Kempo,
T.C.J.:—This
appeal
concerns
the
appellant's
1983
taxation
year
wherein
the
respondent
reassessed
the
appellant
by
adding
to
her
income
the
amount
of
$37,382.75
pursuant
to
subsections
15(2)
and
15(2.1)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
The
appellant
is
the
daughter
of
Murray
Munn
(“Munn”)
who
is
the
majority
and
controlling
shareholder
of
B
&
M
Contractor
Ltd.
(the
"company").
She
was
therefore,
for
fiscal
purposes,
"connected
with"
a
shareholder
of
the
company
which
was
one
of
the
requirements
of
the
subject
tax
provisions
that
was
raised
as
being
applicable
to
the
issues
raised
on
appeal.
A
very
succinct
and
preliminary
distillation
of
the
facts
is
that
the
company
in
1982
had
constructed
a
house
allegedly
for
resale,
that
in
1983
the
appellant
and
her
husband
occupied
it
as
tenants
and
that
in
1985
a
deed
of
sale
therefor
was
executed
and
registered
in
their
favour.
Financing
of
the
sale
and
purchase
was
accomplished
by
an
interest-free
mortgage-back
to
the
company
(which
amount
is
the
subject
matter
of
the
loan
or
indebtedness)
plus
a
“down
payment"
represented
by
the
total
amount
of
all
of
the
rent
which
had
been
paid
($6,000)
plus
the
value
($6,000-$7,000)
of
an
empty
lot
reconveyed
by
the
appellant
back
to
her
parents.
The
monthly
payment
under
the
interest-free
mortgage
was
for
its
principal
sum
only
and
it
was
the
same
amount
as
was
paid
under
the
rental
arrangement.
It
is
important
to
clarify
the
respondent's
assessing
position
as
distinct
from
the
alternative
positions
taken
in
his
pleadings
and
pursued
at
trial.
It
is
reasonably
clear
that
the
assessment
was
predicated
upon
the
allegations
that
the
appellant
had
received
a
loan
from
the
company
which
was
not
in
the
money
lending
business
and
for
which
no
bona
fide
arrangements
for
repayment
had
been
made
within
a
reasonable
time;
viz
clauses
9(c)
to
(f)
of
the
reply.
This
position
reflected
only
one
part
or
aspect
of
paragraph
15(2)(a)
of
the
Act,
infra,
as
it
read
in
1983.
Expressed
in
the
alternative
in
clause
10
of
the
reply
it
was
alleged,
and
argued
at
trial,
that
the
appellant
had
become
indebted
to
the
company
not
arising
in
the
ordinary
course
of
its
business
and
for
which
no
bona
fide
arrangements
for
payment
had
been
made
within
a
reasonable
time.
This
represents
another
part
or
aspect
of
paragraph
15(2)(a)
of
the
Act,
infra.
In
the
further
alternative
in
clause
11
of
the
reply
it
was
alleged,
and
argued
at
trial,
that
the
appellant
had
received
a
loan
or
incurred
a
debt
to
the
company
upon
which
no
interest
was
paid
with
the
consequence
that
she
was
deemed
to
have
received
a
benefit
(i.e.,
the
interest
foregone)
in
1983
pursuant
to
section
80.4
of
the
Act,
infra.
Issues
Raised
For
the
Appellant
1.
(a)
As
the
matter
involved
the
purchase
and
sale
of
a
capital
property,
it
was
not
a
transaction
that
was
a
"loan"
under
paragraph
15(2)(a),
infra,
which
contemplates
a
lender
and
a
borrower;
viz.
T.E.
McCool
Ltd.
v.
M.N.R.,
[1950]
S.C.R.
80;
[1949]
C.T.C.
395;
4
D.T.C.
700.
Further,
the
words
in
this
provision
“or
has
become
indebted”
also
mandate
a
lender/borrower
relationship.
The
relationship
here
was
always
that
of
a
seller
and
a
buyer,
so
the
subject
amount
is
not
caught
and
is
not
taxable
under
this
provision
at
all.
