Date: 20010216
Docket: 1999-832-IT-G
BETWEEN:
ANTONIO F. DIENI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
McArthur J.
[1] The Appellant appeals the decision of the Minister of National Revenue to increase his income in the 1994 taxation year by adding a capital gain of $655,000 pursuant to section 79 of the Income Tax Act. On August 25, 1994, the Appellant transferred a property on Côte-de-Liesse in Montréal, Québec to Manufacturers Life Insurance Company (ManuLife) by way of a Deed of Giving in Payment.[1]
[2] The Minister submits that a transfer arose from the default of the Appellant of the terms of a Deed of Loan to ManuLife and is a surrender of property to which section 79 of the Act applies. The Appellant submits that section 79 does not apply because the Deed of Giving in Payment does not adequately represent the substance of the transaction between the Appellant and ManuLife but rather it was part of an overall settlement to which section 80 of the Act applies.
[3] The issue in this appeal is which one of the two sections applies, section 79 dealing with surrender of property or section 80 which deals with forgiveness of debt.
[4] Counsel for the Appellant suggests that the question in this appeal is one of fact. I believe it is clearly a mixed question of fact and law. Subsection 79(2) of the Act entitled "Surrender of Property" provides as follows:
79(2) For the purposes of this section, a property is surrendered at any time by a person to another person where the beneficial ownership of the property is acquired or reacquired at that time from the person by the other person and the acquisition or reacquisition of the property was in consequence of the person's failure to pay all or part of one or more specified amounts of debts owed by the person to the other person immediately before that time.
Subsection 80(2) provides in part:
80(2) For the purposes of this section,
an obligation issued by a debtor is settled at any time where the obligation is settled or extinguished at that time (otherwise than by way of a bequest or inheritance or as consideration for the issue of a share described in paragraph (b) of the definition "excluded security" in subsection (1));
...
[5] The purpose of section 79 is to deal with the acquisition of a debtor's property by a creditor as a result of the default of the debtor on a debt obligation owing to the creditor. Where the section applies, the debtor is deemed to have realized proceeds of disposition. As a result of the application of section 79, the debtor may realize a capital or non-capital gain or loss depending on the nature of the property surrendered. Section 79 applies when a property is surrendered such that the beneficial ownership is acquired from the debtor in consequence of the debtor's failure to pay a debt to the creditor. Action by a mortgagee lender by way of foreclosure or Deed of Giving in Payment is the most common application of section 79.
[6] Section 80 applies when there is a forgiven amount in respect of a commercial obligation that has been settled or extinguished. Sections 79 and 80 were amended in 1994. While the Appellant submits the former section applies and the Respondent opts for the amended section, when all is said and done, both agree it does not matter which applies. I will refer to the amended version because it came into effect before the surrender or forgiveness.
Facts
[7] The Appellant immigrated to Canada from Italy in 1950 at the age of 15. He became a successful real estate owner and developer who personally or through Les Aménagements Dieni Inc. (the Corporation)[2] owned various residential and commercial buildings in Montréal and area. On October 16, 1990, the Corporation granted a first Deed of Loan and Hypothec to ManuLife for $3.3 million on a commercial property known as the Laird/Canora property.[3] On February 18, 1991, the Appellant granted a Deed of Loan and Hypothec in the amount of $1.5 million on a 58-unit residential apartment building (the Côte-de-Liesse property[4]). The fortunes of these two properties were adversely affected by the recession of the 1990s. Twenty-five thousand square feet of the building on the Laird/Canora property was vacated when Wabasso closed its plant and Côte-de-Liesse suffered almost a 50% vacancy after the National Film Board of Canada closed its premises across the street. As a result, both loans fell into serious arrears with ManuLife.
[8] On June 14, 1993, ManuLife registered two 60-day notices,[5] one against the Appellant in connection with the $1.5 million loan on the Côte-de-Liesse property, and another against the Corporation in connection with the $3.3 million loan on the Laird/Canora property.
[9] On December 23, 1993, the Appellant submitted a settlement proposal which was not accepted by ManuLife. However, ManuLife, the Corporation and the Appellant entered into an agreement dated February 17, 1994 referred to by the Appellant as the "Workout Agreement".[6]
[10] On September 30, 1994, and further to the two aforementioned 60-day notices, ManuLife filed two declarations[7] before the Superior Court of Québec to take possession of the Côte-de-Liesse property (Court file No. 500-05-013146-939), and of the Laird/Canora property (Court file No. 500-05-013147-937). ManuLife did, in fact, take possession of the two properties.
[11] The Appellant has not established that all or part of the outstanding debt on the Côte-de-Liesse property was settled or extinguished. There was no evidence of the fair market value of the property at the time of its transfer. Its value may well have exceeded the outstanding debt.
[12] In effect, only one hypothec was granted by the Appellant and that was on the Côte-de-Liesse property. The Laird/Canora property was owned by the Corporation and not the Appellant.
