Richard M. Doris v. Minister of National Revenue, [1991] 1 CTC 2082, 91 DTC 287

Beaubier, T.C.J.:—This matter was heard in Ottawa, Ontario, on November 15, 1990.

The appellant appeals an income tax reassessment for the 1984 taxation year.

In 1983, the appellant billed 441191 Ontario Inc. (which later changed its name to Brenloc Canada Ltd.), hereinafter called "Brenloc" for the sum of $99,551 for services rendered. In the same year, the appellant wrote the account off as a bad debt. There is no dispute respecting these occurrences.

In 1984, the appellant and six other creditors of Brenloc adopted a series of transactions which are outlined by numbered paragraphs of Exhibit A-4, an agreement dated August 23, 1984:

Revenue Canada thereupon reassessed the appellant on account of the bad debt declared in 1983 in the sum of $99,551 on the basis that Brenloc had paid the appellant the debt in 1984 in the course of the above transaction pursuant to paragraph 12(1)(i) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

The appellant argues that the contract filed as Exhibit A-4 was a mutual obligation which required all of the creditors to act together and in addition Brenloc and 561312 to act with them in sequence and therefore there was no individual act of Brenloc or the appellant by which the bad debt was repaid. He states in essence that the agreement is to give up the debt and that there is no right to the appellant to use the money received, since by the contract, the money went to someone else. As a consequence, the only recovery which the appellant could possibly have obtained on the debt consists of the appellant's indirect interest in the $120,307 which Brenloc retained as a consequence of steps 5 and 6 described above. This percentage interest consists of the apellant’s 32.165 per cent interest in 561312 multiplied by 561312's 8.372 per cent interest in Brenloc. The result is an indirect interest in Brenloc by the appellant of 2.62 per cent which, at best, would be multiplied by the $120,307 retained by Brenloc.

Exhibit A-4, the agreement dated August 23, 1984, between Brenloc of the first part, the appellant and six other creditors of the second part, and 561312 of the third part, states as part of the Preamble on page two:

And Whereas Brenloc wishes to settle its debts with the Creditors in such manner and upon such terms as are set forth herein;

And Whereas the Creditors have agreed to take up shares in 561312 in satisfaction of the debts owing by Brenloc upon such terms as are set forth herein;

And Whereas the Creditors have agreed to subscribe for and take up shares in 561312 upon such terms and in such manner as are set forth herein;

And Whereas 561312 agrees to subscribe for and take up shares in Brenloc upon such terms and in such manner as are set forth herein;

There follows paragraph 2, in which Brenloc and the creditors agree upon the amounts of indebtedness and Brenloc acknowledges the indebtedness to the creditors. Thereafter, in paragraph 6, the parties agree as follows:

Forthwith upon and contemporaneously with the subscription for and payment by 561312 of the shares in Brenloc as set forth in paragraph 5 hereof, Brenloc agrees to settle the debts set forth in Schedule "A" annexed, hereto at their face value without further interest. The Creditors for themselves, their respective heirs, executors, successors and assigns doth by these presents, and in consideration of the allotment to them of shares in 561312 remise and release Brenloc of and from all Suits, actions, claims and demands that they have had or may have in respect of such debts.

Two things should be noted respecting the agreement and the quotations: First, the appellant did, of his individual will, sign the agreement and undertake the transactions described with the various parties to the agreement and in so doing dealt with the debt owed by Brenloc. Second, the preamble is specific as to the settlement of debts and the fact that the creditors have agreed to certain undertakings as part of the settlement of Brenloc’s debt with each of the creditors; thus, paragraph 6 follows and refers to Brenloc settling the debts and thereafter the creditors releasing Brenloc, although no mutuality as to the two acts is specifically described in paragraph 6.

The Minister of National Revenue reassessed the payment by Brenloc to the appellant described in paragraph 6 above quoted pursuant to paragraph 12(1)(i) of the Income Tax Act which provides that “any amount . . . received in the year on account of a debt . . . in respect of which a deduction for bad debts . . . had been made in computing the taxpayer's income for a preceding taxation year" shall be included in computing the income of a taxpayer for the taxation year. The appellant cites M.N.R. v. St. Catharines Flying Training School Ltd., [1955] S.C.R. 738; [1955] C.T.C. 185; 55 D.T.C. 1145 (S.C.C.) in support of arguments that only the group could act and the sequence of events had to be carried out. In essence, the St. Catharines appeal was allowed in part respecting money received by St. Catharines Flying Training School Ltd. which had to be retained on the condition that unless the Crown consented it to be paid over to a flying club, it was to be paid to the Crown; the Court held that the moneys were not the appellant's and were essentially trust moneys (page 190 (D.T.C. 1147)). The appellant also cited a number of cases to the effect that the substance of the transaction must be examined to arrive at a determination, therefore the appellant suggested that one portion of the transaction could not be dealt with separate from the whole.

In response, the counsel for the Minister of National Revenue argued that in essence, the agreement speaks for itself. The debt was paid down, the taxpayer chose the method, the taxpayer must bear the consequences. In particular, counsel for the respondent cites Perrault v. The Queen, [1978] C.T.C. 395; 78 D.T.C. 6272 (F.C.A.) at 401 (D.T.C. 6276) to the effect that if the appellant gave his free consent to the agreement, he is bound by its terms. The Minister of National Revenue's counsel also referred to Saskatchewan Cooperative Credit Society Ltd. v. The Queen, [1984] C.T.C. 628; 84 D.T.C. 6225 (F.C.T.D.); affd [1986] 1 C.T.C. 53; 85 D.T.C. 5599 (F.C.A.). In the Trial Division Strayer, J. stated at page 633 (D.T.C. 6229):

After reviewing these cases it appears to me that characterization in each case must largely depend on the particular facts, and that while in the Canadian cases especially considerable emphasis has properly been given to substance, the form in which taxpayers cast or term the transactions must be given considerable weight in the determination of substance.

The determinations of the trial judge were upheld by the Federal Court of Appeal.

In the instant case, the taxpayer entered into the agreement filed as Exhibit A-4 of his own free will and at that point, agreed to the various forms of consideration embodied in the agreement mutually with the parties. The result is that this Court finds that the bad debt declared in 1983 was paid in full satisfaction to the appellant by the transaction in 1984. In particular the payment by Brenloc described in paragraph 6 of the agreement filed as Exhibit A-4 constitutes payment of the debt to the appellant.

The appeal is therefore dismissed.

Appeal dismissed.