T-1350-83
Donald Stanley Derbecker (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Reed J.—Toronto, January 25;
Ottawa, February 3, 1984.
Income tax — Income calculation — Appeal from Tax
Review Board's decision dismissing plaintiffs appeal from
1977 assessment — Note payable on demand after December
31, 1976 received in consideration for sale of plaintiffs shares
— No demand in 1977 — Defendant including taxable capital
gain from disposition of shares in 1977 income — S.
40(1)(a)(iii) Income Tax Act providing that on disposition of
property reserve may be claimed for sums in respect of dispo
sition not due to taxpayer until after end of year — Board
upholding defendant's claim demand note payable when deliv
ered so cannot claim reserve — Plaintiff arguing note not due
until demand made — Plaintiff arguing distinction between
when action might be brought on note and when payment
required — Whether "due" in s. 40(1)(a)(iii) meaning payable
at once or at future time — Intention to tax when money
required to be paid not when taxpayer entitled to money —
Demand note payable when holder demands payment —
Appeal allowed — Income Tax Act, S.C. 1970-71-72, c. 63,
ss. 40(1)(a)(iii), 64(1) (as am. by S.C. 1974-75-76, c. 26, s. 34).
CASES JUDICIALLY CONSIDERED
APPLIED:
Hannem v. The Minister of National Revenue (1979), 80
DTC 1091 (T.R.B.).
CONSIDERED:
Royal Bk. v. Hogg, [1930] 2 D.L.R. 488 (Ont. S.C.);
Kennedy v. Minister of National Revenue, [1973] F.C.
839; 73 DTC 5359 (C.A.).
REFERRED TO:
Norton v. Ellam (1837), 2 M.&W. 461; 150 E.R. 839
(Exch. of Pleas); Belows et al. v. Dalmyn and Dalco
Contractors Ltd. et al., [1978] 4 W.W.R. 630 (Man.
Q.B.); Massey v. Sladen, et al. (1868), Law Rep. 4 Ex.
13 (Ex. Ct.); Ronald Elwyn Lister Ltd. et al. v. Dunlop
Canada Ltd. (1982), 135 D.L.R. (3d) 1 (S.C.C.); Mister
Broadloom Corporation (1968) v. Bank of Montreal et
al. (1983), 49 C.B.R. (N.S.) 1 (Ont. C.A.); The Queen v.
Timagami Financial Services Limited, [1983] 1 F.C.
413; 82 DTC 6268 (C.A.); Minister of National Revenue
v. John Colford Contracting Company Limited, [1962]
S.C.R. viii, affirming [1960] Ex.C.R. 433.
COUNSEL:
I. V. B. Nordheimer for plaintiff.
H. Erlichman for defendant.
SOLICITORS:
Fraser & Beatty, Toronto, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
REED J.: This is an appeal from a decision of the
Tax Review Board which dismissed the appeal of
the plaintiff from his assessment for the taxation
year 1977.
On December 1, 1976 the plaintiff sold 1,715
shares of Heritage House Limited to his daughter
Pamela Derbecker. The consideration for the sale
of the shares included a promissory note payable
to the plaintiff on demand after December 31,
1976. No demand for payment of the note was
made in 1977. By notice of reassessment dated
March 24, 1981 Revenue Canada included in the
plaintiff's income for the 1977 taxation year the
taxable capital gain attributable to the taxpayer's
disposition of the shares to which the note related.
The plaintiff taxpayer submits that the promis
sory note of Pamela Derbecker was not due to the
plaintiff in 1977 because no demand was made
thereon. The Minister claims that the note, being a
demand note was due as soon as the taxpayer was
entitled to make a demand and therefore the tax
able capital gain had to be accounted for in the
1977 taxation year.
The relevant section of the Income Tax Act
[R.S.C. 1952, c. 148 (as am. by)], S.C. 1970-71-
72, c. 63 as amended is subparagraph
40(1)(a)(iii). It provides that on the disposition of
property a reserve may be claimed for sums in
respect of that disposition which are not due to a
taxpayer until after the end of a taxation year in
question.
40. (1)(a) ...
(iii) such amount as he may claim, not exceeding a
reasonable amount as a reserve in respect of such of the
proceeds of disposition of the property that are not due to
him until after the end of the year ...
A great deal of argument by counsel focussed on
whether a demand note became due at the date of
delivery, or when a demand for payment was
made. Counsel for the Crown focussed on those
cases which have held that action may be com
menced on a demand note before any formal
demand for payment is actually made, and on
those which have held that the limitation period
begins to run from the date of delivery of the note.
Royal Bk. v. Hogg, [1930] 2 D.L.R. 488 (Ont.
S.C.); Norton v. Ellam (1837), 2 M.&W. 461; 150
E.R. 839 (Exch. of Pleas); Belows et al. v. Dalmyn
and Dalco Contractors Ltd. et al., [1978] 4
W.W.R. 630 (Man. Q.B.).
Particular reliance was placed on the words of
Riddell J.A. in the Royal Bk. case (supra) at
pages 489-490:
... it has been law certainly for nearly a century, since Norton
v. Ellam (1837), 2 M & W 461, 150 E.R. 839, and probably
for centuries before, that a promissory note on demand is due
as soon as it is delivered ... a demand note matures for all
purposes as soon as it is delivered ....
