Ronald K Banister v. Minister of National Revenue, [1973] CTC 2036, 73 DTC 42

Roland St-Onge:—This appeal is from reassessments dated February 6, 1967, wherein taxes in the sums of $23,926.85 (plus interest of $20.28) and $55,992.77 (plus interest of $1,418.14) were levied in respect of income for the taxation years 1964 and 1965, respectively.

In those years the appellant controlled a personal corporation by the name of Banholme Holdings Ltd, which said corporation in turn controlled Banron Construction Ltd, a personal corporation (hereinafter called “Banron”), Banister Corporation, a US resident corporation and Banister Construction (1963) Ltd, now known as K R Ranches Ltd (hereinafter called “Ranches”).

On December 1, 1963 Banron sold to Ranches its whole business as a going concern, including a debt in the amount of $750,101.32 due by Banister Corporation to Banron.

In reassessing the appellant, the respondent added the sums of $11,796.56 and $35,682.14 to appellant’s personal income for the taxation years 1964 and 1965, respectively.

At the hearing no witness was called to testify and the Board was asked to render judgment from an agreed statement of facts after taking into consideration the written submissions to be filed by counsel for both the appellant and the respondent.

The reassessments were made because of increases in the income of Banholme Holdings Ltd in the amounts of $11,796.56 in 1964 and $35,682.14 in 1965, which increases were in the form of dividends that Banholme Holdings Ltd was deemed to have received from Banron. The income of Banron was increased by these amounts which consisted of interest deemed received by Banron on funds which it had advanced to Banister Corporation, a non-resident corporation. As no interest income was reported from this loan, the provisions of subsection 19(1) of the Income Tax Act have been applied and interest has been computed at 5% per annum on advances of $713,642.91 for a period of 121 days which was the length of Banron’s 1964 fiscal period ending April 30, 1964, and for the year 1965. At the hearing both parties agreed on the following facts:

Banron, a company incorporated on February 4, 1960 under The Companies Act (Alberta), and a pipeline contractor, made advances of moneys to an associated company, Banister Corporation, either as direct cash advances or by paying bills on its behalf, on various occasions starting from January 19, 1961, and on November 30, 1963 the total amount due by the latter was $750,101.32.

The Banister Corporation was a pipeline contractor and was also engaged in scientific research on a process of thin film coating.

On December 1, 1963 Banron sold all its assets and its business as a going concern to Banister Construction (1963) Ltd whose name was changed in 1970 to K R Ranches Ltd (Ranches) including the loans due by the Banister Corporation in the sum of $750,101.32. Banister Corporation later became Banron Construction Ltd.

On December 12, 1966 the offer made by the Banister Corporation to pay the principal of its indebtedness to Ranches in the sum of $1,435,800 with preferred redeemable shares of its own treasury was accepted by the directors of Ranches, and therefore Ranches received 14,358 preferred shares, 6% non-cumulative, non-voting and redeemable, of a par value of $100 per share, as fully paid and non-assessable in full payment of the principal due.

In his reply to the notice of appeal the respondent alleged that although the agreement of December 1, 1963 constituted an assignment of an existing debt, there was not in fact or in law any extinguishment of the said debt between Banron and the Banister Corporation; that while Ranches owned the loans and had the right to receive payment thereof, Banron was and remained a lender which was subject to tax under subsection 19(1) for the loan outstanding as of December 1, 1963 and which remained so in the 1964 and 1965 taxation years. Consequently he submitted to the Board that the appellant was properly assessed for the amounts of $11,796.56 and $35,682.14 as deemed dividends which had been received by the appellant from Banholme Holdings Limited, a personal corporation, and that these amounts were properly included in computing income in accordance with the provisions of paragraph 6(1 )(i) of the Act and also in accordance with the provisions of section 67 in respect of income from the said personal corporation. Respondent also alleged that the said two amounts cannot be construed as a reserve for doubtful debts covered by paragraph 11 (1)(e) as no interest was payable to the appellant since there was no express agreement between Banron and Banister Corporation to pay interest.