(b)
Alternatively,
if
there
was
a
loan
or
indebtedness
as
contemplated
within
paragraph
15(2)(a),
infra,
it
was
made
or
it
arose
(a)
via
the
mortgage-back
in
1985
and
not
in
1983
as
assessed;
(b)
in
the
ordinary
course
of
the
company's
business;
and
was
(c)
in
respect
of
the
appellant
qua
employee
of
the
company
to
enable
or
assist
her
to
acquire
a
dwelling
for
her
habitation
and
in
respect
of
the
above,
bona
fide
arrangements
had
been
made
for
repayment
within
a
reasonable
time.
(c)
In
the
further
alternative,
the
appellant's
husband's
one-half
ownership
of
the
property
precluded
the
entire
amount
being
attributable
to
the
appellant
alone
in
any
event.
Counsel
for
the
respondent
having
taken
the
position
that
the
appellant
was
not
an
employee
of
the
company
renders
the
loan
benefit
provisions
of
subsection
80.4(1),
infra,
inapplicable.
For
the
Respondent
1.
The
"effect"
of
a
loan
or
an
indebtedness
under
paragraph
15(2)(a),
infra,
is
the
same;
it
does
not
differentiate
between
either
circumstance.
2.
The
appellant
was
not
an
employee
of
the
company
and
thus
she
was
unable
to
come
within
the
exception
of
subparagraph
15(2)(a)(ii),
infra.
3.
Bona
fide
arrangements
for
repayment
were
not
made
within
a
reasonable
time
in
that
the
mortgage-back
was
not
registered
until
eight
months
after
its
execution.
4.
It
is
fiscally
irrelevant
that
the
appellant
held
joint
ownership
of
the
subject
property
with
her
husband
and
that
both
were
the
mortgagors.
5.
(a)
The
real
and
primary
motivation
of
the
company,
as
exercised
through
the
decision
making
of
the
appellant's
father,
was
to
build
a
home
or
a
series
of
homes
for
the
appellant's
use
and
occupancy
at
a
low
rental
rate
pending
its
sale
which
amounted
to
an
appropriation
of
corporate
funds
for
the
personal
benefit
of
the
appellant
who
was,
fiscally,
a
connected
shareholder.
(b)
The
fiscal
benefit
which
resulted
to
the
appellant
commenced
in
1983
at
the
time
of
her
possession
and
use
of
the
subject
property
as
a
tenant
for
the
reason
that
all
the
rents
had
been
retroactively
credited
to
its
purchase
with
exactly
the
same
monthly
amount
being
payable
by
her
after
its
purchase
under
a
mortgage-back
situation.
Essentially,
then,
nothing
had
changed.
The
Law
The
pertinent
parts
of
the
applicable
provisions
of
the
Act
that
were
relied
upon
by
the
parties
read
in
1983
as
follows:
15.
(2)
Shareholder
debt.
Where
a
person
.
.
.,
is
connected
with
a
shareholder
of
a
particular
corporation
.
.
.
and
the
person
.
.
.
has
in
a
taxation
year
received
a
loan
from
or
has
become
indebted
to
the
particular
corporation,
.
.
.
the
amount
of
the
loan
or
indebtedness
shall
be
included
in
computing
the
income
for
the
year
of
the
person
.
.
.
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
to
enable
or
assist
the
employee
.
.
.
to
acquire
a
dwelling
for
his
habitation,
and
bona
fide
arrangements
were
made,
at
the
time
the
loan
was
made
or
the
indebtedness
arose,
for
repayment
thereof
within
a
reasonable
time;
.
.
.
80.4
(1)
Loans.
Where
a
person
.
..
received
a
loan
or
otherwise
incurred
a
debt
by
virtue
of
the
office
or
employment
or
intended
office
or
employment
of
an
individual,
.
.
.,
the
individual
.
.
.,
shall
be
deemed
to
have
received
a
benefit
in
a
taxation
year
equal
to
the
amount,.
.
.,
(2)
Idem.
Where
a
person
.
.
.
was
(b)
connected
with
a
shareholder
of
a
corporation,.
