T-2742-75
The Queen (Plaintiff)
v.
Immobiliare Canada Ltd. (Defendant)
Trial Division, Addy J.—Montreal, June 22;
Ottawa, September 8, 1977.
Income tax — Income calculation — Non-residents —
Associated companies — Defendant, a Canadian resident com
pany, bought bonds from foreign parent — Interest on bonds
owing, but due date postponed by agreement — Whether or not
defendant liable for non-resident tax on interest — Income
Tax Act, R.S.C. 1952, c. 148, ss. 24(1),(2), 106(1)(b), 108(7),
137(2)(b),(3).
Plaintiff appeals a judgment of the Tax Appeal Board allow
ing an appeal by defendant, a Canadian resident company,
against an income tax assessment for liability for failure to
deduct a 15% non-resident tax on the interest portion of bonds
which it purchased from a foreign, non-resident corporation,
Société Générale Immobiliare International Company (S.G.I.).
Place Victoria, a Canadian resident company controlled by
S.G.I., owed S.G.I. interest on bonds issued but, before the
interest became due, postponed the payment date by agree
ment. The defendant, a subsidiary of S.G.I., bought the bonds
with the postponed and accruing interest, and paid S.G.I. with
debentures defendant issued for the purpose. The issue is
whether or not defendant should have deducted and remitted
the non-resident tax for the amount of interest owed S.G.I. by
Place Victoria, but postponed, and therefore liable for it.
Held, the appeal is allowed in part, and the assessment is
referred back for reconsideration. Section 106(1) will not sup
port the assessment. The general principle is that, in default of
any statutory provision to the contrary, where a person pur
chases a debt or obligation from a creditor on which there is
accrued interest owing, the payment to the transferor of an
amount required to purchase the right to the accrued interest
does not constitute payment of interest to the transferor
because the transferee is purchasing an expectancy to receive
interest and not interest. Section 24(1) will not support the
assessment either, because the debt must have been then pay
able and it was not in the present case. Then, too, the payment
must have been in lieu of or in satisfaction of the interest; since
accrued interest was still owed, defendant's payment cannot be
considered in lieu of interest. Although section 24(2) has no
provision that the debt or interest be payable at the time of
transfer, the payment must in some way be made wholly or
partially in lieu of a debt. Defendant may incur some tax
liability under section 137. The only benefit conferred is the tax
saving of 15% of the interest, and therefore by section
137(2)(b), the defendant could be assessed for 15% of the
benefit-15% of 15% of the total accrued interest.
Wigmore v. Thomas Summerson and Sons, Ltd.; Com
missioners of Inland Revenue v. Sir John Hubert Oakley
[1926] 1 K.B. 131, applied. Hall v. M.N.R. 70 DTC 6333,
distinguished and Commissioners of Inland Revenue v.
Paget [1938] 2 K.B. 25, distinguished.
INCOME tax appeal.
COUNSEL:
Jean Halpin for plaintiff.
Robert H. E. Walker, Q. C., and Stephen S.
Heller for defendant.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Martineau, Walker, Allison, Beaulieu,
MacKell & Clermont, Montreal, for defend
ant.
The following are the reasons for judgment
rendered in English by
ADDY J.: The present appeal is against a judg
ment of the Tax Review Board which allowed an
appeal by the taxpayer Company, Immobiliare
Canada Ltd., a Canadian resident company,
against an assessment made on the 19th of July,
1973 relating to the 1966 taxation year, for its
alleged liability under sections 106(1) and 109(1)
and (5) of the Income Tax Act, R.S.C. 1952, c.
148, as amended, for failure to deduct and remit to
the Department of National Revenue a 15% non
resident tax on the interest portion of bonds which
it purchased from a foreign non-resident corpora
tion, la Société Générale Immobiliare Internation
al Company (known as "S.G.I.").
The assessment involved tax in the amount of
$71,212.43 and penalties and interest in the
amount of $39,315.16 to the date of assessment,
for a total of $110,527.29. The figures are not in
dispute but the liability is.
