Frederick Tim Smye v. Minister of National Revenue, [1980] CTC 2372

D E Taylor:—This is an appeal heard at the City of Toronto, Ontario, on February 20, 1980 against an income tax reassessment for the year 1975 in which the Minister of National Revenue reassessed the taxpayer on the following basis:

Your interest income has been reduced by $978.75.

Your carrying charges have been reduced by $965.34.

Your interest and dividend income deduction has been reduced by $978.75 as there was no bona fide acquisition or disposition of the bonds.

In so assessing, 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.

Background

Reference is made to the appeals of: Gordon R Baker, Kathryn E Baker, James Frederick Billett, B T Clark, George A De Courcy, R M Heeler, Robert Savage, Lynne Judith Salsberg, Eric Paul Salsberg, Gabor G S Takach, W Thomas R Wilson and John R White. They were heard at a special sitting of the Board which dealt with the same point in each case—whether the appellant was entitled to the interest and dividend deduction claimed under section 110.1 of the Act. The appeals were not heard on common evidence but it was agreed that this one set of general reasons would be written and that the specifics of the individual appeals would be considered and determined by the Board, within that framework.

At the commencement of the proceedings, counsel for the Minister filed with the Board the following statement:

RESPONDENT’S SUBMISSIONS

The cases before the Board can be broken down into two types:

(i) The appellant placed “Buy” and “Sell” orders with his Broker with respect to certain bonds; however, the bonds were never assigned or transferred to him.

The appellant may also have redeemed bonds which were never assigned or transferred to him.

(ii) The appellant took delivery of the bonds, or was the registered owner of the bonds, and thereby the bonds were assigned or transferred to him. The appellant then either sold the bonds prior to their maturity date, or held them to maturity and redeemed them.

In reassessing the appellants, the respondent assumed that the bonds were not assigned or transferred. The burden of proving otherwise is on each appellant. Where no assignment or transfer of the bonds has been shown, the respondent submits that section 20(14) of the Income Tax Act does not apply to include any amount in their income.

Frank Tyra I a v MNR, [1978] CTC 2905; 78 DTC 1659;

Ralph W Goldsilver v MNR, [1979] CTC 2805; 79 DTC 694;

K D Wollin v MNR, [1979] CTC 2827; 79 DTC 689;

Fred S Wagman v MNR, (unreported).

Where there has been an assignment or transfer of bonds pursuant to section 20(14), the Minister makes the following submissions:

Prior to the enactment of paragraph 20(14)(a), the amount received by a transferor on the sale of his right to interest income was not taxable as interest income, but was a capital amount.

IRC v Paget, 1938, 1 All ER 392;

Wigmore v Thomas Sommerson & Sons (1926), 1 KB 131;

No 729 v MNR, 26 Tax ABC 107; 61 DTC 137.

Pursuant to paragraph 20(14)(a), this amount is included in the transferor’s income with the result that he is taxed on the interest which accrued during the period he held the bonds, notwithstanding that this amount is not actually payable until after the transfer. Where the transferee has become entitled to interest in respect of the period commencing before the transfer and ending after the transfer which has been included in his income pursuant to paragraph 12(1 )(c), paragraph 20(14)(b) provides a deduction for the portion of the amount received that is a product of the “right to interest” he purchased as an account receivable from the transferor.

Where the transferee redeems his bonds, section 20(14) does not require him to include this amount in his income. Nor must the transferee include this amount in his income pursuant to paragraph 12(1)(c), as the “interest” for the purposes of the Income Tax Act has been defined as compensation for the use or retention of money for a period of time. The accrued interest to which the transferee becomes entitled is in compensation for the use or retention of the transferor’s money.

Yonge-Eglinton Building Limited v MNR, [1972] CTC 542; 72 DTC 6456.

Where the appellant has redeemed the bonds, the amount of interest which accrued to him during the period he held the bonds would be included in his income pursuant to paragraph 12(1)(c). An interest and dividend income deduction under section 110.1 would be available to the appellant to the extent of the interest income actually earned by him.