Counsel for the plaintiff, on the other hand, did
not dispute the authorities cited above but argued
that a distinction must be made between (1) when
an action might be brought on a note and (2) when
payment must be made. He argued that the second
point in time was the relevant one for the purposes
of subparagraph 40(1)(a)(iii). He cited those cases
which hold that before a demand note must be
paid two things must happen: the debtor must
receive notice (i.e.: a demand or notice that an
action had been commenced on the note) and he
must be given a reasonable time to pay: Massey v.
Sladen, et al. (1868), Law Rep. 4 Ex. 13 (Ex.
Ct.); Ronald Elwyn Lister Ltd. et al. v. Dunlop
Canada Ltd. (1982), 135 D.L.R. (3d) 1 (S.C.C.);
Mister Broadloom Corporation (1968) v. Bank of
Montreal et al. (1983), 49 C.B.R. (N.S.) 1 (Ont.
C.A.). Reference was made to the fact that the
note on its face said "due on demand" and to a
passage in Falconbridge on Banking and Bills of
Exchange, 7th ed. at page 896:
A promissory note payable on demand is intended to be a
continuing security. It is quite unlike the case of a bill payable
on demand or a cheque, which is intended to be presented
speedily.
In my view the cases on demand notes decided
in the context of bills of exchange law do little but
illustrate the fact that the word "due" can be used
in two different senses. Counsel for the plaintiff
referred me to the definition of the word set out in
Jowitt's Dictionary of English Law (2nd ed.) [at
page 669]:
As applied to a sum of money "due" means either that it is
owing or that it is payable: in other words, it may mean that the
debt is payable at once or at a future time. It is a question of
construction which of these two meanings the word "due" bears
in a given case.
A demand promissory note could obviously be
said to be "due" in both senses argued by counsel.
The crucial question is which sense of the word
"due" was intended in subparagraph 40(1)(a) (iii)
of the Income Tax Act.
I find the reasoning, although not the conclu
sion, of the Tax Review Board in Hannem v. The
Minister of National Revenue (1979), 80 DTC
1091 persuasive. In that case the applicability of a
reserve under subsection 64(1) with respect to a
demand note for the disposition of resource prop
erty was in issue. Argument in that case focussed
on the 1974 amendment to subsection 64(1) in
which the words "not receivable" had been
replaced by the words "not due" [at pages
1092-1093]:
"Due" is a somewhat imprecise word. A debt may be said to
be due to a creditor before the time for payment has arrived so
long as a fixed amount is owing to the creditor. That is one of
the ordinary meanings of the word. However, that is also one of
the meanings of the word "receivable". Parliament, by sub
stituting the word "due" for "receivable", clearly expressed an
intention to point to the time when "the amount or part
thereof" is required to be paid. This meaning is consistent, not
only with a reading of the word in the context of the subsection
as amended, but also with the normal assumption that, in the
absence of some indication to the contrary, Parliament does not
intend tax to attach simply on the creation of a liability.
[Underlining added.]
The Board in that case as in this, went on
however to hold that a demand note was required
to be paid as soon as it was delivered and therefore
no reserve could be claimed.
Reference was made in the Hannem case to the
reasoning of Jackett C.J. in Kennedy v. Minister of
National Revenue, [1973] F.C. 839 at page 842;
73 DTC 5359 (C.A.) at page 5361:
In the case of "income", it is assumed, in the absence of special
provision, that Parliament intends the tax to attach when the
amount is paid and not when the liability is created. (The
courts naturally react against taxation before the income
amount is in the taxpayer's possession.)
The whole concept of a reserve is predicated on
the distinction between sums to which a taxpayer
may be entitled and sums which at the date in
question are required to be paid. It is clear that a
promissory note payable only at an express future
date, or upon the happening of a future event are
not taken into income until that date or event
arrives. Refer: The Queen v. Timagarni Financial
Services Limited, [1983] 1 F.C. 413; 82 DTC
6268 (C.A.) for a case dealing with payment by
installments. See also: Minister of National Reve
nue v. John Colford Contracting Company Lim
ited, [1960] Ex.C.R. 433 affirmed [1962] S.C.R.
viii. A demand note is not appreciably different
except that the future event is a demand by the
holder himself. In the absence of clear statutory
language to the contrary I cannot find that the
meaning of "due" in subparagraph 40(1)(a)(iii)
was intended to differ in the two cases. In both
cases it seems to me that what was intended was to
tax the taxpayer not at the time he was entitled to
the money but at the time when it was required to
be paid to him. In ordinary language I cannot
think that a holder of a demand promissory note
would consider that there was a requirement on
the maker of the note to pay the sum owing until
either a demand had been made or an action
commenced. In coming to this conclusion I am
mindful of the rule of statutory interpretation that
requires provisions of taxing statutes to be inter
preted in favour of the taxpayer when they are
ambiguous. Maxwell on The Interpretation of
Statutes, 12th ed. 1969, at pages 251, 256;
Driedger, Construction of Statutes, 2nd ed. 1983,
at pages 203 ff.
It is true of course, that, subject to limitation
periods and the taxpayer's financial resources, tax
liability on the sale of a capital asset could be
postponed for a considerable length of time where
a demand is not made on a demand note. This is
not, however, a factor relevant to the interpreta
tion of the statute.
Accordingly, I allow the plaintiffs appeal.
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.