Bolton v. The Queen, 95 DTC 277, [1993] 2 CTC 3203

Sarchuk, T.C.C.J.:—Garry K. Bolton appeals from an assessment of tax with respect to his 1987 taxation year. He has elected to have the informal procedure of the Tax Court of Canada Act apply, and in accordance with section 18, to limit his appeal to $7,000 as being the aggregate of all amounts in issue.

In reassessing Bolton the Minister of National Revenue (the Minister) included, in the calculation of his income, the amount of $24,203.71 on the basis that this amount is an employment benefit within the meaning of paragraph 6(1)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

Facts

Mr. Bolton, an engineer, moved to Edmonton in January 1981 to commence employment with Lamb McManus Associates Ltd. ("Lamb"), a consulting engineering firm. Following a request by Bolton, Lamb agreed to lend him $50,000 to assist him in acquiring a house. In the middle of October 1981 Bolton purchased a house for $157,000. The price was paid by way of a first mortgage in favour of London Life Insurance Company in the amount of $100,000, the $50,000 loan from Lamb and the balance from Bolton’s personal funds. The terms and conditions of the loan were set forth in an agreement between Lamb and Bolton dated May 12, 1982 (Exhibit A-11). A demand mortgage in favour of Lamb was registered against the property on May 25, 1982 (Exhibit A-7).

By 1986 the recession was seriously affecting Bolton’s financial future and there was very little work at Lamb. In the latter part of that year he began to make plans to return to Winnipeg to rejoin the consulting firm he had previously worked with. One of his primary concerns was that the value of his property had decreased substantially since its purchase. To this end, on August 27, 1986 he obtained a letter of valuation from a realtor indicating that the property would sell in the range of $115,000 to $120,000 (Exhibit A-2). Concerns regarding his liability for any shortfall, particularly with respect to the second mortgage, also led him to obtain legal opinions dated December 9 and December 24, 1986 (Exhibits A-3 and A-4) which, he says, satisfied him“ "that under Alberta law” he "had no legal exposure” in that event.

On December 5,1986 Bolton met with Mr. Robert Morrison ("Morrison"), the president of Lamb, and advised him of his intention to leave. There was some discussion regarding the sale of his property and the discharge of the mortgage held by Lamb. On January 7, 1987 Bolton listed the property for sale. Bolton had further discussions regarding his proposed departure with Morrison and Lamb's office manager, Mr. John Williams ("Williams") on January 20 and January 30, 1987 and on February 2, 1987 Bolton wrote to Lamb setting out his proposal with respect to the treatment to be given to the mortgage in the event of the sale of his property. On the same date he sent Lamb a formal letter of resignation effective March 27,1987 (Exhibit A-1). His proposal led to another meeting with Morrison and Williams on February 6, 1987. In his proposal Bolton had offered, in addition to the sale proceeds in excess of the first mortgage and selling costs, to leave the current value of his shares in Lamb and, provided he had no income tax exposure, to forgive to Lamb the outstanding 25 per cent unpaid balance of his 1986 bonus. At the meeting Lamb insisted that Bolton put more money on the table and then, if an offer for the property acceptable to Lamb was received, it would provide the discharge.

On March 3,1987 Bolton met with Morrison and Williams and produced an offer of purchase. This was reviewed and accepted by Lamb. On March 4, 1987 Bolton, by way of a letter, confirmed his understanding of the agreement reached with Lamb (Exhibit A-10). In addition to the items offered by Bolton in his February 2 proposal he agreed to assume any potential income tax liability relating to the housing loan and to pay to Lamb a total of $5,000 over a two-year period commencing May 1, 1987. An agreement setting out these terms was signed by the parties on March 24, 1987.

Upon closing the amount available for repayment to Lamb was $16,643.23. That amount was augmented by the value of Bolton's unpaid bonus, his shares and the cash payments of $5,000, to a total value of $9,160. The amount of the loan which was not repaid by him, being of $24,203.77, was forgiven by Lamb and was added to Bolton’s income by the Minister as an employment benefit.

