Gordon R Baker, and Kathryn E Baker v. Minister of National Revenue, [1980] CTC 2362, 80 DTC 1334

D E Taylor:—These appeals were heard on common evidence in the City of Toronto, Ontario, on February 19, 1980, and the issue in each case is identical, although there is a slight difference in the amounts involved. The appeals are against income tax assessments for the year 1975 in which the Minister of National Revenue provided the following information in making changes:

Kathryn E Baker

Your interest income had been reduced by $1,121.92.

Your carrying charges have been reduced by $1,172.92.

Your interest and dividend income deduction has been reduced by $998.41, as there was no bona fide acquisition or disposition of the bonds.

Gordon R Baker

Your interest income has been reduced by $1,121.92.

Your carrying charges have been reduced by $1,172.92.

Your interest and dividend income deduction has been reduced by $954.67, as there was no bona fide acquisition or disposition of the bonds.

In assessing the appellants, the respondent relied, inter alia, upon section 3, subsection 9(1), paragraph 12(1 )(c), subsection 20(14) and section 110.1 of the Income Tax Act, SC 1970-71-72, c 63, as amended. This decision is to be read in conjunction with the decision in Frederick Tim Smye v MNR.

Background

Gordon R Baker is a solicitor by profession, Kathryn E Baker is an employee of the Board of Education, North York, Ontario. Each claimed the full $1,000 interest and dividend deduction (section 110.1), but in reassessing the Minister allowed only an amount of $1.59 for Kathryn Baker as deduction under that section, which amount was received as interest separately from the amounts at issue in this appeal, and in a similar way, allowed the amount of $45.33 for Gordon Baker.

On December 29, 1975, each appellant placed an order with Yorkton Securities Incorporated (“Yorkton”) to purchase $30,000 of Government of Canada bonds at 7.5%, maturing July 1, 1978 (the “bonds”). On December 29, 1975, each appellant ordered Yorkton to sell the bonds.

Contentions

For the appellants:

There was a bona fide acquisition of Government of Canada Bonds by the taxpayers through their agent, Yorkton Securities Inc, and a bona fide disposition thereof. The taxpayers were at a risk and obligated to pay the amount of the purchase price on the purchase and were entitled to the proceeds of disposition on the disposition.

For the respondent:

—The Bonds were not assigned or transferred to the appellants within the meaning of section 20(14) of the Income Tax Act.

— Even if there was a transfer or assignment of the said bonds, the appellants earned no interest from the ownership of the said bonds, but in fact all interest that accrued prior to the date of the assignment or transfer of the bonds to the appellants was capital in the hands of the appellants, and not interest within the meaning of paragraph 12(1)(c) of the Income Tax Act.

— No interest from the said bonds was receivable by the appellants in 1975 within the meaning of paragraph 12(1)(c) of the Income Tax Act and therefore the appellants are not entitled to a deduction pursuant to section 110.1 of the Income Tax Act.

Evidence

The “buy” and “sell” slips from Yorkton for Gordon Baker showed the following:

12/29/75—bought—$30,000 GC bonds—amount $29,430—interest $1,121.92—net amount $30,551.92—settlement date 12/30/(75).

12/29/75—sold—$30,000 GC bonds—amount $29,430—interest $1,121.92—net amount $30,500.92—settlement date 12/30/(75).

The same slips from Kathryn Baker were identical in all aspects material to this decision.

Argument

Essentially, the position of the appellants was that Yorkton had acted as “trustee” or “agent” in three different roles—the purchase of the securities, holding them for the appellants, and selling them when ordered to do so. The fact that these three roles may have been conducted simultaneously was of no import in the view of the appellants. It was agreed by the appellants that they could not demonstrate delivery, but that this was their choice, not that of Yorkton.

Findings

Reference is made to the recent decisions of Vernon G M Fitzgerald v MNR, John R White v MNR, and W Thomas R Wilson v MNR. In the instant matters, there is no evidence of payment or of arrangements for payment to Yorkton which demonstrate that Yorkton would or could deliver the bonds to the appellants. The argument was competently advanced by Gordon Baker that the Board should view the “buy” transactions as if “beneficial ownership” had passed at that moment to the appellants. I am far from convinced that such an argument is tenable, but the more important point is that the evidence required subsection 20(14) for any such assertion is transfer— Physical delivery in this case. On the information available, in my view it is not open to the Board to conclude that such physical delivery was possible, without some further action (presumably payment) on the part of the appellants. Accordingly, the Board does not agree that the appellants have demonstrated that there was an “agency” relationship of any kind between themselves and Yorkton as “holding agent” in which the “transfer” of even a beneficial interest in the securities, let alone the securities themselves, had passed to the appellants. The evidence more appropriately supports a conclusion that Yorkton was holding the securities and retaining the beneficial ownership therein pending completion by the appellants of their part of the transactions—payment—which would then remove that impediment to transfer and delivery.

Without the right to take delivery in their own names, it has not been demonstrated to me that the appellants could have accorded such a right to another party as “agent”, notwithstanding any other rights they may have acquired by virtue of the “buy” orders.

Decision

The appeals are dismissed.

Appeals dismissed.