THURLOW,
J.:—This
is
an
appeal
from
re-assessments
of
income
tax
for
the
years
1960,
1961
and
1962.
In
respect
of
each
of
these
years
there
is
in
issue
the
claim
of
the
appellant
to
deduct,
in
the
computation
of
its
income
for
income
tax
purposes,
the
interest
paid
by
the
appellant
on
an
amount
of
$3,485,000
borrowed
by
it
on
September
4,
1959
from
Caus
Investment
and
Finance
Company
Limited,
a
subsidiary
of
the
appellant,
allegedly
for
the
purpose
of
earning
income
from
the
appellant’s
business.
The
Minister’s
position
on
this
issue
is
that
the
borrowed
money
was
not
used
to
earn
income
from
the
appellant’s
business
or
property
but
was
used
to
finance
the
operations
of
World
T.
and
I.
Corporation,
another
subsidiary
of
the
appellant.
Issues
were
also
raised
on
the
right
of
the
appellant
to
deduct
interest
paid
on
a
further
amount
of
$185,000
borrowed
by
the
appellant
from
Caus
Investment
and
Finance
Company
Limited
on
September
4,
1960
and
on
a
further
amount
of
$180,000
borrowed
by
the
appellant
from
Caus
Investment
and
Finance
Company
Limited
on
September
4,
1961
but
the
evidence
showed
that
these
two
borrowed
amounts
were
used
as
working
capital
in
the
appellant’s
business
and
the
Minister’s
case
with
respect
to
the
deductibility
of
the
interest
thereon
was
abandoned
by
counsel
in
the
course
of
the
argument.
The
appeal
on
these
issues
accordingly
succeeds.
In
respect
of
the
year
1961
there
is
a
further
issue
as
to
the
right
of
the
appellant
to
deduct
a
loss
of
$96,364
on
foreign
exchange
which
is
alleged
to
have
been
incurred
in
paying
to
Schenley
Industries
Inc.,
of
which
the
appellant
is
a
subsidiary,
a
debt
payable
in
United
States
funds
for
inventories,
supplies
and
other
items
of
a
current
nature.
On
this
issue
the
Minister’s
position
is
that
the
loss
was
not
a
business
loss
deductible
from
income
under
the
provisions
of
Section
12(1)
(a)
but
was
a
loss
on
account
of
capital
the
deduction
of
which
is
prohibited
by
Section
12(1)
(b)
of
the
Income
Tax
Act.
The
material
before
the
Court
on
both
of
the
issues
which
remain
to
be
determined
consists
in
part
of
admissions
contained
in
the
notice
of
appeal
and
reply
and
in
an
agreed
statement
of
facts
and
in
part
of
oral
and
documentary
evidence
adduced
in
the
course
of
the
trial.
The
appellant
was
incorporated
in
1945
under
the
Companies
Act
of
Canada
by
the
name
of
Canadian
Schenley
Limited
and
since
then
has
carried
on
the
business
of
distilling,
aging,
blending,
bottling,
labelling
and
selling
Canadian
whiskeys
and
on
occasion
buying
and
selling
other
spirits.
During
the
years
here
in
question
its
business
was
carried
on
only
in
Canada.
The
name
of
the
appellant
was
changed
to
D.W.S.
Corporation
in
1964.
World
T.
and
I.
Corporation
is
a
foreign
corporation
organized
in
1959
with
its
principal
office
in
New
York.
During
the
years
in
question
it
was
engaged
in
the
business
of
buying
Canadian
whiskeys
from
the
appellant
and
selling
them
in
the
United
States
and
elsewhere,
other
than
in
Canada,
and
of
buying
and
selling
throughout
the
world
certain
types
of
whiskeys
distilled
in
the
United
States
and
Scotch
whiskeys
which
it
matured
itself
or
which
it
purchased
as
matured
whiskeys.
Caus
Investment
and
Finance
Company
Limited
was
incorporated
under
the
Companies
Act
of
Canada
and
was
an
investment
company.
The
immediate
object
of
the
transactions
of
September
4,
1959
was
to
arrange
the
financing
of
the
purchase
by
World
T.
and
I.
Corporation
in
Scotland
of
an
exceptionally
large
quantity
of
unmatured
Scotch
fillings.
These,
it
was
intended,
would
remain
in
Scotland
for
several
years
during
which
the
maturing
process
would
be
going
on
and
warehousing
and
other
costs
would
be
accumulating
and
when
withdrawn
from
the
warehouse
would
be
blended
and
imported
into
the
United
States
and
there
bottled
and
sold.
