2000-2696(IT)I
BETWEEN:
THOMAS GIFFORD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on January 23, 2001, at North Bay, Ontario, by
The Honourable D.G.H. Bowman, Associate Chief Judge
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Pascal Tétrault, Esq.
JUDGMENT
It is ordered that the appeal from the assessment made under the Income Tax Act for the 1996 taxation year be allowed and the assessment be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the $100,000 paid by the appellant to Mr. Bentley and the interest paid on the amount borrowed for that purpose are deductible by the appellant under paragraph 8(1)(f) to the extent that they were paid in the taxation year 1996.
The appellant is entitled to his costs if any.
Signed at Ottawa, Canada, this 15th day of February 2001.
|
"D.G.H. Bowman" |
A.C.J.
Date: 20010215
Docket: 2000-2696(IT)I
BETWEEN:
THOMAS GIFFORD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowman, A.C.J.
[1] This appeal is from an assessment made under the Income Tax Act for the appellant's 1996 taxation year. It concerns the treatment of the sum of $100,000 paid by the appellant, a financial advisor employed by Midland Walwyn Capital Inc., stock brokers, to a fellow employee, Scott R. Bentley. It also concerns the deductibility of interest paid on the amount he borrowed to make the payment.
[2] The circumstances in which the payment was made are as follows: both the appellant and Scott Bentley were employed by Midland Walwyn which has since merged with, or been taken over by, Merrill Lynch Canada. Each had his own group of clients or customers to whom they gave financial advice or on whose behalf securities were bought or sold. These clients would certainly be described as clients of Midland Walwyn and no doubt they were also clients of the particular financial advisor such as Mr. Gifford or Mr. Bentley.
[3] It should be observed that no one "owns" a client. Clients are not a commodity that can be bought or sold on the open market. It is not uncommon for a businessperson to sell a customer list but it is obvious that the clients that make up that list are not being sold. There have been many cases in the courts that have considered whether payments for such customer lists were on revenue or capital account or whether they constituted eligible capital expenditures. That is not the situation here. Mr. Gifford could not buy a customer list from Mr. Bentley because Mr. Bentley did not have one to sell.
[4] Mr. Bentley wanted to leave Midland Walwyn and Mr. Gifford wanted to be able to service his clients. In order to affect this desire Mr. Gifford paid Mr. Bentley $100,000 under the following contract.
Agreement to Purchase Client Base
of
Financial Advisor
Whereas Scott R. Bentley, hereinafter referred to as "the Vendor" and Thomas D. Gifford, hereinafter referred to as "the Purchaser", have agreed to the exchange of the said "Client Base" for cash consideration, the following terms constitute this agreement:
1. The "Client Base" is considered to comprise all Midland Walwyn accounts and all direct mutual fund company accounts with the Dealer/Representative code 9270/DP1E, which is the designation for the Vendor as a Midland Walwyn Financial Advisor.
2. The Vendor agrees to identify and exclude from the attached client list, "Exhibit 1", to the best of his ability, any clients that are no longer coded 9270/DP1E.
3. The Vendor agrees not to provide retail securities investment advice to clients identified on the attached client list for a period of thirty months from the date of this agreement.
4. The Vendor also agrees not to provide material information regarding the contents of the Client list to other individuals or institutions providing financial services without the prior written consent of the purchaser.
5. The Purchaser agrees upon closing, to pay the vendor the amount of $90,000 in consideration of the Vendor providing written direction to Midland Walwyn Capital Inc. to transfer the Client Base to Dealer/Representative code 9270/DP1D, which is the designation for the Purchaser as a Midland Walwyn Financial Advisor.
6. The Purchaser further agrees to pay the Vendor on April 8, 1996 the amount of $10,000 conditional upon the following: erosion of mutual fund assets within the client base due to client transfers to other institutions or other financial advisors within Midland Walwyn will amount to no more than $1,500,000 at such time as this payment is due. The purchaser agrees to exclude any transfers which are made to other Midland Walwyn Financial Advisors for cash consideration. The purchaser also agrees to exclude any transfers that are made to other Midland Walwyn Financial Advisors as a result of trading clients. Should erosion of the mutual fund assets as described above exceed $1,500,000, the payment due April 8, 1996 will be reduced by $1,000 per $100,000 of mutual fund erosion.
7. The Vendor agrees to provide a written endorsement of the Purchaser to each of his clients as per "Exhibit 2" of this agreement.
[5] In filing his return of income the appellant deducted $13,258.07, which he claimed represented depreciation of goodwill ($5,250) and interest and insurance expense ($8,008.07). The Minister disallowed this amount on the basis that no provision allowed the appellant to deduct an amount as depreciation of goodwill or interest for the purchase of a customer list.
[6] I agree with the Minister's view that an employee, including an employee paid by commissions, cannot deduct the capital cost of goodwill as an eligible capital expenditure within the meaning of section 14 of the Income Tax Act. Such a deduction is permitted only to persons carrying on a business and it is common ground that the appellant's income was from employment.
[7] The reply to the notice of appeal sets out in paragraph 10 the premise upon which the assessment is based.
10. In so reassessing the Appellant's income tax return for the 1996 taxation year on October 13, 1998, the Minister made the following assumptions of fact:
(a) during the 1996 taxation year, the Appellant was an employee of Midland Walwyn Capital Inc. (the "Employer") in receipt of commission income from the sale of securities;
(b) on December 10, 1995, the Appellant (the "Purchaser") paid Scott Bentley (the "Vendor") the sum of $100,000.00 for a list of clients;
(c) the Vendor was also an employee of the Employer referred to in subparagraph 10(a) herein;
(d) at all relevant times, the Employer was the owner of the list of clients referred to in subparagraph 10(b) herein;
(e) the agreement between the Purchaser and Vendor contained a restriction clause that stipulated that the Vendor would not provide advice to the clients whose names appeared on the list for a period of thirty months from the date of the transaction referred to in subparagraph 10(b) herein;
(f) the list purchased by the Appellant was of enduring value that resulted in a long term benefit to the Appellant;
(g) the purchase referred to in subparagraph 10(b) herein constitutes a capital outlay that qualifies as an eligible capital expenditure; and
(h) there is no provision in section 8 of the Income Tax Act (the "Act") for an employee to claim the amounts of $5,250.00 and $8,008.07 as indicated in paragraph 8 herein.
