The Queen (Plaintiff)
v.
Jack Harvie Quinn (Defendant)
Trial Division, Heald J.—Toronto, April 3;
Ottawa, April 16, 1973.
Income tax—Payments made to trustee for scholarship—
Interest on payments—Whether income of payer—Whether
"received'—Whether a `payment or transfer of property"—
Income Tax Act, secs. 6(1)(b), 16(1), 22(2).
In 1965, Q entered into a scholarship agreement with
Canadian Scholarship Trust Foundation and a trustee. The
agreement provided that Q would pay $25 a month to the
trustee until 1975 to provide a university scholarship for his
son and that on the maturity or earlier termination of the
agreement the interest on the payments would be trans
ferred to the trustee and the principal amount (less an
enrolment fee) returned to the subscriber. In 1970 the
trustee credited Q's deposit account with $110.44 interest.
Held, Q was not assessable to income tax on the interest.
The interest was not "received" by him in 1970 within the
meaning of section 6(1)(b) of the Income Tax Act, and there
was no "payment or transfer of property" to the trustee in
1970 within the meaning of section 16(1) since the trustee
had no proprietary ownership in the interest until the maturi
ty or earlier termination of the contract.
Held also, section 22(2) of the Income Tax Act was not
applicable. The interest was not "received" in 1970, and
there was no evidence that the amount credited by the
trustee to the subscriber in 1970 was in fact the amount of
interest earned by the subscriber's deposits to the trustee in
that year.
APPEAL from Tax Appeal Board.
COUNSEL:
G. W. Ainslie, Q.C., for plaintiff.
Douglas Andison for defendant.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Tory, Tory and Co., Toronto, for defendant.
HEALD J.—This is an appeal from a decision
of the Tax Appeal Board allowing the defend
ant's appeal for the 1970 taxation year. Pursu
ant to Rule 475, this appeal was set down for
hearing, and was argued before me, on a stated
case.
Defendant throughout 1970 lived at Wood-
stock, Ontario and at all material times was, and
is, a resident of Canada. On February 27, 1965,
the defendant subscriber entered into a scholar
ship agreement with Canadian Scholarship Trust
Foundation (hereafter C.S.T.) and Eastern and
Chartered Trust Company (hereafter Eastern
and Chartered) as trustee. Under said agree
ment, the defendant agreed to pay $25.00 per
month to Eastern and Chartered beginning on
April 1, 1965 for a period of 122 months. The
date of maturity of the agreement was stated to
be August 31, 1975. In turn, Eastern and Char
tered undertook to credit said payments to a
separate deposit account maintained in the
name of the defendant as subscriber. The
defendant subscriber agreed "to leave all such
monies and all interest credited thereon on
deposit, less the enrolment fee, until the date of
maturity or of termination hereof". It was
agreed, between the parties, that the first
$125.00 of the monies deposited in the deposit
account was to be the enrolment fee payable
forthwith to C.S.T. This fee has been described
as the "front end load" of the plan and is
designed to cover legal, administration and trus
tee costs, etc.
At the time the agreement was entered into in
1965, the defendant subscriber nominated his
son, Thomas William Quinn, born December 26,
1956 as his nominated beneficiary under the
scholarship agreement. Under the agreement
and plan, a scholarship is to be provided by the
trust in respect of the son's second, third and
fourth years at a university, provided certain
circumstances, such as the child living to uni
versity age and successfully completing the first
year at university, exist in the future. The
amount of the scholarship payable to this par
ticular participant is not specified as it will be
dependent on the number of children of other
subscribers who are able to take advantage of
the scholarship.
Paragraph 5 of Section II of the scholarship
agreement provides as follows:
The Subscriber covenants and agrees that, at the date of
maturity or of termination hereof, an amount equal to all
interest actually credited on monies deposited or credited in
the deposit account up to and including such date will be
transferred to the trustee.
As stated above, the date of maturity in this
particular contract is August 31, 1975. The
agreement also provides that the subscriber can
terminate the agreement at any time on 60 days
notice and provides further that if the subscri
ber defaults in making any of the monthly pay
ments, then the agreement terminates after 60
days notice of default given to the subscriber.
In this case, it is agreed that the defendant
subscriber has made all of the monthly pay
ments required to be made under the agreement
to this date; that the agreement is presently in
full force and effect; and that subject agreement
has neither been terminated nor has it matured
as therein defined.
Paragraph 16 of Section II of the scholarship
agreement provides as follows:
16. The Depository, immediately after the date of maturity
or of termination, shall:
(a) transfer to the Trustee an amount equal to all interest
which has been credited up to and including such date on
monies deposited or credited in the deposit account
hereunder; and
(b) pay to the Subscriber or hold all monies deposited in
the deposit account hereunder, less the amount of enrol
ment fee, and all income which may accrue thereon
thereafter for the Subscriber absolutely.
