Payment & Receipt

The taxpayer, a retired UK businessman, implemented a scheme to transfer funds (the “Suffolk Life Transfer") from his self-invested personal pension plan ("SIPP") to a second pension scheme (the “LML Pension,” of which the taxpayer was the sole member and whose named employer was a Cyprus company that entered into an employment contract with the taxpayer) in order to free up those funds for investment by him in the London residential property market. The SIPP then was likely terminated.

Unbeknownst to the participants, the LML Pension was void for uncertainty, as to which Henderson LJ stated (at para. 37):

It is agreed … that the effect of the failure of the trusts of the LML Pension is that the transfer conveyed only bare legal title to the money, because an immediate resulting trust arose by operation of law.

In rejecting a submission that this meant that there had been no payment out of the SIPP to the LML Pension, so that there thus had been no unauthorized funds payment that attracted tax and penalty tax, Henderson LJ stated (at paras. 40-41, 45):

[T]he natural reaction of anybody to the question whether there had been a payment of the £2.115 million by Suffolk Life to the LML Pension would surely be that of course there had. The money was intended to pass from the control and supervision of one registered pension scheme to another … . From a practical and common-sense perspective, why should it make any difference to this analysis if it later transpired that, unknown to everybody at the time, the transfer was in fact defective and gave rise to a resulting trust? In the context of the carefully designed scheme of the 2004 Act, one would not expect the meaning of an everyday word like "payment" to depend on legal niceties of that kind.

… That conclusion is only reinforced when one looks at the use which he has, in practice, been able to make of the money over the last ten years.

... [P]roperty which is transferred to or in respect of a pension scheme member in breach of trust is always potentially liable to end up in the hands of a bona fide purchaser for value without notice, in which case the position will in substance be the same as if beneficial title to the property had been transferred from the outset. To my mind, this reinforces the unreality of the construction of "payment" for which Mr Clark contends.

The taxpayer (“Black”) controlled both Hollinger Inc. (“Inc.”) and Hollinger International Inc. (“International”). The Delaware Court of Chancery ordered Black and Inc. jointly to pay to International damages equalling the amount of a “non-compete” payment of U.S$16.6 million that International had paid to Inc., plus interest thereon. Black used money borrowed from a third party to pay all of such damages, but successfully argued that he had advanced such funds on behalf of Inc. in satisfaction of an interest-bearing loan that he had orally agreed to make in the same amount to Inc. Rossiter CJ stated (at para. 132):

Black’s direct advancement of funds to International on Inc.’s behalf is not a bar to a loan existing between Black and Inc. …[An] advance on another party’s behalf can support a binding loan.

Although all the conditions for the receipt of government assistance had not yet been (and never were) satisfied, Campbell J found that the taxpayer had “physically acquired” the funds in question through depositing a cheque to a trust account of its own formation and thereafter disbursed the funds out of the account to fund its project without any practical hindrance by the government foundation in question (which appeared to have waived the condition referred to above). Accordingly, she found that the taxpayer had in fact “received” the assistance in question at that time for purpose of a grind to its SR&ED expenditures under s. 37(1)(d).

The taxpayer was a market dealer with a securities dealer (“WCM”), which provided support in the form of an assistant, shared with others and it answered “no” to the question in the T2200 as to whether the contract of employment required the taxpayer to pay for an assistant. For 2011 and 2013, the taxpayer claimed that he paid his wife $12,000 annually for the handling of administrative and expense related matters. The Minister denied an employment expense deduction.

C. Miller J dismissed the case, finding (at paras 11, 13 and 14):

… There are no cheques to Ms. Thériault. Mr. Blott’s income went into the joint account and Ms. Thériault could simply access it. Is there any amount paid to Ms. Thériault in such circumstances? I conclude there is not. … I do not see how anything has been paid or expended to Ms. Thériault. She has received nothing more than what she already had.

