D E Taylor:—This is an appeal by Mr Melvin Joseph Davis with regard to his 1978 tax return. The matter at issue is spelled out completely and fully in the notice of appeal filed by the appellant, and in the reply to notice of appeal filed by the Minister. Until ten minutes ago, I did not have the slightest intention of giving a decision on this matter today and I do reserve the right to amplify these few comments if it becomes necessary or desirable to do so in writing.
Essentially, the matter comes down to an amount alleged to be a loan to the appellant of $84,162 made by a corporation of which the appellant and/or his wife were the controlling shareholders. Under the circumstances, copies of the minutes of the corporation’s directors’ meeting were filed with the Board, together with a copy of an undated, although not questioned promissory note from Mr Davis to the Corporation in that amount. The disturbing part of that note, according to the Minister, appears to be that it is repayable on demand and that it bears no interest. The Minister made a major part of his argument on those points. The actual transaction concerned, and copies of jurisprudence brought forward by both counsel for the appellant and counsel for the respondent indicate that absolute and meticulous care must be taken in order that a taxpayer fit himself within the exclusion provisions of subsection 15(2) of the Income Tax Act.
I have approached the questions noted by both counsel in this matter very cautiously, particularly those brought forward by Mr Taylor, counsel for the respondent, in view of the fact that, to my knowledge, the questions regarding the bona fides of this note as reflected by the lack of repayment terms and interest rate, had not been previously addressed by the Board or the Courts. I have no fixed views on whether or not such a note does indeed fit the requirements of subsection 15(2) of the Act. Whether those aspects of this note would entitle this taxpayer to claim the exemption under subsection 15(2) of the Act may be a problem because the taxpayer is claiming it was a “bona fide” transaction.
But aside from the “bona fides” question, I do have views about one other element that has arisen. In this regard, I should like to read from the minutes of the shareholders’ meeting of Davis General Store Limited held on July 5, 1978, which started this entire proceeding:
2. The Company is to issue 498 common shares of the Company to Melvin Davis for a cash consideration of $84,162.
It is my clear interpretation of the evidence, testimony and documents that the cash consideration for the shares themselves was only some $498, at the rate of $1 par value per share. The balance of the amount at issue was put back into the company, counsel for the respondent agreed, as “contributed surplus”. The minutes of July 5, 1978 indicate to me that the total amount was to be “locked into” the company as capital stock, a situation which would, at least on the surface, have fulfilled one basic requirement of subparagraph 15(2)(a)(iii) of the Act which reads:
where the lender is a corporation, to an officer or servant of the corporation to enable or assist him to purchase from the corporation fully paid shares of the capital stock of the corporation, or to purchase from a corporation related to the corporation fully paid shares of the capital stock of the related corporation, to be held by him for his own benefit . . .
It might be argued that it was completely correct, from a record-keeping perspective, to show the transaction as broken down between cost of shares $498, and contributed surplus $83,664, and I mean no reflection on that accounting procedure. But one could also assert that the 498 treasury shares had been “fully paid”, on receipt of their par value of $498; or that, for the entire $84,162. Mr Davis was only entitled to receive the 498 shares as “fully paid”, without a proportionate interest in an established “contributed surplus” amount.
As I see it, the section of the Act at issue in this appeal does not contemplate the “valuation” of shares as if they were being acquired from another shareholder. It contemplates the acquisition of fully-paid treasury shares — in this case with a par value. I can only conclude that the total amount at issue $84,162, however described, was not “a loan . . . to purchase . . . fully paid shares . ..”. In my view, the transaction as conducted and recorded does not permit the exclusion from income sought by the taxpayer. The appeal is dismissed.
Appeal dismissed.