Tremblay,
T.C.C.J.:—These
appeals
were
heard
on
common
evidence.
The
facts
set
out
below,
which
form
the
basis
of
the
issue,
relate
to
the
appeal
of
Andre
Kyrés.
The
facts
relating
to
the
appeal
of
Andre
Kyrés
apply
mutatis
mutandis
to
the
appeal
of
Theo
Kyrès,
the
issue
being
the
same.
1.
The
point
at
issue
According
to
the
notice
of
appeal
and
the
reply
to
the
notice
of
appeal,
the
appellant
is
questioning
the
reassessments
for
the
1980
to
1986
nation
years.
Basically,
the
issue
is
whether
the
appellant
is
entitled
to
deduct
interest
paid
consecutively
on
borrowed
moneys
on
the
order
of
more
than
one
and
a
half
million
dollars
($1,500,000).
These
moneys
were
used
both
to
purchase
shares
in
Four
Brothers
Holding
Ltd.
(hereinafter
referred
to
as
"Four
Brothers")
and
to
make
investments
in
the
form
of
loans
in
that
company
and
in
one
or
another
of
ten
other
companies
which
make
up
the
Four
Brothers
corporate
group.
The
moneys
lent
to
these
companies
were
reinvested
by
the
companies
for
the
purpose
of
earning
income.
According
to
the
appellant,
the
interest
deduction
was
authorized
by
the
respondent
in
1982.
However,
since
Four
Brothers
and
its
ten
subsidiary
companies
declared
bankruptcy
in
1983,
the
respondent
allowed
the
deduction
of
interest
calculated
only
to
June
23,
the
date
of
the
bankruptcy,
and
disallowed
the
deduction
of
interest
calculated
from
that
date
to
the
end
of
the
year,
amounting
to
$91,356.
The
interest
paid
in
1984,
in
the
amount
of
$99,780,
and
in
1985,
$112,649,
was
also
disallowed.
The
respondent,
who
disallowed
the
interest
deduction,
argues
first
that
in
1983,
following
the
bankruptcies
of
the
companies,
the
appellant
suffered
a
business
investment
loss
of
$442,899.
This
loss
was
applied
against
income
for
the
1980
($48,057),
1981
($15,612),
1982
($6,148),
1984
($134,352)
and
1985
($99,319)
taxation
years.
The
respondent
contends
that
the
appellant
had
no
loss
to
carry
forward
in
1986
and
that
that
year
was
assessed
as
it
was
reported.
When
that
loss
was
applied,
taxable
income
for
1980
to
1984
inclusive
was
reduced
to
nil.
Because
of
this"
nil”
taxable
income,
or
so-called
"nil"
reassessments,
the
respondent
argues
that
the
Court
has
no
jurisdiction
to
hear
the
appeals
from
those
reassessments.
With
respect
to
the
interest
for
which
he
disallowed
the
deduction,
the
respondent
argues
that
the
source
of
the
income
which
might
have
been
derived
from
the
moneys
lent
by
the
appellant
was
extinguished
by
the
bankruptcy
of
the
borrower
companies.
Accordingly,
the
interest
can
no
longer
be
deducted.
In
the
alternative,
the
appellant
argues
that
if
the
interest
is
not
deductible,
he
is
nonetheless
entitled
to
an
eligible
business
investment
loss
in
respect
of
the
interest
in
question
which
was
disallowed.
These
losses
would
then
influence
the
losses
already
calculated
by
the
respondent
and
the
application
of
those
losses
against
1985
and
1986
income.
2.
The
burden
of
proof
and
admissions
of
fact
The
burden
of
proving
the
facts,
which
ordinarily
rests
on
the
appellant,
does
not
apply
to
this
case
since
the
facts
were
admitted
by
the
parties.
The
facts
may
be
summarized,
inter
alia,
by
the
appellant’s
admission
of
the
facts
assumed
by
the
respondent,
which
appear
at
paragraphs
3,
4
and
5
of
the
reply
to
the
notice
of
appeal.
These
paragraphs
read
as
follows:
3.
Without
prejudice
to
his
preliminary
objection
in
law,
solely
for
the
purpose
of
providing
further
details
and
in
order
to
clarify
the
point
in
issue,
the
Minister
of
National
Revenue
states
the
following:
(a)
when
the
appellant
filed
his
1983
tax
return
he
showed
a
business
investment
loss
of
$442,899
as
appears
on
a
schedule
attached
to
the
appellants
return;
[admitted]
(b)
the
amount
of
the
loss
represents
disbursements
for
the
purchase
of
shares
and
advances
given
to
Four
Brothers
Holding
Ltd.
or
to
one
or
another
of
ten
other
companies
which
make
up
the
corporate
group;
accordingly,
the
moneys
invested
by
the
appellant
in
one
or
another
of
the
companies
were
reinvested
by
those
companies
for
the
purpose
of
earning
income;
[admitted]
(c)
in
order
to
make
these
investments,
the
appellant
took
out
various
loans,
including
a
loan
of
$1.5
million
from
the
Permanent;
the
appellant
Steed
this
loan
by
placing
mortgages
on
his
properties;
[admitted]
(d)
Four
Brothers
Holding
Ltd.
and/or
the
other
ten
companiesmade
an
assignment
of
property
under
the
Bankruptcy
Act
on
or
about
June
23,
1983;
[admitted]
(e)
the
Minister
of
National
Revenue
recognizes
the
business
investment
loss
of
$442,899
suffered
by
the
appellant
in
1983;
[admitted]
(f)
in
response
to
a
written
request
by
the
appellant,
the
Minister
of
National
Revenue
carried
forward
part
of
the
loss
to
his
1980,
1981
and
1982
taxation
years,
which
were
for
this
sole
purpose:
|
Year
|
Amount
of
loss
carried
forward
|
|
1982
[corrected
at
hearing]
|
$
6,148
|
|
1981
|
$15,612
|
|
1980
[corrected
at
hearing]
|
$48,057
[admitted]
|
(g)
notwithstanding
the
bankruptcy
of
the
companies,
the
appellant
continued
to
claim
a
deduction
for
the
interest
paid
after
the
bankruptcy
on
the
loans
taken
out
in
the
circumstances
described
above,
in
the
following
amounts:
|
Year
|
Interest
|
|
1983
|
$
91,356
(after
the
bankruptcy)
|
|
1984
|
$
99,780
|
|
1985
|
$112,649
[admitted]
|
(h)
the
Minister
of
National
Revenue
disallowed
the
deduction
of
the
interest
so
paid;
[admitted]
(i)
in
addition,
the
Minister
of
National
Revenue
applied
the
balance
of
the
loss
suffered
in
1983
as
follows:
|
Year
|
Loss
carried
forward
|
|
1984
|
$134,352
|
|
1985
|
$
99,319
[admitted]
|
j)
the
appellant
had
no
loss
to
carry
forward
to
the
1986
taxation
year;
[denied]
4.
In
assessing
the
appellant's
1985
and
1986
taxation
years,
the
Minister
of
National
Revenue
relied
on
the
following
facts:
(a)
during
the
period
preceding
June
23,
1983,
the
appellant,
with
Kyres,
took
out
various
loans
including,
inter
alia,
a
loan
of
$1.5
million
from
the
Permanent,
used
to
purchase
shares
and
to
give
advances
to
Four
Brothers
Holding
Ltd.
and/or
to
one
or
another
of
the
ten
other
companies
in
the
same
corporate
group;
these
companies
used
the
funds
so
invested
by
the
appellant
for
the
purpose
of
earning
income;
[admitted]
(b)
on
June
23,
1983,
Four
Brothers
Holding
Ltd.
and/or
the
ten
other
companies
went
bankrupt;
[admitted]
(c)
in
1983,
the
appellant
suffered
a
business
investment
loss
of
$442,899,
of
which
$99,319
could
be
deducted
in
1985;
[admitted]
(d)
the
shares
and
advances
listed
in
the
appellant's
name
alter
the
bankruptcy
no
longer
constitute
a
source
of
income;
[denied]
(e)
the
loan
taken
out
by
the
appellant
is
no
longer
used
for
the
purpose
of
earning
income
and
the
interest
expense
of
$112,649
is
not
deductible;
[denied]
(f)
the
1986
taxation
year
is
assessed
as
it
was
reported;
[admitted]
5.