[8] The premise that the appellant was acquiring a list of clients and that the agreement set out above involved the acquisition of a capital asset is in my view erroneous. What Mr. Gifford was getting was an agreement by Mr. Bentley to endorse Mr. Gifford to his clients on the list and not to provide investment advice to them. He was not buying a list of clients. Mr. Bentley's clients were clients of Midland Walwyn. There was a procedure, as explained by the branch manager Mr. Greco, whereby clients could be "assigned" from one financial advisor to another. The term "assign" is something of a misnomer in that it implies that any property or legal rights were being assigned from one person to another. All it means is that Midland Walwyn would tell a client that his or her account would henceforth be handled by a different person. The client was free to deal with whomever he or she wanted, whether with Midland Walwyn or anybody else. Indeed, the agreement nowhere says that Mr. Bentley is selling a client list to Mr. Gifford, although the agreement is called "Agreement to Purchase Client Base". The list of clients was not Mr. Bentley's to sell.
[9] Paragraph 8(1)(f) of the Income Tax Act permits a deduction in computing income from an office or employment as follows:
(f) where the taxpayer was employed in the year in connection with the selling of property or negotiating of contracts for the taxpayer's employer, and
(i) under the contract of employment was required to pay the taxpayer's own expenses,
(ii) was ordinarily required to carry on the duties of the employment away from the employer's place of business,
(iii) was remunerated in whole or part by commissions or other similar amounts fixed by reference to the volume of the sales made or the contracts negotiated, and
(iv) was not in receipt of an allowance for travel expenses in respect of the taxation year that was, by virtue of subparagraph 6(1)(b)(v), not included in computing the taxpayer's income,
amounts expended by the taxpayer in the year for the purpose of earning the income from the employment (not exceeding the commissions for other similar amounts referred to in subparagraph (iii) and received by the taxpayer in the year) to the extent that those amounts were not
(v) outlays, losses or replacements of capital or payments on account of capital, except as described in paragraph (j),
(vi) outlays or expenses that would, by virtue of paragraph 18(1)(l), not be deductible in computing the taxpayer's income for the year if the employment were a business carried on by the taxpayer, or
(vii) amounts the payment of which reduced the amount that would otherwise be included in computing the taxpayer's income for the year because of paragraph 6(1)(e).
[10] Subject only to the question of the year of deductibility I am of the view that all of the conditions permitting the appellant to deduct the payment have been met and indeed the Minister in his assumptions stated that he had allowed the majority of the employment expenses claimed.
[11] Obviously, the $100,000 was expended for the purpose of earning the income. I do not however think that it was a capital outlay. Essentially, Mr. Gifford obtained the opportunity to approach Mr. Bentley's clients without interference from Mr. Bentley and indeed with his approval and assistance. This is not an asset or advantage for the enduring benefit of the trade as that phrase was used by Viscount Cave L.C. in British Insulated and Helsby Cables v. Atherton, [1926] A.C. 205. It is one of the ongoing and recurrent demands that are made on persons who seek to earn a living as salesmen selling to the public. It is a current marketing expense.
[12] The authoritative discussion of the difference between capital expenditures and capital account is found in the decision of the Supreme Court of Canada in Johns-Manville Canada v. The Queen, [1985] 2 S.C.R. 46. At pages 56 to 62 Estey J. made the following observations.
When one turns to the appropriate principles of law to apply to the determination of the classification of an expenditure as being either expense or capital, an unnerving starting place is the comment of the Master of the Rolls, Sir Wilfred Greene in British Salmson Aero Engines, Ltd. v. Commissioner of Inland Revenue (1937), 22 T.C. 29, at p. 43:
... there have been ... many cases where this matter of capital or income has been debated. There have been many cases which fall upon the borderline: indeed, in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons ...
This court encountered s. 12(1)(b) in Minister of National Revenue v. Algoma Central Railway, [1968] S.C.R. 447. Fauteux J., as he then was, at p. 449, stated:
Parliament did not define the expressions "outlay ... of capital" or "payment on account of capital". There being no statutory criterion, the application or non-application of these expressions to any particular expenditures must depend upon the facts of the particular case. We do not think that any single test applies in making that determination ...
The Court thereupon expressed agreement with the decision of the Privy Council in B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, [1966] A.C. 224. The Privy Council there determined that a payment made by the taxpayer as an inducement to a service station operator to sign an exclusive agency contract was an income expenditure and not a capital outlay. The contract had a life of five years and thus was an asset of sorts which amounted to an opportunity by the taxpayer to market its gasoline exclusively through the operator's outlet. Nonetheless Lord Pearce concluded, at p. 260:
B.P.'s ultimate object was to sell petrol and to maintain or increase its turnover. There can be no doubt that the only ultimate reason for any lump sum payment was to maintain or increase gallonage.
Here the taxpayer made the expenditure not in order to acquire a piece of land so that it could strip non-ore-bearing rock from it but in order to derive income from the taxpayer's existing ore body which was not located underneath the land in question. After reviewing a number of different approaches to the problem of classifying in law and accounting the nature of the expenditure, Lord Pearce stated, at pp. 264-65:
The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree. That answer:
"depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process":
per Dixon J. in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946) 72 C.L.R. 634, 648.
(Emphasis added.)
The Privy Council applied another test in the course of characterizing the expenditures in B.P. Australia Ltd., supra, at p. 271:
Finally, were these sums expended on the structure within which the profits were to be earned or were they part of the money-earning process?
This question is remarkably apt on the circumstances in the appeal now before this Court. The Privy Council's answer was that the expenditure was not to be taken as being on the structure but rather as part of the money earning process. At p. 273, Lord Pearce, in considering the manner in which the benefit procured by the expenditure was to be used, stated that such benefit was to be used "in the continuous and recurrent struggle to get orders and sell petrol". In my view, the same result is reached on the circumstances existing in this appeal. The removal of the ore here was obviously the continuous and recurrent struggle in which the taxpayer was principally engaged, and the expenditure here was, as revealed by its uniform history over the years and by its role in the process of the recovery of ore, part of the essential profit-seeking operation of the taxpayer.
In the Hallstroms case [Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946), 72 C.L.R. 634] Dixon J., as he then was, in discussing the difference between capital and income expenditures, stated, at p. 647, that the difference lay:
... between the acquisition of the means of production and the use of them; between establishing or extending a business organization and carrying on the business; between the implements employed in work and the regular performance of the work ...; between an enterprise itself and the sustained effort of those engaged in it.
