Peter Caspar! v. Minister of National Revenue, [1983] CTC 2001, [1983] DTC 45

M J Bonner [ORALLY]:—The appellant appeals from assessments of income tax for the 1975, 1976 and 1977 taxation years. As to the assessment for 1977, the appellant concedes that it is correct and consents to judgment dismissing the appeal therefrom. Judgment for that year will go accordingly.

The 1975 assessment was founded in part on a finding that in August of 1974 the appellant received a loan of $31,482.81 from Arames Holdings Limited, which sum the appellant caused to be paid to Royal Trust in satisfaction of a mortgage held by the latter on a house owned by the appellant’s son. The respondent regarded this sum as:

(a) a loan made to a shareholder within the meaning of subsection 15(2) of the Income Tax Act; and

(b) property paid or transferred pursuant to the direction of the appellant as a benefit the appellant desired to have conferred on his son within the meaning of subsection 56(2) of the Act.

As an alternative to the first point it was argued that a benefit or an advantage had been conferred within the meaning of subsection 15(1) of the Act. In this regard the respondent’s counsel relied on the evidence as to a rather hazy paper record of the existence of an obligation on the part of the son to repay Arames.

The appellant was the sole shareholder of Arames Holdings Limited. The son was, at the time the loan was made, an employee of the company. The appellant did not authorize the loan. It appears from the appellant’s evidence that he had little, if anything, to do with the transaction, save to discuss it with his son. The appellant did not initiate the transaction. As to the respondent’s suggestion that the transaction was not a loan at all, evidence on the books of Arames which consistently showed the transaction as a loan to the son, and the action of the son in repaying $17,000 to Arames in 1977, make it quite clear, I believe, that the transaction was a loan and not a gift, and that it was a loan to the son.

Subsection 56(2) of the Income Tax Act cannot be relied upon to redeem the assessment. Assuming that the appellant concurred in the making of the payment to the son of the moneys loaned to him, and assuming that such payment to the son was made in some way as a benefit that the appellant desired to have conferred on the son, subsection 56(2) could operate only to require the inclusion of the payment in the computation of the appellant’s income to the same extent as would be the case if the payment had been made to the appellant. If the payment of moneys loaned to the son by Arames had been made to the appellant, that hypothetical situation would not alone operate to transmute the loan made to the son into a loan made to the appellant. Subsection 15(2) can have no application here. The assessment is therefore in error and the appellant is entitled to succeed in this regard.

In assessing tax for 1975 and 1976, the respondent treated, as loans made to Arames by its shareholder, the appellant, within the meaning of subsection 15(2) of the Act, two other amounts, namely:

(a) $46,000, being the total of unsecured intercorporate loans made by Arames to Sunnydene Estates Limited; and

(b) $80,000, being a liability of Sunnydene to Arames secured by a mortgage on a house which, at one stage, was owned by Sunnydene.

The appellant was the sole shareholder of Sunnydene Estates Limited. It was common ground that the indebtedness arose originally from loans made by Arames to Sunnydene. The respondent’s thesis was that the loans were made to the appellant when the appellant purchased the house from Sunnydene pursuant to an agreement, Exhibit A-20, which called for the assumption of Sunnydene’s obligations to Arames in respect of the loans.

Put as simply as possible, it was the respondent’s contention that loans must have been made to the appellant by Arames because:

(a) in the case of the $80,000, the mortgage from Sunnydene to Arames was discharged and a new mortgage substituted on different terms; and

(b) in the case of the $46,000, the Articles of Dissolution showed that the corporation, Sunnydene, had no debts.

There was uncontroverted evidence that no money passed from Sunnydene to Arames in payment of the debts and that, thus, no money or property passed from Arames to the appellant by way of loan in connection with the transactions. The substitution of the new mortgage from the appellant to Arames was a transaction relating to security for indebtedness only and not a transaction which, as the respondent was forced to argue, necessarily involved a loan to the appellant. Questions as to whether Sunnydene was or should have been released from its covenants, whether express or implied, to repay Arames are irrelevant. What is essential in these appeals is the question whether any transaction took place whereby the two amounts were loaned to the appellant by Arames. I reiterate that the only loans which were shown to have been made were made by Arames to Sunnydene. The appellant’s liability to Arames in respect of those loans arises only from his undertaking to Sunnydene to assume its liabilities in respect of the loans. Nothing done by the appellant in the discharge of that undertaking involved the movement of money or property of Arames to the appellant by way of loan. All that happened here was a substitution for Sunnydene’s original covenant to repay money loaned to it of the appellant’s covenant to pay the same amount to Arames on different terms.

The operative words of subsection 15(2) are “made a loan”. I recognize that, in the result, the appellant has ended up in a position in which he is indebted to his company, Arames. That indebtedness did not, however, result from any loan made by Arames to the appellant. I think it is useful to refer to two passages from the reasons for judgment of members of the Supreme Court of Canada in MNR v T E McCool Limited, [1949] CTC 395; 49 DTC 700, both of which, in my view, apply here mutatis mutandis. At 708, Mr Justice Estey said:

Terms such as “borrowed capital”, “borrowed money” in tax legislation have been interpreted to mean capital or money borrowed with a relationship of lender and borrower between the parties. Inland Revenue Commissioners v Port of London Authority, [1923] AC 507; Inland Revenue Commissioners v Rowntree & Co Ltd, [1948] 1 All ER 482; Dupuis Frères Ltd v Minister of Customs and Excise, [1927] Ex CR 207. It is necessary in determining whether that relationship exists to ascertain the true nature and character of the transaction.

The other passage to which I would refer is in the Reasons for Judgment of Mr Justice Kellock at 712:

It is not sufficient to say that if the company had borrowed the amount of the note and paid McCool it would have been entitled to the deduction. However that may be, that was not done and the statute does not apply.

I might also refer to the Reasons of Mr Justice Rand where he said at 713:

It is, I think, misleading to convert a transaction of this sort into what is considered to be its equivalent and then to attribute to it special incidents that belong to the latter.

In my view, subsection 15(2) of the Act can have no application.

In the result, first, the appeal from the assessment for the 1977 taxation year will, as I have noted previously, be dismissed. Secondly, the appeals from the assessments for the 1975 and 1976 taxation years will be allowed and the assessments will be referred back to the respondent for reconsideration and reassessment on the basis that subsection 15(2) of the Income Tax Act did not warrant the inclusion in income of any amounts in respect of:

(a) the loan made by Arames Holdings Limited to the appellant’s son of $31,482.81; and

(b) the liabilities of the appellant to Arames Holdings Limited resulting from the appellant’s agreement with Sunnydene Estates Limited to assume the indebtedness to the former of the latter.

Appeal allowed.