[13] Pursuant to the terms of the Deed of Loan and Hypothec, the Appellant entered into a Deed of Giving in Payment (Exhibit R-2) dated August 25, 1994, wherein he transferred the Côte-de-Liesse property to ManuLife. A portion of the preamble to this Deed sets out the background from which the transfer was made as follows:
WHEREAS the Loan Agreement further provides that, upon the occurrence of an event of default, the Transferee can, after giving to the registered owner of the written notice required by law, become the absolute owner of the Immoveable Property, ...
WHEREAS the Transferee served upon the Transferor, on April 15, 1993, a Notice of Intention pursuant to Section 244(1) of the Bankruptcy and Insolvency Act (Canada);
WHEREAS the Sixty-Day Notice was duly served upon the Transferor on June 29, 1993, ...
WHEREAS the Transferor agrees to give the Immoveable property to the Transferee in payment for the Debt and the accrued interest, ...
[14] The Corporation entered into the Workout Agreement dated February 17, 1994 wherein it advanced the sum of $225,000 to ManuLife, the balance of interest and costs owing was capitalized, and the term of the loan was extended with interest to be calculated at 75/8% per annum.
[15] It is the position of the Appellant that the transfer of the Côte-de-Liesse property constituted a forgiveness of debt with respect to the Laird/Canora property. It formed part of a larger settlement between the Appellant, the Corporation and ManuLife to which section 80 applies. Counsel for the Appellant added that the context in which the parties executed the Côte-de-Liesse Deed of Giving in Payment must be taken into consideration finding a proper balance between the economic risks that ManuLife was taking and the desire of the Appellant to retain ownership of the Laird/Canora property. Counsel stated that the Deed of Giving in Payment and the Agreement concerning the Laird/Canora property cannot be interpreted in isolation. He refers to the dictum of Dickson C.J. in Bronfman Trust v. The Queen,[8] and states that the entire substance of a transaction must be considered. He refers further to Interpretation 9313290 dated May 11, 1993, Alberta CICA Round Table.[9]
Analysis
[16] To accept the Appellant's submissions, it must be proven that the Deed of Giving in Payment for the Côte-de-Liesse property (Exhibit R-2) is connected to the Workout Agreement (Exhibit R-1) concerning the Corporation and the Laird/Canora property. There is insufficient evidence to conclude that they are interdependent. Neither document (Exhibits R-1 or R-2) refers to the other. The Deed of Giving in Payment was clearly in consequence of the Appellant's failure to pay all or part of the Côte-de-Liesse debt. The documents do not reflect the Appellant's testimony to the effect that his signing of a Deed for the Côte-de-Liesse property was dependent on ManuLife extending the Corporation's Deed of Loan on the Laird/Canora property and reducing the interest rate.
[17] In Hallbauer v. The Queen,[10] Rip J. discussed the meaning of the phrase "in consequence of" at page 776:
The words "in consequence of" in section 79 have a definite meaning, but the words are not defined in the Act. Linden J.A. considered the words "Where a person ... receives a loan, ... because or as a consequence of ... a ... office or employment ..." in subsection 80.4(1) of the Act in A.G. of Canada v. Hoefele et al.; Krull v. A.G. of Canada, 95 DTC 5602 at 5607-08. At page 5608 he stated:
... the phrases ... "because of" or "as a consequence of" ... as well as ... "by virtue of" ... require a strong causal connection. I find little or no difference between the meanings of the phrases "because of", "as a consequence of" and "by virtue of". Each phrase implies a need for a strong causal relation between subject matters, and merely a slight linkage between them.
The Shorter Oxford Dictionary On Historical Principles ("Oxford") defines the word "consequence" as:
1. A thing or circumstance which follows as an effect or result from something proceeding. 2. The action, or condition, of so following; the relation of a result to its cause or antecedent 1656. A logical result or inference M.E.; logical sequence 1571 ...
The French language version of section 79 uses the phrase "par suite de" where the words "in consequence of" are used in the English version. Le Petit Robert Dictionnaire De La Langue Française, 1990, defines "par suite de" as follows:
à cause de, en conséquence de. V. Grace (à). "Par suite d'un refroidissement il lui vint une angine" (FLAUB)
Black's Law Dictionary (1990 Edition) (Black's) defines the word "consequence" as
The result following in natural sequence from an event which is adapted to produce, or to aid in producing, such a result; the correlative of "cause". Board of Trustees of Firemen's Relief and Pension Fund for City of Tulsa v. Miller, 186 Okl. 586, 99 P. 2.ed 146, 147.
The word "consequence" in the phrase "in consequence of" in section 79 demands that there be a strong causal relation between the acquisition (or reacquisition) of the beneficial ownership of the property by the taxpayer (i.e., the creditor) and the failure by the other person (the debtor) to pay all or any amount owing to the creditor. ...
[18] It is not clear which debt the Appellant is relying on as being the debt that was forgiven but, it is not in respect to the Côte-de-Liesse property. The forgiveness of debt would appear to be the reduction of the interest rate on the Corporation's $3.3 million loan on the Laird/Canora property. Although my decision is not dependent upon it, I am not satisfied that there was a debt forgiveness to the Corporation with respect to the Laird/Canora loan. The original rate was fixed in October 1990 at 123/8%. There was no evidence with respect to the original term. The rate in the February 1994 Workout Agreement was fixed at 75/8% from April 1, 1994 to March 1, 1997. This appears to be a reasonable rate during that period.
