A-49-81
The Queen (Appellant) (Defendant)
v.
Antoine Guertin Ltée (Respondent) (Plaintiff)
INDEXED AS: ANTOINE GUERTIN LTÉE V. CANADA
Court of Appeal, Pratte, Marceau and Lacombe
JJ.—Montréal, September 14; Ottawa, November
5, 1987.
Income tax — Income calculation — Deductions —
Expenses incurred to borrow money used to earn income from
business — Whole life insurance policy pledged as security for
loan — Portion of whole life insurance policy premium
equivalent to term life insurance policy premium not allowable
deduction.
Income tax — Income calculation — Deductions — Wheth
er bonuses paid by corporation to employees and immediately
transferred to charitable foundation gifts by employees or
disguised gift by corporation to foundation.
In 1969, the respondent company was required to take out
life insurance policies on two of its officers as security for a
$300,000 loan from the Industrial Development Bank. Two of
the policies were whole life with surrender value and dividend
option and one was term. The Trial Judge ruled that for the
years 1970, 1971 and 1972, the respondent was entitled to
deduct as expenses, with respect to the whole life policies, an
amount equal to annual premiums for term life insurance.
In 1972, the company also deducted the sum of $39,155
which it had reportedly paid to its employees as annual bonuses
but which was immediately transferred, by the employees'
endorsing of their bonus cheques, to a charitable foundation
created by the respondent's president. The Trial Judge found as
a fact that there had been no deceit and that this deduction
would not unduly or artificially reduce the company's income
contrary to subsection 245(1) of the Act.
Held, the appeal should be allowed with respect to the
deduction of part of the insurance premiums but dismissed with
respect to the payment of bonuses to the employees.
Per Marceau J.: The 1964 Exchequer Court decision in
Equitable Acceptance Corp. should be applied. In that case, the
deduction of premiums for whole life insurance policies with
surrender value taken out on the life of a corporate president
was not allowed. It would seem that the reasoning for that
decision—that there had been the acquisition of an asset of a
capital nature, not an expense incurred in the course of borrow
ing money within the meaning of the Act—should apply just as
much to term as to whole life insurance. That decision should
be understood to mean that in order to speak of an expense
incurred in the course of a loan, the expenditure must have
been made for no consideration other than the loan; it must be
an expenditure resulting in a diminution of the borrower's
property. There is no diminution of property where equivalent
value, in the form of insurance, is obtained by the payment of a
premium. However, even if the reasoning in Equitable Accept
ance Corp. would not apply to term insurance, the deduction
herein should not be allowed since the company obtained not
term but permanent insurance. It is a well- established rule that
in a tax matter, what must be considered is what was done, not
what might have been done.
It is on the basis of the testimony of the respondent's
president that the Trial Judge found that the $39,155 had in
fact been paid to the employees in the form of bonuses although
they had agreed with the then president that the money should
be paid to his foundation. In the Judge's opinion, there had
been no deceit. While a more critical view of the testimony
could have been taken, it cannot be said that the Judge made a
manifest error in believing it. It cannot therefore be said that he
erred in deciding as he did. Once it is admitted that the amount
of the bonuses was set in the way described by the respondent's
president, it cannot be concluded that a part of these bonuses
represented a disguised gift made to the foundation by the
respondent.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, R.S.C. 1952, c. 148, ss. 11(1)(cb)(ii)
(as added by S.C. 1955, c. 54, s.1(1)), 12(1)(b).
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 18(1)(b),
20(1)(e)(ii), 110(1)(a), 245(1).
CASES JUDICIALLY CONSIDERED
APPLIED:
Equitable Acceptance Corp. Ltd. v. Minister of National
Revenue, [ 1964] Ex.C.R. 859; 64 DTC 5045; Bronfman
Trust v. The Queen, [1987] 1 S.C.R. 32.
REFERRED TO:
Côté-Reco Inc. v. Minister of National Revenue (1979),
80 DTC 1012 (T.R.B.).
COUNSEL:
Roger Roy for appellant (defendant).
Claude Desaulniers for respondent (plaintiff).
SOLICITORS:
Deputy Attorney General of Canada for
appellant (defendant).
Stikeman, Elliott, Tamaki, Mercier & Robb
Montréal, for respondent (plaintiff).
The following is the English version of the
reasons for judgment rendered by
MARCEAU J.: This appeal, brought on behalf of
Her Majesty, is against a judgment of the Trial
Division [[1981] 2 F.C. 532] which vacated the
assessments of the respondent company made by
the Minister of National Revenue for the 1970,
1971 and 1972 taxation years. It raises two ques
tions which are both of the same type, as in each
case the question is whether a certain expense
appearing on the company's balance sheet was
deductible in computing its taxable income, but
which have nothing else in common, nor do they
cover the same years. There are thus two parts to
the appeal, which can only be dealt with independ
ently of each other.