In
the
transactions
in
question
the
appellant
borrowed
$3,485,000
in
United
States
funds
from
Caus
Investment
and
Finance
Company
Limited,
which
was
evidenced
by
a
promissory
note
payable
on
demand
with
interest
at
six
per
cent
and
thereupon
advanced
the
amount
so
borrowed
together
with
an
additional
$15,000
in
United
States
funds
derived
from
other
sources
to
World
T.
and
I.
Corporation
which
used
it
to
pay
for
the
Scotch
fillings.
The
loan
to
World
T.
and
I.
Corporation
was
also
evidenced
by
a
demand
promissory
note
which
was
dated
at
New
York
and
was
silent
as
to
interest.
A
journal
entry
of
the
appellant
dated
September
1959,
which
was
offered
in
evidence
(Exhibit
4)
without
oral
explanation
or
elaboration
as
to
how
it
came
to
be
made
or
who
made
it,
recorded
the
borrowing
of
$3,321,641
by
the
appellant
from
Caus
Investment
and
Finance
Company
Limited
and
the
loaning
of
it
to
World
T.
and
I.
Corporation
with
the
following
explanation:
To
record
portion
of
demand
loan
receivable
from
World
T
&
I
and
demand
loan
payable
to
Cans
Investment
resulting
from
the
loan
by
Caus
to
Cdn
Schenley
of
$3,485,000
U.S.
Funds
which
in
turn
was
loaned
by
Cdn
Schenley
to
World
T
&
I
Corp.
Loan
of
$3,485,000
U.S.
Funds
converted
at
411%6
to
arrive
at
$3,321,641.
Loan
from
Caus
bears
6%
interest,
loan
to
World
T
&
I
is
noninterest
bearing.
In
1963,
as
a
result
of
a
change,
the
precise
nature
of
which
was
not
explained,
in
the
revenue
laws
of
the
United
States
applicable
to
World
T.
and
I.
Corporation
a
decision
was
made
to
transfer
the
ownership
of
the
Scotch
fillings
to
the
appellant
and
in
August
of
that
year
this
was
done,
some
of
the
fillings
being
transferred
to
the
appellant
in
satisfaction
of
the
loan
obligation,
others
as
a
dividend
in
kind
and
the
remainder
by
a
reduction
of
the
capital
of
World
T.
and
I.
Corporation.
Thereafter
the
fillings
were
disposed
of
by
the
appellant
over
a
period
of
years
and
the
appellant
thus
became
the
recipient
of
the
revenues
from
their
sale.
In
the
latter
part
of
1963
a
payment
of
$10,000
as
remuneration
for
the
use
of
the
borrowed
money
was
made
by
World
T.
and
I.
Corporation
to
the
appellant
pursuant
to
an
agreement
set
out
in
a
letter
from
the
appellant
to
World
T.
and
I.
Corporation
dated
August
26,
1963
the
body
of
which
read
as
follows
:
Reference
is
made
to
conversations
which
we
have
had
relating
to
your
demand
loan
from
us,
dated
September
4th,
1959,
in
the
principal
amount
of
$3,500,000.00,
and
its
repayment
on
August
19th,
1963.
We
have
concurred
that
this
note,
being
payable
on
demand,
bore
no
other
fixed
date
of
maturity.
Also,
no
reference
to
interest
payable
on
said
note
was
indicated
thereon,
it
having
been
mutually
agreed
at
time
of
issuance
that
this
might
be
a
subject
for
discussion
at
a
later
date
and
the
subject
of
a
later
agreement.
As
stated
above,
you
have
discharged
the
principal
amount
of
said
indebtedness
on
August
19th,
1963.
Furthermore,
we
now
confirm
that
you
shall
compensate
us
in
full
for
the
use
of
this
money
by
paying
to
us,
in
addition
to
the
above-mentioned
principal
amount
of
$3,500,000.00,
interest
in
the
amount
of
$10,000.00.
We
also
confirm
that
our
receipt
of
said
payment
of
$10,000.00
shall
discharge
in
full
your
obligations
arising
out
of
said
demand
note.
For
reasons
given
by
you,
this
payment
of
$10,000.00
will
not
become
due
until
November
1st,
1963,
and
we
hereby
confirm
our
agreement
to
this
arrangement.
Please
acknowledge
your
concurrence
in
this
determination
by
signing
and
returning
the
enclosed
copy
of
this
letter.
In
the
same
month
of
August
1963
Caus
Investment
and
Finance
Company
Limited
was
wound
up
and
the
indebtedness
of
the
appellant
to
it
was
extinguished
on
the
distribution
of
its
assets
to
the
appellant
as
its
sole
shareholder.
