Rip J.T.C.C. — The main issue in these appeals is whether a certain outlay is an expense incurred in the course of carrying on a business and is deductible in determining the appellants’ income from business for the year in accordance with section 9 of the Income Tax Act (“Act”). The facts in the appeals of 212535 Oil & Gas Ltd., 212634 Oil & Gas Ltd., 212873 Oil & Gas Ltd. and 228262 Alberta Ltd. from income tax assessment for their 1981 taxation year are similar, if not identical, to those in the appeal of St. Ives Resources Ltd. v. Minister of National Revenue,  1 C.T.C. 2539, D.T.C. 1375 (T.C.C.),  D.T.C. 6223 (F.C.T.D.), aff d  1 C.T.C. 352, D.T.C. 6261 (F.C.A.).
The appellants’ counsel made two alternative submissions. The first was that to the extent the outlay is considered to be a capital outlay it was, as characterized by the respondent, a cost of refinancing the first promissory note and therefore the amount is deductible pursuant to paragraph 20(1 )(e) of the Act. Secondly, the outlay is an eligible capital expenditure within the meaning of section 14 of the Act, as it read in respect of the appellants’ 1981 taxation year.
The parties filed an Agreed Statement of Facts. There was no viva voce evidence. The relevant portions of the Agreed Statement of Facts are for all practical purposes identical to the Agreed Statement of Facts before the Federal Court-Trial Division, in St. Ives, supra, and read as follows:
1. At all material times commencing with the acquisition described below, each Appellant was a principal-business corporation as defined in paragraph 66(15)(h) of the Income Tax Act (the “Act”).
2. At all material times, Carter Oil & Gas Ltd. (“Carter”) was a principalbusiness corporation as defined in paragraph 66(15)(h) of the Act.
3. Prior to December 11, 1979, Carter was the owner of certain resource properties and associated depreciables as more particularly described in the schedule to the Sale Agreement (as herein after defined) (the “Properties”).
4. On December 11, 1979 and pursuant to the terms of a petroleum, natural gas and general rights conveyance made as of December 11, 1979 (the “Sale Agreement”), Carter sold and each Appellant purchased a 10% interest in the Properties (the “Property Interest”). The property Interest was a Canadian resource property as defined in paragraph 66(15)(c) of the Act. The Agreement of December 11, 1979 [was] attached....
5. Each Appellant paid the purchase price provided in the Sale Agreement for the Property Interest of $3,500,000.00 by granting to Carter an interest-bearing promissory note in the amount of $3,500,000.00 due five days after demand (the “Original Note”). An example of the promissory note issued by each Appellant [was] attached ...
6. By a letter dated February 29, 1980 (the “Demand”), Carter demanded payment from each Appellant of the principal and accrued interest under the Original Note. An example of the demand issued by Carter [was] attached....
7. Pursuant to a Price Rectification Agreement dated March 5, 1980, [a copy of which was attached to the Agreed Statement of Facts] each Appellant agreed to grant to Carter in place of the Original Note, a Promissory Note for $4,750,000 on the same terms and conditions as the Original Note. An example of the promissory note for the $4,750,000 [was] attached....
8. In a valuation written in April 1980 Pitfield Mackay Ross Limited (“PMR”) determined that in their opinion the fair market value of the Property Interest acquired by each Appellant was not less than $4,750,000 at acquisition.
9. In computing its income for the 1980 taxation year each Appellant treated the additional $1,250,000 as a cost of the resource property acquired from Carter. On this basis each Appellant sought to treat the additional $1,250,000 as Canadian Development Expense (“CDE”) within the meaning of subsection 66.2(5) of the Act.
The exhibits attached to the Agreed Statement of Facts were copies of documents pertaining to St. Ives Resources Ltd. I should alert the reader to the fact that the second promissory note, referred to in paragraph 7 of the Agreed Statement of Facts, was antedated to December 11, 1979.
