Tax Court of Canada Judgments

Date: 19991124

Docket: 96-4040-IT-G

BETWEEN:

GERALD C. GOREHAM,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Sarchuk J.T.C.C.

[1] These are appeals by Gerald C. Goreham (the Appellant) from assessments with respect to his 1991, 1992 and 1993 taxation years. In assessing the Appellant, the Minister of National Revenue (the Minister) added $217,000 to his income for the 1991 taxation year on the basis that he received a housing loan in that amount from Island Pride Fisheries Limited (the Company) at which time bona fide arrangements were not made for repayment thereof within a reasonable time in accordance with paragraph 15(2)(a) of the Income Tax Act (the Act). As well, in computing the Appellant's income for the 1992 and 1993 taxation years, respectively, the Minister deducted $21,950 and $7,000 pursuant to paragraph 20(1)(j) of the Act.

Facts

[2] The Appellant was the owner of 50% of the issued and outstanding shares of the Company which operates the Island Pride, a herring purse Seine vessel of which he was the captain. The remaining shares were held by Brian Blades (Blades) with 49% and Susan Goreham, the Appellant's wife, 1%, with her shareholding endorsed to Blades. The Company's fiscal period ended on April 30th of each year. The Appellant in his capacity as captain was responsible for the day-to-day operations of the Seiner while the long-term decisions for the Company were made jointly by the Appellant and Blades.

[3] The Appellant and his wife, Susan, resided in a home they owned at Clark's Harbour which they listed for sale December 1988 at a price of $162,000. In April 1989, Susan purchased a lot in Centreville upon which she and the Appellant intended to construct a new residence although, she said, not necessarily immediately. No offers had been received by the time the listing expired in June 1989, and in fact Susan testified that no one had even come to see the house. The listing was not renewed but they personally continued their efforts to sell the property. Susan testified that in November 1990, she was approached by one of her customers who:

A. ... wanted to buy our home but they had to sell their home. ...

Q. Okay.

A. And they thought they did have a buyer for their – well, they did have a buyer.

Q. Yes.

A. But the guy that was going to buy their home couldn't get the mortgage, so that fell through.

Q. So they weren't able to sell their home.

A. Right.

Q. And did that affect their ability to ---

A. Yes.

Q. --- buy yours?

A. That's why they couldn't buy ours.

It was her recollection that it was January 1991 when they were advised of this fact.

[4] At some point of time during this same period, they decided to commence the construction of their new home in Centreville. She testified that they believed that they could sell their property personally and to that end, erected a for sale sign with an asking price of $125,000 in mind. The Appellant for his part made inquiries about obtaining a mortgage at the bank to finance the construction.

[5] In December 1990 or January 1991, the Appellant in the course of a discussion with Blades, made reference to his plan to finance the construction by way of a mortgage. Further discussion led to an arrangement whereby the Company would advance funds (the loan) to the Appellant as necessary to enable him to pay the construction costs. In turn, the Appellant was to repay the loan from the proceeds of the eventual sale of his residence and through his captain's bonus for operating the Island Pride. The possibility of using dividends, should the Company ever declare them, to repay the loan was also discussed. In furtherance of this arrangement, the Company advanced the amount of $150,000 to the Appellant in January 1991 and a further $67,000 in June 1991.

[6] In 1992, Blades instructed the Company's solicitor to prepare a written agreement regarding the Appellant's housing loan. This agreement, which was signed in late June 1992 by the Company and Goreham provided as follows:

1. The Company agrees to made advances as necessary to pay for the construction of the new residence.

2. Goreham agrees to repay to the Company, and the Company agrees to accept as repayment of the advances, the following:

(A) on the sale of Goreham's existing residence at Clark's Harbour, the full net proceeds from the sale shall be applied to the loan;

(B) from Goreham's captain's share of income earned by the Company from the fishing activities of the vessel "Island Pride" the full captain's share, after deductions, shall be applied towards the repayment of the said advances;

(C) in the event that any dividends are declared and paid by the Company to shareholders, Fifty Percent (50%) of the net dividend payable to Goreham shall be applied to the repayment of the loans and advances.

3. This loan shall not bear interest.[1]

...

[7] The Appellant and Blades agree that the full proceeds of the sale of the Clark's Harbour residence were to be applied against the loan. They also agree that one-half of any dividends paid by the Company would be applied against the loan, and, as it turned out, that was the case with respect to the only dividend which was paid during the relevant period of time. There is however substantial disagreement regarding the second method of repayment i.e. the application of the Appellant's captain's bonus to the loan.

[8] The substance of the Appellant's testimony regarding the January 1991 verbal agreement was that, to the best of his recollection, only a portion of the captain's bonus was required to be paid against the loan. He also said that it was up to him to decide how much of it was to be used for this purpose and that it was left to him to give instructions to the Company accountant to that effect. In so doing he followed his understanding of the verbal agreement with Blades and the Company. The Appellant also asserted that the language used in the written agreement did not, in his view, represent a change of his understanding that only a portion of the captain's bonus was to be applied against the loan.