In his written submissions the appellant argued:

(1) that pursuant to the assignment of the debt due by Banister from Banron to Ranches in the sum of $750,101.32 by virtue of the sale agreement dated December 1, 1963 (Exhibit A-1), Banron ceased to be the lender for the purpose of subsection 19(1) after December 1, 1963;

(2) that an interest rate was stipulated on the said debt;

(3) that there was an absolute assignment of debt by Banron to Ranches;

(4) that the legal right to the said debt and the power to give a good discharge for the said debt without concurrence of Banron, the assignor, passed and have been transferred to Ranches;

(5) that, therefore, the debt belongs to Ranches after December 1, 1963; any interest accrued on the debt thereafter was due and payable to Ranches and not to Banron;

(6) that Banron not being a creditor any more could not have been a lender after that date;

(7) that Exhibit A-1 being governed by the laws of Alberta, subsection 34(15) of The Judicature Act, RSA 1970, c 193, applies to this case and reads as follows:

34. (15) Where a debt or other legal chose in action is assigned by an absolute assignment made in writing under the hand of the assignor and not purporting to be by way of charge only, if express notice in writing of the assignment has been given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim the debt or chose in action, the absolute assignment is effectual in law to pass and transfer

(a) the legal right to the debt or chose in action from the date of the notice of assignment,

(b) all legal and other remedies for the debt or chose in action, and

(c) power to give a good discharge for the debt or chose in action without concurrence of the assignor,

and is subject to all equities that would have been entitled to priority over the right of the assignee if this subsection had not been enacted.

At the hearing, appellant’s counsel, with respondent’s consent, filed the following exhibits (A-1 to A-5):

A-1. Agreement of sale dated December 1, 1963, between Banister Construction Co. Limited and Banister Construction (1963) Ltd.

A-2. Financial statements of The Banister Corporation for the taxation years ending March 31, 1963, 1965, 1966 and 1967 and for a month ended April 30, 1964.

A-3. Financial statements of K. R. Ranches Ltd. for the taxation years ending April 30, 1964 and 1965.

A-4. Minutes of a meeting of the directors of K R Ranches Ltd held on December 12, 1966.

A-5. Financial statements of Banron Construction Co Limited for the periods ending April 30, 1964, December 31, 1964, 1966 and 1967.

In his written submissions, counsel for the appellant summarized the

facts as follows:

4.0 Banron has sold to Ranches

4.1 “all the current assets and sundry investments and assume . . . as more particularly set out in schedule A hereto” (article 1 of Exhibit A-1) and

4.2 “all accounts receivable, book debts and other debts due or accruing to the vendor in connection with the said business and the full bentfit of all securities for such accounts or debts” (article 4 of Exhibit A-1).

5.0 Schedule A lists the following debt: “due from The Banister Corporation

— $736,720.43”. This sum in US currency amounts to $750,101.32 in Canadian currency.

6.0 Article 6 of Exhibit A-1 reads as follows:

“6. The Vendor shall take and/or cause to be taken all proper steps, actions and corporate proceedings on its part, including the approval of the sale by the shareholders of the Vendor, to enable it to vest a good and marketable title in the Purchaser to the asset and liabilities hereby agreed to be purchased, assumed and sold. The net liability figure shall be subject to adjustment according to the audited statement as of the date of closing. At the time of closing the Vendor shall deliver to the Purchaser such deeds of conveyance, bills of sale, assurances, transfers, assignments and consents as are required, and consents to the transfer of insurance, licences, leases, leasehold properties, contracts and rights as counsel for the Purchaser may require . . .”

7.0 Banron and The Banister are subsidiaries of Banholme Holdings Limited and Ranches, a sub-subsidiary of Banholme Holdings Limited which is the appellant’s personal corporation. The appellant and A J Cressey acted and signed in the name and on behalf of both the vendor and the purchaser the agreement filed as Exhibit A-1. The same persons were and still are president and secretary respectively of The Banister. Therefore, the vendor, the purchaser and the debtor were on December 1, 1963, acting through the intermediary of the same persons. In summary, the same persons were carrying three hats, each hat representing one of the three companies.

