Canadian Forest Products Ltd. v. The Queen

Canadian Forest Products Ltd. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2004-06-01
Neutral citation
2004 TCC 405
File numbers
2001-3126(IT)G
Judges and Taxing Officers
Theodore E. Margeson
Subjects
Income Tax Act
Decision Content
Docket: 2001-3126(IT)G
BETWEEN:
CANADIAN FOREST PRODUCTS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on common evidence with the appeal of
Canadian Forest Products Ltd., (2001-4526(IT)G) at Vancouver, British Columbia.
Before: The Honourable Justice Theodore E. Margeson
Appearances:
Counsel for the Appellant:
Werner H. G. Heinrich
Counsel for the Respondent:
Lynn M. Burch
____________________________________________________________________
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1994, 1995 and 1996 taxation years are allowed, with costs, and the matters are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 1rst day of June, 2004.
"Theodore E. Margeson"
Margeson, J.
Docket: 2001-4526(IT)G
BETWEEN:
CANADIAN FOREST PRODUCTS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the appeals of
Canadian Forest Products Ltd., (2001-3126(IT)G) at Vancouver, British Columbia.
Before: The Honourable Justice Theodore E. Margeson
Appearances:
Counsel for the Appellant:
Werner H. G. Heinrich
Counsel for the Respondent:
Lynn M. Burch
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1997 taxation year is allowed, with costs, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 1rst day of June, 2004.
"Theodore E. Margeson"
Margeson, J.
Citation: 2004TCC405
Date: 20040601
Dockets: 2001-3126(IT)G
2001-4526(IT)G
BETWEEN:
CANADIAN FOREST PRODUCTS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Margeson, J.
[1] With respect to court file number 2001-3126(IT)G, the Appellant hereinafter referred to as "Canfor" appealed from:
(a) Notice of Reassessment for Part I.3 tax dated January 26, 1999 issued in respect of its 1994 taxation year which reassessment the Appeals Branch of the Canada Customs and Revenue Agency ("CCRA") on June 4, 2001 agreed to vary in part;
(b) Notice of Reassessment dated December 15, 1999 for Part I.3 tax issued in respect of its 1995 taxation year and subsequently confirmed on June 7, 2001; and
(c) Notice of Reassessment dated February 12, 2001 for Part I.3 tax issued in respect of its 1996 taxation year and subsequently reassessed on May 28, 2001 and confirmed on June 7, 2001.
[2] In court file number 2001-4526(IT)G, the Appellant appealed from Notice of Reassessment for Part I.3 tax dated May 28, 2001 issued in respect of its 1997 taxation year which reassessment was confirmed on September 5, 2001.
[3] It was agreed that at the outset that all of these appeals would be heard on common evidence.
Issues
[4] The issues in respect to the 1997 assessment are:
1. Do the net amounts as at the Appellant's year-end constitute "loans and advances" within the meaning of paragraph 181.2(3)(c) of Part I.3 of the Income Tax Act ("Act") as assessed?
2. Should the calculation of the cash balances on hand for purposes of determining the net amounts include the Appellant's short-term investments?
[5] With respect to the assessments for the 1994, 1995 and 1996 taxation years, the issues are:
1. Do the net amounts as at the Appellant's year-end constitute "loans and advances" within the meaning of paragraph 181.2(3)(c) of Part I.3 of the Act as assessed?
2. Should the calculation of the cash balances on hand for purposes of determining the net amounts include the Appellant's short-term investments?
[6] Robert McDonald was a chartered accountant. He was manager of taxation for Canfor. He has been with Canfor since 1990 and before that he was a partner with Price Waterhouse.
[7] Exhibit R-1 was admitted by consent without limitation. He explained the system, how an invoice received from a supplier was stamped, receipted and forwarded to someone for approval for payment. It is approved and is directed to accounts payable, which sends out payment of the invoice.