Where the appellant has sold the bonds, the amount included in his income under paragraph 20(14)(a) is not interest, but is the capital amount he received for the right to interest which he purchased from the previous transferor and, in some cases, his right to the interest which accrued to him. Section 20(14) does not deem this capital amount to be interest. This capital amount is only included in the appellant’s income where he assigns or transfers the bonds to another transferee and the portion that did not accrue to him is automatically deducted from his income pursuant to paragraph 20(14)(b)(ii).

Because the appellant sold his right to the small amount of interest which accrued during the time he held the bonds, this small amount is not included in his income as it is a capital receipt.

IRC v Paget, supra.

Pursuant to section 110.1(1), a $1,000 interest and dividend income deduction is allowed against the amount of interest included in computing a taxpayer’s income for the year. This deduction is not available where a capital amount in respect of a right to accrued interest has been included in an appellant’s income pursuant to paragraph 20(14)(a). The respondent submits that the interest and dividend income deduction is only allowable to an appellant who has earned and received interest which he would be required to include in his income pursuant to paragraph 12(1)(c). Therefore, only the appellants who redeemed their bonds would be entitled to an interest and dividend income deduction to the extent of the small amount of interest they received for the period during which they held the bonds.

Michael A Steeves v MNR, [1979] CTC 2445; 79 DTC 378.

General Evidence and Argument

The individual appellants presented information which stressed relevant elements of fact and law, and counsel for the Minister responded to each case. At the risk of certain selectivity and interpolation for clarity, I quote portions of the arguments given in different submissions which have general relevance and application to the major principles involved:

For the appellants:

Delivery as in the sense of a physical delivery to the taxpayer ... is not a necessary part of the transaction ... the actual delivery. The brokerage house with the bonds in inventory has possession. The brokerage house sells to myself, the taxpayer. The brokerage house then holds the securities, still holds the securities in its possession, but for a different account. It holds it for my account and in fact is a trust.

When I sell the bonds subsequently, in this particular case they purchase for their own transaction as principals, they took the bonds back into their inventory, their would be an offsetting debit against my account and credit into their account and so the bonds on a transaction basis would move from one account into my account, out of my account and back into their account on a transaction basis.

The actual physical delivery to me is not necessary. They are holding the bond and they are holding the bond in a trustee relationship on my behalf.

. . . and to say that those people actually have to take physical delivery on their premises of the bonds flies in the face of what is happening in the real market today.

(The Brokerage firm) held these bonds in trust for me. It is a simple trust. If nothing more, it is an equitable (trust), but it is a trust and it rises on the transaction of the calculation.

In a sense, the broker is acting for you as an agent in dealing with your money and taking delivery of securities . . .

. . . I would submit that (the appellant) purchased the bonds. He had ownership of the bonds. I would further submit that it is irrelevant whether he had physical possession of the bonds or whether his agent at the bank had possession of the bonds. I would submit that the relationship between the appellant and the bank is irrelevant to this transaction. ... His bonds were purchased from a brokerage house ... financing arrangements behind the scene are quite irrelevant. They have to do with him and the bank, nothing with him and the brokerage house and that is where the transaction took place. It was a bona fide transaction. (They were in the custody of) his agent—the bank, in terms of holding them or for safekeeping . . .

I submit that really the question here is the bona fide nature of the transaction and whether or not these bonds were transferred and if they were not transferred to my client, then they must’ve been transferred to someone, ie the bank. Well, there are millions of commercial transactions today where banks act as agents or as custody, where they may in some cases have legal title to documents where the equitable title and ownership will reside in the person.

Nowhere in the Act does ownership come up. It is merely a question of transfer, and transfer I submit can only be to one party (the appellant). To hold otherwise would imply all kinds of ludicrous results. That would mean that the bank would be responsible for interest payment. They would be deemed to have received interest and so on and so forth, which of course is never the case. I submit that in this case, it was strictly bona fide transaction.

It seems to me the central thing is that there appears to be a loophole here. It was here for a year . . .