[9] Blades testified that the verbal agreement reached was subsequently reduced to writing and correctly reflected the fact that the Appellant's full captain's bonus was to be applied in payment of the loan. He further said that the Appellant was entitled to a captain's bonus every time he sailed with the Island Pride and it was only if he was not on board the vessel when it sailed that he would be disentitled to it. Blades would not in the normal course of events have seen the settlement slips and was not aware at the time that the Appellant on occasion had not taken his captain's bonus. Nor was he able to advance any reason why the bonus was not being taken. He confirmed that when the Appellant did not take his bonus this had the effect of increasing the "boat share" which in turn had the effect of increasing the amount of money that was channelled to the company.[2]

[10] The initial advance of $150,000 was made by the Company to the Appellant in January 1991, followed by the second advance of $67,000 in June 1991. A series of settlements made to the end of December 1990 disclose that the Appellant, with one exception, took his full captain's bonus. For the year ending April 30, 1992, there were six settlements. The Appellant took the captain's bonus only on the first settlement. For the year ending April 30, 1993, the Appellant took a captain's bonus on three of the four settlements and for the year ending April 30, 1994, on four of six.[3] For those three years, the Appellant was entitled to receive a captain's bonus on a total of 16 settlements and only took it on eight. With respect to those eight, the following chart reflects those bonuses and the portion applied to the housing loan.

Date	Captain's Bonus	Applied to Housing Loan
May 1991	$3,404.70	$0
June-July 1992	10,498.10	5,200
July-October 1992	24,039.48	12,000
November 1992	7,122.37	3,500
July August 1993	2,968.78	0
Aug., Sept., Oct., 1993	13,870.94	7,000
Oct. Nov. 1993	6,305.39	0
January 1994	3,687.09	0

The first repayment of the advances made by the Company took place following Seine settlement no. 2 for the period June 19 – July 24, 1992 which was approximately 18 months after the verbal agreement was in place and was the first settlement following the execution of the written agreement.

Appellant's Position

[11] The Appellant contends that the originally agreed upon terms of repayment are relevant to the determination of the bona fides of the arrangements and that normal commercial practices should be looked to in determining whether the time allowed for repayment was reasonable. The Appellant submits that subsequent events such as the reduction of fishing quotas and declining prices for their catch as well as their inability to sell their previous residence due to a depressed housing market do not affect the intention of the parties at the time the bona fide arrangements were made. The Appellant also contends that the fact that the Company did not enforce repayment of the loan from the Appellant's captain's bonus does not affect the bona fides of the arrangement since this too reflected the unanticipated economic circumstances affecting his ability to pay.[4]

Conclusion

[12] The issue in these appeals is whether at the time the loan was made, bona fide arrangements had been made for its repayment within a reasonable time within the meaning of paragraph 15(2)(a) of the Act.

[13] The relevant portions of subsection 15(2) of the Act read:

15(2) Where a person ... is a shareholder of a particular corporation ... and the person ... has in a taxation year received a loan from or has become indebted to the particular corporation, ... the amount of the loan or indebtedness shall be included in computing the income for the year of the person ... unless

(a) the loan was made or the indebtedness arose

...

(ii) in respect of an individual who is an employee of the lender ... to enable or assist the individual to acquire a dwelling ... where the dwelling is for the individual's habitation,

...

and bona fide arrangements were made, at the time the loan was made or the indebtedness arose, for repayment thereof within a reasonable time; or ...

Thus, a taxpayer such as the Appellant who falls within subsection 15(2) of the Act must include the amount of the loan in his income unless he can bring himself within the exception. In the present appeals, there is no dispute that the loan was made to enable the Appellant to acquire a dwelling for his habitation. The only issue is whether there were bona fide arrangements at the time the loan was made for repayment thereof within a reasonable time.

[14] The Appellant contends that the issue of bona fides is to be addressed as of the time when the advances in question were made, in this case, as of January and June, 1991. Counsel for the Appellant argued that the fact that payments on the loan were not made as originally agreed is irrelevant unless it puts in question the original intention of the parties. Reference was made to the decision of Mogan J. in Kalousdian v. The Queen.[5] In that case, the taxpayer and another individual each owned one-half of the issued shares of the corporation. The taxpayer had received a loan from the corporation for the acquisition of a dwelling house and in return, provided the corporation with a promissory note indicating repayment of the loan in five years by annual instalments. In fact, pursuant to a subsequent oral agreement between the shareholders and the corporation, no principal repayments were paid for six years. With respect to the oral agreement, Mogan J. stated:

... In my view, the need for formality is greater when an individual owns all of the issued shares or is the controlling shareholder of the corporation. There may not be as much need for formality if the shares of a corporation are held in equal portions by two or more persons who deal at arm's length. In those circumstances, if only one shareholder has received a loan from the corporation on terms which are not reduced to writing, and if all of the shareholders are in agreement with respect to the oral terms of the loan, the conflicting commercial interests of the arm's length non-borrowing shareholders will ordinarily cause them to ensure that the loan is repaid within a reasonable time. ...        Emphasis added