[8] The year-end for the 1997 taxation year was December 26. Twice a week there is a cheque run. They are normally printed and mailed the same date. He referred to Tab 2 and said that the Bank of Montreal ("the bank") was Canfor's bank. The cheque at Tab 2 was for payment dated December 11, 1997. It went to the bank and was deposited on January 2, 1998. This delay is very common. There is usually a four to eight day's delay from the time the cheque is issued to the time it is cashed. Canfor is entitled to put a stop-payment on a cheque for different reasons such as a lost cheque, an improper invoice or a stale-dated cheque. When the cheque is cashed, the next day Canfor gets a magnetic tape and two days later a hard copy of the cancelled cheques. Tab 3 was an Account Reconciliation Service report processed on January 2, 1998 by the bank. Each of Canfor's 25 sections will have a similar system in place. He referred to page 3 where the cheque showed up in the amount of $18,746.63. The total of the cheques presented that day for payment was $3,094,555.98.
[9] Tab 4 was a Statement of Account. He referred to the total debit on page 2 in the same amount as the total presented for payment on January 2, 1998 at the bank amounting to $3,094,555.98. He admitted that at that time Canfor owed the bank that amount. The bank closes off all divisions and puts them into this cash account (total cash balance for all Canfor's Canadian accounts that day). (It shows the amount of money that Canfor owes the bank and the credit shows the deposits that day, set one off against the other, and a net balance of $1,919,891.66.)
[10] If there is a shortfall, the balance would be shown at zero because the bank would use their line of credit to show a zero balance.
[11] Canfor has a record which shows all outstanding cheques. This type of record was shown at Tab 5. On page 13, a cheque earlier referred to in paragraph [8] above, showed up in that list. It was still outstanding. The bank does not know the number of the outstanding cheques. During this period of time because there were more outstanding cheques than money in the bank, it did not cause any concern because the system in place always guarantees a sufficient supply of cash. They track cash coming and going.
[12] There never was a situation where all of the outstanding cheques came due all in one day.
[13] Tab 6A showed the one main account of Canfor for reconciliation purposes. He referred to Tab 7A and said that the Minister assessed Canfor on the difference between the unprocessed cheques and the cash on hand, in the amount of $25,000,000. The bank did not give Canfor cash in this amount. Canfor was not required to pay interest on this amount. There was no liability at this time to pay this amount to the bank. They did have a line of credit in place.
[14] Exhibit A-2 was the agreement with respect to the line of credit. It provided for Canfor to be able to draw from the bank up to an agreed amount from the line of credit on request. The line of credit was sufficient to cover all outstanding cheques. The account was not in overdraft as of that date. If it were, it would have shown up in the financial statements from the bank. All of the statements of Canfor are prepared in accordance with generally accepted accounting principles ("GAAP").
[15] He did not include the difference in the capital because he did not think that they had to be included. They were not a loan or advance. In the years 1995, 1996 and 1997 he treated them differently. He included them in capital because CCRA was looking at the years 1991, 1992 and 1993 and they were going to reassess the capital account. He included them in capital until such time as he was able to get legal advice, but he believed he was right. He treated the 1998 year as he had before and appealed the 1997 decision.
[16] He referred to a summary at Tab 8 of all of the amounts under appeal. If cash is in the bank then the accounts are paid. If there is not sufficient cash they can rely upon their temporary investments and if there are insufficient funds there, they can call upon their line of credit and a deposit will be made to the account to honour the cheques.
[17] In cross-examination, he said that when the cheques were issued, Canfor intended that they be delivered and that they be payment for the invoices that were presented. The unpresented cheques were issued in the normal course of Canfor's business.
[18] He referred to Exhibit A-1, Tab 4, and said that no temporary investments were cashed in and deposited to cover any outstanding cheques. Then he said that he could not say whether the credit amounts resulted from cashing temporary investments or from payments for sales. None of the cheques in issue were post-dated and none had any conditions attached before they could be cashed.