I think taking a very narrow constructive view of these things and if it was literally to be applied in commercial transactions on a daily basis, I think the whole transaction would be rendered meaningless and commercial practice would go out the window.

(Section 110.1 subsection (j)) hasn’t changed anything with (respect to) 20(14) or 12(1)(c). Section 20(14) seems to be quite workable as far as I understand it, except that the problem here is, without plugging the loophole by using section 110.1(j), the taxpayer got a double deduction and that is what it is all about.

You have credit for interest deemed under subsection (14) which he (may have) never earned (according to section 12(1)(c)).

It (section 20(14) says “entitled to interest in respect of the period commencing before the time of transfer and ending after that time that is not payable until after the time of transfer”. We have agreed to the common law definition (that) you are entitled to interest until interest is due and payable. That is the interest under 12(1)(c). This is kind of a confused section. I submit that it recognizes the fact that interest is only accruing, but it is not payable. It will not be payable until some further time and I think the words in this section, although awkward, are broad enough to give (a) deeming definition of interest. In other words, a different kind of interest, (emphasis mine)

I think this section was badly worded. I think it should’ve read “entitled to an expectancy in interest” when this became due or something like that. I think this section should be modified.

But I think what the Minister is arguing is . . . totally contrary to all convention that exists in the market today. Millions of dollars of bonds have been traded hourly on the basis of the interpretation that I place on this section, while we have agreed that the wording is not correct.

Among others, the following case law was particularly referenced by the appellants:

Lyle & Scott Ltd, 1959 Appeal Cases, 763;

Fasken Estate v MNR, [1949] 1 DLR 810; [1948] CTC 265; 49 DTC 491.

For the respondent:

The answer to Appellants . . . is . . . you never owned the bonds, . . . all you owned was a right to the bonds and maybe that (right) (in certain circumstances) was transferred to the bank. ... In that analysis, I think all the appellants’ appeals would fail on the basis that there hasn’t been in their case an assignment or other transfer of the bonds within the meaning of section 20(14).

. . . the Minister also admits that there is an arguable case for the postion that the words “other transfer” should be opened up to include a buy order. If “other transfer” is defined in that way, then these appellants may have owned the bonds at some point in time. Instead of deciding when the right to the bonds arose, which is a lesser problem, the Board will have to consider when ownership of the bonds arose. The Minister would then be forced to submit that ownership of the bonds does not arise on a buy date. It only arises when the appellant or the taxpayer would be entitled to interest. They would be entitled to interest when they had paid for the bonds, when they would be entitled to the bonds let’s say, and that would be the settlement date in my understanding.

Section 110.1 sub (2)(j) does further clarify the Minister’s position. However, its inclusion in the Act in the following year is not an admission of a loophole in the previous year. It confirms rather that the intent of the section was to provide a benefit to a taxpayer who has earned income himself assuming there was an assignment or transfer, then that appellant became entitled to interest income, a small amount, the amount that he actually earned (after the transfer) would be included in his income and that would be available for interest and dividend income deduction, a small amount (though it) might be.

In the (various) cases before the Board, there are a number of different types. In some cases, the bonds are bought and sold on the same date and no interest was earned during the short length of time that the appellant either owned the bonds or owned a right to the bonds.

In the second type of cases, the bonds were held for a day, two or three or more . . . That type of situation can be broken down further—Some of those appellants sold and some of them redeemed. Appellants that sold, sold their right to interest and under the common law, that would also be included in their income as capital amount. Those that redeemed their interest, their right to the interest that they had earned crystallized and would be included in their income under 12(1)(c) . . .

The appellant states that the bonds were held in trust for him, but in the intervening time between the buy and sell orders, no bonds were identified to be held in trust for him. If there was a trust, it was only a trust of an unidentified bond which had not yet been secured, picked out, identified or (possibly even) received by the broker.