Other tests have been adopted in other tax systems. Also in Australia, in the High Court decision in Sun Newspapers Ltd. v. Federal Commissioner of Taxation (1938), 61 C.L.R. 337, the court, speaking through Dixon J. enunciated three principles to be applied in determining the character of an expenditure by a taxpayer for the purposes of applying the taxation statute. He stated, at p. 363:
There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.
On the preceding page, His Lordship, in explaining the test from another aspect, said:
... the expenditure is to be considered of a revenue nature if its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital and that actual recurrence of the specific thing need not take place or be expected as likely.
The Court on that occasion was concerned with the character to be ascribed to a payment made by one competitor to another to secure a discontinuance of a new and threatening adventure. The Court concluded the payment was capital in nature and should not be charged to revenue.
There is almost an endless rainbow of expressions used to differentiate between expenditures in the nature of charges against revenue and expenditures which are capital. It has been said that the terminology employed is merely an attempt to identify particular factors which may tilt the scale in a particular case in favour of one or the other conclusion. At one time it was considered helpful to identify the funds expended as either "circulating capital" of "fixed capital". The vocabulary has changed but the same problem of classification survives.
Another example of these helpful but not controlling tests, and of the changing taxation law vocabulary, is found in the decision of the Privy Council in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd., [1964] A.C. 948, where Viscount Radcliffe stated, at p. 959:
Nevertheless, it has to be remembered that all these phrases, as, for instance, "enduring benefit" or "capital structure" are essentially descriptive rather than definitive, and, as each new case arises for adjudication and it is sought to reason by analogy from its facts to those of one previously decided, a court's primary duty is to inquire how far a description that was both relevant and significant in one set of circumstances is either significant or relevant in those which are presently before it.
The judicial committee added, at p. 960, that when defining what was a capital structure established for "enduring" benefit, "enduring" did not necessarily mean permanent, nor did it mean perpetual.
Analogies in this field are infinite. One which comes to mind is the lump sum payment to an employee in order to terminate an employment contract or rights on dismissal. This was determined many years ago to be a payment in the nature of a charge against revenue rather than capital. In Mitchell v. B.W. Noble, Ltd., [1927] 1 K.B. 719, Lord Hanworth M.R., at p. 737, stated that the payment was made "not in order to secure an actual asset to the company but to enable the company to continue to carry on, as it had done in the past ...." The findings in both courts below in the case at bar are that no intention to acquire a lasting asset is present and indeed no lasting asset was acquired. Both courts, in slightly different terminology, found the land to have been consumed in the mining process. If this analogy is apt, the "expense" classification is to be preferred in the circumstances here.
At one time, the test applied by the courts in discriminating as between revenue and capital was the "once and for all" test. This test was adopted by Viscount Cave L.C. in British Insulated and Helsby Cables, Ltd. v. Atherton, [1926] A.C. 205 at p. 213. Viscount Cave observed that the finding of revenue or capital was a question of fact, but then concerned himself with the answer to the question because of an imprecise finding below. The test he adopted at p. 213 was "to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year", although he recognized that this test was not "to be a decisive one in every case". Later at pp. 213-214 the Lord Chancellor elaborated:
... where an expenditure is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit or a trade, I think that is a very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.
In this the Court relied upon the earlier decision of Vallambrosa Rubber Co. v. Farmer, [1910] S.C. 519, at p. 525. A few years later in Ounsworth v. Vickers, Ltd., [1915] 3 K.B. 267, at p. 273, Rowlatt J. interpreted this test as not requiring that expenditures be made on an annual basis in order to qualify them as a deduction from revenue but rather that the expenditures be "made to meet a continuous demand".
This discussion of authorities takes one full circle to the words of Lord Reid in Regent Oil Co. v. Strick, [1966] A.C. 295, at p. 313:
So it is not surprising that no one test or principle or rule of thumb is paramount. The question is ultimately a question of law for the court, but it is a question which must be answered in the light of all the circumstances which it is reasonable to take into account, and the weight which must be given to a particular circumstance in a particular case must depend rather on common sense than on strict application of any single legal principle.
(Emphasis added.)
It is of little help, in my respectful opinion, to attempt to classify the character of the expenditure according to the subject of that expenditure. Here it was land, and expenditure for land may be classified in good accounting and in good law as capital or, in different circumstances, as an expenditure chargeable against revenue in the computation of profit. In the words of Romer L.J.:
It depends in no way upon what may be the nature of the asset in fact or in law. Land may in certain circumstances be circulating capital. A chattel or a chose in action may be fixed capital. The determining factor must be the nature of the trade in which the asset is employed.
Golden Horse Shoe (New), Ltd. v. Thurgood, [1934] 1 K.B. 548 (C.A.), at p. 563.
The interest in the land there involved was large piles of tailings, and the courts found the purchase of that interest was a cost in the nature of expense and not capital.
[13] The tests enunciated in the many cases cited by Estey J. clearly point to the $100,000 being an expense on revenue account. No capital asset was acquired or created. No permanent advantage was secured. If we ask, to use the words of Dixon C.J. in Hallstroms, what was the payment calculated to effect from a practical and business point of view, the answer is obvious - to get more clients. Clients are fleeting, volatile and evanescent. The cost of attracting them is the part of the recurrent cost of earning the income that must be satisfied out of the revenues generated. The $100,000 is a marketing expense and is deductible under paragraph 8(1)(f). It is not a capital outlay or a payment on capital account.
[14] The one problem - and it is one that was not raised by the respondent - is the year of payment. The appeal is from an assessment for 1996. Paragraph 8(1)(f) permits the deduction of amounts "expended by the taxpayer in the year". It is not entirely clear when the payment was made. The agreement contemplates that at least $10,000 was to be made in 1996. However the appellant was not clearly put on notice that this was to be an issue. I propose to allow the appeal and refer the matter back to the Minister for reconsideration and reassessment to allow the deduction of such portion of the $100,000 that was paid in 1996. Also, the respondent raised no issue with respect to subsection 8(10). The Minister seems to have accepted that the paragraph 8(1)(f) requirements were met as the majority of the employment expenses claimed by the appellant were allowed. Therefore the appellant had no onus in this regard.
