Massey-Ferguson Limited v. Minister of National Revenue, [1973] CTC 2088, [1973] DTC 66

A W Préciuk (orally):—The appellant appeals from the respondent’s reassessment for the taxation year 1967, wherein a sum of $31,956 was added to its income as interest, deemed to have been received on a loan of $1,000,000, US funds, to Perkins Engines Incorporated, a United States corporation hereinafter called “Perkins”, pursuant to the provisions of subsection 19(1) of the Income Tax Act in force at the material time and which reads as follows:

19. (1) Where a corporation resident in Canada has loaned money to a non-resident person and 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, interest thereon, computed at 5% per annum for the taxation year or part of the year during which the loan was outstanding, 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.

At the hearing the appellant took the position that there was no loan from the appellant to Perkins and, alternatively, if the Board should find that there was a Joan, that it was to a subsidiary controlled corporation within the meaning of subsection 19(3) which reads as follows:

19. (3) Subsection (1) does not apply if the loan was made to a subsidiary controlled corporation and it is established that the money that was loaned was used in the subsidiary corporation’s business for the purpose of gaining or producing income.

Evidence at the hearing established that the appellant had many subsidiaries and that Verity Plow Limited, a Canadian corporation (hereinafter called “Verity”), was a wholly-owned subsidiary of the appellant. Verity had no office of its own, no employees and no bank account. Its directors were full-time employees of the appellant. Perkins, according to the evidence, was a wholly-owned American subsidiary of Verity and was located near the City of Detroit in the United States of America and was engaged in the sale and servicing of Perkins diesel engines, manufactured in the United Kingdom by Perkins Engines Limited, a United Kingdom subsidiary of the appellant.

Perkins was in need of funds to continue its operations and apparently the appellant was approached in that regard. Mr Hyman A Sherman, who was the chief witness for the appellant, was employed full time by the appellant as consultant in matters of taxation and held the office of director of taxation. He was requested for advice on the possibility of an interest-free loan. Mr Sherman advised the appellant that the loan be made via Verity to Perkins. Exhibit A-4 as filed is a copy of the appellant’s memorandum dated February 27, 1967 to its employees, Blair and Wleugel, treasurer and assistant treasurer respectively. Said memorandum reads as follows:

February 27, 1967

Mr G Keith Blair

J P Wleugel

Loans to Perkins USA and Perkins Canada

Agrotrac via CIBC is presently lending Perkins Engines Inc, $300,000 at 6% per annum interest. It has been decided to provide Perkins US with an additional loan of $700,000 and Perkins Canada a loan of $250,000—both of medium term character.

As agreed with you and Mr Sherman, we will proceed as follows:

1. ) MF Limited will lend Perkins USA, US $1,000,000 via Verity Plow at no interest charge on March 26, 1967.

2.) MF Limited will lend Perkins Canada, Cdn $250,000 on March 26, 1967.

Whether or not interest will be charged to Perkins Canada, will depend upon MF Limited’s and Perkins Canada profit position. Mr Sherman will review this in September. If interest is charged to Perkins Canada, the rate will be 6% per annum.

3. ) Perkins Inc will, upon receipt of the loan, repay CIBC’s loan of $300,000 in full (plus accrued interest).

4.) It is not advisable to make Perkins US a subsidiary of MF Inc, due to the effect on MF Inc’s borrowing capacity and debt tests. (Refer Mr Sherman’s memo to Mr Tiffany of February 22, 1967.) Mr Sherman and I will review the position again in September.

It will not be necessary for Limited [sic] to borrow in order to obtain the $1,250,000 to be lent and consequently the problem of interest being disallowed for tax purposes does not arise.

[Signature]

JPW/rs

cc Mr H A Sherman

Mr K C Tiffany

bc Mr P A Giroux—please arrange for execution accordingly.

Exhibit A-5 is filed as a copy of the letter dated March 2, 1967 from

March 2, 1967

Mr R F Mead,

Director and Comptroller,

Perkins Engines Limited,

Peterborough,

ENGLAND

Dear Mr Mead:

Loans to Perkins Engines Inc, and Perkins Engines Canada Ltd.

Thank you for your letter of February 20, 1967. It has now been decided to proceed with the loans to Perkins Engines Inc, and Perkins Engines Canada Limited, and it has been suggested that they be handled in the following manner:

Massey-Ferguson Limited will lend Perkins Engines Inc via Verity Plow Limited, US $1,000,000 at no interest charge, on March 26, 1967. However, upon receipt of this loan, Perkins Engines Inc will repay the Canadian Imperial Bank of Commerce its loan of US $300,000 plus accrued interest. Massey-Ferguson Limited will lend Perkins Engines Canada Limited, Cdn $250,000 on March 26, 1967. Whether or not interest will be charged wiil be subject to review in September 1967. If interest is charged, it will be at the rate of 6% per annum.

I understand Mr H A Sherman will be meeting you some time in March, and he wili be able to explain the tax implications of the interest charges at that time.

We hope you will find these arrangements to be satisfactory.

