William T. Andrews v. Minister of National Revenue, [1987] 1 CTC 2165, 87 DTC 118

Rip, T.C.J.:—William T. Andrews appeals from an income tax assessment for 1981 in which the respondent, the Minister of National Revenue, Taxation, disallowed his claim for a reserve pursuant to subsection 40(1) of the Income Tax Act ("Act") on the basis that the "contractual relationship” between Mr. Andrews and the purchasers of his capital property, a partnership interest, allowed him to demand the balance of purchase price at any time during 1981.

Prior to July 1981 Mr. Andrews carried on a well-drilling business in partnership with his two sons, each having a one-third interest. In April 1981 his sons indicated to Mr. Andrews they wished to operate the business more aggressively. Since Mr. Andrews was getting along in age he desired to curtail his business activities and stay closer to home. One July morning in 1981, as Mr. Andrews and his two sons were going to work, a deal was struck whereby Mr. Andrews sold his partnership interest to his two sons.

No documentation in respect of the sale was prepared; one must rely on the testimony of Mr. Andrews and his son to determine whether he had a right to demand payment of the balance of purchase price in 1981.

According to Mr. Andrews the purchase price for his partnership interest was to be satisfied by the delivery to him of an old rig used in the business and cash; the balance, after delivery of the rig, would be paid when "business got good”. His evidence does not indicate specifically the balance of purchase price but it would appear to be $50,000. Of the unpaid balance of purchase price he received $10,000 in November 1981. In addition the “boys paid the tax for me”, the amount of tax for the current taxation year being approximately $11,000.* [1] He said that his sons still owe him $40,000.

Mr. Andrews' son, Brian Andrews, testified that the purchase price for the partnership interest was the rig and $50,000. He stated that immediately after he and his brother purchased their father’s partnership interest he and his brother, acting on advice, transferred the assets and liabilities of the partnership to a corporation formed for this purpose. The father was aware at the time of the original transaction that such a transfer would take place.t [2] The corporation paid his father’s current taxes of approximately $11,000, but that was not part of the transaction according to his son. Brian Andrews "took it for granted” that the sons would be responsible for their father’s taxes. The corporation also paid the appellant on account of the purchase price $10,000 in November 1981. The corporation has been unable as yet to pay the remaining balance of purchase price of $40,000. Brian Andrews stated that when the transaction was struck his father told him and his brother "whenever you have the money, pay me”. The money would come out of the profits of the corporation which the sons were to incorporate. The corporation has been prevented from paying the $40,000 due to pressure from its banker, the Royal Bank of Canada, to whom it owed $150,000, and a business reverse in 1984. At the time of the transaction the brothers had intended that their father would be paid within five or six years, that is, by 1987. Brian Andrews testified they intend to cause the corporation to make payments to their father of $2,000 per month starting in January 1987.

Mr. Brian Andrews described his relationship with his father as close, and of this I have no doubt. Both Mr. Andrews and his son were credible witnesses. Their evidence was forthright and candid. No attempt was made by either witness to explain events other than in the way they occurred. Any conflict in their testimony was insignificant for the purposes of what is to be decided in this appeal and was due simply to an honest misinterpretation of what each appreciates to have been the deal struck in July 1981.

I have no doubt that when the deal was struck Mr. Andrews, the father, did not intend to seek payment until his children’s business could afford it. He testified his sons spoke to him from time to time about the business. The equipment used in the business was stored on the father's property and the shop used in the business was on the property. The father had more than an idea of how the business was progressing. The father expected to be paid at the time agreed with his sons, that is, “when the good years came” and the company had the funds available for payment. My impression of the two witnesses was that Mr. Brian Andrews was a little more sophisticated than his father in the use of business terminology; in the father's mind payment would be made when there was money with which to pay; in the son's mind payment would be made when cash flow permitted. I attach no great importance to these possible distinctions. In any event it is quite obvious that prior to the end of 1981 the vendor would not demand payment of the balance purchase price because neither the purchasers nor the corporation were in a position to make payment.

Was any part of the balance of purchase price not due to Mr. Andrews until after 1981?

The relationship between the father, as creditor, and his sons and the corporation was based on mutual trust. That the transaction was struck and carried out in an informal manner in which each party relied on the honesty and integrity of the other does not affect its existence.

It must be taken as a given fact that the verbal agreement for purchase and sale was valid and binding on the parties; otherwise the appellant would not have been taxed on his gain from the disposition of his partnership interest. No weight can be given to an argument that the terms of the agreement were so uncertain, or contained terms so uncertain, as to render it void. The respondent nowhere suggests, and there is no evidence, that the disposition of the partnership interest constituted a gift from the father to his sons. The disposition of the partnership interest was a “bona fide" transaction. The sole issue therefore is whether, pursuant to subsection 40(1) of the Act, the balance of the purchase price, $40,000, was “due" to Mr. Andrews in 1981. In respect of a disposition occurring before November 13, 1981, paragraph 40(1)(a) read as follows:

40. (1) Except as otherwise expressly provided in this Part

(a) a taxpayer’s gain for a taxation year from the disposition of any property is the amount, if any, by which

(i) if the property was disposed of in the year, the amount, if any, by which his proceeds of disposition exceeds the aggregate of the adjusted cost base to him of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition, or

(ii) if the property was disposed of before the year, the amount, if any, claimed by him under subparagraph (iii) in computing his gain for the immediately preceding year from the disposition of the property,

exceeds

(iii) such amount as he may claim, not exceeding a reasonable amount as a reserve in respect of such of the proceeds of disposition of the property that are not due to him until after the end of the year as may reasonably be regarded as a portion of the amount determined under subparagraph (i) in respect of the property; . . .