[19] It was suggested to him that the treasury people in Canfor "gambled", that not all of the cheques would be cashed before the end of the fiscal year. He would not agree that the word "gamble" was the correct phraseology but he said that it was an educated guess (not a certainty). He reiterated that it was normal to take 48 days before a cheque is presented for payment but in the case of the cheque referred to at Tab 2, was issued on December 12, 1997 and not presented for payment until January 2, 1998, which was about three weeks. If there was to be a slow down it would be in December and the treasury people would be aware of it. He considered the unpresented cheques to be a liability to Canfor for accounting purposes and they are shown as such in the financial statements. With respect to the taxation years 1996 and 1997, he could not say how many temporary investments were cashed by the bank to prop up the cash position, if any.
[20] With respect to Exhibit A-2, he said that there were no terms in the agreement that allowed the bank to have access to the short-term assets. He referred to Exhibit A-1 at Tab 7D, which was the balance sheet. Cash and temporary investments were allowed to be settled against the unpresented cheques as seen at Tab C.
[21] The document at Tab 7B breaks it down to cash and temporary investments and the Minister allowed the cash to be netted out against the unpresented cheques. None of this was cash on hand in foreign currency.
[22] He was asked why the accountants decided to split it up in 1996 and he said that he did not know. He referred to Tab 7A. The assets were broken down and the Minister allowed the taxpayer to offset the cash against the unpresented cheques. None of the temporary investments were cash on hand or foreign currency. The investments were bankers' acceptance; commercial paper (promise to pay by another company). These may be secured or non-secured, they are short-term and they may sell at a discount to face value. Only solid corporations can issue corporate paper. They may be issued in a wide range of denominations and may be discounted or interest bearing. They may be of non-existent value or small secondary value.
[23] He referred to Exhibit R-1 and said that he submitted this document at the time of discovery. It was a summary of information with respect to short-term investments dated December 31, 1997 for the 1997 year-end. The $85,372 was the balance sheet amount. Page two showed a Bank of Montreal, bankers' acceptance in the amount of $5,000,000 at maturity and Canfor paid $4,982,600 for it.
[24] Canfor is not committed to hold it until maturity. If it does, it will sell it at market at that day's price. It may be greater or less than the maturity rate. The projected income for the maturity period would be less. Wood Gundy holds it for Canfor. He referred to a United States temporary investment in the amount of $1,000,000 and said that he did not know what it was. It was similar to the short-term investment referred to on pages 1 and 2. It was not cash. The $4,500,000 figure on pages 1 and 2 was similar.
[25] The large corporation tax is found in Part I.3 of the Act. There is a section for investment allowance under subsection 181.2(4). The company could not take advantage of this because it was of a type of investment that was not eligible for the allowance. Temporary investments may include eligible or non-eligible investments. At Tab 7A, page 2, the reference to $36,844,195 was to an investment allowance. He could not say what was included in the figure of $17,912,009. When it was claimed Canfor could have cashed it and claimed the credit that it was entitled to.
[26] In redirect, he said that he could not say how the cash amount got there. It did not come from the bank because they did not have a bank advance there.
[27] Canfor's system of controlling cash is a sophisticated one and includes a system to ensure that there is enough money in the bank to cover cheques when they are presented. The process for the 1997 taxation year was the same.
Argument on Behalf of the Appellant
[28] In oral and written argument counsel for the Appellant submitted that the Court should adopt the ordinary meaning under the statute and that derived from the case law. Under this definition, there was no loan because, in order for there to be a loan, there must be liability created to the bank. Such a liability was not created here until the cheque went to the bank, the bank honoured it and advanced the money to Canfor.
[29] In the case at bar no one received any money, there was no advance and consequently no loan. The bank gave no cash and Canfor was not indebted to the bank. Canfor decided when the debt arose. To say that there was a loan or advance was pure fiction. Canfor did not pay any interest with respect to the amounts in question which the Minister asserts constitutes a loan or advance.
[30] Part I.3 of the Act describes what is known as the "Tax on Large Corporations". This is imposed by subsection 181.1(1). Tax is imposed on Canfor's "taxable capital that is employed in Canada".
[31] The term "taxable capital employed in Canada" is defined in subsection 181.2(2). "The taxable capital of a corporation (other than a financial institution) for a taxation year is the amount, if any, by which its capital for the year exceeds its investment allowance for the year".