The bonds were issued by a Canadian resident
company, namely, Place Victoria St. Jacques Co.,
Inc. (hereinafter referred to as "Place Victoria")
and were issued in the years 1960, 1962, 1965 and
1966. The total principal amount of the debenture
was $16,000,000 and S.G.I. held $7,615,850 of
this amount. The amount of interest which was
payable on the bonds in 1965 was $291,979.25
(representing interest for the full year) and the
amount which was payable in 1966 was $182,-
770.25 (representing six months interest to the
15th of June, 1966). However, by reason of a delay
in constructing the building complex, which Place
Victoria was incorporated to hold and administer,
and by reason of the resulting complete lack of
revenue in 1966, contrary to original expectations,
Place Victoria decided, with the consent of S.G.I.
and the other debenture holders, that it would not
pay those interest payments when due but would
postpone them for two years. This decision to
postpone was made and approved before the inter
est became payable. The interest accordingly was
not paid when it would otherwise have been due
and payable.
On the 1st of October, 1966, and therefore
before any of these payments of interest became
payable, S.G.I. sold all of its Place Victoria bonds
to the defendant together with accrued interest
thereon. The accrued interest at the time of sale,
i.e., up to the 1st of October, 1966, amounted to
some $664,150 (this included some $474,749.50 of
interest, which would have been payable previously
had there been no postponement) also some
$13,589.12 being interest on overdue interest. The
difference of $155,855.72 represented interest
which would not in any event have become payable
at the time of sale.
The issue is whether a non-resident tax of 15% is
payable on the sum of $474,749.50.
The following additional facts are, in my view,
of some importance: the defendant Immobiliare
Canada Ltd., although a Canadian resident com
pany, was a subsidiary of S.G.I., a foreign com
pany. In payment for the transfer of the Place
Victoria debentures, with accrued interest thereon,
S.G.I. accepted debentures of the defendant which
the latter issued for that specific purpose. Place
Victoria was also controlled by S.G.I. As to this
latter fact, counsel for the defendant argued the
contrary during his reply argument at trial and
stated that no evidence had been led to establish
that S.G.I. held the majority of shares of Place
Victoria, although there was some evidence that
S.G.I. held a substantial amount of them. How-
ever, on examining the statement of claim one
finds that the plaintiff specifically pleaded in para.
graph 3 that Place Victoria was controlled b3
S.G.I. and the defendant in paragraph 1 of it:
defence admitted the facts alleged in paragraph
of the statement of claim. Thus, there would obvi
ously be no necessity for the plaintiff to leac
evidence on this issue and indeed, in the circum
stances, it would have been improper to do so. The
companies were therefore related and must not be
deemed to have been dealing at arm's length.
Many sections of the Act, as it existed in 196E
as well as certain articles of the Civil Code of the
Province of Quebec, were referred to by counsel
during argument. I do not intend to deal with all
of these as some are obviously inapplicable.
Counsel for the plaintiff stated that, although
pleaded in the statement of claim, he was not
relying on section 7(1). I agree that it has nc
application and will refrain from commenting on
it. He also conceded that he was not relying on
section 19A. I again agree that it had no applica
tion to taxation of a non-resident taxpayer under
Part III of the Act as it existed in 1966, although
it has now been made applicable to that part of the
Act by section 108(4)(a) enacted in 1971.
The Crown seeks to rest the assessment mainly
on the provisions of sections 106(1)(b), 108(7) and
137(2)(b). The relevant portions of section
106(1)(b) read as follows:
106. (1) Every non-resident person shall pay an income tax
of 15% on every amount that a person resident in Canada pays
or credits, or is deemed by Part Ito pay or credit, to him as, on
account or in lieu of payment of, or in satisfaction of,
(b) interest....
Counsel for the Crown argues that the words "a
person" are to be taken to apply to any person
whatsoever and not necessarily the debtor or a
person who owes the interest or any other person
acting on his behalf and that, therefore, the pay
ment made by the defendant to S.G.I. was taxable
even though the interest was owed by Place Vic-
toria and not by the defendant and even though
the payment did not in any way discharge Place
Victoria from paying the interest.
The word "interest" in that section means inter
est owing on the bonds, charge, debt or obligation
and not that part of the purchase price paid by a
third party to the holder of same for a transfer of
the right to the accrued interest. The general
principle of Wigmore v. Thomas Summerson and
Sons, Limited; Commissioners of Inland Revenue
v. Sir John Hubert Oakley' applies. I quote from
page 143 of that report:
The truth is that the seller does not receive "interest" from the
buyer, and it is interest which is the subject matter of the
taxation. He receives the price of the expectancy of interest,
and that is not the subject matter of the taxation. The whole
contention on behalf of the Crown depends upon the fallacy
that the price of the expectation of interest is interest.
