Estey,
J.:—The
appellant
submits
that
in
the
computation
of
its
income
tax
for
the
years
1946,
1947
and
1948
it
is
entitled
to
a
deduction
for
payments
made
on
account
of
(a)
compound
interest;
(b)
interest
on
the
face
value
of
the
bonds
in
the
sum
of
$100,
though
only
$90
was
received
by
it;
(c)
a
larger
amount
by
way
of
depreciation.
Incorporated
under
the
laws
of
British
Columbia
in
1928
with
a
capital
of
$500,000,
divided
into
2,500
preference
shares
and
2,500
common
shares
of
$100
each,
the
appellant
acquired,
in
Vancouver,
certain
lots
and
erected
thereon
an
office
building.
The
construction
of
the
latter
was
financed
in
part
by
the
sale
of
$550,000
First
Closed
Mortgage
6%
Fifteen
Year
Sinking
Fund
Gold
Bonds
issued
under
the
terms
of
an
indenture
of
mortgage
and
trust
dated
the
first
day
of
February,
1929.
This
indenture
contained
the
following
:
‘“The
Bonds
shall
bear
interest
at
the
rate
of
6%
per
annum
(after
as
well
as
before
maturity
and
after
as
well
as
before
default
and
interest
on
overdue
interest
at
the
said
rate)
payable
semi-annually
on
the
1st
days
of
February
and
August
in
each
year
during
the
currency
of
the
bonds
upon
surrender
of
the
coupons
attached
thereto.”
Appellant
commenced
to
operate
the
building
on
July
1,
1929,
and
by
December
1,
1932,
the
payment
of
interest
was
in
arrears
and
has
remained
so
at
all
times
material
hereto.
The
consequent
items
of
compound
interest
disallowed
by
the
Minister
were
in
1946,
$24,395.87,
in
1947,
$27,834.31
and
in
1948,
$31,482.10.
The
bonds
were
in
denominations
of
$100
each,
but
were
sold
at
a
discount
of
$1
and
a
brokerage
fee
of
$9
per
bond
was
charged.
The
appellant,
therefore,
realized
only
$90
in
cash
from
the
sale
of
each
bond.
The
Minister,
under
the
provisions
of
Section
5(1)
(b)
of
the
Income
War
Tax
Act
(R.S.C.
1927,
c.
97)
allowed
a
deduction
of
simple
interest
at
6%
on
the
$90,
but
disallowed
the
above
amounts
of
compound
interest.
Section
5(1)
(b)
provides:
“5.
(1)
‘Income’
as
hereinbefore
defined
shall
for
the
purposes
of
this
Act
be
subject
to
the
following
exemptions
and
deductions
:
(b)
Such
reasonable
rate
of
interest
on
borrowed
capital
used
in
the
business
to
earn
the
income
as
the
Minister
in
his
discretion
may
allow
notwithstanding
the
rate
of
interest
payable
by
the
taxpayer,
but
to
the
extent
that
the
interest
payable
by
the
taxpayer
is
in
excess
of
the
amount
allowed
by
the
Minister
hereunder,
it
shall
not
be
allowed
as
a
deduction
and
the
rate
of
interest
allowed
shall
not
in
any
case
exceed
the
rate
stipulated
for
in
the
bond,
debenture,
mortgage,
note,
agreement
or
other
similar
document,
whether
with
or
without
security,
by
virtue
of
which
the
interest
is
payable.’’
That
the
‘‘interest
on
overdue
interest’’
provided
for
under
the
indenture
and
here
referred
to
as
compound
interest
is
a
payment
for
a
‘‘retention
.
..
of
a
sum
of
money’’
and,
therefore,
as
the
appellant
submits,
interest
as
defined
in
Halsb
ury’s
Laws
of
England,
2nd
ed.,
Vol.
23,
p.
174,
para.
253,
and
as
such
it
is
often
provided
for
in
agreements
for
the
lending
of
money,
may
be
readily
accepted.
It
can
also
be
conceded
that
interest
may
be
deducted
in
the
computation
of
income
as,
indeed,
under
Section
5(1)
(b)
the
Minister
has
here
allowed
a
deduction
of
simple
interest.
It
is
the
contention
of
the
appellant
that
the
amounts
of
compound
interest
should
have
been
allowed
as
a
deduction
upon
the
same
basis.
This
submission
is
made
upon
two
bases:
(a)
that
the
Minister,
in
the
exercise
of
his
discretion,
having
allowed
interest
at
6%
upon
the
amount
realized
from
the
sale
of
the
bonds,
should
have
allowed
it
upon
the
overdue
interest,
as
the
statute
makes
no
difference
between
simple
and
compound
interest;
(b)
that
in
reality
there
is
here,
by
virtue
of
the
above
provision
in
the
indenture
of
mortgage
and
trust,
a
loan
by
the
bondholders
of
this
unpaid
interest
upon
which
the
company,
under
the
terms
of
that
indenture,
must
pay
6%
per
annum.
It
was
particularly
emphasized
that
the
interest
had,
in
fact,
here
been
capitalized.
The
appellant
cited
In
re
Morris
(1922),
91
L.J.
