Reed,
B.
[Orally]:—There
is
no
dispute
in
this
case
concerning
the
applicable
law.
There
is
little
dispute
concerning
the
facts.
What
is
in
issue
is
the
proper
characterization
of
those
facts.
The
plaintiff
claims
that
certain
amounts
($1,158,473.58)
paid
to
its
main
shareholder,
Eugene
Mah,
in
1981
was
an
ex
gratia
bonus
or
reward
or
management
fee
and,
therefore,
a
deductible
expense
pursuant
to
paragraph
20(1)(e)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
The
plaintiff
claims
that
certain
property
which
was
transferred
to
a
partnership,
Golden
Crown
Holdings
Ltd.,
in
1982
is
governed
by
the
rollover
provisions
of
section
97
of
the
Act,
and
no
capital
gains
tax
is
payable
by
the
plaintiff
with
respect
to
that
transfer.
I
note
first
of
all
that
the
arguments
before
me
differ
somewhat
from
those
raised
by
the
original
statements
of
claim
and
defence.
Amended
statements
of
claim
and
defence
were
filed.
The
first
change
addressed
therein,
is
that
deleting
the
plaintiff's
claim
that
the
$1,158,473.58
paid
to
Eugene
Mah,
is
deductible
as
an
interest
expense
incurred
by
the
taxpayer.
It
is
conceded
by
the
plaintiff
that
such
a
claim
cannot
succeed
because
there
was
no
legal
obligation
to
pay
those
amounts.
A
claim
that
they
should
be
characterized
as
an
ex
gratia
bonus
or
reward
was
substituted
in
the
statement
of
claim.
Secondly,
the
defendant
concedes
that
it
cannot
answer
the
plaintiff's
claims
in
so
far
as
they
relate
to
the
1982
year
on
the
basis
that
a
nil
assessment
was
issued
for
that
year.
A
notice
of
assessment
for
1982
claiming
taxes
and
interest
payable
with
respect
thereto
has
now
been
issued.
Thirdly,
the
plaintiff
has
withdrawn
its
claims
relating
to
the
deductibility
of
interest
paid
on
account
of
certain
commodity
transactions,
which
claims
were
contained
in
the
original
statement
of
claim.
With
respect
to
the
$1,158,473.58
paid
to
Eugene
Mah
in
1981,
I
have
no
doubt
that
it
was
paid
as
interest.
Mrs.
Mah's
evidence
that
it
should
not
be
so
characterized
is
simply
not
convincing.
Her
evidence
appeared
to
me
to
be
little
more
than
an
ex
post
facto
attempt
to
carefully
frame
and
phrase
one's
evidence
so
as
to
bring
it
within
the
terms
of
the
statute
without
any
regard
for
the
reality
of
what
actually
occurred.
While
the
promissory
notes
did
not
contain
any
express
provisions
respecting
the
payment
of
interest,
they
did
provide
that
these
were
to
be
repayable
"at
such
times
and
in
such
amounts"
as
the
directors
would
decide.
On
March
3,
1981,
the
directors
passed
a
resolution
that
certain
property
could
be
sold
to
pay
off
some
bank
loans
and
"to
pay
the
shareholder
loans
of
Eugene
Mah
with
interest".
On
June
2,
1981,
the
directors
passed
a
resolution
authorizing
"the
payment
of
interest
on
the
shareholder
loan
of
Eugene
Mah"
and
stipulating
the
amount
of
interest
payable
and
the
yearly
amounts
by
reference
to
which
the
total
was
to
be
calculated.
Exhibit
D-1
contains
a
more
detailed
analysis
of
exactly
how
the
amount
paid
to
Eugene
Mah
was
calculated.
Mrs.
Mah's
evidence
on
examination
for
discovery
was
unreservedly
to
the
effect
that
the
amount
paid
to
her
husband
had
been
interest.
To
try
to
resile
from
that
characterization
now,
when
the
legal
basis
of
the
plaintiff's
claim
has
changed
is,
to
say
the
least,
unconvincing.
I
accept
counsel’s
argument
that
whether
or
not
a
taxpayer
describes
an
amount
which
is
paid
as
interest
or
describes
an
amount
paid
in
some
other
terms
is
not
conclusive
of
its
legal
characterization.
