Donald M. Cormie v. Her Majesty the Queen, [1995] 1 CTC 2463, 95 DTC 808

Beaubier J.T.C.C.:-This matter was heard in Edmonton, Alberta on October 17, 18 and 19, 1994 pursuant to the general procedure of this Court.

The appellant testified and called Robert Brintnell, a chartered accountant who was retained by County Investments Ltd. ("County”) at the time in question. There were no other witnesses.

The amended pleadings which are dated October 11, 1994, clearly define the issues before the Court. They read, in part:

Amended Notice of Appeal

The appellant, who is located at #2703 Toronto-Dominion Tower, Edmonton, Alberta, T5J 2Z1, hereby appeals from reassessment of his tax payable for the 1987 taxation year made by notice of reassessment dated March 20, 1989 with serial number 1945427.

Material Facts

1. County Investments Ltd. ("County") was incorporated in 1955, and from that time up to and inclusive of the 1987 taxation year of the appellant, was in the business of investing and lending money.

2. The appellant, for at least 25 years prior to his 1987 taxation year, had borrowed money from County with arrangements being made for the payment of interest and repayment of the borrowed money within a reasonable time, and in that 25 year history:

(a) had borrowed at any one time and repaid as much as $7.5 million; and

(b) had never defaulted in the arrangements which had been made.

3. During County's 1987 taxation year, the appellant borrowed further money from or became indebted to County in the aggregate amount of $7,244,048.83 (the "1987 loans"). The 1987 loans were not repaid within one year after the 1987 taxation year of County.

4. At the times that money was loaned to him by County, including the 1987 Loans, the appellant had authority to make and did make all decisions on behalf of County and was connected with the shareholders of County within the meaning of subsection 15(2.1) of the Income Tax Act of Canada.

4A. The 1987 loans made by County to the appellant were of the same type with respect to which County had established a pattern of making loans to the appellant over the 25 years preceding his 1987 taxation year.

5. The Minister of National Revenue by notice of reassessment dated March 20, 1989, reassessed the amount of tax and interest payable by the appellant with respect to his 1987 taxation year, resulting in an increase in the liability of the appellant to the respondent with respect to the taxation year as follows:

(a) taxes: $3,759,351.40

(b) Interest to the date of mailing of the notice of reassessment: $341,138.44

6. The basis of the reassessment was that the Minister of National Revenue determined that the provisions of subsection 15(2) of the Income Tax Act of Canada should be applicable to include in the income of the appellant the 1987 loans.

7. By notice of objection dated May 25, 1989, the appellant objected to the reassessment and by notification of confirmation by the Minister of National Revenue dated March 27, 1991, the Minister of National Revenue confirmed the reassessment.

Issues to be decided

8. Does subsection 15(2) of the Income Tax Act of Canada apply so as to include in the appellant’s income for his 1987 taxation year the 1987 loans or do the 1987 loans fall within the exception provided in subparagraph 15(2)(a)(i) of the Income Tax Act?

Statutory provisions to be relied on

9. The appellant relies on subparagraph 15(2)(a)(i) of the Income Tax Act, 1970-71-72 c. 63, as amended.

Reasons the appellant intends to rely on

10. The appellant submits that subsection 15(2) of the Income Tax Act of Canada should not apply so as to include in income for his 1987 taxation year the 1987 loans for the following reasons:

(a) the lending of money had been part of County's ordinary business for the 30 years prior to and during the 1987 taxation year of the appellant;

(b) the 1987 loan was made by County in the ordinary course of its business; and

(c) the arrangements which were made by the appellant with County for the repayment of the 1987 loan were arrangements which followed the established pattern and history of the lending relationship which had existed between County and the appellant for over 25 years, which arrangements provided for the payment of interest and repayment of the principal within a reasonable time.