Ch.
188.
There
the
mortgage
provided
for
the
payment
‘‘of
£40,000
with
compound
interest
for
the
same
at
the
rate
of
£4
10s.
Od.
per
cent
per
annum
.
.
.’’.
The
issue
turned
upon
whether
the
overdue
interest
was
capitalized
and
became
part
of
the
capital
or
remained
as
interest.
It
was
held
that
the
interest
was
not
capitalized.
After
pointing
out
that
as
a
matter
of
practice
or
of
bookkeeping
it
would
be
treated
as
capital
and
in
fact
was
“commonly
and
conveniently
spoken
of
as
capitalizing
the
interest’’,
Lord
Sterndale
stated
at
p.
192:
“I
do
not
think
that
these
words
‘compound
interest
with
yearly
rests’
at
all
necessarily
show,
or
indeed
do
show,
that
the
mortgagors
intended
that
any
unpaid
interest
should
become
capital
for
all
purposes,
.
.
.
I
think
that
the
word
‘capitalization’
used
in
many
of
the
books
quoted
is
a
convenient
word,
but
for
the
purposes
for
which
it
has
been
used
in
the
argument
before
us
it
is
a
fallacious
word,
because
it
is
taken
as
referring
to
capitalization
for
all
purposes,
income
tax
and
otherwise.
I
do
not
think
that
is
the
meaning
of
the
word.
I
think,
not
to
beg
the
question,
that
when
these
sums
come
to
be
paid,
at
the
end
of
the
time
when
payment
off
of
the
mortgages
is
made,
although
interest
has
been
charged
upon
them,
and
although
as
a
matter
of
bookkeeping,
they
have
been
from
time
to
time
added
to
the
capital,
they
do
not
cease
to
be
interest
on
money;
that
is
to
say,
they
are
overdue
interest
upon
which
interest
has
been
paid.”
It
is
not
suggested
that
this
so-called
capitalization
effected
a
payment
of
the
interest
and,
in
fact,
it
would
seem
that
the
parties
intended
no
more
by
this
provision
than
to
add
to
the
obligation
of
the
appellant
a
liability
to
pay
interest
upon
overdue
interest.
The
position
upon
this
point
is
similar
to
that
described
by
Lord
Thankerton
:
‘In
my
opinion
there
was
no
discharge
of
the
debtor’s
liability
for
the
overdue
interest
and
the
result
of
the
arrangement
was
the
improvement
of
the
security,
and
an
increased
liability
for
interest
by
the
overdue
interest
being
made
to
carry
interest.’’
Inland
Revenue
Commissioners
v.
Oswald,
[1945]
A.C.
360
at
369.
The
indenture
of
mortgage
and
trust,
with
respect
to
the
interest
as
it
becomes
due
and
unpaid,
does
not,
either
by
express
terms
or
necessary
implication,
provide
that
while
it
remains
unpaid
the
bondholders
should
be
lenders
and
the
appellant
a
borrower
thereof.
It
is
because
of
the
absence
of
this
relationship
of
lender
and
borrower,
essential
to
the
application
of
Section
5(1)
(b),
that
the
appellant’s
submission
must
fail.
It
is
true
there
is
a
covenant
to
pay
interest
upon
overdue
interest
in
the
indenture,
but
that
covenant
becomes
operative
only
on
a
default
of
a
payment
of
interest
on
the
principal
sum.
There
is,
with
respect
to
the
principal
sum
of
$550,000,
the
relationship
of
lender
and
borrower,
but,
as
to
the
interest,
it
is
difficult
to
find
any
other
relationship
than
that
of
debtor
and
creditor,
particularly
as
the
language
in
the
indenture
goes
no
further
than
to
say
‘‘and
interest
on
overdue
interest
at
the
said
rate’’.
In
the
circumstances,
there
is
not
here
present
that
relationship
of
lender
and
borrower
contemplated
in
Section
5(1)
(b).
M.N.R.
v.
T.
E.
McCool
Ltd.,
[1950]
8.C.R.
80;
[1949]
C.T.C.
395.
The
appellant
further
submits
that
this
item
of
compound
interest
ought
to
be
allowed
as
a
deduction
under
Section
6(1)
(a),
the
relevant
portions
of
which
read
:
“6.
(1)
In
computing
the
amount
of
the
profits
or
gains
to
be
assessed,
a
deduction
shall
not
be
allowed
in
respect
of
(a)
disbursements
or
expenses
not
wholly,
exclusively
and
necessarily
laid
out
or
expended
for
the
purpose
of
earning
the
income,
(b)
any
outlay,
loss
or
replacement
of
capital
or
any
payment
on
account
of
capital
or
any
depreciation,
..
.’’.
In
M.N.R.
v.
The
Dominion
Natural
Gas
Company
Limited,
[1941]
S.C.R.
19;
[1940-41]
C.T.C.
155,
this
Court
disallowed
a
deduction
for
legal
expenses
incurred
in
defending
its
[sic]
right
to
supply
natural
gas
to
the
inhabitants
of
a
portion
of
the
City
of
Hamilton.
