Linden
J.A.
(Stone,
J.A.,
Henry
D.J.,
concurring)
—:
The
main
issue
in
this
appeal
and
five
others
argued
with
it
is
whether
the
proceeds
of
a
disposition
of
certain
rental
property
in
1987
are
to
be
taxed
in
accordance
with
subparagraphs
31(21)(d)(i)
and
54(h)(i)
or
pursuant
to
subsection
79(c)
of
the
Income
Tax
Act.
The
Trial
Judge
decided
in
favour
of
the
Crown,
holding
that
subsection
79(c),
as
the
more
specific
provision,
should
govern
the
tax
treatment
of
the
proceeds
of
the
disposition
which
occurred
as
a
result
of
a
type
of
judicial
sale
called
a
“Rice
Order”.
The
appellant’s
counsel
contended
that
this
was
in
error;
the
correct
provisions
under
which
this
disposition
should
be
taxed,
he
suggested,
are
subparagraphs
13(21)(d)(i)
and
54(h)(i)
which
deal
with
sales
of
all
kinds,
including
judicial
sales.
He
argued
that
subsection
79(c)
is
meant
to
cover
only
acquisitions
by
foreclosure
or
other
types
of
takeovers
where
no
fixed
price
has
been
set.
Counsel
for
the
Crown
defends
the
decision
of
the
Trial
Judge,
arguing
that
subsection
79(c)
is
a
relatively
complete
code
designed
to
furnish
a
tax
regime
for
all
types
of
acquisitions
by
lenders
from
borrowers
(including
sales)
in
order
to
ensure
harmony
in
their
tax
treatment.
Subparagraph
13(21
)(d)(i)
in
1987
read
as
follows:
13(d)
“Proceeds
of
disposition”.-
“proceeds
of
disposition”
of
property
includes
(i)
the
sale
price
of
property
that
has
been
sold,
(ii)
compensation
for
property
unlawfully
taken,
(iii)
compensation
for
property
destroyed
and
any
amount
payable
under
a
policy
of
insurance
in
respect
of
loss
or
destruction
of
property,
(iv)
compensation
for
property
taken
under
statutory
authority
or
the
sale
price
of
property
sold
to
a
person
by
whom
notice
of
an
intention
to
take
it
under
statutory
authority
was
given,
(v)
compensation
for
property
injuriously
affected,
whether
lawfully
or
unlawfully
or
under
statutory
authority
or
otherwise,
(vi)
compensation
for
property
damaged
and
any
amount
payable
under
a
policy
of
insurance
in
respect
of
damage
to
property,
except
to
the
extent
that
such
compensation
or
amount,
as
the
case
may
be,
has
within
a
reasonable
time
after
the
damage
been
expended
on
repairing
the
damage,
(vii)
an
amount
by
which
the
liability
of
a
taxpayer
to
a
mortgagee
is
reduced
as
a
result
of
the
sale
of
mortgaged
property
under
a
provision
of
the
mortgage,
plus
any
amount
received
by
the
taxpayer
out
of
the
proceeds
of
such
sale,
and
(viii)
any
amount
included
in
computing
a
taxpayer’s
proceeds
of
disposition
of
the
property
by
virtue
of
paragraph
79(c);
Subparagraph
54(h)
then
stipulated:
54(h)
“Proceeds
of
disposition”.-
“proceeds
of
disposition”
of
property
includes,
(i)
the
sale
price
of
property
that
has
been
sold,
(ii)
compensation
for
property
unlawfully
taken,
(iii)
compensation
for
property
destroyed,
and
any
amount
payable
under
a
policy
of
insurance
in
respect
of
loss
or
destruction
of
property,
(iv)
compensation
for
property
taken
under
statutory
authority
or
the
sale
price
of
property
sold
to
a
person
by
whom
notice
of
an
intention
to
take
it
under
statutory
authority
was
given,
(v)
compensation
for
property
injuriously
affected,
whether
lawfully
or
unlawfully
or
under
statutory
authority
or
otherwise,
(vi)
compensation
for
property
damaged
and
any
amount
payable
under
a
policy
of
insurance
in
respect
of
damage
to
property,
except
to
the
extent
that
such
compensation
or
amount,
as
the
case
may
be,
has
within
a
reasonable
time
after
the
damage
been
expended
on
repairing
the
damage,
(vii)
an
amount
by
which
the
liability
of
a
taxpayer
to
a
mortgagee
is
reduced
as
a
result
of
the
sale
of
mortgaged
property
under
a
provision
of
the
mortgage,
plus
any
amount
received
by
the
taxpayer
out
of
the
proceeds
of
such
sale,
(viii)
any
amount
included
in
computing
a
taxpayer’s
proceeds
of
disposition
of
the
property
by
virtue
of
paragraph
79(c),
and....