Yours truly,

[Signed] “P A Giroux”

	P A Giroux
	Treasury Assistant
PAG/rs
cc Messrs G K Blair	P R Sheppard
F H Ladouceur	H A Sherman

Exhibit A-7 is filed as a copy of the letter dated March 27, 1967 from

March 27, 1967

Mr P R Sheppard,

Comptroller,

Perkins Engines Inc,

27575 Wixom Road,

PC Box 500,

Wixom, Michigan, USA

Dear Mr Sheppard:

Perkins Engines Inc $1,000,000 US Loan

This letter will confirm our telephone conversation of March 23, at which time we advised you that Massey-Ferguson Limited will lend Perkins Engines Inc, via Verity Plow Limited, US $1,000,000 on March 29, 1967, at no interest charge. These funds will be credited to your account at the National Bank of Detroit, Branch #52, Novi Branch, Wixom, Michigan, for value March 29, 1967. For accounting purposes this loan should be recorded as a shortterm advance from Verity Plow Limited.

However, upon receipt of this loan, Perkins Engines Inc, should repay the Canadian Imperial Bank of Commerce its loan of $300,000 US plus accrued interest up to March 29, 1967, which amounts to US $7,545.60.

It is important that your bank be made aware of these impending transactions so that they may be carried out without delay on March 29, 1967.

Yours truly,

[Signed] “P A Giroux”

P A Giroux

Treasury Assistant

PAG/rs

be Messrs G K Blair

R F Read

Exhibit A-6 is filed as a photocopy of the letter dated May 23, 1967

March 23, 1967

The Canadian Imperial Bank of Commerce,

25 King Street West,

TORONTO 1, Ontario

Attention: Mr L L Wilson—Manager’s Department

Gentlemen:

In accordance with our telephone conversation of today, would you please arrange the transfer of the following funds for value March 29, 1967:

1) $250,000 Canadian from the account of Massey-Ferguson Limited, CIBC, Toronto to Perkins Canada Limited at CIBC, Dixon Road and Martingrove Branch, Rexdale, Ontario.

2) $1,000,000 US in federal funds from the account of Massey-Ferguson Limited, CIBC, New York Agency, to Perkins Engines Inc, at the National Bank of Detroit, Branch #52, Novi Branch, Wixom, Michigan.

In addition, Perkins Engines Inc will repay on March 29, 1967, their loan of $300,000 US plus accrued interest calculated at 6% per annum. Agrotrac SA will be in contact with you regarding the disposition of their deposit of $300,000 US plus accrued interest on March 29, 1967.

Thank you for your co-operation in this matter.

Yours truly,

MASSEY-FERGUSON LIMITED

(Signature)

(Signature)

PAG/rs

bc Messrs G K Blair

A M van Geneygen

J P Wleugel

PS For accounting purposes the $1,000,000 US loan to Perkins Engines Inc should be shown as a short-term advance from Verity Plow Limited at no interest charge. The $250,000 Canadian loan to Perkins Canada Limited should be shown as a short-term advance from MF Limited. Whether or not interest is to be charged on this loan, will be subject to review in September 1967.

Exhibit A-9 is filed and contains inter alia advice dated March 29, 1967 to the appellant from Canadian Imperial Bank of Commerce, New York agency which reads as follows:

We DEBIT your account as follows:

Refer our Toronto Branch telegram

of 27th instant—

T/T National Bank of Detroit,

Novi Branch #52, Novi, [sic] Michigan

for credit Perkins Engines Inc.

$1,000,000.00

The appellant treasury employees then prepared a general ledger account for Verity to record the transaction in Exhibits A-9 and A-10.

On September 23, 1969 Verity, by letter, assigned the said loan of $1,000,000 US funds to the appellant.

The appellant called two other witnesses, namely F J Bradley, CA, its general financial information manager, and John P McCarter, CA, controller of Perkins at the material time and since. Neither of them added materially to the evidence already adduced. Mr McCarter assumed his duties on November 1, 1967 and has no personal knowledge as to the loan transaction in question.

It is a well-established principle and indeed trite to say that a taxpayer may arrange his affairs in such a manner within the ambit of the law which would render him the greatest advantage from the standpoint of taxation. It is equally well established that it is the substance rather than its form that is to be regarded in considering whether a particular transaction brings a party within the terms of the Income Tax Act. (See Dominion Taxicab Association v MNR, [1954] SCR 82; [1954] CTC 34; 54 DTC 1020.)

Nowhere in the exhibits filed is there any suggestion that there was to be a loan to Verity. In all instances the appellant speaks of a loan to Perkins via Verity. The fact of the matter is that Verity, neither by resolution or otherwise, asked for a loan, received it, nor lent any money to Perkins. The ledger sheets for Verity were prepared by appellant’s employees and the Board was advised by evidence of Mr Sherman that this was a record of a true fact. I have no hesitation in finding that the true fact was that this alleged transaction between the appellant and Verity was a fiction, pure and simple. I further find that the loan in the sum of $1,000,000, US funds, was made by the appellant to Perkins at the material time and that Perkins was not a subsidiary controlled corporation of the appellant. The appeal accordingly is dismissed.

Appeal dismissed.