A Quistclose trust (as described by C. Miller J ) provides an equitable remedy to a lender where it has lent to a borrower for a specific purpose and it is exposed to the risk of other creditors snatching the advanced funds before the borrower uses them for the intended purpose. C. Miller J made a Rule 58(1) determination that no Quistclose trust attached to the funds advanced by the lender under a leveraged donation arangement because the funds essentially were advanced by the lender directly to the charity rather than, on a realistic view, passing first through the hands of the borrower taxpayers.

Bocock J found that when a bank seized the security (a GIC) provided by a tax debtor to secure his guarantee of a bank loan to his son’s company, this constituted a transfer of property by him to that company for s. 160 purposes.

In 1994, a non-resident executive was granted units which entitled him, on retirement, to receive payments calculated by reference to the consolidated profits of Glencore International AG, a Swiss corporation ("GI"). He retired at the end of 2006, and became entitled to receive U.S.$160 million in instalments commencing in July 2007. He and Glencore then agreed (pursuant to an agreement which was not executed until January 2008) that the first four instalments would be paid by GI to the Swiss taxing authority (the FTA) in satisfaction of Swiss withholding tax on the U.S.$160 million. This remittance occurred in 2008.

The relevant Australian tax law provided that, in the case of a reward for personal service, the income “derived” by the taxpayer is the “amount…actually received in the year in question” (Brent, 125 CLR 418, at para. 13), and a deeming provision specified that “you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct."

The Full Court of the Australian Federal Court held that although two of the four instalments were due to him in 2007, they were not income to him until 2008 when they were paid on his behalf to the FTA, stating (at para. 95):

The… Commissioner’s submission… postulates that income is relevantly “dealt with” on behalf of a taxpayer when the debtor (here GI) refrains from making payment of a debt due to the taxpayer at the creditor’s request. Brent v Federal Commissioner of Taxation [1971] HCA 48; 125 CLR 418 ...indicates that more is required… . There was therefore no derivation of income in the 2007 income year when the first two instalments, though due, were merely withheld from payment to the appellant. … The applicant derived the first two instalments as income when, in January 2008, they were paid, with his agreement, to the FTA by GI on his behalf.

The appellant ("Great-West") provided prescription drug plans to the employees of various employers. The claims were processed by a third party ("Emergis") using its "Assure Card System." The plan members' claims were adjudicated electronically immediately upon being charged for filling a prescription at a participating pharmacy. Emergis would then reimburse the pharmacies for the claim amount, and submit periodic invoices to Great-West.

In explaining his finding (at para. 81) that "the essential character of the supply provided by Emergis to Great-West is the payment to the plan member of the drug benefit claimed by the plan member under a group health benefits plan," Owen J stated (at para. 82):

In the past, the entitlement to the benefit would have been satisfied by the issuance of a cheque to the plan member. Under the Assure Card system, the entitlement is satisfied by relieving the plan member of the obligation to pay the amount of the benefit to the pharmacy at the point of sale. The result is the same. The plan member constructively receives at the pharmacy counter the benefit payable to him or her under the terms of the group health benefits plan.

See summaries under Financial Services and Financial Institutions (GST/HST) Regulations, s. 4(2) and s. 123(1) – financial service – (f.1) and (r.4).

Purported distributions out of a purported EPSP to children employees of the taxpayer were to a bank account controlled by the father, so that the participants "never had control of these funds" (para. 40), and so that the "real transactions" were "the payment of amounts by the corporation to the father" (para. 42). See detailed summary under General Concepts –Sham.

Margeson J. accepted (at para. 99) that employees to whom the taxpayer issued shares in payment of bonuses to them gave consideration equal to the full value of those share "on the basis of past unremunerated services rendered to the Appellant."

In settlement of a suit by the taxpayer, who was an income beneficiary, the settlement agreement provided for the payment by the trust to her of $1.7 million in satisfaction of her interest in the trust. Through a numbered company, the capital beneficiary issued a promissory note to the trust for $1.7 million in exchange for shares held for the taxpayer. The trust issued a promissory note to the taxpayer in the same amount. The trust's law firm then gave the taxpayer a certified cheque for $1.7 million to discharge the trust's promissory note.

