Watson,
D.T.C.C.J.:—
The
appellant
is
appealing
from
a
reassessment
by
the
Minister
of
National
Revenue
by
which
the
sum
of
$21,942
was
included
in
the
calculation
of
his
income
for
the
1987
taxation
year.
On
January
7,
1987
the
appellant
borrowed
$25,000
from
Les
Placements
S.M.L.
Inc.
(hereinafter"S.M.L."),
a
corporation
in
which
the
sole
shareholder
was
his
father,
Mr.
Ovide
Laflamme.
S.M.L.'s
main
activity
was
the
rental
of
real
estate;
the
lending
of
money
was
not
part
of
S.M.L.'s
usual
activities.
On
December
31,
1987
the
balance
of
the
loan
outstanding
was
still
$25,000;
at
December
31,
1988
the
outstanding
portion
was
$21,942.72.
At
the
hearing
of
this
appeal
the
facts
were
admitted
by
the
appellant,
but
he
contends
that
the
only
reason
the
respondent
included
this
amount
in
calculating
his
1987
income
was
his
connection
with
the
S.M.L.
shareholder
and
that
this
is
discriminatory
and
inconsistent
with
subsection
15(1)
of
the
Canadian
Charter
of
Rights
and
Freedoms
("the
Charter").
The
respondent
maintains
that
under
subsections
15(2)
and
(2.1)
and
251(1)
and
(2)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act"),
the
appellant
should
have
included
the
outstanding
portion
amounting
to
$21,942
in
calculating
his
income
for
1987.
Subsection
15(1)
of
the
Charter
provides:
15.
(1)
Every
individual
is
equal
before
and
under
the
law
and
has
the
right
to
the
equal
protection
and
equal
benefit
of
the
law
without
discrimination
and,
in
particular,
without
discrimination
based
on
race,
national
or
ethnic
origin,
colour,
religion,
sex,
age
or
mental
or
physical
disability.
The
subsections
of
the
Income
Tax
Act
read
as
follows:
15.
(2)
Shareholder
debt.
Where
a
person
(other
than
a
corporation
resident
in
Canada)
or
a
partnership
(other
than
a
partnership
each
member
of
which
is
a
corporation
resident
in
Canada)
is
a
shareholder
of
a
particular
corporation,
is
connected
with
a
shareholder
of
a
particular
corporation
or
is
a
member
of
a
partnership,
or
a
beneficiary
of
a
trust,
that
is
a
shareholder
of
a
particular
corporation
and
the
person
or
partnership
has
in
a
taxation
year
received
a
loan
from
or
has
become
indebted
to
the
particular
corporation,
to
any
other
corporation
related
thereto
or
to
a
partnership
of
which
the
particular
corporation
or
a
corporation
related
thereto
is
a
member,
the
amount
of
the
loan
or
indebtedness
shall
be
included
in
computing
the
income
for
the
year
of
the
person
or
partnership,
unless
(a)
the
loan
was
made
or
the
indebtedness
arose
(i)
in
the
ordinary
course
of
the
lender's
or
creditor’s
business
and,
in
the
case
of
a
loan,
the
lending
of
money
was
part
of
its
ordinary
business,
(ii)
in
respect
of
an
employee
of
the
lender
or
creditor
or
the
spouse
of
an
employee
of
the
lender
or
creditor
to
enable
or
assist
the
employee
or
his
spouse
to
acquire
a
dwelling
for
his
habitation,
(iii)
where
the
lender
or
creditor
is
a
corporation,
in
respect
of
an
employee
of
the
corporation
to
enable
or
assist
the
employee
to
acquire
from
the
corporation
fully
paid
shares
of
the
capital
stock
of
the
corporation,
or
to
acquire
from
a
corporation
related
thereto
fully
paid
shares
of
the
capital
stock
of
the
related
corporation,
to
be
held
by
him
for
his
own
benefit,
or
(iv)
in
respect
of
an
employee
of
the
lender
or
creditor
to
enable
or
assist
the
employee
to
acquire
an
automobile
to
be
used
by
him
in
the
performance
of
the
duties
of
his
office
or
employment,
and
bona
fide
arrangements
were
made,
at
the
time
the
loan
was
made
or
the
indebtedness
arose,
for
repayment
thereof
within
a
reasonable
time;
or
(b)
the
loan
or
indebtedness
was
repaid
within
one
year
from
the
end
of
the
taxation
year
of
the
lender
or
creditor
in
which
it
was
made
or
incurred
and
it
is
established,
by
subsequent
events
or
otherwise,
that
the
repayment
was
not
made
as
part
of
a
series
of
loans
or
other
transactions
and
repayments.