.
.
and
by
virtue
of
such
shareholding
that
person
received
a
loan
from,
or
otherwise
incurred
a
debt
to,
that
corporation,
.
.
.,
the
person
.
.
.
shall
be
deemed
to
have
received
a
benefit
in
a
taxation
year
equal
to
the
amount,
.
.
.
Facts
Mr.
Munn
testified
that
the
company,
owned
and
operated
by
himself,
began
its
operations
in
1970
for
the
purpose
of
apartment
acquisitions.
Its
business
later
evolved
to
include
a
woods/lumbering
activity.
It
was
described
as
being
a
family
operation
from
the
outset.
Mr.
Munn
has
four
adult
children;
three
sons
now
aged
25
to
36
years
and
one
daughter
who
is
the
appellant.
He
conceded
that
the
company's
major
source
of
income
for
its
1982-1983
taxation
years
was
derived
from
its
forestry
operations.
The
Munn
family
lived
in
Nashwaak
Bridge,
New
Brunswick,
located
on
No.
8
highway
leading
from
Fredericton
to
Newcastle
about
25
miles
north
of
Fredericton.
It
comprised
of
a
population
of
2,300
situate
within
a
four-
to
five-
mile
area
along
the
highway.
The
company
owned
a
stretch
of
land
along
No.
8
highway
approximately
fourteen
miles
north
of
Fredericton.
It
was
three-quarters
of
a
mile
long
overlooking
the
Nashwaak
River.
Mr.
Munn
testified
that
the
company
decided
in
1982
to
build
houses
on
this
property
for
resale.
The
plan
at
that
time
was
to
build
one
house
at
a
time.
Because
the
appellant
and
her
husband
were
then
looking
for
a
place
of
their
own
in
which
to
live,
it
was
decided
that
they
would
rent
each
house
until
its
sale.
This
was
seen
to
satisfy
the
needs
of
all
parties
as
it
was
the
company's
preference
that
a
house
not
be
vacant,
and
thereby
subject
to
vandalism,
until
its
sale.
Also
its
holding
costs
would,
to
some
degree,
be
offset
by
the
rental
receipts.
Apparently
the
subject
house
was
the
first
and
only
one
actually
built
by
the
company
under
this
plan.
Its
construction
began
in
late
1982
and
was
finished
in
time
for
the
appellant's
occupancy
during
December.
The
agreed
rental
price,
which
was
paid,
was
$250
per
month.
Mr.
Munn
explained
that
the
construction
cost
of
the
house
was
to
have
been
$36,000.
It
was
designed
as
a
modest,
low-priced
three
bedroom
bungalow
for
resale.
Unforeseen
circumstances
resulted
in
the
actual
construction
costs
coming
out
at
$43,000.
Mr.
Munn
testified
that
the
company
planned
on
selling
the
house
for
$36,000
plus
$8,000
to
$10,000
for
the
underlying
lot
for
a
total
anticipated
price
of
$45,000
to
$46,000.
Rapidly
escalating
interest
rates
were
blamed
for
its
nonsale,
although
he
indicated
that
the
company
would
have
been
willing
to
finance
the
transaction
itself.
Mr.
Munn
said
he
hardly
ever
advertised
anything
for
sale
for
the
reason
that
he
had
many
personal
business
contacts
so
that
he
could
rely
on
word
of
mouth
advertising.
It
was
for
this
reason,
he
said,
that
the
property
had
never
been
listed
with
a
realtor,
nor
had
any
for-sale
signs
been
placed
on
the
property.
He
conceded
that
the
company
had
not
formulated
any
fixed
asking
price;
rather,
it
had
had
in
mind
an
anticipated
or
hoped
for
range
of
$45,000
to
$46,000.
Apparently
several
inquiries
were
made
during
1982
and
1983
concerning
only
the
vacant
lots
in
the
area,
but
no
interest
was
shown
by
anyone
with
respect
to
the
subject
house.
Mr.
Munn
was
unable
to
recall
precisely
when
the
decision
was
made
to
sell
the
property
to
the
appellant
and
her
husband.
