The Queen v. Quinn, 73 DTC 5215, [1973] CTC 258 (FCTD)

Heald, J:—This is an appeal from a decision of the Tax Review Board allowing the defendant’s appeal for the 1970 taxation year. Pursuant to Rule 475, this appeal was set down for hearing, and was argued before me, on a stated case.

Defendant throughout 1970 lived at Woodstock, Ontario and at all material times was, and is, a resident of Canada. On February 27, 1965 the defendant subscriber entered into a scholarship agreement with Canadian Scholarship Trust Foundation (hereafter CST) and Eastern and Chartered Trust Company (hereafter Eastern and Chartered) as trustee. Under said agreement, the defendant agreed to pay $25 per month to Eastern and Chartered beginning on April 1, 1965 for a period of 122 months. The date of maturity of the agreement was stated to be August 31, 1975. In turn, Eastern and Chartered undertook to credit said payments to a separate deposit account maintained in the name of the defendant as subscriber. The defendant subscriber agreed “to leave all such monies and all interest credited thereon on deposit, less the enrolment fee, until the date of maturity or of termination hereof”. It was agreed, between the parties, that the first $125 of the moneys deposited in the deposit account was to be the enrolment fee payable forthwith to CST. This fee has been described as the “front end load” of the plan and is designed to cover legal, administration and trustee costs, etc.

At the time the agreement was entered into in 1965, the defendant subscriber nominated his son, Thomas William Quinn, born December 26, 1956 as his nominated beneficiary under the scholarship agreement. Under the agreement and plan, a scholarship is to be provided by the trust in respect of the son’s second, third and fourth years at a university, provided certain circumstances, such as the child living to university age and successfully completing the first year at university, exist in the future. The amount of the scholarship payable to this particular participant is not specified as it will be dependent on the number of other subscribers who are able to take advantage of the scholarship.

Paragraph 5 of section 11 of the scholarship agreement provides as follows:

The Subscriber covenants and agrees that, at the date of maturity or of termination hereof, an amount equal to all interest actually credited on monies deposited or credited in the deposit account up to and including such date will be transferred to the trustee.

As stated above, the date of maturity in this particular contract is August 31, 1975. The agreement also provides that the subscriber can terminate the agreement at any time on 60 days notice and provides further that, if the subscriber defaults in making any of the monthly payments, then the agreement terminates after 60 days notice of default given to the subscriber.

In this case, it is agreed that the defendant subscriber has made all of the monthly payments required to be made under the agreement to this date; that the agreement is presently in full force and effect; and that subject agreement has neither been terminated nor has it matured as therein defined.

Paragraph 16 of section 11 of the scholarship agreement provides as follows:

16. The Depository, immediately after the date of maturity or of termination, shall:

(a) transfer to the Trustee an amount equal to all interest which has been credited up to and including such date on monies deposited or credited in the deposit account hereunder; and

(b) pay to the Subscriber or hold all monies deposited in the deposit account hereunder, less the amount of enrolment fee, and all income which may accrue thereon thereafter for the Subscriber absolutely.

Accordingly the position under the agreement is that all amounts deposited by the defendant subscriber, except for the enrolment fee of $125 are returnable to him either at the maturity date of the agreement (August 31, 1975) or at any earlier termination thereof. At the time the deposits less enrolment fee are returned, an amount equal to the total of all interest credited to the account will be transferred in accordance with the terms of the agreement. It is the interest earned over the period specified in this agreement along with all other similar agreements that actually provides the scholarship funds.

To complete the historical narrative, it should be noted that effective December 1, 1967 Eastern and Chartered Trust Company amalgamated with Canada Permanent Trust Company and, after that date, Canada Permanent Trust is the trustee under subject scholarship plan.

During the defendant’s 1970 taxation year the Canada Permanent Trust Company, as trustee, credited to defendant’s deposit account, as interest payable by it with respect to the moneys on deposit with it as represented by the then current balance in the deposit account, the sums of $50.64—April 30, 1970 and $59.80—October 31, 1970.