Section
79
then
enacted:
79.
Mortgage
foreclosures
and
conditional
sales
repossessions.
Where,
at
any
time
in
a
taxation
year,
a
taxpayer
who
(a)
was
a
mortgagee
or
other
creditor
of
another
person
who
had
previously
acquired
property,
or
(b)
had
previously
sold
property
to
another
person
under
a
conditional
sales
agreement,
has
acquired
or
reacquired
the
beneficial
ownership
of
the
property
in
consequence
of
the
other
person’s
failure
to
pay
all
or
any
part
of
an
amount
(in
this
section
referred
to
as
the
“taxpayer’s
claim”)
owing
by
him
to
the
taxpayer,
the
following
rules
apply:
(c)
there
shall
be
included,
in
computing
the
other
person’s
proceeds
of
disposition
of
the
property,
the
principal
amount
of
the
taxpayer’s
claim
plus
all
amounts
each
of
which
is
the
principal
amount
of
any
debt
that
had
been
owing
by
the
other
person,
to
the
extent
that
it
has
been
extinguished
by
virtue
of
the
acquisition
or
reacquisition,
as
the
case
may
be;
(d)
any
amount
paid
by
the
other
person
after
the
acquisition
or
reacquisition,
as
the
case
may
be,
as,
on
account
of
or
in
satisfaction
of
the
taxpayer’s
claim
shall
be
deemed
to
be
a
loss
of
that
person,
for
his
taxation
year
in
which
payment
of
that
amount
was
made,
from
the
disposition
of
the
property;
(e)
in
computing
the
income
of
the
taxpayer
for
the
year,
(i)
the
amount,
if
any,
claimed
by
him
under
subparagraph
40(l)(a)(iii)
in
computing
his
gain
for
the
immediately
preceding
taxation
year
from
the
disposition
of
the
property,
and
(ii)
the
amount,
if
any,
deducted
under
paragraph
20(l)(n)
in
computing
the
income
of
the
taxpayer
for
the
immediately
preceding
year
in
respect
of
the
property,
shall
be
deemed
to
be
nil;
(f)
the
taxpayer
shall
be
deemed
to
have
acquired
or
reacquired,
as
the
case
may
be,
the
property
at
the
amount,
if
any,
by
which
the
cost
at
that
time
of
the
taxpayer’s
claim
exceeds
the
amount
described
in
subparagraph
(e)
(i)
or
(ii),
as
the
case
may
be,
in
respect
of
the
property;
(g)
the
adjusted
cost
base
to
the
taxpayer
of
the
taxpayer’s
claim
shall
be
deemed
to
be
nil;
and
(h)
in
computing
the
taxpayer’s
income
for
the
year
or
a
subsequent
year,
no
amount
is
deductible
in
respect
of
the
taxpayer’s
claim
by
virtue
of
paragraph
20(l)(l)
or
(p).
The
facts
in
summary
are
that
the
appellant
invested
in
a
Multiple
Unit
Residential
Building
(MURB)
called
“Sun
Creek”
in
1981
in
the
Province
of
Alberta.
His
purpose
was
to
profit
from
rental
income
as
well
as
from
possible
capital
gains
upon
the
ultimate
sale
of
the
property.
The
property
was
subject
to
a
mortgage
in
favour
of
the
Standard
Trust
Company.