Reply to the amended notice of appeal

In reply to the appellant’s amended notice of appeal with respect to his assessment for income tax for the 1987 taxation year, the Deputy Attorney General of Canada says as follows:

A. statement of facts

1. Except as herein expressly admitted, the appellant’s allegations in his amended notice of appeal are denied.

2. The allegations in paragraphs 3, 4, 5, 6 and 7 of the amended notice of appeal are admitted.

3. The allegations in paragraphs 2 and 4A of the amended notice of appeal are denied.

4. With respect to paragraph 1 of the amended notice of Appeal, the allegation that County Investments Ltd. ("County") was incorporated in 1955 is admitted; the remainder of the allegations in that paragraph are denied.

5. In assessing the appellant with respect to his 1987 taxation year the Minister of National Revenue made the following assumptions of fact:

(a) The 1987 loans referred to in the amended notice of appeal were not made in the ordinary course of County’s business and the lending of money was not part of its ordinary business, within the meaning of subparagraph 15(2)(a)(i) of the Income Tax Act;

(b) The 1987 loans did not arise out of the circumstances enumerated in subparagraphs 15(2)(a)(ii), (iii) or (iv) of the Income Tax Act; and

(c) No bona fide arrangements were made at the time the 1987 loans were made for their repayment within a reasonable time, within the meaning of paragraph 15(2)(a) of the Income Tax Act.

B. The issues to be decided

6. The respondent submits that the issue to be decided is whether the 1987 loans which have been added to the appellant’s income on reassessment properly fall to be included in his income for the 1987 taxation year pursuant to subsection 15(2) of the Income Tax Act.

C. The statutory provisions relied on by the respondent

7. The respondent relies on subsections 15(2) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended.

D. The reasons on which the respondent intends to rely

8. The respondent submits that the 1987 loans were received by the appellant in the circumstances described in subsection 15(2) of the Income Tax Act, and therefore fall to be included in his income for this reason.

For the purposes of this matter, the pertinent portions of subsection 15(2) read as follows:

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,

and bona fide arrangements were made, at the time the loan was made or the indebtedness arose, for repayment thereof within a reasonable time....

The Court finds that County was ordinarily in the business of lending money. It usually lent money at a rate 1/8 of 1 per cent above its rate of borrowing, its described purpose was to be in the business of lending money and in most years it reported taxable income from that business.

The next issue is whether the loans in question were made in the ordinary course of the lender’s or creditor’s business.

By 1987 the appellant, a lawyer, was established as a prominent Alberta businessman who headed the "principal group" of companies. These companies were essentially in the trust and investment business and gathered deposits from the public. In about June 1987 the province of Alberta put two of the group’s deposit gathering institutions into receivership. Mr. Cormie called these companies "First Investors" and "Associated Investors". By the end of August 1987 Mr. Cormie had received legal advice to place the principal group of companies into bankruptcy.

In about September 1987 Cormie family members "turned over" about $3,000,000 worth of shares in "Collective Securities Inc." Mr. Cormie testified that by November 30, 1987, he felt there might be litigation and that he would take the responsibility. It is in these circumstances that the 1987 transactions which ultimately led to the assessment before the Court occurred.

Mr. Brintnell described County "to be basically a family bank run by Don Cormie". The Court finds this description to be reasonably accurate. Essentially, in its latter years of operation County borrowed money and lent it to Donald and Mrs. Cormie and their children to be used for earning income so that the interest charged to them by County was deductible. Some other very minor loans were also made by County to a few associates of Mr. Cormie. The loans to the Cormie family were made without any security, promissory notes, director’s resolutions or written agreed terms to repay. Both Mr. Cormie and Mr. Brintnell described the family loans as "on demand". Mr. Cormie testified that he decided upon such demands and that he had never considered demanding a loan before it was paid.

There were instances when County lent money to the appellant for a nil rate of interest.

County’s year-end was always December 31. On December 31, 1986 the appellant did not owe any money to County. On March 31, 1987 the appellant borrowed $2,400,000 from County. This was followed by what Mr. Cormie described as a "rolldown" whereby book entries were made respecting $1,212,310.33 on April 9 showing a payback and a new loan at a reduction of 0.5 per cent interest. (These "rolldowns" were not uncommon and reduced the interest rates family members paid County.) Other transactions between Mr. Cormie and County followed in 1987.

