Sweet,
DJ:—This
is
an
appeal
from
the.
decision
of
the
Tax
Appeal
Board
allowing
the
respondent’s
appeal
against
the
respondent’s
income
tax
assessments
for
the
1966
and
1967
taxation
years.
The
issue
is
whether
the
respondent
was
entitled
to
make
certain
deductions
in
respect
of
interest
paid
to
its
parent
company.
The
parties
through
their
counsel
have
submitted
an
Agreed
Statement
of
Facts
as
follows:
The
Appellant
and
the
Respondent
hereby
admit
the
several
facts
respectively
hereunder
specified
but
these
admissions
are
made
for
the
purpose
of
this
appeal
only
and
may
not
be
used
against
either
party
on
any
other
occasion
or
by
any
other
than
the
Appellant
and
the
Respondent.
The
parties
reserve
the
right
to
object
to
the
admissibility
of
any
or
all
of
the
said
facts
on
the
ground
that
they
are
not
relevant
or
material
to
any
of
the
issues
to
be
determined
in
this
appeal.
1.
The
parties
agree
that
this
appeal
shall
be
heard
on
a
record
consisting
of
the
pleadings
in
the
Tax
Appeal
Board
and
in
this
court,
the
documents
forwarded
by
the
Minister
to
the
Board
pursuant
to
former
Section
89(4)
of
the
Income
Tax
Act,
the
transcript
of
evidence
in
the
Tax
Appeal
Board,
the
exhibits
which
were
filed
at
the
hearing
before
the
Board
and
this
Agreed
Statement
of
Facts.
It
is
agreed
that
each
party
may
refer
to
and
rely
upon
the
said
transcript
and
documents,
and
exhibits
in.
addition
to
this
Agreed
Statement
of
Facts.
2.
The
Respondent
is
a
company.
incorporated.
on
the
4th
day
of
January,
1954,
under
the
laws
of
Canada
and
carries
on
business
in
Strathroy,
Ontario.
3.
The
Respondent.
is
a
wholly
owned
subsidiary
of
MWA
Company
(formerly
Mid-West
Abrasive
Company)
of
Owosso,
Michigan
USA
(herein
called
“the
Parent
Company”).
4.
During
the
period
May,
1960,
to
December,
1961,
the
Respondent
borrowed
the
following.
sums
of
money
from.
the
Parent
Company:
|
Amount
|
Amount
Amount
|
|
Date
|
US
Dollars
|
Canadian
Dollars
|
|
May
13,
1960
|
$
51,579.63
|
|
|
.:_..$
50,000.00
|
|
August
18,
1961
|
28,547.39
|
30,000.00
|
|
September
5,
1961
|
29,090.63
|
30,000.00
|
|
December
8,
1961
|
96,080.00
|
100,000.00
|
|
$205,297.65
|
$210,000.00
|
5.
Each
of
the
loans.
referred
to
in
pargraph
3
was
evidenced
by
a
promissory
note
executed
and
delivered
by
the
Respondent
to
the
Parent
Company
bearing
the
following
endorsement:
“Interest
will
be
paid
if
requested,
but
not
in
excess
of.
6%.”
6.
At
all
relevant
times
the
$210,000.00.
(Canadian
dollars)
described
in
paragraph
4
above
and
hereafter
called
the
“borrowed
money”
was
used
for
the
purpose
of
earning
income
from
the
Respondent’s
business.
7.
In
the
Respondent’s
fiscal
periods
ending
December
31,
1962,
1963,
and
1964,
no
amount.
was:
accrued
or
deducted
in
its
books
of
account
or
financial
statements
as
a
liability
in
respect
of
interest
referable
to
the
borrowed
money
although
the
Respondent
used
the
accrual
method
of
accounting
in
computing
its
income
and
the
principal
amount
of
the
debt,
$210,000.00,
was
shown.
8.
After
1964
the
Respondent
changed
its
fiscal
year
end
to
June
30th
in
order
to
coincide
with
the
fiscal
year
of
the
Parent
Company.
In
the
six-
month
fiscal
period
ending
June
30,
1965,
again
the
Respondent
did
not
accrue
or
deduct
any
amount
as
a
liability
in
respect
of
interest
referable
to
the
borrowed
money.
9.
In
the
early
years
of
its
operation,
the
Respondent
inccuræd
losses
which
resulted
in
a
cumulative
deficit.
Commencing
in
1963,
however,
the
company’s
operations
became
profitable
and
the
deficit
gradually
was
reduced
until
the
Respondent
began
to
accumulate
retained
earnings.
The
table
below
sets
out
the
profit
(or
loss)
for
the
respective
years
and
the
correpsonding
retained
earnings
(or
deficit).
|
Taxation
|
Profit
(or
|
Retained
Earnings
|
|
Year
|
Loss)
Loss)
|
(or
Deficit)
|
|
31/12/61
|
|
($41,709.10)
|
|
31/12/62
|
($20,213.00)
|
(
61,922.10)
|
|
31/12/63
|
2,845.18
|
(
59,076.92)
|
|
31/12/64
|
43,742.32
|
(
15,334.60)
|
|
30/06/65
|
18,291.09
|
2,956.49
|
|
30/06/66
|
18,861.04
|
21,817.53.
|
10.