He
referred
in
this
regard
to
the
Perini
cases.
[Perini
v.
M.N.R.,
[1976]
C.T.C.
2323;
76
D.T.C.
1246;
affd
[1978]
C.T.C.
164;
78
D.T.C.
6080;
affd
[1982]
C.T.C.
74;
82
D.T.C.
6080.]
At
the
same
time,
in
the
present
case,
the
evidence
that
the
amount
paid
was
interest
is
simply
overwhelming.
The
taxpayer's
description
of
the
amounts
paid
as
"interest"
accords
with
the
reality
of
the
situation.
With
respect
to
the
transfer
of
certain
properties
in
1982
to
the
Golden
Crown
Holding
Ltd.
Partnership,
the
plaintiff
transferred,
in
that
year,
properties
worth
$1.9
million
to
the
partnership.
An
election
was
duly
filed
pursuant
to
subsection
97(2)
of
the
Act
whereby
it
was
agreed
that
the
properties
were
being
transferred
in
return
for
a
partnership
interest.
The
other
member
of
the
partnership,
247021
B.C.
Ltd.,
contributed
$950,000
to
the
partnership
assets.
The
partnership
agreement
[was]
provided
(paragraph
6.10)
and
I
will
quote
part
of
it:
The
Partners
agree
that
following
the
transfer
of
title
to
the
Lands
by
Haro
.
.
.
and
payment
by
B.C.
Ltd.
and
the
General
Partner
of
their
contributions
.
.
.
Haro
shall
be
entitled
to
demand
and
receive
forthwith
out
of
the
property
of
the
Partnership
a
Capital
Repayment
in
cash
for
an
amount
equal
to
the
amount
contributed
by
B.C.
Ltd.
.
.
.
The
plaintiff
transferred
the
properties
in
question
to
the
partnership
on
February
7,
1982.
Approximately
five
days
after
the
transfer,
the
plaintiff
was
paid
$950,000
by
the
partnership.
Mrs.
Mah's
evidence
makes
it
clear
that
there
was
no
other
reason
for
this
transfer
except
as
payment
in
consideration
of
the
plaintiff's
transferring
of
the
properties
to
the
partnership.
Some
attempt
at
an
explanation
was
given
to
the
effect
that
the
payment
was
made
to
reduce
the
partnership
interests
to
a
50/50
split.
This
is
not
convincing,
in
light
of
the
overall
terms
of
the
partnership
agreement.
Counsel
for
the
defendant
invites
me
to
characterize
the
transaction
as
one
in
which
the
properties
in
question
were
transferred
to
the
partnership
in
consideration
of
an
interest
in
the
partnership
and
a
cash
payment
of
$950,000.
As
such,
it
is
argued
that,
the
subsection
97(2)
election
is
invalid
and
the
taxpayer
should
be
assessed
as
having
made
a
capital
gain
on
the
disposition
of
the
property.
He
refers
in
this
regard
to
paragraph
85(1)(b)
of
the
Act:
85.
(1)
Where
a
taxpayer
has,
after
May
6,
1974,
disposed
of
any
of
his
property
that
was
a
capital
property
(other
than
real
property,
an
interest
therein
or
an
option
in
respect
thereof,
owned
by
a
non-resident),
a
property
referred
to
in
subsection
59(2),
an
eligible
capital
property
or
an
inventory
(other
than
real
property)
to
a
taxable
Canadian
corporation
for
consideration
that
includes
shares
of
the
capital
stock
of
the
corporation,
if
the
taxpayer
and
the
corporation
have
jointly
so
elected
in
prescribed
form
and
within
the
time
referred
to
in
subsection
(6),
the
following
rules
apply:
(a)
the
amount
that
the
taxpayer
and
the
corporation
have
agreed
upon
in
their
election
in
respect
of
the
property
shall
be
deemed
to
be
the
taxpayer's
proceeds
of
disposition
of
the
property
and
the
corporation's
cost
of
the
property;
(b)
subject
to
paragraph
(c),
where
the
amount
that
the
taxpayer
and
the
corporation
have
agreed
upon
in
their
election
in
respect
of
the
property
is
less
than
the
fair
market
value,
at
the
time
of
the
disposition,
of
the
consideration
therefor
(other
than
any
shares
of
the
capital
stock
of
the
corporation
or
a
right
to
receive
any
such
shares)
received
by
the
taxpayer,
the
amount
so
agreed
upon
shall,
irrespective
of
the
amount
actually
so
agreed
upon
by
them,
be
deemed
to
be
an
amount
equal
to
that
fair
market
value;
(c)
where
the
amount
that
the
taxpayer
and
the
corporation
have
agreed
upon
in
their
election
in
respect
of
the
property
is
greater
than
the
fair
market
value,
at
the
time
of
the
disposition,
of
the
property
so
disposed
of,
the
amount
so
agreed
upon
shall,
irrespective
of
the
amount
actually
so
agreed
upon,
be
deemed
to
be
an
amount
equal
to
that
fair
market
value;
[Emphasis
added.]