15.
(2.1)
Persons
connected
with
a
shareholder.
For
the
purposes
of
section
(2),
a
person
is
connected
with
a
shareholder
of
a
particular
corporation
if
that
person
does
not
deal
at
arm's
length
with
the
shareholder
and
if
that
person
is
a
person
other
than
(a)
a
foreign
affiliate
of
the
particular
corporation;
or
(b)
a
foreign
affiliate
of
a
person
resident
in
Canada
with
which
the
particular
corporation
does
not
deal
at
arm's
length.
251.
(1)
For
the
purposes
of
this
Act,
(a)
related
persons
shall
be
deemed
not
to
deal
with
each
other
at
arm's
length;
and
(b)
it
is
a
question
of
fact
whether
persons
not
related
to
each
other
were
at
a
particular
time
dealing
with
each
other
at
arm's
length.
(2)
Relationship
defined.
For
the
purpose
of
this
Act
related
persons”,
or
persons
related
to
each
other,
are
(a)
individuals
connected
by
blood
relationship,
marriage
or
adoption;
(b)
a
corporation
and
(i)
a
person
who
controls
the
corporation,
if
it
is
controlled
by
one
person,
(ii)
a
person
who
is
a
member
of
a
related
group
that
controls
the
corporation,
or
(iii)
any
person
related
to
a
person
described
by
subparagraph
(i)
or
(ii);
(c)
any
two
corporations
(i)
if
they
are
controlled
by
the
same
person
or
group
of
persons,
(ii)
if
each
of
the
corporations
is
controlled
by
one
person
and
the
person
who
controls
one
of
the
corporations
is
related
to
the
person
who
controls
the
other
corporation,
(iii)
if
one
of
the
corporations
is
controlled
by
one
person
and
that
person
is
related
to
any
member
of
a
related
group
that
controls
the
other
corporation,
(iv)
if
one
of
the
corporations
is
controlled
by
one
person
and
that
person
is
related
to
each
member
of
an
unrelated
group
that
controls
the
other
corporation,
(v)
if
any
member
of
a
related
group
that
controls
one
of
the
corporations
is
related
to
each
member
of
an
unrelated
group
that
controls
the
other
corporation,
or
(vi)
if
each
member
of
an
unrelated
group
that
controls
one
of
the
corporations
is
related
to
at
least
one
member
of
an
unrelated
group
that
controls
the
other.
The
only
question
in
this
appeal
is
as
to
the
constitutional
validity
of
the
foregoing
subsections
of
the
Income
Tax
Act.
Do
these
subsections
contravene
a
right
guaranteed
by
subsection
15(1)
of
the
Charter?
The
question
of
discrimination
was
considered
in
Law
Society
of
British
Columbia
v.
Andrews,
[1989]
1
S.C.R.
143,
56
D.L.R.
(4th)
1;
that
case
established
that
though
a
statute
may
create
a
distinction
between
persons,
only
distinctions
that
are
discriminatory
infringe
the
equality
rights
guaranteed
by
subsection
15(1)
of
the
Charter.
At
pages
168-69
(S.C.R.),
Mcintyre,
J.
said:
It
is
not
every
distinction
or
differentiation
in
treatment
at
law
which
will
transgress
the
equality
guarantees
of
section
15
of
the
Charter.
It
is,
of
course,
obvious
that
legislatures
may
—
and
to
govern
effectively—must
treat
different
individuals
and
groups
in
different
ways.