Sir
Lyman
Duff,
C.J.,
with
whom
Davis,
J.
concurred,
was
of
the
opinion
that
it
was
a
capital
expenditure,
while
Crocket,
J.,
Hudson,
J.,
and
Kerwin,
J.
(now
C.J.),
held
that
this
expenditure
could
not
be
allowed
as
a
deduction
because
it
did
not
come
within
the
scope
of
the
test
applied
in
Robert
Addie
&
Sons’
Collieries,
Ltd.
v.
Commissioners
of
Inland
Revenue,
[1924]
S.C.
231
at
235:
'What
is
‘money
wholly
and
exclusively
laid
out
for
the
purposes
of
the
trade’
is
a
question
which
must
be
determined
upon
the
principles
of
ordinary
commercial
trading.
It
is
necessary,
accordingly,
to
attend
to
the
true
nature
of
the
expenditure,
and
to
ask
oneself
the
question,
Is
it
a
part
of
the
Company’s
working
expenses;
is
it
expenditure
laid
out
as
part
of
the
process
of
profit
earning?
Or,
on
the
other
hand,
is
it
a
capital
outlay
;
is
it
expenditure
necessary
for
the
acquisition
of
property
or
of
rights
of
a
permanent
character,
the
possession
of
which
is
a
condition
of
carrying
on
its
trade
at
all?”
In
the
Addie
case
the
taxpayer
had,
under
a
lease
for
mining
the
coal,
the
right
of
access
and
passage
over
the
land
and
to
dump
thereon
debris.
It
was
also
contemplated
that
the
removal
of
the
coal
might
cause
damage
to
the
surface.
For
all
of
these
«compensation
was
to
be
paid
under
the
terms
of
the
lease.
The
amount
thereof
in
the
sum
of
£6,104
was
not
allowed
as
a
deduction
within
the
foregoing
test.
In
referring
to
the
first
item
of
access
and
passage
the
Lord
President
stated
at
p.
236
:
‘‘In
any
case,
the
expenditure
was
made
for
the
acquisition
of
an
asset
in
the
form
of
the
means
of
access
and
passage,
which
was
part
of
the
capital
establishment
of
the
Company,
and,
accordingly,
it
cannot
be
treated
as
other
than
a
capital
expense.
’
’
Lord
Davey
in
another
case
spoke
as
follows
:
"It
is
not
enough
that
the
disbursement
is
made
in
the
course
of,
or
arises
out
of,
or
is
connected
with,
the
trade,
or
is
made
out
of
the
profits
of
the
trade.
It
must
be
made
for
the
purpose
of
earning
the
profits.”
Strong
Co.,
Ltd.
v.
Woodifield,
[1906]
A.C.
448
at
453.
Not
only
was
there
no
borrowing
of
this
interest,
as
already
pointed
out,
but,
on
the
contrary,
the
compound
interest
was
payable
because
of
the
provision
of
the
indenture
of
mortgage
and
trust
already
quoted.
The
provision
for
its
payment
is
part
of
the
consideration
promised
by
the
appellant
in
order
to
secure
its
capital.
As
such,
it
is
an
expense
incurred
in
the
acquisition
of
capital,
rather
than
an
expenditure
to
earn
income—a
“payment
on
account
of
capital’’
within
Section
6(1)
(b),
rather
than
a
disbursement
‘‘wholly,
exclusively
and
necessarily
laid
out
or
expended
for
the
purpose
of
earning
the
income’’
under
Section
6(1)(a).
The
cases
cited
by
the
appellant
are
distinguishable
on
their
facts.
In
Reid’s
Brewery
Co.
v.
Male,
[1891]
2
Q.B.
1,
the
taxpayer
had
loaned
not
as
a
permanent
investment
but,
as
stated
in
paragraph
6
of
the
statement
of
facts,
‘‘only
in
connection
with
the
current
dealings
and
transactions
of
the
customer
with
the’’
taxpayer.
The
taxpayer
was
allowed
to
deduct
such
portion
thereof
as
he
eventually
wrote
off
as
bad
debts
as
‘‘money
wholly
or
exclusively
laid
out
or
expended
for
the
purposes
of
such
trade,
manufacture,
adventure
or
concern’’.
In
Vallambrosa
Rubber
Co.,
Ltd.
v.
Farmer
(1910),
5
T.C.
929,
the
taxpayer
had
an
estate
for
the
production
of
rubber
and
asked
a
deduction
of
£2,022
paid
out
for
“superintendence,,
allowances,
weeding,
and
so
on’’.
That
a
portion
of
such
should
be
allowed
as
an
expenditure
of
‘‘money
wholly
or
exclusively
laid
out
or
expended
for
the
purposes
of
such
trade
.
.
.’’
was
not
disputed.
The
real
issue
turned
upon
the
contention
of
the
taxing
authority
that
but
one-seventh
thereof
should
be
allowed
because
the
revenue
in
the
taxation
year
was
derived
from
one-
seventh
of
the
land.
This
contention
was
rejected.
In
British
Insulated
and
Helsby
Cables,
Ltd.
v.
Atherton,
[1926]
A.C.