8.0 Note 1 to the financial statements for the periods ended April 30, 1964 and March 31, 1965, (Exhibit A-2) establishes clearly that the sum of $750,101 (Canadian Funds) is due to Ranches and not to Banron. The amount of $791,625 US funds, shown on April 30, 1964, is made of the debt assigned by Banron to Ranches on December 1, 1963, plus other advances made directly by Ranches to The Banister after December 1, 1963. The respondent has already recognized that other advances had been made by Ranches to The Banister after that date in his reply to Notice of Appeal in the case of Ranches vs The Minister of National Revenue. The Banister has consented to the assignment of debt and this is reflected in its financial statements.

9.0 Another indication of the acknowledgement by The Banister cf the absolute assignment of the debt is the full payment by The Banister to Ranches in December 1966 of its debt due to Ranches (including the sum of $750,101) by the means of 14,358 preferred shares of a par value of $100 each, 6% non-voting, non-cumulative and issued as fully paid to Ranches, resulting in the cancellation of indebtedness by Ranches, as shown in the financial statements for the period ended March 31, 1967 (Exhibit A-2) and in the minutes of a meeting of the directors of Ranches held on December 12, 1966, filed as Exhibit A-4.

10.0 The financial statements of Ranches (Exhibit A-3) support our contention, since they show the debt due by The Banister to Ranches (in Canadian funds) including the debt of $750,101 already assigned to Ranches by Banron and Note 3 to the financial statements for the period ended April 30, 1964, refers to the sale agreement.

11.0 The financial statements of Banron (Exhibit A-5) support our contention to the absolute assignment of debt, since the debt due by The Banister is not shown any more as a company’s asset.

12.0 There was a rate of interest of 5% per annum stipulated on the debt and Exhibit A-2 supports the facts recited in paragraphs 11 and 12 of the notice of appeals.

13.0 Exhibit A-4 supports also the fact that there was a rate of interest Stipulated on the said debt and mentioned that the interest amount will be repaid in due course.

14.0 The losses suffered by The Banister mentioned in paragraph 16 of the Notice of Appeals appear in Exhibit A-2. The accumulated deficit of The Banister was in the sum of $1,086,661 (US funds) as of March 31, 1966.

STATEMENT OF REASONS

15.0 Section 17(1) is not applicable since there was “an interest at a reasonable rate” stipulated on the debt, this is 5%.

16.0 There was an absolute assignment made in accordance with the provisions of section 34(15) of The Judicature Act of Alberta and the debtor, The Banister, has been informed of the said assignment, has consented to it, the best evidence being the full payment of its debt due to Ranches.

17.0 The question of “absolute assignment” has been decided in the cases of Canadian Terrazzo & Marble Co Ltd vs B Kaplan Construction Co Ltd and La Banque Provinciale du Canada, 1966 CS 505, Charles Guay vs J E Lecours (1908) RP 89, Dessureault Inc vs Dame Bastien 1960 BR 1052, 1962 RCS 97, United Trailer Co Ltd vs MNR, 1961 DTC 1162 and Bank of Nova Scotia vs Leblanc & Al., 1954 DLR 579.

18.0 In the tax case of United Trailer Co Ltd, there was an absolute assignment of the conditional sales contract to a finance company and the appellant’s status passed from that of creditor to that of the finance company’s warrantor, the appellant’s customers became contractual debtors of the finance company and there was no debt owing to the appellant or amounts receivable by the appellant in respect of which a reserve could be claimed. The Honourable Justice Dumoulin refers in this case to Bank of Nova Scotia vs Leblanc & Al. and reaches the conclusion that there was an absolute assignment.

19.0 Based upon the above jurisprudence, we believe, Mr President, that you cannot arrive at another conclusion than to decide that there was an absolute assignment of debt by Banron to Ranches, that all moneys became due to Ranches, that Banron not being any more a creditor, could not have been the lender who would have included in his income the accrued interests, since the accrued interests were payable to the new creditor, Ranches.