The issue before the Trial Division of the Federal Court and the Court of Appeal in St. Ives, supra, was whether the sum of $1,250,000 which that taxpayer had agreed to pay Carter Oil & Gas Ltd. (“Carter”) was a Canadian development expense within the meaning of subparagraph 66.2(5)(a)(iii) of the Act as it read in 1980 and 1981. The Court of Appeal agreed with the Trial Division that the amount in issue was not such an expense since it was not a payment made for the preservation of the rights of St. Ives Resources Ltd. in respect of the Property Interest.
As a result of the decision of the Federal Court of Appeal in St. Ives, supra, the appellants amended their Notices of Appeal and now say the outlay of the $1,250,000 was an expense incurred in the course of carrying on the appellants’ business and is deductible pursuant to section 9 of the Act in arriving at the appellants’ profit for the year. This question appears not to have been pursued in the Federal Court appeals of St. Ives although it had been raised as an alternative argument in that appellant’s pleadings.
The respondent pleaded that the result in St. Ives should bind the appellants. Counsel acknowledged that the appellants were not parties to the litigation between St. Ives Resources Ltd. and the Minister.
She conceded that “res judicata in its technical sense requires the parties to be the same” but suggested that in these appeals the principle of res judicata be extended “given the fact that each one of the appellants (and St. Ives Resources Ltd.) are like peas in a pod”.
Counsel for the respondent submitted that the appellants be restricted to arguing issues that were not argued or were not available to be argued in the course of St-Ives. An alternative ground for appeal before this Court in St. Ives was that the Minister failed to allow the amount of $1,250,000 as an expense incurred in the course of the business carried on by the appellant which was properly deductible in computing its income from that business. In the St. Ives Statement of Claim to the Trial Division of the Federal Court the appellant asked that the amount of $1,250,000 be permitted as a deduction in computing its income for the year. Thus, counsel submitted, the question whether the $1,250,000 was deductible was properly before the courts in St. Ives and the appellants should be precluded from arguing the issue, even if that argument was not advanced at trial or considered by the courts.
Respondent’s counsel relied on the following cases: Thomas v. Trinidad and Tobago,  115 N.R. 313 [P.C.] at page 316 and Doyle v. Minister of National Revenue, 80 D.T.C. 6260 [F.C.T.D.]. In Thomas the Judicial Committee of the Privy Council stated that the doctrine of res judicata “applies not only where the remedy sought and the grounds therefore are the same in the second action as in the first but also where, the subject matter of the two actions being the same, it is sought to raise in the second action matters of fact or law directly related to the subject matter which could have been but were not raised in the first action”.
The doctrine of res judicata is based on the principle that the Court requires parties to litigation to bring forward their whole case in that litigation. A party is not permitted to begin fresh litigation because he or she later thought of a new argument. There should be a finality to litigation between the same parties. In an income tax appeal, for example, the taxpayer is to bring forward his or her whole case to defeat the assessment.
One may not appeal a second time from the same assessment. In the appeals at bar and in St. Ives the appellants are not the same. Where the parties to the litigation are different there is no res judicata, even when the facts are identical. In Thomas, supra, the same person started an action for the second time. I am obliged to follow the reasons for judgment of the Court of Appeal in St. Ives with respect to what it decided; the Court of Appeal did not consider and therefore did not decide whether the amount of $1,250,000 was deductible in computing the income of St. Ives Resources Ltd. Hence the appellants at bar are free to make that argument.
Appellant’s Main Submission
Counsel for the appellants stated that the facts assumed by the Minister in making the assessments do not lead to the conclusion that the $1,250,000 was a capital outlay and therefore the onus of proof that the amount of $1,250,000 was on capital account is on the respondent: Minister of National Revenue v. Pillsbury Holdings Ltd.,  C.T.C. 294, 64 D.T.C. 5184 (Ex. Ct.) at page 5188. In making the assessment, one of the facts assumed by the Minister was:
(e) the increase of $1,250,000 between the two demand notes was in consideration of a refinancing of the contract of December 11, 1979, and the forbearance of Carter from pursuing legal remedies available to it to enforce payment of the demand note for $3,500,000;
The appellants’ counsel argued the payment of the $1,250,000 was a current expense and therefore deductible. The Minister, he said, correctly assumed the amount of $1,250,000 was paid by each appellant for forbearance by Carter for a period of five days and the refinancing of the contract. Except for the increase in the principal amount of the second note, the terms of both the original or first note and second note were identical, counsel declared. The appellants ended up in the same position five days after demand as they were before demand. They were still indebted to Carter.