Accordingly the position under the agreement
is that all amounts deposited bÿ the defendant
subscriber, except for the enrolment fee of
$125.00 are returnable to him either at the
maturity date of the agreement (August 31,
1975) or at any earlier termination thereof. At
the time the deposits less enrolment fee are
returned, an amount equal to the total of all
interest credited to the account will be trans
ferred in accordance with the terms of the
agreement. It is the interest earned over the
period specified in this agreement along with all
other similar agreements that actually provides
the scholarship funds.
To complete the historical narrative, it should
be noted that effective December 1, 1967 East
ern and Chartered Trust Company amalgamated
with Canada Permanent Trust Company and,
after that date, Canada Permanent Trust is the
trustee under subject scholarship plan.
During the defendant's 1970 taxation year,
the Canada Permanent Trust Company, as trus
tee, credited to defendant's deposit account, as
interest payable by it with respect to the monies
on deposit with it as represented by the then
current balance in the deposit account, the sums
of $50.64—April 30, 1970 and $59.80—October
31, 1970.
This case is in the nature of a test case. While
the amount of interest in this particular case is
small, it is in the same position as the interest
credited on some 39,000 other agreements in
force in the Canadian Scholarship Trust Plan in
1970. At October 31, 1970 there was on deposit
with the trustee under this plan as deposits, a
figure in excess of 26 million dollars. The
accumulated interest on deposit was in excess
of 6 million dollars.
The first question of law submitted to the
Court is as follows:
A. Are the amounts of $50.64 and $59.80 which were
credited to the Deposit account on April 30, 1970 and
October 31, 1970 respectively amounts that were received
by the defendant in 1970 as interest or on account or in lieu
of payment of, or in satisfaction of interest, within the
meaning of paragraph 6(1)(b) of the Income Tax Act?
Section 6(1)(b) of the Income Tax Act reads as
follows:
6. (1) Without restricting the generality of section 3,
there shall be included in computing the income of a taxpay
er for a taxation year
(b) amounts received in the year or receivable in the year
(depending upon the method regularly followed by the
taxpayer in computing his profit) as interest or on account
or in lieu of payment of, or in satisfaction of
interest•
In subject case, the defendant taxpayer files
his income tax returns on a cash basis and
counsel for the plaintiff concedes that the por
tion of section 6(1)(b) referring to "amounts
receivable" has no application to the facts of
this case where the taxpayer files on a cash
basis. His contention is that, up until maturity or
termination of the agreement, the trustee had no
proprietary right in or to the accrued interest;
that said ownership remained in the defendant
subscriber; that when the deposit account was
credited with accrued interest, that said amount
was "received" by the defendant subscriber at
that time within the meaning of section 6(1)(b)
of the Act; that he has received it and has
exercised his power of disposition over it by
agreeing to transfer it to a third party upon the
happening of a certain event (maturity or
termination).
After carefully considering all of the submis
sions by both counsel, I have concluded that
Question A (supra) must be answered in the
negative because the said sums were not "re-
ceived" by the defendant in 1970 within the
meaning of section 6(1)(b) of the Act.
A somewhat similar situation prevailed in the
case of Stephen v. M.N.R. 50 DTC 375. In that
case, a commission salesman was credited with
commissions at the date of sale, but was not
entitled to, and did not in fact receive, any
payment until the customer actually paid for the
goods. The Income Tax Appeal Board held that
he was entitled to deduct from his income the
total of commissions credited to him but not
paid at the end of the taxation year. As an
individual, his income was returnable on a cash
basis only.
Similarly, in the case of M.N.R. v. Rousseau
[1960] C.T.C. 336, the Exchequer Court held
that salaries and rents credited to an employee-
shareholder of a corporation, but not in fact
received by him in cash in the year, should not
have been included in income for the year
because the income was not "received" by him.
In my opinion, the case at bar is even stronger
than the Stephen case and the Rousseau case. In
this case, the defendant subscriber will never,
under any circumstances ever actually receive
the interest monies credited to his account with
the trust company. If he terminates the agree
ment tomorrow, the trust company gets the
interest. If he simply stops making the monthly
payments, the trust company gets the interest. If
he continues making the monthly payments
through to maturity, the trust company still gets
the interest.
However, even if it could be considered on
the facts of this case that this defendant had
"received" these interest monies, the Supreme
Court case of Dominion Taxicab Assoc. v.
M.N.R. [1954] S.C.R. 82 is authority for the
view that an amount received is not income
unless absolute ownership in it is vested in the
recipient. If it is received subject to a restric
tion, contractual or otherwise, as to its use,
disposition or enjoyment, it cannot be included
in income. A similar view was expressed in the
Exchequer Court case of Canadian Fruit Dis
tributors Ltd. v. M.N.R. 54 DTC 1145.
Having answered Question A in the negative,
it becomes necessary to consider Question B
which reads as follows:
B. Was there, in 1970, a transfer to the Trustee under the
Trust Deed, within the meaning of Section 16(1) of the
Income Tax Act, of the said amounts of $50.64 and 859.80?