This case is in the nature of a test case. While the amount of interest in this particular case is small, it is in the same position as the interest credited on some 39,000 other agreements in force in the Canadian Scholarship Trust Plan in 1970. At October 31, 1970 there was on deposit with the trustee under this plan as deposits a figure in excess of $26 million. The accumulated interest on deposit was in excess of $6 million.

The first question of law submitted to the Court is as follows:

A. Are the amounts of $50.64 and $59.80 which were credited to the Deposit account on April 30, 1970 and October 31, 1970 respectively amounts that were received by the defendant in 1970 as interest or on account or in lieu of payment of, or in satisfaction of interest, within the meaning of paragraph 6(1 )(b) of the Income Tax Act?

Paragraph 6(1 )(b) of the Income Tax Act reads as follows:

6. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year

(b) amounts received in the year or receivable in the year (depending upon the method regularly followed by the taxpayer in computing his profit) as interest or on account or in lieu of payment of, or in satisfaction of interest;

In subject case, the defendant taxpayer files his income tax returns on a cash basis and counsel for the plaintiff concedes that the portion of paragraph 6(1 )(b) referring to “amounts receivable” has no application to the facts of this case where the taxpayer files on a cash basis. His contention is that, up until maturity or termination of the agreement, the trustee had no proprietary right in or to the accrued interest; that said ownership remained in the defendant subscriber; that when the deposit account was credited with accrued interest, that said amount was “received” by the defendant subscriber at that time within the meaning of paragraph 6(1 )(b) of the Act; that he has received it and has exercised his power of disposition over it by agreeing to transfer it to a third party upon the happening of a certain event (maturity or termination).

After carefully considering all of the submissions of both counsel, I have concluded that Question A (supra) must be answered in the negative because the said sums were not “received” by the defendant in 1970 within the meaning of paragraph 6(1 )(b) of the Act.

A somewhat similar situation prevailed in the case of Robert Stephen, Jr v MNR, 2 Tax ABC 309; 50 DTC 375. In that case, a commission salesman was credited with commissions at the date of sale, but was not entitled to, and did not in fact receive, any payment until the customer actually paid for the goods. The Tax Appeal Board held that he was entitled to deduct from his income the total of commissions credited to him but not paid at the end of the taxation year. As an individual, his income was returnable on a cash basis only.

Similarly, in the case of MNR v Claude Rousseau, [1960] CTC 336; 60 DTC 1236, the Exchequer Court held that salaries and rents credited to an employee-shareholder of a corporation, but not in fact received by him in cash in the year, should not have been included in income for the year because the income was not “received” by him.

In my opinion, the case at bar is even stronger than the Stephen case and the Rousseau case. In this case, the defendant subscriber will never, under any circumstances ever actually receive the interest moneys credited to his account with the trust company. If he terminates the agreement tomorrow, the trust company gets the interest. If he simply stops making the monthly payments, the trust company gets the interest. If he continues making the monthly payments through to maturity, the trust company still gets the’interest.

However, even if it could be considered on the facts of this case that this defendant had “received” these interest moneys, the Supreme Court case of Dominion Taxicab Association v MNR, [1954] SCR 82; [1954] CTC 34; 54 DTC 1020, is authority for the view that an amount received is not income unless absolute ownership in it is vested in the recipient. If it is received subject to a restriction, contractual or otherwise, as to its use, disposition or enjoyment, it cannot be included in income. A similar view was expressed in the Exchequer Court case of Canadian Fruit Distributors Ltd v MNR, [1954] CTC 284; 54 DTC 1145.

Having answered Question A in the negative, it becomes necessary to consider Question B which reads as follows:

B. Was there, in 1970, a transfer to the Trustee under the Trust Deed, within the meaning of Section 16(1) of the Income Tax Act, of the said amounts of $50.64 and $59.80?

Subsection 16(1) reads as follows:

16. (1) A payment or transfer of property made pursuant to the direction of or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer’s income to the extent that it would be if the payment or transfer had been made to him.

It is my view that subsection 16(1) cannot apply to the facts of this case because there was no “payment or transfer of property” to the trustee in the taxation year 1970.

The subscriber’s agreement clearly contemplates that the beneficial ownership of the interest moneys remains with the defendant subject to his contractual obligation to dispose of them in a certain manner upon the occurrence of a particular event in the future. Up until the date of maturity or termination, the trustee has no proprietary right in or to the accrued interest.