[32] The Act also defines in subsection 181.2(3) what Canfor's capital is. Included in that definition by virtue of paragraph (c) are "the amount of all loans and advances to the corporation at the end of the year". In the case at bar, the Minister says that the difference in the amount between the total outstanding cheques (unpresented) at year end less the actual cash on hand in the bank account at year end [the net amount] represents a loan or advance made to Canfor at the year end.
[33] On the law, counsel for the Appellant said that the amounts in question do not constitute a "loan or advance" for three reasons:
(a) they do not constitute a "loan or advance" within the ordinary meaning of those terms;
(b) the context in which the phrase "loan or advance" is used in the Act precludes the suggestion that there has been a "loan or advance"; and
(c) the authorities suggest that there has been no loan or advance in these circumstances.
[34] The terms "loans or advances" are not defined in the Act. Consequently, it is useful to consider the ordinary meaning of the terms by resorting to dictionary terms.
[35] Black's Law Dictionary (6th Edition) defines the terms "loan" and "advance" as follows:
Advance. Payment before it is due - payment or advance before time of payment.
Loan. Lending is the delivery by one party and receipt by another party of a sum of money upon agreement to repay.
[36] The New Lexicon Webster's Encyclopaedic Dictionary of the English Language (Canadian Edition) suggests similar definitions:
Advance. a payment of money before it is due.
Loan. something lent, usually money, on condition that it is returned, with or without interest.
[37] Implicit in the ordinary meaning of what constitutes a "loan or advance" is that there must be an actual transfer of funds to, directly or indirectly, the recipient of the loan or advance. The words "delivery and return" and "payment and repayment" are used.
[38] The conclusion that the "loans and advances" referred to in paragraph 181.2(3)(c) suggest an actual transfer of funds is supported when those words are considered in the context of the legislation in which they are found. Subsection 181.1(1) imposes tax on "its taxable capital employed in Canada for the year". The use of the word "employed" is significant. The word implies that the capital in question is used by the business. See subsection 181.2(1).
[39] A reading of subsection 181.2(3) indicates that the items enumerated under the definition of "capital" are all items which represent resources available to a corporation for the conduct of its business.
[40] Paragraph 181.2(3)(a) refers to shareholder contributions and surpluses. Paragraphs 181.2(3)(d) and (f) refer to different kinds of indebtedness, which imply receipt by the taxpayer of the funds. Paragraphs 181.2(3)(b) and (e) refer to reserves and unpaid dividends, again amounts available to Canfor in the carrying on of its business.
[41] Consequently, in light of the context in which the phrase "loans and advances" is found, it is difficult to suggest that the "net amount of unpresented cheques" represents a loan or advance for purposes of the section since nothing has been transferred from the bank to Canfor that could be employed or used by Canfor in the operation of its business as at the year end.
[42] Counsel referred to the case of The Grocery People Limited [1]where Sobier, J., when discussing the term "loans and advances" said:
[1] ... there has to be an indebtedness created, a liability of the taxpayer to its financial institution. No liability has been created vis-à-vis the two of them. On that basis, even though they have characterized it as bank indebtedness, if it is not in fact bank indebtedness then calling it so can't make it bank indebtedness.
[2] ... until such time as the bank accepts the cheque for payment and allows the account to go into overdraft - the mere presentation of a cheque by the taxpayer to its creditor does not create a bank indebtedness and using the plain meaning of the words "loans and advances", there is no loan or advance until the bank says there is and the bank has not done so in this case and I would allow the appeal.
[43] The question was again addressed in the case of PCL Construction Management Inc. [2]. As pointed out in that case, the amounts relating to outstanding cheques were conceded by the Crown at trial. The Court ruled in accordance with that concession that the net amount of unpresented cheques did not constitute a loan or advance for the purposes of paragraph 181.2(3)(c).
[44] Counsel said that the Courts had not addressed the issue of unpresented cheques directly but the Courts have considered what is meant by a loan or advance both in the context of Part I.3 and other provisions of the Act.
[45] Authorities in the Tax Court have clearly adopted the ordinary meaning of the term "advance" as being a "payment" before payment is "due".
