Stirling v. The Queen, 83 DTC 5252, [1983] CTC 220 (FCTD), rev'd 85 DTC 5199, [1985] 1 CTC 275 (FCA)

Rouleau, J:—The plaintiff, during the years 1971 through 1975, acquired gold bullion and disposed of it in the years 1972 and 1975. The capital gain was declared, less carrying charges related to the financing of the acquisition as well as safekeeping charges. Both were disallowed by the Minister. Exhibits 2 and 3 filed, are agreed statements of facts elaborating the preceding summary.

The question that arises in this appeal, is whether, in computing the capital gain from the disposition, there may be deducted only the price paid for the bullion; or, may he also deduct the interest paid on the money owed to the vendor, subsequent to the purchase, during the period the plaintiff held the gold; as well as safekeeping charges paid by him. We shall be discussing throughout the consolidated Income Tax Act, 1975-76.

Pursuant to section 3 of the Income Tax Act, there is a requirement to declare and pay tax on capital gains, when the income earned is not as defined under paragraph 3(a):

The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:

(a) determine the aggregate of amounts each of which is the taxpayer’s income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property;

(b) determine the amount, if any, by which

(i) the aggregate of his taxable capital gains for the year from dispositions of property other than listed personal property, and his taxable net gain for the year from dispositions of listed personal property,

Paragraph 38(a) provides that the taxable capital gain is one half of the gain derived from the disposition of any property:

38. Meaning of taxable capital gain and allowable capital loss.

For the purposes of this Act,

(a) a taxpayer’s taxable capital gain for a taxation year from the disposition of any property is % of his capital gain for the year from the disposition of that property;

Subparagraph 40(1 )(a) defines gain as the proceeds of disposition,

General rules

(1) Except as otherwise expressly provided in this Part

(a) a taxpayer’s gain for a taxation year from the disposition of any property is the amount, if any, by which

(i) if the property was disposed of in the year, the amount, if any, by which his proceeds of disposition exceeds the aggregate of the adjusted cost base to him of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by him for the purposes of making the disposition,

Paragraph 54(a) provides for the general rules governing “adjusted cost base”:

(a) “Adjusted cost base”.—“adjusted cost base” to a taxpayer of any property at any time means, except as otherwise provided,

(i) where the property is depreciable property of the taxpayer, the capital cost to him of the property as of that time, and

(ii) in any other case, the cost to the taxpayer of the property adjusted, as of that time, in accordance with section 53,

except that

(iii) for greater certainty, where any property of the taxpayer is property that was reacquired by him after having been previously disposed of by him, no adjustment to the cost to him of the property that was required to be made under section 53 before its reacquisition by him shall be made under that section to the cost of him of the property as reacquired property of the taxpayer,

and

(iv) in no case shall the adjusted cost base of any property at the time of its disposition by the taxpayer be less than nil:

section 53 provides for computing the adjusted cost base of property: there shall be added to the cost such amounts described in subsection 1 that are applicable; and there shall be deducted the amounts described in subsection 2.

The plaintiff submits that when gold is purchased with borrowed money, held for a period of time under safekeeping arrangements, that costs before disposition, not only includes the price paid for the gold, but also the interest on the borrowed money together with safekeeping charges.

The Minister argues that the latter cannot be added to make up the adjusted cost, because they are not provided for under the Income Tax Act. Counsel for the Minister referred to a series of authorities: Tuxedo Holding Co Ltd v MNR, [1959] CTC 172; 59 DTC 1102; The Queen v Canadian Pacific Limited, [1977] CTC 606; 77 DTC 5383; The Lord Mayor, Aldermen and Citizens of the City of Birmingham v Barnes (Inspector of Taxes), [1935] AC 292; Metropolitan Properties Co Ltd v MNR, [1982] CTC 2254; 82 DTC 1258; as well as some American rulings: Georgia Cypress Co v South Carolina Tax Commission, 22 SE 2d 419; Fraser v Commissioner of Internal Revenue, 25 F 2d 653.

I have reviewed these authorities and they do not appear to address the issue which is being litigated. They demonstrate, in various factual situations, how they arrive at determining whether moneys applied to the acquisition and disposition of property was “capital cost” or whether it should be considered a “business expense”.

Counsel for the Minister submits that the acquisition and disposal of gold bullion is akin to a taxpayer acquiring and financing an automobile or a summer cottage. Upon the disposition of these items, one cannot deduct the carrying charges incurred. I find the analogy irrelevant, since the examples used are not of the same class and they are provided for specifically under paragraph 18(1 )(h)* [1] of the Income Tax Act.

The plaintiff suggests that allowing the expense of the cost of the money and the safekeeping is a fair reading of the statutory provisions. Though the matter being litigated is not specifically dealt with under the Income Tax Act, he submits that by section 11 of the Interpretation Act, one is required, when reading an enactment that it: “shall be given such fair large and liberal construction and interpretation as best insures the attainment of its object” (section 11. of the Interpretation Act, RSC 1970, c I-23). Only such an interpretation could ensure the attainment of the object of the capital gain tax provisions, which were to bring all gains from disposition of property into the income base for taxation purposes.