In
each
of
the
years
1960,
1961
and
1962,
however,
the
appellant
had
paid
Caus
Investment
and
Finance
Company
Limited
an
amount
in
the
vicinity
of
$200,000
as
interest
on
the
loan
and
it
is
the
deductibility
of
these
sums
in
computing
the
appellant’s
income
for
tax
purposes
that
is
in
issue.
I
should
add
at
this
point
that
there
is
evidence
given
by
Mr.
Arthur
W.
Gilmour,
a
chartered
accountant,
who
as
financial
adviser
and
consultant
on
Canadian
tax
matters
to
the
Schenley
companies
participated
in
meetings
of
senior
officers
of
the
appellant
and
its
parent
company,
that
the
senior
officers
of
the
various
subsidiary
companies
of
the
Schenley
group
were
jealous
of
the
profit
showings
of
the
companies
for
which
they
were
responsible
and
that
it
was
the
policy
of
the
senior
officers
of
the
parent
company
to
allocate
revenues
to
each
subsidiary
company
so
that
it
would
be
able
to
reflect
in
its
profit
and
loss
statements
its
fair
share
of
the
profits
or
losses
arising
from
ventures
to
which
more
than
one
of
them
had
in
some
way
contributed.
He
went
on
to
say
that
at
the
time
of
the
making
of
the
loan
to
World
T.
and
I.
Corporation
no
decision
had
been
made
as
to
whether
the
fillings
would
be
marketed
in
the
United
States
by
that
company
and
that
no
decision
had
been
made
with
respect
to
a
rate
of
interest
to
be
paid
for
the
use
of
the
money
since
the
venture
in
purchasing
the
whiskey
was
hazardous
and
its
results
were
not
predictable.
He
expressed
himself
as
sure,
however,
that
had
World
T.
and
I.
Corporation
held
the
fillings
to
maturity
and
marketed
them
the
appellant
would
have
pressed
in
the
councils
of
the
organization
for
interest
for
the
use
of
the
money
over
the
lengthy
period
involved.
The
witness
also
said
that
at
one
point
during
the
currency
of
the
loan
he
was
asked
to
make
a
report
on
the
reasons
for
the
reduced
state
of
the
appellant
company’s
earnings
which
reduction
was
in
part
due
to
the
fact
that
it
was
receiving
no
income
from
the
use
of
the
borrowed
money
but
was
paying
interest
on
its
own
loan
from
Caus
Investment
and
Finance
Company
Limited
at
six
per
cent
and
that
when
the
decision
was
made
that
the
fillings
should
be
transferred
to
the
appellant
it
was
considered
that
since
the
appellant
would
be
receiving
the
revenues
from
the
marketing
of
the
fillings
it
would
be
amply
reimbursed
for
the
use
of
the
money
during
the
time
it
was
on
loan
to
World
T.
and
I.
Corporation
and
that
the
president
of
the
appellant
was
well
satisfied
that
the
arrangement
afforded
satisfactory
remuneration
therefor.
Mr.
Gilmour
also
said
that
it
was
intended
at
the
time
of
the
making
of
the
loan
that
interest
would
be
charged
though
the
amount
or
rate
could
not
then
be
determined
and
that
it
was
he
who
recommended
in
1968
that
the
token
payment
of
$10,000
as
remuneration
be
paid.
In
the
view
I
take
of
the
matter
the
transaction
in
which
the
exceptional
quantity
of
Scotch
fillings
was
purchased
was
entirely
that
of
World
T.
and
I.
Corporation
for
its
own
account
and
there
was
at
that
time
neither
any
agreement
for
sharing
with
the
appellant
any
profits
or
losses
that
might
arise
from
the
venture
nor
any
agreement
to
remunerate
the
appellant
for
the
use
of
the
money
loaned
to
it
over
the
rather
lengthy
period
for
which
it
would
be
required
whether
at
a
particular
rate
of
interest
or
at
interest
the
rate
or
amount
of
which
would
be
determined
later
or
at
all.
The
appellant
as
the
owner
of
all
the
shares
of
World
T.
and
I.
Corporation
was
no
doubt
in
a
position
to
determine
what
World
T.
and
I.
Corporation
would
do,
and
might
either
by
the
exercise
of
that
power
or
by
demanding
payment
of
the
loan
put
World
T.
and
I.
Corporation
in
a
position
where
it
could
not
successfully
decline
to
pay
interest
but
in
the
way
matters
stood
throughout
the
relevant
period
there
was
as
between
the
two
corporations
no
right
accruing
to
the
appellant
to
interest
or
to
any
other
kind
of
remuneration.