In
confirming
the
1986
taxation
year,
the
Minister
of
National
Revenue
also
took
into
account
the
fact
that
the
appellant
had
no
non-capital
loss
available
for
the
purposes
of
deduction;
[denied]
[Translation.]
3.
The
facts
Upon
the
above
admissions
being
made
by
the
appellants,
the
evidence
of
the
facts
was
greatly
reduced.
3.01
The
parties
filed
the
following
exhibits:
Exhibit
R-1:
Andre
Kyrés’
income
tax
returns
relating
to
the
1980
to
1986
taxation
years,
including
financial
statements,
notices
of
reassessment
and
notices
of
objection.
Exhibit
R-2:
Theo
Kyrè's
income
tax
returns
for
the
1983,to
1986
taxation
years,
including
notices
of
reassessment
and
notices
of
objection.
Exhibit
A-1:
Portions
of
Exhibit
R-1
which
the
appellant
deems
to
be
more
important.
Exhibit
A-2:
Portions
of
Exhibit
R-2
which
the
appellant
deems
to
be
more
important.
Exhibit
A-3:
Interpretation
Bulletin
IT-512,
dealing
with
determination
and
redetermination
of
losses.
Paragraph
6
of
Interpretation
Bulletin
IT-512
explains
that
the
taxpayer
may
give
notice
to
the
Minister
to
this
effect:
On
the
other
hand,
a
taxpayer
who
chooses
not
to
initiate
the
determination
procedure
may
object
or
appeal,
in
respect
of
the
amount
of
the
loss,
in
the
year
in
which
it
is
deducted
since
subsubsection
152(1.3)
does
not
apply
in
these
circumstances.
Counsel
for
the
appellants
noted
that
his
clients
had
chosen
to
take
this
route.
Exhibit
A-5:
Portion
of
Andre
Kyrè's
form
T-1982.
Statement
of
net
income
from
property.
3.02
The
appellants
borrowed
a
total
of
$1,771,394.
However,
the
parties
agreed
to
produce
only
the
document
relating
to
the
main
loan,
in
the
amount
of
$1,000,000,
taken
out
from
the
Canada
Permanent
Mortgage
Company
(the
"Permanent")
on
September
21,
1982
(Exhibit
A-4).
The
main
points
which
counsel
for
the
appellants
noted
in
this
contract
are
set
out
in
the
following
paragraphs
from
Exhibit
A-4:
Paragraph
2
Interest
rate:
19
1/4
percent
Monthly
payment:
$23,752
(principal
and
interest)
Term:
36
months,
balance
payable
at
end.
The
borrower
is
not
entitled
to
pay
in
advance.
Paragraph
5
The
loan
is
secured
by
the
registration
of
mortgages
on
five
apartment
buildings
belonging
to
the
appellants
and
situated
in
the
region
of
Montreal.
These
are
second
mortgages.
Paragraph
9
An
indemnity
of
five
per
cent
of
the
balance
owing
shall
be
paid
if
collection
procedures
must
be
undertaken.
Paragraph
14
As
security
for
the
said
indemnity
of
five
per
cent,
a
mortgage
of
$300,000
shall
be
registered
in
addition
to
the
mortgages
otherwise
given
as
security.
Paragraph
20
To
provide
better
security,
the
rents
on
the
apartment
buildings
shall
be
transferred
to
the
lender.
Paragraph
21
To
provide
better
security
in
the
event
that
the
borrower
debts
on
its
obligations
under
the
contract,
the
lender
shall
be
entitled
to
take
over
the
management
of
the
buildings.
Paragraph
23
There
is
an
expiration
of
term
clause.
Paragraph
24
There
is
a
giving
in
payment
clause.
Interveners
All
the
companies
in
the
Four
Brothers
corporate
group,
which
also
guarantee
the
loan,
shall
be
interveners
in
the
contract.
[Translation.]
3.03
Counsel
for
the
appellants
admitted
that
because
of
the
“nil”
reassessments
the
Court
did
not
have
jurisdiction
in
respect
of
the
1980,
1981,
1982,
1983
and
1984
taxation
years.
3.04
Counsel
for
the
appellants
also
admitted
that
even
if
the
appeal
were
allowed
in
relation
to
the
interest,
1980,
1981
and
1982
could
not
be
subject
to
review.
3.05
Moreover,
counsel
for
the
appellants
explained
that
if
the
appeal
were
allowed
in
relation
to
the
interest
deduction,
such
deduction
would
have
the
effect
of
using
less
of
the
original
business
investment
loss
since
the
interest
would
be
deducted
before
the
losses.
Accordingly,
there
would
be
an
outstanding
loss
in
1986
which
could
be
applied
against
that
year's
income.
3.06
The
appellants’
five
apartment
buildings,
on
which
a
second
mortgage
was
placed
as
security,
brought
in
the
following
income:
|
Gross
income
|
Net
income
|
|
1982
|
—
|
$
74,951
A-5
|
|
1983
|
$390,935
|
84,921
A-1
|
|
1984
|
474,922
|
23,742
A-1
|
|
1985
|
444,631
|
2,379
A-1
|
|
1986
|
432,824
|
116,459
A-1
|
It
should
be
noted
that
in
computing
net
income,
interest
not
only
on
the
first
mortgages,
but
also
on
the
seconds,
that
is,
those
which
provided
security
for
the
Permanent,
was
taken
into
account.
In
1985,
the
interest
paid
was
$225,298
(Exhibit
AS).
One
building
was
sold
at
the
end
of
1985;
thus
the
income
shown
above
for
1986
was
for
four
buildings.
A
total
of
$37,589
in
interest
on
the
first
mortgages
was
considered
in
computing
net
income.
4.
Law—cases
at
law—analysis
4.01
The
provisions
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act")
which
are
most
specifically
involved
in
this
appeal
are
paragraph
20(1)(c)
and
subsection
50(1).
They
read
as
follows:
20.
Deductions
permitted
in
computing
income
from
business
or
property.—(1)
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
(other
than
borrowed
money
used
to
acquire
property
the
income
from
which
would
be
exempt
or
to
acre
a
life
insurance
policy),
[(ii),
(iii)
and
(iv)
are
not
applicable.]
50.
Debts
established
to
be
bad
debts
and
shares
of
bankrupt
corporation.—(1)
For
the
purposes
of
this
subdivision,
where
(a)
a
debt
owing
to
a
taxpayer
at
the
end
of
a
taxation
year
(other
than
a
debt
owing
to
him
in
respect
of
the
disposition
of
personal-use
property)
is
established
by
him
to
have
become
a
bad
debt
in
the
year,
or
(b)
a
share
(other
than
a
share
received
by
a
taxpayer
as
consideration
in
respect
of
the
disposition
of
personal-use
property)
of
the
capital
stock
of
a
corporation
is
owned
by
the
taxpayer
at
the
end
of
a
taxation
year
and
(i)
the
corporation
has
during
the
year
become
a
apt
(within
the
meaning
of
subsection
128(3)),
(ii)
the
corporation
is
a
corporation
refereed
to
in
section
6
of
the
Winding-
up
Act
that
is
insolvent
(within
the
meaning
of
that
Act)
and
in
respect
of
which
a
winding-up
order
under
that
Act
has
been
made
in
the
year,
the
taxpayer
shall
be
deemed
to
have
disposed
of
the
debt
or
the
share,
as
the
case
may
be,
at
the
end
of
the
year
and
to
have
reacquired
it
immediately
thereafter
at
a
cost
equal
to
nil.
4.02
Cases
at
law
The
following
cases
were
cited:
1.
Mandryk
v.
The
Queen,
[1989]
1
C.T.C.
162,
89
D.T.C.
5062
(F.C.T.D.);
2.
Johns-Manville
Canada
Inc.
v.
The
Queen,
[1985]
2
S.C.R.
46,
[1985]
2
C.T.C.
111,
85
D.T.C.
5373
(S.C.C.);
3.
Banque
provinciale
du
Canada
v.
Ross
et
autres,
[1955]
Que.S.C.
292,
35
C.B.R.
198;
4.