During
the
economic
downturn
in
the
mid
1980s,
there
was
default
in
the
mortgage
payments,
leading
to
an
action
in
the
Alberta
Court
of
Queen’s
Bench
by
the
mortgagee.
On
March
15,
1987,
the
Court
issued
what
is
called
a
“Rice
Order”,
allowing
the
lender
to
purchase
the
property
for
an
amount
determined
to
be
$49,000
and
including
a
judgment
for
the
balance
of
the
amount
owing.
The
appellant,
relying
on
subparagraphs
12(21)(d)(i)
and
54(h)(i),
reported
in
his
1987
return
the
value
of
the
disposition
at
the
amount
of
$49,000
the
purchase
price
paid
to
him
by
Standard
Trust
Company.
The
Minister,
relying
on
subsection
79(c),
reassessed
the
taxpayer,
regarding
the
proceeds
from
the
disposition
as
the
full
principal
amount
still
outstanding
on
the
mortgage,
$63,785.00.
The
appellant
in
his
tax
return
also
deducted
the
amount
of
interest
he
paid
on
the
mortgage
in
1987
before
the
sale
of
the
property
pursuant
to
paragraph
20(l)(c),
but
the
Minister
disallowed
this,
which
issue
is
also
to
be
decided
in
this
appeal.
In
my
view,
the
proper
tax
treatment
of
this
disposition
is
according
to
subparagraphs
13(21)(d)(i)
and
54(h)(i).
Utilizing
the
“words-in-context”
approach
to
the
Income
Tax
Act,
as
outlined
recently
in
Friesen
v.
R.,
(sub
nom.
Friesen
v.
Canada)
,
it
is
plain
to
me
that
paragraphs
13(21
)(d)
and
54(h)
prescribe
the
amount
or
value
of
the
proceeds
or
benefit
received
from
a
disposition
of
property
so
as
to
help
to
determine
the
appropriate
capital
gain
or
loss
from
that
disposition.
In
the
case
of
a
simple
sale,
the
amount
of
the
sale
price
is
the
figure
that
is
used
.
Other
situations
are
also
set
out,
where
specific
amounts
are
received
as
compensation
for
the
loss
of
property
in
various
ways
such
as
destruction
or
expropriation.
In
this
case,
a
specific
amount
was
received
by
the
taxpayer
as
a
result
of
a
“Rice
Order”
which
led
to
a
judicial
sale
of
the
property.
It
is
clear
to
me
that
a
sale
is
a
sale,
whether
it
is
done
voluntarily
or
pursuant
to
a
Court
order.
This
is
so
because
the
sale
price
is
determined
by
the
Court.
It
is
a
definite
amount
that
is
paid
and
received.
It
leaves
nothing
to
be
ascertained
later.
I
see
no
ambiguity
here.
I
am
not
persuaded
by
counsel
for
the
Crown
who
contends
that
paragraph
79(c)
should
be
used
to
determine
the
amount
of
the
disposition,
that
is,
the
amount
of
the
debt
still
owing
at
the
time
of
the
disposition.
In
my
view,
this
would
be
a
needless
exercise
in
abstraction,
not
necessary
in
a
case
such
as
this,
where
there
has
been
a
judicial
sale
at
a
fixed
price.
It
would
not
be
consistent
with
the
commercial
reality
of
the
situation.
Normally,
the
Income
Tax
Act
taxes
someone
on
the
basis
of
what
has
actually
been
received,
not
on
the
basis
of
some
theoretical
formula.
The
situations
meant
to
be
covered
by
paragraph
79(c)
are
acquisitions
by
the
lenders
in
a
context
where
no
fixed
price
is
paid,
and
where
it
might
take
some
time
to
ascertain
the
true
value
of
what
has
been
disposed
of.
Paragraph
79(c)
provides
a
useful
code
for
the
fair
and
consistent
treatment
of
dispositions
where
no
definite
figure
is
involved.
Such
situations
include
foreclosures
and
repossessions,
where
lenders
may
be
forced
to
keep
the
property
for
some
time
before
disposing
of
it
and
where
different
parties
may
calculate
the
value
of
the
disposition
differently.