The
US
Internal
Revenue
Service
imputed
interest
income
to
the
Parent
Company
in
respect
of
the
borrowed
money
for
the
1962,
1963
and
1964
years
and
required
it
to
pay
tax
on
such
imputed
interest
without
regard
to
whether
such
interest
had
been
accrued
by
the
Parent
Company.
No
such
interest
had
been
paid
by
the
Respondent
or
received
or
accrued
by
the
Parent
Company
in
those
years.
This
action
by
the
US
Internal
Revenue
Service,
coming
at
a
time
when
the
Respondent
had
the
financial
ability
to
pay
interest,
appears
to
have
been
the
event
which
caused
the
Parent
Company
to
request
and
the
Respondent
Company
to
accept
and
pay
interest
as
set
forth
below.
11.
In
computing
its
income
for
the
taxation
year
ending
June
30,
1966,
the
Respondent
deducted
the
amount
of
$13,246.43
representing
interest
on
the
borrowed
money
for
the
period
July
1,
1965,
to
June
30,
1966.
12.
In
preparing
its
financial
statements
for
the
taxation
year
ending
June
30,
1966,
the
Respondent
charged
against
its
“Retained
Earnings”
as
at
June
30,
1966,
the
amount
of
$19,869.65
representing
interest
on
the
borrowed
money
for
the
period
January
1,
1964,
to
June
30,
1965.
The
amount
of
$19,869.65
was
not,
however,
deducted
in
computing
the
Respondent’s
income
for
1966.
13.
No
interest
was
in
fact
paid
by
the
Respondent
to
the
Parent
Company
prior
to
August
29,
1966.
On
August
29,
1966,
the
Respondent
remitted
to
the
Parent
Company
the
sum
of
$33,116.08,
being
the
sum
of
the
two
amounts
of
$13,246.43
and
$19,869.65,
referred
to
above.
Subsequently,
in
the
1967
taxation
year,
the
Respondent
remitted
to
the
Parent
Company
the
sum
of
$26,642.65
in
respect
of
interest
for
the
period
January
1,
1962,
to
December
31,
1963.
14.
The
Respondent
filed
its
T2
Corporation
Income
Tax
Return
for
its
1966
taxation
year
on
the
30th
day
of
September,
1966.
At
the
same
time
it
filed
amended
returns
for
the
twelve
month
taxation
year
ending
December
31,
1964,
and
the
six
month
taxation
year
ending
June
30,
1965.
15.
In
the
amended
return
for
1964
filed
on
the
30th
day
of
September,
1966,
the
Respondent
sought
to
amend
its
computation
of
income
by
deducting
interest
in
the
amount
of
$13,246.43
for
that
twelve
month
taxation
year.
In
the
amended
return
for
1965
filed
on
the
30th
day
of
September,
1966,
the
Respondent
sought
to
amend
its
computation
of
income
by
deducting
interest
in
the
amount
of
$6,623.22
for
the
six
month
taxation
year.
The
Department
of
National
Revenue
did
not
take
any
action
following
receipt
of
the
amended
returns
for
1964
and
1965
and,
in
particular,
did
not
allow
the
deduction
of
interest
for
those
taxation
years.
16.
The
Parent
Company
must
have
informed
the
Respondent
that
it
was
requesting
interest
at
least
in
respect
of
the
amounts
of
$13,246.43
and
$19,869.65
prior
to
July
13th,
1966
because
the
auditors’
report
to
the
Respondent
in
respect
of
the
fiscal
period
ending
June
30,
1966,
is
dated
July
13,
1966,
and
in
Exhibit
“B”
to
that
report
the
amount
of
$13,246.43
is
deducted
in
computing
income,
and
$19,869.65
is
charged
against
retained
earnings.
17.
By
letter
dated
September
22,
1966,
(Exhibit
“A-6”
in
the
Tax
Appeal
Board)
the
Parent
Company
informed
the
Respondent
“that
demand
is
being
made
on
your
company
for
repayment
of
the
advances
and
interest
at
6%
now
existing’.
At
a
meeting
of
the
Board
of
Directors
of
the
Respondent
on
October
10,
1966,
it
was
agreed
that
the
Respondent
would
accept
interest
charges
on
the
notes
payable
to
the
Parent
Company
starting
with
the
year
1962.
18.
In
computing
its
income
for
the
taxation
year
ending
June
30,
1967,
the
Respondent
deducted
interest
on
the
borrowed
money
in
the
amounts
of
$6,692.04
and
$46,512.30.
The
amount
of
$6,692.04
represented
interest
for
the
period
July
1,
1966,
to
June
30,
1967.