The appellants were in default on the original notes. The additional $1,250,000 was to be paid to Carter by each appellant so Carter would not exercise its rights on the original notes and the debt to Carter would be preserved. On March 5, 1980 Carter and the appellants entered into agreements to cancel the first note and to substitute it for the second note. The payment of the $1,250,000 as forbearance for five days is not a capital payment, counsel declared. All that was done, said counsel, was that the appellants told Carter they wanted to continue to owe the amount of $3,500,000 and did not want to pay that amount at the time. The $1,250,000 was paid in order to remain “staying where we were at,” and
for Carter to make demand for payment only after March 5, 1980.
In support of his submission counsel referred to several leading cases. He relied on the decision of Johns-Manville Canada Inc. v. R. (sub nom. Johns-Manville Canada Inc. v. The Queen),  2 S.C.R. 46, 2 C.T.C. 111, 85 D.T.C. 5373 at page 67 (C.T.C. 123, D.T.C. 5381) for the approaches to be used to qualify an expenditure. Amongst them are: 1) the courts are required to apply what Estey J. refers to as a common sense appreciation of all the guiding features which provide the ultimate answer, 2) there is no single test, one must look at the facts of the particular case, 3) the characterization of an expense in situations like this is a policy question, and 4) one must look at what the expenditure is calculated to effect from a business point of view. Counsel referred to Estey J., at pages 5381-82:
This reasoning, of course, does not conclusively lead to any result, either for or against either of the contending parties. 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 to the 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 disqualified by paragraph 12(l)(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(l)(b) relating to capital expenditures. I turn back, therefore, to the comments of Viscount Cave in B.P. Australia, supra, at page 271, where he stated:
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.
Jackett P., as he then was, described the “usual test” to determine whether a particular payment is one made on account of capital 1s
Was it made “with a view of bringing into existence an advantage for the enduring benefit of the appellant’s business”?: Algoma Central Railway v. Minister of National Revenue,  C.T.C. 130, 67 D.T.C. 5091, at page 134 (D.T.C. 5093).
Appellant’s counsel stated that in St. Ives the taxpayer argued it acquired a resource property with the $1,250,000 and the Trial Division and Court of Appeal said it did not. The appellants acquired nothing that was of an enduring benefit to them when they increased the notes by
In Aluminum Co. of Canada Ltd. v. The Queen,  C.T.C. 471, 74 D.T.C. 6408 (F.C.T.D.), the taxpayer agreed to a settlement and paid $3,600,000 to its subsidiary to pay to the Jamaican Government in order to preserve its supply of raw material which would otherwise have been jeopardized by a conflict with the Jamaican Government. The amount of the payment was deductible in computing the taxpayer’s income in Canada. Heald J. held that cases such as British Insulated and Helsby Cables Ltd. v. Atherton,  A.C. 205, 10 Tax Cas. 155 (U.K.H.L.) and Associated Investors of Canada Ltd. v. Minister of National Revenue,  C.T.C. 138, 67 D.T.C. 5096 (Ex. Ct.) are not authorities for the proposition that monies expended for the maintenance and continuation of a capital asset are outlays on account of capital (page 6412).
The payment of the $1,250,000 could not be characterized as a capital expenditure, counsel argued. He relied on the guidelines set down by Jackett P. in Canada Starch Co. v. Minister of National Revenue,  C.T.C. 466, 68 D.T.C. 5320 (Ex. Ct.) at page 472 (D.T.C. 5323-24):
(a) on the one hand, an expenditure for the acquisition or creation of a business entity, structure or organization, for the earning of profit, or for an addition to such an entity, structure or organization, is an expenditure on account of capital, and
(b) on the other hand, an expenditure in the process of operation of a profit-making entity, structure or organization is an expenditure on revenue account.
