Harold F. Puder v. Minister of National Revenue, [1963] CTC 445, 63 DTC 1282

THURLOW, J.:—This is an appeal from a judgment of the Tax Appeal Board (30 Tax A.B.C. 219) which dismissed the appellant’s appeal from a re-assessment of income tax for the year 1958. The issue in the appeal is the liability of the appellant for income tax in respect of a sum of $4,161.15 received by him in addition to the principal sum on the release before maturity of a mortgage which he held.

The mortgage in question constituted a first charge on a hotel property worth several times the amount thereby secured and was given by Mulhern Investments Limited on July 9, 1957 to secure repayment of a principal sum of $45,000 loaned to that company by the appellant together with interest at 714 per cent per annum. By its terms the principal sum was to be repaid in monthly instalments of $500 payable on the 15th of each month together with interest to date over a 714 year period but the mortgagor had the right to double the monthly payments after three years and the further right “to repay the balance after three (3) years of principal and interest to dates of payments together with a bonus of three (3) months interest’’.

In October 1958 when the mortgage had been running but 15 months the mortgagor on arranging a sale of the mortgaged property requested a release of the mortgage and the appellant acceded to this request but stipulated that the mortgagor pay ‘‘the unearned interest for that portion of the three year period remaining as a bonus, plus a further bonus of three months interest.” These amounted to $4,161.15 and $516.99 respectively and were paid by the mortgagor on October 31, 1958 on delivery of the discharge of the mortgage. In making the re-assessment the Minister included the former, though not the latter in the computation of the appellant’s income for the year in question and his action in so doing has been upheld by a majority of the members of the Tax Appeal Board.

At the hearing of the appeal to this Court it was conceded that insofar as the amount represented interest for the period from October 15 to October 31, 1958 it was income and was properly included but the liability of the appellant for tax in respect of the rest of the amount in question remained im issue. It was also stated in the course of argument that if the appeal succeeded it would be in order for the Minister to disallow as a deduction an amount of $208.05 in respect of commission paid to the appellant’s agents for collecting the amount in question.

The Minister’s case for including the portion of the $4,161. 15 remaining in question in the appeal in the computation of the appellant’s income was based on two grounds, the first of which was that the amount was interest and was received as interest or in lieu of interest and was therefore properly included pursuant to Section 6(1) (b) of the Income Tax Act, R.S.C. 1952, e. 148. That paragraph provides that without restricting the generality of Section 3, there shall be included in computing the income of a taxpayer for a taxation year

“6.(1) . ..

(b) amounts received in the year or receivable in the year (depending upon the method regularly followed by the taxpayer in computing his profit) as interest or on account or in lieu of payment of, or in satisfaction of interest ;”’

It was said that under the mortgage the appellant had but two claims, one to the principal sum, the other to interest, that the amount in question was not principal but had the quality of interest and could only be a sum received as interest or in lieu of interest, and that the amount would have been interest if earned and its quality as income would not change because of its having been received in a lump sum payment.

In my opinion this contention cannot succeed. It disregards the fact that the appellant had other rights besides those to repayment of the principal and interest at the time when the release was requested and it overlooks as well the fact that the amount in question was never earned as interest. Interest, in my opinion, is essentially compensation for the use or retention of money for a period of time (vide Riches v. Westminster Bank, [1947] A.C. 390) and here this element is lacking. The amount in question was not paid or received for or in respect of the use or retention of the principal sum for the period of 15 months or thereabouts during which the mortgage was in effect. Nor on the other hand was it paid or received for or in respect of the use of the principal sum for the remainder of the three-year period provided for in the mortgage for throughout that period the appellant had his principal sum and presumably the use of it as well and the mortgagor had neither. Though called interest the amount was accordingly not interest in fact and as it was not interest I do not think it can be regarded as having been -received as interest’’ within the meaning of Section 6(1) (b). In this respect the case resembles that which I had occasion to consider in R. G. Huston v. M.N.R., [1962] Ex. C.R. 69; [1961] C.T.C. 414, and I adhere to the opinion therein expressed. Nor in my opinion can the amount properly be regarded as having been received ‘‘on account of or in lieu of payment of, or in satisfaction of interest” within the meaning of Section 6(1) (b) since no part of the amount ever accrued as interest and no part of it was paid in lieu of or in satisfaction of any amount that ever accrued as interest.

