Strayer
J.A.:
This
is
an
appeal
from
a
judgment
of
the
Tax
Court
of
Canada.
It
concerns
the
characterisation
of
certain
moneys
paid
by
the
appellant
to
holders
of
its
debentures
in
the
course
of
buying
back
those
debentures.
The
appellant
had
issued
two
series
of
debentures,
each
of
which
required
it
to
pay
to
the
holders
interest
semi-annually
on
June
15
and
December
15.
Both
series
were
governed
by
trust
indentures
which
required
the
establishment
of
a
sinking
fund
from
which
the
appellant
was
obliged
to
redeem
debentures.
It
could
also
meet
its
sinking
fund
requirements
by
buying
back
its
own
debentures
in
the
market
from
debenture
holders.
In
the
transactions
giving
rise
to
this
litigation,
the
appellant
repurchased
certain
of
its
debentures
through
brokers.
According
to
the
evidence,
a
discounted
price
was
negotiated
with
vendors
in
respect
of
the
capital
amount,
it
being
assumed
in
such
negotiations
that
the
amount
of
interest
accrued
on
the
debentures
as
of
the
date
of
repurchase
(but
not
yet
required
to
be
paid
at
that
time)
would
also
be
paid
by
the
appellant
to
the
holders
of
those
debentures
at
the
time
of
repurchase.
When
such
repurchases
took
place
the
broker
provided
a
written
statement
showing
the
agreed
discount
rate
and
payment
in
respect
of
the
capital
amount,
and
the
amount
of
the
appellant’s
payment
attributable
to
interest.
The
appellant
in
calculating
its
taxable
income
for
the
years
in
question
deducted
from
its
income
these
amounts
so
attributed
to
interest,
deducting
them
as
interest
amounts
paid,
pursuant
to
a
legal
obligation,
on
borrowed
money
and
for
the
purpose
of
earning
income,
all
as
permitted
by
sub-paragraph
20(1)(c)(1)
of
the
Income
Tax
Act:
20.(1)
Deductions
permitted
in
computing
income
from
business
or
property.
-
Notwithstanding
paragraphs
18(1)(a),
(b)
and
(h),
in
computing
a
taxpayer’s
income
for
a
taxation
year
from
a
business
or
property,
there
may
be
deducted
such
of
the
following
amounts
as
are
wholly
applicable
to
that
source
or
such
part
of
the
following
amounts
as
may
reasonably
be
regarded
as
applicable
thereto:
(c)
interest.
-
an
amount
paid
in
the
year
or
payable
in
respect
of
the
year
(depending
upon
the
method
regularly
followed
by
the
taxpayer
in
computing
his
income),
pursuant
to
a
legal
obligation
to
pay
interest
on
(i)
borrowed
money
used
for
the
purpose
of
earning
income
from
a
business
or
property....
The
Minister
dissallowed
these
deductions
on
the
basis
that
they
were
not
interest
amounts,
nor
were
they
paid
pursuant
to
a
legal
obligation
to
pay
interest
on
borrowed
money.
On
appeal
to
the
Tax
Court
this
reassessment
was
confirmed.
We
have
concluded
that
this
appeal
should
be
allowed.
Given
the
fact
that
the
appellant
was
the
issuer
of
the
debentures
and
therefore
had
a
legal
obligation
to
pay
interest
on
the
prescribed
dates
twice
a
year,
its
repurchase
of
them
by
agreement
to
pay
that
interest
in
advance
of
the
repurchase
date
in
reality
involved
a
substitution
of
a
new
obligation
by
the
same
debtor
to
pay
the
same
creditor
the
same
rate
of
interest
but
for
a
shorter
period.
We
are
satisfied
that
the
transaction
of
repurchase
through
a
broker
involved
a
mutual
understanding
that
the
rate
of
interest
prescribed
in
the
debenture
would
be
paid
in
addition
to
the
discounted
price
of
the
debenture,
pro-rated
to
the
date
of
purchase
in
lieu
of
interest
running
until
the
next
prescribed
date
of
payment.
The
appellant
was
not
buying
an
“expectation
of
interest”
as
it
would
obviously
not
contemplate
paying
itself
interest
once
it
had
repurchased
the
debentures.
With
respect
we
believe
that
the
two
cases
mainly
relied
on
by
the
learned
Tax
Court
Judge,
Wigmore
v.
Thomas
Summerson
&
Sons
Ltd.
and
R.
v.
Immobilière
Canada
Ltd.
are
distinguishable
in
that
they
each
involved
the
purchase
of
a
debt
instrument
by
someone
other
than
the
debtor
under
that
instrument.
We
will
therefore
allow
the
appeal,
set
aside
the
judgment
of
the
Tax
Court
of
Canada,
and
refer
this
matter
back
to
the
Minister
for
reassessment
in
accordance
with
these
reasons.
Appeal
allowed.
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