In finding that these transactions qualified as a distribution by the trust, Boyle J. rejected the Minister's argument that the money was never the property of the trust, but rather was property of the beneficiary's numbered company. The transfer of promissory notes was a transfer of trust property. He stated (at para. 21):

Surely [the Minister] would not seriously have contested a bill of exchange involving a bank and I have been provided with no persuasive argument that enforceable promissory notes from solvent entities should be treated any differently.

Boyle J. also found that the property had been distributed to the taxpayer. He stated (at para. 22) that "[t]here is no apparent reason put forward to suggest that the term 'distributed' should not be given its ordinary meaning."

The taxpayer acquired a 100% undivided interest in a property (the "Quarter Claim") adjoining its "Golden Giant" mine subject to a 50% net profits royalty in favour of the vendor ("Teck/Corona"). In finding that the payment by the taxpayer of 50% of the net profits from the mining operations it conducted on the Quarter Claim did not entail a "reimbursement" by Teck/Corona for 50% of the mining taxes that the taxpayer paid as an expense of that operation, D'Arcy J. stated (at para. 77):

The allocation of revenue from the Golden Giant Mine to the calculation of the Quarter Claim Royalty was not payment of an amount by Teck/Corona. [The taxpayer] as the owner of the Golden Giant Mine (including the Quarter Claim) realized all revenue from mining the Golden Giant Mine. This revenue was not the revenue of Teck/Corona. Teck/Corona was only entitled to receive an amount as a royalty. Further, such royalty was only payable if the Royalty Account showed a credit balance.

The individual taxpayer was found to have received a bonus from a closely-held corporation in the year that the corporation declared the bonus rather than in the subsequent year of payment in light of the withholding and remittance of source deductions on the full amount of the bonus in the first year, the booking by by the corporation in that year of a loan back to it of the net bonus proceeds and the absence of any evidence that this was done without his knowledge or consent. Jorré J. also quoted (at para. 78) with apparent approval a statement of commentators that "when money is paid by an employer to a third party for the benefit of the taxpayer, the payment constituted constructive receipt in the hands of the taxpayer."

The shareholder of a Canadian company (“Merchant 2000”) lent U.S. $650,000 to a wholly-owned U.S. subsidiary (“Merchant U.S.”) of Merchant 2000, and subsequently transferred that receivable to Merchant 2000 in exchange for a receivable from Merchant 2000 of $650,000. Merchant 2000 owed a $650,000 debt to Merchant U.S. Accordingly, Merchant 2000 had a receivable from Merchant U.S. of $650,000 and owed a debt to Merchant U.S. of $650,000. Merchant 2000 and Merchant U.S. set-off their debts against each other.

One of the issues addressed by raised by Paris J was whether the set-off resulted in payment of the debts, as to which he stated (at para. 41):

Parties may agree to set off amounts due rather than pay money back and forth, and the set off will constitute payment and receipt of the amounts, respectively. (See for example: Armstrong … 88 D.T.C. 1015 … .)

Frequent flyer points applied by the taxpayer to purchase air tickets to Chicago for medical treatment there constituted "an amount paid" for purposes of s. 118.2(2)(g).

After noting (at para. 21) that "the case law is clear that an amount may be included in income even where it is only notionally or constructively received", McArthur, J. went on to find that the taxpayer had received insurance policies under a policy that had been assigned by it to a bank given that it benefited from the insurance proceeds being applied to pay off a loan owing by it to the bank.

Promissory notes owing by the taxpayers, which were consideration for their acquisition of units of a limited partnership, provided that the interest thereon was to be paid by way of set-off against distributions otherwise payable by the partnership to the taxpayers. In fact, the partnership did not generate distributable cash and, particularly for the first taxation year in question, there was no evidence that interest was paid through the making of timely journal entries. Accordingly, the amounts represented by the notes were limited recourse amounts.