M.N.R.
v.
G.H.
Steer,
[1967]
S.C.R.
34,
[1966]
C.T.C.
731,
66
D.T.C.
5481;
5.
Emerson
(R.I.)
v.
The
Queen,
[1986]
1
C.T.C.
422,
86
D.T.C.
6184
(F.C.A.);
.
Trans-Prairie
Pipelines
Ltd.
v.
M.N.R.,
[1970]
C.T.C.
537,
70
D.T.C.
6351;
7.
Meredith
v.
The
Queen,
[1976]
1
F.C.
292,
[1975]
C.T.C.
570,
75
D.T.C.
5412;
8.
Deschenes
v.
M.N.R.,
[1979]
C.T.C.
2690,
79
D.T.C.
459
(T.R.B.);
9.
Alexander
v.
M.N.R.,
[1983]
C.T.C.
2516,
84
D.T.C.
459
(T.R.B.);
10.
Lyons
v.
M.N.R.,
[1984]
C.T.C.
2690,
84
D.T.C.
1633
(T.C.C.);
11.
Bronfman
Trust
v.
The
Queen,
[1987]
1
S.R.C.
32,
[1987]
1
C.T.C.
117,
87
D.
T.C.
5059,
(S.C.C.);
12.
Botkin
v.
The
Queen,
[1989]
2
C.T.C.
2110,
89
D.T.C.
398
(T.C.C.).
4.03
Analysis
4.03.1
The
Court
must
consider
two
points:
1.
May
the
appellant
deduct
the
interest
paid
after
June
22,1983?
It
was
on
June
23
that
Four
Brothers
and
its
ten
companies
went
bankrupt.
2.
In
the
alternative,
if
the
deduction
of
the
interest
is
disallowed,
is
the
appellant
entitled,
in
respect
of
the
disallowed
interest,
to
an
eligible
business
investment
loss?
The
appellant
argues
that
the
Supreme
Court
has
held
that,
were
it
not
for
paragraph
20(1)(c),
an
interest
expense
would
be
a
capital
payment
and
subsection
50(1)
would
apply.
4.03.2
Appellant's
Argument
4.03.2(1)
The
appellant's
argument
with
respect
to
the
main
point,
on
whether
or
not
deduction
of
the
interest
is
allowable,
may
be
summarized
as
follows:
In
that
the
respondent
allowed
the
interest
on
the
loans
to
be
deducted
after
they
were
taken
out
by
the
appellant,
it
is
submitted
that
the
respondent's
decision
to
cease
to
allow
the
interest
to
be
deducted
following
the
financial
difficulties
encountered
by
the
corporation
to
which
the
appellant
lend
the
moneys
he
had
borrowed
is
without
basis,
since
the
appellant
did
not
per
se
dispose
of
his
rights
in
the
loans
in
question
and
thedeemed
disposition
under
subsection
50(1)
of
the
Act
is
a
deemed
disposition
solely
for
the
purposes
of
Subdivision
c
of
Division
B
of
Part
I
of
the
Act
(the
subdivision
dealing
with
capital
gains
and
losses);
Accordingly,
with
respect
to
the
provisions
dealing
with
the
deductibility
of
the
appellants
interest
[paragraph
20(1)(c)
of
Subdivision
b
of
Division
B
of
Part
I
of
the
it
is
submitted
that
the
appellant
is
not
deemed
to
have
disposed
of
his
claims
and
that
he
may
continue
to
deduct
the
interest
despite
the
setbacks
of
the
corporation
to
which
he
lent
the
funds
he
had
borrowed.
[Translation.]
4.03.2(2)
The
appellant
bases
his
first
argument
on
the
contract
for
the
$1,500,00
loan
with
the
Permanent
(Exhibit
A-4),
the
main
elements
of
which,
the
basis
of
the
appellant’s
argument,
are
described
above
(3.02).
The
monthly
payment
of
$23,752
without
the
right
to
pay
in
advance
(paragraph
2
of
Exhibit
A-4),
the
security
given
by
mortgaging
five
apartment
buildings
(paragraph
5
of
Exhibit
A-4),
the
5
per
cent
indemnity
provided
in
the
event
of
collection
procedures
(paragraph
9
of
Exhibit
A-4),
the
$300,000
mortgage
given
to
secure
that
5
per
cent
indemnity
(paragraph
14
of
Exhibit
A-4),
the
transfer
of
the
rents
on
the
buildings
to
the
lender
(paragraph
20
of
Exhibit
A-4),
the
right
of
the
lender
to
take
over
the
management
of
the
buildings
(paragraph
21
of
Exhibit
A-4),
the
expiration
of
term
clause
(paragraph
23
of
Exhibit
A-1),
the
giving
in
payment
clause
(paragraph
24
of
Exhibit
A-4),
the
intervention
of
the
Four
Brothers
corporate
group
to
guarantee
the
loan:
all
these
factors
show
the
seriousness
with
which
the
loan
was
taken
out
and
the
appellant's
inability
to
make
payments
in
advance
to
settle
the
loan.
The
depression
which
occurred
in
1982
and
the
years
following,
with
interest
rates
of
19
A
per
cent
for
three
years,
was
the
cause
of
the
bankruptcy
of
the
Four
Brothers
group.
Loans
totalling
$1,771,394
were
invested
in
Four
Brothers,
partly
for
share
purchases
and
partly
as
advances.
"The
company
went
bankrupt,
but
we
still
have
our
shares,
we
still
have
our
advances,
and
so
there
has
been
no
disposition
of
the
source
of
income
as
was
the
case
in
Emerson
and
as
was
the
case
in
most
of
those
cases."
(Transcript,
page
71.)
[Translation.]
Since
the
appellants
could
not
make
payments
in
advance
and
upon
expiry
of
the
term,
they
did
not
attempt
to
renew
it.
According
to
the
appellant,
the
source
of
income
therefore
existed
as
of
the
moment
when
the
interest
started
to
be
paid
and
existed
until
the
end
of
the
payments.
To
confirm
the
position
taken
in
this
first
argument,
the
appellants
referred
to
a
civil
law
decision
of
the
Superior
Court
of
Quebec,
Banque
provinciale
du
Canada
v.
Ross
et
autres
(4.02(3)).
The
following
appears
at
pages
294-95:
1.
Did
the
corporation
continue
to
exist
after
the
bankruptcy?
It
seems
that
we
should
have
no
hesitation
in
answering
this
first
question
in
the
affirmative.
It
is
settled
law
that
the
authority
which
created
the
corporation
is
the
only
one
which
may
extinguish
it
and
do
away
with
its
legal
entity.
[Emphasis
added.]
This
amounts
to
saying
that
the
bankruptcy
itself
does
not
void
the
company's
charter,
and
even
if
its
management
powers
are
transferred
to
the
trustee,
it
must
be
said
that
the
directors,
either
by
themselves
or
through
the
persons
they
have
authorized,
may
do
certain
things
and
pass
certain
resolutions
which
would
be
necessary
for
the
purposes
of
such
management.
These
principles
have
been
recognized
in
a
line
of
case
law
which
seems
to
have
remained
unchanged,
and
which
is
still
consistently
applied.
Re:
Canadian
Cereal
and
Flour
Mills
Co.
Ltd.
(1):
Except
in
those
cases
in
which
an
order
is
made
by
the
bankruptcy
court
that
pegs
taken
under
the
Bankruptcy
Act,
1919
shall
be
continued
under
the
Winding-up
Act,
R.S.C.
1906,
ch.
144,
a
trading
corporation
which
has
made
an
assignment
for
creditors
under
the
Bankruptcy
Act
still
has
the
power
thereafter
to
hold
directors’
meetings
and
shareholders”
meetings
and
to
pass
resolutions
expressing
its
corporate
decisions.
See
also
Duncan
and
Reilley
(2).
That
author,
relying
on
the
decision
refereed
to
above,
notes
that:
A
corporation
does
not
lose
its
entity
on
being
adjudged
bankrupt
or
on
making
an
authorized
assignment.
It
was
even
argued
that
the
trustee
does
not
have
the
power
to
sell
the
charter
and
name
of
the
corporation
as
an
asset.
[Translation.]