[46] In TransCanada Pipelines Limited [3]the Court adopted the dictionary concept of an advance being a "payment made beforehand". The cash must flow in order for there to be an advance. In that case they received the money.
[47] This concept that an "advance" represents an actual transfer of funds from the advancer to the borrower was affirmed by the Federal Court of Appeal in Oerlikon Aérospatiale Inc. [4]. This case was decided under Part I.3 of the Act. In that case the Court said at paragraph 32:
[32] The effect of an advance, be it in the sense of a payment on account or a loan, is to make the amount of money it represents available to the person or corporation which receives it. ...
[48] Counsel opined that this means there must be a transfer of cash and a debt created and that an advance is an actual payment that is "received" and were part of the financial resources of the firm.
[49] The conclusion that an "advance" for purposes of paragraph 181.2(3)(c) requires the actual payment of money rather than an anticipated payment has also been adopted by the Courts when interpreting the concept of an "advance" under different provisions of the Act.
[50] In the case of David J. Foster [5], the Court considered the concept of "advance" for the purpose of subsection 83(3) to conclude it meant "payment before due".
[51] In Manufacturers Life Insurance Co. [6], the Court rejected the argument of the Minister, that for capital tax purposes, a deferred portion of gains realized on the disposition of bonds, stock, real estate and mortgages were financial resources available to the Respondent and concluded that the Minister's argument ignored precisely what was said by Noël, J.A. in Oerlikon [7]:
[32] The effect of an advance, be it in the sense of a payment on account or a loan, is to make the amount of money it represents available to the person or corporation which receives it. In the instant case, the advances were an integral part of the financial resources available to the appellant at the end of its 1989 fiscal year according to the financial statements it filed, and nothing either in the legislation or the tax policy which led to its enactment indicates that Parliament intended to exclude advances from the tax under Part I.3.
In Manufacturers Life Insurance Co. [8], the Court concluded that unamortized, realized gains were not shown as financial resources available to the Respondent according to its financial statements and these were accepted by the Superintendent of Financial Institutions.
[52] As in the case at bar there was no loan or advance on the financial statements.
[53] Counsel maintained that the authorities also suggested that there is no liability (loan) between the taxpayer (the borrower) and the lender (the bank) as (the financial institution) until such time as the unpresented cheques are actually presented at the bank and funds are advanced by the bank to cover them. It is at this time that the bank has made available to the borrower the use of the funds. [9]
[54] The Courts have considered the application of the Part I.3 tax in a number of cases albeit none directly on point with the issue here today. However, the cases appear to support the conclusion in The Grocery People Limited [10], that no liability between the taxpayer and the bank occurs until such time as the cheques are presented to the bank and honoured by an actual draw on the line of credit.
[55] In Autobus Thomas Inc. [11], the Court sought to determine whether the relationship between the taxpayer was one of "vendor/purchaser" or one of "creditor/debtor". If the latter, there would be a loan or advance for purposes of paragraph 181.2(3)(o). The Tax Court had no difficulty in concluding that there was a loan in these circumstances between the bank and the taxpayer. In doing so it adopted Black's Law Dictionary concept that there must be actual creation of a debit by the advance of money for a loan to be created.
[56] At the Federal Court of Appeal it was concluded that the parties intended to create security for a loan. The Court of Appeal drew a distinction between a "line of credit" which it concluded was only a "loan commitment" not an actual loan. The "line of credit" or "loan commitment" may or may not have been acted on. The Court also concluded that the money did not have to be directly handed over to the taxpayer for there to be a loan. However, the key conclusion to be drawn from this case is that for there to be a loan or advance for purpose of the section, the funds taxed must be transferred to the taxpayer or to someone on the taxpayer's behalf. It is this actual transfer of funds which converts the commitment of a loan into a "loan or advance" covered by paragraph 181.2(3)(c).
