in respect of the obligation shall be applied to reduce at that time
the enumerated losses. Paragraph 80(2)(a) of the Act provides that an obligation issued by a debtor is settled at any time
where the obligation is settled or extinguished at that time.
[35]
Under the agreement for
the sale of the shares of Showbizznet signed on August 23, 2002, the
shareholders of Showbizznet purely and simply waived the repayment of the
advances they had made to the said company. Showbizznet was not a party to that
agreement and the shareholders did nothing to give effect to the waiver. No release
was issued to Showbizznet and no resolution of the board of directors or the shareholders
of Showbizznet was adopted to give effect to the forgiveness of debt. However, Showbizznet's
balance sheet and financial statements at August 23, 2002, which were
attached to the said sale agreement as Appendix C, show that the shareholders' advances
had been deleted.
[36]
As the shareholders'
advances had been stricken from Showbizznet's books, it is reasonable to conclude
that the debt was extinguished by release within the meaning of
article 1687 of the Civil Code of Québec. That provision reads as
follows:
1687. Release
takes place where the creditor releases his debtor from his obligation.
Release is complete, unless it is stipulated to
be partial.
[37]
There is no doubt that
the shareholders' unilateral waiver of repayment of the advances was for the
exclusive benefit of Showbizznet. The consent to, or the acceptance of, this
waiver by Showbizznet was implicitly given by its directors as the mandataries of
the company under article 321 of the Civil Code of Québec. At the
time of the sale of Showbizznet's shares, Showbizznet's directors were all members
of the family of Réal Parent. The vendor shareholders were, with at most one
exception, members of Réal Parent's family and corporations related to those
family members.
[38]
For these reasons, the
appeal from the assessment under the Act made on October 19, 2006, with respect
to the appellant's taxation year ending August 31, 2003, is dismissed with
costs.
Signed at Ottawa, Canada, this 16th day of November 2009.
"Réal Favreau"
Translation certified true
on this 29th day
of January 2010.
Erich Klein,
Revisor
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