Thus,
according
to
the
appellant,
even
though
Four
Brothers
and
the
others
were
bankrupt,
they
still
continue
to
exist.
The
source
still
exists
even
if
it
does
not
generate
any
income.
Thus,
the
interest
is
deductible
up
to
1985.
4.03.2(3)
The
appellants’
second
argument
is
that
at
the
time
of
the
companies'
bankruptcy
they
had
to
pay
the
principal
andinterest
on
the
second
mortgages
on
the
apartment
buildings
if
they
wanted
to
save
that
source
of
income.
Moreover,
at
the
end
of
1985,
one
of
the
buildings
was
sold
for
$1,240,000
with
a
capital
gain
of
$606,612.
The
1986
net
income
from
the
other
four
buildings
was
$116,459
(3.06).
This
was
therefore
a
valuable
source
of
income
to
be
saved.
4.03.2(4)
In
support
of
his
position
that
the
interest
was
deductible
because
of
the
second
source
of
income,
the
appellant
referred
to
Mandryk
(4.02(1)),
a
decision
of
Rouleau,
J.
of
the
Federal
Court
rendered
in
December,
1988.
This
case
has
further
been
appealed
to
the
Federal
Court
of
Appeal.
Rouleau,
J.
summarizes
the
issues
in
that
case
as
follows:
The
central
issue
in
dispute
between
the
parties
is
whether
certain
losses
sustained
by
the
plaintiff
are
properly
characterized
as
losses
on
account
of
capital,
or
business
losses.
There
is
a
subsidiary
issue
of
the
deductibility
of
certain
sums
of
interest
paid
by
the
plaintiff
during
the
taxation
years
in
question.
The
plaintiff
alleges
that
the
losses
in
question
are
business
losses
and
that
the
interest
paid
by
him
is
deductible
under
subsection
20(1)
(c)
of
the
Income
Tax
Act.
The
defendant
takes
the
opposing
position
on
both
issues.
[Official
English
version.]
In
fact,
Rouleau,
J.
found
for
the
taxpayer
on
both
of
these
points.
With
respect
to
the
interest,
the
facts
may
be
summarized
as
follows:
After
a
company,
Stoney
Court
Ltd.
(Stoney
Court),
in
which
Mr.
Mandryk
held
50
per
cent
of
the
shares
and
for
which
he
had
guaranteed
loans,
ceased
to
have
income
starting
in
1982,
Mr.
Mandryk
becomes
responsible
for
the
company's
debts.
His
partner,
Mr.
Anthony
Brown,
who
held
the
other
50
per
cent
of
the
shares,
went
bankrupt.
Mr.
Mandryk
therefore
goes
alone
to
the
lender,
the
Bank
of
Montreal.
By
the
time
of
this
meeting
the
taxpayer's
obligation
to
the
Bank
was
$245,700.46
including
interest.
This
amount
had
built
up
between
June
of
1978
to
December
of
1980
by
the
signing
of
individual
notes
in
all
but
two
cases
in
the
amount
of
$10,000.
The
remaining
two
notes
dated
August
20,
1979
and
December
31,
1980
were
in
the
amount
of
$30,000
and
$13,775.45
respectively.
It
was
decided
that
the
taxpayer
would
provide
approximately
$15,000
of
his
own
money
and
pay
this
money
to
the
Bank
impartial
satisfaction
of
his
obligation.
The
taxpayer
also
signed
a
single
note
consolidating
the
balance
of
the
moneys
owed
on
the
twenty
earlier
notes
in
the
amount
of
$230,000.
Mr.
Mandryk
became
the
sole
owner
of
the
company’s
assets
as
Mr.
Brown's
involvement
hadentirely.
The
note
Mr.
Mandry
k
to
the
Bank
of
Montreal
was
further
secured
by
the
pledging
and
assignment
of
numerous
assets
to
the
Bank
including
several
mortgages
which
were
outstanding
on
properties
sold
by
Stoney
Court,
the
mortgage
on
Mr.
Brown's
home
in
favour
of
the
taxpayer,
and
a
25
per
cent
stake
in
another
real
estate
development
company
called
Guysborough
Properties
Ltd.
which
had
been
purchased
by
Stoney
Court.
After
this
serious
reverse,
Stoney
Court's
sales,
which
had
been
over
$500,000
in
1980,
fell
to
$44,000
in
1981
and
were
thereafter
nil.
Stoney
Court
does
however
still
exist
and
the
taxpayer
keeps
its
Minute
Book
active.
The
taxpayer
has
been
paying
off
his
indebtedness
to
the
Bank
of
Montreal
including
interest
since
1980.
The
proceeds
of
each
of
the
sales
in
real
estate
which
he
has
effected
of
his
other
holdings
discussed
above
have
gone
to
reduce
the
amount
of
the
principal
owed
to
the
Bank.
[Official
English
version.]
After
giving
his
decision
in
reset
of
the
business
loss,
Rouleau,
J.
states:
As
to
the
deductibility
of
the
interest
payments
made
by
the
taxpayer
during
the
1980
to
1984
taxation
years,
the
plaintiff
argues
that
he
signed
the
note
and
agreed
to
additional
interest
payments
to
the
Bank
in
order
to
protect
his
real
estate
holdings
from
seizure;
that
these
holdings
generated
income
for
the
plaintiff
and
that
hence
paragraph
20(1)(c)
of
the
Act
provides
that
they
can
be
deducted
from
income.
The
defendant
argues
that
as
Stoney
Court
had
essentially
stopped
its
operations,
there
was
no
active
source
of
business
income
to
which
the
plaintiff
could
relate
the
cost
of
borrowing
the
money.
In
advancing
this
proposition,
the
defendant
relies
on
the
case
of
Russell
I.
Emerson
v.
Her
Majesty
the
Queen,
86
D.T.C.
6184.
This
does
not
answer
the
plaintiffs
argument
that
the
purpose
of
the
borrowed
funds
was
to
protect
the
balance
of
the
real
estate
interests
of
the
plaintiff.
As
distinguishable
from
the
Emerson
case,
supra,
the
plaintiff
is
still
the
holder
of
in
Stoney
Court
and
it
is
not
up
to
the
Court
to
speculate
as
to
whether
or
not
they
may
or
may
not
generate
income.
Further,
after
taking
over
the
assets
of
Stoney
Court
in
1981,
he
disposed
of
a
house
and
in
subsequent
years
income
from
mortgages
previously
held
by
Stoney
Court.
He
continued
and
continues
up
to
this
day
transacting
in
real
estate.
His
half
interest
in
the
Florida
property
was
disposed
of
in
1980;
the
33
acres
referred
to
as
the
Vienna
property
was
disposed
of
in
1981;
of
the
three
Mount
Elgin
properties,
one
was
sold
in
1982
and
two
in
1986;
the
downtown
Tillsonburg
land
was
expropriated
by
the
municipality
in
1984
from
which
the
76
acres
in
Aylmer
sold
in
1988,
though
not
part
of
the
taxation
years
in
question,
returned
$70,000.
He
continues
to
hold
the
Guysborough
property
to
this
day.
All
were
reported
as
income
and
undoubtedly
support
the
plaintiffs
contention
of
continuing
activity
in
the
field.
The
interest
payments
are
hence
deductible.
[Official
English
version.]
4.03.2(5)
The
appellants
argue
that
in
this
case
they
had
two
choices.
The
first
was
not
to
make
any
more
payments
and
to
let
the
creditors
seize
the
apartment
buildings
which
had
been
given
as
security
and
sell
them
to
recover
the
outstanding
debt,
principal
and
interest.
The
appellants
would
then
undoubtedly
have
lost
a
large
part,
if
not
all,
of
their
income
properties.
The
second
choice
was
to
continue
to
pay
the
outstanding
principal
and
interest
in
accordance
with
the
contract,
Exhibit
A-4,
including
clause
2,
which
did
not
authorize
the
appellants
to
pay
in
advance
(3.02,
paragraph
2).
The
payments
were,
moreover,
made
out
of
the
income
from
the
apartment
buildings.
The
appellants
argue
that
if,
based
on
the
first
argument,
the
Court
finds
that
the
source
of
income
had
disappeared,
then
based
on
the
second
argument,
we
should
find
that
there
was
at
least
a
change
of
source.