[57] In A. C. Simmonds & Sons Limited [12], the Court dealt with the deemed interest provision of subsection 17(1) of the Act. This subsection imposes deemed interest liability on a Canadian resident taxpayer who loans funds to a non-resident. Christie, A.C.J. concluded that there was no loan between the taxpayer and the non-resident because a loan requires the actual delivery and receipt of money under an agreement. The Court concluded that for a loan to exist there must be a movement of consideration under the agreement so as to create the creditor/debtor relationship. This did not exist even though the Court concluded that the United States company was indebted to the taxpayer. The indebtedness was not the consequence of a loan or a "debtor/creditor" relationship.
[58] The conclusion that there must be a transfer of consideration between the lender to the borrower for a loan to arise was also reached in the case of Walter Crassweller [13], where it was held that the amounts were not "loans or advances" within the meaning of section 18 of the Income War Tax Act [14]. The board dealt with the issue as to whether the distribution of funds out of capital surplus could be taxed as a dividend under section 3 or as a "loan or advance" and therefore a deemed dividend under section 18.
[59] In summary he said it was difficult to see how the "net amount: of unpresented cheques" can be characterized as a "loan or advance" to the Appellant from the bank.
[60] On the date in question:
(a) the Appellant had not "received" any money from the bank nor had the bank advanced any money on the Appellant's behalf;
(b) the unpresented cheques were under the full control of the Appellant until they reached the bank;
(c) the taxpayer decided how the cheques would be honoured:
(i) via line of credit; or
(ii) cashing in temporary investments;
(d) the bank had:
(i) no cause of action or legal right to recover the net amounts of unpresented cheques simply because it had never advanced these amounts to the Appellant; and
(ii) the Appellant was under no obligation to pay interest with respect to these amounts.
[61] The reality is that there was no "advance" or "loan" by the bank to the Appellant on the day at issue in the amounts at issue.
[62] The appeals should be allowed, with costs.
Argument on behalf of the Respondent
[63] In oral and written argument counsel for the Respondent indicated that the issues are agreed upon and there is no issue with respect to the facts. The primary issue in this case is whether cheques that had been issued by Canfor and recorded in Canfor's balance sheet as current liabilities but unpresented to the bank by the recipient before the end of the fiscal period ("unpresented cheques") should be included in the computation of capital for the purposes of Part I.3 of the Act?
[64] Specifically, are unpresented cheques "loans or advances" within the meaning of paragraph 181.2(3)(c) and Part I.3 of the Act?
[65] A secondary issue in this case is whether Ministerial policy that allows corporations to offset cash balances against unpresented cheques can be judicially expanded to include short-term investments. Counsel argued that there must be a legal basis to allow this offset and there is none existent. Therefore, the Court has no jurisdiction on this issue.
[66] The amounts of unpresented cheques in dispute for 1995, 1996 and 1997 are: $10,141,827, $16,770,897 and $24,508,399 respectively. The Appellant's line of credit with the bank was, at all material times, a "revolving facility for general operating requirements in the normal course of business".
[67] All the unpresented cheques were issued in the normal course of the Appellant's business and would have been honoured by the bank once presented for payment. There was no provision in the Appellant's agreement with the bank to allow the bank any access to the short-term investments. That is, in the event that the Appellant chose to liquidate any of its short-term investments to satisfy any indebtedness to the bank, the Appellant would have had to take the necessary steps to "cash in" or liquidate them, the bank having no authority or ability to do so.
[68] The credit agreement in place between the bank and the Appellant required that all payments to be made by the Appellant to the bank pursuant to the credit agreement were payable in the same type of currency in which the borrowing was denominated. Further, the agreement stated at paragraph 3 of Exhibit A-2:
... all payments to be made by the Borrower pursuant to this Agreement are to be made in freely transferable, immediately available funds and without set-off, withholding or deduction of any kind whatsoever except to the extent required by applicable law. If any such set-off, withholding or deduction is so required and is made the Borrower will, as a separate and independent obligation to the Bank, pay to the Bank all such additional amounts as may be required to fully indemnify and save harmless the Bank from such set-off, withholding or deduction.
[69] Had the unpresented cheques been presented for payment to the bank prior to the Appellant's fiscal year ends, the Appellant did not have sufficient cash on hand and would, unless other arrangements were made, have had to use its line of credit with the bank.