[15] I turn now to a more difficult question. The appellant borrowed money to make the $100,000 payment. The deduction of interest on that borrowing was disallowed by the Minister on the basis that the interest was not incurred for the purpose of gaining or producing income from business or property within the meaning of paragraph 20(1)(c) and the interest was not otherwise deductible pursuant to subsection 8(2). As I will discuss below, paragraph 20(1)(c) clearly has no application here. It is of very little assistance to state, as the reply does, that a section that patently has no application does not apply. There are about 250 other sections that do not apply. They do not need to be referred to either.
[16] Here we have interest on money borrowed for the purpose of earning employment income. It therefore does not fall within paragraph 20(1)(c). Paragraph 8(1)(j) provides a limited deduction for interest on money borrowed to acquire aircraft or automobiles used by an employee who is entitled to a deduction under paragraph 8(1)(f). It reads as follows:
(j) Where a deduction may be made under paragraph (f), (h) or (h.1) in computing the taxpayer's income from an office or employment for a taxation year,
(i) any interest paid by the taxpayer in the year on borrowed money used for the purpose of acquiring, or on an amount payable for the acquisition of, property that is
(A) a motor vehicle that is used, or
(B) an aircraft that is required for use
in the performance of the duties of the taxpayer's office or employment, and
(ii) such part, if any, of the capital cost to the taxpayer of
(A) a motor vehicle that is used, or
(B) an aircraft that is required for use
in the performance of the duties of the office or employment as is allowed by regulation.
[17] Obviously it is of no application here.
[18] If the interest is deductible at all it must be under paragraph 8(1)(f). The initial question is, therefore, whether it is an amount "expended by the taxpayer ... for the purpose of earning the income from the employment". Since I have concluded that the $100,000 paid to Mr. Bentley is such an amount, it follows ineluctably that the interest on the money borrowed is also such an amount. That part of the inquiry is easy. The harder part is whether the interest is on capital account and is therefore excluded from paragraph 8(1)(f) by subparagraph (v). The answer to this question requires a four part analysis.
(a) Is the interest on money borrowed to make a capital payment?
(b) Is interest on borrowed money invariably and by its very nature intrinsically and inherently capital?
(c) Am I precluded by binding precedent from holding that interest can be a current as opposed to a capital expense. Specifically, does the judgment of the Supreme Court of Canada in Shell Canada Limited v. The Queen et al., 99 DTC 5669, hold that interest on borrowed money is invariably and as a matter of law capital?
(d) Does the reference to interest in paragraph 8(1)(j) preclude the deduction of interest as being incurred for the purpose of earning employment income under paragraph 8(1)(f)?
[19] For reasons that I will develop more fully below, I have concluded that the answer to all four questions is "no".
[20] (a) The answer to the first question is obviously "no" in light of my conclusion with respect to the characterization of the $100,000 payment.
[21] (b) I see nothing in the law or in logic or as a matter of principle that would dictate that any expenditure is inherently of a capital or a revenue nature. The inquiry must go further. As Estey J. said in Johns-Manville at page 61:
It is of little help, in my respectful opinion, to attempt to classify the character of the expenditure according to the subject of that expenditure. Here it was land, and expenditure for land may be classified in good accounting and in good law as capital or, in different circumstances, as an expenditure chargeable against revenue in the computation of profit. In the words of Romer L.J.:
It depends in no way upon what may be the nature of the asset in fact or in law. Land may in certain circumstances be circulating capital. A chattel or a chose in action may be fixed capital. The determining factor must be the nature of the trade in which the asset is employed.
[22] In my opinion, whether interest is of a capital or a revenue nature depends on what the borrowed money is used for. I am fortified in this view by the article written by Mr. Brian J. Arnold, "Is Interest a Capital Expense?" (1992) 40 Canadian Tax Journal No. 3, page 533. The article contains a thorough analysis of Canadian jurisprudence up to 1992. At page 545 he refers to Bennett and White Construction Co. Ltd. v. M.N.R., [1949] C.T.C. 1, as follows: (footnotes omitted)
On appeal, the Supreme Court, noting that guarantee fees were not interest, held unanimously that the fees were not deductible expenses because they were not incurred in earning income from the business (on the basis of the reasoning in the Montreal Coke case) and that they were expenses incurred on account of capital. Once again, the Supreme Court seemed to confuse the prohibitions in paragraphs 18(1)(a) and (b). The early English cases were cited extensively without reservation. Indeed, Mr. Justice Rand stated,
In the absence of statute, it seems to be settled that to bring interest paid on temporary financing within deductible expenses requires that the financing be an integral part of the business carried on. That is clearly exemplified where the transactions are those of daily buying and selling of securities: Farmer v. Scottish Trust, [1912] AC 118: or conversely lending money as part of a brewery business: Reid's Brewery v. Mail, [1891] 2 Q.B. 1.
The distinction between fixed and circulating capital, however, was not dealt with explicitly in the case.
[23] In Wharf Properties Ltd. v. Commissioner of Inland Revenue, [1997] N.L.O.R. No. 59, [1997] 2 W.L.R. 334 (P.C.) the Judicial Committee, on appeal from Hong Kong, held that interest claimed was not deductible because it was of capital nature. However, the Privy Council did not base its decision on any inherent quality of interest as capital or revenue. Lord Hoffman said:
9 Mr. Gardiner made no point of the tramway licence fees but did advance several other arguments against the conclusion that the interest payments were expenses of a capital nature. First, he said that interest was by definition a revenue payment and could not be anything else. Their Lordships think that this confuses the position of payer and recipient. It is true that in the hands of the recipient, interest will be either the earnings of capital advanced or, in some cases, additional income derived from trading in money. In either case, it will have the character of income. From the point of view of the payer, however, a payment of interest may be a capital or revenue expense, depending upon the purpose for which it was paid. The fact that it is income in the hands of the recipient and a recurring and periodic payment does not necessarily mean that it must be a revenue expense. Wages and rent are income in the hands of their recipients; periodic payments, in return for services or the use of land or chattels respectively. But whether such payments are of a capital or revenue nature depends on their purpose. The wages of an electrician employed in the construction of a building by an owner who intends to retain the building as a capital investment are part of its capital cost. The wages of the same electrician employed by a construction company, or by the building owner in maintaining the building when it is completed and let, are a revenue expense.