It can be noted from the appellants’ arguments that some taxpayers stress the “ownership” aspect, disregarding the necessity for transfer, while others attach importance only to the “transfer” and do not agree that “ownership” is even necessary. The proposal of the appellants might be summarized as: “Although ‘assignment or other transfer’ in Tyrala (supra) was equated by the Minister to essentially ‘registration or delivery’ and accepted as such by the Board, the term should not be so rigidly interpreted for purposes of subsection 20(14) of the Act since (a) the common business practice in the investment trade is to deal with the ‘buy’ and ‘sell’ orders as evidence of ‘assignment or other transfer’, and even though the formalities are not completed at that point, the party retaining the securities is in the role of ‘agent’ or ‘trustee’ for the purchase; and/or (b) the Minister has been assessing since the introduction of subsection 20(14) in 1952 on the basis of the ‘buy’ and ‘sell’ orders, and only the passage of section 110.1 of the Act, effective in 1974, caused the re-examination underlying these appeals.” Counsel for the Minister recognized the import of these arguments and suggested that it was within the purview of the Board to look at them. However, counsel did not purpose that custom or practice by either party should be the determining factor in the interpretation of the section now that its construction and language were being reviewed.

The “trustee” or “agent” argument was examined rather fully in a discussion between the presiding member (M) and one of the appellants (A) as noted:

(M) . . . in effect you are saying the stockbroker was also trustee for you in the holding of these stocks. Is that what you are saying?

(A) I don’t know the legal implications of calling him a trustee, but the bonds were bought on margin and he held those bonds as security because I didn’t pay him for those bonds.

(M) That is the crux of the problem—to figure out how you are entitled (to the) deduction when you readily admit you did not hold the bonds, you were not in possession of them at any time, and you couldn’t do so unless you paid your account to the stockbroker ...

(A) I contend that I owned them (from) either the transaction date or the settlement date, I don’t know which from a legal point of view. . . . He was holding my bonds as security for the money that I owed him, but they were definitely my bonds as the statement indicates and the transaction slip.

(M) . . . the essence of the Minister’s contention is that what was redeemed on your behalf and that for which you were paid was the beneficial interest that existed for you in those bonds, but not the bonds themselves. That is a very difficult distinction to comprehend—to separate the role of stockbroker (in purchasing them) from the trustee (in holding them). The difficulty is to see the link between the acquisition from the stockbroker of a beneficial interest or a right to something, and the security itself, which produces interest. The question here is interest and the beneficial interest or the right to interest (as you would like it called) could produce no interest (in its own right)—(only the) security itself can produce interest . . .

(A) . . . my contention is that the bonds were held in my margin account as security for my loan, the fact that they were not actually registered or transferred or physically delivered in my name I feel does not alter the situation or doesn't make the interest not my interest. In connection with section 12(1 )(c), as I understand it, the Minister is saying that interest accrued up until the transaction date is not interest to the purchaser whereas interest accrued between the transaction date and the maturity date or the date the security is sold is interest. I find that incredulous that prior to that date it is and after that date it isn’t, whether they are transferred or registered or whatever.

General Findings

The Board recognizes the difficulty, possibly even the dilemma of the parties in these appeals with respect to the term “assignment or other transfer’’. However, in my opinion, no evidence of fact, or argument of law, has been proposed to the Board whereby that term can or should be adapted to the exigencies of the practice of either the trade or the Minister for purposes of subsection 20(14), while at the same time leaving the same term, or the individual words “assignment’’ or “transfer” with their historically developed meaning (as detailed in Tyrala (supar)) for other purposes of the Income Tax Act. Mr M Bonner, a Member of this Board, recently dismissed a similar appeal (Fred S Wagman v MNR,—unpublished) with the following comment:

In this case, there was evidence only that the appellant placed an order with his broker and received a confirmation of that order which was a purchase order and that he placed an order to sell and received a confirmation of the sale. That evidence of a transaction between the appellant and his broker does not, in my view, establish that there was an actual assignment or other transfer of a bond, nor does it establish that the appellant became entitled to interest. An assignment or other transfer contemplates a change in property in the bond. The evidence did not establish whether the bond was a bearer bond or a registered bond. If it was a bearer bond, there is no evidence which indicated that any act took place as a result of the placing of the order, which transferred properly any given bond or group of bonds to the appellant. If the bond was a registered bond, there is no evidence on which I can find that the appellant ever became the registered owner of the bond and thus became entitled to payment of interest.