205,
the
taxpayer
decided
to
set
up
a
superannuation
fund
for
its
employees
and
as
part
of
its
contribution
thereto
paid
£31,784
as
a
basis
or
a
nucleus
for
the
fund.
This
payment
was
not
allowed
as
“money
wholly
and
exclusively
laid
out
or
expended
for
the
purpose
of
such
trade,
manufacture,
adventure
or
concern’’,
but
was,
in
fact,
described
as
a
payment
in
the
nature
of
a
capital
expenditure.
In
Morgan
(Inspector
of
Taxes)
v.
Tate
de
Lyle,
Ltd.,
[1954]
2
All
E.R.
413,
the
taxpayer
expended
the
sum
of
£15,330
in
financing
a
campaign
in
opposition
to
nationalization.
Lord
Morton
of
Henryton,
at
p.
417,
stated:
“.
.
.
the
only
purpose
for
which
this
money
was
expended
was
to
prevent
the
seizure
of
the
business
and
assets
of
the
company,
..
y
and
at
p.
431
Lord
Reid
stated
:
‘‘The
respondent
company’s
expenditure
was
wholly
and
exclusively
laid
out
to
prevent
their
business
and
assets
being
taken
from
them,
.
.
.’’
Counsel
for
the
appellant
stressed
the
fact,
as
set
forth
in
his
factum,
that
‘‘without
the
moneys
which
were
loaned
by
the
bondholders
there
would
have
been
no
office
building
and
therefore
no
profits
or
gains’’,
from
which
fact
he
concludes:
‘‘It
follows
that
the
disbursements
required
to
pay
interest
on
the
borrowed
moneys
were
wholly,
exclusively
and
necessarily
laid
out
or
expended
for
the
purpose
of
earning
the
income.’’
His
statement
of
facts
or
premises
is
quite
accurate
and
the
amount
received
by
the
appellant
from
the
sale
of
its
bonds
has
been
accepted
by
the
Minister
as
‘‘borrowed
capital
used
in
the
business
to
earn
the
income’’
and
interest
at
6%
has
been
allowed
thereon
under
Section
5(1)
(b).
The
position
is
quite
different
with
respect
to
the
compound
interest,
with
which
we
are
here
concerned.
It
is
not
upon
borrowed
capital
to
earn
income,
but
rather
as
a
payment
provided
for
under
the
indenture
of
mortgage
and
trust
only
after
the
appellant,
as
borrower,
has
been
in
default
in
the
payment
of
interest.
It
is,
therefore,
a
payment
consequent
upon
the
appellant’s
default
in
the
payment
of
a
debt.
Moreover,
the
provision
for
the
payment
of
this
interest
does
not
nor
does
it
purport
to
prevent
the
bondholders
taking
proceedings
consequent
upon
the
nonpayment
of
the
interest.
It
was
not,
therefore,
an
expenditure
directed
to
save
the
property
in
any
sense
analogous
to
the
money
expended
in
the
Morgan
case
supra.
Counsel
for
the
appellant
submitted
that
the
compound
interest
could
be
allowed
under
Section
3,
notwithstanding
the
provisions
of
Sections
5
and
6.
He
pointed
out
that
Section
5
does
not
enumerate
all
of
the
deductions
that
are
accepted
in
commercial
accounting
and
by
the
Minister
under
the
Income
War
Tax
Act.
He
also
emphasized
the
absence
in
our
legislation
of
a
provision
similar
to
that
in
Section
159
of
the
English
Income
Tax
Act,
1842
(5
&
6
Vict.,
ce.
35)
(Section
209
of
the
English
Income
Tax
Act,
1918,
8
&
9
Geo.
V,
c.
40):
“In
arriving
at
the
amount
of
profits
or
gains
for
the
purpose
of
income
tax
(a)
no
other
deductions
shall
be
made
than
such
as
are
expressly
enumerated
in
this
Act.”
Income,
as
defined
under
Section
3,
is
arrived
at
upon
the
accepted
principles
of
commercial
accounting,
subject
to
the
provisions
of
the
statute.
While,
therefore,
all
deductions
are
not
specified
in
the
statute,
it
follows
that
in
so
far
as
it
contains
specific
provisions
relative
thereto
they
must
be
given
effect.
Even
if
it
be
accepted
that
the
compound
interest
is
a
payment
of
interest
on
capital,
it
could
not
be
allowed,
as
it
comes
within
the
specific
prohibition
of
Section
6(1)
(b),
already
quoted,
which
prohibits
a
deduction
of
‘‘any
payment
on
account
of
capital”.
This
general
prohibition
is
subject
to
an
exception
contained
in
Section
5(1)(b),
but,
as
already
pointed
out,
in
respect
to
this
compound
interest
there
is
not
here
present
that
relationship
of
lender
and
borrower
essential
to
bring
it
within
this
Section
5(1)
(b).
The
omission
of
any
such
provision
as
found
in
the
English
Act
above
quoted
does
not
affect
the
foregoing
or
assist
the
appellant.