On
this
point
I
regard
it
as
being
of
some
significance
that
in
referring
in
his
letter
of
August
26,
1963
to
what
occurred
at
the
time
of
the
loan
on
the
subject
of
interest
the
president
of
the
appellant
company
stated
that
it
was
agreed
that
interest
‘
"
might
be’’
a
subject
for
discussion
at
a
later
date
and
the
subject
of
a
later
agreement
and
did
not
use
an
unequivocal
expression
indicative
of
an
agreement
at
that
time
that
remuneration
in
some
form
was
to
be
paid.
This
to
my
mind
falls
short
of
saying
that
it
was
intended
at
the
time
either
that
interest
at
some
rate
was
to
be
paid
or
that
interest
was
to
be
charged.
It
is
also
of
significance
that
no
decision
had
been
made
as
to
who
would
market
the
fillings
when
they
were
matured
and
that
no
rate
of
interest
had
been
determined.
This
to
my
mind
indicates
that
the
whole
subject
of
remuneration
for
use
of
the
money
was
in
abeyance
and
that
no
decision
had
been
made
that
any
remuneration
would
be
allocated
or
paid.
Moreover,
Mr.
Gilmour’s
statement
that
it
was
intended
at
the
time
that
interest
would
be
charged
suffers
both
from
the
fact
that
it
was
made
in
response
to
a
leading
question
put
by
counsel
for
the
appellant
and
even
more
from
the
fact
that
it
is
an
expression
by
the
witness
of
a
conclusion
as
to
what
was
in
someone
else’s
mind
rather
than
a
statement
of
known
facts
from
which
the
Court
might
draw
a
conclusion
one
way
or
another
on
the
critical
point.
To
my
mind
this
is
not
acceptable
as
evidence
of
what
in
fact
was
intended.
Even
if
it
were
acceptable
as
evidence
of
someone’s
intention—the
witness
did
not
say
whose
intention
it
was—there
is
a
difference
between
someone’s
intention
to
charge
interest
at
some
undetermined
rate
at
some
later
time
and
a
present
arrangement
between
a
prospective
payor
and
payee
that
interest
at
some
reasonable
rate
having
regard
to
circumstances
and
relevant
considerations
will
be
paid.
Here
there
is,
in
my
view,
no
evidence
of
any
such
arrangement
binding
World
T.
and
I.
Corporation
during
the
relevant
period
to
pay
anything
whatever
as
remuneration
for
use
of
the
borrowed
money.
In
a
case
of
this
kind,
that
is
to
say,
one
in
which
the
taxpayer
is
not
engaged
in
a
business
which
itself
involves
the
borrowing
of
money
and
the
payment
of
interest
thereon,
the
deductibility
of
interest
in
computing
income
for
tax
purposes
turns
on
Section
11(1)
(c)
of
the
Income
Tax
Act
by
which
it
is
provided
that
:
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;
For
the
purpose
of
determining
the
present
issue
the
critical
words
of
the
section
are
‘‘borrowed
money
used
for
the
purpose
of
earning
income
from
a
business
or
property’’
and
the
question
which
they
raise
is
whether
in
the
circumstances
described
the
$3,485,000
in
United
States
funds
which
the
appellant
borrowed
from
Caus
Investment
and
Finance
Company
Limited
on
September
4,
1959
was
in
the
years
1960,
1961
and
1962
used
for
the
purpose
of
earning
income
from
(the
appellant’s)
business
or
property
when,
throughout
the
material
period,
the
borrowed
money
remained
on
loan
to
the
appellant’s
subsidiary,
World
T.
and
I.
Corporation,
with
no
agreement
in
effect
under
which
remuneration
for
the
use
of
the
money
was
being
earned
or
would
be
or
become
payable.
So
far
as
the
appellant’s
claim
to
deduct
the
interest
may
be
based
on
the
submission
that
the
borrowed
money
was
used
for
the
purpose
of
earning
income
from
the
appellant’s
business
the
matter,
in
my
view,
is
concluded
against
the
appellant
by
the
judgment
of
the
Supreme
Court
in
Canada
Safeway
Limited
v.
M.N.R.,
[1957]
S.C.R.
717;
[1957]
C.T.C.
335.
In
that
case
the
appellant
sought
to
deduct
interest
on
borrowed
money
used
to
purchase
shares
and
thus
to
acquire
control
of
a
company
which
was
one
of
its
suppliers.
By
securing
control
of
this
company
the
appellant
was
able
to
obtain
trading
advantages
over
competitors
which
resulted
in
enhanced
profits
from
the
appellant’s
business.