The
amount
of
$46,512.30
was
composed
of
two
separate
items:
firstly,
the
amount
of
$19,869.65
described
in
paragraph
12
above;
and
secondly,
the
amount
of
$26,642.65
representing
interest
on
the
borrowed
money
for
the
period
January
1,
1962
to
December
31,
1963.
19.
In
preparing
its
financial
statement
for
the
taxation
year
ending
June
30,
1967,
the
Respondent
charged
against
its
“Retained
Earnings”
as
at
June
30,
1967,
only
the
amount
of
$26,642.65.
The
remaining
$19,869.65
had
been
charged
in
1966:
see
paragraph
12
above.
20.
In
summary,
interest
referable
to
the
borrowed
money
requested
in
1966
by
the
Parent
Company
in
respect
of
the
fiscal
periods
commencing
January
1,.1962,
was
deducted
by
the
Respondent
in
computing
income
and/or
charged
against
retained
earnings
in
the
respective
taxation
years
reflected
in
the
table
below.
|
Interest
|
Amount
of
|
Deducted
in
|
Charged
to
|
|
Period
|
Interest
|
Computing
income
|
Retained
Earnings
|
|
Jan.
1/62
to
$26,642.65
|
1967
|
Non-recurring
|
|
Dec.
31/63
|
|
Expense
—1967
|
|
Jan.
1/64
to
|
19,869.65
|
1967
|
Non-recurring
|
|
June
30/65
|
|
Expense
—1966
|
|
July
1/65
to
|
13,246.43
|
1966
|
Implicit
with
|
|
June
30/66
|
|
income
calculation
|
|
July
1/66
to
|
6,692.04
|
1967
|
Implicit
with
|
|
June
30/67
|
|
income
calculation
|
21.
By
reasessments
for
the
1966
and
1967
taxation
years,
Notices
of
which
were
mailed
to
the
Respondent
on
August
1,
1968,
the
Appellant
disallowed
as
a
deduction
in
computing
income
the
following
amounts
of
interest
which
had
been
claimed
by
the
Respondent:
|
1966
|
—
|
$13,246.43
|
|
1967
|
—
|
46,512.30
|
The
Appellant
disallowed
the
sum
of
$13,246.43
on
the
basis
that
it
was
not
an
amount
payable
or
a
liability
incurred
before
June
30,
1966,
being
the
last
day
of
the
1966
taxation
year.
The
Appellant
disallowed
the
sum
of
$46,512.30
on
the
basis
that
it
was
not
“an
amount
.
.
.
payable
in
respect
of
the
year”
within
the
meaning
of
Section
11
(1)(c)
of
the
Income
Tax
Act.
22.
Even
if
the
request
for
interest
were
made
by
the
Parent
Company
after
June
30,
1966,
but
before
the
date
of
the
auditor’s
report,
good
accounting
practice
would
require
the
liability
in
respect
of
interest
to
be
disclosed
in
the
report.
The
handbook
of
the
CICA
states
at
page
1500:13:
“any
event
or
transaction
between
the
date
of
the
balance
sheet
and
the
date
of
the
auditors’
report
thereon,
which
may
have
a
material
effect
on
the
financial
position
or
net
income
of
the
business,
should
be
disclosed.”
23.
Montgomery’s
Auditing,
Eighth
Edition,
a
well
recognized
text
dealing
with
accounting
principles
and
distributed
to
all
accounting
students
in
the
Province
of
Ontario
states
at
page
377:
“Statement
on
Auditing
Procedure:
No.
25,
issued
in
October,
1954,
relating
to
the
auditor’s
responsibility
in:
connection
with
the
disclosure
of
events
occurring
or
becoming
known
subsequent
to
the
date
of
statements
concerning
which
he
is.
expressing
an
opinion,
sets
forth
the
general
rule
that
such
financial
statements
should
be
adjusted
to
recognize
liabilities
determined
subsequent
to
the
balance
sheet
date
and
prior
to
the
time
his
report
is
submitted.”
24.
Attached
hereto
as
Schedule
I
is
the
transcript
of
evidence
in
the
Tax
Appeal
Board
(75
pages)
together
with
the
15
Exhibits
(A-1
to.
A-10
and
R-1
to
R-5)
which
were
filed
at
the
hearing
before
the
Board.
Upon
opening,
counsel
for
the
appellant
stated
that
the
appeal
in
respect
of
1966
was
abandoned.
Of
the
interest
stated
in
paragraph
20
of
the
Agreed
Statement
of
Facts
to
be
‘‘referable
to
the
borrowed
money
in
respect
of
the
fiscal
periods
commencing
January
1,
1962”
only
the
amounts
of
$26,642.65
and
$19,869.65
respectively
associated
in
paragraph
20
with
the
“interest
period”
“Jan.
1/62
to
Dec.
31/63”
and
the
“interest
period”
“Jan.’
1/64
to
June
30/65”
remain
in
issue.
