Date: 19991209
Docket: A-367-97
CORAM: STRAYER J.A.
LÉTOURNEAU J.A.
NOËL J.A.
BETWEEN:
THE CHASE MANHATTAN BANK OF CANADA
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
| Heard at Toronto, Ontario, on Thursday, December 9, 1999 |
Judgment Delivered Orally from the Bench at Toronto, Ontario
on Thursday, December 9, 1999
REASONS FOR JUDGMENT BY: NOËL J.A.
Date: 19991209
Docket: A-367-97
CORAM: STRAYER J.A.
LÉTOURNEAU J.A.
NOËL J.A.
BETWEEN:
THE CHASE MANHATTAN BANK OF CANADA
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
(Delivered from the Bench at Toronto, Ontario on
Thursday, December 9, 1999)
NOËL J.A.:
I. This is an appeal from a decision of the Tax Court of Canada holding that a former subsidiary of the appellant was not entitled to deduct interest paid on an the major portion of a $36 M. loan advanced by the appellant. The subsidiary in question has since been wound up and the appellant in these proceedings is seeking to uphold the deduction as claimed in the computation of the subsidiary"s income for its 1986 and 1987 taxation years.
II. The subsidiary was in the business of leasing equipment to arm"s length third parties. It was incorporated in 1980 as the appellant"s leasing subsidiary. From inception to the period up to and including 1985, its financing was provided by the appellant in the form of interest bearing advances. At that juncture, a decision was made to shift the cost of financing the operations of the subsidiary from the subsidiary to the appellant. This was achieved by having the appellant purchase share capital of the subsidiary out of borrowed funds. Towards the same end, the appellant in February of 1986 bought additional common shares of the subsidiary by offsetting the interest bearing advances owed to it which then stood at $37 M.
III. This change in the financing structure was brought about in the expectation that the appellant would thereafter be in a taxable position and the subsidiary would not. However, these financial results did not materialize. The 1986 taxation year of the appellant resulted in a loss whereas the subsidiary reported a gain. Anticipating similar results in the future, a decision was made to reverse the effect of the February 1986 share purchase.
IV. For that purpose an interest bearing loan of $36 M. was advanced by the appellant to the subsidiary which was followed by a $45 M. cash dividend. It is the deduction of the interest paid by the subsidiary to the appellant under this $36 M. loan that is in issue in this appeal.
V. The Minister disallowed the deduction except for a portion computed by reference to the subsidiary"s retained earnings as these stood prior to the payment of the dividend.1 In allowing the deduction of this portion of the interest, the Minister recognized in effect that the loan, up to the amount of the retained earnings, served to replenish the working capital of the subsidiary.
VI. The appellant attempted to convince the Tax Court that the balance of the interest paid on the loan was also deductible based on the reasoning advanced by Jackett P. in Trans-Prairie Pipelines Ltd. v. MNR [1970] C.T.C. 537. McArthur T.C.C.J. denied the appeal. He found that contrary to the situation in Trans-Prairie, it has not been shown in this instance that the loan had been used to fill a "real hole" in the capital requirements of the subsidiary.
VII. The direct use of the borrowed funds was to pay the dividend. As to its alleged indirect use, the evidence indicates that at the time of the borrowing, the capital used in the business was constituted by $39 M. of share capital contributed by the appellant shareholder. This amount was not redeemed or cancelled. None of the share capital was converted to debt. Except to the extent of the retained earnings the borrowing was not a replacement of moneys that had been withdrawn for the business. While the continued operations of a business after the withdrawal of its working capital suggests that other funds are being used in the conduct of the business, no such inference arises here.
VIII. In order to succeed, it was incumbent upon the appellant to demonstrate that the borrowed funds were being put to eligible use by the subsidiary during the relevant taxation years. This demonstration has not been made.
IX. The appeal will be dismissed with costs.
"Marc Noël"
J.A.
FEDERAL COURT OF CANADA
Names of Counsel and Solicitors of Record
DOCKET: A-367-97
| STYLE OF CAUSE: THE CHASE MANHATTAN BANK OF CANADA |
DATE OF HEARING: THURSDAY, DECEMBER 9, 1999
PLACE OF HEARING: TORONTO, ONTARIO
| REASONS FOR JUDGMENT BY: NOËL J.A. |
Delivered at Toronto, Ontario
on Thursday, December 9, 1999
APPEARANCES: Mr. Jeffrey W. Galway
Ms. S. Patricia Lee
| SOLICITORS OF RECORD: Blake, Cassels & Graydon |
Commerce Court West
Toronto, Ontario
Morris Rosenberg
| Deputy Attorney General of Canada |
FEDERAL COURT OF APPEAL
Date: 19991209
Docket: A-367-97
BETWEEN:
| THE CHASE MANHATTAN BANK OF CANADA |
Appellant
Respondent
__________________
1 The retained earnings stood at approximately $5 M.
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