T-4337-82
The Queen (Plaintiff)
v.
Alexander Epstein (Defendant)
Trial Division, Strayer J.—Toronto, March 13;
Ottawa, April 10, 1984.
Income tax — Income calculation — Black Prince Holdings
Limited assuming mortgage — Later mortgagee assigning
mortgage to trustee of RRSP of which defendant annuitant —
Defendant not dealing at arm's length with Black Prince —
Minister including in 1975 income fair market value of interest
in mortgage acquired by RRSP pursuant to s. 146(10) of Act
— S. 4900(1)(g) of Regulations providing qualified investment
not including mortgage acquired by savings plan trust where
mortgagor person with whom annuitant not dealing at arm's
length — Plaintiff arguing "mortgagor" including any person
deriving title under original mortgagor according to law of
Ontario — Black Prince not mortgagor within s. 4900(1)(g) —
Expressions in Act must be given interpretation consistent with
purposes of Act — "Mortgagor" given narrow, literal meaning
of person originally granting mortgage — Regulation to pre
vent original mortgagor setting terms of mortgage so as to
avoid legitimate taxation — Person not at arm's length to
RRSP annuitant who assumes rights and obligations of mort
gagor under existing mortgage not in position to distort terms
of mortgage to avoid taxation — While mortgage could be
"rigged" by original mortgagor if not at arm's length from
annuitants, in instant case relationship between defendant and
original mortgagor not alleged — Income Tax Regulations,
SOR/54-682, s. 4900(1)(g) (as enacted by SOR/71-331), s. 2)
— Income Tax Act, S.C. 1970-71-72, c. 63, ss. 146(10), 251(2)
— Interpretation Act, R.S.C. 1970, c. 1-23 — The Mortgages
Act, R.S.O. 1970, c. 279, s. 1(d).
COUNSEL:
Donald G. Gibson for plaintiff.
Alexander Epstein for defendant.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Barkin & Epstein, Toronto, for defendant.
The following are the reasons for judgment
rendered in English by
STRAYER J.: It was agreed at the outset of the
trial that this case and that of The Queen v.
Epstein (T-4336-82) would be heard together and
that the evidence and argument would be applied
to both cases.
The salient facts are simple and not in dispute.
They are set out in several paragraphs of the
statement of claim which were admitted in the
statement of defence. These paragraphs are as
follows:
4. In reassessing the Defendant for the 1975 taxation year, the
Minister of National Revenue included the amount referred to
in paragraph 2 in computing his income. In so doing, he
assumed, among others, the facts referred to in paragraphs 5
to 12.
5. On 15 May 1964, David and Diane Opie sold a motel
property at 8700 Yonge Street, Richmond Hill, Ontario (the
"property") to Emerald Isle Motel Limited ("Emerald Isle").
6. On 6 May 1965, Emerald Isle granted a first mortgage in the
amount of $132,000 (the "mortgage") on the property to
Credit Foncier Franco -Canadien ("Credit Foncier").
7. On 14 July 1970, Emerald Isle sold the property to Black
Prince Holdings Limited ("Black Prince"). The purchase price
was $410,000, which was satisfied by $126,000 cash, by a
second mortgage from Black Prince to Emerald Isle in the
amount of $182,000, and by Black Prince assuming the mort
gage with Credit Foncier. The outstanding balance of the
mortgage was $102,000.
9. On 5 September 1975, Credit Foncier assigned the mortgage
to Guaranty Trust Company of Canada ("Guaranty Trust"),
which acquired it as trustee for the RRSP of which the
Defendant was the annuitant. The outstanding balance of the
mortgage was $63,220.98.
10. The fair market value of the interest in the mortgage
acquired by the trust governed by Alexander Epstein's RRSP
was $51,650. The fair market value of the interest in the
mortgage acquired by the trust governed by Florence Epstein's
RRSP was $11,200.
11. On 15 March 1976, an agreement was entered into between
Guaranty Trust and Black Prince extending the time for Black
Prince to pay the mortgage until 5 September 1980. This
agreement provides in part "... that the mortgagor shall have
the privilege of paying the whole or any part of the principal
sum hereby secured at any time or times without notice or
bonus."