A Canadian corporation ("C&A") paid two dividends to its Canadian-resident parent ("Holdings"), which distributed the same amounts to its U.S.-resident parent ("Products") as distributions of paid-up capital. Boyle J. noted (at para. 21) that there was no dispute that a distribution of stated capital by a Canadian corporation, that did not have a bank account, to its non-resident shareholder had been paid by it through directions in respect of a dividend payable to it by its subsidiary:

Since Holdings did not have a bank account, in each case the amount of Holdings' return of capital to Products was distributed electronically from C&A's bank account directly to Products' bank account. There was no dispute that C&A was acting as Holdings' agent in this regard with satisfactory directions and financial reporting.

t was found that bonuses declared payable by the taxpayer to its two directors were paid by it within the 180 day period referred to in s. 78(4) pursuant to a demand loan agreement (notwithstanding that the directors did not report the portion of the demand loan that was not paid in cash until the subsequent year as employment income until that subsequent year).

Bell J. rejected the Crown's submission that the taxpayer can only make a deduction under s. 8(1)(i) for amounts paid in cash or by cheque with proof of payment, and found that the taxpayer was entitled to a deduction under s. 8(1)(I)(ii) for snowmobiles, motorcycles and gasoline that he had purchased for his sons as payment for their services in performing mailings to 2,500 people on five different occasions in the year.

Miller T.C.J. noted that with respect to the situation where the taxpayer, which owed approximately $60 million in accrued interest, paid $60 million to the creditor at the same time that the creditor paid $60 million to the taxpayer as an addition to the advances owing by the taxpayer, that he had difficulty identifying any moment in time at which the taxpayer did not owe $60 million to the creditor. Nonetheless, the transaction was found to constitute a payment of $60 million by the taxpayer to the creditor because, unlike the Cox case (71 DTC 5150), in this case both the taxpayer and the creditor had arranged for sufficient funds such that the cheques would be honoured, and in fact were honoured:

"It was not a matter of each side relying on the other side's funds for their cheques to be honoured."

In order to generate an interest deduction for accrued interest owing by an insolvent company ("WIL") to its shareholder (a pension fund) pursuant to a provision of the Corporation Taxes Act 1988 (U.K.) which required that interest be paid in order to be deductible, the pension fund lent money to WIL with WIL using the borrowed proceeds to pay the outstanding arrears of interest. In finding that this arrangement was effective, Lord Nicholls stated (at pp. 868-869) that "prima facie, payment of interest in s. 338 has its normal legal meaning, and connotes simple satisfaction of the obligation to pay ... . Leaving aside sham transactions, a debt may be discharged and replaced with another even when the only persons involved are the debtor and the creditor".

'The taxpayer received two cash payments of $10,000 and $25,000 on an interest-bearing promissory note for $525,000 owing by an arm's length debtor. The payments were found by Mogan J not to have been appropriated by the debtor as between interest or principal, and to have been applied by the taxpayer to principal. Mogan J found (at para. 11) that the payments were of interest rather than of principal on the basis of the doctrine that "in the absence of any appropriation made by the debtor, the creditor may direct his payment to be applied as he thinks fit."

The taxpayer transferred his equity in a house to his former spouse in satisfaction of arrears of alimony or maintenance owing to her of $19,946. In finding that this constituted a payment of such arrears, O'Connor TCJ. stated (at p. 752) that "payment in kind, provided there has been an agreement or a binding determination of the value in money of the object given, will suffice ... . To do otherwise would seem to run counter to the definition of 'amount' in subsection 248(1)".

In finding that the redesignation of a 'bonus payable' to 'due to shareholder' did not constitute the receipt of an amount giving rise to income in the taxpayer's hands, Bowman TCJ. stated (at p.196):

"Nor can I accept that the mere bookkeeping entry of moving the amount of bonus owing to Mr. Phillips from 'bonus payable' to 'due to shareholder' connotes receipt. Accounting entries are supposed to reflect realities, not create it ...".

and went on to refer to the decision in Gresham Life Society Co., Ltd. v. Bishop (1902), 4 TC 464 (HL) [below].

