Lamarre Proulx J.T.C.C.:-This is an appeal for the 1987 taxation year.
The questions at issue are whether a loan made to the appellant by a corporation of which the appellant is a shareholder was made to acquire fully paid shares of the capital stock of a corporation related to the first corporation and whether a bona fide arrangement was made, at the time the loan was made, for repayment thereof within a reasonable time, within the meaning of subsection 15(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the ’’Act”).
Subsection 15(2) of the Act, for the pertinent part reads as follows:
15.(2) Where a person (other than a corporation resident in Canada) or a partnership (other than a partnership each member of which is a corporation resident in Canada) is a shareholder of a particular corporation, is connected with a shareholder of a particular corporation or is a member of a partnership or a beneficiary of a trust, that is a shareholder of a particular corporation and the person or partnership has in a taxation year received a loan from or has become indebted to the particular corporation, to any other corporation related thereto or to a partnership of which the particular corporation or a corporation related thereto is a member, the amount of the loan or indebtedness shall be included in computing the income for the year of the person or partnership, unless
(a) the loan was made or the indebtedness arose
(iii) where the lender or creditor is a corporation, in respect of an employee of the corporation to enable or assist the employee to acquire from the corporation fully paid shares of the capital stock of the corporation, or to acquire from a corporation related thereto fully paid shares of the capital stock of the related corporation, to be held by him for his own benefit, or
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
The facts on which the Minister of National Revenue, (the "Minister”), relied to reassess the appellant are described at paragraph 9 of the reply to the notice of appeal, (the ’’Reply”), and are the following:
(a) the facts hereinbefore stated and admitted;
(b) at all material times the appellant was a shareholder and employee of Service de Pneus Lavoie Outaouais Inc. (hereinafter referred to as SPL Inc.) and Pneus Pierre Lavoie Inc. (hereinafter referred to as PLO Inc.);
(c) in or about September 1986 the appellant obtained a loan from the National Bank of Canada, in the amount of $50,000, in order to purchase shares in SPL Inc.;
(d) in or about December 1987 the appellant borrowed an amount of $40,000 from PLO Inc. which money was used to pay off the said loan at the National Bank of Canada, in the amount of $40,000;
(e) during the 1987 taxation year the appellant qua shareholder received from PLO Inc. loans in the amount of $40,000 which loans were not repaid within the 1987 taxation year or within one year from the end of the 1987 taxation year of PLO Inc.;
(f) no bona fide arrangements were made at the time the said loan was made or the indebtedness arose for repayment thereof within a reasonable time;
(g) the amount of $40,000 was not borrowed by the appellant nor was it lent to him by PLO Inc. to enable or assist him, as an employee or shareholder of PLO Inc., to acquire from PLO Inc., or a corporation related thereto, previously unissued fully paid shares of the capital stock of PLO Inc. or the related corporation to be held by the appellant for the appellant’s own benefit;
(h) PLO Inc. did not lend the amount of $40,000 to one of its employees to enable or assist the employee to acquire a dwelling house;
(i) the amount of $40,000 is to be included in the income of the appellant qua shareholder for the 1987 taxation year.
Counsel for the appellant stated at the beginning of the hearing that subparagraphs 9(b), 9(c), 9(d), 9(e) and 9(h) of the reply were admitted.
Mr. Gérard Robineault, an accountant of Maniwaki, testified for the appellant. He has known the appellant since 1985 and was the auditor of the appellant’s company, Pneus P. Lavoie Inc. This is the old company and it does business in Maniwaki. It has been in ‘existence since the mid-60s and the appellant owned 98 per cent of its voting shares. The new company, Service de pneus Lavoie Outaouais Inc., does business in Gatineau. Formerly its name was Réchappage de pneus Lavoie Inc.
The witness produced as Exhibit A-l, his recollection of the events. This recollection proved not to be in accordance with some dates of the events as they really took place. For example, his recollection was that the appellant had borrowed the amount of $50,000 May 15, 1986 whereas the respondent produced a copy of the actual borrowing from the bank and the date was September 15, 1986. Another example is that the witness said that the promissory note was signed on or about September 18, 1986 whereas the promissory note produced as Exhibit A-2 was dated December 16, 1987.
Let us put aside the errors regarding the dates and examine whether a binding agreement had been entered into between the corporation and the appellant which is the second question at issue. If the answer is "no” to this question, there will be no need to examine the first question at issue.
The witness said that the appellant’s intent was to reimburse the corporation when there would be a sufficient amount of liquidities in the corporations in question. When he was asked in cross- examination if it was because dividends or salaries would be paid, the witness answered "no", only the cash flow had to be considered. According to his projections this sufficient cash flow should not have taken more than five years to accumulate. He says that the reimbursement at the end of those five years proved that the plan had been followed and that there had been a true commitment to repay the loan. He goes on to express the view that this commitment was as binding as any other well structured document that could have been written and not complied with.