Indeed,
such
distinctions
are
one
of
the
main
preoccupations
of
legislatures.
The
classifying
of
individuals
and
groups,
the
making
of
different
provisions
respecting
such
groups,
the
application
of
different
rules,
regulations,
requirements
and
qualifications
to
different
persons
is
necessary
for
the
governance
of
modern
society.
The
wording
of
subsection
15(1)
limits
its
protection
to
distinctions
that
are
discriminatory.
At
pages
180-81
(S.C.R.),
Mcintyre,
J.
said:
The
words
"without
discrimination”
require
more
than
a
mere
finding
of
distinction
between
the
treatment
of
groups
or
individuals.
Those
words
are
a
form
of
qualifier
built
into
section
15
itself
and
limit
those
distinctions
which
are
forbidden
by
the
section
to
those
which
involve
prejudice
or
disadvantage.
Accordingly,
section
15
does
not
apply
to
all
distinctions
and
the
question
is
as
to
what
constitutes
discrimination.
At
page
174
(S.C.R.),
McIntyre,
J.
said:
I
would
say
then
that
discrimination
may
be
described
as
a
distinction,
whether
intentional
or
not
but
based
on
grounds
relating
to
personal
characteristics
of
the
individual
or
group,
which
has
the
effect
of
imposing
burdens,
obligations
or
disadvantages
on
such
individual
or
group
not
imposed
upon
others,
or
which
withholds
or
limits
access
to
opportunities,
benefits
and
advantages
available
to
other
members
of
society.
At
page
178
(S.C.R.),
he
quotes
the
judgment
in
the
Belgian
Linguistic
Case
(No,
2)
(1968),
1
E.H.R.R.
252,
at
page
284,
which
deals
with
article
14
of
the
European
Convention
on
Human
Rights,
23
U.N.T.S.
222,
an
article
which
secures
rights
without
discrimination:
.
.
.the
principle
of
equality
of
treatment
is
violated
if
the
distinction
has
no
objective
and
reasonable
justification.
The
existence
of
such
a
justification
must
be
assessed
in
relation
to
the
aim
and
effects
of
the
measure
under
consideration,
regard
being
had
to
principles
which
normally
prevail
in
democratic
societies.
A
difference
in
treatment
in
the
exercise
of
a
right
laid
down
in
the
Convention
must
not
only
pursue
a
legitimate
aim:
Article
14
is
likewise
violated
when
it
is
clearly
established
that
there
is
no
reasonable
relationship
of
proportionality
between
the
means
employed
and
the
aim
sought
to
be
realised.
At
page
165
(S.C.R.),
McIntyre,
J.
said:
In
simple
terms,
then,
it
may
be
said
that
a
law
which
treats
all
identically
and
which
provides
equality
of
treatment
between
“A”
and
"B"
might
well
cause
inequality
for"C",
depending
on
differences
in
personal
characteristics
and
situations.
To
approach
the
ideal
of
full
equality
before
and
under
the
law—and
in
human
affairs
an
approach
is
all
that
can
be
expected—the
main
consideration
must
be
the
impact
of
the
law
on
the
individual
or
the
group
concerned.
Recognizing
that
there
will
always
be
an
infinite
variety
of
personal
characteristics,
capacities,
entitlements
and
merits
among
those
subject
to
a
law,
there
must
be
accorded,
as
nearly
as
may
be
possible,
an
equality
of
benefit
and
protection
and
no
more
of
the
restrictions,
penalties
or
burdens
imposed
upon
one
than
another.
In
other
words,
the
admittedly
unattainable
ideal
should
be
that
a
law
expressed
to
bind
all
should
not
because
of
irrelevant
personal
differences
have
a
more
burdensome
or
less
beneficial
impact
on
one
than
another.
In
questions
falling
under
section
15
of
the
Charter,
the
approach
taken
by
my
colleagues
of
the
Tax
Court
of
Canada
is
generally
to
examine
the
purpose
of
the
disputed
legislation
and
the
relevance
of
the
distinction
to
that
purpose.
In
McKinnon
v.