Notwithstanding
what
I
view
as
the
clear
meaning
of
the
above
language,
there
is,
if
needed,
further
support
for
this
interpretation
in
the
marginal
notes.
Although
the
Interpretation
Act®
states
that
marginal
notes
“form
no
part
of
an
enactment”,
it
is
permissible
to
consider
them
as
part
of
the
context
of
the
legislation
as
a
whole.
As
Madame
Justice
Wilson
wrote
in
R.
v.
Wigglesworth
:
There
is
no
doubt
that
the
traditional
view
was
that
marginal
notes
could
not
be
used
as
aids
to
interpretation
as
they
formed
no
part
of
the
Act
which
was
passed
by
Parliament....
But
reference
to
marginal
notes
has
been
made
in
some
English
authorities....
And
this
Court
has
used
statutory
headings
to
assist
in
interpreting
sections
of
the
Charter....
Her
Ladyship
quotes
Mr.
Justice
Estey
in
Skapinker
v.
Law
Society
of
Upper
Canada
(sub
nom.
Re:
Skapinker)*,
where
he
opined
that
a
“court
should
not,
by
the
adoption
of
a
technical
rule
of
construction,
shut
itself
off
from
whatever
small
assistance
might
be
gathered
from
an
examination
of
the
heading”.
Madame
Justice
Wilson
observed:
It
must
be
acknowledged,
however,
that
marginal
notes,
unlike
statutory
headings,
are
not
an
integral
part
of
the
Charter....
The
case
for
their
utilization
as
aids
to
statutory
interpretation
is
accordingly
weaker.
I
believe,
however,
that
the
distinction
can
be
adequately
recognized
by
the
degree
of
weight
attached
to
them.
Marginal
notes,
therefore,
can
be
used
to
aid
the
Court.
In
this
case,
the
marginal
note
is
“Mortgage
foreclosures
and
conditional
sales
repossessions”,
indicating
to
me
that
it
is
meant
to
apply
to
situations
where
there
is
no
determined
sale
price.
If
it
were
intended
to
cover
all
acquisitions
by
lenders,
whether
by
sale
or
not,
as
contended
for
by
the
Crown,
the
marginal
notes
would
have
so
described
the
subsection.
Further
support
for
this
position
can
be
gleaned
from
the
Interpretation
Bulletin,
which
of
course
has
no
binding
effect,
but
which
may
also
be
looked
at
as
part
of
the
context
of
the
legislation.
In
Lowe
v.
R.,?
Mr.
Justice
Stone
quoted
Décary
J.A.
in
Vaillancourt
v.
R.'°,
as
follows:
It
is
well
settled
that
Interpretation
Bulletins
only
represent
the
opinion
of
the
Department
of
National
Revenue,
do
not
bind
either
the
Minister,
the
taxpayer
or
the
courts
and
are
only
an
important
factor
in
interpreting
the
Act
in
the
event
of
doubt
as
to
the
meaning
of
the
legislation.
Having
said
that,
I
note
that
the
courts
are
having
increasing
recourse
to
such
Bulletins
and
they
appear
quite
willing
to
see
an
ambiguity
in
the
statute
—
as
a
reason
for
using
them
—
when
the
interpretation
given
in
a
Bulletin
squarely
contradicts
the
interpretation
suggested
by
the
Department
in
a
given
case
or
allows
the
interpretation
put
forward
by
the
taxpayer.
When
a
taxpayer
engages
in
business
activity
in
response
to
an
express
inducement
by
the
Government
and
the
legality
of
that
activity
is
confirmed
in
an
Interpretation
Bulletin,
it
is
only
fair
to
seek
the
meaning
of
the
legislation
in
question
in
that
bulletin
also.
As
Prof.
Coté
points
out
in
The
Interpretation
of
legislation
in
Canada:
“The
administrations’s
presumed
authority
and
expertise
is
never
more
persuasive
than
when
the
judge
succeeds
in
turning
it
against
its
author,
demonstrating
a
contradiction
between
the
administration’s
interpretation
and
its
contentions
before
the
Court.