The obligation to transfer the accrued interest moneys to the trustees arises on the termination or maturity of the agreement and not before. Up until that point in time the defendant can control the amount of interest moneys earned. If he chooses to cease making the monthly payments today, the amount of interest accrued will be considerably less than if he continues the payments until maturity.

Thus, the transfer of the property (accrued interest) does not take place until maturity or termination and it would not be until the happening of that event takes place that the transfer of property within the meaning of subsection 16(1) would occur. Since the agreement neither matured nor was terminated in 1970, subsection 16(1) cannot apply to the interest moneys credited to the defendant’s account in that year.

Question B is therefore also answered in the negative.

In view of my answer to Question B, it is not necessary to answer Question C which requires an answer only in the event that there was an affirmative answer to Question B.

The parties have agreed that if the Court answers Question A in the negative and either of Questions B and C in the negative, then in such event, the appeal is to be dismissed and the assessment referred back to the Minister of National Revenue in accordance with such answers. Since I have answered both Questions A and B in the negative, the appeal is dismissed and the assessment referred back to the Minister in accordance with such answers.

However, before concluding, I should mention that in addition to the questions of law raised in the stated case, at the trial, plaintiff’s counsel argued an additional ground of appeal, namely that subsection 22(2) of the Income Tax Act would apply to the facts of this case and that, by virtue thereof, this defendant would be taxable on subject interest income in 1970.

Even though this matter was not pleaded, and was not included in the stated case, I allowed both counsel to make submissions thereon because plaintiff’s counsel had indicated to defendant’s counsel a week or two before trial that he was going to raise this matter in argument and thus defendant’s counsel was not taken by surprise or prejudiced in any way.

Subsection 22(2) reads as follows:

22. (2) Where, by a trust created in any manner whatsoever since 1934, property is held on condition

(a) that it or property substituted therefor may

(i) revert to the person from whom the property or property for which it was substituted was directly or indirectly received, or

(ii) pass to persons to be determined by him at a time subsequent to the creation of the trust, or

(b) that, during the lifetime of the person from whom the property or property for which it was substituted was directly or indirectly received, the property shall not be disposed of except with his consent or in accordance with his direction,

income from the property shall, during the lifetime of such person while he is resident in Canada, be deemed to be income of such person.

In my opinion, subsection 22(2) does not apply to the facts of this case for two reasons.

First of all, any income (interest) from the property (the principal deposit payments) was not received in the taxation year 1970 for the reasons given (supra).

Secondly, subsection 22(2) refers to “income from the property”. In subject case, there is no evidence before me as to the amount of the interest moneys earned by the defendant’s deposits in the hands of the trustees. The amount which plaintiff is seeking to tax is merely the amount of interest which the trust company, under its agreement with CST has agreed to credit defendant’s deposit account with. This interest figure totalling $110.44 for 1970 may not have much relationship to the amount of income derived by the trust company from defendant’s deposit account.

The “income from the property” could be less but is quite likely considerably more than the figure of $110.44. There was no evidence before me on which I could conclude that the said amount of $110.44 was “income from property” within the meaning of subsection 22(2) of the Act.

I have therefore concluded that subsection 22(2) has no application to the facts of this case.

On the question of costs, the parties have agreed that the provisions of subsection 178(2) of the new Act apply to the situation here. Subsection 178(2) reads as follows:

178. (2) Where, on an appeal by the Minister other than by way of cross-appeal, from a decision of the Tax Review Board, the amount of tax that is in controversy does not exceed $2,500, the Federal Court, in delivering judgment disposing of the appeal, shall order the Minister to pay all reasonable and proper costs of the taxpayer in connection therewith.

Counsel for the defendant suggests a figure of $2,000 to cover all the reasonable and proper costs of the taxpayer. It seems to me that this suggested figure is slightly excessive. It is true that this is a test case and, in that sense, large sums of money are involved. However, the case was disposed of in one sitting day in Court and the issues involved were fairly narrow issues.

I accordingly fix the sum of $1,500 to cover all the defendant’s reasonable and proper costs, inclusive of all disbursements.