Citation: 2014 TCC 26
Date: 20140123
Docket: 2013-1893(IT)I
BETWEEN:
Alexander C. Doulis,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre J.
[1]
This is an appeal from
a reassessment made by the Minister of National Revenue (Minister) for
the 2010 taxation year. The Minister disallowed an interest expense in the amount
of $8,953.
[2]
This amount corresponds
to the amount of interest paid by the appellant to the Canada Revenue Agency (CRA)
on the outstanding arrears of taxes owed by him under the Income Tax Act
(ITA).
[3]
The appellant stated in
his notice of appeal that he had opened in the Isle of Man, UK, an investment
account from which he received interest and capital gains that he reported to
the CRA. He indicated that he financed this investment account with funds that he
would have otherwise paid to the CRA for tax owed pursuant to the ITA. He now
claims that, as a result of his indebtedness to the CRA, he incurred an
interest expense, namely, the interest paid to the CRA on the tax arrears
amount used to fund his investment account. In his view, the interest amount
paid to the CRA ($8,953) is an amount paid or payable pursuant to a legal
obligation to pay interest on borrowed money from the CRA used for the purpose
of earning income from his investment in the UK, which interest amount, he
states, is deductible pursuant to paragraphs 18(1)(a) and 20(1)(c)
of the ITA.
[4]
The appellant further asserts
that the interest was paid to the CRA under a contractual obligation which was
created in the context of a borrower-lender relationship between him and the
CRA. He contends that the writ of seizure and sale obtained by the CRA against
him with regard to his shares and dividends (Exhibit A-1) is evidence of the
existence of a legal debt owed by him to the CRA arising from moneys borrowed from
the CRA.
[5]
Counsel for the
respondent argued that the interest amount at issue was paid by virtue of a
legal obligation to pay interest with respect to taxes owing for prior years in
accordance with subsection 161(1) of the ITA. Hence the interest amount at
issue was paid or payable under the ITA and therefore, pursuant to paragraph
18(1)(t) of the ITA, not deductible.
[6]
In the alternative, counsel
for the respondent argued that, should I accept that the appellant borrowed
money from the CRA, the interest was not paid on funds borrowed and used
directly for the purpose of earning income from a business or property in
accordance with paragraphs 18(1)(a) and 20(1)(c).
Statutory provisions
18. (1) General
limitations — In computing
the income of a taxpayer from a business or property no deduction shall be made
in respect of
(a) General limitation — an outlay or expense except to the extent that it
was made or incurred by the taxpayer for the purpose of gaining or producing
income from the business or property;
(b) Capital outlay or loss — an
outlay, loss or replacement of capital, a payment on account of capital or an
allowance in respect of depreciation, obsolescence or depletion except as
expressly permitted by this Part;
. . .
(h) Personal and living expenses — personal or living expenses of the
taxpayer, other than travel expenses incurred by the taxpayer while away from
home in the course of carrying on the taxpayer’s business;
. . .
(t) Payments under different acts — any amount paid or
payable
(i) under
this Act (other than tax paid or payable under Part XII.2 or Part XII.6),
(ii) as
interest under Part IX of the Excise Tax Act, or
(iii) as interest under the Air Travellers Security Charge 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 on the method regularly
followed by the taxpayer in computing the taxpayer’s 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),
(ii) an amount payable for property acquired
for the purpose of gaining or producing income from the property or for the
purpose of gaining or producing income from a business (other than property the
income from which would be exempt or property that is an interest in a life
insurance policy),
. . .
Interest
161. (1) General — Where at any time after a taxpayer’s balance-due day for a taxation
year
(a) the total of the
taxpayer’s
taxes payable under this Part and Parts I.3, VI and VI.1 for the year
exceeds
(b) the total of all
amounts each of which is an amount paid at or before that time on account of
the taxpayer’s tax payable and applied as at that time by the Minister against
the taxpayer’s liability for an amount payable under this Part or Part I.3, VI
or VI.1 for the year,
the taxpayer shall pay to
the Receiver General interest at the prescribed rate on the excess, computed
for the period during which that excess is outstanding.
. . .
PART XVII — INTERPRETATION
248. (1) Definitions — In this Act,
. . .