The
following
were
conceded
by
counsel:
1.
The
wording
“interest
will
be
paid
if
requested,
but
not
in-
excess
of
6%
on
the
promissory
notes
was
to
be
taken
as
though
the
wording
were
“interest
will
be
paid
if
requested,
but
not
in
excess
of
6%
per
annum”.
2.
The
interest
calculations
were
correctly
mathematically
computed
at
6%
per
annum.
3.
The
demand
for
interest
could
be
made
retroactive
to
the
dates
of
the
loans.
4.
The
demand
or
request
for
interest
was
not
made
earlier
than
the
calendar
year
1966.
Relevant
are
the
following
extracts
from
what
was
section
11
of
the
Income
Tax
Act:
11.
(1)
Notwithstanding
paragraphs-(a),
(b)
and
(h)
of
subsection
(1)
of
section
12
the
following
amounts
may
be
deducted
In
computing
the
income
of
a
taxpayer
for
a
taxation
year:
(c)
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
(other
than
borrowed
money
used
to
acquire
property
the
income
from
which
would
be
exempt),
or
a
reasonable
amount
in
respect
thereof,
whichever
is
the
lesser;
A
method
which
could
have
been
“regularly
followed
by
the
taxpayer
in
computing
his
income”
is
the
cash
basis
accounting
method.
Another
could
have
been
the
accrual
accounting:
method.
The
effect
of
the
judgment
of
Thurlow,
J,
as
he
then
was,
in
Industrial
Mortgage
and
Trust
Company
v
MNR,
[1958]
Ex
CR.
205:
[1958]
CTC
106;
58
DTC
1060,
which
dealt
with
the
construction
to
be
put
upon
the
word
“method”
in
what
was
then
paragraph
(b)
of
sec-
tio-n
6,
is
that
the
taxpayer
was
not
necessarily
confined
to
either
a
cash
basis
or
an
accrual
basis
in
the
computation
of
profits.
The
following
is
an
extract
from
the
judgment
(pp
213-14
[114,
1064]):
As
I
interpret
it,
the
word:
“method”
is
not
used
in
Section
6(b)
in
any
narrow
or
technical
sense
but
simply
means
the
system
or
procedure
which
the
taxpayer
has
regularly
followed
in
computing
his
profit.
The
system
or
procedure,
in
my
opinion,
may
be
made
up
of
a
number
of
practices,
and
I
can
see
no
valid
reason
why,
in
the
diverse
business
such
as
that
of
the
appellant,
such
system
or
procedure
could
not
include
different
practices
for
accounting
for
revenue
from
different
activities
or
sources,
depending
on
the
nature
of
such
activities
or
sources
and
of
the
revenues
therefrom,
and
still
be
regarded
as
a
“method”
within
the
meaning
of
that
word
in
Section
6(b).
In
my
opinion,
the
practices
followed
by
the
appellant
did
amount
to
a
“method”
within
the
meaning
of
the
section
and;
as
that
method
had
been
followed
by
the
appellant
without
change
for
seven
years
immediately
preceding
1949
and
for
1949
as
well,
I'
have
no
hesitation
in
concluding
that
it
was
the
“method”
regularly
followed
by
the
appellant
in
computing
its
profit
within
the
meaning
of
Section
6(b).
I
think
that
case
is
distinguishable.
There
are
significant
differences
between
the
circumstances
in
that
case
and
in
this
apart
from
the
circumstance
that
what
was
being
dealt
with
there
was
interest
as
a
profit
item
and
here
interest
is
dealt
with
as
a
deduction
in
the
computation
of
profits.
There
the
appellant
in
computing
its
income
for
1949,
as
it
had
in
previous
years,
brought
into
account
on
a
cash
received
basis
revenue
from
all
sources
except
interest
on
government
bonds
and
a
remnant
of
mortgages
taken
prior
to
1942
which
it
accounted
for
on
an
accrual
basis.
In
assessing
the
Minister
added
to
the
income
reported
the
amount
of
mortgage
interest
which
became
due
but
was
not
paid
in
1949
on
mortgages
the
interest
from
which
in
1949
and
in
previous
years
had
been
brought
into
revenue
on
a
cash
received
basis.
Here
there
is
only
one
lender—the
respondent’s
parent
company.
There
the
practice
had
been
followed
by
the
appellant
without
change
for
the
seven
years
immediately
preceding
1949
and
for
1949
as
well.
Moreover,
it
is
my
understanding
that
Counsel
for
the
respondent
agrees
that.
the
respondent
used
the
accrual
method.
In
any
event
I
consider
that
the
wording
of
sections
7
and
8
of
the
Agreed
Statement
of
Facts
impels
the
conclusion
that
this
case
must
be
decided
upon
the
basis
that
at
and
for
all
revelant
times
the
respondent
had
“regularly
followed”
the
accrual
method
in
computing
its
income
and
without
having
adopted
any
other
method
in
respect
of
any
phase
of
its
operation.