A taxpayer was ordered in 1984 to retain arrears of alimentary allowance that had accumulated from March 1983 onward to be applied against an amount owing to him by his estranged wife. In finding that the alimentary allowance was not "paid" by him for purposes of s. 60(b), and was not "received" by her for purposes of s. 56(1)(b), Garon J. stated (p. 1499):

"... The verb 'pay' in the context of that paragraph means a transfer of money, a handing over of funds ... [and] the expression 'received' involves the idea of being put in possession of something."

Bowman J. stated:

A mere bookkeeping entry in a loan account by itself does not constitute a taxable event unless there is something more, such as receipt. In Gresham Life Society Co., Ltd. v. Bishop (1902), 4 TC 464 at 476 [sic, 475 - see also summary below], Lord Brampton said:

My Lords I agree with the Court of Appeal that a sum of money may be received in more ways than one e.g. by the transfer of a coin or a negotiable instrument or other document which represents and produces coin, and is treated as such by business men. Even a settlement in account may be equivalent to a receipt of a sum of money, although no money may pass; and I am not myself prepared to say that what amongst business men is equivalent to a receipt of a sum of money is not a receipt within the meaning of the Statute which your Lordships have to interpret. But to constitute a receipt of anything there must be a person to receive and a person from whom he receives and something received by the former from the latter, and in this case that something must be a sum of money. A mere entry in an account which does not represent such a transaction does not prove any receipt, whatever else it may be worth.

A company issued charge cards to cardholders who would obtain petrol from garages by presenting the card and signing a sales voucher completed by the garage. Because the acceptance of the card by the garage constituted unconditional payment for the petrol, the garages following the insolvency of the company had no entitlement to receive payment for the petrol directly from cardholders.

An American corporation passed a resolution providing "'that a distribution of seven per cent on the capital stock of this corporation, amounting to $52,500 dollars, be and the same is hereby declared, payable on the 15th December, 1936'" and went on to provide that the distribution should not be payable in cash, but in the form of certificates of indebtedness bearing interest at 4%, and payable approximately four years later. In finding that there was no "income arising from possessions out of the United Kingdom" to the U.K. shareholder, Scott L. J. concluded that "the reality of the transaction was the declaration of a money dividend payable not presently, but only on a future date", rather than "a distribution by way of dividend not of money but of money's worth" (at p. 203, All E.R.).

The taxpayer, who held bonds on which the payment of interest had been suspended, exchanged his matured interest coupons on the bond for interest-bearing 20-year funding bonds of the debtor. In finding that the funding bonds did not constitute "income arising from securities outside the United Kingdom", MacKinnon L.J. stated (at p. 435) that "there can never be payment of its debt by a debtor by giving his own promise to pay at a future date ... though income arises to a creditor from a debtor's paying his debt, income does not arise by the debtor's promising that he will pay his debt later on".

The taxpayer, a UK life insurance company which was managed in London and had foreign branch businesses, was assessed for interest and dividends which it received on foreign securities held in the hands of agents abroad, and which were reinvested abroad, on the basis that it received such income in the U.K. In finding that the taxpayer was not taxable on such amounts, Lord Brampton stated (at p. 475):

[I]t is conceded that no part of the money in question was ever received in the United Kingdom in specie… . But it was argued that… it was "constructively" so received in the accounts of the Society. …If it means something differing from or short of an actual receipt, then it seems to me that a constructive receipt is not recognised by the Statute, which in using the word "received" alone, must be taken to have used it having regard to its ordinary acceptation. … I am not myself prepared to say that what amongst business men is equivalent to a receipt of a sum of money is not a receipt within the meaning of the Statute… . But…[a] mere entry in an account which does not represent such a transaction does not prove any receipt… .