In
Mandryk,
counsel
for
the
appellant
submits,
the
threat
was
a
general
one
(Mr.
Mandryk
had
guaranteed
the
companies).
In
the
case
at
bar,
the
threat
is
specific:
there
is
mortgages
on
the
apartment
buildings.
4.03.2(6)
The
appellants
cited
the
Supreme
Court
of
Canada
in
Johns-Manville
Canada
Inc.
(4.02(2)).
In
that
case,
the
issue
is
whether
Johns-Manville
Canada
Inc.
has
the
right
to
charge
the
cost
of
land
purchased
in
the
course
of
mining
operations
it
carries
on
in
Asbestos,
Quebec,
to
expense
rather
than
to
capital
account.
The
issue
relates
to
the
taxation
years
ending
in
1969
and
1970.
After
trying
several
arguments
relating
to
the
interpretation
of
paragraphs
12(1)(a)
and
12(1)(b),
18(1)(a)
and
18(1)(b)
of
the
new
Act
in
vain,
on
the
facts
of
the
case,
the
Supreme
Court
states,
at
page
67:
This
reasoning,
of
course,
does
not
conclusively
lead
to
any
result,
either
for
or
against
either
of
the
contending
parties.
On
the
other
hand,
it
the
interpretation
of
a
taxation
statute
is
unclear,
and
one
enable
interpretation
leads
to
a
deduction
to
the
credit
of
a
taxpayer
and
the
other
leaves
the
taxpayer
with
no
relief
from
clearly
bona
fide
expenditures
in
the
course
of
his
business
activities,
the
general
rules
of
interpretation
of
taxing
statutes
would
direct
the
tribunal
to
the
former
interpretation.
That
is
the
situation
here,
in
my
view
of
these
statutory
provisions.
These
expenditures
were
clearlymade
for
purposes.
They
clearly
are
not
disqualified
by
paragraph
12(1)(a)
nor
by
any
other
section
of
the
Income
Tax
Act
dealing
with
expenditures
in
the
course
of
operating
a
business.
The
only
possible
basis
in
the
statute
for
a
denial
of
these
bona
fide
expenditures
closely
associated
with
the
conduct
of
the
taxpayer's
mining
operations
is
the
prohibition
in
paragraph
12(1)(b)
relating
to
capital
expenditures.
[Emphasis
added—Official
English
version.]
The
Supreme
Court
then
refers
to
the
comments
of
Viscount
Cave
in
B.P.
Australia
v.
Commissioner
of
Taxation
of
the
Commonwealth
of
Australia,
[1966]
A.C.
224,
at
page
271:
If,
therefore,
one
must
allocate
these
payments
either
wholly
to
one
year's
revenue
or
to
capital
it
would
seem
that
either
course
presents
difficulties
but
that
an
allocation
to
revenue
is
slightly
preferable.
[Official
English
version]
The
appellants
submit
that
this
principle
applies
here;
the
expenses
were
incurred
for
legitimate
reasons:
borrowing
for
the
purpose
of
earning
income
and
paying
interest
after
the
bankruptcy
to
preserve
the
apartment
buildings,
which
are
sources
of
Income.
They
therefore
submit
that
allowing
the
interest
expenses
is
a
reasonable
interpretation.
4.03.3
Respondent's
Argument
4.03.3(1)
After
noting
the
three
basic
conditions
for
paragraph
20(1)(c)
to
apply,
which
are:
(1)
that
the
funds
must
have
been
used
for
the
purpose
of
earning
income;
(2)
that
there
must
be
an
obligation
to
pay
interest,
and
(3)
that
there
must
be
a
source
of
income,
Moldowan
decision
of
the
Supreme
Court,
[1978]
1
S.C.R.
480,
[1977]
C.T.C.
310,
77
D.T.C.
5213,
which
there
is
not
in
this
case:
the
source
of
income
disappeared
with
the
bankruptcy
of
the
Four
Brothers
group.
4.03.3(2)
Counsel
for
the
respondent
does
not
see
in
clause
2
of
the
contract,
Exhibit
A-4
(3.02),
prohibiting
the
appellants
from
paying
the
terms
of
the
loan
in
advance,
a
significant
factor
which
might
satisfy
the
basic
element
of
the
use
of
the
funds
in
the
year
in
question.
4.03.3(3)
Mandryk
(4.02(1))
may
be
distinguished
from
the
present
case
in
that:
(1)
the
Court
was
convinced
in
that
case
that
all
of
the
real
estate
activities,
including
Stoney
Court,
were
the
taxpayer's
personal
business,
(2)
the
taxpayer
had
reacquired
the
assets
of
Stoney
Court,
(3)
Stoney
Court
has
never
gone
bankrupt,
(4)
the
loss
was
a
business
loss,
not
a
business
investment
loss.
When
the
case
was
heard,
Mr.
Mandryk
was
still
doing
business.
In
the
present
case,
there
is
nothing
of
these
elements
at
all,
and
so
the
two
are
not
comparable.
4.03.3(4)
With
respect
to
Johns-Manville
Canada
Inc.
and
the
quotation
supporting
the
deduction
(4.03.2(6)),
counsel
notes
that
the
appellants
are
not
operating
a
business
like
the
Johns-Manville
company
and,
he
adds,
there
is
no
doubt
as
to
interpretation
in
this
case.
4.03.3(5)
Counsel
for
the
respondent
referred
to
Meredith
(4.02(8))
in
which
Cattanach,
J.
of
the
Federal
Court-Trial
Division
finds
that
in
1969
the
source
of
income
no
longer
existed:
Mr.
Meredith
was
not
then
operating
his
fish-
breeding
business
but
rather
was
trying
to
sell
his
property.
Accordingly,
Cattanach,
J.
finds
that
in
computing
income
for
1969,
the
taxpayer
was
no
longer
entitled
to
deduct
interest
on
moneys
borrowed
(along
with
numerous
other
expenses,
as
well:
depreciation,
property
tax,
electricity,
and
so
on)
for
the
purpose,
inter
alia,
of
building
the
breeding
ponds.
At
pages
302
and
303
(C.T.C.
578,
D.T.C.
5417),
the
judge
stated:
With
respect
to
the
deduction
of
the
interest
paid
by
the
plaintiff
on
the
bank
loan,
the
money
was
borrowed
by
the
plaintiff
to
acquire
the
property,
to
create
the
ponds
and
to
instal
[sic]
the
equipment
necessary
to
operate
the
business.
He
was
under
a
legal
obligation
to
repay
the
principal
and
to
pay
the
interest
thereon.
However
a
cardinal
rule
of
interpretation
of
a
statute
is
that
the
statute
speaks
from
the
present
unless
the
context
requires
otherwise.
Subparagraph
11(1)(c)(i)
of
the
Income
Tax
Act
quoted
above
permits
the
deduction
in
computing
income
for
a
particular
year
of
an
amount
paid
in
the
year
pursuant
to
a
binding
legal
obligation
to
pay
interest
on“
borrowed
money
used
for
the
purpose
of
earning
income
from
a
business
or
property".
Income
tax
is
an
annual
affair.
While
theobligation
to
pay
the
interest
on
the
loan
continued
throughout
the
plaintiff's
1969
taxation
year,
the
money
borrowed
was
not
being
used
in
that
year
for
the
purpose
of
producing
income
from
a
business
in
that
year.
With
reluctance,
therefore,
I
conclude
that
consequent
upon
paragraph
11(1)(c)
the
deduction
of
the
interest
is
also
precluded."
[Emphasis
added—Official
English
version.]
4.03.3(6)
Counsel
for
the
respondent
also
referred
to
Deschenes
(4.02(9)),
Alexander
(4.02(10))
and
Lyons
(4.02(11),
in
which
the
sources
of
income
which
were
made
possible
by
the
loans,
no
longer
existed
at
the
time
when
the
interest
was
claimed.
4.03.3(7)
Counsel
for
the
appellant
had
already
referred
to
Emerson
(4.02(6))
because
of
the
commentary
b
R.B.
Thomas
in
the
Canadian
Tax
Journal
(4.02(5)),
entitled
"Short
shrift
for
an
important
principle".