It
seems
to
me
that
the
relevant
portions
of
those
sections
are:
~~
7.
In
the
Respondent’s
fiscal
periods
ending
December
31,
1962,
1963,
and
1964,
no
amount
was
accrued
or
deducted
...
in
respect
of
interest
.
.
.
although
the
Respondent
used
the
accrual
method
of
accounting
In
computing
its
income
and
....
8.
.
.
.
In
the
six-month
fiscal
period
ending
June
30,
1965,
again
the
Respondent
did
not
accrue
or
deduct
any
amount
.
.
.
in
respect
of
interest.
.
.
.
In
section
16
of
the
Agreed
Statement
of
Facts
there
is:
The
Parent
Company
must
have
informed
the
Respondent
that
it
was
requesting
interest
at
least
in
respect
of
the
amounts
of
$13,246.43
and
$19,869.65
prior
to
July
13th,
1966
.
.
.
.
According
to
section
11
of
that
statement
in
computing
its
income
for
the
taxation
year
ending
June
30,
1966
the
respondent
deducted
$13,246.43
“representing
interest
on
the
borrowed
money
for
the
period
July
1,
1965,
to
June
30,
1966”.
However
that
was
not
remitted
to
the
parent
company
until
August
29,
1966
(see
section
13
of
the
Statement
of
Agreed
Facts).
Since
August
29,
1966
was
subsequent
to
the
fiscal
year
ending
June
30,
1966
the
deduction
in
respect
of
the
fiscal
year
ending
June
30,
1966
notwithstanding
actual
payment
not
having
been
made
until
August
29,
1966
was
consistent
only
with
the
accrual
method
of
computing
profit.
If
'I
understand
the
position
of
counsel
for
the
respondent
correctly,
he
in
effect
admits
that
if
the
promissory
note
had
provided
for
interest
at
a
definite
rate
and
without
the
requirement
of
a
request
for
it
the
taxpayer,
being
on
an
accrual
basis,
would
have
had
to
claim
the
deduction
for
interest
in
each
year
in
respect
of
which
the
obligation
to
pay
interest
arose
or
not
at
all.
Nevertheless,
as
I
understand
it
his
submissions
include:
The
liability
to
pay
interest
arose
only
after
the
request
for
interest
was
made
but
that
the
amount
is
calculated
on
the
period
the
loan
was
oustanding;
even
though
the
request
was
for
interest
related
to
prior
years
as
well
as
subsequent
periods
there
was
nothing
to
accrue
or
to
deduct
until
the
request
was
made;
until
the
request
was
made
it
would
not
be
known
whether
there
would
ever
be
a
requirement
to
pay
interest;
although
the
obligation
to
pay
interest
was
limited
to
6%
the
request,
if
made,
could
have
been
for
less
than
6%;
the
phrase
“in
respect
of
the
year”
determines
only
the
time
or
taxation
year
when
an
amount
of
interest
may
be
deducted
and
does
not
determine
the
amount
which
may
be
deducted.
I
do
not
agree
with
his
submissions.
Counsel
for
the
respondent
referred
to
MNR
v
Benaby
Realties
Limited,
[1968]
SCR
12;
[1967]
CTC
418
at
420;
67
DTC
5275
at
5277,
wherein
Judson,
J
said:
My
opinion
is
that
the
Canadian
Income
Tax
Act
requires
that
profits
be
taken
into
account
or
assessed
in
the
year
in
which
the
amount
is
ascertained.
Apparently
the
position
of
counsel
for
the
respondent
is
that
there
is
an
analogy
between
that
situation
where
the
subject
matter
is
profits
and
the
situation
where
the
subject
matter
is
deductions
to
arrive
at
profits.
In
my
opinion
this
by
no
means
follows.
In
order
to
determine
what,
if
anything,
may
be
deducted
in
respect
of
interest
on
borrowed
money
in
computing
the
income
of
a
taxpayer
for
a
taxation
year
it
is
the
wording
of
the
statute
which
governs.
Here
the
deduction
could
only
be
made
if
circumstances
brought
the
taxapayer
within
the
wording
of
the
relevant
legislation—in
this
case
subparagraph
11(1)
(c)(i).
Wording
to
be
considered
is
“an
amount
paid
in
the
year
or
payable
in
respect
of
the
year”
in
paragraph
11(1)(c).
In
my
opinion
the
words
“paid
in
the
year”
are
applicable
to
those
taxpayers
who,
in
computing
income,
regularly
follow
the
cash
basis
accounting
method
and
the
words
“payable
in
respect
of
the
year”
are
applicable
to
those
who,
in
computing
income,
regularly
follow
the
accrual
accounting
method.
The
respondent,
in
my
finding,
in
computing
its
income,
regularly
followed
the
accrual
accounting
method.