Applying this test to the acquisition or creation of ordinary property constituting the business structure as originally created, or an addition thereto, there is no difficulty. Plant and machinery are capital assets and moneys paid for them are moneys paid on account of capital whether they are
(a) moneys paid in the course of putting together a new business structure,
(b) moneys paid for an addition to a business structure already in existence,
(c) moneys paid to acquire an existing business structure.
In Oxford Shopping Centres Ltd. v. R. (sub nom. Oxford Shopping Centres Ltd. v. The Queen,  C.T.C. 7, 79 D.T.C. 5458 (F.C.T.D.), at page 14 (D.T.C. 5463) aff’d  C.T.C. 128, 81 D.T.C. 5065, Thurlow A.C.J. held “that the fact a payment is made once and for all and that the advantage, whatever it was, was expected to be of a lasting or more or less permanent nature” are facts which carry weight but are not in themselves conclusive payment is on capital account (page 5463).
Respondent’s Main Submission
Respondent’s counsel argued that the increase of $1,250,000 in debt to Carter was to refinance the existing debt and for the forbearance of Carter from pursuing legal remedies to enforce payment of the first note and is on account of capital, the deduction of which is precluded by the provisions of paragraph 18(l)(b) of the Act. Counsel relied on the three-step test adopted by the Australian High Court in Sun Newspapers Ltd. v. Federal Commissioner of Taxation (1938), 61 C.L.R. 337, at page 363, per Dixon J., which was applied by the Supreme Court of Canada in Johns-Manville, supra, at page 57 (C.T.C. 119; D.T.C. 5378):
There are...three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.
(i) Assumption by Minister
The fact relied on by counsel for the appellants is one of at least five facts assumed by the Minister in making the assessments. The other four facts stated in the Amended Reply to the Amended Notice of Appeal are similar to facts described in paragraphs 4, 5 and 6; the Minister also assumed Carter and the appellants agreed Carter would withdraw its demand for payment on the first note and a new promissory note in the amount of $4,750,000 would be executed to replace the first note.
An assessment is deemed to be correct and it is for the appellant to adduce evidence that it is wrong. An assessment may be correct for the wrong reasons.
In Pillsbury Holdings, supra, the taxpayer did not challenge the truth of the Minister’s allegation of facts or that he assumed such facts. The taxpayer put evidence before the Court to show exactly what the facts were and contended that those facts did not support the assessment. In the appeals at bar the appellants also did not challenge the Minister’s allegations of facts, or that the Minister assumed such facts. They did what the taxpayer did in Pillsbury Holdings: they put evidence before the Court to show what the facts were. The evidence was by way of Agreed Statement of Facts. They contended that one fact that was contained in the respondent’s pleadings (but that was not included in the Agreed Statement of Facts) did not support the assessments.
I do not consider Pillsbury Holdings authority for the proposition that if one fact assumed by the Minister in assessing does not lead to the Minister’s conclusion of law, there is an immediate shift in the onus of proof. I have before me an Agreed Statement of Facts. Usually these would be the only facts before a judge. However in tax appeals, the respondent frequently sets out in the pleadings certain of the facts the Minister had assumed to be true and which he relied on when making the assessment. The veracity of these facts was not challenged by the appellants. These facts are to be accepted as they were dealt with by the Minister or assessor: Johnston v. Minister of National Revenue,  S.C.R. 486,  C.T.C. 195, 3 D.T.C. 1182 (S.C.R.) at page 1183. Only when considering the facts in the Statement of Facts and those assumed by the Minister may one consider whether the assessment is good. The facts relied on by the Minister may not support the assessment; the other facts agreed to by the parties may support the assessment. In such a context, there is no shifting of any onus. The taxpayer must still show the Court the assessment is wrong.
(ii) Analysis of Main Issue
In an analysis whether an outlay or expense is deductible in computing income for tax purposes, Iacobucci J. stated, in Symes v. R. (sub nom. Symes v. The Queen),  4 S.C.R. 695,  1 C.T.C. 40, 94 D.T.C. 6001, at page 723 (C.T.C. 51, D.T.C. 6009) that:
... one’s first recourse is to s. 9(1), a section which embodies ... a form of “business test” for taxable profit.
