Donald Stanley Derbecker v. Her Majesty the Queen, [1984] CTC 138, 84 DTC 6136

Reed, J:—This is an appeal from a decision of the Tax Review Board which dismissed the appeal of the plaintiff from his assessment for the taxation year 1977.

On December 1, 1976 the plaintiff sold 1,715 shares of Heritage House Limited to his daughter Pamela Derbecker. The consideration for the sale of the shares included a promissory note payable to the plaintiff on demand after December 31, 1976. No demand for payment of the note was made in 1977. By noticeof assessment dated March 24, 1981 Revenue Canada included in the plaintiffs income for the 1977 taxation year the taxable capital gain attributable to the taxpayer’s disposition of the shares to which the note related.

The plaintiff taxpayer submits that the promissory note of Pamela Derbecker was not due to the plaintiff in 1977 because no demand was made thereon. The Minister claims that the note, being a demand note was due as soon as the taxpayer was entitled to make a demand and therefore the taxable capital gain had to be accounted for in the 1977 taxation year.

The relevant section of the Income Tax Act, RSC 1970, c 1970-71-72, c 63 as amended is subparagraph 40(l)(a)(iii). It provides that on the disposition of property a reserve may be claimed for sums in respect of that disposition which are not due to a taxpayer until after the end of a taxation year in question.

(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. . .

A great deal of argument by counsel focussed on whether a demand note became due at the date of delivery, or when a demand for payment was made. Counsel for the Crown focussed on those cases which have held that action may be commenced on a demand note before any formal demand for payment is actually made, and on those which have held that the limitation period begins to run from the date of delivery of the note. Royal Bank v Hogg, [1930] 2 DLR 488; Norton v Ellam (1837), 2 M & W 461; Belows et al v Dalmyn and Dalco Contractors Ltd and Toronto-Dominion Bank (Garnishee), [1978] 4 WWR 630.

Particular reliance was placed on the words of Riddell, JA in the Royal Bank case (supra) at 655:

. . .it has been law certainly for nearly a century since Norton v Ellam (1837), 2 M & W 461, and probably for centuries before, that a promissory note on demand is due as soon as it is delivered ... a demand-note matures for all purposes as soon as it is delivered . . .

Counsel for the plaintiff, on the other hand, did not dispute the authorities cited above but argued that a distinction must be made between (1) when an action might be brought on a note and (2) when payment must be made. He argued that the second point in time was the relevant one for the purposes of subparagraph 40( l)(a)(iii). He cited those cases which hold that before a demand note must be paid two things must happen: the debtor must receive notice (ie; a demand or notice that an action had been commenced on the note) and he must be given a reasonable time to pay: Massey v Sladen (1868), LR 4 Ex 13; Lister Ltd et al v Dunlop Canada Ltd (1982), 135 DLR (3d) 1; Mister Broadloom v Bank of Montreal and Clarkson Company Limited(Ont CA, dated December 12, 1983, unreported). Reference was made to the fact that the note on its face said “due on demand” and to a passage in Falconbridge on Banking and Bills of Exchange, 7th ed at 896:

A promissory note payable on demand is intended to be a continuing security. It is quite unlike the case of a bill payable on demand or a cheque, which is intended to be presented speedily.

In my view the cases on demand notes decided in the context of bills of exchange law do little but illustrate the fact that the word “due” can be used in two different senses. Counsel for the plaintiff referred me to the definition of the word set out in Jowitt’s Dictionary of English Law (2nd ed):

As applied to a sum of money “due” means either that it is owing or that it is payable: in other words, it may mean that the debt is payable at once or at a future time. It is a question of construction which of these two meanings the word “due” bears in a given case.

A demand promissory note could obviously be said to be “due” in both senses argued by counsel. The crucial question is which sense of the word “due” was intended in subparagraph 40(l)a()(iii) of the Income Tax Act.

I find the reasoning, although not the conclusion, of the Tax Review Board in Marvin L Hannem v MNR, [1980] CTC 2089; 80 DTC 1091 persuasive. In that case the applicability of a reserve under subsection 64(1) with respect to a demand note for the disposition of resource property was in issue. Argument in that case focussed on the 1974 amendment to subsection 64(1) in which the words ‘‘not receivable” had been replaced by the words “not due”:

“Due” is a somewhat imprecise word. A debt may be said to be due to a creditor before the time for payment has arrived so long as a fixed amount is owing to the creditor. That is one of the ordinary meanings of the word. However, that is also one of the meanings of the word “receivable”. Parliament, by substituting the word “due” for “receivable”, clearly expressed an intention to point to the time when “the amount or part thereof’ is required to be paid. This meaning is consistent, not only with a reading of the word in the context of the subsection as amended, but also with the normal assumption that, in the absence of some indication to the contrary, Parliament does not intend tax to attach simply on the creation of a liability. [Italics added.]

The Board in that case as in this, went on however to hold that a demand note was required to be paid as soon as it was delivered and therefore no reserve could be claimed.

Refrence was made in the Hannem case to the reasoning of Jackett, CJ in James F Kennedy v MNR, [1973] CTC 437; 73 DTC 5359 at 5361:

In the case of “income”, it is assumed, in the absence of special provision, that Parliament intends the tax to attach when the amount is paid and not when the liability is created. (The courts naturallly react against taxation before the income amount Is in the taxpayer’s possession.)

The whole concept of a reserve is predicated on the distinction between sums to which a taxpayer may be entitled and sums which at the date in question are required to be paid. It is clear that a promissory note payable only at an express future date, or upon the happening of a future event are not taken into income until that date or event arrives. Refer: The Queen v Timagami Financial Services Limited, [1982] CTC 314; 82 DTC 6268, for a case dealing with payments by instalments. See also: MNR v John Coif ord Contracting Company Limited, [1960] Ex CR 433; [1960] CTC 178; 60 DTC 1131 affirmed [1962] SCR viii; [1962] CTC 546; 62 DTC 1338. A demand note is not appreciably different except that the future event is a demand by the holder himself. In the absence of clear statutory language to the contrary I cannot find that the meaning of “due” in subparagraph 40( 1 )(a)(iii) was intended to differ in the two cases. In both cases it seems to me that what was intended was to tax the taxpayer not at the time he was entitled to the money but at the time when it was required to be paid to him. In ordinary language I cannot think that a holder of a demand promissory note would consider that there was a requirement on the maker of the note to pay the sum owing until either a demand had been made or an action comenced. In coming to this conclusion I am mindful of the rule of statutory interpretation that requires provisions of taxing statutes to be interpretated in favour of the taxpayer when they are ambiguous. Maxwell on Interpretation of Statutes, 12th ed 1969, at 251, 256; Driedger, Construction of Statutes, 2nd ed 1983, at 203ff.

It is true of course, that, subject to limitation periods and the taxpayer’s financial resources, tax liability on the sale of a capital asset could be postponed for a considerable length of time where a demand is not made on a demand note. This is not, however, a factor relevant to the interpretation of the statute.

Accordingly, I allow the plaintiffs appeal.