Mr.
Hazen
Calabrese,
the
solicitor
for
Mr.
Munn
and
the
company,
testified
that
his
files
indicated
he
received
instructions
from
Mr.
Munn
in
January
of
1984
to
prepare
a
mortgage
to
the
company
for
$45,000
principal,
interest
free,
repayable
at
$250
per
month
with
a
five-year
maturity
date
which
was
to
be
renewable
every
five
years,
payable
in
full
at
any
time.
This
document
was
ultimately
prepared
as
instructed,
except
the
amount
was
$43,000
and
not
$45,000.
It
was
dated
October
10,
1985.
A
deed
of
transfer
in
favour
of
the
appellant
and
her
husband
was
dated
of
same
date
and
registered
October
16,
1985.
The
mortgagor's
affidavit
and
the
notarial
certificate
on
the
mortgage
document
were
executed
eight
months
later
on
June
19,
1986
and
it
was
registered
on
June
24,
1986.
Mr.
Calabrese
was
unable
to
recall
whose
responsibility
it
was
to
have
the
mortgage
registered.
As
noted
earlier,
consideration
for
the
sale
and
purchase
was
the
transfer-back
by
the
appellant
of
a
vacant
lot
which
her
parents
had
conveyed
to
her
in
1980.
This
deed
of
transfer-back
was
fully
executed
on
October
14,
1985
and
was
registered
one
week
later.
Therefore,
by
mid-October
of
1985
the
subject
property
had
been
deeded
to
the
appellant
and
her
husband,
the
mortgage-back
had
ostensibly
been
signed
and
the
appellant
had
deeded
back
the
vacant
lot
as
part
consideration.
According
to
Mr.
Munn
the
selling
price,
which
he
conceded
was
then
in
excess
of
its
fair
market
value,
comprised
of
the
$43,000
mortgage
plus
the
total
rental
paid
of
$6,000
plus
the
value
of
the
vacant
lot.
Mr.
Alexander
MacMillan,
a
chartered
accountant,
testified
that
at
the
very
outset
he
understood
the
company's
plan
was
solely
to
build
homes
from
which
to
derive
rental
income,
and
that
the
$250
paid
per
month
by
the
appellant
was
to
be
treated
as
rental
income.
He
said
that
when
completing
the
company's
1984
corporate
tax
return
he
was
advised
for
the
first
time
that
the
monthly
payments
were
not
to
be
treated
as
rent
but
rather
as
part
of
the
purchase
price
of
the
property.
He
confirmed
that
the
financial
statements
of
the
company
had
shown
the
subject
property
as
its
own
asset
for
1983
and
1984
with
rental
income
receipted,
and
that
the
1985
financial
statements
indicated
that
the
property
had
been
sold
with
rental
payments
having
been
credited
against
the
selling
price.
He
testified:
Q.
Do
you
recall
the
amount
for
which
the
property
was
sold
to
Beverly
and
Garth
Dorcas?
A.
The
mortgage
was
set
up
at
forty-three
thousand
dollars
($43,000).
But
that
was
after—there
was
approximately
eight
thousand
dollars
($8,000)
in
payments
that
had
previously
been
made.
So
we
treated
the
sale
at
fifty-one
thousand
dollars
($51,000).
Q.
And
do
you
know
whether
or
not
Beverly
and
Garth
Dorcas
conveyed
any
lands
as
part
of
this
purchase
price,
any
other
lot
that
they
might
have
had?
A.
I'm
not
certain.
[T.
42]
Mr.
MacMillan
said
he
was
aware
that
houses
had
been
built
by
the
company
for
Larry
Munn
purportedly
for
resale
and
another
for
Keith
Munn.
At
this
juncture,
the
evidence
of
Mr.
Munn
was
that
the
sale
price
was
attributable
to
the
$43,000
mortgage
plus
$6,000
paid
rental
plus
the
$6,000-$7,000
value
of
the
reconveyed
vacant
lot
for
an
apparent
total
price
of
$55,000
to
$56,000.