M.N.R.,
[1991]
2
C.T.C.
2284,
91
D.T.C.
1002,
the
question
was
as
follows:
does
subsection
122.4(2)
of
the
Income
Tax
Act
contravene
section
15
of
the
Charter?
Judge
Sobier
first
examined
the
purpose
of
the
Act,
and
then
decided
whether
the
distinction
was
relevant
to
that
purpose.
At
pages
2286-87
(D.T.C.
1004),
he
said:
Parliament
has
chosen
to
exclude
those
individuals
who
it
saw
fit
not
to
benefit,
namely,
certain
types
of
prison
inmates.
This
is
a
valid
distinction
since
the
objective
is
to
assist
low
income
families
and
individuals
and
not
to
benefit
persons
serving
prison
terms.
The
distinction
is
made
as
part
of
a
legitimate
exercise
of
social
policy-making
which
is
Parliament's
right.
In
Tiberio
v.
M.N.R.,
[1990]
2
C.T.C.
2545,
91
D.T.C.
17,
Judge
Garon
said
at
page
2556
(D.T.C.
25):
Applying
the
foregoing
principles
to
the
facts
of
the
present
case,
there
is
no
question
that
the
provisions
of
paragraphs
109(1)(d)
and
(h)
in
1985
and
1986
and
subsection
118(2)
in
1988
establish
legal
distinctions
on
account
of
age.
However,
I
do
not
believe
that
these
distinctions
are
discriminatory
within
the
context
of
section
15(1)
in
the
sense
in
which
this
concept
has
been
defined
in
the
Supreme
Court
of
Canada
in
the
above
case
Andrews
v.
The
Law
Society
of
British
Columbia.
These
provisions
are
not
founded
on
the
basis
of
those
“irrelevant
personal
differences”
referred
to
in
the
latter
decision,
having
regard
to
the
obvious
and
publicly
declared
purpose
of
the
legislation.
Before
discussing
the
constitutionality
of
subsection
15(2)
of
the
Income
Tax
Act,
there
is
one
thing
I
should
mention.
When
the
appellant
borrowed
this
money
in
1987,
he
brought
himself
within
the
ambit
of
subsection
15(2).
He
believes
he
belongs
to
a
class
of
persons
who
are
the
subject
of
discrimination,
a
class
of
"persons
connected
with”
a
shareholder;
but
he
did
not
have
to
borrow
the
money
from
the
company
owned
by
his
father.
He
had
the
option
of
obtaining
the
loan
from
a
bank,
a
financial
institution
or
some
other
person.
As
regards
the
allegation
of
a
breach
of
the
Charter,
the
appellant
believes
that
the
distinction
made
by
subsection
15(2)
of
the
Income
Tax
Act
is
discriminatory.
Is
the
distinction,
namely
the
filiation
with
the
shareholder,
relevant
to
the
purpose
or
objective
of
the
Act?
The
purpose
of
subsection
15(2)
is
explained
in
the
case
law
and
other
texts.
In
Heal
v.
M.N.R.,
[1980]
C.T.C.
2199,
80
D.T.C.
1169,
at
page
2201
(D.T.C.
1171),
Mr.
Delmer
Taylor
of
the
Tax
Review
Board
states:
The
sections
of
the
Act
(15(1)
and
15(2))
at
issue
here
were
obviously
placed
therein
at
least
in
part
for
the
purpose
of
dissuading
taxpayers
from
using
the
funds
of
corporations
in
which
they
were
shareholders
for
purposes
and
in
ways
materially
different
from
those
to
which
such
funds
would
be
put
by
them
in
the
regular
business
operations
of
the
corporation.
The
risk
in
perceiving
a
closely-
held
private
corporation
as
a
mere
business
extension
or
alter
ego
of
a
shareholder
taxpayer
personally
must
be
avoided,
or
the
penalty
paid.
There
are
only
a
limited
number
of
mechanisms
by
which
a
shareholder
may
legitimately
put
himself
personally
in
control
of
funds
of
a
corporation
—
salary,
dividends,
and
interest
primarily.