Iacobucci J. approved the view of Thorson P. in Royal Trust Co. v. Minister of National Revenue,  C.T.C. 32, 57 D.T.C. 1055 (Exch), at page 40 (D.T.C. 1059) that:
...the first approach to the question whether a particular disbursement or expense was deductible for income tax purpose was to ascertain whether its deduction was consistent with ordinary principles of commercial trading or well accepted principles of business...practice....
[Emphasis added. I
Because the determination of profit under subsection 9(1) is a question of law, Iacobucci J. denied a subsection 9(1) test based on “generally accepted accounting principles” (“G.A.A.P.”). To adopt G.A.A.P., he stated, would confer a degree of control by accountants which is inconsistent with the legal test for profit under subsection 9(1). He thought it was more appropriate in considering the subsection 9(1) business test to speak of “well accepted principles of business (or accounting) practice” or “well accepted principles of commercial trading”.
No evidence was led as to how these principles of business (or accounting) practice or commercial trading would have treated the increase between the principal amounts of the first and second promissory notes. I can only adopt what I think is a common sense appreciation of guiding features of reported cases to the facts before me and determine what the increase between the principal amounts was calculated to effect from a business point of view.
As I appreciate the facts of these appeals, each appellant purchased a Property Interest from Carter for $3,500,000, payable by an interest bearing demand note for $3,500,000 due five days after demand. The trans-
actions of purchase and sale were closed on December 11, 1979.
Rouleau J., in St. Ives, supra, held the price was fixed at $3,500,000 and was not subject to the determination of its fair market value. Sarchuk J.T.C.C., when St. Ives was heard in this court, found no adequate proof that on December 11, 1979 the parties agreed the market value of each Property Interest was greater than the sale price set out in each Sale Agreement, i.e. $3,500,000. My colleague found there was no error on December 11, 1979 in the Sale Agreement price. Subsequent to December 11, 1979 the parties to the Sale Agreements appear to have become aware, after receiving what I assume to be an oral valuation of the Property Interests, that each Property Interest was sold for less than market value. This, in my view, led Carter to make its demands for payment on each of the original promissory notes and led the appellants to issue the second promissory notes in the principal amount of $4,750,000 each. The appellants could have paid the $3,500,000 to Carter. As Rouleau J. stated in St. Ives, at p. 6225, they “could have gone to any commercial bank and borrowed money to pay off the note, particularly so since the appraised fair market value had been established as $4,750,000 and had the appellants done so they” could have avoided any action in debt being instituted”. I too have doubt that in such circumstances a businessman would agree to pay $1,250,000 for forbearance or for refinancing a note of $3,500,000, or for both. This is one reason that I do not accept the Minister’s assumption the increase in the debt was for forbearance or to refinance any contract.
The Rectification Agreement stated, amongst other things:
As you have acknowledged that the purchase price paid by you on December 11, 1979 did not reflect the fair market value of the oil and gas properties (“the properties”) sold which acknowledgement we understand is based on a verbal independent evaluation (subject to a written report) of the properties made by Pitfield Mackay Ross Limited on your behalf, this will confirm your agreement to increase the purchase price by an additional $1,250,000.00, thereby revising the purchase price from $3,500,000.00 to $4,750,000.00. You shall execute a new promissory demand note dated December 11, 1979, for the total revised price on the same terms and conditions as the old note, and we shall return the latter note to you upon receipt of the new note.
The increase in the purchase price shall also be in consideration for Carter Oil & Gas Ltd.’s withdrawal of its Demand of Payment, and for it not to pursue the legal remedies available to it to enforce payment of such note.
In St. Ives Sarchuk J.T.C.C. held the letter of March 5, 1980, referred to as a Rectification Agreement, was not a rectification agreement.
Nevertheless, the contents of that letter imply quite clearly that Carter was of the view it sold the Property Interest for less than fair market value and wanted the purchasers to pay what the property was worth. Carter’s problem, it appears to me, was that the transactions had closed and it could not legally oblige the purchasers to increase the purchase price. Carter made demand on the original promissory notes and for reasons best known to the appellants and Carter, the appellants issued the second promissory notes to Carter. Sarchuk J.T.C.C. found the original promissory note, once granted, constituted a contract distinct from the Sale Agreement and in fact it was pursuant to the original promissory note that Carter on February 29, 1980 demanded payment of the principal and interest.