He submits, that should I find that the Minister may exclude such costs from the computation of the gain, it would result in bringing something more than the actual gain into the computation of income; to that extent, the provision would fail in the attainment of its object, which is to impose a tax on “actual gain not otherwise, subject to tax”.

Capital costs of property incorporated into a business or property acquired to produce income seems to be well-settled. There is no doubt that certain items may be added to the price paid for the property as costs to the vendor; and certain expenses after acquisition may be deducted upon disposition.

In MNR v McCool Limited, [1950] SCR 80; [1949] CTC 395; 4 DTC 700, Rand, J states that when an asset is acquired as part of the capital structure of a business for a price, plus interest on the unpaid portion thereof, that interest was part of the “capital cost” to the taxpayer. Rand, J: “what the vendor did was to sell his property for the consideration, in addition to the shares, of a price plus interest; that interest is part of the capital cost to the Company”.

In Sherritt Gordon Mines Limited v MNR, [1968] CTC 262; 68 DTC 5180 at 287 [5195] states:

In the absence of any definition in the statute of the expression “capital cost to the taxpayer of property” and in the absence of any authoritative interpretation of those words as used in section 11 (1)(a) [now 20(1 )a, insofar as they are being considered with reference to the acquisition of capital assets, I am of opinion that they should be interpreted as including outlays of the taxpayer as a business man that were the direct result of the method he adopted to acquire the assets. In the case of the purchase of an asset, this would certainly include the price paid for the asset. It would probably include the legal costs directly related to its acquisition. It might well include, I do not express any opinion on the matter, the cost of moving the asset to the place where it is to be used in the business. When, instead of buying property to be used in the business, the taxpayer has done what is necessary to create it, the capital cost to him of the property clearly includes all monies paid out for the site and to architects, engineers and contractors. It seems equally clear that it includes the cost to him during the construction period of borrowing the capital required for creating the property, whether the cost is called interest or commitment fee.

and continuing at 288 [5196]:

The inclusion of interest during construction as part of the capital cost of property within the meaning and for the purposes of section 11 (1)(a) [now 20(1 )a], may present problems in some instances, but I do not think that an interpretation that includes such interest is inconsistent with the scheme of the Act or its capital cost allowance provisions. On the contrary, that treatment of interest during construction should, I think, help to accurately reflect the result of each taxation year’s operations and the profit therefrom for that year for both business and income tax purposes, without unduly interfering with the smooth working of the Act.

Interpretation Bulletin No IT-174R seems to summarize it all and paragraph 1 states as follows:

The term “capital cost of property” generally means the full cost to the taxpayer of acquiring the property. It includes legal, accounting, engineering of other fees incurred to acquire the property.

It is important to note that when the capital gain provisions were added to the Income Tax Act in 1972, the purpose was to make other incomes subject to tax; one half of all gains from disposition of property, to the extent that such gains would not otherwise be included in the income that is subject to tax. In so doing, land speculators could no longer depreciate property or charge expenses incurred against other income, but special provisions under paragraph 53(1 )(h) provided the necessary relief in arriving at their adjusted cost base:

where the property is land of the taxpayer, any amount paid by him after 1971 and before that time pursuant to a legal obligation to pay

(i) interest on borrowed money used to acquire the land, or on an amount payable by him for the land, or

(ii) property taxes (not including income or profits taxes or taxes imposed by reference to the transfer of property) paid by him in respect of the property to a province or to a Canadian municipality

to the extent that that amount was, by virtue of subsection 18(2), not deductible in computing his income from the land or from a business for any taxation year commencing before that time;

As Kerr, J puts in Sherritt Gordon Mines Limited, (supra) at 5196:

On the contrary, the treatment of interest during construction should, I think, help to accurately reflect the result of each taxation year’s operations and the profit therefrom for that year for both business and income tax purposes, without unduly interfering with the smooth working of the Act.

It is inconceivable to me that the spirit of the Act, its smooth working and its interpretation would not take into account the deductions from the gain that are being claimed by this taxpayer. If we carry the rationale to its extreme, I would like to present the following example, submitted by counsel, which would focus on an obvious inconsistency: A taxpayer acquires $100,000 worth of gold and owes the vendor the entire sum; if, after two years he has incurred $20,000 worth on interest charges and sold the gold for $110,000, there would be a net gain on the acquisition and disposition of the property, half of which, being $5,000, would have to be taken into additional income; his net loss would be $10,000. This seems totally contrary to the spirit and intent of the law. Had Parliament in 1972 foreseen the buying and selling of gold, which is more prevalent today, I am sure additional amendments would have been included in section 53. I agree with section 11 of the Interpretation Act, (supra) and give liberal construction and interpretation, as best ensures the attainment of the objectives of the Income Tax Act which I find is to tax actual gain.

I therefore find that when the plaintiff purchased gold with borrowed money, held during a period under safekeeping arrangements, then sold it, the cost incurred immediately prior to the disposition is not only the price paid for the gold, but the interest on the borrowed money for the period which it was held, together with the safekeeping charges for the same period. The interest and safekeeping charges are together and exclusively attributable to the gain derived for the acquisition and the disposition of the property.

I therefore refer the matter back to the Minister for consideration and reassessment, pursuant to section 177 of the Income Tax Act, and to look to exhibit 3, one of the agreed statement of facts, which outlines the calculations which were agreed to by the parties at the outset.