The
appellant
also
contends
that
the
discount
of
$1
and
the
brokerage
charge
of
$9
were
expenses
chargeable
to
capital
and,
therefore,
that
it
should
be
allowed
interest
thereon
as
the
Minister
did
allow
interest
on
the
90%
of
the
face
value
of
the
bonds
under
Section
5(1)
(b).
In
principle
there
does
not
appear
to
be,
so
far
as
this
case
is
concerned,
any
difference
between
the
discount
and
the
commission.
They
were
both
expenses
incurred
in
the
acquisition
of
capital
rather
than
in
the
earning
of
income
and,
as
such,
they
were
not
different
in
character
from
the
expenses
incurred
in
the
refunding
or
refinancing
of
the
capital
indebtedness
in
Montreal
Coke
and
Manufacturing
Co.
v.
M.N.R.,
[1944]
A.C.
126,
where,
at
p.
134
[[1944]
C.T.C.
94,
at
p.
100],
Lord
Macmillan
stated:
“It
was
conceded
in
the
courts
in
Canada,
and,
in
any
event,
it
is
clear,
that
the
expenses
incurred
by
the
appellants
in
originally
borrowing
the
money
represented
by
the
bonds
subsequently
redeemed
were
properly
chargeable
to
capital
and
so
were
not
incurred
in
earning
income.
If
the
bonds
had
subsisted
to
maturity
the
premiums
and
expenses
then
payable
on
redemption
would
plainly
also
have
been
on
capital
account.
Why,
then,
should
the
outlays
in
connexion
with
the
present
transactions,
compendiously
described
as
‘refunding
operations’,
not
also
fall
within
the
same
category?
Their
Lordships
are
unable
to
discern
any
tenable
distinction.”
These
items
of
discount
and
commission
being
capital
expenditures
made
for
the
purpose
of
obtaining
capital,
interest
thereon
cannot
be
allowed
by
the
Minister
under
Section
5(1)
(b),
where
he
is
restricted
by
the
provisions
thereof
to
allowing
interest
upon
''borrowed
capital
used
in
the
business
to
earn
income’’.
This
distinction
is
emphasized
by
Lord
Macmillan
in
the
Montreal
Coke
case,
supra,
where
at
p.
134
[[1944]
C.T.C.
at
p.
100],
he
states
:
“The
statute,
in
Section
5(b),
significantly
employs
the
expression
‘capital
used
in
the
business
to
earn
the
income’,
differentiating
between
the
provision
of
capital
and
the
process
of
earning
profits.’’
Moreover,
these
items
having
been
capital
expenditures
for
the
acquisition
of
capital,
interest
thereon
could
not
be
classified
as
a
disbursement
"wholly,
exclusively
and
necessarily
laid
out
or
expended
for
the
purpose
of
earning
the
income’’
within
the
meaning
of
Section
6(1)
(a).
The
foregoing
is
not
affected
by
the
fact
that
the
appellant
filed
income
tax
returns
throughout
the
period
1929
to
1948
inclusive.
It
may
be,
as
the
appellant
contends,
that
under
a
statutory
provision
which
permits
of
two
or
more
constructions
that
should
be
preferred
which
is
in
accord
with
long
established
practice.
However
that
may
be,
the
present
provision
is
sufficiently
clear
that
once
these
expenditures
were
made
for
the
acquisition
of
capital,
in
order
that
the
building
might
be
constructed,
interest
thereon
could
not
be
allowed.
The
appellant
further
contends
that
the
Minister
has
failed
to
deduct
a
sufficient
amount
for
depreciation.
An
allowance
for
depreciation
is
provided
for
in
Section
6(1)(n).
In
making
the
assessment,
of
which
the
appellant
received
notice
under
date
of
March
6,
1950,
the
Department
reviewed
the
depreciation
as
computed
by
the
company
in
making
its
income
tax
returns
from
1929
to
date,
but
applied
the
provisions
of
Ruling
Number
15
dated
January
4,
1929,
only
from
the
year
1943.
It
is
not
disputed
that
had
the
provisions
of
Ruling
Number
15
been
applied
throughout
the
entire
period
larger
deductions
for
depreciation
would
have
been
made
in
the
relevant
years.
It
is,
therefore,
the
appellant’s
contention
that
‘‘the
respondent
has,
by
his
review
of
depreciation
since
1929,
opened
the
entire
matter
and
that
the
appellant
has
a
legal
right
to
have
its
depreciation
reviewed
in
the
light
of
Ruling
No.
15”.
Under
Section
6(1)
(n)
only
such
an
amount
may
be
allowed
by
way
of
depreciation
as
the
Minister,
in
his
discretion,
may
allow.
As,
therefore,
the
Minister
has
exercised
his
discretion,
in
order
for
the
appellant
to
succeed
it
must
show
either
that
the
Minister
has
acted
‘‘manifestly
against
sound
and
fundamental
principles’’
(Pioneer
Laundry
and
Dry
Cleaners,
Limited
v.
M.N.R.,
[1940]
A.C.
127),
or,
as
otherwise
stated,
he
has
failed
to
exercise
his
discretion
‘‘bona
fide,
uninfluenced
by
irrelevant
considerations
and
not
arbitrarily
or
illegally’’
(D.