In
my
opinion
the
words
“payable
in
respect
of
the
year”
are
to
be
read
together
with
the
first
two
words
in
paragraph
(c),
namely
“an
amount”
so
that
for
those
who
follow
the
accrual
method
the
paragraph
is
to
read,
“an
amount
.
.
.
payable
in
respect
of
the
year”.
“In
respect
of
the
year”
refers,
in
my
opinion,
to
the
year
during
which
the
borrowed
money
was
used
and
not
to
the
year
in
which
the
lender
chose
to
make
the
request
for
interest.
It
is
my
opinion
that
following
the
request
the
respondent
was
obliged
to
pay
interest
for
the
use
of
the
borrowed
money
during
the
year
or
years
in
which
the
borrowed
money
was
used
by
the
borrower,
it
being
conceded
that
the
demand
for
interest
could
be
made
retroactive
to
the
dates
of
the
loans.
Of
course
if
the
request
was
not
effective
retroactively
interest
would
only
become
payable
in
respect
of
the
period
commencing
with
the
request
and
the
borrower
would
have
the
money
interest
free
up
until
the
time
of
the
request.
Consistent
with
the
view
that
the
words
“in
respect
of
the
year”
refer
to
the
year
during
which
the
borrowed
money
was
used
and
not
to
the
year
in
which
the
request
was
made
is
the
nature
of
interest
and
the
manner
in
which
it
accrues
according
to
the
learned
author
in
Halsbury’s
Laws
of
England,
3rd
edition,
Vol
27,
sec
6,
page
7:
Interest
is
return
or
compensation
for
the
use
or
retention
by
one
person
of
a
sum
of
money
belonging
to
or
owed
to
another.
Interest
accrues
de
die
in
diem
even
if
payable
only
at
intervals
.
..
The
author
refers
to
Re
Farm
Security
Act,
1944,
[1947]
SCR
394
at
411;
Dunn
Trust,
Ltd
v
Feetham,
[1936]
1
KB
22
(CA)
and
Re
Rogers’
Trusts
(1860),
1
Drew
&
Sm
338.
Consistent
also
with
this
is
The
Apportionment
Act,
RSO
1970,
c
23,
section
3:
3.
All
rents,
annuities,
dividends,
and
other
periodical
payments
in
the
nature
of
income,
whether
reserved
or
made
payable
under
an
instrument
in
writing
or
otherwise,
shall,
like
interest
on
money
lent,
be
considered
as
accruing
from
day
to
day,
and
are
apportionable
in
respect
of
time
accordingly.
If
the
proper
construction
of
the
section
did
not
confine
the
deduction
which
taxpayers
who
follow
the
accrual
method
(unmodified)
may
make
in
respect
of
interest
to
the
year
in
which
the
borrowed
money
was
used
and
if
the
proper
construction
permitted
it
to
be
deducted
in
some
subsequent
year
(for
whatever
cause)
the
result
would
be
inconsistent
with
the
concept
underlying
the
accrual
method.
In
that
event
one
might
have
“accrual”
in
respect
of
all
matters
except
interest
and
have
a
cash
basis
for
interest.
In
my
opinion
the
wording
of
the
section
does
not
permit
such
a
result
except
in
circumstances
such
as
existed
in
Industrial
Mortgage
and
Trust
Company
v
MNR
(supra)
and
in
my
view
such
circumstances
do
not
exist
in
this
case.
In
Associated
Investors
of
Canada
Limited
v
MNR,
[1967]
2
Ex
CR
96;
[1967]
CTC
138;
67
DTC
5096,
Jackett,
P,
as
he
then
was,
dealt
with
a
situation
arising
out
of
advances
to
salesmen.
At
page
100
[142,
5098]
in
a
footnote
he
deals
with
a
submission
that
paragraph
12(1
)(a)
of
the
Income
Tax
Act
must
be
interpreted
as
prohibiting
the
deduction
in
the
computation
of
profit
from
a
business
for
a
year
of
any
outlay
or
expense
not
made
or
incurred
in
that
year.
In
that
footnote
he
says,
inter
alia:
in
my
view,
while
certain
types
of
expense
must
be
deducted
in
the
year
when
made
or
incurred,
or
not
at
all,
(e.g.,
repairs
as
in
Naval
Colliery
Co.
Ltd.
v.
C.I.R.
(1928),
12
T.C.
1017,
or
weeding
as
in
Vallambrosa
Rubber
Co.,
Ltd.
v.
Farmer
(1910),
5
T.C.
529),
there
are
many
types
of
expenditure
that
are
deductible
in
computing
profit
for
the
year
“in
respect
of”
which
they
are
paid
or
payable.
(Compare.
Sections
11(1)(c)
and
14
of
the
Act.)
Although
in
that
comment
there
is
nothing
to
indicate
that
the
distinguished
then
President
of
the
Court
had
in
mind
the
unusual
situation
which
exists
here,
namely
no,
interest
to
be
payable
unless
requested,
as
I
understand
his
comment,
its
effect
is
that
when
a
taxpayer
adopts
the
accrual
method
interest.
can
only
be
deducted
in
and
for
the
year
or,
years
in
which
it
is
earned
which-would
be
the
year
or
years
during
which
the
borrowed
money
was
in
the
hands
of
the
borrower.