Any
other
procedures
must
be
carefully
scrutinized
by
the
shareholder
to
ensure
that
he
is
not
also
assuming
an
income
tax
liability
personally.
The
lack
of
proper
advice,
or
a
lack
of
understanding
by
the
taxpayer
does
not
absolve
him
of
the
results
however
unfortunate
or
oppressive.
In
the
Canadian
Tax
Journal,
November
and
December
1988,
vol.
36,
No.
6,
at
page
1414,
Prof.
John
W.
Durnford
says:
Only
nine
years
passed,
however,
before
a
rudimentary
version
of
what
is
now
subsection
15(2)
of
our
current
Income
Tax
Act
was
inserted
as
subsection
4(8).
The
reason
for
this
addition
was
just
as
obvious
as
that
for
its
original
omission.
Evidently
too
many
people
were
seeking
to
avoid
paying
taxes.
Where
the
earnings
of
a
corporation,
which
have
already
been
taxed
in
its
hands,
are
distributed
to
its
owners,
whether
by
dividends
paid
on
its
shares,
or
salaries
paid
to
owners
who
are
employed
by
the
company,
or
interest
on
funds
loaned
to
it,
a
second
layer
of
taxes
is
levied.
But
early
in
the
history
of
our
income
tax
legislation,
taxpayers
realized
that
if
funds
of
the
corporation
were
merely
lent
to
the
owners
of
the
business,
no
additional
taxes
would
be
levied
on
the
income
in
their
hands.
All
that
was
required
for
this
tax
scheme
to
work
was
a
genuine
loan
to
the
shareholder,
the
repayment
of
which
was
not
enforced.
The
purpose
of
subsection
15(2)
of
the
Act
is
to
include
the
amount
of
shareholder
loans
in
income
so
as
to
prevent
the
distribution
of
a
corporation's
profits
to
its
shareholders
free
of
income
tax.
There
is
also
a
warning
to
be
sounded:
if
you
invoke
the
advantages
of
incorporation,
you
must
live
with
the
consequences,
which,
if
you
are
careless,
ignorant,
or
ill
advised,
may
result
in
surprises.
An
unpleasant
reality
is
that
if
an
amount
received
by
a
shareholder
from
the
corporation
is
included
in
his
income
by
way
of
a
loan
under
subsection
15(2),
the
burden
of
income
tax
will
be
greater
than
if
the
amount
had
taken
the
form
of
a
dividend,
since
only
in
the
latter
instance
will
the
dividend
tax
credit
apply.
And,
at
page
1415,
he
says:
Subsection
15(2)
has
accordingly
taken
on
the
characteristics
of
a
penalty
provision.
The
purpose
is
no
doubt
to
protect
the
fisc
against
attempts
to
escape
taxation.
It
is
submitted
that
it
is
difficult
to
agree
with
a
penalty
that
is
applied
without
distinction
to
all
shareholders
who
obtain
loans
from
their
companies,
when
a
good
number
of
them
have
unwittingly
come
within
subsection
15(2).
Further
developments
involved
spreading
the
net
(1)
to
include
certain
borrowers
who
are
not
themselves
shareholders
of
the
company
making
the
loans,
and
(2)
to
include
lenders
over
and
above
the
corporation
of
which
the
borrower
is
a
shareholder.
The
coverage
was
also
extended
to
indebtedness
as
well
as
loans.
Evidently
taxation
leakages
were
occurring
from
the
interposition
of
persons
other
than
immediate
shareholders
and
the
corporations
in
which
they
held
shares,
as
well
as
from
the
use
of
transactions
that
did
not
strictly
constitute
loans.
Thus
a
shareholder,
whether
or
not
intending
to
avoid
taxation
on
funds
received
from
a
corporation,
is
obliged
to
include
in
his
income
the
amount
of
any
loan
made
to
him
by
the
company,
or
indebtedness
incurred
in
its
favour.
But
the
rule
is
not
absolute.