“amount”
means money, rights or things expressed in terms of the amount of money or the
value in terms of money of the right or thing, except that . . .
. . .
“borrowed money” includes the proceeds to a taxpayer
from the sale of a post-dated bill drawn by the taxpayer on a bank;
“business” includes a profession, calling, trade,
manufacture or undertaking of any kind whatever and, except for the purposes of
paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph
110.6(14)(f), an adventure or concern in the nature of trade but does
not include an office or employment.
Analysis
[7]
I am of the view that
subparagraph 18(1)(t)(i) of the ITA clearly prohibits the deduction of
the interest amount at issue here.
[8]
That interest amount is
an amount paid or payable under “this Act” (the ITA). It was by the application
of subsection 161(1) of the ITA that the appellant was obligated to pay the
interest on tax owed for prior years. The fact that subparagraph 18(1)(t)(i)
does not specify what particular amounts are non-deductible under the ITA does
not mean that interest is excluded from the amounts paid or payable under the
ITA that may not be deducted pursuant to that provision. On the contrary, it
means that no amount paid or payable under the ITA, other than tax paid or
payable under Part XII.2 or Part XII.6 (of which there is none involved here),
may be deducted in computing income.
[9]
This interpretation is
consistent with the Explanatory Notes to Legislation Relating to Income Tax
issued by the Minister of Finance in June 1989, where, in clause 8 dealing with
the introduction of paragraph 18(1)(t), it is stated:
Clause
8
General
Limitations
ITA
18(1)(t)
Section
18 of the Act prohibits the deduction of certain outlays and expenses in
computing a taxpayer’s income from a business or property. This amendment,
which is applicable to the 1989 and subsequent taxation years, adds new
paragraph 18(1)(t) and denies a deduction in respect of any amount – including
taxes, interest and penalties – payable under the Act.
[10]
This approach was also
confirmed in Godsell v. The Queen, 96 DTC 1292 at 1294, [1995] T.C.J.
No. 1757 (QL) at paragraph 18, aff’d. 2001 FCA 196, 2001 DTC 5384, [2001]
F.C.J. No. 947 (QL).
[11]
The appellant argued
that subparagraph 18(1)(t)(i) should not be read as including interest
paid under the ITA because subparagraphs 18(1)(t)(ii) and (iii), which
follow that provision, specifically state that interest under Part IX of the Excise
Tax Act and interest under the Air Travellers Security Charge Act is
an amount that may not, pursuant to paragraph 18(1)(t), be deducted.
[12]
I do not accept that
argument. Subparagraphs 18(1)(t)(ii) and (iii) simply state that
interest paid under those two specific Acts may not be deducted from income. As
I said before, subparagraph 18(1)(t)(i) states that any amount paid
under the ITA, with the exception of tax under Part XII.2 and Part XII.6 (of which
there is none involved here), is not deductible, which includes interest. It is
a case where the words of the provision are precise and unequivocal and do not support
the alternative meaning suggested by the appellant.
[13]
Furthermore, I also
accept the respondent’s view that the interest payment is not deductible
pursuant to paragraph 20(1)(c) of the ITA either. First, the appellant
did not, properly speaking, borrow money from the CRA. There is no evidence of
a relationship of lender and borrower between the parties. The CRA did not
agree to loan money to the appellant. The appellant owes tax to the CRA by
virtue of legislation (the ITA).
[14]
There is not in this case
a contractual agreement between two parties. We are not in a situation where
capital was borrowed such that there existed a relationship of lender and
borrower between the parties (Minister of National Revenue v. T. E. McCool
Ltd., [1950] S.C.R. 80.
[15]
Second, even if there
was a borrower-lender relationship, it is clear that the direct use of the
“borrowed money” was not the investment of that money outside the country, but
rather the payment of interest on the appellant’s personal income tax owed to
the CRA.
[16]
As a result, the
interest expense is not deductible (Singleton v. Canada, 2001 SCC 61, [2001]
2 S.C.R. 1046; LeCaine v. The Queen, 2009 TCC 382, 2009 DTC 1246, [2009]
T.C.J. No. 296 (QL)).
[17]
The appeal is
dismissed.
Signed at Quebec, Quebec, this 23rd day of January 2014.
“Lucie Lamarre”
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