I
The first part of the appeal covers the three
years, and the expense the deduction of which is at
issue was incurred to pay life insurance premiums.
The facts are straightforward. In 1969 the
respondent company—a Quebec family company
engaged in the manufacture of feed and raising of
turkeys in St-Pie, a village near Montréal—bor-
rowed $300,000 from the Industrial Development
Bank to purchase a piece of land and construct
buildings to be used in expanding its operations.
Among the many securities required by the Bank
was the following:
[TRANSLATION] The transfer of a sum of insurance on the lives
of Messrs. Jacques Guertin ($200,000.00) and Emile Cordeau
($100,000.00), this insurance to be held either by the company
and payable to it or by Messrs. Guertin and Cordeau and
payable to their estates or to the company.
To meet this requirement the company obtained
two $100,000 insurance policies on the life of
Jacques Guertin, who was its president, and trans
ferred them to the Bank. They were whole life
policies with a surrender value and dividend
option, and the annual premiums totalled $4,022,
$2,011 for each one. In computing its taxable
income for each of the next three years, the com
pany used this transaction to include the sum of
$1,090 in its expenses, representing what it con
sidered would be the annual premiums it would
have paid if, instead of whole life policies, it had
only purchased temporary [term] policies as it had
done to meet the Bank's requirement for Mr.
Cordeau. The Minister challenged this procedure
but the Trial Judge ruled against him, and the
Deputy Attorney General submits on behalf of
Her Majesty that the learned Judge was in error.
The old Income Tax Act and the new one which
replaced it in 1972 are both involved in view of the
years in question, but the provisions directly appli
cable are to the same effect in each one. In the old
Act, R.S.C. 1952, c. 148, the sections concerned
are subparagraph 11(1)(cb)(ii) (as added by S.C.
1955, c. 54, s. 1(1)) and paragraph 12(1)(b):
11. (1) Notwithstanding paragraphs (a), (b) and (h) of
subsection (1) of section 12, the following amounts may be
deducted in computing the income of a taxpayer for a taxation
year:
(cb) an expense incurred in the year,
(ii) in the course of borrowing money used by the taxpayer
for the purpose of earning income from a business or
property (other than money used by the taxpayer for the
purpose of acquiring property the income from which
would be exempt),
12. (1) In computing income, no deduction shall be made in
respect of
(b) an outlay, loss or replacement of capital, a payment on
account of capital or an allowance in respect of depreciation,
obsolescence or depletion except as expressly permitted by
this Part,
In the current Act, S.C. 1970-71-72, c. 63, the
sections are paragraph 18(1)(b) and subparagraph
20 (1) (e) (ii):
18. (1) In computing the income of a taxpayer from a
business or property no deduction shall be made in respect of
(b) an outlay, loss or replacement of capital, a payment on
account of capital or an allowance in respect of depreciation,
obsolescence or depletion except as expressly permitted by
this Part;
20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (h),
in computing a taxpayer's income for a taxation year from a
business or property, there may be deducted such of the
following amounts as are wholly applicable to that source or
such part of the following amounts as may reasonably be
regarded as applicable thereto:
(e) an expense incurred in the year,
(ii) in the course of borrowing money used by the taxpay
er for the purpose of earning income from a business or
property (other than money used by the taxpayer for the
purpose of acquiring property the income from which
would be exempt),
The Deputy Attorney General of course argued
that the special and exceptional deduction allowed
by subparagraphs 11(1) (cb) (ii) of the old Act and
20(1)(e)(ii) of the new was inapplicable because
the cost of purchasing the two life insurance poli
cies with surrender value was not "an expense
incurred in the course of borrowing money" (une
dépense engagée à l'occasion d'un emprunt), and
he relied in this regard on the authority of the
decision of the Exchequer Court in Equitable
Acceptance Corp. Ltd. v. Minister of National
Revenue, [1964] Ex.C.R. 859; 64 DTC 5045. The
respondent argued that Cattanach J.'s judgment in
that case did not support the contention of the
Deputy Attorney General. The Trial Judge, it said,
clearly explained the scope of that judgment when
he wrote [at page 534 F.C.]: "Cattanach J. ruled
that premiums for insurance policies on the life of
the plaintiff Company's president were not deduct
ible, precisely because this was permanent insur
ance which was not restricted to the term of the
loan but covered the entire life of the insured, with
a surrender value". It was precisely in order to
take account of the judgment in Equitable
Acceptance Corp. the respondent explained, that it
deliberately refrained from claiming the total pre
mium it had paid; but it was quite understandable
that it should deduct what it would have spent if it
had purchased only a temporary policy for the
duration of the loan. To this the Deputy Attorney
General responded that while it is true that if the
insurance obtained had only been temporary,
deduction of the premium could have been
approved (as it was in the case of the policy
obtained on the life of Mr. Cordeau), the fact
remains that this is not what was done.