There is nothing in section 106(1) nor in any
other section of the Act which might prevent
section 106(1) from being so interpreted. The
defendant also relies on The Commissioners of
Inland Revenue v. Henderson's Executors 2 ; Com
missioners of Inland Revenue v. Paget 3 ; and
Monks v. Executors of Sir G. W. Fox 4 .
It is, of course, dangerous to rely on cases
dealing with the interpretation of a particular sec
tion in a foreign taxation statute as so much
depends on the exact wording of the section itself,
on the accompanying interpretation sections of the
particular statute, on the other interpretation stat
utes of general application in that jurisdiction as
well as on the particular context where the section
under consideration is found. However, all of the
last-mentioned cases, like the Wigmore case, seem
to have been decided on the basis of a general
principle that, in default of any statutory provision
to the contrary, where a person purchases a debt
or obligation from a creditor on which there is
accrued interest owing, the payment to the trans-
feror of an amount required to purchase the right
to the accrued interest does not constitute payment
of interest to the transferor because the transferee
is purchasing an expectancy to receive interest and
not interest.
The Crown relied heavily on the case of Hall v.
M.N.R. 5 which was affirmed without reasons by
' [1926] 1 K.B. 131.
2 [1931] S.C. 681.
3 [1938] 2 K.B. 25.
4 [1928] 1 K.B. 351.
5 70 DTC 6333.
the Supreme Court of Canada in 71 DTC 5217.
The taxpayer in this case sold matured interest
coupons and the amount received therefor was
held to be interest within the meaning of section
6(1)(b) but at page 6336 of the first-mentioned
report the learned Judge clearly distinguishes the
Wigmore case (supra) on the grounds that, in the
latter case, the interest was not yet_ m payable. In
some of the English cases this distinction of wheth
er the interest was payable at time of sale does not
seem to have been universally recognized. In the
Paget case, for instance, we find at page 35 of the
above-mentioned report:
The purchase price received by Miss Paget was not income
arising from the bonds at all. It arose from contracts of sale and
purchase whereby Miss Paget sold whatever right she had to
receive such income in the future as well as her right to take
what was offered by the defaulting debtors. It is, in my opinion,
quite impossible to treat this as equivalent in any sense to
"income arising from" the bonds. [The underlining is mine.]
In the present case, however, the question does
not really arise as the interest was not payable at
the date of sale, in any case.
I must therefore conclude that the assessment
cannot be justified on the basis of section 106(1).
Sections 108(7), 24(1) and 24(2) read as
follows:
1o8....
(7) Where, if section 24 were applicable in computing a
non-resident person's income, that section would require an
amount to be included in computing his income, that amount
shall, for the purpose of this Part, be deemed to have been, at
the time he received the security, right, certificate or other
evidence of indebtedness paid to him on account of the debt in
respect of which he received it.
24. (1) Where a person has received a security or other right
or a certificate of indebtedness or other evidence of indebted
ness wholly or partially as or in lieu of payment of or in
satisfaction of an interest, dividend or other debt that was then
payable and the amount of which would be included in comput
ing his income if it has been paid, the value of the security,
right or indebtedness or the applicable portion thereof shall,
notwithstanding the form or legal effect of the transaction, be
included in computing his income for the taxation year in which
it was received; and a payment in redemption of the security,
satisfaction of the right or discharge of the indebtedness shall
not be included in computing the recipient's income.
(2) Where a security or other right or a certificate of
indebtedness or other evidence of indebtedness has been
received by a person wholly or partially as, or in lieu of
payment of or in satisfaction of a debt before the debt was
payable, but was not itself payable or redeemable before the
day on which the debt was payable, it shall, for the purpose of
subsection (1), be deemed to have been received when the debt
became payable by the person holding it at that time.
As to section 24(1) the debt must have been
"then payable" and it was not in the present case.