.
.
It
is
my
view.
that
when
the
respondent
executed
the.
promissory
notes
‘containing
“interest
will
be
paid
if
requested,
but
not
in
excess
of
6%”,
liability
for
interest
was
created.
The
request
for
interest
did
not
create
the
liability.
The
respondent
assumed
liability
for
interest
and
committed.
itself
in
respect
of
interest
when
it
signed
and
delivered
the
notes.
The
lender
might
not
have
invoked
its
rights
under
that
commitment
and
would
not
have
invoked
its
rights
if
it
did
not
request
interest.
The
lender’s
omission
to
make
the
request
would
merely
be
a
waiver
of
its
rights
and
a
forgiveness
of
the
respondent’s
liability
for
interest
which
existed
from
the
beginning.
If
and
when
the
request
is
made
it
would
merely
be
indicative
of
the
time
the
borrower’s
already
existing
liability
for
interest
is
to
be
discharged
by
payment.
However
regardless
of
what
the
technical
position
regarding
the
commencement
of
liability
may
be
and
whether
it
commenced
with
the
delivery
of
the
notes
or
came
into
existence
upon
the
request
being
made,
the
interest
would
nevertheless
be
in
respect
of
the
year
or
years
in
which
it-was
earned,
which
would
be
the
year
or
years
in
which
the
borrowed
money
was
used
by
the
borrower.
The
interest
applicable
to
the
time
prior
to
the
request
would
not
be
interest
in
respect
of
the
year
in
which
the
request
for
interest
was
made.
Counsel
for
the
respondent
submitted,
too,
that
the
Minister’s
construction
would
result
in
the
statute
discriminating
against
a
taxpayer
entering
into
a
contract
respecting
borrowing
and
interest
such
as
exists
here.
If
(although
here
I
need
not
and
do
not
decide
the
point)
until
the
request
for
interest
is
made
no
deduction
for
interest
was
available
to
the
respondent,
the
fixing,
by
the
request,
of
the
time
when
the
interest
became
payable
cannot
change
the
effect
of
the
legislation
giving
the
right
to
make
a
deduction
in
respect
of
interest.
That
right
is
limited
by
the
legislation.
In
any
event
I
do
not
see
how
the
respondent
can
justifiably
complain
of
discrimination
when
it
was
the
decision
of
the
taxpayer
to
enter
into
the
type
of
contract
which
exists
here.
Having
decided
to
enter
into
that
type
of
contract
it
must,
of
course,
abide
by
the
results,
whether
beneficial
or
adverse,
flowing
from
it.
The
foregoing
is
sufficient
to
dispose
of
this
matter.
I'
need
not,
and
do
not,
make
any
decision
here
as
to
whether
the
treatment
of
interest
in
the
respondent’s
financial
statements
affects
the
situation.
Nevertheless
the
treatment
in
the
financial
statements
of
the
respondent
of
the
two
interest
items
in
issue,
namely
$26,642.65
and
$19,869.65,
respectively
associated
in
paragraph
20
of
the
Agreed
Statement
of
Facts
with
the
“interest
period”
“Jan.
1/62
to
Dec.
31/63”
and
the
“interest
period”
“Jan.
1/64
to
June
30/65”
appears
to
me
to
recognize
that,
although
they
were
paid
in
the
year
ending
June
30,
1967,
they
are
expense
items
applicable
to
periods
prior
to
the
1967
taxation
year
and
are
‘in
respect
of”
those
prior
periods.
Contained
in
the
respondent’s
financial
statement
for
the
fiscal
yearing
ending
June
30,
1966
there
is
a
statement
of
income
and
retained
earnings.
It
has
a
category
“non-recurring
expenses—interest
expense—prior
year’s”
and
the
amount
of
that
category
is
$19,869.65.
That
is
the
interest
item,
$19,869.65,
associated
in
paragraph
20
of
the
Agreed
Statement
of
Facts
with
“interest
period”
“Jan.
1/64
to
June
30/65”.
In
that
statement
of
income
and
retained
earnings
that
amount,
$19,869.65,
is
deducted
from
the
figure
of
$43,775.53
shown
in
that
statement
as
“net
earnings
before
Federal
and
Provincial
income
taxes
and
non-recurring
expenses”.
After
making
that
deduction
and
the
other
calculations
as
shown
on
the
statement,
there
is
developed
the
figure
of
$21,817.53
called
in
the
statement
“retained
earnings—June
30,
1966”.
The
financial
statement
for
the
year
ending
June
30,
1966
includes
a
“tax
calculation”.
That
“tax
calculation’
does
not
include
as
a
deduction
the
$19,869.65
figure.