Thus, on the main issue, because the appellant has failed to make out a case establishing the factual premise on which he rested, the appeal must fail.

Therefore, when no evidence of registration or physical delivery of the security itself has been presented to the Board, the appeal must be dismissed.

On the “trustee” or “agent” aspect proposed, the designation of an arrangement can be termed an “agency” only if the circumstances surrounding it demonstrate in fact and in law the claim that an agency exists. The implied agency arrangements proposed by some appellants failed to take into account the major consideration (the financial obligation) in any way. In my view, the Board cannot accept the “agency” assertion where there was any impediment whatever to the appellant himself accepting delivery (transfer) of the securities. The lack of payment in full to the “purchasing agent” (whether the same party or a different party than that proposed as the “holding trustee or agent”) would constitute such an impediment and leave the transaction outside the parameters of the term “assignment or other transfer”). I cannot feature that a taxpayer in the circumstances of these appeals can place a second or third party in a position more advantageous than that which he himself enjoys, simply by calling that other party “an agent”. In this connection, I would make general reference to Smith, Stone and Knight Ltd v Birmingham Corp, [1939] 4 All ER 116.

With regard to the arguments dealing with “interest” (in the circumstances where there is evidence of assignment or transfer), I would quote with approval a comment from the respondent’s written submission given above:

Pursuant to Paragraph 20(14)(a), this amount is included in the transferor’s income with the result that he is taxed on the interest which accrued during the period he held the bonds, notwithstanding that this amount is not actually payable until after the transfer.

However, in my view, this is at variance with, and negates a later comment in ths same written submission:

Because the Appellant sold his right to the small amount of interest which accrued during the time he held the bonds, this small amount is not included in his income as interest income as it is a capital receipt.

“Interest” for purposes of paragraph 12(1)(c) is only earned when it is due and payable, not simply when it can be calculated as “accrued” under the provisions of subsection 20(14). Efforts were made by some of the appellants to use the words from paragraph 12(1 )(c)—“on account of or in lieu of payment of, or in satisfaction of, . . to cover an amount called “accrued interest” which was received on sale of a security before the due date of an interest coupon, in additon to the capital value of the security. I do not agree. That is the precise situation provided for within subsection 20(14) of the Act, but then only after “assignment or other transfer”. Interpretation Bulletin IT-284R extends the provisions of paragraph 12(1)(c) to a form of accrual for reporting interest income to allow for particular funds receivable but not received. However, the Bulletin contains this important caveat: “However, the accrual method does not extend to allow an amount of interest that has not yet been earned to be included in income.” In my opinion, amounts included in income on fulfillment of the provisions of section 20(14) are so included as interest even though they may not be identical in all aspects and characteristics to other amounts to be included as interest under paragraph 12(1)(c).

This leaves to be considered the situation where there is no evidence of “assignment or other transfer”, and yet because of the bond market trans- actions entered into by the appellants, there was a profit (or a loss) related to the alleged “accrued interest” either on sale or redemption of the security or bond coupon. The spectre was raised at the hearing that in the event that these amounts are not to be included under the provisions of subsection 20(14), they might escape tax altogether, or be “capital” amounts or something else. Reference was also made to the problem which might face the alleged “transferor”under subsection 20(14) in a situation in which it became clear there was no “transfer” (in the sense of delivery”) as required by the Minister. The determination of these questions is not the subject of this decision, but the provisions of subsection 16(1) of the Act might have some relevence:

Income and capital combined.

(1) Where a payment under a contract or other arrangement can reasonably be regarded as being in part a payment of interest or other payment of an income nature and in part a payment of a capital nature, the part of the payment that can reasonably be regarded as a payment of interest or other payment of an income nature shall, irrespective of when the contract or arrangement was made or the form or legal effect thereof, be included in computing the recipient’s income from property.