[70] None of the unpresented cheques were post-dated or subject to any condition limiting or predetermining the time that they could be presented for payment by the recipients.
[71] The unpresented cheques were delivered to and received by the recipients.
[72] Against the amounts of unpresented cheques in 1996 and 1997 the Appellant now wishes to offset other amounts described as "short term" investments such as GICs and other similar financial instruments in the amounts of $90,958,112 and $85,372,482, respectively.
[73] Part I.3 tax on large corporations was specifically enacted to reduce the federal deficit and to ensure that all large corporations pay federal taxes and contribute to the deficit reduction.
[74] Part I.3 tax is determined on an annual basis by applying a specified rate to the capital tax base of a corporation. Liability is based upon the capital tax base of the corporation and is independent of whether it is earning profits or incurring losses in a given year.
[75] Section 181.2 deals with corporations that are not financial institutions and are resident in Canada.
[76] The application of Part I.3 requires the use of a balance sheet prepared in accordance with GAAP (subsection 181(3) of the Act). The balance sheets in question were prepared in accordance with these principles.
[77] Pursuant to paragraph 181.2(3)(c) of the Act, the amount of all "loans and advances" to the corporation at the end of the year are included in the capital tax base of the corporation.
[78] According to the Minister's interpretation: a loan is generally defined as delivery by one party, and receipt by another party, of a sum of money upon agreement, expressed or implied to repay with or without interest. The carrying value of a loan - whether secured or unsecured, long or short-term, and whether owed to related or non-related entities - is included in the capital tax base. The current portion of a loan is also included in the capital tax base.
[79] The term "advance" often means simply "pay" or "pay money before it is due" and, therefore, has a broad scope. Generally, any amount received by a corporation that is not included in income will constitute an advance and will be required to be included in the capital tax base.
[80] The following are some of the amounts that must be included in the capital tax base as loans and advances according to the Minister:
1. line or letter of credit, to the extent drawn upon;
2. deferred revenue represented by cash;
3. bank overdrafts;
4. insurance policy loans; gold loans;
5. outstanding cheques issued, to the extent that they exceed funds on deposit, in all jurisdictions governed by common law;
6. outstanding cheques honoured by the corporation's bank, to the extent they exceed funds on deposit, in the civil law jurisdiction of Quebec;
7. take-or-pay amounts;
8. prepaid amounts including rent received;
9. customer and security deposits;
10. contract advances;
11. proceeds from the sale of gift certificates, to the extent they are not included in income;
12. forgivable loans;
13. inter-company loans between a parent corporation and its wholly-owned subsidiaries pursuant to a cash management system agreed to by a bank (generally referred to as a mirror accounting system) where overdrafts of subsidiaries are regularly transferred to the parent's account; and
14. drawings from a partnership, except to the extent they represent a distribution of a corporate partner's partnership capital included in its capital tax base.
[81] The outstanding cheques in issue here exceeded funds on deposit.
[82] The following amounts would not be included in the capital tax base as loans or advances:
1. advance billings not received in cash where the service has been rendered;
2. loans legally defeased, provided no amount is reflected in the balance sheet in respect of the defeased debt; and
3. the mere granting or provision of credit facilities by a supplier, creditor or lender. (This without more would not be enough.) Here she referred to IT-532, Part I.3 - Tax on Large Corporations.
[83] It was also submitted that the Act does not define loans or advances. She referred to Black's Law Dictionary which defines "loan" as "a delivery by one party to and receipt by another party of a sum of money upon agreement, express or implied, to repay it with our without interest". The definition continues to include, among other things, "(1) the creation of a debt by the lender's payment of or agreement to pay money to the debtor or a third party for the account of the debtor; (2) the creation of a debt by a credit to an account with the lender upon which the debtor is entitled to draw immediately".