10 For this purpose, their Lordships consider that there is no material distinction between interest and other periodic payments. As Lord Upjohn said in Chancery Lane Safe Deposit and Offices Co. Ltd. v. Inland Revenue Commissioners [1966] A.C. 85, 124 (in a passage quoted by the Commissioner in his correct and succinct reasons for disallowing the deduction): "the cost of hiring money to rebuild a house is just as much a capital cost as the cost of hiring labour to do the rebuilding".
11. Mr. Gardiner said that it was not legitimate to examine the purpose for which the money was borrowed in order to ascertain whether the interest paid in consideration of the borrowing had been for a capital or revenue purpose. Their Lordships agree with Litton V-P. that, on the contrary, there is no other way in which the nature of the interest payment can be discovered. The immediate consideration for each payment of interest is, of course, the use of money during the period in respect of which the interest has been paid, but since money is no more than a medium of exchange which may be expended for either capital or revenue purposes, the question can be answered only by ascertaining the purpose for which the loan was required during the relevant period.
[24] After referring to and distinguishing the decision of the House of Lords in Beauchamp v. Woolworth Plc., [1990] 1 A.C. 478, Lord Hoffman concluded:
14 Thus, while the question of whether money is intended to be used for a capital or revenue purpose is inconclusive as to whether its receipt is a revenue receipt or an addition to the company's capital, the purpose of the loan during the period for which the interest payment was made is critical to whether it counts as a capital or revenue expense. In the present case, during the whole of the two years in question, the loan was clearly being applied for the purpose of acquiring and creating a capital asset rather than holding it as an income-producing investment. It follows that the interest was being expended for a capital purpose.
[25] The decisions of the Privy Council are not binding on Canadian courts, but the correctness of the reasoning in the above quotations is unassailable.
[26] I complete this part of the analysis with two quotations from the article of Mr. Arnold, with which I am in full and respectful agreement.
Interest on borrowed money used to finance the current expenses of a business, such as the payment of salaries, should be deductible currently. Such interest is a cost of earning income. Since the interest does not relate to the creation of value beyond the current year, it must be deductible currently to achieve an accurate portrayal of the taxpayer's income for the year. This result is required by both the matching and the ability-to-pay principles. (The interest expense represents a reduction in the taxpayer's wealth, since it produces no future benefits.)
...
This article makes two simple points. First, the case law does not support the well-established proposition that interest is an expenditure on account of capital. Second, from a tax policy perspective, interest is sometimes a current expense and sometimes a capital expense, depending on the use of the borrowed funds. Both points accord with a common-sense view of interest expense.
[27] (c) So far as the third question is concerned, all this discussion of what a principled and common-sense approach to the deductibility of interest should be is interesting but academic if the Supreme Court of Canada has held that interest on borrowed money is invariably capital. I do not however think that the Supreme Court of Canada has held that interest expenses are invariably on capital account.
[28] I start with the most recent decision of the Supreme Court of Canada in Shell at page 5681:
Furthermore, it is important to underline that interest expenses on money used to produce income from a business or property are only deemed by s. 20(1)(c)(i) to be current expenses and, in the absence of that provision, would be considered to be capital expenditures: Canada Safeway, supra, per Rand, J., at p. 727. This Court was not invited on this appeal to revisit this characterization of such interest expenses: they therefore remain capital expenses which s. 20(1)(c)(i) deems to be deductible from Shell's gross income notwithstanding the general prohibition of such capital deductions in s. 18(1). Accordingly, even if the general analysis in Ikea applied to this case, it would tend to support the conclusion that the gains should be treated as being on capital account.
It seems obvious to me that the Supreme Court of Canada has left the door open with the words "This Court was not invited on this appeal to revisit this characterization of such interest expenses".
[29] The only reference in the Supreme Court of Canada judgment to the purpose for the borrowing is found at page 5671: "In 1988, Shell required approximately $100 million in United States currency ("US$") for general corporate purposes". There was no need to reconsider the position because the court held that the interest fell within the provisions of paragraph 20(1)(c). Moreover, in all probability the purpose of the use of the funds was, given the magnitude and term of the borrowing, of a capital nature.
[30] It is useful, in considering the case law that preceded Shell, to quote again from Brian Arnold's article.
Under paragraph 20(1)(c) of the Income Tax Act,1 interest paid or payable in respect of borrowed money or the unpaid purchase price of property is deductible if the money or property is used for the purpose of earning income from a business or property. The question examined in this paper is whether interest (or other financing expenses) is deductible in computing income for tax purposes under section 9. Or, to put the question another way, would interest be deductible in the absence of a specific statutory provision such as paragraph 20(1)(c)?
It is well established that amounts are deductible in computing income if they are deductible in accordance with accounting principles and practices and their deduction is not prohibited by statue or by fundamental principles of income tax law.2 Interest is a deductible expense in computing profit for accounting purposes. Paragraph 18(1)(b) of the Act, however, prohibits the deduction of "an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion," except as expressly permitted by part I of the Act.
The accepted wisdom is that, in the absence of a specific statutory provision, interest would not be deductible in computing income because it is a payment on account of capital. This proposition was recently reiterated by the Supreme Court of Canada in the Bronfman Trust case:
It is perhaps otiose to note at the outset that in the absence of a provision such as s. 20(1)(c) specifically authorizing the deduction from income of interest payments in certain circumstances, no such deductions could generally be taken by a taxpayer. Interest expenses on loans to augment fixed assets or working capital would fall within the prohibition against the deduction of a "payment on account of capital" under s. 18(1)(b).3
Thirty years earlier, the Supreme Court was equally confident about this proposition:
It is important to remember that in the absence of an express statutory allowance, interest payable on capital indebtedness is not deductible as an income expense.4
Commentators have espoused, almost unanimously, the same proposition, sometimes in an even more sweeping manner than that expressed by the Supreme Court.5 At least one commentator, however, has questioned it.6 Most commentators suggest that there may be a narrow exception to the general rule that interest is a non-deductible capital expenditure. The exception has been variously described. Interest is deductible as a current expense if the taxpayer is in the business of lending money; if the borrowed funds are used to acquire current assets; if the borrowing is temporary and does not add to the fixed assets of the business; if the interest is attributable to a transaction on income account.7 Apparently, however, Revenue Canada does not recognize any exceptions to the general rule.