R.
Fraser
and
Company,
Limited
v.
M.N.R.,
[1949]
A.C.
24
at
36).
The
Minister
in
this
case
reviewed
the
depreciation
allowances
asked
by
the
appellant
throughout
the
entire
period
of
its
existence
and
has,
in
computing
the
depreciation
allowance
for
the
relevant
years,
accepted
the
appellant’s
computation
thereof
for
the
earlier
years
and
applied
Ruling
Number
15
in
the
later
years.
The
suggestion
is
that
this
discloses
he
has
acted
in
an
arbitrary
or
discriminatory
manner.
It
is
not
suggested
that
the
Minister
has
not
taken
all
relevant
circumstances
into
account
and,
apart
from
evidence
in
support
thereof,
it
would
appear
that
the
mere
fact
that
he
has
so
determined
depreciation
does
not
establish
that
he
has
exercised
his
discretion
in
any
arbitrary,
discriminatory
or
illegal
manner.
In
this
connection
it
is
important
to
observe
that
Ruling
Number
15
is
not
a
statutory
provision,
but
rather
a
circular
to
provide
direction
and
assistance
to
the
officials
of
the
Department.
In
the
Pioneer
Laundry
case,
supra,
the
taxpayer
had
computed
depreciation
in
accord
with
the
provisions
of
certain
circulars
and
contended
that
the
Minister
had,
in
the
preparation
of
these
circulars,
exercised
his
discretion.
Their
Lordships
of
the
Privy
Council
disposed
of
this
contention
at
p.
134
as
follows
:
‘‘
The
amount
of
depreciation
claimed
by
the
appellant
company
in
its
statutory
return
was
in
conformity
with
the
rates
stated
in
certain
circulars
issued
by
the
respondent
to
local
officers
of
the
department
(Exhibits
3,
4,
5
and
6),
and
the
appellants
sought,
because
of
their
being
made
available
to
the
public,
to
have
them
treated
as
an
exercise
by
the
respondent
of
his
statutory
discretion
as
to
depreciation.
Their
Lordships
agree
with
the
view
of
Crocket
and
Hudson,
JJ.,
that
these
departmental
circulars
are
for
the
general
guidance
of
the
officers,
and
cannot
be
regarded
as
the
exercise
of
his
statutory
discretion
by
the
respondent
in
any
particular
case.”
It
would
seem
that
rigid
adherence
to
such
a
circular
would
defeat
the
intention
of
Parliament
in
enacting
Section
5(1)
(a),
which
contemplates
that
each
taxpayer
is
entitled
to
have
the
Minister
allow
such
an
amount
for
depreciation
as,
after
an
examination
of
all
relevant
factors,
he
may,
in
the
particular
case,
in
the
exercise
of
his
discretion,
determine.
In
the
foregoing
case
the
Minister
disallowed
certain
items
of
depreciation,
in
referring
to
which
their
Lordships
of
the
Privy
Council,
at
p.
137,
stated:
‘.
.
.
the
reason
given
for
the
decision
was
not
a
proper
ground
for
the
exercise
of
the
Minister’s
discretion,
and
that
he
was
not
entitled,
in
the
absence
of
fraud
or
improper
conduct,
to
disregard
the
separate
legal
existence
of
the
appellant
company,
and
to
inquire
as
to
who
its
shareholders
were
and
its
relation
to
its
predecessors.”
The
other
cases
referred
to
by
counsel
for
the
appellant
are
all
distinguishable
from
that
here
under
consideration
on
the
basis
either
that
the
Minister
had
failed
to
make
any
allowance
and,
therefore,
to
exercise
any
discretion,
or
that
he
had
erred
in
relation
to
the
facts.
In
the
present
case
the
Minister
has
admittedly
reviewed
the
depreciation
and,
in
the
exercise
of
his
discretion,
decided
that
Ruling
Number
15
should
not
be
applied
to
the
entire
period.
As
already
intimated,
this
does
not
justify
a
conclusion
that
he
has
acted
in
either
an
arbitrary
or
a
discriminatory
manner.
The
judgment
of
the
Exchequer
Court
should
be
affirmed
and
the
appeal
dismissed
with
costs.
LOCKE,
J.
(concurred
in
by
Rand
and
Abbott,
el
J.)
:—This
is
an
appeal
from
a
judgment
of
the
President
of
the
Exchequer
Court,
by
which
the
appeal
of
the
present
appellant
from
a
judgment
of
the
Income
Tax
Appeal
Board
was
dismissed
and
the
cross-appeal
of
the
Minister
from
that
decision
allowed.
The
appellant
is
the
owner
of
the
Stock
Exchange
Building,
situate
at
the
corner
of
Howe
and
Pender
Streets
in
Vancouver.
The
building
was
constructed
in
the
year
1929
at
a
cost
of
approximately
$875,000,
its
construction
being
financed
in
part
by
moneys
realized
from
the
sale
of
debentures
issued
by
the
appellant
and
secured
by
a
deed
of
mortgage
and
trust
in
favour
of
the
Toronto
General
Trusts
Corporation.
