James A. Archer v. Minister of National Revenue, [1989] 2 CTC 2300, 89 DTC 571

Lamarre Proulx, T.C.J.:—The appellant is appealing the respondent's reassessments for the 1982 and 1983 taxation years.

The appeal concerns the application of subsections 80.4(1) and 80.4(3) of the Income Tax Act (the Act) which read in part as follows:

(1) Where a person . . . received a loan or otherwise incurred a debt by virtue of the office or employment . . . of an individual . . . the individual . . . shall be deemed to have received a benefit in a taxation year equal to the amount, if any, by which the aggregate of

(a) the amount of interest for the year on all such loans and debts computed at such prescribed rates. . ., and

(b) the aggregate of all amounts each of which is an amount of interest that was paid. . .by

(a person other than the appellant)

exceeds

(c) the amount of interest for the year paid on all such loans and debts not later than 30 days after the end of the year.

(3) Subsections (1) and (2) do not apply in respect of any loan or debt, or any part thereof,

(b) that was included in computing the income of a person or partnership under this Part.

The findings or assumptions of fact upon which the Minister relied in reassessing tax to the appellant as they appear in the amended reply to notice of appeal are the following:

(a) at all material times, the Appellant owned and controlled F.H. Crispo Co. Ltd. ("the company") and was also an officer of the company;

(b) during the taxation years under review the Appellant received loans from the company by virtue of his office, but did not pay any interest on such loans in the years during which the loans remained outstanding;

(c) the said loans remained outstanding for varying periods during each of the taxation years under review and therefore the Appellant received benefits in the amounts of $9,189.00 in the 1982 taxation year and $1,526.29 in the 1983 taxation year.

The statutory provisions upon which the respondent relied and the reasons he intended to submit to the Court were as follows:

The respondent relies, inter alia, upon subsections 6(9) and 80.4(1) of the Income Tax Act, R.S.C. 1952, Chapter 148, as amended (the "Act").

The respondent submits that the appellant has been properly assessed in respect of his 1982 and 1983 taxation years in that he is deemed by virtue of subsection 80.4(1) of the Act to have received benefits in the taxation years under appeal equal to the amount of interest on all loans for period in the taxation years under appeal during which the said loans remained outstanding. The appellant received benefits pursuant to subsection 80.4(1) in the amounts of $9,189.00 and $1,526.29 for the 1982 and 1983 taxation years respectively.

The appellant set out his reasons to appeal the respondent's reassessments firstly in a notice of appeal and then in an amended notice of appeal which came after the amended reply to notice of appeal. I refer to both notices of appeal because I find that they were not properly drafted with respect to the function of pleadings. The first notice of appeal gave the following reasons as the basis of the appeal:

The basis of the appeal is set forth below:

(1) The reassessments relate to interest deemed to have been earned on loans or advances made to James Archer during the years 1982 and 1983 from a company owned and controlled by him. The reassessments are based on Section 80.4(1) of the Income Tax Act.

(2) Section 80.4(3)(b) provides that Section 80.4(1) does not apply in respect of any loan or debt that was included in computing income of the individual for the year.

(3) The advances or loans in question were included in the taxpayer's income in the years in question.

The amended notice of appeal deleted paragraph 3 to replace it by the following:

(3) Section 80.4(1) is not applicable to any loans or advances that may have been made to James Archer in the years in question.

At the outset of the hearing the appellant's agent presented the Court with what was to be the appellant's three main issues and I quote from the transcript of evidence:

I have established three main issues to place before you, the first of which stands alone and quite apart from the other two which are somewhat related.

First, ! suggest there is what is referred to as the qua-employee or qua-shareholder issue. It deals with the basic question as to whether or not we have a valid assessment. I shall deal with this matter first, and if Your Honour should agree with the argument that will be placed before you on this issue it may indeed be unnecessary to proceed further. My aim on this particular issue will simply be to demonstrate to Your Honour that the Appellant, James Archer, is indeed the principal shareholder of this company, that any advances or loans that may have been made to him were made in that capacity, and that accordingly, tax law, jurisprudence and practice over the years would effectively preclude him from receiving such advances or loans or benefits thereunder "by virtue of this office or employment." My argument will be that the entire assessment is accordingly invalid as the qua-employee aspect is essential to the application of section 80.4(1), which is the section under which we are being assessed.

Your Honour, if we are to proceed beyond this initial issue, and I shall of course be in Your Honour's hands at the time on that matter, I would intend to proceed with the argument relating to any deemed interest benefit that may exist on $50,000.00 of the advances in question. That was the sum that was repaid by the Appellant to the company in September 1982. In this instance it will be my approach to demonstrate as to the inappropriateness of the retroactivity aspect of the Ways and Means Motion of December 1982 and the legislation which was only passed in late 1983 and applied retroactively to January 1982, as well as the dependence by the Respondent, I suggest, in paragraph 8 of their Amended Reply, dependence on further amendments to the legislation that were made only in 1985. Accordingly, I shall argue that any assessment of deemed interest on that $50,000.00 item that was repaid to the company is quite inappropriate.

Again, Your Honour, assuming we proceed beyond the first issue and cover that second issue, I would then move to a third issue which relates to any deemed interest benefit on those advances remaining over and above the $50,000.00 that I just referred to.

Your Honour, over and above the $50,000.00 referred to, I have calculated that the remaining advances over the two years in question amount to $63,307.36, which consists of $35,344.90 advanced during the course of 1982 and $27,962.46 advanced during the course of 1983. These particular advances, I shall argue, fall under the section 80.4(3)(b) exclusion and that they are not subject to any deemed interest benefit under section 80.4(1). In other words, they were repaid in the year.