This
reasoning
is
applicable
here,
where
the
Interpretation
Bulletin
IT-505
reads
in
part
as
follows:
Income
Tax
Act
Mortgage
Foreclosures
and
Conditional
Sales
Repossessions
1.
This
bulletin
deals
with
those
rules
in
section
79
which
apply
where
a
mortgagee
or
similar
creditor,
hereinafter
referred
to
as
the
“creditor”,
acquires
or
reacquires
after
November
12,
1981,
beneficial
ownership
of
a
property
in
consequence
of
the
failure
of
a
mortgagor
or
other
debtor,
hereinafter
referred
to
as
the
“debtor”,
to
pay
all
or
any
part
of
an
amount
owed
to
the
creditor,
The
bulletin
deals
with
the
most
common
situation
in
which
the
property
which
was
acquired
or
reacquired
either
was
the
security
for
the
amount
owing
or
had
been
sold
to
the
debtor
under
a
conditional
sales
agreement.
In
this
bulletin
“creditor”
includes
a
person
who
is
an
assignee
of
the
creditor.
2.
An
acquisition
or
reacquisition
of
property,
for
the
purpose
of
1
above,
may
take
place
by
means
of
(a)
a
foreclosure
order
obtained
though
a
court,
(b)
repossession
under
a
conditional
sales
agreement,
or
(c)
a
quit
claim.
3.
Section
79
will
not
apply
where
the
creditor
purchases
property
from
the
debtor
merely
in
anticipation
of
the
debtor’s
default
or
where
the
debtor’s
property
is
disposed
of
to
a
third
party
pursuant
to
a
power
of
sale....
It
will
be
noted
that
there
is
no
mention
of
a
judicial
sale
to
the
lender
itself,
something
that
could
easily
have
been
included
if
it
was
thought
to
be
covered
by
the
subsection.
Consequently,
this
is
not
a
case
where,
because
of
a
conflict,
the
Court
must
choose
to
apply
a
specific
provision
over
a
general
one
in
accordance
with
that
well-known
principle
of
statutory
interpretation;
there
is
no
conflict
here.
Both
provisions
are
specific,
but
they
cover
different
situations
—
paragraphs
13(21)(d)
and
54(h),
covering
sales
and
other
situations
where
a
precise
compensation
figure
is
known
and
paragraph
79(c),
applying
to
foreclosures
and
repossessions
where
there
is
no
ascertained
amount.
If
it
were
otherwise,
we
would
be
faced
with
a
situation
where
a
judicial
sale
to
a
lender
would
have
to
be
treated
differently
by
the
taxpayer
than
a
sale
at
the
same
price
to
a
third
person,
something
that
cannot
have
been
intended
by
Parliament.
The
second
issue
is
whether
interest
paid
by
the
taxpayer
in
1987
is
deductible
under
paragraph
20(1)(c)
which
in
1987
read
as
follows:
20.
Deductions
permitted
in
computing
income
from
business
or
property.
(1)
Notwithstanding
paragraphs
18(l)(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),
(ii)
an
amount
payable
for
property
acquired
for
the
purpose
of
gaining
or
producing
income
therefrom
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),
(iii)
an
amount
paid
to
the
taxpayer
under
(A)
an
Appropriation
Act
and
on
terms
and
conditions
approved
by
the
Treasury
Board
for
the
purpose
of
advancing
or
sustaining
the
technological
capability
of
Canadian
manufacturing
or
other
industry,
or
(B)
the
Northern
Mineral
Exploration
Assistance
Regulations
made
under
an
Appropriation
Act
that
provides
for
payments
in
respect
of
the
Northern
Mineral
Grants
Program,
or
(iv)
borrowed
money
used
to
acquire
an
interest
in
an
annuity
contract
to
which
section
12.2
applies,
or
would
apply
if
the
contract
had
a
third
anniversary
in
the
year,
except
that,
where
annuity
payments
have
commenced
under
the
contract
in
a
preceding
taxation
year,
the
amount
of
interest
paid
or
payable
in
the
year
shall
not
be
deducted
to
the
extent
that
it
exceeds
the
amount
included
under
section
12.2
or
paragraph
56(l)(d.l)
in
computing
the
taxpayer’s
income
for
the
year
with
respect
to
his
interest
in
the
contract,
or
a
reasonable
amount
in
respect
thereof,
whichever
is
the
lesser;
It
is
agreed
that
the
money
borrowed
was
used
to
buy
the
property
in
this
case.