Section 16(1) reads as follows:
16. (1) A payment or transfer of property made pursuant
to the direction of or with the concurrence of, a taxpayer to
some other person for the benefit of the taxpayer or as a
benefit that the taxpayer desired to have conferred on the
other person shall be included in computing the taxpayer's
income to the extent that it would be if the payment or
transfer had been made to him.
It is my view that section 16(1) cannot apply
to the facts of this case because there was no
"payment or transfer of property" to the trustee
in the taxation year 1970.
The subscriber's agreement clearly contem
plates that the beneficial ownership of the inter
est monies remains with the defendant subject
to his contractual obligation to dispose of them
in a certain manner upon the occurrence of a
particular event in the future. Up until the date
of maturity or termination, the trustee has no
proprietary right in or to the accrued interest.
The obligation to transfer the accrued interest
monies to the trustees arises on the termination
or maturity of the agreement and not before. Up
until that point in time, the defendant can con-
trol the amount of interest monies earned. If he
chooses to cease making the monthly payments
today, the amount of interest accrued will be
considerably less than if he continues the pay
ments until maturity.
Thus, the transfer of the property (accrued
interest) does not take place until maturity or
termination and it would not be until the hap
pening of that event takes place that the transfer
of property within the meaning of section 16(1)
would occur. Since the agreement neither
matured nor was terminated in 1970, section
16(1) cannot apply to the interest monies credit
ed to the defendant's account in that year.
Question B is therefore also answered in the
negative.
In view of my answer to Question B, it is not
necessary to answer Question C which requires
an answer only in the event that there was an
affirmative answer to Question B.
The parties have agreed that if the Court
answers Question A in the negative and either
of Questions B and C in the negative, then in
such event, the appeal is to be dismissed and the
assessment referred back to the Minister of
National Revenue in accordance with such
answers. Since I have answered both Questions
A and B in the negative, the appeal is dismissed
and the assessment referred back to the Minis
ter in accordance with such answers.
However, before concluding, I should men
tion that in addition to the questions of law
raised in the stated case, at the trial, plaintiff's
counsel argued an additional ground of appeal,
namely that section 22(2) of the Income Tax
Act would apply to the facts of this case and
that by virtue thereof, this defendant would be
taxable on subject interest income in 1970.
Even though this matter was not pleaded, and
was not included in the stated case, I allowed
both counsel to make submissions thereon
because plaintiff's counsel had indicated to
defendant's counsel a week or two before trial
that he was going to raise this matter in argu
ment and thus, defendant's counsel was not
taken by surprise or prejudiced in any way.
Section 22(2) reads as follows:
22. Where, by a trust created in any manner whatsoever
since 1934, property is held on condition
(a) that it or property substituted therefor may
(i) revert to the person from whom the property or
property for which it was substituted was directly or
indirectly received, or
(ii) pass to persons to be determined by him at a time
subsequent to the creation of the trust, or
(b) that, during the lifetime of the person from whom the
property or property for which it was substituted was
directly or indirectly received, the property shall not be
disposed of except with his consent or in accordance with
his direction,
income from the property shall, during the lifetime of such
person while he is resident in Canada, be deemed to be
income of such person.
In my opinion, section 22(2) does not apply to
the facts of this case for two reasons.
First of all, any income (interest) from the
property (the principal deposit payments) was
not received in the taxation year 1970 for the
reasons given (supra).
Secondly, section 22(2) refers to "income
from the property". In subject case, there is no
evidence before me as to the amount of the
interest monies earned by the defendant's
deposits in the hands of the trustees. The
amount which plaintiff is seeking to tax is
merely the amount of interest with which the
trust company, under its agreement with C.S.T.
has agreed to credit defendant's deposit
account. This interest figure totalling $110.44
for 1970 may not have much relationship to the
amount of income derived by the trust company
from defendant's deposit account.
The "income from the property" could be less
but is quite likely considerably more than the
figure of $110.44. There was no evidence
before me on which I could conclude that the
said amount of $110.44 was "income from
property" within the meaning of section 22(2)
of the Act.
I have therefore concluded that section 22(2)
has no application to the facts of this case.
On the question of costs, the parties have
agreed that the provisions of section 178(2) of
the new Act apply to the situation here. Section
178(2) reads as follows:
178. (2) Where, on an appeal by the Minister other than
by way of cross-appeal, from a decision of the Tax Review
Board, the amount of tax that is in controversy does not
exceed $2,500, the Federal Court, in delivering judgment
'disposing of the appeal, shall order the Minister to pay all
reasonable and proper costs of the taxpayer in connection
therewith.
Counsel for the defendant suggests a figure of
$2,000.00 to cover all the reasonable and proper
costs of the taxpayer. It seems to me that this
suggested figure is slightly excessive. It is true
that this is a test case and in that sense, large
sums of money are involved. However, the case
was disposed of in one sitting day in Court and
the issues involved were fairly narrow issues.
I accordingly fix the sum of $1,500.00 to
cover all the defendant's reasonable and proper
costs, inclusive of all disbursements.
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.