[15] This judgment has limited application to the present appeals since there is a substantial disagreement as to one of the terms of the loan. The respective recollections of the Appellant and Blades regarding the application of the captain's bonus in payment of the loan are contradictory. In Massey-Ferguson Ltd. v. The Queen,[6] Urie, J. speaking for the Federal Court of Appeal stated at page 5017:

The whole development of commercial law over the centuries is replete with examples of the Courts recognizing that business men do not always depend on expert documentation to prove the true characterization of their transactions. Rather, they tend to achieve their desired ends, particularly when the relationships between them are close, in informal and expeditious ways which perhaps are abhorrent to lawyers. In doing so they ran [run] the risks inherent in such a practice of determining their respective rights. Frequently no difficulties ensue, but if they do, in the absence of contracts or other documents, Courts must determine the intention of the parties and the nature of the obligations imposed on them by reference to credible evidence of another kind. ...     Emphasis added

What is the evidence available to the Court? Blades testified that he instructed the Company lawyer to draw up the written agreement to reflect his understanding of the verbal arrangement, i.e. that the full amount of the captain's bonus would be utilized in repayment of advances. Blades has been a business associate of the Appellant for a number of years and it was evident that he was well disposed towards him. Furthermore, he has no interest whatsoever in the outcome of this appeal. On balance, his testimony with respect to this issue was clear and unequivocal and I accept it in preference to that of the Appellant. It is also of some significance that when the Appellant signed the agreement, which was couched in plain and straightforward language, he took no exception to paragraph 2(B) thereof which provided that "the full captain's share", was to be applied towards the loan.[7]

[16] For two reasons, I am unable to conclude that at the time of the advances arrangements had been made for the loan to be reimbursed within a reasonable time. First, the Appellant and his wife assert that there was a definite expectation that their former residence would be sold. I have serious reservations regarding that testimony. The Appellant and his wife knew, at the very latest in January 1991, that their property would not be sold. It is also a fact that it had been on the market for approximately 25 months, that they had received no offers and that indeed, during the course of the original listing, no one had even bothered to look at the property. After June 1989, they personally attempted to sell it with no interest being shown by anyone until November 1990 at which time they were obliged to reduce the asking price from $162,000 to $125,000 and to accept a rather nebulous conditional oral offer. Susan's testimony made it crystal clear that they were aware of the downturn in the housing market during that period of time and that there were few, if any, buyers. It is also evident that they were prepared to proceed with the construction of a new residence regardless of that knowledge.[8] Given these facts, it is difficult to accept the Appellant's contention that the agreement with the Company was such that the loan was to be reimbursed within a reasonable time. The decision relied upon by the Appellant, Dionne v. The Queen,[9] is in my view distinguishable since on the evidence before me, it is not possible to conclude with reasonable certainty when the Appellant's residence might be sold.

[17] The second reason flows from my rejection of the Appellant's testimony that only a portion of the captain's bonus was to be applied in payment of the loan. However, even if I had not made that determination, it would not have been possible to conclude that arrangements were in place to have the loan repaid within a reasonable time. The Appellant's view of the agreement was that the repayment was variable at his option. Since the decision to take the captain's bonus was also in his complete control it permitted him to pay as little as he chose or to defer making any payment at all if he were so inclined (as indeed occurred on several occasions). I do not mean to imply bad faith on the part of the Appellant but merely to point out the extent to which the agreement failed to provide a recognizable and reasonable termination date for payment of the loan.

[18] The evidence as a whole raises a serious question as to whether the conditions for repayment were sufficient for the purposes of subsection 15(2) of the Act. In The Queen v. Silden,[10] the taxpayer held shares in the Canadian subsidiary of his Norwegian parent employer. The Norwegian corporation advanced funds to the taxpayer with respect to a house that he had acquired approximately one and one-half years earlier. Upon acquisition of the house, the taxpayer had assumed the existing mortgage which had a penalty clause for early repayment. The funds advanced by the parent corporation were secured by a mortgage on the property and the loan was to be repaid if the taxpayer left the corporation's employment or resold or transferred the property. In commenting on the need for certainty as to the time of repayment, Pratt J.A. stated:

... What the statute requires is that arrangements be made "at the time the loan [is] made for repayment thereof within a reasonable time". The real question therefore is not whether the arrangements relating to the repayment of the loan were reasonable but whether, pursuant to those arrangements, the loan was to be reimbursed within a reasonable time. That question cannot, in this instance, be answered in the affirmative since the arrangements that were made at the time of the loan did not permit to determine with any certainty the time within which it had to be reimbursed.    Emphasis added

Given the circumstances in the present appeal, it is not possible to conclude that the agreement, as perceived by the Appellant, would provide any certainty as to the time within which the advances made to him by the Company were to be reimbursed. Accordingly, the appeals are dismissed, with costs.

Signed at Ottawa, Canada, this 24th day of November, 1999.

"A.A. Sarchuk"

J.T.C.C.

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