Statutory provisions

Income Tax Act

6(1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(a) the value of board, lodging and other benefits of any kind whatever received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment, except any benefit

(i) derived from his employer's contributions to or under a registered pension fund or plan, group sickness or accident insurance plan, private health services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policy,

(ii) under an employee benefit plan or employee trust, or

(iii) that was a benefit in relation to the use of an automobile, except to the extent that it related to the operation of the automobile;

6(15) For the purposes of paragraph (1)(a), the value of the benefit received or enjoyed by a taxpayer, in circumstances where a loan or other obligation to pay an amount is settled or extinguished at any time without any payment by nim or by payment by him of an amount that is less than the amount of the obligation outstanding at that time, shall be deemed to be the amount, if any, by which the amount of the obligation outstanding at that time exceeds the amount so paid, if any. [1]

Law of Property Act, R.S.A. 1980, c. L-8:

41(1) In an action brought on a mortgage of land, whether legal or equitable, or on an agreement for the sale of land, the right of the mortgagee or vendor is restricted to the land to which the mortgage or agreement relates and to foreclosure of the mortgage or cancellation of the agreement for sale, as the case may be, and no action lies

(a) on a covenant for payment contained in the mortgage or agreement for sale,

(b) on any covenant, whether express or implied, by or on the part of a person to whom the land comprised in the mortgage or agreement for sale as been transferred or assigned subject to the mortgage or agreement for the payment of the principal money or purchase money payable under the mortgage or agreement or part thereof, as the case may be, or

(c) for damages based on the sale or forfeiture for taxes of land included in the mortgage or agreement for sale, whether or not the sale or forfeiture was due to, or the result of, the default of the mortgagor or purchaser of the land or of the transferee or assignee from the mortgagor or purchaser.

Appellant's position

Bolton contended that he did not receive any benefit from the discharge of the second mortgage, given that by virtue of section 41 of the Law of Property Act (Alberta). Lamb could not sue on the covenant. Had Lamb not agreed to provide a discharge Bolton could have turned the keys over to the first mortgagee who would have foreclosed and Lamb would not have had legal recourse against him with respect to any shortfall. With respect to the additional payments of $9,160 to Lamb, Bolton's rationale was that it was a good business decision. He had a good credit rating and he was not prepared to have foreclosure proceedings "sitting on my credit rating”.

Counsel for the appellant submits that section 41 of the Law of Property Act ("Property Act”) provides that the mortgagee only has recourse against the property which is used to secure the mortgage but has no recourse against the mortgagor. Thus the mortgagee cannot either directly or indirectly recover by way of legal process a personal judgment on the personal covenant set out in a mortgage. Subsection 41(1) of the Property Act takes away the right to bring an action on the covenant for payment in a land mortgage. Counsel argued that one cannot speak for forgiveness of the loan since Lamb did not have any right to collect beyond the value of the land. He contended:

. . .in order to be a forgiveness, it is something that you are forgiving that you had a right to collect. This is something that you didn't have any right to collect beyond the value of the land, and the amount that was discharged was the excess over the sale proceeds, which is an amount that the lender was never entitled to receive. So I am saying that what happened here was it was not a forgiveness by lender, but it was just a matter whereby the amount outstanding on the loan, beyond the value of the land, was discharged simply by operation of law.

Thus subsection 6(15) has no application to the facts at hand. There was no obligation to pay anything in excess of the value of the land, and the amount paid beyond the value of the land was not paid pursuant to any obligation.

Second, counsel for the appellant argued that the crux of the matter is whether Bolton received a benefit pursuant to paragraph 6(1)(a) of the Act. He submitted that Bolton did not receive anything from Lamb that he could not have obtained by the mere operation of law. Thus, no benefit was conferred by Lamb to Bolton as an employee. To determine whether Bolton had received a benefit one must ascertain whether he was any better off after the event than before. Counsel contended that nothing Lamb did improved Bolton's economic position. (McNeil! v. The Queen, [1986] 2 C.T.C 352, 86 D.T.C. 6477 (F.C.T.D.); Splane v. The Queen, [1991] 2 C.T.C. 224, 92 D.T.C. 6021 (F.C.A.).)