Counsel
argues,
in
addition,
that
the
comments
of
Mr.
Justice
Dickson
in
Bronfman
v.
The
Queen,
[1987]
1
S.C.R.
32;
[1987]
1
C.T.C.
117;
87
D.T.C.
5059
are
pertinent.
I
refer
to
the
admonition
that
one
should
consider
the
true
commercial
and
practical
nature
of
a
taxpayer's
transaction
rather
than
considering
only
the
form
of
the
transaction.
I
quote
at
page
128
(D.T.C.
5067):
Assessment
of
taxpayers'
transactions
with
an
eye
to
commercial
and
economic
realities,
rather
than
juristic
classification
of
form,
may
help
to
avoid
the
inequity
of
tax
liability
being
dependent
upon
the
taxpayer's
sophistication
at
manipulating
a
sequence
of
events
to
achieve
a
patina
of
compliance
with
the
apparent
prerequisite
of
a
tax
deduction.
Counsel
for
the
plaintiff
has
rightly
pointed
out
that
the
Chief
Justice's
admonition
in
the
Bronfman
case
has
to
be
read
in
the
light
of
Stubart
v.
The
Queen,
[1984]
1
S.C.R.
536;
[1984]
C.T.C.
294;
84
D.T.C.
6305
and
the
prerequisite
with
which
Chief
Justice
Dickson
conditioned
his
remarks
in
Bronfman.
He
indicated
that
the
tendency
to
consider
the
substance
as
well
as
the
form
of
a
taxpayer's
transaction
was
"a
laudable
trend
provided
it
is
consistent
with
the
text
and
purposes
of
the
taxation
statute"
(page
128
(D.T.C.
5067)).
Counsel
for
the
plaintiff
argues
that
all
the
steps
necessary
to
fulfil
a
section
97
rollover
requirement
were
in
fact
met
in
this
case
and
that
that
is
the
end
of
the
matter.
He
argues
that
whether
or
not
the
plaintiff
received
a
partnership
drawing
of
$950,000
five
or
six
days
later
is
irrelevant.
I
agree
that
properties
belonging
to
the
plaintiff
were
transferred
to
the
partnership,
and
this
triggers
the
possibility
of
a
subsection
97(2)
election.
The
consideration
received
for
that
transfer
was,
however,
as
counsel
for
the
defendant
argues,
both
a
partnership
interest,
and
the
$950,000
paid
as
a
cash
payment
a
few
days
after
the
transfer.
To
characterize
the
facts
in
any
other
fashion
would
be
artificial
in
the
extreme.
Accordingly,
paragraph
85(1)(b)
applies.
The
amount
received
by
the
taxpayer
on
transfer
of
the
property
to
the
partnership
was
greater
than
the
amount
agreed
upon
by
the
plaintiff
and
the
partnership
in
their
subsection
97(2)
election.
Thus,
the
Minister
was
correct
in
deeming
the
plaintiff's
proceeds
of
disposition
of
the
property.
For
the
reasons
given,
the
plaintiff's
claim
is
dismissed;
the
defendant
shall
recover
her
costs
of
the
action.
Appeal
dismissed.
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