I should say first that I have some difficulty
understanding how the scope of the judgment in
Equitable Acceptance Corp. can be limited to
cases in which the life insurance obtained and
transferred is whole life insurance. In my opinion,
Cattanach J.'s reasoning is entirely contained in
this paragraph from his reasons [at pages 865
Ex.C.R.; 5048 DTC]:
In my view the cost of the purchase of the two life insurance
policies and the maintenance in force thereof by the payment of
premiums is not an expense incurred in the year in the course of
borrowing money used by the taxpayer for the purpose of
earning income from a business. While it is true that the
purchase of these life insurance policies and their assignment to
Triarch was a condition imposed by Triarch before making the
loan to the appellant, nevertheless the true nature of the
transaction was that the appellant acquired an asset which
could be used, and was in fact used, as a collateral security
necessary to borrow money to be used in its business. In short,
the appellant, by the purchase of the two insurance policies,
merely enhanced its position as a reliable lending risk.
It seems to me that this reasoning applies just as
much to the case of temporary insurance as to that
of whole life insurance. The right of the insured
under a temporary life insurance contract is an
"asset" in the sense in which the word is used by
Cattanach J., that is, a usable security from which
a benefit can be obtained, or valuable property, in
the same way as the right conferred on an insured
by a "permanent" life insurance contract, even
though the asset is of a lower value and its trans
formation into cash is of course only a contingen
cy. Cattanach J.'s judgment has often been treated
as based simply on an interpretation of the phrase
"in the course of" (Ã l'occasion de) contained in
the wording of the applicable provision, the Judge
being of the view that the expense was prior to the
loan and not "in the course of borrowing" (Ã
l'occasion d'un emprunt) (Cf Côté-Reco Inc. v.
Minister of National Revenue (1979), 80 DTC
1012 (T.R.B.)). On the contrary, the reasoning
appears to me to go much further than that. I
understand it to mean that, in order to speak
strictly and accurately of an expense incurred in
the course of a loan, the expenditure must as such
have had no consideration other than the loan, or
in other words, it must be an expenditure resulting
in a diminution of the borrower's property. The
property right represented by temporary insurance
is the premium paid in another form with an
equivalent value, and no diminution could possibly
result in the property of the insured.
It is true that, in his reasons, Cattanach J. went
on to say, in a paragraph subsequent to the one
just cited, the following:
If the insured, Emil E. Schlesinger, had died while the
policies were in force and before the repayment of the loan, the
appellant would then be in the position of the loan being fully
paid from the proceeds of the insurance policies and the
amount of the loan received by the appellant would become
part of the appellant's assets without any corresponding debit
entry. Again if the proceeds were in excess of the amount
required to repay the loan, then any such excess would have
accrued to the appellant's assets. Further when the loan was
repaid, as it was, there was nothing to prevent the appellant
from securing another loan from the same or a different source
on the strength of the security of the two life insurance policies,
if the necessity arose.
In my view, however, in so doing the Judge added
nothing to his reasoning and merely elucidated the
various aspects of the "asset" represented by the
policies at issue in the case before him. I know that
this paragraph (in particular, I take it, because of
what he said in the last sentence) seems to have
given rise to a limiting interpretation of his judg
ment, an interpretation which the Department
even adopted in its Interpretation Bulletin
IT-309R of January 10, 1979. I would still, with
respect, dispute the legitimacy of this reaction. In
my view the reasoning underlying Equitable
Acceptance Corp. applies just as much to tempo
rary insurance for the duration of the loan as to
insurance which will continue beyond it, and it is a
reasoning which appears to me to be unimpeach
able.
I have taken the time to examine the question of
whether temporary insurance could more ade
quately meet the conditions for application of sub-
paragraphs 11(1)(cb)(ii) and 20(1)(e)(ii) of the
Act than permanent insurance because it was the
focus of the parties' concerns and the basis of their
arguments. I think nevertheless that strictly speak
ing, in the circumstances of the case at bar, it is
not necessary for the Court to adopt a final posi
tion on the point as, even assuming that a differ
ence in treatment between permanent and tempo
rary insurance is warranted, there is still the
response of the Deputy Attorney General that, in
any case, here the company obtained not tempo
rary but permanent insurance, and I think this
response is conclusive. Quite recently, once again,
in Bronfman Trust v. The Queen, [1987] 1 S.C.R.