The
Court,
however,
held
the
interest
on
the
borrowed
money
not
deductible
not
alone
because
the
dividends
from
the
shares
would
constitute
exempt
income
but
also
because
the
borrowed
money
was
not
used
in
the
appellant’s
business.
With
respect
to
the
1947
and
1948
taxation
years,
to
which
the
Income
War
Tax
Act
applied,
Kerwin,
C.J:
speaking
for
himself
and
Taschereau,
J.
(as
he
then
was)
said
at
page
723
[p.
340]
:
Reliance
was
placed
upon
subsection
(1)
(b)
of
Section
5,
but
the
exemption
and
deduction
there
contemplated
of
"such
reasonable
rate
of
interest
on
borrowed
capital
used
in
the
business
to
earn
the
income
as
the
Minister
in
his
discretion
may
allow”
do
not
apply,
first,
because
the
money
borrowed
on
the
debentures
was
not
used
by
the
appellant
in
its
own
business
to
earn
the
income
and
Reference
was
then
made
to
Sections
11,
12
and
27
and
127(1)
of
The
1948
Income
Tax
Act
and
the
learned
judge
observed
at
page
724
[p.
342]
:
Generally
speaking,
these
enactments
have
the
same
effect
as
those
applicable
to
the
1947-1948
taxation
years
and,
if
anything,
the
definitions
included
in
the
Income
Tax
Act
clarify
the
situation.
Rand,
J.,
referring
to
Section
11(1)
(c)(i),
said
at
page
728
[p.
345]
:
The
language
in
(i)
“used
for
the
purpose
of
earning
income
from
a
business”
corresponds
with
that
of
Section
5(1)
(b)
of
the
repealed
Act
and
to
what
has
been
said
on
the
latter
there
is
nothing
to
be
added:
the
business
of
the
subsidiary
is
not
that
of
the
company.
Earlier
Rand,
J.
had
said
at
page
727
[p.
344]
:
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.
If
a
company
has
not
the
money
capital
to
commence
business,
why
should
it
be
allowed
to
deduct
the
interest
on
borrowed
money?
The
company
setting
up
with
its
own
contributed
capital
would,
on
such
a
principle,
be
entitled
to
interest
on
its
capital
before
taxable
income
was
reached,
but
the
income
statutes
give
no
countenance
to
such
a
deduction.
To
extend
the
statutory
deduction
in
the
converse
case
would
add
to
the
anomaly
and
open
the
way
for
borrowed
capital
to
become
involved
in
a
complication
of
remote
effects
that
cannot
be
considered
as
having
been
contemplated
by
Parliament.
What
is
aimed
at
by
the
section
is
an
employment
of
the
borrowed
funds
immediately
within
the
company’s
business
and
not
one
that
effects
its
purpose
in
such
an
indirect
and
remote
manner.
I
shall
therefore
hold
that
the
borrowed
money
here
in
question
was
not
during
the
relevant
period
used
for
the
purpose
of
earning
income
from
(the
appellant’s)
business
within
the
meaning
of
Section
11(1)
(c)
of
the
Act.
The
submission
was,
however,
made
that
the
borrowed
money
was
used
for
the
purpose
of
earning
income
from
the
appellant’s
property,
that
is
to
say,
the
demand
note
given
by
World
T.
and
I.
Corporation
or
the
property
right.
which
it
evidenced.
It
was
not
suggested
that
the
money
was
used
for
the
purpose
of
earning
income
in
the
form
of
dividends
from
World
T.
and
I.
Corporation
but
I
do
not
think
such
a
contention
would
be
tenable
anyway
since
such
dividends,
if
received,
would,
I
think,
be
income
from
the
appellant’s
property
in
the
shares
of
World
T.
and
I.
Corporation
rather
than
from
the
property
right
evidenced
by
the
demand
note.
On
this
point
Rand,
J.
in
Canada
Safeway
Limited
v.
M.N.R.
said
at
page
728
[p.
345]
:
The
word
“property”
is
introduced
in
paragraphs
(i)
and
(ii)
but
I
cannot
see
that
it
can
help
the
appellant;
the
language
borrowed
money
used
for
the
purpose
of
earning
income
from
.
.
.
property
(other
than
property
the
income
from
which
is
exempt)
in
(i)
means
the
income
produced
by
the
exploitation
of
the
property
itself,
There
is
nothing
in
this
language
to
extend
the
application
to
an
acquisition
of
“power”
annexed
to
stock,
and
to
the
indirect
and
remote
effects
upon
the
company
of
action
taken
in
the
course
of
business
of
the
subsidiary.
