Date: 19990506
Docket: A-330-96
CORAM: STRAYER J.A.
ROBERTSON J.A.
SEXTON J.A.
BETWEEN:
HUDSON BAY MINING AND SMELTING CO., LIMITED,
Appellant,
- and -
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered from the Bench at Winnipeg, Manitoba on Thursday, May 6, 1999)
STRAYER J.A.
[1] This is an appeal from a judgment of the Tax Court of Canada. It concerns the characterisation of certain moneys paid by the appellant to holders of its debentures in the course of buying back those debentures.
[2] The appellant had issued two series of debentures, each of which required it to pay to the holders interest semi-annually on June 15 and December 15. Both series were governed by trust indentures which required the establishment of a sinking fund from which the appellant was obliged to redeem debentures. It could also meet its sinking fund requirements by buying back its own debentures in the market from debenture holders.
[3] In the transactions giving rise to this litigation, the appellant repurchased certain of its debentures through brokers. According to the evidence, a discounted price was negotiated with vendors in respect of the capital amount, it being assumed in such negotiations that the amount of interest accrued on the debentures as of the date of repurchase (but not yet required to be paid at that time) would also be paid by the appellant to the holders of those debentures at the time of repurchase. When such repurchases took place the broker provided a written statement showing the agreed discount rate and payment in respect of the capital amount, and the amount of the appellant's payment attributable to interest.
[4] The appellant in calculating its taxable income for the years in question deducted from its income these amounts so attributed to interest, deducting them as interest amounts paid, pursuant to a legal obligation, on borrowed money and for the purpose of earning income, all as permitted by sub-paragraph 20(1)(c)(i) of the Income Tax Act:
| 20. (1) Deductions permitted in computing income from business or property. -Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto: |
| * * * * |
| (c) interest. - an amount paid in the year or payable in respect of the year (depending upon the method regularly followed by the taxpayer in computing his income), pursuant to a legal obligation to pay interest on |
| (i) borrowed money used for the purpose of earning income from a business or property . . . . |
[5] The Minister dissallowed these deductions on the basis that they were not interest amounts, nor were they paid pursuant to a legal obligation to pay interest on borrowed money.
[6] On appeal to the Tax Court this reassessment was confirmed.
[7] We have concluded that this appeal should be allowed. Given the fact that the appellant was the issuer of the debentures and therefore had a legal obligation to pay interest on the prescribed dates twice a year, its repurchase of them by agreement to pay that interest in advance of the repurchase date in reality involved a substitution of a new obligation by the same debtor to pay the same creditor the same rate of interest but for a shorter period. We are satisfied that the transaction of repurchase through a broker involved a mutual understanding that the rate of interest prescribed in the debenture would be paid in addition to the discounted price of the debenture, pro-rated to the date of purchase in lieu of interest running until the next prescribed date of payment. The appellant was not buying an "expectation of interest" as it would obviously not contemplate paying itself interest once it had repurchased the debentures.
[8] With respect we believe that the two cases mainly relied on by the learned Tax Court Judge, Wigmore v. Thomas Summerson and Sons Limited1 and H.M. v. Immobiliaire Canada Ltd.2 are distinguishable in that they each involved the purchase of a debt instrument by someone other than the debtor under that instrument.
[9] We will therefore allow the appeal, set aside the judgment of the Tax Court of Canada, and refer this matter back to the Minister for reassessment in accordance with these reasons.
"B.L. Strayer"
J.A.
Winnipeg, Manitoba
May 6, 1999
Date: 19990506
Docket: A-330-96
CORAM: STRAYER J.A.
ROBERTSON J.A.
SEXTON J.A.
BETWEEN:
HUDSON BAY MINING AND SMELTING CO., LIMITED,
Appellant,
- and -
HER MAJESTY THE QUEEN,
Respondent.
Heard at Winnipeg, Manitoba, on Thursday, May 6, 1999
Judgment delivered at Winnipeg, Manitoba on May 6, 1999
REASONS FOR JUDGMENT BY: STRAYER J.A.
FEDERAL COURT OF CANADA
APPEAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
COURT NO.: A-330-96
| STYLE OF CAUSE: HUDSON BAY MINING AND SMELTING CO., LIMITED v. HER MAJESTY THE QUEEN |
PLACE OF HEARING: Winnipeg, Manitoba
DATE OF HEARING: May 6, 1999
REASONS FOR JUDGMENT STRAYER J.A.
OF THE COURT: ROBERTSON J.A.
SEXTON J.A.
DELIVERED BY: STRAYER J.A.
DATED: May 6, 1999
APPEARANCES
Joel A. Weinstein
Robert Lee
for the Appellant
Robert Gosman
Department of Justice
301 - 310 Broadway
Winnipeg, Manitoba
R3C 0S6
for the Respondent
SOLICITORS OF RECORD
Aikins MacAulay & Thorvaldson
Winnipeg, Manitoba for the Appellant
Morris Rosenberg
Deputy Attorney General of Canada for the Respondent
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