The second promissory note was not issued to Carter in payment of the first promissory note. The appellants were not released from paying the whole or any part of the debt due on the first promissory note.
The second promissory note included the debt on the first promissory note plus the additional debt the appellants agreed to incur. I have no reason to doubt the additional debt was incurred for business purposes.
Even if I accept that the increase between the principal amounts of the notes was for refinancing it does not follow that I must find the increased amount was on revenue account and deductible in calculating profits of the appellants under subsection 9(1) of the Act. Since the main purpose of every business undertaking is presumably to make a profit, any expenditure made for the purpose of gaining or producing income comes within the terms of paragraph 18(1 )(a), whether it be classified as an income expense or as a capital outlay: B.C. Electric Railway Co. v. Minister of National Revenue,  S.C.R. 133, C.T.C. 21, 58 D.T.C. 1022. In the present appeals the additional debt was incurred by each of the appellants for the purpose of gaining income from its business and was incurred on account of capital. For the $1,250,000 to be considered an expenditure on revenue account would fly in the face of common sense.
The second promissory note was not a debt rescheduling or restructuring. The money represented by the first notes is a capital asset. The additional $1,250,000 was not an expense incurred in order to maintain that asset in existence. No portion of the increase of the notes was paid to Carter to withdraw its demand for payment or to pursue legal remedies to enforce payment of the note. The terms of the first note were not amended so as to forestall default and acceleration of the obligation to repay the money. The notes were both dated December 11, 1979. The second note replaced the first note ab initio. The principal amount of the original note was on account of capital and so was the principal amount of the second note.
The additional debt of $1,250,000 was not an expenditure incurred in the process of operation of a profit-making entity, structure or organization contemplated by Jackett P. in Canada Starch, supra. The debt was not incurred in carrying on the regular business operations of any appellant. The $1,250,000 was incurred to satisfy a one-time obligation. The debt was not a recurring debt, nor was it a periodical outlay to cover its use or enjoyment for periods commensurate with the debt. To allocate the $1,250,000 to revenue account would, in the circumstances of these appeals, distort the profit for the year of the appellants. I am not satisfied the amount of $1,250,000 is a proper expenditure or liability to be charged against income.
The purposes of the increase in the promissory notes was not to bring the increase “within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade ...”: Sun Newspapers (1938), 61 CLR 337 at page 362, supra, page 362, cited in Johns-Manville Inc. v. The Queen,  2 S.C.R. 46, 2 C.T.C. Ill, 85 D.T.C. 5373, supra, at pages 58, 71, (C.T.C. 118, 125; D.T.C. 5378, 5383). In Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946) 72 C.L.R. 634 at page 643, cited in Johns-Manville Inc. v. The Queen,  2 S.C.R. 46, 2 C.T.C. 111, 85 D.T.C. 5373, supra, at page 57, 71 (C.T.C. 118, 125, D.T.C. 5377, 5383), Dixon J. stated that the classification of an expenditure ... depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of legal rights...”. The debt of $1,250,000 was not incurred bona fide in the course of the appellants’ regular day-to- day business operations. The $1,250,000 is not an amount to be included in calculating an appellant’s profit from a business, and hence its income, for the year for purposes of subsection 9(1) of the Act.
Cost of borrowing The appellants’ first alternative submission, in the event I find the payment of $1,250,000 was on capital account, was that the amount of $1,250,000 was an expense incurred in the course of borrowing money used by the particular appellant for the purpose of earning income from a business or property and therefore, pursuant to subparagraph 20(l)(e)(ii), is deductible in computing income.
Subparagraph 20(l)(e)(ii), as it read at the time, provided that in computing income from a business or property, a taxpayer may deduct:
...an expense incurred in the year...in the course of borrowing money used by the taxpayer for the purpose of earning income from a business or property (other than money used by the taxpayer for the purpose of acquiring property the income from which would be exempt), including a commission, fee or other amount paid or payable for or on account of services rendered by a person as a salesman, agent or dealer in securities in the course of issuing or selling the units, interests or shares or borrowing the money, but not including any amount paid or payable as or on account of the principal amount of indebtedness or as or on account of interest....