Though
in
the
present
case
there
was
no
use
of
the
borrowed
money
to
purchase
stock
to
obtain
"‘power''
or
control
over
World
T.
and
I.
Corporation
I
think
that
the
possibility
of
increased
dividends
by
lending
to
World
T.
and
I.
Corporation
must
be
taken
to
be
too
remote
to
characterize
the
lending
of
the
borrowed
money
to
it
without
interest
as
use
for
the
purpose
of
earning
income
from
the
property
represented
by
the
loan.
It
is
the
loan
itself
rather
than
the
shares
that
I
think
Rand,
J.
refers
to
when
he
says
the
statute
means
"‘the
income
produced
by
the
exploitation
of
the
property
itself’’.
In
my
view,
however,
during
the
material
time
the
possibility
of
increased
dividends
on
the
shares
of
World
T.
and
I.
Corporation
held
by
the
appellant
was
the
only
prospect
of
income
even
indirectly
flowing
from
the
use
to
which
the
appellant
put
the
money
it
had
borrowed
from
Caus
Investment
and
Finance
Company
Limited.
There
was,
in
my
view,
as
I
have
already
said,
no
arrangement
between
the
appellant
and
World
T.
and
I.
Corporation
for
sharing
the
profits
or
losses
of
the
venture
in
purchasing
the
Scotch
fillings
nor
was
there
any
other
agreement
or
arrangement
in
effect
pursuant
to
which
remuneration
in
the
form
of
interest
or
otherwise
was
accruing.
Nor
was
interest
or
any
other
form
of
remuneration
being
received
or
claimed
in
the
material
period
and
this
even
though
the
effect
of
the
loan
on
the
company’s
affairs
was
being
felt.
Understandably
nothing
appeared
in
the
appellant’s
financial
statements
for
the
years
in
question
to
reflect
any
income
right
arising
from
the
loan
to
World
T.
and
I.
Corporation.
The
statement
of
Mr.
Gilmour
that
if
satisfaction
had
not
been
obtained
through
the
transfer
of
the
fillings
to
the
appellant
more
interest
than
the
token
payment
of
$10,000
ultimately
made
would
have
been
paid
is
moreover
in
my
view
merely
speculation.
As
I
see
it,
throughout
the
relevant
period
there
was
no
right
to
more
remuneration
or
to
any
remuneration.
The
$10,000
itself
was
not
earned
as
interest.
It
was
a
lump
sum
payment,
a
mere
token
in
amount
and
neither
more
nor
less
in
substance
than
a
gift
which
after
the
material
time
top
management,
on
the
advice
of
their
tax
consultant,
required
World
T.
and
I.
Corporation
to
pay
to
the
appellant.
In
my
opinion
therefore
the
statutory
requirement
that
the
borrowed
money
be
used
for
the
purpose
of
earning
income
from
(the
appellant’s)
property
was
not
satisfied.
The
appeal
on
this
issue
accordingly
fails.
I
turn
now
to
the
foreign
exchange
loss
which
the
appellant
seeks
to
deduct
in
computing
income
for
its
fiscal
period
which
ended
on
August
31,
1961.
In
the
course
of
its
business
the
appellant
purchases
supplies
of
Bourbon
whiskeys
distilled
in
the
United
States,
barrels,
flavourings
and
other
items
of
a
current
nature
from
other
Schenley
companies
in
the
United
States
and
elsewhere
and
sells
to
companies
of
this
group
both
matured
and
unmatured
liquors
which
it
has
produced
in
Canada.
On
the
account
of
these
transactions
maintained
by
the
appellant
there
was
on
August
31,
1961
a
balance
of
$3,051,000
admittedly
owing
to
Schenley
Industries
Inc.
in
United
States
funds.
It
is
agreed
that
this
indebtedness
had
been
expressed
at
par
in
the
appellant’s
accounts.
Some
of
it
had
been
outstanding
for
several
years,
the
appellant
having
purchased
some
years
earlier,
on
terms
not
requiring
immediate
payment,
some
large
quantities
of
Bourbon
fillings
for
re-distillation
and
further
maturing
in
Canada
before
being
marketed.
At
the
beginning
of
the
appellant’s
1961
fiscal
period
that
is
to
say
on
September
1,
1960
the
balance
owing
by
the
appellant
in
this
account
had
stood
at
$2,666,135
United
States
dollars
and
at
that
time
and
for
some
years
prior
thereto
the
Canadian
dollar
had
been
above
par
in
terms
of
United
States
dollars.
In
the
course
of
the
1961
fiscal
year
of
the
appellant,
however,
the
value
of
the
Canadian
dollar
declined
and
on
August
31,
1961
was
below
par
in
United
States
dollars.
