Bonner,
TCJ
[ORALLY]:—I
will
now
give
my
reasons
for
judgment
in
the
Sumcot
appeals.
First
I
would
observe,
Mr
McGarva,
that
if
you
do
not
have
a
wristwatch
—
they
are
cheap
these
days
—
you
should
get
one.
It
is
the
duty
of
counsel
to
arrive
promptly
and
not
delay
the
Court.
Two
days
in
a
row
is
too
much.
Sumcot
Development
Corporation
Limited
appeals
from
assessments
of
income
tax
for
the
1978
taxation
year
of
its
predecessor
corporations,
William
Phillips
Investment
Limited
and
Sumcot
Development
Corporation
Limited.
Both
appeals
raise
the
same
issue.
It
is
whether
the
predecessor
was
entitled
to
deduct
a
reserve
under
paragraph
20(1
)(n)
of
the
Income
Tax
Act.
The
predecessors
had
each
carried
on
the
business
of
assembling
blocks
of
recreational
land,
subdividing
them
and
selling
individual
cottage
lots.
As
a
result
of
this
business
activity
the
predecessor
corporations
acquired
from
purchasers
a
number
of
mortgages
securing
payment
of
deferred
balances
of
purchase
prices.
On
October
23,
1978,
the
predecessors
entered
into
an
agreement
with
Associates
Realty
Credit
Limited,
which
I
will
refer
to
hereafter
as
“Associates”.
By
the
terms
of
that
agreement
Associates
agreed
to
lend
the
predecessors
$286,863.04.
The
principal
and
interest
were
to
be
repaid
in
monthly
instalments
equal
in
amount
to
the
principal
and
interest
payments
to
be
made
under
a
group
of
mortgages
acquired
by
the
predecessors
in
the
manner
just
described.
The
agreement
required
that
the
group
of
mortgages
be
assigned
to
Associates
as
security
for
the
loan.
The
Minister’s
position
was
that
the
predecessors
were
not
entitled
to
the
paragraph
20(1
)(n)
reserves
in
respect
of
the
assigned
mortgage
portfolios
because
no
amount
was
“due”
to
the
predecessors
under
those
mortgages
as
required
by
that
provision.
The
Minister
based
this
position
on
arguments
that
the
mortgages
had
been
sold
outright
to
Associates
and,
further,
that
the
mortgage
indebtednesses
were
not
due
to
the
predecessors
because
notices
of
assignment
of
them,
duly
executed
by
the
predecessors,
had
been
given
to
the
mortgagors.
I
find
both
arguments
unpersuasive.
The
plain
words
of
the
agreement
between
the
predecessors
and
Associates,
if
taken
at
face
value,
rebut
the
assertion
that
the
predecessors
sold
their
mortgage
receivables.
There
was
no
suggestion
that
there
existed
between
the
predecessors
and
Associates
any
relationship
which
could
explain
the
entering
into
an
agreement
for
sale
of
mortgages,
which
agreement
the
parties
saw
fit
to
cloak
and
disguise
as
an
agreement
for
a
loan.
There
is
nothing
in
clause
1
of
the
agreement
which
is
inconsistent
with
a
lenderborrower
relationship
accompanied
by
a
pledge
of
the
mortgages
as
security.
It
does
not
follow
from
the
fact
that
the
mortgages
generated
precisely
the
amount
of
principal
and
interest
necessary
to
meet
the
predecessors’
obligations
to
Associates
that
the
transaction
is
a
disguised
sale.
The
first
paragraph
of
clause
5
is
badly
drafted,
but
it
appears
to
reflect
an
agreement
that
the
assignment
of
any
individual
mortgage
was
to
become
absolute
if
that
mortgage
went
into
default
and
remained
in
default
for
thirty
days.
That
provision
and
the
second
paragraph
of
clause
5
are,
it
is
true,
of
a
type
which
might
normally
be
found
where
there
is
an
absolute
assignment
by
way
of
sale,
but
they
are
both
terms
which
a
lender
and
borrower
may
negotiate
if
they
wish.
The
same
comment
applies
to
clause
6(b).
This
is
simply
a
case
in
which
Associates
was
obviously
satisfied
that
the
mortgages
pledged
as
security
were,
whether
viewed
individually
or
collectively,
worth
their
full
face
value.
The
testimony
of
Theresa
Mackey
that
the
assignments
did
not
become
absolute
until
September
1983
when
the
loan
agreement
matured
was
not
shaken
or
rebutted
in
any
way.
I
turn
now
to
the
Minister’s
second
argument.
It
may
be,
as
the
Minister
assumed,
that
the
assignments
to
Associates
were
perfected
by
notices
to
the
debtors
or
mortgagors.
The
result
of
that
action,
however,
is
merely
that
Associates
was
put
in
a
position
to
take
action
directly
against
defaulting
mortgagors.
I
was
not
referred
to
any
authority
for
the
proposition
that
any
notice
given
by
Associates
to
the
mortgagors
could
have
had
the
result
of
changing
the
character
in
which
Associates
held
the
mortgages
from
that
of
pledgee
to
that
of
absolute
owner
of
the
receivable.
Accordingly,
the
appeals
will
be
allowed
and
the
assessments
referred
back
to
the
respondent
for
reconsideration
and
reassessment
on
the
basis
that
the
appellant
is
entitled
to
the
reserves
in
issue.
Appeal
allowed.
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