These
bore
interest
at
the
rate
of
6%
per
annum,
payable
semi-annually,
and
interest
on
overdue
interest
was
payable
at
the
same
rate.
The
debentures
were
either
underwritten
or
sold
by
a
firm
of
investment
bankers.
The
price
to
the
public
was
$99
for
each
$100
debenture
but
the
amount
received
by
the
appellant
from
the
underwriters
in
respect
of
each
was
only
$90.
As
an
investment
the
venture
proved
to
be
unsuccessful
and,
for
a
long
period
of
years,
the
appellant
was
unable
to
pay
the
interest
charges
in
full.
As
of
December
31,
1945,
debentures
in
the
principal
amount
of
$534,400
were
outstanding
and
interest
was
in
arrear
in
an
amount
approximating
$421,000.
The
appeals
concern
assessments
made
in
respect
of
the
taxation
years
1946,
1947
and
1948.
In
1946
the
appellant
claimed
in
its
return,
as
an
expense
of
operation,
debenture
interest
in
the
sum
of
$56,459.87,
this
including
interest
upon
interest
in
default
in
the
amount
of
$24,395.87.
For
the
year
1947
it
claimed
a
deduction
for
interest
in
the
amount
of
$59,898.31,
which
included
$27,834.31
compound
interest.
For
the
year
1948
the
amount
claimed
as
a
deduction
was
$62,477.30
for
debenture
interest,
which
included
$28,382.58
compound
interest.
The
amounts
claimed
as
deductions
for
compound
interest
were
in
each
case
disallowed.
During
each
of
these
years
the
appellant
also
claimed,
as
a
deduction
from
income,
interest
on
the
face
amount
of
the
debentures
and
this
deduction
was
allowed
only
on
the
principal
amount
of
$90
for
each
$100
debenture,
being
the
amount
received
by
the
company
as
the
proceeds
of
their
sale.
The
Minister
disallowed
the
claim
for
a
deduction
in
respect
of
the
compound
interest
which
became
payable
in
each
of
the
years
in
question,
on
the
ground
that
it
was
not
interest
on
borrowed
money
used
in
the
business
to
earn
the
income,
within
the
meaning
of
paragraph
(b)
of
subsection
(1)
of
Section
5
of
the
Income
War
Tax
Act.
The
appeal
against
this
portion
of
the
assessment
was
dismissed
by
the
Income
Tax
Appeal
Board
and
by
the
judgment
of
the
Exchequer
Court.
The
Appeal
Board,
however,
allowed
the
appeal
as
to
the
principal
amount
upon
which
the
appellant
was
entitled
to
reckon
interest
as
a
deduction,
finding
that
the
company
was
entitled
to
compute
simple
interest
on
$99
for
each
$100
debenture
issued,
being
the
amount
at
which
they
were
sold
to
the
public.
The
learned
President
has
allowed
the
cross-appeal
of
the
Minister
in
respect
to
this
portion
of
the
assessment.
Dealing
first
with
the
claim
for
the
allowance
of
the
compound
interest
as
a
deduction,
the
right
to
this
must
be
based
upon
Section
5(1)
(b),
referred
to
by
the
Minister,
which
reads:
“5.
(1)
‘Income’
as
hereinbefore
defined
shall
for
the
purpose
of
this
Act
be
subject
to
the
following
exemptions
and
deductions
:
(b)
Such
reasonable
rate
of
interest
on
borrowed
capital
used
in
the
business
to
earn
the
income
as
the
Minister
in
his
discretion
may
allow
notwithstanding
the
rate
of
interest
payable
by
the
taxpayer,
but
to
the
extent
that
the
interest
payable
by
the
taxpayer
is
in
excess
of
the
amount
allowed
by
the
Minister
hereunder,
it
shall
not
be
allowed
as
a
deduction
and
the
rate
of
interest
allowed
shall
not
in
any
case
exceed
the
rate
stipulated
for
in
the
bond,
debenture,
mortgage,
note,
agreement
or
other
similar
document,
whether
with
or
without
security,
by
virtue
of
which
the
interest
is
payable.’’
In
my
opinion,
the
appellant
was
entitled
to
claim
as
of
right
such
rate
of
interest
on
borrowed
capital
used
in
the
business
as
the
Minister
in
his
discretion
might
allow.
That
discretion
was
exercised
by
allowing
the
rate
fixed
in
the
mortgage
to
the
extent
that
it
was
payable
upon
the
principal
amount
which
the
company
received
as
the
proceeds
of
the
sale
of
its
debentures.
The
question
to
be
determined
is
whether
the
interest
in
default
upon
which,
by
the
terms
of
the
mortgage,
the
borrower
was
obligated
to
pay
interest
is
“borrowed
capital
used
in
the
business
to
earn
the
income’’,
within
the
meaning
of
the
language
of
the
subsection.
In
my
opinion
it
was
not.
The
section
appears
to
me
to
contemplate
the
allowance
of
the
interest
on
capital
borrowed
for
the
purpose
of
enabling
the
enterprise
of
the
taxpayer
to
be
carried
on
and,
in
respect
of
such
moneys,
to
justify
the
allowance
the
relation
of
borrower
and
lender
must
be
created
at
the
outset
between
the
taxpayer
and
the
person
to
whom
the
interest
is
payable.