12. At all material times: Alexander Epstein and Florence
Epstein were husband and wife; Black Prince was controlled by
Alexander Epstein; and neither Alexander Epstein nor Florence
Epstein dealt with Black Prince at arm's length.
Mr. and Mrs. Epstein did not include, in comput
ing their respective incomes for the 1975 taxation
year, the amounts of $51,650 and $11,200 respec-
tively representing the fair market value of the
investments acquired by their Registered Retire
ment Savings Plans as noted in paragraphs 9 and
10 of the statement of claim (supra).
The Department of National Revenue issued a
notice of reassessment on June 3, 1980 in respect
of Alexander Epstein and on August 26, 1980 in
respect of Florence Epstein, including in their
respective incomes for 1975 the amounts of
$51,650 and $11,200 respectively representing the
fair market value of the investment by their
RRSPs in the mortgage on 8700 Yonge Street as
assigned by Credit Foncier to the Guaranty Trust
Company. The Minister of National Revenue
takes the position that the acquisition of this mort
gage by their RRSPs was a non-eligible invest
ment. He relies on Income Tax Regulations,
[SOR/54-682 (as enacted by SOR/72-331, s. 2)]
paragraph 4900(1)(g), which in 1975 provided
that a qualified investment for a Registered
Retirement Savings Plan would include
4900. (1) .. .
(g) a mortgage, or interest therein, secured by real property
situated in Canada and acquired by the savings plan trust,
other than a mortgage in respect of which the mortgagor is
the annuitant under the plan governing the savings plan trust
or a person with whom the annuitant does not deal at arm's
length.
By virtue of subsection 146(10) of the Income Tax
Act [R.S.C. 1952, c. 148 (as am. by S.C. 1970-71-
72, c. 63, s. 1)] where a Registered Retirement
Savings Plan acquires a non-qualified investment,
the cost of the investment is to be included in
computing the income for the year of the taxpayer
who is the annuitant under the plan. Section 251
of the Act, in particular for these purposes subsec
tion 251(2), defines relationships which are not
deemed at arm's length. In this case, however, it is
agreed that Alexander Epstein and Florence
Epstein were not dealing with Black Prince Hold
ings Limited at arm's length.
The issue for determination, then, is as to
whether Black Prince became a "mortgagor"
within the meaning of paragraph 4900(1)(g) of the
Income Tax Regulations as quoted above. It is
clear that Black Prince was not the mortgagor in
1965 when the mortgage was first granted by
Emerald Isle Motel Limited to Credit Foncier
Franco -Canadien. The question is whether, by
buying the mortgaged property from Emerald Isle
in 1970, partly for cash, partly by assuming Emer
ald Isle's obligations under the mortgage granted
to Credit Foncier, and partly by giving a second
mortgage back to Emerald Isle, Black Prince
became a "mortgagor" with respect to the mort
gage to Credit Foncier. If so, then when Credit
Foncier in 1975 assigned its interests as mortgagee
to the Epsteins' Registered Retirement Savings
Plans, the mortgagor (Black Prince) would be a
legal person with whom the annuitants (the
Epsteins) would not be dealing at arm's length. It
was common ground that the meaning of the term
"mortgagor" was not defined in the Income Tax
Act or in the federal Interpretation Act [R.S.C.
1970, c. I-23].
Briefly put, the position of the plaintiff is that
the word "mortgagor" should be given the mean
ing it has in the law of Ontario in this case because
the mortgage is one governed by the laws of
Ontario. Counsel referred to various authorities
and statutes to demonstrate that in Ontario a
person who derives title under a mortgagor is for
all practical purposes in the same position as the
original mortgagor with respect to his entitlement
to the equity of redemption and his obligation to
make the payments under the mortgage. In par
ticular, he cited The Mortgages Act, R.S.O. 1970,
c. 279, paragraph 1(d) which provides that in that
Act " `mortgagor' includes any person deriving
title under the original mortgagor or entitled to
redeem a mortgage, according to his estate, inter
est or right in the mortgaged property".
The defendant on the other hand argues in
effect that by its dictionary meaning, "mortgagor"
means the person who "gives a mortgage as secu
rity for a loan" or "pledges that property for some
particular purpose such as security for a debt".