The other ground upon which the Minister’s case was based was that whether or not the amount fell to be included as interest pursuant to Section 6(1) (b), it was properly included in the computation of the appellant’s income pursuant to Section 3 of the Act as income from property. Section 3 declares that. for the purposes of Part I of the Act the income of a taxpayer for a taxation year is his income for the year from all sources inside and outside Canada and, without restricting the generality of the foregoing, includes income for the year from all (a) businesses,

(b) property, and (c) offices and employments. By Section 4 it is provided that subject to the other provisions of Part I of the Act, income for a taxation year from a business or property is the profit therefrom for the year and ‘‘property’’ is defined by Section 139(1) (ag) as meaning property of any kind whatsoever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes a right of any kind whatsoever, a share or a chose in action.

The submission on behalf of the Minister on this ground was that the appellant’s investment in the mortgage in question was his principal sum which, being a fixed amount, could not increase in value and that anything he received in addition to the principal amount must have been profit from his investment and therefore income within the meaning of the statutory provisions.

In my opinion it is not correct either to regard the appellant’s property, during the time when the mortgage was in effect, as consisting merely of his right to the principal sum which remained outstanding on the mortgage or to regard the gain (to use as neutral a word as I can find) represented by the amount here in question as a profit from his property. The transaction in which the mortgage was given appears to have been a mere investment of capital in which the appellant parted with or exchanged his $45,000 for the rights which the mortgage gave him. These rights were not however limited to a right of repayment of the principal sum or to that right plus the payment of interest to the date of repayment but included all the other enforceable legal rights given him by the mortgage including the right to insist on payment of the principal and interest at the times stated therein. It was the whole of these rights which the appellant surrendered when he gave a release of the mortgage and the amount he received at that time in my opinion represented his property itself rather than profit from his property except to the extent that the amount represented a right or gain of an income nature. The portion of the amount received by the appellant which represented interest for the period from October 15 to October 31, 1958 in my view clearly had that nature for to that extent the amount by which the sum received exceeded the $45,000 which the appellant had invested in the mortgage was attributable to the fact that during that period a part of the principal sum was still outstanding on the terms of the mortgage and was bearing interest as therein provided. But with respect to the remainder of the increase or gain, beyond the fact that it was called interest, which in my view it was not, and the fact that it was calculated as interest is calculated, which, at most, is an equivocal fact, vide Glenboig Union Fireclay Ltd. v. C.I.R.,

12 T.C. 427, there is in my view nothing in the case upon which an income nature may be attributed to it. It was not a substitute for interest payable under the mortgage, for the whole of the interest which accrued under the mortgage was paid. Nor was it interest or income from the principal sum for the remainder of the three-year period, since it was in no sense derived from or even related to the use made of the money during that time. It appears to me to have been simply a sum received in respect of the relinquishment by the appellant of his right to insist on payment of the mortgage according to its tenor which in my opinion was not a right of an income nature even though retaining it would have resulted in income accruing to him. Moreover, I do not think that the fact that the appellant exacted the amount in question as a condition of giving up his right can affect the amount with an income quality or serve to characterize it as anything more than an amount received in exchange for a right of a capital nature by one not engaged in a business of making investments for the purpose of securing amounts of that kind. In my opinion therefore the amount in question was not a receipt of an income nature and was not income from property within the meaning of the Act.

The appeal accordingly succeeds and it will be allowed with costs and the re-assessment will be varied accordingly.

Judgment accordingly.