In
the
present
matter,
there
was
no
such
borrowing
of
the
interest
in
default:
it
was
merely
a
debt
which
became
payable
by
reason
of
the
inability
of
the
borrower
to
pay
the
interest
as
it
fell
due.
It
was
not,
in
any
sense,
capital
used
in
the
business
to
earn
the
income,
within
the
meaning
of
the
subsection.
The
second
question
to
be
determined
is
whether
the
appellant
was
entitled
to
deduct
simple
interest
upon
the
face
amount
of
the
outstanding
debentures
or
upon
90%
of
that
amount,
being
the
sum
actually
received
by
it
and
used
in
its
business.
It
is
not
clear
from
the
evidence
whether
the
debentures
were
bought
outright
by
the
underwriters
at
90%
of
their
face
value,
or
whether
the
underwriters
agreed
to
purchase
and
did
purchase
such
of
the
debentures
as
were
not
purchased
by
the
public
at
that
rate.
At
the
trial,
the
Crown
were
without
information
on
the
point
and
counsel
for
the
appellant
contented
himself
with
saying
that
he
agreed
with
a
statement
appearing
in
the
reasons
for
judgment
of
the
Income
Tax
Appeal
Board,
to
the
effect
that
the
underwriters
were
paid
$9
out
of
every
$99
received
from
the
public
to
cover
its
charges
of
underwriting
the
issue.
While
this
would
not
be
underwriting
in
the
generally
accepted
meaning
of
that
term,
I
think,
for
the
decision
of
the
point
in
issue,
that
it
makes
no
difference
whether
it
was
the
one
or
the
other.
It
was
shown
by
the
evidence
of
the
appellant’s
accountant
that
in
the
year
1929
the
appellant,
by
its
return,
sought
to
write
off
$18,333.34
as
part
of
what
was
called
‘‘bond
discount’’
and
further
portions
of
the
total
discount
of
$55,000
in
the
years
1931
to
1934
and
that
all
of
these
claims
were
disallowed
by
the
Department.
The
ruling
of
the
Department
at
that
time
appears
to
me
to
be
in
accordance
with
what
was
later
decided
in
this
Court
in
the
case
of
Montreal
Light,
Heat
and
Power
Company
v.
M.N.R.,
[1942]
S.C.R.
89;
[1942]
C.T.C.
1.
Expenses
of
the
same
general
nature
were
there
disallowed
as
proper
deductions
from
income.
Sir
Lyman
Duff,
C.J.,
and
Kerwin,
J.
(as
he
then
was)
considering
them
to
have
been
payments
on
account
of
capital
within
the
meaning
of
that
expression
in
Section
6(1)
(b)
of
the
Act,
and
this
view
was
not
dissented
from
in
the
judgment
of
the
Judicial
Committee
([1944]
A.C.
127
at
134;
[1944]
C.T.C.
94
at
101).
These
are
expenditures
of
a
capital
nature
which,
in
a
properly
prepared
balance
sheet,
may
be
amortized
out
of
income
only
after
taxation
and
cannot
be
deducted
in
computing
income.
It
is
my
opinion
that
the
borrowed
capital
referred
to
in
Section
5(1)
(b)
is
the
amount
of
money
borrowed
and
not
the
extent
of
the
obligation
ineurred
in
order
to
borrow
it.
In
this
ease,
on
the
security
of
these
debentures,
the
appellant
was
able
to
borrow
90%
of
their
face
amount
and
it
was
that
amount
alone
which
was
used
in
the
business
and
upon
which
interest
may
be
allowed
as
a
proper
deduction
from
income.
The
facts
upon
which
the
appellant
bases
its
claim
in
respect
of
allowances
for
depreciation
of
the
building
and
the
equipment
are
set
forth
in
detail
in
the
judgment
appealed
from.
I
respectfully
agree
with
the
conclusion
of
the
learned
President
that
the
question
of
the
propriety
of
the
allowances
made
by
the
Department
for
depreciation
between
the
years
1929
and
1945
cannot
be
considered
in
the
present
appeal,
which
is
concerned
only
with
the
allowances
for
the
years
1946,
1947
and
1948.
Claims
for
depreciation
of
buildings
or
equipment
as
a
deduction
from
income
must
be
based
upon
the
provisions
of
Section
6(1)(n)
of
the
Income
War
Tax
Act
which,
so
far
as
relevant,
reads:
u
6.
(1)
In
computing
the
amount
of
the
profits
or
gains
to
be
assessed,
a
deduction
shall
not
be
allowed
in
respect
of
(n)
depreciation,
except
such
amount
as
the
Minister
in
his
discretion
may
allow.
’
1
I
find
no
evidence
in
this
record
to
support
a
contention
that,
in
respect
to
the
three
years
in
question,
the
Minister
failed
to
exercise
the
discretion
vested
in
him
in
good
faith
and
upon
proper
principles.
The
appeal
should
be
dismissed
with
costs.
Email this Content