20.0 The respondent may invoke the fact that no notice in writing of the assignor to the debtor has been filed as evidence, but the purpose of this notice is to keep informed the debtor of his new creditor, Ranches, who has been subrogated in the rights of his old creditor, Banron, and the appellant has produced plenty of evidence ito that effect: ali parties concerned were acting through the same persons or representants, the appellant and A J Cressey, the financial statements, the minutes, the payment by preferred shares, etc. We may cite the case of Polson vs Wulffsohn, 2 British Columbia Report 39; for instance which decided that the intention of the parties may be inferred even from external circumstances including conduct.

21.0 We draw to your attention the fact that the Income Tax Act makes itself a distinction between a transfer of rights to income and an absolute transfer or assignment of property (section 56(4) where in the case of a transfer of rights to income, the amount shall be included in computing the assignor’s income. But in our case, it is not a transfer of rights to income or a transfer by way of charge or security but an absolute assignment. The Income Tax Act has to be interpreted strictly and section 17(1) for instance is different from sections 74(1) or 75(1) where an income from property transferred absolutely to the spouse or to the children is deemed to be income of the transferer and not of the transferee.

22.0 We maintain that from December 1, 1963, and thereafter, there was no “lien juridique” between Banron and The Banister, all legal rights to the debt having passed to Ranches with the remedies and power to give a good discharge for the debt without concurrence of the assignor, Banron. Therefore, there was no legal relationship of lender-debtor between Banron and The Banister and no debt outstanding between them. Then, how could there be any accrued interest if there was no debt.

23.0 If we pursue the respondent’s reasoning, the respondent will be in a position to continue to tax the income derived from an apartment building in the hands of its seller or the interest paid on a mortgage in the hands of its ex-owner.

24.0 If the assets sold had been in excess of the liabilities and interest charged on the purchase price Baron would, if we follow the respondent’s arguments, have been taxable on the interest paid (or accrued) to it by Ranches and on the accrued interest deemed to have been received by it from The Banister.

25.0 Another way of looking at the question would be to ask ourselves if the respondent, being a creditor of Banron, would have been able to seize the debt. The answer is ‘‘no’’, in accordance with the provisions of section 34(15) of The Judicature Act, since the respondent would not have been entitled to more rights than those, if any, possessed by Banron and since Banron did not possess any right in the debt, the respondent was not entitled either to any right in the said debt.

26.0 Section 17(1) applies only when “the loan has remained outstanding for one year or longer without interest at a reasonable rate having been included in computing the lender’s income”. Therefore, since no interest was legally due and payable to Banron, it follows that Banron could not include any accrued interest in computing its income.

27.0 Therefore, the conclusion in paragraph 20 of the appellant’s Notice of Appeals shall be upheld and the re-assessments vacated.

28.0 As an alternative and without prejudice of the above allegations, had the active debt due by The Banister not been sold by Banron to Ranches, any interest that would have then accrued to Banron would have been considered as a doubtful debt since in the light of the circumstances and the heavy losses sustained by The Banister, it would have been reasonable to set a reserve in an equal amount. (Falaise Steamship Company Limited, No 3 vs Minister of National Revenue, 1967 DTC 663 and Acadia Overseas Freighters Limited vs Minister of National Revenue, 1964 DTC 630).

On the other hand, counsel for respondent argued inter alia that there was no agreement between the two companies stipulating the terms of repayment or rate of interest to be charged on the loans; that

11. In December 1964, Banron amended its Memorandum of Association to increase its authorized share capital by the creation of 1,000 preferred shares with a par value of $1.00. (Exhibits A5 and A7).

12. The preferred shares were subject to certain rights, restrictions and conditions which follow:

(a) Each preferred share shall have the right to 800 votes at all meetings of shareholders;

(b) The Company shall redeem at any time the whole, or from time to time, any part of these outstanding preferred shares on payment for each share to be redeemed of (sic) the amount paid up thereon, when so directed in writing by the holders of no less than 40% of the voting rights of the company. (Balance sheet as at December 31, 1964).