It
has
also
been
agreed
that
the
property
in
this
case
was
acquired
for
the
purpose
of
gaining
or
producing
income
in
the
form
of
rents.
Therefore,
the
interest
payments
deducted
from
income
by
the
taxpayer
from
1980
to
1987
was,
it
is
agreed,
properly
deducted.
However,
the
attempt
to
deduct
the
appellants
share
of
the
amount
of
interest
paid
from
January
1,
1987,
to
the
date
of
the
judicial
sale,
$2,354.00,
was
challenged
by
the
Minister,
on
the
ground
that,
since
there
was
no
reasonable
expectation
of
profit
during
that
period,
the
Moldowan
v.
R.
case
applies
to
deny
the
deduction.
The
Trial
Judge
agreed
and
disallowed
the
deduction
of
interest
for
this
period.
In
my
respectful
view,
he
was
right
in
doing
so,
according
to
the
authorities
as
they
exist
at
this
time.
The
appellant
relied
on
Emerson
v.
R.
,
a
decision
of
this
Court,
which
held
that
“an
essential
requirement
for
interest
deductions...is
the
continued
existence
of
the
source
to
which
the
interest
expense
relates”.
Further,
it
was
said
that,
where
the
“source
has
been
terminated,
the
interest
expense
is
no
longer
deductible”.
Therefore,
counsel
argued
that
since
the
property
in
this
case
was
owned
by
the
taxpayer
until
the
sale
took
place,
the
interest
paid
on
it
should
be
deductible
until
the
sale
date.
Counsel
relied
on
the
statement
of
the
Trial
Judge
in
Emerson
to
the
effect
that
“had
the
Plaintiff
retained
the
shares,
he
would
have
been
permitted
to
deduct
the
interest
expense
on
the
loan”.
In
Emerson,
however,
the
facts
were
different
than
they
are
here.
The
taxpayer
had
sold
his
shares
at
a
loss
and
later
took
out
a
loan
to
repay
a
previous
loan
taken
out
to
pay
for
the
shares
that
had
been
sold.
The
Court
denied
the
interest
expense
on
the
new
loan
as
the
source
to
which
the
payment
related
had
been
extinguished.
Counsel
for
the
taxpayer
relies
on
two
cases
decided
after
the
Trial
decision
in
this
case.
In
Tennant
v.
Æ.
,
the
Supreme
Court
of
Canada
allowed
a
taxpayer
to
deduct
interest
on
$1,000,000
borrowed
to
acquire
shares
that
were
later
traded
for
shares
in
a
different
company
worth
$1,000.
The
Minister
denied
the
expense;
the
Trial
Division
of
this
Court
and
this
Court
agreed
on
the
basis
that
the
original
shares
were
no
longer
a
source
of
income
after
the
exchange.
The
Supreme
Court,
however,
explained
that
the
interest
to
be
deducted
“relates
to
the
amount
of
the
loan,
and
not
the
value
of
the
replacement
property”
.
Mr.
Justice
lacobucci
found
that
such
a
result
was
dictated
by
the
purpose
of
the
interest
deduction
provisions
which
was
“to
encourage
the
accumulation
of
capital
which
would
produce
taxable
income.”
Counsel
for
the
Crown
suggested
that
the
basis
for
the
Tennant
decision
was
that
the
property
in
question
there
was
replaced
by
other
eligible
property
and,
hence,
the
deduction
was
permitted,
whereas
in
this
case
there
was
no
such
replacement.
I
agree
that
Tennant
does
not
apply
in
these
circumstances,
which
are
quite
different
than
those
in
that
case.
The
other
case
relied
on
by
the
taxpayer
was
Tonn
v.
Æ.
where
deductions
for
interest
inter
alia
were
allowed
on
loans
taken
out
to
buy
residential
units
for
the
purpose
of
gaining
rental
income.