Although the statement that interest is a non-deductible expenditure on account of capital is frequently made, it is seldom accompanied by any analysis. Commentators usually cite the cases as authority for their proposition; the cases cite other cases or consider the proposition to be self-evident.
The issue is not one of purely academic interest. Although the deductibility of interest and other financing expenses is governed by specific statutory provisions, there are many situations in which those provisions do not apply for one reason or another. For example, financing expenses may not be deductible because they do not fit within the narrow judicial definition of interest; or interest may not be deductible because a requirement of borrowed money in paragraph 20(1)(c) is not met. In these situations, the deductibility of the expenses under section 9 is crucial.8 More fundamentally, if interest is not generally an expenditure on account of capital, paragraph 20(1)(c) and the related provisions dealing with the deductibility of interest are of limited significance. Interest would be generally deductible under section 9 in accordance with accounting practice and would probably be subject to the same tracing test that the courts have developed under paragraph 20(1)(c).
________________
1 RSC 1952, c. 148, as amended by SC 1970-71-72, c. 63, and as subsequently amended (herein referred to as "the Act"). Unless otherwise stated, statutory references in this article are to the Act.
2 B.J. Arnold, Timing and Income Taxation: The Principles of Income Measurement for Tax Purposes, Canadian Tax Paper no. 71 (Toronto: Canadian Tax Foundation, 1983).
3 The Queen v. Bronfman Trust, 87 DTC 5059, at 5064; [1987] 1 CTC 117, at 124 (SCC).
4 Canada Safeway Ltd. v. MNR, 57 DTC 1239, at 1244; [1957] CTC 335, at 344 (SCC) (Rand J).
5 See, for example, Vern Krishna, The Fundamentals of Canadian Income Tax: An Introduction, 3d ed. (Toronto: Carswell, 1989), 342: "Interest on borrowed money is an expenditure on account of capital. Thus, in the absence of specific authority, expenditures on account of interest would not be deductible as an expense." See also Canada Tax Service (Don Mills, Ont.: De Boo) (looseleaf), at 20-1052: "It has been long settled that in the absence of an express statutory allowance ... interest payable on capital indebtedness would be regarded as a non-deductible 'payment on account of capital' within paragraph 18(1)(b) of the Act ." Canadian Tax Reporter (Don Mills, Ont.: CCH Canadian) (looseleaf), paragraph 5061: "in the absence of paragraph 20(1)(c), interest payments on loans to purchase capital assets would not be deductible by virtue of the prohibition under paragraph 19(1)(b)." Nathan Boidman and Bruno Ducharme, Taxation in Canada: Implications for Foreign Investment (Deventer, the Netherlands: Kluwer, 1985), 79-80: "As a rule of common law, interest is a capital outlay, unless it is accessory to a taxpayer's stock in trade, which would only be the case of taxpayers who are in the business of lending money." Brian J.Arnold and Tim Edgar, eds., Materials on Canadian Income Tax, 9th ed. (Don Mills, Ont.: De Boo, 1991), 522: "The deduction of interest on borrowed capital would normally be prohibited by paragraph 18(1)(b) as a 'payment on account of capital.'" Edwin C. Harris, Canadian Income Taxation, 4th ed. (Toronto: Butterworths, 1986), 239-40: "Except to the extent that the Act specifically grants the right to a deduction, interest and other financing costs incurred by a taxpayer, even though related to the earning of income, are nondeductible because they are considered to be 'payments on account of capital.' The only exception that appears to have been recognized is where the borrowed money is required for a very temporary purpose and does not add to the permanent working capital or to the fixed assets of the business." Robert Couzin, "Income Tax Treatment of Financing Charges," in Income Tax Aspects of Corporate Financing, 1980 Corporate Management Tax Conference (Toronto: Canadian Tax Foundation, 1981), 191-228, at 191: "absent the statutory provisions, many or all of the [financing] charges would not be deductible, at least to most taxpayers."
6 See David A. Ward, "Interest Deductibility," paper delivered at a National Tax Centre conference on tax reform, Toronto, May 27, 1988.
7 See the excerpts quoted in footnote 5, supra, and Income Taxation in Canada (Scarborough, Ont.: Prentice-Hall Canada) (looseleaf), vol. 2, at 19,856-57.
8 Consider, for example, a securities lending arrangement involving debt securities.
[31] In my view the statements made by the learned commentators in footnote 5 of the article go farther than they need to go, and farther than the case law warrants. The proposition that interest "payable on capital indebtedness" is capital is understandable if "capital indebtedness" means borrowed money used for capital purposes, as it certainly was in Canada Safeway. Rand J. in Canada Safeway was merely stating the obvious. Similarly the statement by Dickson C.J. in Bronfman at page 5064 that interest on loans "to augment fixed assets or working capital would fall within the prohibition against the deduction of 'a payment on account of capital' under s. 18(1)(b)" merely reiterates the point that interest on borrowed money used for a capital purpose is itself capital. It is difficult to know just what Dickson C.J. was referring to when he spoke of "working capital". The term is one of some elasticity. If he meant money used for a capital purpose, it is one thing. If he meant money used to meet a payroll it is another. In the context of the Bronfman case, where the money was borrowed to make a distribution of capital to a beneficiary of the trust it seems obvious he was referring to borrowings used to meet a capital requirement.
[32] In Tennant v. The Queen, 96 DTC 6121 at page 6125, Iacobucci J. made the following observation:
In my opinion, s. 20(1)(c)(i) is not ambiguous. It clearly states that interest can be deducted as an expense when the interest is paid or payable in the taxation year pursuant to a legal obligation to pay interest, and when the interest is payable on money borrowed for the purpose of earning income from a business or property. The purpose of the interest deduction provision is to encourage the accumulation of capital which would produce taxable income, as Dickson, C.J. noted in Bronfman Trust, supra, at p. 45. But for s. 20(1)(c)(i), the deduction of interest payments would be prevented by s. 18(1)(b) (Canada Safeway Ltd. v. Minister of National Revenue [57 DTC 1239], [1957] S.C.R. 717; some commentators suggest that Canada Safeway is wrongly decided; see P.W. Hogg and J.E. Magee, Principles of Canadian Income Tax Law (1995), at p. 221, note 36; however, I need not address that issue in these reasons).