Third, counsel for the appellant argued that in order to be taxable a benefit must arise in respect of, by virtue of, or in the course of employment. While Bolton acknowledged that the loan was given by virtue of his employment the "forgiveness" occurred by operation of law and not by virtue of his employment. The arrangement with respect to the discharge of the second mortgage was made under a separate agreement, separate from the contract of employment and it occurred at a time when he was no longer in the employ of Lamb. Counsel submitted that Bolton falls within the scope of the reasons given by Jerome, J. in Blanchard v. Canada, [1992] 2 C.T.C. 402, 92 D.T.C. 6585 (F.C.T.D.). Since the forgiveness occurred after the termination of employment there is no basis for including the amount as income.

Fourth, counsel for the appellant argued that the agreement between Lamb and Bolton was made prior to February 17, 1987 and thus the provisions of subsection 6(15) could not apply in any event since this subsection is only applicable in respect of obligations settled or extinguished after February 17, 1987.

Respondent's position

Counsel argued that Lamb made an interest free loan by way of a second mortgage to Bolton as a result of his employment. The objective behind the agreement reached on March 24, 1987 was the regularization of the affairs between Lamb and Bolton for reasons which were best suited to them. The fact that no personal covenant would have been enforceable between the parties is irrelevant to the point that a benefit was conferred. According to The Queen v. Savage, [1983] 2 S.C.R. 428, [1983] C.T.C. 393, 83 D.T.C. 5409 the word "benefit" is not to be construed in a restrictive manner. Bolton received a benefit by terminating his employment in the manner that he did in that he left Lamb on good business terms, his credit rating was generally maintained as he desired and he was forgiven the balance of the obligation incurred by way of the employee loan.

Although section 41 of the Property Act restricts the ability of the mortgagee to collect an amount it does not affect the quantum of liability. The section of the Property Act does not extinguish liability but merely precludes the ability to recover by legal process.

Counsel for the respondent referred to Cousins v. M.N.R., [1972] C.T.C. 2017, 72 D.T.C. 1055 (T.R.B.) and DeWaal v. M.N.R., [1975] C.T.C. 2160, 75 D.T.C. 127 (T.R.B.) in support of his proposition that Bolton received a benefit by way of the cancellation of the amount remaining outstanding on the mortgage loan. Although the written agreement between them does not specify whether it constituted a severance package, one must look at the actual conduct of the parties to so determine.

Counsel also argued that when a loan is forgiven it need not be part of a severance package for the amount to be considered a benefit arising out of the employer/employee relationship. (McArdle v. M.N.R., [1984] C.T.C. 2277, 84 D.T.C. 1251 (T.C.C.)) The agreement between the parties to settle the unpaid balance on the mortgage loan was part and parcel of the employer/employee relationship and constituted a benefit to Bolton within the meaning of paragraph 6(1)(a) of the Act.

Conclusions

I am satisfied that the assessment must stand. The first two submissions made by counsel for the appellant are premised on the proposition that by virtue of the provisions of section 41 of the Property Act Bolton was under no obligation to pay anything in excess of the value of the land. Secondly, Bolton received nothing from Lamb that he could not have obtained by mere operation of law.

In my view section 41 of the Property Act neither extinguishes or satisfies the debt but merely bars the remedy by way of personal judgment on the covenant (Commercial Life Assurance Co. of Canada v. Debenham, [1941] 1 D.L.R. 294, [1940] 3 W.W.R. 592 (Alta. C.A.), at page 300 (W.W.R. 597-98) [2] ; Crédit Foncier Franco Canadien v. Edmonton Airport Hotel Co. (1964), 47 D.L.R. (2d) 508, 48 W.W.R. 641 at pages 543-44 (W.W.R. 679) (Alta. C.A.); aff'd [1965] S.C.R. 441, 50 D.L.R. (2d) 510, 51 W.W.R. 431 at pages 444-45 (D.L.R. 513-14, W.W.R. 434).

Second, at the time the agreement was entered into in March 1987 there was no foreclosure under way. As Ford, J.A. stated in Commercial Life Assurance, supra, at page 300 (W.W.R. 597):

At the time when Mrs. Debenham filed her proposal for a composition, extension, or scheme of arrangement, no order for cancellation of her agreement to purchase had been made, nor has one yet been made, and it seems clear that until such an order is made her covenant to pay, though unenforceable by action, exists. It is only then, by the terms of the Act, that the right of the vendor for the recovery of money agreed to be paid, under and by virtue of the agreement, ceases.