32, the Supreme Court restated the rule that in a
tax matter what must be considered is what was
done, not what might have been done. The follow
ing is an extract from the reasons of the Chief
Justice, speaking for the Court, at pages 54 and
55:
Before concluding, I wish to address one final argument
raised by counsel for the Trust. It was submitted — and the
Crown generously conceded — that the Trust would have
obtained an interest deduction if it had sold assets to make the
capital allocation and borrowed to replace them. Accordingly,
it is argued, the Trust ought not to be precluded from an
interest deduction merely because it achieved the same effect
without the formalities of sale and repurchase of assets. It
would be a sufficient answer to this submission to point to the
principle that the courts must deal with what the taxpayer
actually did, and not what he might have done: Matheson v.
The Queen, 74 D.T.C. 6176 (F.C.T.D.), per Mahoney J., at p.
6179.
I think that the first part of the appeal is
definitely valid.
II
The second part of the appeal relates to a single
taxation year, 1972. Though like the preceding
case this one again involves a disallowed expense,
the question raised is much more difficult to
define, as it is rooted in a somewhat complex series
of facts. However, in view of the conclusion I
intend to adopt, it will not be necessary for me to
go into any detail. Broadly speaking, the matter is
as follows.
The respondent company was established by
Antoine Guertin, the father of Jacques, who was
its president in 1972. Antoine Guertin had also
created a foundation whose funds were to be used
for religious purposes. This foundation received
gifts primarily from the respondent company and
its employees; it loaned the amounts received to
the respondent company in return for interest and
donated this interest for use in missionary work.
In its tax returns, for the purpose of computing
its 1972 income tax, the company first reported a
gift of $12,400 to the foundation, and then the
payment to all its employees without exception of
large annual bonuses a third of which, $39,155 out
of $111,600, was never received by the employees
but was simply represented by cheques endorsed to
the foundation. The Minister refused to allow both
the deduction of the $12,400 gift and that of the
part of the bonuses paid to the foundation, on the
ground that these deductions, if allowed, would
unduly or artificially reduce the company's income
contrary to subsection 245 (1) of the Act.
The Trial Judge dismissed the Minister's argu
ments. His understanding of the evidence led him
to conclude that the sum of $12,400 paid to the
foundation by the respondent represented a true
gift and that of $39,155 had in fact been paid to
the employees in the form of bonuses, although
they agreed with Antoine Guertin that it should be
paid to his foundation. In the Judge's opinion,
there had been no deceit.
The appellant's counsel no longer disputes that
the $12,400 gift was really a gift. However, he
argues that the Judge erred in allowing deduction
of the sum of $39,155. This, he said, had not really
been paid to the employees in the form of bonuses,
it was paid to them on the basis and subject to the
condition that they pay it to the foundation, so
that it was in fact a gift made by the respondent to
the foundation through intermediaries and this gift
could not be deducted in addition to that of the
$12,400, since the latter was the maximum
deductible under paragraph 110(1) (a) of the Act.
This argument by counsel for the appellant of
course rests on a basic assumption, that the sum of
$39,155 would not have been distributed to the
employees if they had not previously agreed to pay
it to the foundation as Antoine Guertin asked
them to do. However, the respondent's president
Jacques Guertin testified to the contrary, and
asserted that the amount of each employee's bonus
was set by the management committee without
intervention by Antoine Guertin, and regardless of
whether the employee in question had agreed to
make a gift to the foundation. The Trial Judge
clearly could not have decided as he did unless he
believed this part of Jacques Guertin's testimony.
It seems to me, after reading and re-reading the
evidence, that I would have been inclined to take a
more critical view of the testimony, but I cannot
say that the Judge made a manifest error in believ-
ing it. That being so, I also cannot say that he
erred in deciding as he did. Once it is admitted
that the amount of the bonuses was set in the way
described by Jacques Guertin, it cannot be con
cluded that a part of these bonuses represented a
disguised gift made to the foundation by the
respondent. Accordingly, the appellant cannot suc
ceed on the second part of the action.
I therefore conclude that the appeal should be
allowed and the assessments restored as to the
disallowing of deductions in the amount of $1,090
for insurance premiums for each of the years 1970,
1971 and 1972, but should be dismissed as to the
payment of bonuses to the employees. In view of
the mixed outcome, I would let each party pay its
costs.
PRATTE J.: I concur.
LACOMBE J.: I concur.
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.