13. These shares were issued on December 23, 1964, to the Bank of Nova Trust Company (Bahamas) Limited (hereinafter referred to as “Bank”) and the directors on December 31, 1964, were three staff members of the Bank with residence in Nassau. (Exhibit A-7).

14. Banron, since 1964, is an inactive corporation. (Exhibit A-5).

15. The appellant considers the loans between Banron and Banister Corporation to have been extinguished by novation when the assets of Banron were sold to Banister Construction. The 1964 and 1965 financial statements of Corporation include 5% unsecured advance payable to Banister Construction for US $791,381. and US $1,065,157. respectively; but this 5% unsecured advance does not appear as such in the financial statements of Banister Construction. In Banister Construction’s 1965 balance sheet appears:

Assets

	1965	1964
Due from affiliated companies:
The Banister Corporation	1,164,511.00	831.780
accrued interest	11,521.00
	1,176,032.00	831,780
Less allowance for loss	661,521.00
	514,511.00	831,780

Can one assume that the amounts include the $713,642.94 of advances, if it is not specifically referred to?

16. The position of the respondent is that although Banron transferred the loan to Banister Construction on December 1, 1963, and that Banister Construction owns the loans and has right to receive payment of the loans, Banister Construction is not the lender which is the person subject to tax under section 19(1).

17. The respondent also submits that Banron continue to be the lender described by section 19(1) and so liable as long as the interest-free loans made by it to the non-resident remain outstanding notwithstanding any sale of assets. He also considers Banron a personal corporation of Banholme in years subsequent to 1963.

18. The appellant argues that the sale of assets from Banron to Banister Construction, which assets included a receivable from Corporation extinguished the debt between Banron and Corporation by novation; there was a new contract between Corporation and Banister Construction.

19. It is our submission that in common law a debt may be transferred to a third party by assignment without extinguishing the debt; the assignment gives the assignee a right against the assignor personally, but not an independent right of action against the debtor. After the assignment, the relationship may change in a sense because the assignee becomes entitled to receive the money but he cannot be said to be the lender. In fact, the relationship of borrower-lender exists only between the two first persons who contract the obligation.

20. The appellant’s counsel is relying on section 44(15) of the Judicature Act RSA (1955) c 164. We respectfully submit that this section does not apply to the present case. There is no evidence as to whether the debtor received written notice of the sale of assets; the only evidence is that of a payable to Banister Construction in its book as detailed earlier.

21. There is also no evidence that all parties concerned were acting through the same persons or representants as suggested by the appellant’s counsel in his notes and authorities.

22. Novation is distinguished from assignment in that in the former the debtor must be a party to the transaction with the consent of all the parties concerned a new contract is substituted for the original. When the substitution of creditor is effected the transaction, to be novation, must clearly show the intention to extinguish the original debt; otherwise the novation fails for want of consideration.

23. Facts submitted by the appellant to establish novation are inconclusive.

24. Authorities quoted by the appellant’s counsel are also inconclusive. For example, in United Trailer Co Ltd (1963) DTC 1162, the appellant made absolute assignments of its customer’s contracts to a finance company, guaranteeing their fulfilment, and was unable to take a reserve under section 11(1)(e) since its status passed from that of creditor to that of the finance company’s warrantor. Novation is not discussed.

25. Subsidiarily and under reserve of the foregoing, we respectfully submit, Mr President, that before you could arrive at the conclusion that there was novation or that there was a transfer of debt by Banron to Ranches and that all moneys became due to Ranches, you should consider the interwoven relationship of the legal entities concerned which were not dealing at arm’s length. I respectfully submit, Mr President, that you should consider the artificiality of the transaction and consider whether for that reason the appellant’s contention should not be waived aside. The fact that a Canadian corporation sells a loan to an affiliated company, that is to say, a company controlled by the same group of persons, should not alter the position that the relationship pertaining to the entire amount due from Banister Corporation is that of a lender and borrower.