The emphasis here is on the person who initially
grants the mortgage and that is of course the most
common way in which the word is used. The
defendant Alexander Epstein on behalf of himself
and his wife argued that this is the common law
meaning of "mortgagor" and that the common law
interpretation should govern. He contended that
there is no justification for using a provincial
statute to interpret a federal law.
I have no doubt that in many circumstances
involving the application of the Income Tax Act it
is necessary to look to provincial law to ascertain
the legal relationships between individuals or the
legal consequences of certain actions or transac
tions. Clearly the Income Tax Act assumes a
whole network of legal relationships, a majority of
them under provincial law, governing property and
commercial transactions. The Income Tax Act
imposes certain fiscal consequences on these rela
tionships and to apply the Income Tax Act it is
often necessary to resort to provincial law to deter
mine the nature of these relationships. But it must
be remembered that the purposes of the Income
Tax Act are not necessarily those of provincial law
and expressions in the Income Tax Act must be
given an interpretation which is consistent with the
purposes of that Act. Perhaps there is some
ambiguity in the word "mortgagor" as it is used in
paragraph 4900(1)(g) of the Income Tax Regula
tions applicable in 1975. Arguably, it might be
taken in its literal sense to refer only to the person
who first grants the mortgage, or it conceivably
could be taken to refer more broadly to the assig-
nee of a mortgagor who becomes the owner of the
equity of redemption and assumes the obligations
of the original mortgagor. Faced with this
ambiguity, it is my view that the interpretation
which is most consistent with the purposes of the
Income Tax Act is the more narrow, literal inter
pretation which would confine the word "mortga-
gor" as it appears in paragraph 4900(1)(g) of the
Regulations to mean the person originally granting
the mortgage.
I believe this to be the interpretation most con
sistent with the purpose of the Income Tax Act,
because I can see no reason for this Regulation
except as a means to prevent an original mortga
gor who is not dealing with the mortgagee at arm's
length from granting an improvident mortgage on
business or investment property at an excessive
rate of interest above what the market would
require, thus putting himself in the position of
paying large amounts of unnecessary interest (tax
deductible as a business or investment expense)
into an RRSP where the proceeds would be tax
sheltered and of which he is the beneficiary or
"annuitant". In other words, it is the opportunity
which the original mortgagor would have, where
the mortgagee is not dealing with him at arm's
length, to set the terms of the mortgage in such a
way as to avoid legitimate taxation, which is the
"mischief" which is to be prevented by the Regula
tion. In the present case, or in other similar cases,
where the person not at arm's length to the Regis
tered Retirement Savings Plan annuitant takes
over the rights and obligations of a mortgagor
under an existing mortgage, it is not in a position
to distort the terms of the mortgage in a manner to
avoid taxation. Therefore in terms of what I con
ceive to be the purpose of the Regulation, there is
no justification for giving an extended meaning to
the word "mortgagor" to include the person who
has acquired the equity of redemption from the
mortgagor.
It is, of course, conceivable that a mortgage
could be "rigged" at an earlier stage by the origi
nal mortgagor in anticipation of transfers of the
interests of the mortgagor and/or of the mortgagee
with the result that the party with the equity of
redemption, and the annuitants of the RRSP that
ultimately acquired the rights of the mortgagee,
would be parties not dealing with each other at
arm's length. But presumably this would only
happen if the original mortgagor was itself not
acting at arm's length from the annuitants in
which case the ultimate investment by the RRSP
in that mortgage would be disqualified under para
graph 4900(1)(g). In the present case the defend
ants denied any relationship with Emerald Isle
Motel Limited, the original mortgagor, or its
owners, and the Minister did not allege any such
relationship.
It is also possible that once an RRSP takes over
a mortgage where the mortgagor is not at arm's
length to the annuitant, the terms might be sub
stantially revised by mutual consent so as to make
it essentially a new mortgage. In such case there
might be reason for treating the revised mortgage
as a non-eligible investment. But that position has
not been argued here with respect to the extension
of this mortgage, and the agreed facts do not
suggest that the terms of the mortgage have been
substantially revised. The mortgage has only been
extended, presumably on the same terms.
I therefore conclude that Black Prince Holdings
Limited is not a mortgagor within the meaning of
paragraph 4900(1) (g) of the Income Tax Regula
tions and as a result this appeal should be
dismissed.
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.