On October 31, 1987 the appellant owed County $5,711,053.69. On November 30, 1987 the appellant assumed the loans that had been made by County to the other members of his family; for this purpose he borrowed a further $4,054,778.22 from County. This new loan and the other loans to the appellant from County in 1987 were accomplished exactly as before—no security, no promissory notes, no director’s resolutions and no written terms of repayment. Nor is there evidence of any documentation between the appellant and his family respecting the assumptions of liability by the appellant on November 30, 1987.

The result of the appellant’s transactions was that on December 31, 1987, the appellant owed County a net balance of $7,244,048.83. This formed the basis of the assessment by the Minister of National Revenue pursuant to section 15 of the Income Tax Act.

The appellant’s 1987 transactions with County are detailed on page 11 of Exhibit A-129. From July 13, 1987 until the end of 1987 the appellant received "new loans" from County in an amount of over $10,000,000. The loan of $4,054,778.72 was made after the appellant decided to borrow that sum to keep his family out of litigation. It is clear that his was the operating mind of County. By the end of 1987 his debt and another $8,735.70 owed by Mr. Connie’s associates were the only moneys owed to County by anyone.

Mr. Cormie testified that in November 1987 he anticipated that he would repay County by what he called a "round robin" transaction. County owed Collective Securities Ltd. ("CSL") $6,918,666 on December 31, 1987. Mr. Cormie would draw the money from CSL, pay County and County would pay CSL. No security documents were drawn up to cause this to occur and it never did occur.

The Court finds that the loan of $4,054,778.72 was not made by County in the ordinary course of its business. Given the circumstances surrounding Mr. Cormie and his corporations in the last half of 1987 (many of which were public knowledge), no ordinary creditor would have made such a loan in the ordinary course of business. At the very least, such a loan would not have been made without ample security and documentation, given the knowledge which County and the public had by November 30, 1987. Furthermore, if the other loans to the appellant after July 13, 1987 had in fact been on a demand basis, any lender in its ordinary course of business would have demanded repayment of the unsecured loans by November 30, 1987. The Court finds, for the reasons stated throughout this judgment, that these other loans were not demand loans and they were not loans made in the ordinary course of the lender’s business.

The final issue before the Court is whether in respect of the loans by County to the appellant, to quote paragraph 15(2)(a):

bona fide arrangements were made, at the time the loan was made or the indebtedness arose, for repayment thereof within a reasonable time.

In The Queen v. Jan Silden, [1993] 2 C.T.C. 123, 93 D.T.C. 5362 (F.C.A.), at page 126 (D.T.C. 5365), Pratte J.A. said:

What the statute requires is that arrangements be made "at the time the loan [is] made for repayment thereof within a reasonable time". The real question therefore is not whether the arrangements relating to the repayment of the loan were reasonable but whether, pursuant to those arrangements, the loan was to be reimbursed within a reasonable time. That question cannot, in this instance, be answered in the affirmative since the arrangements that were made at the time of the loan did not permit to determine with any certainty the time within which it had to be reimbursed.

That is the case here. "To arrange" is to draw up in ranks, or to put in order. An overt act or action is required which will settle the details of repayment. None of the loans by County to the appellant contained arrangements at the time of the loans which permitted a determination with any certainty of the time within which they had to be reimbursed. On the evidence before it, the Court finds that, at the time the 1987 loans were made, no arrangements were made between the appellant and County for any repayment. Except for the names used by the witnesses there is no evidence the loans were even "demand" loans. There is no extraneous evidence, nor is there any history respecting previous transactions between County and the appellant that indicates with any certainty when repayment might be. The 1987 loans have not yet been demanded. There is no evidence of any written acknowledgement. Based upon what is in evidence the loans may not be collectible under the Limitations of Actions Act for the province of Alberta. From these facts, the Court finds that there were no bona fide arrangements for repayment of the loans within a reasonable time.

The appeal is dismissed.

The respondent is awarded party-and-party costs. However, the testimony occupied one and one half days. Counsel then asked the Court to adjourn until the following afternoon in order to prepare argument. That was granted. Argument took one half day. Accordingly taxable costs for the hearing, including argument, are fixed at two days.

Appeal dismissed.