Mr.
MacMillan,
from
information
received
via
Mr.
Munn,
treated
the
sale
price
at
$51,000.
In
my
view
the
overriding
inference
to
be
extrapolated
from
all
this
is
that
due
to
the
very
close
family
connection
the
whole
matter
had
been
dealt
with
in
a
very
casual
and
most
informal
basis.
The
testimony
of
both
individuals
is
supportive
of
a
finding
that
the
sale
price
was
ostensibly
greater
than
the
subject's
fair
market
value
in
1985.
Dealing
now
with
the
testimony
concerning
the
company's
loaning
or
credit
granting
activities,
the
evidence
was
that
it
had
around
35
steady
employees
occupied
in
its
logging
operations
with
nearly
100
people
on
its
payroll
from
time
to
time
at
peak
seasons.
Apparently
the
company
had
purchased
hundreds
of
power
saws
at
$500
to
$700
each
for
the
purpose
of
resale
to
its
employees.
Some
of
these
sales
were
financed
by
way
of
rental-purchase
transactions,
interest
was
not
always
charged.
In
the
main
the
company
financed
equipment-sales
were
given
by
it
to
those
employees
who
were
not
able
to
get
financing
elsewhere.
Mr.
Munn
said
these
deals
were
done
for
the
financial
benefit
of
the
company.
He
also
testified
to
the
facts
of
some
large
personal
loans
which
had
been
made
to
its
employees,
some
with
interest
and
some
without.
With
respect
to
her
employment
with
the
company,
the
appellant
described
it
thusly:
Q.
Now,
with
respect
to
this
matter,
I’d
like
to
ask
you,
did
you
do
any
work
for
B
&
M
Contractors
in
1983?
A.
Yes.
Q.
And
would
you
tell
us
what
it
was?
A.
I've
done—I
helped
my
mother
with
the
books
and
I
helped
whenever
they
needed
any
typing
done,
if
they
needed
T-4's
typed
up,
if
they
needed
letters
going
out
concerning
apartments,
if
they
needed
any
letters,
period,
to
go
out,
if
she
needed
something
else
done.
But
I
was
also
at
the
time
working
at
the
Dr.
Everett
Chalmers
Hospital,
and
I
do
not
work
full-time
for
my
father.
That
was
on
the
side,
just
as
a
policy
that
I’ve
always
done
for
my
dad.
I
have
tried
to
repay
him
for
what
he's
given
all
these
years
that
he’s
brought
me
up.
I’m
trying
to
help
him
out
also.
Q.
Now,
in
1983,
your
income
tax
return,
which
is
marked
#A-7,
shows
an
item
called,
Other
income,”
A.
Yes.
Q.
.
.
.
wages,
two
thousand
dollars
($2,000).
A.
Yes.
Q.
Could
you
tell
the
Court
what
that
represents?
A.
Well,
my
parents
gave
it
to
me
at
the
end
of
the
year,
and
it
was
for
the
work
that
I
had
done
throughout
the
year
for
them.
It
wasn't
for
any
specific
amount
of
hours
or
anything,
because
!
didn't
keep
track
of
hours.
Like
I
say,
I
was
doing
it
because
I
love
my
parents
and
I
wanted
to
help
them
out.
Q.
Yes.
So
you
did,
in
fact,
receive
that
amount.
A.
Yes,
I
did.
[T.
137,
138]
With
respect
to
the
subject
property
the
appellant
said
her
rental
payment
of
$250
per
month
plus
utilities
was
a
reasonable
deal
and
that
the
value
of
the
vacant
lot
conveyed
back
to
her
parents
amounted
at
least
to
the
value
of
the
subject's
underlying
lot.
Her
recall
of
the
reason
for
the
mortgage-back
being
interest-free
related
to
the
reconveyed
lot
being
slightly
larger
than
the
subject's.
She
said
she
was
aware
in
1982
of
the
company's
intention
to
start
a
housing
subdivision
which
had
included
the
subject
for
resale
but
that
she
and
her
husband
were
to
be
in
possession
only
as
tenants
pending
its
sale.