From the above, it is not evident to me that such amounts which might be included in income by virtue of that section would necessarily be classified as ‘’interest”.

The Board also notes, simply for the record, a relevent section from Interpretation Bulletin IT-396 dated October 17, 1977:

Accrual Method

6. Under the accrual method, interest is recognized as being earned on a daily basis, regardless of the date that the interest debt becomes receivable or is received. In the example given in 4 above, a taxpayer adopting the accrual method would report interest of

(275	)
$67.80	x $90.00) for 1977 in respect of
(365	)

that particular bond. While paragraph 12(1)(c) does not specifically recognize the accrual method, it is the practice of the Department to permit a taxpayer to adopt this method provided it is followed consistently from year to year. (Emphasis mine)

It might well be argued that paragraph 12(1)(c) not only does not specifically recognize the accrual method, it virtually rules it out.

General Summary

Therefore, whether or not the Minister challenges the results of all transactions conducted under the brokerage house “buy” and “sell” arrangements, does not change the fact that the Minister in the appeals before the Board has challenged the “bona fides” of these particular transactions, at least to the degree that evidence of “transfer” must be demonstrated. Neither the rationale for that challenge nor the results which flow from its determination are direct considerations for the Board in deciding the merits of the basis upon which the Minister has reassessed in these particular situations. Where there is no evidence of physical registration or delivery, the appeal will be dismissed; where such registration or delivery is asserted by virtue of a trustee or agency relationship, then that will be considered only if it is established that no impediment, including payment, remained to prohibit such registration or transfer to the individual appellant. Amounts to be included in income after passing the above tests, whether under paragraph 12(1)(c) or subsection 20(14) of the Act, will be regarded as interest income for purposes of section 110.1 of the Act.

Again, for the record, the remarks in this decision to this point have general application to all the appeal cases noted at the beginning, as well as to that of Frederick T Smye, with which the Board will now deal.

Frederick T Smye

Turning finally to the specifics of this particular appeal, the essential evidence as understood by the Board is as follows:

—The appellant is an insurance salesman;

— In early December 1975, he ordered $27,000 of Government of Canada bonds from McLeod, Young, Weir & Company Limited, stockbrokers;

—On December 12, 1975, he paid $27,965.34 by certified cheque (including an amount for accrued interest);

— He took possession of the bonds on that date;

—The bond numbers were:

F56E15458, E15193, 006780, 006651, 004907, 006627, 006748.

— He delivered them to his bank the same day as quickly as possible.

—At the time of purchase of the bonds, he had existing bank loans and funds, but may have borrowed some part of the amount required, either before or after the purchase and delivery.

— He was unable to locate any particular bank or personal records which would have provided loan details for this hearing.

—On December 15, 1975, the bonds matured and were redeemed.

—On that date, he received interest totalling $978.75.

— In the preparation of his income tax return, he included the amount of $978.75 as interest income, deducted the amount of $965.34 as interest expense, and further claimed the $978.75 as interest and dividend income deduction.

According to the testimony of the appellant, the purchase was accomplished in the following manner:

I took physical possession of them and I remember walking back to my bank with fear in my heart that I would get mugged on the way back to my bank and I have receipts showing they were deposited there.

The Chairman:

That is a very interesting change because to my recollection, no one up to this moment in discussing this matter has said to me that he did have physical possession of the bonds.

The appellant: I did. I assumed that everyone did.

The Chairman:

.. . You are saying at one point in time you physically took delivery of the bonds.

The appellant: Yes.

And under questioning by his counsel:

Q. Can you be any more specific about the arrangement between you and your bank? Did they tell you that they wanted you to deposit the bonds with them?

A. To be perfectly honest, I don’t know. I know that I would have wanted the monies to go back into my account. That is why I say I am not exactly sure whether there was a partial loan to get up to the $28,000 or not.

Q. So you can’t remember either the amount of the loan or what the security of that loan was supposed to be?

A. .. . the amount of the cheque had to be for the twenty-seven (thousand) nine sixty-five and if there actually was a loan, | really can’t say.