Appellants’ counsel argued that if the obligation to pay an additional $1,250,000 created a capital asset, the only asset his clients could have received that is capital has to be the refinancing under the second note. He therefore concluded that if the appellants each paid $1,250,000 to refinance under the second notes, then they paid the money in the course of borrowing because it was in part in connection with or incidental to or arising from obtaining the money under the second note.
In order for a payment to be deductible under subparagraph 20( 1 )(e)(ii), it must be incurred “in connection with”, “incidental to” or “arising from” the borrowing of money. The appellants’ counsel suggested that if I find the payment was on account of capital it was because I was persuaded the appellants ended up with money under the second notes which they did not have before the making of the demand. If the appellants paid $1,250,000 to obtain refinancing, the monies were paid in the course of borrowing those monies since it was or in connection with, incidental to or arising from obtaining the monies under the second note. The appellants relied on the decision of Minister of National Revenue v. Yonge-Eglinton Building Ltd.,  C.T.C. 209, 74 D.T.C. 6180 at 214 (D.T.C. 6183), where Thurlow J. held, at p. 6183, that the words “in the course of” are not a reference to the time when the expenses are incurred but are used in the sense of “in connection with” or “incidental to” or “arising from” and refer to the process of carrying out the borrowing for or in connection with which the expenses are incurred.
The respondent submitted the outlay of $1,250,000 was not “an expense incurred in the course of borrowing money” within the meaning of subparagraph 20(l)(e)(ii). See Riviera Hotel Co. v. Minister of National Revenue,  C.T.C. 157, 72 D.T.C. 6142 (F.C.T.D.) and Neonex International Ltd. v. R. (sub nom. Neonex International Ltd. v. The Queen),  C.T.C. 485, 78 D.T.C. 6339 (F.C.A.). In The Queen v. Antoine Guertin Ltée.,  1 C.T.C. 360, 88 D.T.C. 6126 (F.C.A.) at page 363 (D.T.C. 6129), Marceau J. (Pratte and Lacombe J.J. concurring) held that:
...in order to speak strictly and accurately of an expense incurred in the course of a loan, the expenditure must as such have had no consideration other than the loan, or in other words, it must be an expenditure resulting in a diminution of the borrower’s property.
The consideration of the additional $1,250,000 was for something other than the debt of $3,500,000, counsel declared.
I agree with the respondent. The $1,250,000 was not incurred “in connection with” or “incidental to” or “arising from” a borrowing. The additional debt was not incurred as a cost of borrowing money from Carter. The money borrowed, $3,500,000, was borrowed before the debt, or expenditure, of the $1,250,000 was even contemplated. The $1,250,000 was debt added to the original debt of $3,500,000 but not otherwise connected or incidental to it. Accordingly the $1,250,000 is not deductible in computing income of an appellant.
Eligible Capital Expenditure
The appellants’ final submission, assuming I reject the first two arguments, was that the payment of the $1,250,000 was an eligible capital expenditure within the meaning of paragraph 14(5)(b), as it read in 1981. Revenue Canada says the amount of $1,250,000 was paid to a creditor of the appellants on account or in lieu of payment of a debt and as such does not fall into the definition of eligible capital expenditure.
Respondent’s counsel provided me with various dictionary definitions of the terms “on account of”, “in lieu of” and “debt”. They do not assist me. The amounts of $1,250,000 were not payments made on account or in lieu of payment of any debt or on account of a cancellation of any debt. The appellants remained indebted to Carter after March 5, 1980 in the full amount of the original note plus $1,250,000. The $1,250,000 added to the original debt of $3,500,000 was not payable to Carter on account of or in lieu of payment of the original note. There was no intent by the appellants or Carter that the second note would represent any payment of the original note and it did not.
The amount of $1,250,000 was incurred by each of the appellants, as a result of a transaction in 1980, on account of capital for the purpose of gaining or producing income from their businesses.
The appeals will be allowed with costs. The amounts of $1,250,000 were eligible capital expenditures in respect of the business carried on by each of the appellants.