Her
recollection
was
that
discussions
concerning
the
purchase
occurred
around
January
9th,
1984
and
that
it
was
finalized
in
1985.
The
testimony
of
Mr.
Munn
concerning
his
recall
of
the
reason
for
the
mortgage
being
interest-free
was
not
the
same
as
his
daughter's.
He
opined
that
the
company
gained
a
considerable
“benefit”
from
the
transaction
as
a
whole
because
it
could
not
have
sold
the
house
for
$43,000
due
to
market
and
high
interest
rate
conditions,
that
on
this
deal
it
would
at
least
be
getting
its
actual
costs
back
over
time,
and
that
the
sale
freed
it
of
the
holding
costs,
including
insurance
and
property
taxes.
However,
he
did
concede
in
principle
that
any
interest-free
loan
from
the
company
would
be
an
advantage
gained
to
the
recipient
from
the
company.
Analysis
Of
first
concern
is
whether
any
fiscal
benefit
whatever
had
ensued
to
the
appellant
in
1983
as
assessed.
The
factual
evidence
led
by
the
appellant
was
contradictory
with
respect
to
the
purchase
price
of
the
property
and
the
reasons
for
the
mortgage-back
being
interest-free.
A
great
deal
of
the
testimony,
upon
observing
the
manner
and
demeanour
of
the
witnesses,
was
heavily
premised
on
biased
and
selfserving
recall.
However,
and
even
though
the
evidence
called
by
the
appellant
was
not
entirely
believable
or
satisfactory,
I
nonetheless
am
unable
to
find
that
she
had
in
fact
enjoyed
any
taxable
benefit
in
her
1983
taxation
year
as
assessed.
The
earliest
written
documents
evidencing
any
possible
form
of
enforceable
agreement
with
respect
to
the
purchase
and
sale
of
the
subject
property
were
those
dated
in
October
of
1985,
some
two
years
later.
Until
that
time
I
do
not
see
how
it
can
be
found,
in
fact
or
in
law,
that
the
appellant
could
have
been
otherwise
than
a
tenant
in
possession
as
alleged.
There
was
not
one
scintilla
of
evidence
produced
which
would
support
a
finding
that
in
1983
the
appellant
was
in
fact
and
in
law
a
purchaser
in
possession
premised
on
real
property
law
principles
that
all
of
the
monthly
payments
made
to
the
company,
plus
the
fact
of
actual
possession,
amounted
to
part
performance
of
a
then
extant
oral
and
enforceable
agreement
of
sale
and
purchase
of
land.
The
respondent's
assessing
theory
was
best
expressed
in
counsel's
fifth
argumentative
submission,
supra.
The
root
problem
with
this
position,
which
in
my
view
renders
it
wholly
unacceptable
and
without
merit,
is
that
the
declaration
of
retroactivity
of
rental
payments
does
not
and
cannot
rewrite
history
itself.
Expressed
another
way,
the
application
of
an
event
designed
to
operate
retroactively
cannot
amount
to
substitution
and
avoidance
ab
initio
of
an
event
which
existed
as
historical
fact.
The
historical
fact
was
that
of
a
landlord
and
tenant
relationship
between
the
company
and
the
appellant
in
1983.
No
evidence
was
advanced
supportive
of
a
finding,
based
on
probability,
that
the
rental
payments
were
low
or
unreasonable,
given
all
of
the
circumstances.
As
the
above
analysis
fully
disposes
of
the
matter,
I
have
refrained
from
making
any
findings
with
respect
to
the
other
matters
raised
by
counsel
for
the
parties.
Conclusion
.,
The
appeal
is
allowed
and
the
matter
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
on
the
basis
that,
for
the
appellant's
1983
taxation
year,
the
amount
of
$37,382.75
included
into
her
income
for
that
year
pursuant
to
subsection
15(2)
of
the
Income
Tax
Act
is
to
be
deleted
therefrom.
The
appellant
is
entitled
to
her
costs
on
a
party-to-party
basis.
Appeal
allowed.
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