When
the
hoped
for
profit
did
not
materialize,
the
Minister
had
sought
to
disallow
the
deductions
on
the
basis
of
Moldowan
to
the
effect
that
there
was
no
reasonable
expectation
of
profit
during
the
years
in
question.
This
Court,
reversing
the
Tax
Court
Judge,
held
that
the
deductions
were
properly
allowed
and
suggested
that
Moldowan
be
used
sparingly
in
cases
where
there
was
no
personal
element
or
suspicious
circumstances.
It
stated
also
that
Moldowan
not
be
used
to
second
guess
good
faith
business
judgments
that
were
flawed.
There
was
nothing
in
Tonn,
however,
to
indicate
that
the
Moldowan
principle
was
not
to
be
applied
in
cases
where
interest
expenses
were
deducted
in
situations
where
there
was
no
reasonable
expectation
of
profit.
The
Moldowan
test,
however,
should
not
be
used
in
paragraph
21(c)(i)
cases
unless
it
is
clear
that
no
profit
is
likely
to
be
earned
in
the
taxation
year.
In
cases
such
as
this,
therefore,
where
it
is
clear
that
no
profit
could
be
earned
in
the
year
or
forever
after
because
of
the
judicial
sale
proceedings,
Moldowan
is
applicable.
Indeed,
the
parties
in
this
case
agreed
that
there
was
no
reasonable
expectation
of
profit
in
the
taxation
year
1987.
This
is
not
a
case
of
second-guessing
poor
business
decisions
that
do
not
yield
profit,
which
was
the
case
in
Jonn.
In
cases
where
it
is
not
clear
whether
that
profit
will
be
earned
eventually,
Tonn
teaches
that
taxpayers
should
be
allowed
the
deductions,
when
profit
is
not
in
fact
earned.
But
where,
as
here,
no
profit
is
possible
in
the
taxation
year
and
thereafter,
the
deduction
cannot
be
permitted.
The
absurd
situation
conjured
up
by
counsel
for
the
taxpayer
in
which
interest
might
be
deductible
only
in
profitable
years
and
not
in
years
where
no
profit
was
earned,
creating
havoc
among
businesses
which
would
not
know
whether
they
could
deduct
interest
or
not
until
the
end
of
the
year,
is
not
a
realistic
fear.
In
applying
Moldowan,
it
is
not
whether
profit
is
earned,
but
whether
it
could
reasonably
be
earned.
As
long
as
the
business
has
a
reasonable
chance
of
earning
profit
in
the
year
or
in
the
near
future,
the
interest
is
deductible,
whether
or
not
there
actually
was
a
profit
earned
in
a
given
taxation
year.
That
is
the
lesson
of
the
Tonn
case,
which
only
seeks
to
restate
and
clarify
the
application
of
the
principle
of
Moldowan.
Thus,
where
as
here,
if
no
profit
is
possible
in
the
year
or
in
the
near
future,
no
deduction
can
be
allowed
(at
least
as
long
as
Moldowan
continues
to
govern
cases
such
as
these).
The
Trial
Judge
was
correct
when
he
held
that
the
amount
of
interest
from
January
1,
1986
to
March
15,
1987,
the
date
of
the
Rice
Order
was
not
deductible.
In
conclusion,
the
appeal
should
be
allowed
in
part.
On
the
first
issue,
the
taxation
of
the
proceeds
of
the
disposition,
the
matter
should
be
remitted
to
the
Minister
for
reconsideration
and
reassessment
on
the
basis
that
the
plaintiffs
“proceeds
of
disposition”
for
the
taxation
year
1987
are
to
be
determined
pursuant
to
subparagraph
13(21)(d)(i)
and
paragraph
54(h)(i)
of
the
Income
Tax
Act.
The
appeal
on
the
second
issue,
dealing
with
the
deductibility
of
interest,
should
be
dismissed.
The
costs
should
be
to
the
taxpayer
who
was
successful
on
the
main
issue,
and
should
be
limited
to
one
set
of
costs
in
this
appeal
and
the
other
five
appeals
referred
to
above.
Appeal
allowed
in
part.
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