Until a mortgage is foreclosed and the land vested in the mortgagee, or an agreement of sale is cancelled or determined, the debt arising from the covenant to pay is not extinguished: Martin v. Strange, [1943] 4 D.L.R. 367, [1943] 2 W.W.R. 123 at page 369 (W.W.R. 126) (Alta. C.A.). I do not accept the submission that the amount outstanding on the loan beyond the value of the land was discharged by operation of law. What existed was an obligation on the part of Bolton to pay an amount pursuant to the terms of the mortgage agreement entered into with Lamb. This obligation was compromised and settled by way of payment of some $25,803.23. That is what Bolton opted to do. He may have had an alternative but he chose to protect his economic interests and proceeded in this manner because it was a good business decision.

As to Bolton’s position that he did not receive a benefit I find that by virtue of the agreement Bolton’s loan obligation was settled upon acceptance by Lamb of an amount less than the amount outstanding at that time. The unpaid bonus, the shares and the additional cash payment are referred to in the agreement dated March 27, 1987 (incidentally the actual date of the termination of employment) as partial repayment of the unsatisfied portion of the loan, in consideration of which Lamb relinquishes any further claim against Bolton for repayment of any unsatisfied portion of the original loan amount. That, in my view, constitutes a benefit to Bolton.

In this context reference should be made to the decision of the Supreme Court of Canada in Savage, supra. As to the provisions of subsection 6(1) of the Act the Court stated at page 440 (C.T.C. 399, D.T.C. 5414):

Our Act contains the stipulation, not found in the English statutes referred to, benefits of any kind whatever. . . in respect of, in the course of, or by virtue of an office or employment". The meaning of" benefit of whatever kind” is clearly quite broad; in the present case the cash payment of $300 easily falls within the category of "benefit". Further, our Act speaks of a benefit “in respect of" an office or employment. In Nowegijick v. The Queen, [1983] 1 S.C.R. 29, [1983] C.T.C. 20, 83 D.T.C. 5041 this Court said, at page 39 (C.T.C. 25, D.T.C. 5045), that:

The words "in respect of” are, in my opinion, words of the widest possible scope. They import such meanings as "in relation to”, "with reference to" or “in connection with”. The phrase “in respect of” is probably the widest of any expression intended to convey some connection between two related subject matters.

See also Paterson v. Chadwick, [1974] 2 All E.R. 772 (Q.B.) at page 775.

While the arrangement with respect to the discharge in a technical sense was made by way of a separate agreement it was not in reality independent of the employment relationship. In McArdle, supra, Christie, C.J.T.C.C. (as he then was) in a similar factual situation, found that the forgiveness of the balance of a loan was an integral part of the arrangements under which the taxpayer's employment was brought to an end by mutual agreement with the employer. Thus the amount in question was a benefit received by the taxpayer in respect of his employment and was properly included in his income.

Reference should be made to the agreement executed by them. Its language suggests that the arrangement was made as a result of Bolton's "announced intention to terminate his employment with Lamb McManus Associates Ltd. as of March 27, 1987". I am satisfied the agreement reached between Bolton and Lamb to extinguish the unpaid balance of the loan was part and parcel of the employer/employee relationship and constituted a benefit to Bolton within the meaning of paragraph 6(1)(a) of the Act.

The final submission on behalf of the appellant is that Lamb agreed to provide Bolton with a discharge on February 6, 1987. Thus the provisions of subsection 6(15) did not apply.

In my view no binding agreement existed at that time. There was considerable negotiation with respect to the amounts to be paid by Bolton to Lamb in order to obtain the discharge. The original proposal made by him on February 2, 1987 did not include a cash offer. Lamb continued to express concern that Bolton had not put enough on the table. A cash payment was then profferred but on the evidence it is clear that final approval was premised upon the receipt of an offer to purchase acceptable to Lamb. Thus no final agreement can be said to have been made prior to the meeting on March 3 at which time an offer was presented to Lamb. In my view, the earliest one can say an agreement existed is March 3, 1987, which agreement was subsequently reduced to writing and signed by the parties on March 24, 1987. Thus this submission cannot succeed.

The appeal is dismissed.

Appeals dismissed.