Nevertheless,
as
I
see
it,
the
deduction
of
that
$19,869.65
from
retained
earnings
together
with
the
content
of
section
20
of
the
Agreed
Statement
of
Facts
could,
logically,
only
be
on
the
basis
that
expense
had
been
incurred
“in
respect
of”
some
period
prior
to
June
30,
1966
which
brought
the
retained
net
earnings
below
what
they
would
have
been
if
that
expense
had
not
been
incurred,
that
that
expense
was
interest
in
the
amount
of
$19,869.65
and
that
the
period
“in
respect
of”
which
it
had
been
incurred
was
January
1,
1964
to
June
30,
1965.
This
significant
treatment
of
the
situation
in
the
financial
statement
was
much
more
than
mere
disclosure
of
the
request
for
interest.
If
only
disclosure
was
intended
it
could
have
been
made
in
the
report
without
actual
incorporation
of
the
interest
item
into
the
figures
with
the
resulting
change
as
was
done.
The
financial
statement
for
the
year
ending
June
30,
1967
also
contains
a
statement
of
income
and
retained
earnings.
In
it
and
under
a
heading
“non-recurring
expenses”
there
is
an
item
called
“Interest
Expense—Prior
year’s”
of
$26,642.65.
That
is
the
$26,642.65
associated
in
paragraph
20
of
the
Agreed
Statement
of
Facts
with
the
“interest
period
“Jan.
1/62
to
Dec.
31/63”.
In
that
statement
that
$26,642.65
is
deducted
from
the
figure
of
$42,689.73
stated
to
be
“net
profit
before
Federal
taxes
and
Provincial
taxes
and
non-recurring
expenses”.
After
making
that
deduction
and
the
other
calculations
in
the
statement
there
is
developed
a
figure
of
$18,556.79
called
“retained
earnings—June
30,
1967”.
The
same
financial
statement
contains
what
is
called
a
“tax
calculation”.
It
commences
with
an
item
of
$42,689.73
called
“Net
Profit
before
Federal
and
Provincial
Taxes
and
non-recurring
expenses,
per
financial
statement”.
It
includes,
as
a
deduction,
$46,512.30
called
“Prior
Years’
interest
on
notes
payable”,
which
is
the
sum
of
the
previously
mentioned
interest
amounts
of
$19,869.65
and
$26,642.65.
The
designations
in
the
taxpayer’s
own
financial
statements
of
those
interest
items
as
being
“prior
years”
and
the
reduction
of
the
retained
earnings
by
the
amount
of
the
interest
item
of
$19,869.65
in
the
financial
statement
for
the
taxation
period
ending
June
30,
1966
do,
I
think,
indicate
the
respondent’s
recognition
that,
in
actuality,
that
interest
is
applicable
to
and
is
in
respect
of
periods
prior
to
the
taxation
year
1967
and
this
regardless
of
the
“tax
calculations”.
Emphasis
is
given
to
this
by
the
following
in
the
financial
statement
for
the
year
ended
June
30,
1967:
Interest
Mid-West
Abrasive
Company,
Ltd.,
|
—
Current
|
$
6,692.04
|
|
—
Prior
Years
|
$26,642.65
|
Although
it
is
not
necessary
in
this
case
to
have
regard
to
the
provision
in
section
11
which,
in
any
event,
has
the
effect
of
prohibiting
any
deduction
for
interest
beyond
a
reasonable
amount,
it
is
of
some
interest
to
note
that
if
the
sum
of
$46,512.30
were
interest
only
in
respect
of
the
year
ended
June
30,
1967
that
amount
together
with
the
interest
item
of
$6,692.04
not
in
issue
would
total
$53,204.35.
That,
if
it
were
applicable
only
to
the
1967
taxation
year
would
be
an
inordinate
amount
of
interest
for
one
year
on
the
total
of
the
money
the
respondent
borrowed
from
its
parent
company
($210,000
Canadian
—see
section
4
of
Agreed
Statement
of
Facts).
I
find
that
the
said
interest
items
of
$26,642.65
and
$19,869.65,
totalling
$46,512.30,
were
not
amounts
payable
in
respect
of
the
respondent’s
1967
taxation
year
within
the
meaning
of
paragraph
11(1)(c)
of
the
Income
Tax
Act
and
that
they
are
not
amounts
which
may
be
deducted
in
computing
the
income
of
the
respondent
for
its
1967
taxation
year.
The
appeal
in
respect
of
and
in
so
far
as
it
relates
to
the
respondent’s
1966
taxation
year
is
dismissed.
In
all
other
respects
the
appeal
is
allowed.
The
assessment
for
the
respondent’s
1967
taxation
year
is
restored.
The
matter
is
referred
back
to
the
Minister
of
National
Revenue
for
reassessment
accordingly.
The
respondent
will
have
its
costs
of
the
appeal
payable
by
the
appellant
up
to
and
including
June
1,
1973
and
the
appellant
will
have
his
costs
after
that
date
payable
by
the
respondent.
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