[84] "Advance" has been accepted as being broader than "loan". It may mean "advance in the sense of a loan" or "advance in the sense of a payment on account" or instalments. [15]
[85] An advance may include a payment made in return for the agreement of the recipient to provide goods or services in future. [16]
[86] In the case at bar, the bank has promised to make money available to the Appellant by way of a line of credit or overdraft. A line of credit is an arrangement by which a bank or supplier extends a specified amount of credit to a specified borrower for a specified time period. It is an agreed overdraft facility to deal with fiscal fluctuations and is a binding promise to lend funds. See Autobus Thomas Inc. [17]at paragraph 5:
[5] ... At law, the establishment of a line of credit can only be construed as loan commitment, and the various steps detailing the use of that line of credit can only be interpreted as formal requirements for meeting the commitment. Those steps can be described separately - sending of invoices, payment on the purchaser's behalf, drafting and signing of an instalment sales contract, assignment of that contract, entry in a special account, calculation of interest at the variable rate in effect, repayment by instalments [sic] periodic cumulative reports - but cannot be considered in isolation or out of context.
[87] Given the requirement to refer to balance sheet items, the wording of the provisions in paragraph 181.2(3)(c) is to be interpreted by reference to "the language accountants speak". [18]
Cheques
[88] She said that the legal effect of the delivery of a negotiable instrument by one person to another constitutes payment depending on their circumstances and their intentions both real and inferred. In the case of pre-existing debt, the cheque operates presumably as conditional payment only. If the cheque is honoured after presentment for payment, the payment of the debt becomes absolute as of the time of the making of the cheque. [19]
[89] At the time the Appellant issued and delivered the unpresented cheques to the recipients the Appellant intended to effect and perfect payment. In common law jurisdictions delivery of a cheque constitutes payment at that time.
[90] The writing of a cheque on a bank account is considered to constitute a draw upon that account where that cheque represents payment. At common law delivery of a cheque constitutes conditional payment. It was submitted that a conditional payment, where a line of credit or overdraft agreement is in place, creates a loan or advance for the purposes of Part I.3.
[91] The principle of conditional payment is well established in common law jurisdictions. In Marreco v. Richardson [20], Farewell, L.J. stated:
... the giving of a cheque for a debt is payment conditional on the cheque being met, that is, subject to a condition subsequent, and if the cheque is met it is an actual payment ab initio and not a conditional one.
[92] In Moody [21], at page 1054, the Exchequer Court stated:
In the absence of some special circumstance indicating a contrary conclusion such as, for example, post-dating or an arrangement that the cheque is not to be used for a specified time, a payment made by cheque, although conditional in some respects, is nevertheless presumably made when the cheque is delivered, ...
[93] The principle enunciated in Marreco [22], and confirmed in Moody [23], has been applied without exception in cases involving the Act. [24]
[94] This principle is not altered by the fact that the underlying liability between the original debtor and creditor is not generally discharged until the cheque is honoured by the respective bank nor whether the bank can charge interest on the amount of the cheque between the date of delivery and the day the cheque is presented to the bank.
[95] The common law principle establishes the conditional payment date as the time of delivery of the cheque. The subsequent presentation of the cheque to the bank, will not alter in law the payment date unless the cheque is not honoured. Where the cheque results in indebtedness or a negative bank balance on the balance sheet, this amounts to a loan or advance within the meaning of Part I.3 as, by granting the line of credit or overdraft, the bank has tacitly acknowledged or agreed to the overdraft.
[96] In the civil law jurisdiction of the province of Quebec the law is different on this point. The civil code stipulates that the date of payment is the date on which the bank honours the cheque and delivery is irrelevant to that determination. [25]
[97] While the unpresented cheques in themselves do not constitute an indebtedness of the corporation, the bank indebtedness reflected in the balance sheet resulting from outstanding cheques constitutes a loan or advance where the delivery of the cheques by a debtor to a creditor operates as payment.
[98] By contractually agreeing to extend the line of credit to the Appellant the bank has tacitly acknowledged or agreed in advance to the overdraft.
[99] Here, the Appellant intended payment, the recipient expected payment and the bank had bound itself to extend credit to cover the payment thereby anticipating the condition subsequent.
[100] In a decision in an Informal Procedure appeal, The Grocery People Limited [26], Sobier, T.C.J. held that unpresented cheques do not create an indebtedness between the taxpayer and the bank such that there