Furthermore, the payment must have been "in lieu
of ... or in satisfaction of an interest, dividend,
[etc.]". Surely the payment by the defendant
cannot be "in lieu of ... or in satisfaction or' any
part of the accrued interest owed by Place Vic-
toria. The latter still owed every penny of the
interest. As to section 24(2), although there is no
requirement as in the case of section 24(1) that the
debt or interest be payable at the time of transfer,
the same condition exists to the effect that the
payment made must in some way be made wholly
or partially in lieu of or in satisfaction of a debt.
Furthermore, section 24(1) provides that the pay
ment (i.e.: made to S.G.I.) shall be deemed to have
been received (by it) at the time the debt became
payable. No part of the debt of Place Victoria
became payable in 1966 by reason of the previous
arrangement made with S.G.I. and other bond-
holders and therefore no payment of interest can
be deemed to have been received by S.G.I. during
that year by virtue of the payment made to it by
the defendant. Section 108(7) cannot therefore
support the assessment.
The relevant portions of section 137(2)(b) on
which the Crown also relies read as follows:
137....
(2) Where the result of one or more ... transactions of any
kind whatsoever is that a person confers a benefit on a taxpay
er, that person shall be deemed to have made a payment to the
taxpayer equal to the amount of the benefit conferred notwith
standing the form or legal effect of the transactions ... and ...
the payment shall ... be
(b) deemed to be a payment to a non-resident person to
which Part Ill applies, or
Section 137(3) provides that where the transac
tion is at arm's length and bona fide, no party
shall be regarded as having conferred a benefit. In
view of my finding that S.G.I. controls both Place
Victoria and the defendant Company, the latter
cannot invoke the protection of section 137(3)
since the transaction was not at arm's length.
The precise nature of the benefit conferred upon
S.G.I., if any, is not easy to determine. S.G.I.
received from the defendant in 1966, the money
equivalent of the full capital debt and of the
accumulated interest to which it would ultimately
have been entitled. It also received of course the
sum for the sale of the interest portion of the debt
without having to pay the normal 15% non-resi
dent tax on that amount.
The immediate receipt by S.G.I. of the proceeds
representing the full capital amount of the loan,
especially where the capital would bear interest at
a current rate (i.e., 6% and 7%) if not received and
therefore be productive of income, does not in any
way constitute a benefit.
As to the prepayment of a sum equivalent to the
accrued interest which S.G.I. would have been
entitled to receive in 1968 in any event, if the
accelerated receipt of interest did constitute a
benefit, the determination of the money value of
same would be highly speculative to say the least.
Furthermore, interest was payable on all arrears of
interest as in the case of capital. In any event, no
assessment was made on the basis of an accelerat
ed receipt of interest. Thus, no onus can be con
sidered as having been cast upon the taxpayer to
rebut it. More importantly, I feel that this is not
the type of benefit which is contemplated by that
section; the benefit must be of a more tangible and
identifiable nature.
As to the receipt of the full value of the
accumulated interest, without having deducted
therefrom 15% of same for non-resident tax, this,
in my view, constitutes a definite, tangible, iden
tifiable and measurable benefit which S.G.I.
received in 1966 and which the defendant con
ferred upon it, for, without the purchase by the
defendant, the vendor S.G.I. at some time in the
future would otherwise be obliged to suffer a 15%
reduction of total amount of interest to which it
would have been entitled.
The only benefit conferred is therefore the tax
saving of 15% of the interest and since that ben
efit, by virtue of paragraph (b) of section 137(2)
quoted above is "deemed to be a payment to a
non-resident person [i.e. S.G.I.] to which Part III
applies," the defendant could be assessed for 15%
of the benefit or tax saving, in other words, 15% of
15% of the total accrued interest of $644,150 at
the time of sale.
It is to be noted that the application of section
137(2)(b) in the particular circumstances of this
case, brings about an assessment which is different
both as to the rate of assessment and as to the
amount of accrued interest to which the rate is
applied. The rate is 15% of 15% of the interest
involved as opposed to a straight 15% as assessed
by the plaintiff and the period includes all accrued
interest to the date of sale (the 1st of October,
1966) or $644,150 as opposed to $474,749.50
being interest which would have actually become
payable by the end of 1966 had the postponement
not been agreed upon (the last interest gale date in
1966 being the 15th of June).
The assessment will accordingly be referred
back to the Minister for reconsideration and
re-assessment.
Under the circumstances I am not awarding any
costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.