Loans
repaid
within
the
delay
stipulated
by
subsection
15(2)
are
not
included
in
income;
repayments
on
loans
that
are
so
included
are
deductible
under
paragraph
20(1)(j)
from
the
income
of
subsequent
years.
Moreover,
a
loan
falling
into
one
of
the
four
categories
set
forth
in
paragraph
15(1)(a)
(and
which
meets
the
conditions
set
forth
in
that
paragraph)
is
not
included
in
income.
Parliament
evidently
considers
that
such
loans
are
for
legitimate
purposes.
In
Taxation
of
Corporations
and
Shareholders
by
Brian
J.
Arnold,
D.
Keith
McNair
and
Claire
F.
L.
Young,
at
pages
380-81,
it
states:
The
purpose
of
section
15
is
to
subject
to
taxation
amounts
received
by
shareholders
outside
the
normal
modes
of
distribution
of
company
funds
(such
as
dividends).
Subsection
15(2)
causes
both
loans
made
to
a
shareholder
from
a
company
and
indebtedness
incurred
by
him
in
favour
of
the
company
to
be
included
in
his
income.
In
principle,
a
loan
is
not
a
distribution
because
of
the
obligation
to
repay;
logically,
therefore,
the
amount
of
a
loan
should
not
be
included
in
a
shareholder's
income
for
taxation
purposes.
(See
/.R.C.
v.
Sansom,
[1921]
2
K.B.
492
(C.A.).)
However,
the
reality
is
that
in
many
instances
the
lender
company
would
not
enforce
its
right
to
payment
against
the
shareholder.
This
would
be
particularly
true
where
the
shareholder
controlled
the
company.
The
role
of
subsection
15(2)
accordingly
is
to
prevent
de
facto
tax-free
distributions
of
corporate
funds
to
shareholders.
The
same
reasoning
applies
to
indebtedness.
I
am
persuaded
that
the
purpose
of
subsection
15(2)
is
to
prevent
the
de
facto
tax-free
distribution
of
corporate
funds
to
shareholders.
A
distinction
made
on
the
basis
of
a
blood
relationship
or
dependence
to
a
shareholder
is
directly
relevant
to
this
purpose.
It
follows
that
the
legislator
has
distinguished
shareholders
and
persons
connected
to
shareholders
in
this
Act
because
they
are
best
placed
to
take
advantage
of
their
controlling
position.
When
the
borrower
controls
the
corporation,
the
latter
may
not
do
all
that
is
necessary
to
ensure
repayment
of
the
debt;
subsection
15(2)
prevents
this
by
requiring
the
shareholder
and
persons
connected
to
the
shareholder
to
include
in
their
income
what
might
otherwise
be
free
of
tax.
That
does
not
mean
that
this
was
what
the
appellant
and
S.M.L.
intended,
but
the
law
exists
to
protect
against
certain
situations
and
if
by
his
own
actions
someone
comes
within
the
ambit
of
the
section,
it
does
not
matter
whether
that
person
actually
intended
to
do
what
the
Act
exists
to
prevent.
Under
subsection
15(2)
of
the
Income
Tax
Act,
all
shareholders
and
persons
connected
with
a
shareholder
are
treated
in
the
same
way
without
discrimination
based
on
one
of
the
grounds
of
discrimination
mentioned
in
subsection
15(1)
of
the
Charter
or
a
ground
similar
to
those
mentioned.
The
fact
that
a
"connected"
person
is
treated
differently
from
a
person
not
so
connected,
or
that
a
shareholder
or
employee
receives
different
treatment
from
someone
not
a
shareholder
or
employee,
is
not
discrimination.
Within
the
class
of
persons
affected
by
subsection
15(2)
of
the
Income
Tax
Act,
there
is
equal
treatment,
equal
protection
and
equal
benefit
without
discrimination.
The
appellant
has
the
burden
of
showing
that
he
did
not
receive
equal
treatment
before
the
law
and
in
the
law,
or
that
the
legislation
has
a
particular
effect
on
him
as
to
protection
or
benefit,
and
further
that
the
legislation
is
discriminatory.
Appeal
dismissed.
Email this Content