In
that
case,
Mr.
Emerson
had
in
June,
1980
borrowed
$100,000
to
purchase
shares
in
three
small
business
owned
by
corporations.
In
August,
1981,
the
taxpayer
sold
his
shares
at
a
loss
of
$35,000.
At
the
same
time,
the
appellant
borrowed
$63,500
to
repay
the
first
loan.
The
interest
on
that
second
loan,
which
the
taxpayer
claimed,
was
the
subject
matter
of
the
case.
Mr.
Emerson
argued
subsection
20(3),
which
provides
that
"where
a
taxpayer
has
used
borrowed
money
to
repay
money
previously
borrowed
.the
borrowed
money
shall
be
deemed
to
have
been
used
for
the
purpose
for
which
the
money
previously
borrowed
was
used.
.
.
.”
Cullen,
J.
of
the
Federal
Court-Trial
Division
decided
that
that
provision
did
not
apply
because
at
the
time
of
the
second
loan
the
shares
purchased
with
the
first
loan
had
already
been
sold.
If
they
had
been
retailed,
the
judge
said,
the
interest
would
have
been
deductible
until
they
were
sold.
Then,
recalling
a
fundamental
principle,
he
states:
An
essential
requirement,
therefore,
of
any
deduction
on
account
of
interest
pursuant
to
20(1)(c)
is
the
existence
of
the
source
to
which
the
expense
relates
and
if
the
source
has
been
terminated,
as
is
the
case
here,
the
interest
expense
is
no
longer
deductible.
The
continuing
obligation
to
meet
the
interest
costs
of
an
outstanding
loan,
after
the
source
has
been
extinguished,
is
not
relevant.
[Official
English
version.]
The
Court
of
Appeal
affirmed
this
decision.
The
Supreme
Court
denied
leave
to
appeal
on
June
12,
1986.
4.03.3(8)
In
Bronfman
Trust,
the
central
issue
was
whether
the
money
borrowed
by
the
trust
had
been
used
to
produce
income.
The
Supreme
Court
said
it
had
not,
because
it
was
used
directly
to
pay
the
beneficiary,
which
did
not
generate
any
income.
The
fact
that
the
loan
indirectly
allowed
assets
such
as
the
sharesof
Gulf
Oil
of
Canada
to
be
preserved
is
not
a
justification,
in
view
of
the
provisions
of
subparagraph
20(1)(c)(i),
cited
above.
The
Supreme
Court
held,
at
pages
48-49
(C.T.C.
126,
D.T.C.
5065):
In
my
view,
neither
the
Income
Tax
Act
nor
the
weight
of
judicial
authority
permits
the
courts
to
ignore
the
direct
use
to
which
a
taxpayer
puts
borrowed
money.
One
need
only
contemplate
the
consequences
of
the
interpretation
sought
by
the
Trust
in
order
to
reach
the
conclusion
that
it
cannot
have
been
intended
by
Parliament.
In
order
for
the
Trust
to
succeed,
subparagraph
20(1)(c)(i)
would
have
to
be
interpreted
so
that
a
deduction
would
be
permitted
for
borrowing
by
any
taxpayer
who
owned
income-producing
assets.
Such
a
taxpayer
could,
on
this
view,
apply
the
proceeds
of
a
loan
to
purchase
a
life
insurance
policy,
to
take
a
vacation,
to
buy
speculative
properties,
or
to
engage
in
any
other
non-income-earning
or
ineligible
activity.
Nevertheless,
the
interest
would
be
deductible.
A
less
wealthy
taxpayer,
with
no
income-earning
assets,
would
not
be
able
to
deduct
interest
payments
on
loans
used
in
the
identical
fashion.
Such
an
interpretation
would
be
unfair
as
between
taxpayers
and
would
make
a
mockery
of
the
statutory
requirement
that,
for
interest
payments
to
be
deductible,
borrowed
money
must
be
used
for
circumscribed
income-earning
purposes.
[Official
English
version.]
The
Supreme
Court
further
confirms
that
it
is
the
current
use
of
the
borrowed
funds
which
must
be
considered,
and
not
the
original
use.
At
page
47,
we
read
:
The
cases
are
consistent
with
the
proposition
that
it
is
the
current
use
rather
than
the
original
use
of
borrowed
funds
by
the
taxpayer
which
is
relevant
in
assessing
deductibility
of
interest
payments:
see,
for
example,
Lakeview
Gardens
Corp.
v.
M.N.R.,
[1973]
C.T.C.
586
(F.C.T.D.)
per
Walsh
J.,
for
a
correct
application
of
this
principle.
A
taxpayer
cannot
continue
to
deduct
interest
payments
merely
because
the
original
use
of
borrowed
money
was
to
purchase
income-bearing
assets,
after
he
or
she
has
sold
those
assets
and
put
the
proceeds
of
sale
to
an
ineligible
use.
To
permit
the
taxpayer
to
do
so
would
result
in
the
borrowing
of
funds
to
finance
the
purchase
of
incoming
property
which
could
be
re-sold
immediately
without
affecting
the
deductibility
of
interest
payments
for
an
indefinite
period
thereafter.”
[Emphasis
added—Official
English
version.]
Counsel
for
the
respondent
argues
that
the
principle
set
out
above
also
applies
when
the
capital
property
purchased
with
the
borrowed
money
is
lost
because
of
a
bankruptcy.
4.04
Decision
4.04.1
With
respect
to
the
appellants
first
argument
(4.03.2(2)),
that
is,
that
because
the
appellants
still
own
the
shares
of
Four
Brothers
and
because
the
company
still
exists,
the
source
of
income
still
exists
even
if
it
is
not
generating
any
income,
I
am
of
the
view
that
Four
Brothers
is
a
mere
shell,
a
tool.
The
real
source
of
income
is
the
business
which
disappeared
with
the
bankruptcy.
Another
business
might
perhaps
be
reborn
“from
the
ashes
of
the
first
but
it
would
be
a
new
source
of
income.
There
is
no
longer
any
reasonable
expectation
of
profit
from
the
old
source.
4.04.2
The
appellant's
second
argument
seems
to
me
to
be
prima
fade
more
serious.
4.04.2(1)
It
is
precisely
as
a
result
of
the
first
source
of
income,
which
already
existed
before
the
loan
and
the
creation
of
Four
Brothers,
that
is,
the
five
apartment
buildings,
that
the
loan
was
possible,
that
it
was
possible
to
create
Four
Brothers
and
that
it
was
possible
to
establish
the
second
source
of
income,
the
grocery
store
chain.
After
the
death
of
that
second
source,
which
was
born
of
the
loan,
the
first
source
securing
the
loan
continued
to
exist
(3.06),
but
its
survival
was
conditional
on
payment
of
the
principal
and
interest
on
the
loan.
In
these
circumstances,
do
the
provisions
of
paragraph
20(1)(c)
permit
the
deduction
of
that
interest,
paid
after
June,
1983?
The
spirit
and
intention
of
this
provision,
which
was
referred
to
above
(4.01),
were
the
subject
of
comment
in
Bronfman
Trust,
at
page
45
(C.T.C.
124,
D.T.C.
5064):
It
is
perhaps
otiose
to
note
at
the
outset
that
in
the
absence
of
a
provision
such
as
paragraph
20(1)(c)
specifically
authorizing
the
deduction
from
income
of
interest
payments
in
certain
circumstances,
no
such
deductions
could
generally
be
taken
by
the
taxpayer.
Interest
expenses
on
loans
to
augment
fixed
assets
or
working
capital
would
fall
within
the
prohibition
against
the
deduction
of
a
"payment
on
account
of
capital”
under
paragraph
18(1)(b):
Canada
Safeway
Ltd.
v.
M.N.R.,
[1957]
S.C.R.
717,
[1957]
C.T.C.
335,
57
D.T.C.
1239,
at
pages
722-23
per
Kerwin,
C.J.
and
at
page
727
per
Rand,
J.
[Official
English
version.]
In
that
case,
Canada
Safeway
Ltd.,
Rand,
J.
states,
inter
alia,
at
page
727
(C.T.C.
345,
D.T.C.
1244):
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.
[Official
English
version.]