The position of the appellant is that the evidence indicates that the balance of the proceeds of disposition of the partnership interest were only payable to Mr. Andrews at a time when the well-drilling operation provided sufficient cash flow so as to enable the purchasers to pay the balance of the proceeds of sale. In his submission, counsel for the appellant argued that on similar facts to the case at bar the courts have held that unpaid balances of purchase price or repayment of loans were not payable on demand, but payable only when the particular contingency or condition in each case had been satisfied; therefore that portion of the proceeds of disposition of the partnership interest not paid in 1981, were not due to the appellant until after the end of 1981 since the cash flow of the business was not sufficient at any time during 1981 to permit payment to be made.

Counsel placed great reliance on the reasons for judgment of the Ontario Court of Appeal in Re Gould, [1940] 3 D.L.R. 12. In Re Gould a niece, on receipt of a loan from her uncle, verbally promised to repay the money as soon as she possibly could after she and her husband got going on their farm, the uncle acquiescing therein. The Chief Justice of Ontario stated, at pages 16-18, as follows:

The promise formed part of the transaction of loan and was accepted by the appellant as a satisfactory promise of repayment. It is submitted, however, by counsel for the respondent that the statement is too vague to be given any legal consequence. He contends that the loan was repayable on demand, notwithstanding this promise to pay at a time in the future after certain conditions were fulfilled. There are many cases where a promise to pay “as soon as I am able”, or out of a specific fund not yet in hand and other similar promises, have been held a sufficient promise to take a case out of the Statute of Limitations after it has commenced to run: Tanner v. Smart, 6 B. & C. 603, 108 E.R. 573; Re Kensington Station Act (1875), L.R. 20 Eq. 197; Roblin v. McMahon (1889), 18 O.R. 219. In such cases, however, the Court does not disregard such a condition when attached to the promise to pay as being too vague to be enforced, but, on the contrary, requires the creditor seeking to enforce the promise to pay to establish that the condition of ability to pay, or whatever the condition may be that was attached to the promise, has been fulfilled. Respondent's counsel endeavours to distinguish cases of this kind and contends that they are not applicable here upon the ground that while to defeat the Limitations Act a promise to pay the past due debt is essential, there is not really a new contract between the parties, the new promise being a mere unilateral act of the debtor. Granting such a distinction may exist, it does not seem to afford any ground for holding that the promise may be more vague in its terms in the one case than in the other and still be a good promise that the Court will enforce according to its terms and not otherwise . . .

Further, on pages 21-22, Masten, J. added:

In Hammond v. Smith, 33 Beav. 452, 55 E.R. 443, Sarah Smith being indebted to the plaintiff wrote to him on March 4, 1856, stating that her parents were living, but were of great age and in a precarious state of health. She added “/ will pay you as soon as I get it in my power; before I cannot. I having nothing to pay with, or I should willingly do it.”

Her parents died on or before February 9, 1861, leaving her entitled to property more than adequate to pay the plaintiff in full. Sarah Smith having died in 1862, the plaintiff sued her executors in 1863. The Statute of Limitations was pleaded in defence.

The Master of the Rolls (Sir John Romilly) held that (p. 456) “the letter of the 4th of March 1856 constituted a distinct promise, on the part of the testatrix, to pay the debt when she should be of ability, and that the statute did not begin to run until the death of her father, when she first had the means of paying the debt.” Judgment accordingly.

In the case of Ingrebretsen v. Christensen, 37 Man. R. 93, the agreement was in the following words: “This is to certify that I Christen Christensen have received $357.00 as a temporary loan and that same is to be paid in full as soon as possible.”

It was held by the Court of Appeal confirming the judgment of the Court below that where the bearer promises to repay “as soon as possible” the Statute of Limitations will not begin to run until the bearer has ability to pay; and the same principle was upheld in the case of Re Wahn (1927), 4 D.L.R. 440, 37 Man. R. 95.

See also O’Neil v. Hanna, O’Neil v. Royal Trust Co. (1957), 8 D.L.R. 312 (Ont. H.C.J.) which considered and applied Re Gould, (supra).

In making the assessment the respondent assumed, amongst other things, that the following fact was true:

(c) The Appellant did not insist upon immediate payment of the remaining $40,000 being the balance of the purchase price and represented to his two sons that he would not insist upon payment of the unpaid balance of the purchase price until the oil drilling business of the partnership improved and it’s (sic) cash flow allowed it to pay the balance of the purchase price;

and concluded that:

(f) the arrangement between the Appellant and his two sons amounted to an unwritten demand loan for $40,000, being the balance of the purchase price of the partnership.