Q. Why did you take the bonds to your bank?

A. ... there must have been a loan or some reason why I I took it to the bank as opposed to leaving them at McLeod, Young, Weir, but again I am not quite sure. I don’t know.

Q. Now, did you sell these bonds to someone else or did you redeem them?

A. They were redeemed by the bank.

Q. Would it be correct to say that the bank credited your loan account with the amount that they received on redemption for the bonds?

A. They credited my account. Whether it was a loan account or not, to my knowledge, it was an ordinary chequing account.

Q. So, assuming it went back into your chequing account, you would have had to use part of it to pay off your loan?

A. I wouldn’t have had to. If I had let’s say $30,000, I could have.

Counsel for the respondent commented in summation:

This ... appears to be a case where there was actually physical delivery of bonds. Therefore, the Minister’s submissions based on the decisions of the Goldsilver, Tyrala and Wollin cases are rendered somewhat inapplicable. .. . assuming that the Board can very rightly find that there has been a transfer of the bonds to the appellant in this case by way of physical delivery.

In this case, there is no evidence that the bonds were paid for in full. The evidence is that there could have been all or part of the payment, the payment for the bonds could have been a loan from the bank. Therefore, it is conceivable that . . . the appellant had (only) a right to the bonds.

If that analysis of the Minister is accepted, then the Tyrala case remains undisturbed. All the appellant ever had was a right and only having a right is not “entitled to any interest.” He is only entitled to the right of the interest, at least for the purposes of section 20(14) and therefore for the purposes of the Minister’s submissions in 110.1.

If (the appellant) did own the bonds when he walked to the bank with them, if at that point in time their having been delivered to him was sufficient to have him be the owner, then the Minister can no longer rely on the Tyrala line of reasoning. Then the Minister would make the submissions that the interest that he receives on redemption, which related to the accrued interest that he would have in fact purchased as an account receivable from a previous vendor of the bonds is not interest included in his income. It is only an amount included in his income.

Therefore, the Minister’s submission is that when section 110.1 speaks of interest, it speaks of the appellant’s interest because to include anyone else’s interest would be clearly against the purpose for which that section was drafted.

Specific Findings

It should be noted that the appellant did not claim anything on account of interest he might have paid to the bank for a loan during the three relevant years (December 12 to December 15,1975) and accordingly, the Board is not required to decide whether such an amount would have been additionally deductible in the circumstances of this case. It should also be noted that the Board has already dealt with and rejected in the GENERAL FINDINGS of this decision the above-mentioned arguments of counsel for the respondent that interest as calculated under subsection 20(14) is different from interest for the purposes of paragraph 12(1)(c) of the Act, as such amounts are related to the provisions of section 110.1. The respondent’s fundamental argument therefore is that Smye was only performing some sort of “delivery” function on behalf of the bank—the bonds were really acquired by the bank, and the appellant’s loan represented only funds used in such acquisition. The ownership of the bonds rested with the bank, not with the appellant, according to the Minister, and if there was a transfer, it was to the bank from the stockbroker, not to the appellant.

In my view, the evidence does not support such a conclusion. The period of time during which this appellant had physical possession of the bonds may indeed have been very short—apparently in a rapid dash from the office of the stockbroker to the bank—but payment and delivery were made, and acceptance by the taxpayer from the “purchasing agent” (the stockbroker) was completed. The crux of this part of the issue is delivery and that must be determined in the appellant’s favour. The circumstances of this case meet the rigid requirements which have been imposed by the Minister himself for the use of the provisions of subsection 20(14) of the Act. l am satisfied that in this situation a distinction can be made between the roles of the bank as “holding agent” for whatever purpose, and the role of the stockbroker as “purchasing agent”. After delivery to the taxpayer by the broker and before delivery by the taxpayer to the bank, all proprietary rights in the bonds rested with the taxpayer, and this would include the right to interest they could generate. Neither the particular arrangements nor the personal commitments between the bank and the taxpayer enter into a determination of the issue before the Board in this case.

Decision

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment accordingly.

Appeal allowed.