This
was
furthermore
the
point
on
which
the
Supreme
Court
relied
in
Bronfman
Trust
in
refusing
the
interest
deduction:
the
direct
or
immediate
purpose
of
the
loan
was
not
to
produce
income
but
to
pay
the
beneficiary
of
the
trust.
4.04.2(2)
In
this
case,
it
is
not
the
question
of
the
direct
purpose
which
is
in
issue,
but
rather
the
following:
can
the
first
source
of
income,
the
apartment
buildings
given
as
security
for
the
loan,
become,
after
June
23,
1983,
that
is,
after
the
second
source
of
income
born
out
of
the
loan
was
extinguished,
a
valid
source
which
can
support
the
deduction,
both
because
of
the
causal
link
between
this
first
source
and
the
loan
and
because
of
the
obligation
to
pay
the
principal
and
interest
in
order
to
preserve
that
source?
First,
the
principal
borrowed
was
not
used
for
the
apartment
buildings,
and
second,
their
survival
depends
on
payment
of
the
mortgages,
that
is,
of
the
outstanding
principal
borrowed
and
the
interest
thereon.
Can
the
decision
in
Mandryk
be
applied
to
the
present
case?
In
my
view,
it
is
difficult
to
apply
that
case
to
the
present
case,
primarily
because
the
Court
was
persuaded
that
all
of
the
real
estate
activities,
including
Stoney
Court,
were
the
taxpayer's
personal
business,
and
the
taxpayer
had
consolidated
the
debts
and
reacquired
the
assets
of
Stoney
Court,
which
had
never
gone
bankrupt
(4.03.2(4)),
as
counsel
for
the
respondent
noted
(4.03.3(3)).
Nor,
in
my
view,
does
Emerson
(4.03.3(7))
apply,
because
the
source
of
income
had
completely
disappeared,
but
there
was
no
other
source
having
any
connection
with
the
loan
as
there
is
here:
in
the
present
ease,
while
the
source
of
income
derived
from
the
loan
had
disappeared,
the
first
source,
which
had
moreover
made
the
loan
possible,
still
exists,
and
again
it
is
as
a
result
of
that
first
source
that
the
appellants
were
able
to
continue
to
pay
the
loan,
the
condition
sine
qua
non
for
preserving
that
source.
4.04.2(3)(a)
Can
we
not
say
that,
beginning
on
June
23,
1983,
there
was
a
change
of
source?
4.04.2(3)(b)
Moreover,
the
facts
of
this
case
are
somewhat
unusual.
The
existing
case
law
does
not
have
sufficient
application.
Can
it
not
be
said
that
the
interpretation
is,
at
least,
unclear
and
that
the
rule
set
out
by
the
Supreme
Court
in
Johns-Manville
Canada
Inc.,
cited
above
(4.03.2(6))
applies
to
ensure
a
reasonable
interpretation
in
favour
of
the
taxpayer?
There
is
some
value
in
quoting
this
passage
again;
it
reads
as
follows:
On
the
other
hand,
if
the
interpretation
of
a
taxation
statute
is
unclear,
and
one
reasonable
interpretation
leads
to
a
deduction
to
the
credit
of
a
taxpayer
and
the
other
leaves
the
taxpayer
with
no
relief
from
clearly
bona
fide
expenditures
in
the
course
of
his
business
activities,
the
general
rules
of
interpretation
of
taxing
statutes
would
direct
the
tribunal
tothe
former
interpretation.
That
is
the
situation
here,
in
my
view
of
these
statutory
provisions.
These
expenditures
were
clearly
made
for
bona
fide
purposes.
They
clearly
are
not
defined
by
paragraph
12(1)(a)
nor
by
any
other
section
of
the
Income
Tax
Act
dealing
with
expenditures
in
the
course
of
operating
a
business.
The
only
possible
basis
in
the
statute
fora
denial
of
these
bona
fide
expenditures
closely
associated
with
the
conduct
of
the
taxpayer's
mining
operations
is
the
prohibition
in
paragraph
12(1)
(b)
relating
to
capital
expenditures.
[Emphasis
added—Official
English
version.]
In
the
present
case
as
well
the
only
possible
basis
in
the
Act
for
a
denial
of
this
bona
fide
expenditure
is
paragraph
18(1)(b)
(formerly
paragraph
12(1)(b)),
if
we
refer
back
(4.04.2(1))
to
the
comments
of
Dickson,
J.
in
Bronfman
Trust
on
the
origin
of
paragraph
20(1)(c).
4.04.2(3)(c)
Finally,
can
we
not
say
that
the
interest
paid
as
of
June
23,
1983
may
be
“reasonably”
considered
as
relating
to
that
source
within
the
meaning
of
the
introduction
to
paragraph
20(1)(c)?
4.04.2(4)
I
was
strongly
inclined
to
answer
these
three
questions
in
the
affirmative.
I
then
returned
to
each
of
the
questions,
rereading
paragraph
20(1)(c)
for
the
nth
time;
it
is
perhaps
useful
to
cite
it
again
here:
20.
Deductions
permitted
in
computing
income
from
business
or
property.
(1)
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
(other
than
borrowed
money
used
to
acquire
property
the
income
from
which
would
be
exempt
or
to
acquire
a
life
insurance
policy),
4.04.2(4)(a)
In
response
to
the
question
in
paragraph
(a)
of
4.04.2(3)
in
respect
of
the
change
of
source,
subparagraph
20(1)(c)(i)
does
not
seem
to
be
broad
enough
to
permit
a
change
of
source:
that
provision
requires
that
the
interest
be
paid
in
the
year
on
“borrowed
money
used
for
the
purpose
of
earning
income
from
a
business”.
The
business
which
was
created
with
the
borrowed
money
no
longer
exists.
These
funds
were
never
used
for
the
apartment
buildings.
The
fact
that
those
buildings
were
used
as
security
for
the
loan,
and
that
after
the
bankruptcy
of
the
companies
the
ability
of
the
appellants
to
retain
ownership
of
the
buildings
depended
on
payment
of
the
mortgages,
does
not
alter
the
text
of
the
Act:
”
.
.
.borrowed
money
used.
.
.
.”
From
this
point
of
view,
the
only
way
to
deduct
the
cost
of
the
interest
would
have
been
for
the
interest
to
be
paid
with
the
principal
when
the
appellants
could
see
the
bankruptcy
coming,
under
an
agreement
with
the
lender
which
could
have
agreed
to
ignore
the
clause
taking
away
the
right
to
pay
in
advance
(paragraph
2
of
Exhibit
A-4
(3.02)).
However,
they
would
probably
have
had
to
borrow
once
again
for
this
purpose.
The
interest
paid
on
that
new
loan
after
the
bankruptcy
could
not
then
have
been
deducted,
even
under
subsection
20(3)
(see
Emerson
(4.03.3(7)).
4.04.2(4)(b)
With
respect
to
the
question
in
paragraph
of
4.04.2(3),
as
to
the
application
of
the
principle
of
interpretation
set
out
in
Johns-Manville
Canada
Inc.,
subparagraph
20(1)(c)(i)
clarifies
the
interpretation
to
the
point
that
there
is
no
need
to
use
the
principle.
4.04.2(4)(c)
With
respect
to
the
question
in
paragraph
(c)
of
4.04.2(3),
relating
to
the
introduction
of
20(1)(c)
[s/c],".
.
.or
such
part
of
the
following
amounts
as
may
reasonably
be
regarded
as
applicable
thereto"
(i.e.
the
source
of
income),
it
seems
to
me
that
this
provision
applies
in
cases
where
the
money
is
used
for
two
different
purposes:
it
may
be
that
the
money
from
a
loan
(subparagraph
20(1)(c)(i))
might
be
used
to
create
two
different
businesses
or
even
in
part
for
a
business
and
in
part
to
acquire
personal
property
(a
house,
and
so
on).
We
must
then
attribute
to
the
source
of
income
that
part
of
the
interest
which
may
reasonably
be
applicable
thereto.
The
same
would
be
true
for
a
taxpayer
who
would
purchase
directly
from
another
person
two
different
properties,
for
example
a
business
and
a
family
home
(subparagraph
20(1)(c)(ii)).
In
this
case,
the
situation
is
clear.