On
that
date,
as
a
result
of
a
suggestion
by
the
Canadian
income
tax
authorities
that
because
it
had
been
outstanding
for
several
years
some
of
this
indebtedness
would
not
qualify
for
deduction
in
computing
income
until
the
year
in
which
it
was
paid
the
appellant,
on
the
advice
of
Mr.
Gilmour,
purchased
the
required
number
of
United
States
dollars
and
paid
off
almost
all
of
the
balance
owing
in
this
and
several
other
smaller
accounts
recording
transactions
of
a
current
nature.
It
purchased
the
United
States
dollars,
however,
at
a
premium
of
$96,364,
which
is
the
item
the
deductibility
of
which
is
now
in
issue.
Most
of
the
funds
necessary
to
purchase
the
required
amount
of
United
States
dollars
were
raised
by
borrowing
$3,100,000
Canadian
dollars
from
Schenley
Industries
Inc.
Prior
to
this
occasion
the
appellant
had
recorded
foreign
currency
transactions
on
what
the
witness
called
a
"‘cash''
method.
In
it,
on
a
sale
or
purchase
of
goods
for
United
States
dollars,
the
transaction
would
be
entered
at
the
amount
thereof
converted
at
the
then
prevailing
exchange
rate
into
Canadian
dollars.
No
account
would
thereafter
be
taken
of
oscillations
in
the
exchange
rate
until
the
transaction
was
completed
by
actual
payment
on
which
date
appropriate
entries
would
be
made
to
record
any
change
in
the
amount
of
Canadian
dollars
required
to
complete
the
transaction.
It
was
in
this
context
that
Mr.
Gilmour
recommended
some
time
during
the
1961
fiscal
period,
when
the
suggestion
by
the
Canadian
tax
authorities
with
respect
to
the
non-deductibility
of
items
in
the
merchandising
account
was
made,
that
the
balance
in
the
merchandising
account
be
settled
by
actual
payment
at
the
end
of
each
fiscal
period.
Such
settlement
was,
however,
carried
out
only
on
the
one
occasion
as
in
the
1962
fiscal
period
the
appellant
adopted
an
accrual
method
which
differed
from
the
earlier
method
in
that
at
the
end
of
the
fiscal
period
the
amount
necessary
to
complete
outstanding
transactions
was
computed
at
the
exchange
rate
prevailing
on
that
date
and
profit
or
loss
taken
into
income
accordingly.
In
my
opinion
the
loss
here
in
question
was
clearly
deductible
in
computing
income
for
the
year
1961
not
only
because
it
re-
suited
on
the
purchase
of
United
States
funds
purchased
for
the
purpose
of
discharging,
and
thereafter
used
to
discharge,
obligations
incurred
in
trading
transactions
and
thus
represented
a
loss
realized
in
the
year
in
accordance
with
the
accounting
method
which
had
been
followed
in
earlier
years
and
was
being
followed
in
the
year
in
question
but
also
because
it
represented
a
loss
which
had
in
fact
been
sustained
on
trading
account
in
the
year
as
a
result
of
the
decline
in
the
value
of
the
Canadian
dollar
and
which
was
merely
measured
and
determined
by
the
transaction
of
August
31,
1961.
Vide
Eli
Lilly
and
Company
(Canada)
Limited
v.
M.N.R.,
[1955]
S.C.R.
745;
[1955]
C.T.C.
198;
Tip
Top
Tailors
Limited
v.
M.N.R.,
[1957]
S.C.R.
708;
[1957]
C.T.C.
309;
and
Canadian
General
Electric
Company
v.
M.N.R.,
[1961]
S.C.R.
3;
[1961]
C.T.C.
512.
Counsel
for
the
Minister
did
not
dispute
the
loss
or
the
amount
of
it
but
made
three
submissions
in
support
of
the
Minister’s
position.
It
was
said
first
that
the
evidence
showed
that
the
appellant’s
liability
for
a
large
portion
of
the
balance
owing
in
the
account
had
been
in
existence
for
more
than
ten
years
and
that
it
should
on
that
account
be
regarded
as
having
been
a
capital
rather
than
a
trading
obligation.
With
respect
to
this
submission
I
am
unable
to
see
how,
in
the
absence
of
any
applicable
statutory
provision,
the
mere
length
of
time
in
which
the
obligation
was
outstanding
has
any
effect
in
a
situation
of
this
kind
in
changing
what
was,
at
the
time
it
was
incurred,
a
trading
obligation
into
an
obligation
on
capital
account.