[19] Paragraph 16 on page 4 of the Workout Agreement states that all terms and conditions of the original loan agreement remain in force. The preamble refers to a Deed of Loan and Hypothec executed by the Appellant, as borrower, although the Corporation owned the Laird/Canora property and not the Appellant. The Appellant signed as surety only. There was no evidence by ManuLife or anyone other than the Appellant that the two documents complement each other and are to be read together. In fact an opposite conclusion is more logical for the following reasons: (a) the documents are dated six months apart - Exhibit R-1 is February 17, 1994 and Exhibit R-2 is August 25, 1994; (b) Exhibits R-1 and R-2 were prepared by counsel for ManuLife who did not give evidence; (c) there is clearly no forgiveness of debt for the Appellant with respect to the Côte-de-Liesse property; (d) if there was a forgiveness of debt for the Laird/Canora property, it was in favour of the Corporation; (e) there is no reference to the Laird/Canora property in the Côte-de-Liesse document nor is there reference to the Côte-de-Liesse property in the Laird/Canora document; (f) Exhibit A-3 is a memorandum of settlement prepared by Shahir Guindi on behalf of the Appellant and sent to counsel for ManuLife. This is of no assistance to the Appellant. It was not accepted and the counsel involved did not give evidence; and (g) ManuLife took legal action to realize on its security of the Côte-de-Liesse property.
[20] We have a separate agreement or contract for each property. The only connection between the two is the uncorroborated evidence of the Appellant to the effect that a reduction of the interest rate for the Corporation's Laird/Canora Deed of Loan and Hypothec was dependent on his surrender of the Côte-de-Liesse property. This is not sufficient to offset the evidence to the contrary contained in the Deed of Giving in Payment.
[21] Section 80 of the Act only applies when there is a forgiven amount in respect of a commercial obligation that has been settled or extinguished. In Arcade Construction Ltd. v. The Queen,[11] Bonner J. set out clearly and simply what is required for a debt to be settled. At page 656, he stated:
... It seems to me that in ordinary English usage a debt or obligation is settled when creditor and debtor deliberately agree to fix or vary their existing rights and obligations. ...
ManuLife and the Appellant did not fix or vary their existing rights and obligations with respect to the Côte-de-Liesse property. ManuLife took the property in accordance with the strict terms of their Deed of Loan. Section 80 does not apply.
[22] As a consequence of his failure to pay his creditor, the Appellant surrendered the Côte-de-Liesse property to the creditor. Clearly, section 79 of the Act applies and it has priority over section 80. Counsel for the Appellant acknowledges that section 79 has priority over section 80 and it does not serve a purpose to review the scheme of the Act.
[23] In the Reply to the Notice of Appeal, the Minister correctly stated that the Deed of Giving in Payment was published on August 25, 1994. By the publication, the third parties, like the Minister, were bound by the terms of the Agreement according to article 2941 of the Civil Code of Québec (articles 2082 and 2083 of the Civil Code of Lower Canada). There was no reference to article 2941 in argument.
[24] The appeal is dismissed, with costs.
Signed at Ottawa, Canada, this 16th day of February, 2001.
"C.H. McArthur"
J.T.C.C.
COURT FILE NO.: 1999-832(IT)G
STYLE OF CAUSE: Antonio F. Dieni and
Her Majesty the Queen
PLACE OF HEARING: Montréal, Québec
DATE OF HEARING: December 5, 2000
REASONS FOR JUDGMENT BY: The Honourable Judge C.H. McArthur
DATE OF JUDGMENT: February 16, 2001
APPEARANCES:
Counsel for the Appellant: Nicolas Cloutier
Counsel for the Respondent: Nathalie Labbé
COUNSEL OF RECORD:
For the Appellant:
Name: Nicolas Clouthier
Firm: Goodman Phillips & Vineberg
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-832(IT)G
BETWEEN:
ANTONIO F. DIENI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on December 5, 2000, at Montréal, Québec, by
the Honourable Judge C.H. McArthur
Appearances
Counsel for the Appellant: Nicolas Cloutier
Counsel for the Respondent: Nathalie Labbé
JUDGMENT
The appeal from the assessment of tax made under the Income Tax Act for the 1994 taxation year is dismissed, with costs.
Signed at Ottawa, Canada, this 16th day of February, 2001.
|
"C.H. McArthur" |
J.T.C.C.
[1] Exhibit R-2. The Deed of Giving in Payment was executed following an action by ManuLife equivalent to that of mortgage foreclosure in most other provinces.
[2] The Appellant controlled Les Aménagements Dieni Inc.
[3] The Laird/Canora property was registered in the name of the Corporation.
[4] The Côte-de-Liesseproperty was registered in the name of the Appellant and is the subject of this appeal.
[5] Exhibit A-1.
[6] Exhibit R-1.
[7] Exhibit A-2.
[8] [1987] 1 S.C.R. 32.
[9] Tab 3 of Appellant's authorities.
[10] 97 DTC 767 (aff'd 98 DTC 6275 (F.C.A.).
[11] 81 DTC 655.