The
bankruptcy
occurred
on
June
20
[sic],
1983,
and
this
date
clearly
establishes
the
demarcation
line
in
computing
interest.
It
therefore
has
no
application
in
this
case.
4.05
The
alternative
argument
4.05.1
The
appellants’
alternative
argument
is
as
follows:
the
interest
paid
as
of
the
bankruptcy
of
June
23,
1983
is
part
of
the
business
investment
loss,
under
paragraph
39(1)(c)
and
subsection
50(1)
of
the
Act.
The
$442,849
loss
was
also
calculated
in
accordance
with
these
two
provisions,
which
is
not
in
issue:
it
was
taken
into
consideration
that
the
use
of
the
$1,771,394
principle
(3.02)
both
to
purchase
shares
in
Four
Brothers
and
to
make
advances
to
it
thus
met
the
conditions
in
the
provisions
of
the
Act
referred
to
above.
Half
constituted
a
capital
loss:
$885,697,
shared
equally
by
the
two
appellants,
for
$442,849
each.
It
is
quite
obvious
in
this
calculation
that
the
interest
paid
up
to
the
date
of
the
bankruptcy
was
not
taken
into
consideration,
because
it
had
already
been
deducted
under
paragraph
20(1)(c).
Only
the
interest
paid
after
the
date
of
the
bankruptcy
is
claimed
by
the
appellants:
|
1983
|
$
91,356
|
|
1984
|
99,780
|
|
1985
|
112,649
|
|
$303,785
|
The
capital
loss
on
this
amount
(2.01(3)(g))
would
thus
amount
to
$151,852.50,
or
$75,946.25
for
each
of
the
appellants,
if
their
argument
is
correct.
4.05.2
Since
the
interest
cannot
be
deducted
under
paragraph
20(1)(c)
it
cannot
be
deducted
in
computing
net
income
under
paragraph
18(1)(a):
as
was
held
by
the
Supreme
Court
in
both
Bronfman
Trust
and
Canada
Safeway
Ltd.,
interest
"would
fall
within
the
prohibition
against
the
deduction
of
a
payment
on
account
of
capital
under
paragraph
18(1)(b)”
(4.04.2(1)).
The
relationship
of
interest
to
capital,
is
that
of
ancillary
to
primary,
and
interest
is
probably
in
the
nature
of
capital
for
the
purposes
of
the
Income
Tax
Act.
It
therefore
seems,
prima
facie,
that
this
interest
could
form
part
of
the
business
investment
loss.
4.05.3
On
the
other
hand,
can
we
still
consider
the
payments
made
to
the
company
after
it
went
bankrupt
to
be
advances?
It
is
clear
from
the
judgment
of
the
Supreme
Court
in
G.H.
Steer
(4.02(4))
that,
in
a
similar
case
for
that
time,
we
must
place
ourselves
at
the
point
when
a
loan
or
guarantee
transaction
takes
place,
not
at
the
point
when
the
borrower
or
the
guarantor
must
pay,
in
order
properly
to
determine
the
nature
of
the
transaction.
In
that
case,
Mr.
Steer,
the
taxpayer,
had
received
one
quarter
of
the
shares
of
an
oil
company
in
1951
in
return
for
guaranteeing
the
company's
indebtedness
to
the
bank
to
a
maximum
of
$62,500.
In
1957,
as
a
result
of
the
company's
financial
difficulties,
Mr.
Steer
was
obliged
to
repay
the
bank.
He
claimed
this
payment
as
a
deduction.
The
Supreme
Court,
reversing
a
decision
of
the
Exchequer
Court
and
affirming
the
decision
of
the
Tax
Review
Board,
decided
that
this
was
a
capital
loss
and
that
its
deduction
was
prohibited
by
subsection
12(1)(b)
of
the
Act.
At
page
732,
the
Supreme
Court
states:
“The
guarantee
meant
that
at
some
time
the
respondent
might
have
to
step
into
the
bank's
shoes
to
this
extent.
At
the
time
of
the
debtor's
bankruptcy,
he
is
subrogated
to
the
bank
and
becomes
a
creditor
in
the
bankruptcy.
He
may
even
receive
a
bankruptcy
dividend,
as
in
Steer.
The
Supreme
Court
went
on:
“The
transaction
[theguarantee]
was
a
deferred
loan
to
the
company,
part
of
which
was
recovered
in
the
bankruptcy.
These
bankruptcy
dividends
were
not
income
but
a
partial
recovery
of
a
capital
loss.
They
are
in
no
way
analogous
to
the
consideration
received
in
1951
as
the
respondent's
remuneration
for
the
guarantee,
which
I
have
characterized
as
a
deferred
loan.“
The
capital
loss
was
not
yet
deductible
in
1957,
under
the
Act.
In
the
case
at
bar,
the
interest
paid
as
of
June
23,
1983
is
not
deductible
under
paragraph
20(1)(c)
and
therefore
falls
under
the
jurisdiction
of
paragraph
18(1)(b).
If
we
go
back
to
the
origin
of
the
loan
in
1982,
everything
was
done
for
the
purpose
of
earning
income
and
it
thus
falls
within
the
exception
set
out
in
subparagraph
40(2)(g)(ii).
From
this
point
of
view,
the
interest
being
in
the
nature
of
capital
(4.04.2(1)
and
4.05.2),
it
seems
to
be
justified
to
find
that
it
is
in
the
nature
of
a
business
investment
loss.
4.05.4
The
interest
paid
after
the
bankruptcy
arises
from
the
undertaking
entered
into
before
the
bankruptcy.
To
my
mind,
the
fact
that
the
source
of
income
which
the
loan
created
has
been
extinguished
changes
nothing
in
the
calculation
of
the
business
investment
loss.
We
are
not
dealing
with
paragraph
20(1)(c),
but
rather
with
paragraph
39(1)(c)
and
subsection
50(1)
which
come
under
not
Subdivision
b
(Division
B
of
Part
I
of
the
Act),
dealing
with
income
or
loss
from
business
or
property,
where
we
find
paragraph
20(1)(c),
but
rather
with
Subdivision
c
of
Division
B,
which
deals
with
taxable
capital
gains
and
allowable
capital
losses.
Section
50
starts
out
by
stating:
For
the
purposes
of
this
subdivision.
.
."
and
provides
that
when
a
debt
has
become
a
bad
debt,
the
taxpayer
“shall
be
deemed
to
have
disposed
of
the
debt
or
the
share,
as
the
case
may
be,
at
the
end
of
the
year
and
to
have
reacquired
it
immediately
thereafter
at
a
cost
equal
to
nil”.
This
condition
has
been
met
here.
Finally,
the
principle
of
tax
interpretation
set
out
by
the
Supreme
Court
in
Johns-Manville
Canada
Inc.
could
be
applicable
here
if
we
find
that
the
interpretation
was
not
clear.
As
in
Johns-Manville
Canada
Inc.,
the
issue
in
this
case
is
also
paragraph
18(1)(b)
and
originally
the
expense
was
incurred
for
the
purpose
of
earning
income,
except
that
here
paragraph
18(1)(a)
cannot
be
applied.
I
therefore
find
that
the
interest
paid
after
the
business
bankruptcy
in
1983,
1984
and
1985
must
be
considered
in
calculating
the
business
investment
loss.
4.05.5
However,
this
conclusion
does
not
affect
the
fact
that
since
the
1980
to
1984
taxation
years
were
nil
the
reassessments
are
upheld
(3.03).
The
increase
of
$75,946.25
for
each
appellant
in
the
amount
of
the
business
investment
loss
will
certainly
affect
1985,
and
perhaps
also
1986.
However,
the
Court
does
not
have
the
figures
in
hand
to
make
this
determination
with
any
certainty.
The
loss
might
even
affect
one
appellants
1986
taxation
year
and
not
the
other's.
The
Court
therefore
allows
the
appeal
for
1986
as
well,
to
the
extent
that
the
loss
is
applicable.
5.
Conclusion
The
appeals
in
respect
of
1980,
1981,
1982,
1983
and
1984
are
dismissed.
The
appeals
in
respect
of
1985
and
1986
are
allowed,
with
costs,
for
the
foregoing
reasons.
Appeals
allowed
in
part.
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