TO SUMMARIZE, Your Honour, first I will argue the qua-employee/qua- shareholder issue. Next, the retroactivity in post-1982 amendments issue as they relate to $50,000.00 in the advances. Finally, section 80.4(3)(b) exclusion issue for the remainder of the advances. I hope that either the argument on the first issue, or alternatively a combination of arguments on the second or third issues, will convince Your Honour of the inappropriateness of the assessments we have here today.

With the exception of the third argument, the first two arguments reflected a considerable change from the reasons given in the notices of appeal. Asked as to why these substantial changes were not in the notices of appeal, the agent answered that the reason as to the qua-shareholder and qua-employee was referred to in paragraph 3 of the amended notice of appeal. The retroactivity argument was not. I will discuss later on the use of arcane language in Court proceedings.

The Facts

Mr. Archer testified on his own behalf. In the years under appeal he was, and still is, the 100 per cent shareholder of the company and he did not share voting privileges with anyone. The corporation has no other executive position except his. He is the chief executive officer of the company. He used to take a modest salary. He obtained the rest of his money from advances by the corporation. He testified that “By the end of the year I have a real good handle on just how profitable it was and I try to clean out that advance out of the profit before the end of the year."

In January 1982, the advance account was in the amount of $47,417.56 and in September in the amount of $79,093.77. On September 1, 1982, the appellant credited the account with a payment of $50,000. On December 31, 1982, the balance of the advance account was of $35,344.90 which was credited by an equivalent amount representing an amount having been paid as a dividend at the end of that year. In the year 1983 the balance of the advance account on December 30 was $27,692.46. This amount was credited on December 31 by an amount of $26,692.46 paid as a salary.

In brief what the appellant did for the year 1982 was to repay his company's advance account with an amount of $50,000 on September 2, 1982 and at the end of the year credit the balance of that account with an equivalent amount that had just been paid as dividend. In the year 1983 the balance of the account was credited with an equivalent amount paid as salary at that time.

With respect to the issue as to whether the advances were made to the appellant qua-shareholder or qua-employee, I am of the view that this issue should have been raised clearly in the notice of appeal. With respect to the function of pleadings, I wish to quote from Holmested and Watson, Ontario Civil Procedure, volume 2 at paragraph 25(6)

Pleadings are responsive written statements of position by the parties, with respect to the subject matter of the action, designed to define what are the issues in the case. This issue definition aids efficiency, since the parties and the court need not worry about matters which are agreed upon. More importantly, the information exchange provided by pleadings is essential to procedural fairness. The right to participate in the proceeding and to be heard are of limited value unless the party knows the case alleged against him so that he can marshall the relevant evidence and argument to meet it.

Williston and Rolls, The Law of Civil Procedure (1970), p. 637 describe the function of pleadings as follows (footnotes omitted):

"The function of pleadings is fourfold:

1. To define with clarity and precision the question in controversy between litigants.

2. To give fair notice of the case which has to be met so that the opposing party may direct his evidence to the issues disclosed by them. A defendant is entitled to know what it is that the plaintiff asserts against him; the plaintiff is entitled to know the nature of the defence raised in answer to his claim.

3. To assist the court in its investigation of the truth of the allegations made by the litigants.

4. To constitute a record of the issues involved in the action so as to prevent future litigation upon the matter adjudicated between the parties.

Reflecting on the matter, I believe that this was a case where an amendment to the notice of appeal would have been warranted. This amendment would have allowed the respondent to plead alternatively. This amendment was not sought. However had it been asked it would not have changed my finding on the issue of whether a benefit had been received by the appellant. In the circumstances at bar, it appears impossible or at least futile, to try to distinguish whether the benefit had been received by the appellant as a shareholder or as an officer of the corporation. He was the majority shareholder and he was the only officer of the corporation. He could have been assessed either under subsection 80.4(1) or 80.4(2).

The retroactivity argument cannot be sustained. The amending Act clearly stipulates that it has a retrospective action. The relevant subsections

80. 4(l) and 80.4(2) were amended by S.C. 1980-81-82-83, c. 140, subsection 44(1) and subsection 44(2) of that Act and read as follows: "Subsection (1) is applicable to taxation years ending after 1981."

The rules of statutory interpretation are to the effect that statutes do not have a retroactive effect unless specifically or clearly stipulated. In this case the date of coming into force of subsection 44(1) of the amending legislation is clear, it is at the expiration of the last day of the year 1981. See Craies on Statute Law, 7th edition, pages 387 to 406.

Now I have to turn to the third argument of the appellant which is that, except for the amount of $50,000 that was repaid on September 2,1982, the other amounts were included in computing the appellant’s income. This argument is derived from the wording of paragraph 80.4(3)(b) which says that subsections (1) and (2) do not apply in respect of any loan or debt, or any part thereof, that was included in computing the income of a person or partnership under this Part.

The meaning of paragraph 80.4(3)(b) is not readily apparent. I am inclined to the view that it means that, if a loan or a debt is otherwise included in computing the income of a person or partnership by virtue of another provision of the Act, it will not also be included by virtue of subsection 80.4(1) or (2). For example, if it is included under salary at the end of the year it is not an inclusion of a loan or a debt in the taxpayer's income and thus the appellant does not come within the circumstances described in subsection 80.4(3) of the Act. I therefore find that there were benefits received by the appellant while the advances were outstanding and that they were correctly assessed under subsection 80.4(1) of the Act.

The appeals are dismissed.

Appeals dismissed.