[33] This comment was noted by Robertson J.A. in 74712 Alberta Limited v. The Queen, 97 DTC 5126 at pages 5133-4.
I note that the Supreme Court recently acknowledged the view held by some commentators that Canada Safeway was "wrongly" decided: see Tennant v. The Queen, 96 DTC 6121 at 6125, Iacobucci, J. I presume that that acknowledgment stems from and is limited to the holding in Canada Safeway that interest is necessarily an outlay on capital: see P.W. Hogg and J.E. Magee, Principles of Canadian Income Tax Law (Carswell, 1995) at 221, note 36; and B.J. Arnold, "Is Interest a Capital Expense?" (1992) 40 Can. Tax J. 533. If I am mistaken on this point then obviously the Supreme Court would have to re-evaluate Bronfman as well.
[34] I have concluded that this court is not precluded from considering whether interest may be a revenue expense. The Supreme Court of Canada has not conclusively held it to be invariably capital. The door is open and this case is obviously an ideal one in which to reconsider the question. We have an interest expense that does not fall within either paragraph 20(1)(c) or 8(1)(j) and a statutory provision in paragraph 8(1)(f) that permits an employee to deduct certain expenses that are expended to the earning of the commission employment income. The sole question is whether the interest is a capital expense.
[35] I have obtained great assistance from a case comment on Shell in the Canadian Tax Journal "Is Interest a Current Expense?" by Mr. Joel Nitikman (Canadian Tax Journal, 2000 Vol. 48, No. 1, page 133).
[36] I shall not repeat what was said in that article beyond referring to an Australian case mentioned in it, Steele v. Deputy Commissioner of Taxation, (1999) 161 A.L.R. 201, [1999] H.C.A. 7 (4 March 1999) where the majority of the Australian High Court made the following observation: (footnotes omitted)
29 ... interest is ordinarily a recurrent or periodic payment which secures, not an enduring advantage, but, rather, the use of borrowed money during the term of the loan. ... [I]t is therefore ordinarily a revenue item. This is not to deny the possibility that there may be particular circumstances where it is proper to regard the purpose of interest payments as something other than the raising or maintenance of the borrowing and thus, potentially, of a capital nature. However, in the usual case, of which the present is an example, where interest is a recurrent payment to secure the use for a limited term of loan funds, then it is proper to regard the interest as a revenue item, and its character is not altered by reason of the fact that the borrowed funds are used to purchase a capital asset. The fact that the asset has not yet become, and may never become, income-producing may be relevant to a decision as to whether the case falls within the first limb of s 51(1). However, once it is determined, or accepted by hypothesis, that the interest is, during the relevant year, an outgoing incurred in gaining or producing the taxpayer's assessable income, (even though no assessable income is derived during that year, and no such income may ever be derived), the circumstance that the capital asset has produced no income is not a reason to conclude that the interest is an outgoing of a capital nature.
[37] The portion of the majority judgment that I have quoted above goes farther than I would consider it necessary to go, at least in Canadian law, in that it implies that interest on money borrowed to acquire a capital asset is itself of a revenue nature. In this regard the majority judgment in Steele appears to reject the reasoning of the Judicial Committee in Wharf Properties.
[38] If one is to reconcile these opposing points of view - and it may not be possible - it may be on the basis that the majority appears to be of the view that the Australian tax law does not draw a distinction between interest incurred in order to earn profits and interest incurred in order to obtain capital - a distinction that in my view is not meaningful under Canadian income tax law. The Australian law requires a determination whether the interest is paid on money borrowed for the purpose of acquiring an income-producing asset. Where the asset is income-producing, interest is a current expense whether or not the underlying acquisition is a capital asset. The Australian law therefore appears to presume that interest is on income account whenever money is borrowed to acquire an income-producing asset.
[39] It is interesting to refer to the dissenting decision of Kirby J. in the Steele case where he stated: (footnotes omitted)
51. The decision of the Full Court of the Federal Court of Australia, from which this appeal comes, caused a certain amount of consternation when it was published. The opinion was expressed that the treatment of interest deductions required by the decision was in conflict with more than 50 years of case law. And that it even challenged the understandings of that law held by the Commissioner of Taxation (the Commissioner) who was obliged, as a consequence, to withdraw a number of his rulings. The Full Court decision was denounced as "heresy".
52. When fresh eyes are focused on a statutory text, it sometimes happens that new insights are secured. Assumptions, long accepted, when placed under a judicial microscope, are found to be wanting. Those regularly engaged in the application of legislation such as the Income Tax Assessment Act 1936 (Cth) (the Act) enjoy the advantage of affectionate familiarity with its terms. But it is no more than a statute enacted by the Parliament. It is to be construed, as every statute must, in accordance with its purpose as disclosed in its language. Decisional authority provides necessary guidance, not least because of the complexity and size of the Act, the subtlety of some of its concepts and the high desirability that its application should be clear and predictable, without the need for undue litigation in the huge number of cases to which it is applied. But when an appeal comes, there is no substitute for a study of the legislative language and purpose.
53. At the risk of intruding a jarring note into the response to the appeal (and the critics) I am obliged by my opinion to offer a dissenting view from that reached by the majority of this Court. I can derive a measure of comfort from Bertrand Russell's assurance that every advance in civilisation has been denounced as unnatural while it was recent. I am reassured by the fact that my dissenting view is harmonious with the recent unanimous judgment of the Privy Council in Wharf Properties Ltd v Commissioner of Inland Revenue.
[40] After referring to a number of previous Australian decisions, Kirby J. continues: (footnotes omitted)
73. ... the suggestion that, of its very nature, the payment of interest is of an "income" character and not "of a capital ... nature" is totally inconsistent, with the foregoing authority. It is also inconsistent with the recognition by this Court that, for some circumstances, interest may take on the characteristic of capital - not, of course, in the hands of the recipient (for whom it will be income) but in the hands of the payer. Whatever criticisms exist of the analysis of Munro in the Full Court, by reference to the statutory regime applicable in 1926, the basic principle cannot be gainsaid. It is a simple matter of statutory law. Interest may certainly be a loss or outgoing within s 51(1). Whether it is of a capital or non-capital nature depends upon the facts of the particular case. No hard and fast, and certainly no absolute, rule can be adopted. This is because, as a matter of law, the Act denies such a possibility. Convenient and congenial as absolute rules are for those who live their lives in the company of the Act, they are fundamentally incompatible with the task of characterisation which the exception in the Act calls forth. Necessarily, that task requires evaluation and judgment of each particular loss and outgoing, including where it is in the form of interest and where it is propounded as an allowable deduction.