The
second
point
made
was
that
the
loss
in
question
was
connected
with
an
outlay
that
was
not
made
for
the
purpose
of
gaining
or
producing
income
from
the
appellant’s
business
within
the
meaning
of
the
exception
to
Section
12(1)
(a)
of
the
Act.
It
was
said
that
the
loss
was
incurred
simply
because
the
appellant
decided
to
pay
the
debt
when
there
was
no
business
reason
to
do
so.
This
submission
treats
the
loss
as
having
been
caused
by
the
transaction
by
which
the
debt
was
paid
and
disregards
the
fact
that
the
liability
to
pay
some
three
million
United
States
dollars
was
incurred
in
the
course
of
trading
and
thus
was
an
expense
incurred
for
the
purpose
of
gaining
or
producing
income.
While
the
payment
of
that
obligation,
whenever
made,
would
be
in
itself
a
transaction
in
the
course
of
trading,
that
particular
transaction
could
scarcely
be
an
income
producing
or
earning
transaction
even
though
the
amount
of
the
expense
itself
in
terms
of
Canadian
dollars
might
grow
or
decline
as
the
exchange
rate
fluctuated.
At
any
particular
moment
while
the
obligation
was
outstanding
and
real
extent
of
this
obligation
was
the
amount
of
Canadian
funds
necessary
to
purchase
enough
United
States
dollars
to
pay
it,
and
whether
or
not
in
the
accounting
method
which
the
appellant
had
followed,
a
profit
or
loss
might,
on
the
payment
of
the
obligation,
appear
and
be
taken
into
income
that
profit
or
loss
could
not
arise
from
the
transaction
itself.
It
could
only
arise
from
the
fluctuation
of
the
exchange
rate
while
the
obligation
incurred
in
the
course
of
trading
remained
outstanding.
Whatever
the
reason
for
paying
the
obligation
on
any
particular
day
the
transaction
itself,
in
my
opinion,
therefore
could
have
no
effect
whatever
in
producing
an
exchange
profit
or
loss
but
could
simply
quantify
and
determine
once
and
for
all
an
exchange
profit
or
loss
which
had
in
fact
arisen
from
other
causes.
In
my
view
by
paying
the
obligation
the
appellant
was
able
to
compute
and
show
more
accurately
the
profit
from
its
business
for
the
year
than
if
the
obligation
had
been
left
unpaid.
Finally
it
was
urged
that
the
loss
arose
from
an
artificial
transaction
carried
out
when
payment
had
not
been
demanded
and
solely
for
tax
reasons
and
on
that
account
as
well
should
not
be
regarded
as
having
been
incurred
for
the
purpose
of
gaining
or
producing
income
from
the
appellant’s
business.
To
my
mind
this
submission
is
a
mere
extension
of
the
previous
submission
and
is
also
unmaintainable.
The
fact
that
payment
had
not
been
demanded
is
in
my
view
irrelevant
and
the
argument
as
a
whole
disregards
the
fact
that
the
loss
arose
not:
from
the
transaction
carried
out
on
August
31,
1961,
which
no
doubt
was
carried
out
for
tax
reasons,
but
from
decline
in
the
value
of
the
Canadian
dollar
which
made
it
necessary
to
use
more
Canadian
dollars
to
meet,
on
whatever
day
payment
might
be
made,
an
obligation
incurred
in
the
course
of
trading.
By
paying
the
account
on
the
day
chosen,
regardless
of
the
reason
for
deciding
to
do
so,
the
appellant,
in
my
view,
merely
quantified
in
Canadian
dollars
the
extent
of
its
trading
obligation
in
United
States
dollars
and
thus
determined
once
and
for
all
the
amount
of
a
loss
sustained
in
the
year
by
not
having
discharged
the
obligation
before
the
value
of
the
Canadian
dollar
declined.
The
appeal
on
this
issue
accordingly
succeeds.
In
the
result,
therefore,
the
appeal
will
be
allowed
to
the
extent
indicated
in
these
reasons.
As
the
appellant
has
had
substantial
success
it
will
be
entitled
to
the
general
costs
of
the
appeal
but
not
including
any
items
pertaining
exclusively
to
the
issue
on
which
it
has
failed.
The
Minister
may
tax
and
set
off
against
the
costs
so
awarded
to
the
appellant
any
taxable
costs
he
may
have
incurred
pertaining
exclusively
to
the
issue
on
which
he
has
succeeded.
On
taxation
one-third
of
the
time
taken
for
the
trial
is
to
be
taken
as
applicable
to
the
issue
on
which
the
Minister
succeeded
and
two-thirds
of
the
time
to
the
issues
on
which
the
appellant
succeeded.