The wording of the promissory note signed by the appellant to the corporation is as follows:
Je, soussigné Pierre Lavoie, domicilié à Maniwaki, Province de Québec reconnaît devoir la somme de QUARANTE MILLE DOLLARS (40 000 $) à Pneus Pierre Lavoie Inc.
Cette somme porte intérêt à 10 % et sera remboursable à demande.
Signé ce seizième jour de décembre, mil neuf cent quatre-vingt-sept (16 décembre 1987).
Signé
Pierre Lavoie
The witness said that the interest had been paid by the appellant.
Was this promissory note signed by the appellant a bona fide arrangement for repayment within a reasonable time?
Counsel for the appellant submitted that the promissory note was the type of agreement that is entered into by business people for business reasons. He also pointed out that the Tribunal must look at what was the mischief that this provision wanted to sanction. It was the taking of a corporation’s money by the shareholder in the guise of a loan without ever paying it back to the corporation and not paying income tax on the money so appropriated. He said that the term of repayment was determined by the cash flow of the corporations. This is a precise undertaking business wise.
Respecting the submission that one may enter into a strict agreement and not comply with it and therefore an agreement based on what is reasonable business is as good as a strict agreement which is not complied with, I am of the view that if a complete and binding agreement had been signed between the corporation and the appellant, and had the appellant not complied with the terms of the agreement, it would have been open to the Minister to consider that the agreement was not binding, if the cir- cumstances could lead to this conclusion.
At any rate, what I have to analyze is the actual agreement of repayment. This Court in the matter of Perlingieri v. M.N.R., [1993] 1 C.T.C. 2137, 93 D.T.C. 158 has already examined whether a loan payable on demand was a binding arrangement. I quote the Tribunal at 2140 (D.T.C. 161):
Arrangements to repay the loan must be made in good faith at the time the loan was made. At the time the loan is made the creditor and the debtor must be aware of the arrangements made between them for the repayment of the loan. The debtor must know when he must repay the loan at the time the loan is made. Because a demand loan is open ended with respect to repayment, at the time the loan is made the creditor may or may not know when he will demand payment and the debtor does not know when he will have to make payment. Hence no bona fide arrangement-indeed no arrangement at all<+->has been made at the time of the demand loan for its repayment.
It is clear that an important feature of the appellant’s legal situation regarding the demand note signed by him is that he owned 98 per cent of the voting shares of the corporation from which he had obtained the loan. In such circumstances, it is impossible to consider a demand loan as a binding agreement between the corporation and its debtor.
Counsel for the respondent referred to the decision of the Federal Court of Appeal in Silden v. M.N.R., [1993] 2 C.T.C. 123, 93 D.T.C. 5362 and more specifically at pages 125-26 (D.T.C. 5364-65):
The Trial Division found that the loan to the respondent, even though made after the acquisition of the house, ought to be considered to have been made to enable or assist him to purchase that house since the loan was made pursuant to a commitment given by the lender to the respondent prior to the acquisition of the house. We need not express any opinion on the correctness of that finding since we are of the view that the Trial Division clearly erred in concluding that the second condition prescribed for the application of subparagraph 15(2)(a)(ii) was met.
The finding of the Trial Division with respect to this second condition flows from its conclusion that the understanding that the loan would be repaid if and when the respondent left his employment or ceased to own the house was in the circumstances a reasonable arrangement. That is beside the point. 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. ]
To conclude that a loan made by a corporation to one of its shareholder employees should not be included in that person’s income as is required by subsection 15(2) of the Act, the Court has to be convinced that a bona fide agreement of repayment of the loan had been entered into and not only an arrangement that "did not permit to determine with certainty the time within which it had to be reimbursed". In this instant case, the Court is of the view that it is the latter situation that occurred.
If the terms of the reimbursement of the loan are uncertain, the amount should be included in the calculation of the taxpayer’s income and when the loan is repaid, the taxpayer may ask for its deduction in accordance with paragraph 20(1 )(j) of the Act which reads as follows:
20.(1 )(j) such part of any loan or indebtedness repaid by the taxpayer in the year as was by virtue of subsection 15(2) included in computing his income for a preceding taxation year (except to the extent that the amount of the loan or indebtedness was deductible from the taxpayer’s income for the purpose of computing his taxable income for the preceding taxation year, if it is established by subsequent events or otherwise that the repayment was not made as part of a series of loans or other transactions and repayments;
The appeal is therefore dismissed with costs.
Appeal dismissed with costs.