26. A taxpayer cannot defeat the purpose of section 19(1) by an alleged transfer of debt or by alleged inscriptions and/or writings in the balance sheets of inter-related or affiliated Companies.

27. As an alternative argument, the appellant submits that “had the active debt due by the Banister not been sold by Banron to Ranches, any interest that would have been accrued to Banron would have been considered as a doubtful debt since in the light of the circumstances and the heavy losses sustained, it would have been reasonable to set a reserve in an equal amount’’.

28. We respectfully submit that section 19(1) deems interest to be received and does not create a debt. Therefore section 11(1)(e) is not applicable in these circumstances.

29. During all the years involved, and although the Banister Corporation sustained very heavy losses, Banron was continuing to advance further money to the Banister Corporation. We respectfully submit that this money was advanced without any expectation of profit and without any intention of earning income.

30. In the light of the facts of the present case and according to the following authorities, no reserve can be allowed in computing the income of the appellant: No 81 v Minister of National Revenue, 53 DTC 98, 8 Tax ABC 82: Western Wood Products Ltd v Minister of National Revenue, (1963) Ex CR 380: New St James Ltd v Minister of National Revenue, (1966) Ex CR 977, and United Trailer Co Ltd v Minister of National Revenue, (1961) Ex CR 345.

Although counsel for the respondent has alleged that the transactions under consideration were artificial, he did not refer to any section of the Act and apparently there is no section therein to prevent the appellant from acting as he did. According to subsection 19(1), where a corporation resident in Canada has loaned money to a nonresident person without interest, as is the case in the present appeal, Banron (the Canadian corporation) having made a loan to Banister Corporation (a US company), interest at 5% per annum shall, for the purpose of computing the lender’s income, be deemed to have been received by the lender on the last day of each taxation year during all or part of which the loan has been outstanding.

According to the evidence, the loan in question, ie $750,101.32 among other things, was part of a transfer of a business as a going concern, and was transferred to Ranches, a new creditor. This transfer was made under the laws of the province of Alberta, which stipulate that such transfer operates an absolute transfer or assignment of property and that the debtor should be given notice in writing of such transfer. Obviously, the said written notice was not given by Banron to Banister but, apparently, it was unnecessary because all the parties involved were not acting at arm’s length and the evidence shows that Banister Corporation was well aware of the transaction and, furthermore, the subsequent transactions prove it.

Counsel for the respondent argued that Banron never ceased to be the lender and although there was a transfer of a debt, the transfer did not extinguish the debt and, therefore, Banron should be subjected to subsection 19(1) of the Act.

Such reasoning is far-fetched and even if Banron was the original lender, it does not mean that it was still the lender after December 1, 1963. Banron having, after that date, no further legal claim against the borrower, cannot be deemed to have remained the lender or the creditor. The new creditor is Ranches which, according to the laws of Alberta, received the absolute assignment of all the legal rights or other remedies for the debt and which was the only company in a position to give a good discharge for the debt without concurrence of the assignor. Furthermore, Ranches is subject to all equities that would have been entitled to priority over the right of the assignee if this subsection had not been enacted. Subsection 34(15) of The Judicature Act, RSA 1970, c 193 (Alberta Act).

Whereas there are no sections in the Act to prevent a taxpayer from acting as the appellant did, and whereas well-known jurisprudence exists to the effect that a taxpayer may arrange his affairs to pay the least income tax as long as he is acting within the ambit of the Act, the Board does not see how the respondent can prevent the appellant from arranging his affairs the way he did.

The Board does not hesitate in ruling that as of December 1, 1963 there was no lender-borrower relationship between Banron and Banister Corporation and consequently the debt was extinguished between the said parties. From that date, Banister did not owe any money to Banron, but the latter was obligated to pay the said debt of $750,101.32 to the new creditor, Ranches. This being the case, the appeal is allowed.

Appeal allowed.