Respondent's counsel submitted that payment of the balance of purchase price on the basis the terms of payment of the debt provided for payment only when the business improved and its cash flow allowed payment were vague and uncertain and not legally enforceable. In the respondent's view the terms of payment did not set out a standard by which it is possible to determine when the means to pay the debt is acquired and no such standard was articulated by the appellant or his son during trial; further, neither the manner of making payment nor the time within which to make such payment is set out in the terms of payment. The vagueness of the terms of payment suggests, stated counsel for the respondent, that the terms were simply a private arrangement between father and sons supported by what might be termed social and moral gestures. Counsel for respondent referred the Court to Fridman, The Law of Contracts, (1976) 29, 35 and 39. Counsel submitted that there was no evidence the appellant and his sons intended the terms of payment to be legally enforceable, and in the absence of enforceable contractual terms, the debt in issue should be regarded as being payable on demand: McDermid v. Fraser, [1917] O.W.N. 292 at 293.

Counsel for respondent argued that the treatment accorded by the Court of Appeal in Re Gould to a promise to "repay as soon as possible” stands as an exception to the position normally taken by the courts in enforcing such terms, and the reasons for this departure, he indicates, stems from the manner in which the issue arose namely, by way of the defendant claiming that the plaintiff's action on a debt was barred by the Statute of Limitations; such claims had previously been dealt with for example in Re Wahn, (supra), by examining whether there had been an acknowledgment of the debt so as to take the debt out of the Statute of Limitations. Counsel submits that the decision in Re Gould represents an extension of the grounds on which a debt can be taken out of the Statute of Limitations when no such acknowledgment has been made and where, having regard to the intention of the parties, a Court considers it inequitable to terminate the rights of the creditor to take action on the debt: he concludes Re Gould should not be adopted as the basis for otherwise determining the enforceability of alleged terms of payment.

I am not asked to decide upon the enforceability of the debt in question. The debt by the sons to the father exists and is enforceable; the respondent does not dispute this. What the respondent's counsel appears to question is whether the terms only of the payment are enforceable. Earlier in these reasons I stated I accept without hesitation the evidence of the appellant and his sons. I do not believe the very unusual facts of this appeal preclude a time being fixed for payment of the debt and in my view the time was when the business had the cash flow to make a payment. This is no different than if the purchasers had promised to “pay . . . as soon as (they) possibly could . . .”, as the debtor did in Re Gould. The facts assumed by the respondent do not derogate from what Mr. Andrews and his sons stated at trial. There was no evidence presented during the course of the trial, nor did the respondent assume as a fact, that the parties to the transaction agreed expressly or implicitly that any portion of the balance of the purchase price of $40,000 was due prior to the end of 1981. There is no question in my mind that Mr. Andrews and his sons agreed that the balance of payment, or any portion of the balance, would be made as soon as it possibly could. Chief Justice Robertson had no difficulty in accepting this as a statement of the occurrence in Re Gould, op cit, page 16. "Such a promise from the niece”, the Chief Justice wrote, “is assuredly more in keeping than a mere dumb acceptance, and that seems upon the evidence the only alternative.” Surely when his sons told Mr. Andrews how and when they would be able to pay him the balance of purchase price, he knowingly, and not dumbly, accepted those terms. Counsel for the respondent did not provide any authorities in support of his view that the decision in Re Gould stands as an exception to the position normally taken by the courts in enforcing such terms.

I have some difficulty in appreciating the respondent counsel's argument, that the ratio of Robertson, C.J.O. and Masten, J. are narrowly based and ought not to be applied to determine the enforceability of terms of payment simply because the Ontario Court of Appeal was asked to rule on whether a debt was taken out of the Statute of Limitations. In Re Gould Robertson, C.J.O. concluded at page 17, by asking:

. .. Why cannot the Court give effect to all the terms of a promise that would seem to be a most reasonable and likely arrangement for repayment between the appellant and his niece, when a promise to pay with the same conditions attached, if made after the debt is due, would unquestionably be valid and enforceable? The time when payment is due, is to be ascertained by evidence in the same way in either case, and in either case the creditor to succeed in an action for payment would have to prove fulfilment of the condition — that is, in this case, that they had got going and become able to pay.

In an action against his sons for payment of the balance of purchase price, Mr. Andrews would have to prove fulfillment of the condition — that is, the business was generating the cash flow to pay him. For purposes of the case at bar, which is an appeal against an income tax assessment, Mr. Andrews must prove a negative fact: that a portion of the proceeds of disposition of the property was not due to him until after 1981. The evidence of Mr. Andrews' son was that prior to the end of 1981 only $10,000 of the balance of purchase price could be paid by the debtors or the corporation which acquired the business. What events affecting the business transpired after 1981 is of no concern to the Court for the purposes of deciding this appeal.

I am reasonably satisfied that according to the parties — Mr. Andrews and his sons — in 1981 there was no money in the business, to use their terms, to pay Mr. Andrews more than $10,000 on account of the balance of purchase price. No evidence was submitted to suggest this was not the case.

The appeal is allowed with costs.

Appeal allowed.