74. Where the Commissioner suggests that, in the particular circumstances, the interest payment, although undoubtedly a loss or outgoing to the taxpayer, is "of a capital ... nature" it is therefore no valid answer to that proposition to assert, as the taxpayer did, that all interest payments, of their essence, are non-capital in nature. Such a proposition may have been accepted or assumed in earlier cases. It may have been assumed by the Commissioner in his earlier rulings. It may even have provided a false foundation for particular provisions of the Act 1936, drafted and enacted upon an assumption about the universal character of interest. But that assumption simply will not stand with the legal characterisation which the exception to s 51(1) requires. The common likelihood that, in most circumstances, interest payments will not be characterised as capital in nature cannot deny the possibility that, in particular circumstances they can, and should be so classified.
[41] I agree with Kirby J. Whether interest is an outgoing on revenue or capital account cannot be determined without a consideration of the facts of the particular case, and specifically the purpose for which the borrowed funds are used.
[42] (d) Finally, I must deal with the question whether paragraph 8(1)(j) occupies the entire field of interest deductibility for employees and impliedly excludes any other deduction of interest.
[43] It is clear that paragraph 8(1)(j) is limited to interest on money borrowed to acquire a particular type of capital asset. For the reasons that follow, I do not think that paragraph 8(1)(j) is the only route to the deductibility of interest as an expense to earn commission employment income. Even if the interest does not fall within paragraph 8(1)(j), it is in my view deductible under paragraph 8(1)(f) provided of course that the other requirements of 8(1)(f) are met.
[44] Paragraph 8(1)(f) provides that amounts are deductible where they were expended for the purpose of earning commission employment income to the extent that those amounts are not payments on account of capital except as provided in paragraph 8(1)(j). Therefore, paragraph 8(1)(j) is a derogation from the prohibition of the deduction of capital expenditures in subparagraph 8(1)(f)(v). Subparagraph 8(1)(f)(v) is only necessary where the interest expense is on capital account. For that reason paragraph 8(1)(j) is not an exclusive code relating to the deduction of interest. It is needed because interest is sometimes a capital outlay on the basis that it is assimilated to the purpose for which the funds are borrowed. Interest on borrowed money is not inherently anything - revenue or capital - it is simply the price paid for the use of borrowed money.
[45] Paragraph 8(1)(j) provides for the deduction of interest from commission employment income whereas paragraph 20(1)(c) provides, in a similar manner, for the deduction of interest from business or property income. The structure of the two provisions is different, but that difference is not substantial enough to detract from their similarities. Consistently with my view on paragraph 8(1)(j), I do not think paragraph 20(1)(c) is the only route to the deductibility of interest as a business or property expense and that a deduction under section 9 is possible provided it is not prohibited by such provisions as paragraphs 18(1)(a), (b) or (h).
[46] My conclusion that paragraphs 8(1)(j) or 20(1)(c) do not provide an exclusive code for the deduction of interest is supported by the decision of the Federal Court of Appeal in The Queen v. Boulangerie St-Augustin Inc., 97 DTC 5012 affirming 95 DTC 56, which held that the failure of an expense to come within subparagraph 20(1)(g)(iii) was not fatal to its deductibility under section 9 provided it was not prohibited by paragraph 18(1)(a) or (b).
[47] The notion that a specific provision impliedly ousts a more general one is, as a matter of statutory construction, of somewhat limited assistance and of no assistance at all here. In Associated Investors of Canada Ltd. v. M.N.R., 67 DTC 5096, it was unsuccessfully argued that paragraph 11(1)(f) (now 20(1)(p)) which permitted the deduction of bad debts in certain circumstances impliedly prohibited the deduction of bad debts that did not fall within that provision. Jackett P. (as he then was) rejected the contention. At page 5102 he said:
Section 11(1)(f) does not, in terms, prohibit any deduction for "bad debts". It does, however, expressly authorize in qualified terms a deduction that could have been made, in accordance with ordinary business principles, in the computation of profit from a business. It might therefore have been thought, as the respondent contends, that a deduction for a "bad debt" that is excluded from section 11(1)(f) by the qualifications expressed in it is impliedly prohibited. Such an interpretation would, however, have results that cannot, in my view, have been contemplated. For example, a bond dealer, who, in effect, buys and sells "debts", would, on such an interpretation, be precluded from taking into account losses arising from bonds becoming valueless by reason of the issuing company becoming insolvent. If section 11(1)(f) is not to be interpreted as impliedly prohibiting such an obvious and necessary deduction in arriving at the profits of a business, I am of opinion that it is not to be interpreted as impliedly excluding the deduction of the losses that are in question in this appeal, which, in my opinion, are just as obvious and necessary in computing the profits from the appellant's business.
[48] It follows that if paragraph 20(1)(c) does not exclude the deductibility of interest under section 9 a fortiori the extremely restricted deduction of interest on a specific form of capital indebtedness in paragraph 8(1)(j) does not oust the deductibility under paragraph 8(1)(f) of interest that is not on capital account.
[49] My conclusion therefore is that neither the $100,000 paid to Mr. Bentley nor the interest paid to borrow that amount is on capital account and that they are deductible under paragraph 8(1)(f) of the Income Tax Act.
[50] The appeal is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the $100,000 paid by the appellant to Mr. Bentley and the interest paid on the amount borrowed for that purpose are deductible by the appellant under paragraph 8(1)(f) to the extent that they were paid in the taxation year 1996.
[51] The appellant is entitled to his costs if any.
Signed at Ottawa, Canada, this 15th day of February 2001.
|
"D.G.H. Bowman" |
A.C.J.
COURT FILE NO.: 2000-2696(IT)I
STYLE OF CAUSE: Between Thomas Gifford and
Her Majesty The Queen
PLACE OF HEARING: North Bay, Ontario
DATE OF HEARING: January 23, 2001
REASONS FOR JUDGMENT BY: The Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF JUDGMENT: February 15, 2001
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Pascal Tétrault, Esq.
COUNSEL OF RECORD:
For the Appellant:
Name: --
Firm: --
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada