74712 Alberta Ltd. (Formerly Cal-Gas & Equipment Ltd. v. Her Majesty the Queen), [1994] 2 CTC 191, 94 DTC 6392

Muldoon J.:—The plaintiff, by amended statement of claim filed July 20, 1990, appeals from a judgment of the Tax Court of Canada pronounced on April 10, 1990 [[1990] 2 C.T.C. 2001, 90 D.T.C. 1401] wherein Cal-Gas’ appeal from its reassessments for the taxation years 1983, 1984 and 1985 was dismissed. The plaintiff was called Cal-Gas & Equipment Ltd. at the material times.

The plaintiff claims:

(a) an order or judgment setting aside the Tax Court’s judgment and directing that the reassessments of Cal-Gas’ tax liability for the years 1983, 1984 and 1985 be varied upon reference back to the Minister of National Revenue for reconsideration and reassessment on the basis that the plaintiff is entitled to deduct interest paid on the Wells Fargo loan for the taxation years 1983, 1984 and 1985, and

(b) costs of this action.

The Well Fargo loan refers to the sum of $1,700,000 lent to the plaintiff by the Wells Fargo Bank Canada included among other sums lent according to WFBC's letter of commitment dated September 21, 1982, Exhibit 1(35) and annex to (36). It is the interest on this loan paid by the plaintiff which it seeks to have deducted from its taxable income for the said three years.

This litigation is engaged by the following provisions of the Income Tax Act, R.S.C. 1952, Chap. 148, as amended by section 1 of Chap. 63, S.C. 1970-71-72.

Deductions

18(1) In computing the income of a taxpayer from a business or a property no deduction shall be made in respect of

(a) 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) 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;

20(1) 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) 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),

The basic issue is whether the interest payments were contemplated in and by paragraphs 18(1 )(a) and (b) or whether such payments were properly deductible in accordance with subparagraph 20(1 )(c)(i) of the Income Tax Act in the computation of the plaintiff’s taxable income. The specific issue, however, is whether the money borrowed by the plaintiff was used for the purpose of earning income from a business or property pursuant to paragraph 20(1 )(c) of the Act.

A lamentable complication arising in this case over the Minister’s interpretation of the statutory provisions above cited, in Interpretation Bulletin IT-445, paragraph 52,450 at pages 33,593-94, seemed to create another issue, of which, more anon, save to observe that these bulletins — this bulletin — can surely run afoul of the Constitution's imperative about the rule of law. The judicial branch of the State being the constitutionally authentic and authoritative interpreter of the law, it is sometimes regarded by taxpayers and their advisers, to their not infrequently ultimate woe, to be somehow subordinated to the authors of the departmental interpretation bulletins who sometimes create more harm than good with their well-intentioned interpretations.

Because the defendant denied knowledge of the allegations expressed in paragraphs 2, 3, 4, 5, 8, 9, 10, 11 and 12 of the amended statement of claim, and therefore did not admit them, but adduced no evidence, except through cross- examination of the plaintiff's two witnesses, the facts are largely to be established through the parties’ pleadings as established by the testimony of the witnesses and agreement of the parties’ respective counsel.

Two exhibits, each with a number of sub-exhibits — all documents — were received by consent, with defendant's counsel's reservation of admission of the correctness, in all respects, of the facts stated therein noting that the witnesses’ testimony would have to explain the context. In particular regarding Exhibit 2, consisting of documentary financial material, the defendant admits that they are what they purport to be. The Crown admits the obviously straightforward business-records evidence but notes that there are included in Exhibit 2 a number of schedules or charts prepared by the plaintiff’s solicitors and by retained accountants for the purposes of presenting the evidence through the plaintiff's two witnesses. The Crown indicated clearly for the record that until those documents were explained and the figures were verified in some way, it would not admit that the contents were true (transcript: pages 6 through 9).

The allegations of facts set out in the statement of claim are so sparse as to verge on anorexia, but the plaintiff's counsel fleshed them out at trial, under the watchful and not always compliant supervision of the defendant's counsel.

The facts are as follows. Beginning in 1979, the material time from the parties' oint of view, the plaintiff, then called Cal-Gas & Equipment Ltd. carried on the basic business of industrial propane gas sales. It was one of a group of seven corporations: (1) Allied Equipment Ltd., (2) Trennd Investments (1979) Ltd., (3) Lethbridge Crane Service Ltd., (4) Pioneer Machinery Co., (5) the plaintiff Cal-Gas,

(6) Trennd Investments Ltd., and (7) Chinook Auto Electric Ltd. Those corporations were largely owned, controlled and operated by John Corbett (called Jack) Anderson (hereinafter Anderson). Each corporation had its own separate banking arrangements primarily with a separate distinct branch of the Canadian Imperial Bank of Commerce (CIBC). In most instances the most substantial company of the Anderson group, Allied Equipment, was called upon to guarantee the borrowings of the other corporations of the Anderson group, and in particular it was called upon from time to time to furnish a guaranty of, and against, Cal-Gas’ borrowings.

In September, 1979 (or generally in the autumn of that year), Mr. Anderson effected a restructuring of his group of corporations. Probably because Lethbridge Crane Service Ltd. was wholly owned by Allied Equipment Ltd., the plaintiff refers to the sibling corporations as being only six in number. After September, 1979, (as is asserted in Exhibit 2(1), charts A and B) one of the group, Trennd Investments (1979) Ltd. (hereinafter Trennd (1979)) became the "parent" of the other five corporations of the Anderson group.

According to the plaintiff's first witness, Russell Norman Wood (hereinafter Wood), former executive vice-president (finance) of the "Trennd organization”, starting in that capacity sometime in 1978, Cal-Gas had a small line of credit with the Bow Valley branch of CIBC in autumn 1979 before the restructuring. He testified (transcript: page 24):

A. Cal-Gas had a branch of Lethbridge, a branch at Calgary . . . at Edmonton, and it just recently commenced to do business in Lioydminster.

The word "recently" has an inherently present tense connotation, but the Court at the time of Wood's testimony understood, and still understands his phrase “just recently” to mean “just previously” or “just around that time” in terms of the question which he was answering formulated by the plaintiff's counsel"...kindly describe to us the business of Cal-Gas, what it was doing on or about the fall of 1979 . . . ?" So, the Court concludes that prior to the autumn of 1979, and months before the Anderson group's restructuring in the context of the rest of Wood's answer and his testimony in general, Cal-Gas had "commenced to do business in Lloydminster”, shortly after midsummer of 1978, not 1979 at all.

The Court also concludes that Wood was either not privy to the narrative of events as conceived in counsel's mind, or reluctant to go along with it. Here is plaintiff's counsel’s question and Wood's not wholly responsive answer:

Q. And could you tell us what this chart [Exhibit 2(16)] depicts in terms of the period before Cal-Gas gave its guarantee, the period after Cal-Gas gave its guarantee, and the period after Cal-Gas made the guarantee payment, and you can take a little time dealing with this, Mr. Wood.

A. Maybe I could deal with it this way by looking at the individual lines here, the categories “Gross Sales”, for example. The period prior to Lloydminster would have ended in June 30, 1978. At that point Cal-Gas had gross sales of 1,059,000. By September 30, 1983, gross sales had reached 6.3 million dollars.

Indeed, what Mr. Wood testified is confirmed by what the plaintiff tendered the colour-coded chart, “Cal-Gas . . . Comparative Financial Figures” [Exhibit 2(16)] by comparison of the two pink columns, June 30/78 and June 30/79. The prosperity brought by the Husky Oil contract in Lloydminster is reflected in the more favourable figures shown to have been achieved by June 30/79 over June 30/78, during the plaintiff's Lloydminster operations. These factual aspects of Cal-Gas’ march to greatness seem to be omitted from the plaintiff's counsel’s concept of that march. In any event, the effects of the plaintiff's business with Husky Oil in Lloydminster beginning in July, 1978, can be seen on the chart which the plaintiff's advisers concocted for this litigation.

The Court noted that Wood did not like to be contained in his answers by the constrictive nature of the plaintiff’s counsel's questions in chief. Here is a significant part of his factual answer to a question seeking a speculative answer about the effect of a new credit facility created in the second quarter of 1980 (transcript, page 36):

A. . . . and Cal-Gas’ typical business at that time prior to Lloydminster [that is, June 30, 1978] arose out of supplying heaters and propane to the construction industry and the construction industry, because of high interest rates, was in a very severe down turn.

Now, at about that time, the other operating branches of Cal-Gas started to get into trouble. Lethbridge was losing money badly and we had to close that branch. Edmonton was losin money badly and we had to close that branch and Calgary was staggering along and surviving. The real dollars were made in Lloydminster.

[Emphasis added.]

It will be seen from his general line of questioning that the plaintiff’s counsel's concept of affairs requires the genesis of the plaintiff’s business in Lloydminster to be in autumn 1979, or even in 1980 to coincide with, or to briefly precede, the establishment of the credit facility, but his coloured chart shows an upsurge in Cal-Gas’ business during the period from the end of June, 1978, to the end of June, 1979. It is a time which the plaintiff, or its counsel, keeps amputating or ignoring from consideration in this narrative of events. This is illustrated by and in the coy questioning and somewhat coy answering recorded on the transcript's page 43. It snows that after the business began in Lloydminster after June 30, 1978, Cal-Gas did fairly well, but of course its ability to pay trade debts vastly improved after the establishment in 1980 of the credit facility with mutual guarantees in the Anderson group.

So, the index of precision augmented when Wood was cross-examined by the defendant's counsel, thus:

Q. And when did Cal-Gas initially open the Lloydminster branch to carry on this operation?

A. I don’t have the exact date. Our first business we did in Lloydminster was in 1979. In the fiscal year 1979, we did something like $130,000.

Q. Was there a branch in Lloydminster prior to 1979?

A. No, there was no branch prior to that piece of business being done.

Q. Now, by that piece of business, this would be the Husky contract?

A. It was principally the Husky. I can’t recall if we took on any other small operators at that time, but for all intents and purposes, it was the Husky contract.

Q. And that arose as a result of Husky's dissatisfaction with their other supplier and they approached Cal-Gas to determine whether or not you could supply them?

A. That is correct.

Q. And when was that approach made?

A. That would have been probably mid- to late 1978.

Q. And was a contract, was there a formal contract entered into between Cal-Gas and Husky?

A. Not on an overall basis. There would have been specific — probably specific lease agreements covering each well head.

Q. Can you explain what you mean by. that?

A. Well, Cal-Gas would be leasing a thousand gallon tank to Husky. Husky would be paying a monthly rental on that. (Transcript: pages 63 & 64)

Q. Do you recall when — now you said I think sometime in 1979 — the first of these leases was entered into sometime in 1979?

A. Either late '78 or early '79 because the company’s year-end at that time was June 30, so what appears as business in the June 30, '79 year might very well be partly in 1978. (Transcript: page 64)

Q. . . . if this was put in place in late 1978, that the general arrangements with Husky were agreed to prior to the refinancing agreement [that is the 1980 credit facility] wit Bank of Commerce [CIBC]?

A. The request from Husky was prior to the refinancing arrangements, but the request from Husky triggered the Trennd organization to say, we have got to find financing if we are going to do this deal for Husky.

Q. And why was that necessary?

A. Because there were hundreds of thousands of dollars of equipment that had to be purchased so that Cal-Gas could go in and do this job for Husky.

If Cal-Gas could not demonstrate that it had the funds to buy the tanks and the equipment so that it could service these wells, Husky would not have been interested in doing business with Cal-Gas. (Transcript: page 65)

A. Cal-Gas had to purchase the equipment and then, in turn, lease it to the operator, so Cal-Gas had to come up with the money.

Q. What mechanism did Cal-Gas use to actually purchase the equipment? What financing arrangements were made for that?

A. The financing arrangements were for, in the initial stages, to buy it out of operating capital, accumulate a bulk of it, and then go to the Bank of Commerce Leasing Group and obtain a sale and lease back arrangement.

Q. And that was the mechanism that was used prior to this Lloydminster opportunity?

A. No, I'm referring to the Lloydminster transaction, that is how we financed Lloydminster.

Q. The net result is that in 1979, we have Cal-Gas entering into a large number of these capital leases with the Bank of Commerce so as to obtain the equipment necessary to start the Lloydminster operation?

A. That's true, yes.

Q. And that continued through 1979 and then the financing arrangements were changed

A. The initial leases that Cal-Gas took to Commerce Leasing prior to this blanket line put into place, the lease financing was obtained from the Commerce under the guarantee of Allied Equipment.

(Transcript: page 66)

A. What I intended to say and I thought what I did say was that Cal-Gas could not do this on its own. Cal-Gas did not do any of this on its own. The original financing that Cal-Gas obtained to get the ball rolling, the first financing with Commerce Leasing was provided against the guarantee of Allied Equipment.

Q. Okay. I understand that. So that from the point in 1978 sometime in 1979 when Husky offers the opportunity and the decision is made to go with it, Cal-Gas is able, through arrangements guaranteed by Allied, to obtain the capital leases totalling some $909,000 shown in the comparative financial figures that you reviewed with your counsel without having entered into the arrangement that is formalized in the April 9, 1980 letter from the Bank of Commerce. It was basically done through direct borrowing by Cal-Gas guaranteed by a sister company?

A. That is correct. (Transcript: pages 67 & 68)

A. . . . there was even some thought, about the time that I joined the organization, that Commerce was going to call Cal-Gas’ loans.

Q. Okay. When was that?

A. This would have been in 1978 or thereabouts.

[This is rather imprecise, but on direct examination, recorded on page 22, Wood snapped out, in answer, that he joined the Trennd organization in 1978 as executive director, vice-president (etc.). It beggars belief that even the individual branch of CIBC with which Cal-Gas dealt would think of calling the loans once the Husky business in Lloydminster was afoot, in 1978. In the contest between Wood's oath of witness and loyalty to the party which called him to testify, the oath seems to have been subordinated here, and elsewhere.]

Q. Okay, but within the next year of that, though, the bank goes along on the basis of Cal-Gas’ security and the leased equipment and the guarantees from the sister companies to extend a further $909,000 worth of financing through the leases?

A. Because of the negotiations that were going on at that time with the Bank of Commerce at two different branches on the basis that we were going to wrap all this together in a proper financing package and have it dealt with.

And in the meantime, Cal-Gas needed financing and the sister company Allied, which was really the parent at that time, guaranteed it and that is how Cal-Gas got its financing because of the support of the parent company and without the additional financing that we got with the line of credit, Cal-Gas could not have fulfilled its obligations at Lloydminster or taken advantage of the situation that was presented at Lloydminster.

THE COURT: And was the bank aware of the temporary arrangement with Allied Equipment?

A. Yes, the bank was pushing us to get this all pulled together and so as a temporary measure to provide some financing to Cal-Gas against the guarantee of Allied.

Q. MR. McNARY: But when you say the bank was pushing you, is there anything in the documentation that you reviewed or that you have found that indicates that prior to the letter of January 23, 1980, in which Trennd notifies them of the corporate reorganization that occurred in the fall and requests certain accommodations on financing, that there were actual discussions as to any of this?

A. I believe the first sentence of that letter indicates that we have been holding discussions.

Q. Well, it indicates:

As you are aware, we have recently undergone a corporate reorganization.

And it explains the nature of the corporate reorganization and provides charts.

A. Yes.

Q. And says:

In keeping with our previously expressed desire to consolidate the operating lines of credit.

Now, that is something different than in keeping with the bank’s demand that a reorganization be put in place to protect the credit already extended?

A. That is what the letter says, but I can assure the Court that the bank was saying to me on more than one occasion, get this thing pulled together. We don't like two companies with the same connection dealing at different branches under different managers. We want it pulled together under one manager so it can be properly managed and controlled.

Q. MR. McNARY: The net effect of all of this, though, is that by the time the guarantee is given in April of 1980, something in excess of $900,000 of the credit to be extended Cal- Gas has already been extended, in fact, much more than that.

There is some 1.3 million, 1.3 something million has already been extended and the bank’s concern and Cal-Gas’ concern is and Trennd's concern, I suppose, is the rationalization of the loan arrangements? It is not you want to rationalize it under one branch and with one manager supervising the account and the bank is concerned that this be done?

A. That's correct.

Q. And the rationalization that was to be effected was that as indicated in the pleadings, and I think your evidence earlier, Trennd effectively became the banker of its new subsidiaries that had been rolled under it in the fall of'79?

A. That's correct.

Q. And then in the letter of April 9, 1990, the bank confirms that there is going to be a total accommodation of the Trennd group of companies of some 7.4 million dollars of which $2,016,000 [i.e. $2,016,498 — Exhibit 1(3), pages 7 & 8] was released to Cal-Gas indebtedness?

A. That is partially true. That isn't — directly to Cal-Gas was 2 million, but Cal-Gas also had access to the operating line.

Q. Okay. So in addition to the 2,016,498 referred to, Cal-Gas could access the operating loans in the name of Trennd Investments 1979 Limited to the extent of the 3.3 million that was made available to Trennd?

A. That's correct.

Q. Now, in looking at that 2,016,498 figure made up of two term loans, an interim loan and lease agreements, these amounts were not new amounts being loaned to Cal-Gas, this is a restatement of Cal-Gas’ previously indebtedness to that point; is that correct?

A. Yes

Q. So that in other words, this arrangement did not allow other than the access to the operating line of 3.3 million, when we look at the figure of 2,016,000, this is not accessing new financing, this is the bank securing its position with respect to the group for already existing agreements and indebtedness?

A. Could you refer me to that Exhibit?

Q. Okay. I’m sorry, it is tab three of Exhibit 1 and I’m looking at pages 7 and 8.

A. The $2,016,000, the old portion of that is Term Loan 1 and 2.The interim loan is a new transaction.

Q. Okay. We will talk about that in a minute and the 1,280,388 are the existing leases?

A. No, there would be — yes, those would be the leases existing on that date.

Q. Okay. So the net effect of this is that the lease agreements that were necessary to operate Lloydminster don't result from this agreement and the consequent guarantee, but are already in place and this is security for the bank that the bank wanted presumably to keep dealing with the whole group?

A. And in line with our undertaking to the bank that this is what we were doing.

[It is notable that the loans granted to Cal-Gas before the Anderson Group’s reorganization in the autumn of 1979, and long before the yet to be described consolidated credit facility offered by CIBC, were, with Allied’s guaranty, for capital expenditures. The new loan received by Cal-Gas (the so-called “interim loan”) in 1980, was $670,000 capital borrowing in order to build an office building in Calgary — nothing at all to do with income, or even capital, borrowing for the already extant and profitable operations in Lloydminster. So Wood's testimony unfolds, and he was vice-president, finance.]

Q. Now, the $670,000 interim loan related to what?

A. That was the interim financing to build a Calgary building.

Q. So this had nothing to do with Lloydminster other than — I'm sorry, perhaps I could make it more clear. What was that building intended to be used for?

A. This was to house the Calgary branch office of Cal-Gas and to provide the administrative staff or house the administrative staff for the whole Cal-Gas operation.

Q. So it had nothing directly to do with the operations that were going on at Lloydminster and the revenue that was being generated there, but clearly would benefit the company as a whole or was presumably for the benefit of the company as a whole to the extent that the administrative offices were contained there?

A. That is correct.

Wood could hardly bring himself to utter or confirm the reality which goes far to undermine the plaintiff’s position in this litigation. Here is how his testimony is recorded on page 75 of the transcript:

Q. [I]f $670,000 is intended to be spent on the Calgary operation which subsequently goes into hard times and at best breaks even, or to be used for administration so presumably benefits the company in terms of, if anything, on the expense side, but it has nothing to do with the company's opportunity in Lloydminster to generate the substantial amounts of revenue that you reviewed with your counsel. Okay, by the nod I presume that you are saying yes?

A. I’m saying indirectly it was supporting the whole operation, directly the Lloydminster operation had its own facilities.

[Emphasis added.]

John Corbett Anderson (Anderson), the head of the Anderson group of companies, testified but his testimony and his credibility were worth less than those of Wood, for he selectively lost his memory and knowledge upon cross- examination. The Court prudently accepts some few admissions against interest on Anderson's part, and disregards the rest of his testimony. Such highlights of credibility will be called upon where needed.

It is hard to believe that Cal-Gas which, by the first quarter of 1980, was in its third calendar year of conducting substantially, or significantly profitable business in Lloydminster was not independently cred it-worthy, without even needing the reorganization of the Anderson group of corporate chums in the autumn of 1979. However, reorganized it was,

Once the Anderson group was reorganized with Trennd 1979 as its new parent corporation in September, 1979, Anderson and Wood gave some thought to sharing up the rest of the reorganized group and, apparently, CIBC gave some thought about consolidating the Anderson group's credit line.

Conversations were held between CIBC and Trennd (1979) in late 1979 and early 1980, but the CIBC and Trennd (1979) hardly moved on this allegedly crucial credit facility with anything like vertiginous alacrity, or seemingly, even deliberate speed. Now, Wood testified (transcript: page 77) that the concept of putting all the credit line "together as a package at the bank was subsequently done”; but that, as he had elsewhere testified, was the CIBC's idea.

The Anderson group obtained legal and financial advice about how to accomplish the objective, which advice led to Wood's letter dated January 23, 1980 to the CIBC relating that the reorganization was then, but "recently" in effect, ready for the consolidated line of credit. The letter, Exhibit 2(15), includes a diagram of the old and the new configuration of the Anderson group and its shareholding percentages cascading from Anderson, himself. This letter, despite its weird punctuation, asks for CIBC’s “favourable” consideration of a line of credit along the following lines:

3,300,000 — operating loans in the name of Trennd Investments (1979) Ltd. for the months of January, February and March, [presumably, 1980] reverting to:

3,000,000 — operating loans in the name of Trennd Investments (1979) Ltd. for the remainder of the year. [presumably, 1980]

secured by

hypothecation of a $900,000. demand debenture conveying a fixed charge over land and buildings, with adequate insurance etc.

guarantee and postponement of claim Allied Equipment Ltd. for full liability.

supported by

guarantee and postponement of claim Cal-Gas & Equipment Ltd. for full liability.

supported by

assignment of accounts receivable.

hypothecation of a $500,000 demand debenture conveying a first floating charge over all assets and undertakings (subject to prior charges as they exist from time to time) together with adequate fire insurance, etc.

guarantee and postponement of claim Lethbridge Crane Service Ltd. for full liability.

supported by

on the following understandings

assigned accounts receivable of Allied, Cal-Gas, Lethbridge Crane Service and Pioneer will provide full cover for operating loans.

assigned accounts receivable of Allied, Cal-Gas, Lethbridge Crane Service and Pioneer, together with the value of Pioneer inventory (less prior encumbrances) will provide a margin of 25 per cent over operating loans of Trennd and term loans of Pioneer.

etc.

The foregoing anticipates that the term loans outstanding in the names of Pioneer, Allied and Cal-Gas will remain in those names. You will also note that provision is requested for an additional $300,000 during the months of January, February and March which we anticipate may be required to cover mid-month swings.

Turning now to the various statements enclosed. We are satisfied with the results achieved by Cal-Gas and Allied [then in January, 1980], both of which showed significant improvement over the previous year. The reserve for bad debts in Cal-Gas is abnormally high and is, to some extent, precautionary. In actual fact, some of the accounts which were reserved have since been collected and a sizable amount of additional recoveries should be made before year-end.

We are, however, less than satisfied with the results achieved by Pioneer. There are various reasons for the poor showing; the major ones being summarized below:

From a routine standpoint it would appear that the following additional security documents will be required to meet the terms of the suggested credit:

1. demand debenture in the name of Trennd Investments (1979) in the amount of $900,000.; and

2. guarantee of Lethbridge Crane Service Ltd. for loans to Trennd; supported by:

(a) assignment of accounts receivable; and

(b) demand debenture in the amount of $1,000,000.

As at September 30, 1979, J.C. Anderson had $138,373 in shareholders loan due from Allied Equipment Ltd. Since that date $86,000 has been withdrawn and further amounts may be required later in the year. Please make provision in the line of credit for those withdrawals on the understanding that, if required, Mr. Anderson will return whatever funds are withdrawn.

Yours very truly,

TRENND INVESTMENTS (1979) LTD.

R. N. Wood

Executive Vice-President

Indeed, in the second schedule appended to that letter of January 23, 1990, Wood and his advisers opined that the excess of market value of Cal-Gas’ asserts over its too-rapidly depreciated assets was $204,874, as of September 30, 1979.

In February of 1980 the original Trennd was wound up, and Trennd (1979) carried on.

Next, and some eleven weeks later after Wood's letter dated April 9, 1980, came a letter, Exhibit 1(3), addressed to Trennd (1979) from the CIBC advising that "at the pleasure of the Bank, the following line of credit has been made available to Trennd Investments (1979) Ltd. and subsidiaries . . . .” The CIBC's real crystallized terms generally followed those proposed by Trennd (1979) but were more detailed ana extensive as expressed, for example, in regard to Trennd (1979) in that letter of April 9, 1980, thus:

$7,436,936 — Total Accommodation to the Trennd Group of Companies [i.e. the Anderson group]

Accommodation in the name of Trennd Investments (1979) Ltd.

$3,300,000 — operating loans in the name of Trennd Investments (1979) Ltd.

$40,000 — by way of letters of guarantee to the postmaster in the name of any of the companies in the Group

secured by:

general assignment of accounts receivable, registered in Alberta from Trennd Investments (1979) Ltd. — monthly lists to be provided

hypothecation of a demand collateral debenture for $900,000 from Trennd Investments (1979) Ltd. — monthly lists to be provided

hypothecation of a demand collateral debenture for $900,000 from Trennd Investments (1979) Ltd. conveying a second fixed charge over the land and buildings located at 5519-6 Street S.E., Calgary and a first floating charge over all other assets and undertakings of the Company together with adequate fire insurance with loss payable to the Bank

guarantee bond and postponement of claim from Allied Equipment Ltd. for full liability

supported by:

general assignment of accounts receivable registered in Alberta, Saskatchewan and British Columbia — monthly lists to be provided (held secondly for term loans in the name of Allied Equipment Ltd. and thirdly for term loans in the name of Pioneer Machinery Co.)

hypothecation of a demand collateral debenture for $1 million conveying a first floating charge over all assets and undertakings of the company (subject to a prior claim of United Dominions) together with adequate insurance coverage with loss payable to the Bank (this security is held firstly in support of term loans in the name of Allied Equipment Ltd., secondly for operating loans in the name of Trennd Investments (1979) Ltd., and thirdly for term loans in the name of Pioneer Machinery Co,)

guarantee bond and postponement of claim from Pioneer Machinery Co. for full ability

supported by: . . . .

[Exhibit 1(3), pages 1 and 2.]

The provisions of the CIBC terms specific to Cal-Gas were as follows:

guarantee bond and postponement of claim from Cal-Gas & Equipment Ltd. for full liability

supported by:

general assignment of accounts receivable registered in Alberta, British Columbia and Saskatchewan — monthly lists to be provided

hypothecation of a demand collateral debenture for $500,000 conveying a first floating charge over all assets and undertakings of the Company (subject to a prior claim of United Dominions and/or Commerce Leasing as they may appear from time to time) together with adequate insurance with loss payable to the Bank (held firstly for term loans in its own name)

guarantee bond and postponement of claim from Lethbridge Crane Service Ltd. tor full liability

supported by:. . .

Now, the credit accommodation set out in Exhibit 1(3), CIBC’s terms dated April 9, 1980, for Cal-Gas are these with the Court's own notations derived from the testimony of Wood:

hypothecation of Form 5001 of Duplicate Certificate of Title to property located at 4255—64 Avenue S.E., Calgary, supported by a registered caveat

acknowledged assignment of mortgage proceeds, due from Canadian Commercial and Industrial Bank in an amount sufficient to provide full cover for interim loans

Logement of fire insurance during the construction period with loss payable to the ban

$1,280,388 — lease agreements Commerce Leasing Limited [already "existing leases]

secured by:

executed lease agreements.

What sort of already existing leasing arrangements were in effect as of the date of CIBC's terms in April, 1980? In the meanwhile, on January 8, 1980, Cai-Gas had already effected terms with Commerce Leasing Limited (hereinafter CLL) as en- closed in Cal-Gas’ letter of that date, Exhibit 2(14), electing the terms of “Plan B" therein. It dealt entirely with the leasing of capital equipment, trucks for 68 months, and propane tanks & heaters for 94 months. Plan B provides:

FLOATING RATE

(B) During the term of the lease the monthly rental factor will Float relative to the minimum lending rate of the Canadian Imperial Bank of Commerce. The minimum lending rate will be deemed not to exceed 16 per cent and will be deemed not to go below 11.50 per cent during the term of the lease.

The monthly lease factor (expressed as a percentage of lesser’s original acquisition cost) will be as follows: . . . .

A purchase option was included whereby Cal-Gas could "purchase all, but not less than all, of the equipment. . . .”

Cal-Gas was also indebted to United Dominions Corporation (Canada) Ltd. (hereinafter UD) under chattel mortgages on various pieces of equipment operating in the Lloydminster business — another form of term financing (transcript: pages 97-98). The pay-out of a chattel mortgage and its discharge leave the owner with its chattel unencumbered to the extent of such mortgage.

The manner in which Anderson and the CIBC arranged the financial affairs of the Anderson group on April 16, 1980, saw the subsidiaries, Allied Pioneer, Lethbridge Crane and Cal-Gas authorizing CIBC 'to transfer funds from [their] respective accounts to the account of Trennd" (1979) “in conjunction with the centralization of our operating requirements in the account of Trennd” (1979). That is documented in Exhibit 1(5) in which Anderson and Wood signed on behalf of all the subsidiary corporations. On that same date Trennd (1979) executed a guaranty to the CIBC of Cal-Gas’ indebtedness to the bank as seen in Exhibit 1(7). On that same day, April 16, 1980, Cal-Gas executed a guaranty to the CIBC of Trennd (1979)'s indebtedness to that bank, as seen in Exhibit 1(8). Like its immediate predecessor, Exhibit 1(8) contains a typewritten addendum which recites that the guarantor “has business relations with the [guaranteed] and it is expedient and in the interests of this Company [Cal-Gas, in Exhibit 1(8)] to guarantee the present and future indebtedness and liability of the said [Trennd (1979)] to the [CIBC]”. There follows the directors' resolution of Cal-Gas authorizing the guaranty.

In law consideration may be a promise for a promise, but the Court finds that, not in the textbook legal sense, but in the commercial, fiscal sense, the by now sturdy Cal-Gas ave that guaranty without adequate consideration. The events continued to unfold, and Trennd (1979) gave its guaranty of its subsidiaries, both stable and shaky, to the CIBC. Exhibit 1(12) is a copy of Trennd (1979)'s guaranty to UD in regard to Cal-Gas’ further borrowings given about five months later on September 4, 1980.

All the while Cal-Gas was performing profitably and well and appeared not to need the support of the Anderson Group, out was, rather, needed by that group. In a letter, Exhibit 1(13), dated February 10, 1981, CIBC wrote to Trennd (1979), (attention of Anderson) in these terms:

As you realize the bank is currently in the process of reviewing the group's performance during the past year, which includes further corporate acquisitions. We note that, recently, long term fixed finding was obtained on properties owned by the group, with funds used to reduce temporarily operating loans here. With respect to those properties the bank was requested to postpone its charge to the newer encumbrance on the property, thus reducing the support they provided for Bank loans. In light of this, and other items a full review of 1980 operations and 1981 prospects, together with a detailed assessment of the bank’s security position, is timely.

Therefore before making further commitments we would like your specific comments on the following:

3. In respect to earlier projections it appears only Cai-Gas achieved its budgeted results. It is a matter of concern that Pioneer continues to perform well below projections with the resultant pressure on operating loans. In addition the acquisitions made during the year, have, so far, been a further drain on cash flow.

In light of what has been said above there is reluctance to postpone security without a corresponding reduction in loans. Therefore a full review of loans and security in the account is necessary.

It is not entirely clear that, the group’s performance further acquisitions were justified. The current high financing rates will likely impact on future cash flow which last year did not appear to full provide from long term funding requirements and which durin the current year will ave to provide for increase long term debt servicing. A consolidated statement prepared by your accountants should also be provided to assist in the review.

Yours truly,

[Emphasis added.]

Exactly one year to the day after the CIBC’s granting of the original consolidated credit line, that is, on April 9, 1981, CIBC proposed a restructuring of its financing of the Anderson group. It began, in Exhibit 1(14), with advice to the effect that lines of credit had been made available in the total of $6,624,529 and inter alia in particular:

$22,500 capital loan (Cal-Gas)

$1,296,592 leasing (Cal-Gas)

The account of Trennd (1979) was to be secured by various shares, accounts receivable, collateral and supplemental debentures and security on land in Calgary and a first floating charge over all asserts and undertakings of Trennd (1979), securities and support by and from Allied, by and from Action Automotive (1981) Ltd., Cal-Gas and the three others. The guaranty bond and postponement of claim executed by Cal-Gas for full liability was to be supported by:

general assignment of accounts receivable registered in Alberta, Saskatchewan and British Columbia

a demand collateral debenture in the amount of $500,000 executed by Cal-Gas & Equipment Ltd., in favour of the bank, conveying a first floating charge over all assets and undertakings of the company

supplemental indenture to the $500,000 debenture including fixed charge over property located at 4255-64th Avenue S.E., Calgary

guarantee bond and postponement of claim executed by Allied Equipment Ltd. for full iability

guarantee bond and postponement of claim executed by Trennd Investments (1979) Ltd. for full liability

guarantee bond and postponement of claim executed by J.C. Anderson for full liability

and so forth in terms of support from the others.

There were strict understandings written into this "anniversary" letter of April 9, 1981, among which were these, in regard to the plaintiff:

Capital loan of Allied Equipment Ltd. will not exceed 50 per cent of the monthly depreciated book value of rental equipment. Capital loans to reduce at the rate of $7,000 per month plus interest.

Capital expenditures by Allied Equipment Ltd. will not exceed $50,000, other than normal replacement of rental fleet equipment, without the bank’s prior approval.

Interest rates will be charged as follows:

Trennd — operating — at the bank’s minimum lending

rate (MLR) + 1 per cent

— special	— MLR+2 2 per cent
Pioneer — capital	— MLR + 11/2 per cent

Allied	— capital	— MLR + 11/2 per cent
	— interim	— MLR + 2 per cent
Cal-Gas — capital		— MLR + 11/2 per cent

CIBC also advised that it would review this line of credit on or about September 30, 1981. This “anniversary” letter from the CIBC was endorsed on its last page by Anderson's signature by acceptance of all terms, understandings and conditions expressed therein.

Cal-Gas continued to perform well, but Pioneer was becoming increasingly ill. On October 20, 1981, by “private and confidential” letter, Exhibit 1(15), CIBC expressed its dismay at “the sharp losses continuing to be incurred” and, it would seem incorrect, if not duplicitous, reporting by Anderson and/or Trennd (1979) about reduction of Pioneer’s inventory. This letter followed several telephone discussions with Anderson and is strongly and insistently worded.

On December 24, 1981, by “private and confidential” letter, Exhibit 1(17), addressed to Anderson at Pioneer, CIBC purported to call the collective guaranty. Upon reciting that guaranty, dated April 16, 1980, CIBC, through one D.E. Kelly, then wrote:

We find it necessary to call upon you under your Guarantee and, accordingly, we hereby demand from you payment forthwith of the indebtedness of Trennd Investments (1979) Ltd. to us, which as at the date hereof amounts to $3,002,000, plus interest of $49,852 and interest thereafter at the rate of $1,501 per diem.

Other demands were made by CIBC. Exhibit 1(18), dated December 24, 1981, also demanded payment of Pioneer's debt under a promissory note dated November 15, 1976. Anderson, by his signature, acknowledged receipt of both letters, Exhibits 1(17) and (18). By nis own letter, Exhibit 1(19), to CIBC, dated December 29, 1981, Anderson consented to putting Pioneer into receivership, subject to five conditions, of which the fifth indicated that Trennd (1979) would probably be looking to Cal-Gas to help pay Allied’s, Chinook's and Lethbridge Crane's indebtedness.

The CIBC began relentlessly closing in and by "private and confidential” letter dated January 4, 1982, Exhibit 1(20), CIBC made formal demand of Trennd (1979) for payment of 33 promissory notes (dated between August 14 and December 31, 1981) in the total amount of $3,094,000 together with interest of $10,312 to date and thereafter at $1,483.42 per diem. That demand also constituted demand for payment under the demand debenture. The treat of installing a receiver without further notice was also expressed.

Finally, by letter dated also January 4, 1982, addressed to Cal-Gas (attn Anderson), Exhibit 1(21), CIBC made a call on this corporation's guaranty and demand debenture, thus:

We find it necessary to call upon you under your Guarantee and, accordingly, we hereby demand from you payment forthwith of the liabilities of Trennd Investments (1979) Ltd. to us, which as at the date hereof amounts to $4,054,000 plus interest of $13,764.05 and interest thereafter at the rate of $1,956.84 per diem.

This demand also constitutes demand for payment under the demand debenture and failure to pay will render the security enforceable and entitle the bank to cause a receiver and manager to be appointed without further notice.

It was obvious that CIBC management was uneasy about Trennd (1979) and most of its subsidiaries, except Cal-Gas.

Indeed, in terms of credit-worthiness Cal-Gas was the “milch cow" of the Anderson group. Wood testified:

Q. The events that led to the call on the guarantee in 1982 had nothing directly to do with Cal-Gas; is that correct?

A. That's correct.

Q. What happened was, as I understood it, other members of the group suffered serious losses and in particular Pioneer suffered serious losses arising out of this one crusher?

A. That's correct.

Q. And the result of that was that the indebtedness of the other corporations particularly Pioneer and the financial position of that company reached the point where the Bank of Commerce no longer wanted to extend credit to the group at all?

A. That's correct.

THE COURT: was it, in fact, cut off?

A. Yes.

CIBC, in fact, issued a minor “blizzard” of demands on the Anderson group in January, 1982.

Starting in a relentless looking manner, CIBC nevertheless wrote to Cal-Gas b letter dated March 5, 1982, Exhibit 1(27), and made available a new, or revised, but temporary, line of credit in the amount of $100,000 operating loan. It is not clear that Cal-Gas needed this line of credit especially on terms, as written, it had to give inter alia: a bond and postponement of claim for full liability from each of Anderson, Trennd (1979) and Allied; an assignment of accounts receivable at CIBC's valuation which at all times were to provide 200 per cent coverage over loans; and the balance of accounts receivable were to be held in support of Cal- Gas' guarantee to Trennd (1979); all the while maintaining payments to CLL and UD in a current position. Cal-Gas was being made into the Anderson group's crutch. Exhibit 1(28) indicates that. Exhibit 1(27) does not show acknowledged acceptance of its terms.

Exhibit 1(29) is a copy of a letter from Anderson, or his group's then solicitors dated August 16, 1982, and addressed to CIBC. It bears the legend “without prejudice”, but of course it is part and parcel of Exhibit 1 received at the behest and with the consent of both sides’ respective counsel herein. In this letter, Exhibit 1(29) the plaintiff's former solicitors were proposing to the CIBC that Cal-Gas borrow $1,700,000 “five year term loan with payments amortized over ten years".

The proposal was that Cal-Gas be made to pay by borrowing, and thereby to rescue Trennd (1979) and Anderson. The solicitors wrote:

4. Use of Loan Proceeds

(a) $1,700,000 to liquidate loans of Trennd Investments (1979) Ltd. at 628-8th Avenue S.W. branch. We would require confirmation that such a payment will extinguish the direct loans of Trennd.

(b) $150,000 to repay temporary funds injected by a shareholders loan.

(c) $350,00 for operating purposes, of which $100,000 is already being used and the balance is urgently required to meet payables.

5. Conditions — This proposal is conditional upon the following:

(a) Confirmation of the bank that the payment of $1,700,000 will extinguish the loan of Trennd.

(b) That Trennd will have no further direct or indirect liability to the bank or United Dominions except for loans granted to Cal-Gas.

(c) That the guarantee of Jack C. Anderson for the liability. to the bank of Pioneer Machinery Co. is cancelled.

As an alternative, if the bank would prefer not to grant the operating loan then we would request that the bank agree to subrogate its position on the accounts receivable and inventory to another lender in order that an operating line of credit can be arranged elsewhere.

We are advised by our client that Cal-Gas has achieved a positive cash flow. Our client states that the cash flow for Cal-Gas for the ten months ending July 31, 1982 is in excess of $900,000 and that the outlook for the months and years ahead, particularly at Lloydminster, is favourable and we believe that it is in the interests of all parties to have this matter resolved and that the secured creditors will benefit from the proposed settlement.

Our client feels that it would be most unfortunate if the present problems cannot be resolved and our client feels that it is in the interests of both the bank and the shareholders to see the company placed in a position so that it can continue to operate. Our client feels that the company has demonstrated in the past that it can generate substantial funds in the future in order to liquidate its loan at Commerce Leasing and United Dominions Corporation as well as the loan referred to in this proposal.

Our client feels that if the company were not able to obtain adequate financing in order to operate, that the secured creditors may only be able to realize a portion of the debt.

[Exhibit 1(29), pages 2 and 3.]

So much, it seems, for the plaintiff's plea that poor little Cal-Gas needed the support of Trennd (1979) credit facility with the CIBC in order to carry on in its business and to prosper in Lloydminster. The balance of probability on the evidence before the Court is that such plea is wrong, if not duplicitous.

It appears that $1,700,000 was what CIBC required to clear out of its relation- ship(s) with the Anderson group. Cal-Gas was managed to borrow that sum from the Wells Fargo Bank Canada (hereinafter Wells Fargo). In late August, 1982, CIBC had declared that both Trennd (1979) and Allied had defaulted in their payment as shown in Exhibits 1(33) and (34). CIBC made its ultimate call on August 16, and declared default on August 23. By September 21, 1982, Wells Fargo confirmed what it called, in Exhibit 1(35), “a flexible financing package for [Cal-Gas] . . . .” A financing package levied against Cal-Gas in order to bail out Anderson and Trennd (1979), is what it was.

A final illustration of the veritable reality of this affair is furnished in Exhibit 1(36), a copy of a multilateral agreement dated October 20, 1982. The parties were CIBC, Trennd (1979), the receiver of Pioneer, Cal-Gas, Allied, the receiver of Lethbridge Crane, Chinook, Anderson personally, UD, UD Investments, and the Anderson group therein called the Trennd Group. The agreement whose copy is Exhibit 1(36) is all interesting, but perhaps its most pertinent passages are these:

WHEREAS Cal-Gas has arranged a line of credit with Wells Fargo Bank Canada ("Wells Fargo”) in accordance with the terms set forth in Wells Fargo’s commitment to Cal-Gas dated September 2, [sic (21)] 1982 (a copy of which is annexed as Schedule "A" hereto), and as a condition therein funding is contingent upon the release of all corporate security, notes, guarantees and other contingent liabilities presently held by the bank, UD and UD Investments from Cal-Gas;

AND WHEREAS the bank requires that certain terms and conditions be agreed upon before the bank, UD and UD Investments will provide such a release, including certain conditions upon the provision of such release itself;

NOW THEREFORE these presents witness that in consideration of the mutual covenants and agreements herein contained and these presents, the parties hereto covenant and agree as follows:

1. The bank, UD and UD Investments will provide to Cal-Gas a release of all corporate security, notes guarantees and other contingent liabilities presently held by them from Cal-Gas (the "Cai-Gas Security”) upon receipt from Cai-Gas through advances made by Wells Fargo of:

(a) the sum of $1,700,000 by bank draft payable to the bank, together with a written direction from Cal-Gas stipulating that such amount be utilized to reduce Trennd's indebtedness to the bank by the amount of $1,700,000 (which will be applied firstly to payment of accrued and unpaid interest and secondly to repayment of principal);

Needless to emphasize, Cal-Gas’ executed that great 11-page agreement by the hands of Anderson and Wood.

So, Cal-Gas thereafter made payments to pay off Trennd (1979)'s liabilities, in full, owed to the CIBC. The evidence is that Cal-Gas’s assets were released by CIBC but encumbered by Wells Fargo. Trennd (1979) and Anderson had their securities released by CIBC. The sum of $1.7 million, paid over to the CIBC, was a portion of the refinancing package which was obtained from Wells Fargo; the other portion was used for Cal-Gas’ own purposes and is not engaged in this litigation.

The plaintiff submits that the interest expenses which it claimed for the 1983-84-85 taxation years were incorrectly disallowed by the Minister of National Revenue because, the plaintiff asserts, that interest was paid on the borrowed $1.7 million used for the purpose of earning income from a business or property pursuant to paragraph 20(1 )(c) of the Act. This Court holds that the evidence, bot documentary and viva voce, does not support the plaintiff's contention. Cal-Gas, by Anderson's fiat was made to bail out and rescue himself and Trennd (1979). The plaintiff still argues that the true purpose of the $1.7 million borrowing on a proper view of the transaction — truly the transactions — and the Court views them back to summer 1978 — was to provide a credit facility for Cal-Gas. That was the (only) way in which it could have afforded to get into that profitable business at Lloydminster asserts plaintiff's counsel. The Court does not agree with that posture in terms of times and volume of business both long preceding the credit facility designed and proposed by Wood and Anderson in early 1980 and put in place in April, 1980 by CIBC’s acceptance of their proposal, with no great variations until CIBC became restive in 1981 and later.

The statute permits a deduction for an amount paid, or payable, in the year pursuant to a legal obligation to pay interest on (i) borrowed money used for the purpose of earning income. The plaintiff's counsel urges that such is the sole issue herein, whether the plaintiff meets the purpose test expressed in subparagraph (i) above. The purpose described above, which the plaintiff asserts as the sine qua non of Cal-Gas’ profitable exploitation of the Lloydminster business is clearly unsupported by the evidence, and is rejected.

There is another aspect to this sole issue, according to the plaintiff's counsel. In particular, the plaintiff submits that the $1.7 million was borrowed from Wells Fargo by Cal-Gas so as to avoid its being put into receivership by the CIBC. It is submitted to the Court that the borrowing of the $1.7 million for the purpose of preserving income-producing assets fulfils the requirement of subparagraph 20(l)(c)(i) that the borrowed money be used for the purpose of earning income from a business or a property.

The plaintiff's counsel relied strongly on the case of Imperial Oil Ltd. v. M.N.R.,

[1947] C.T.C. 353, 3 D.T.C. 1090 (Ex. Ct.), a decision of President Thorson, but misconstrued its import (transcript: pages 144-45). The passage cited by counsel was not the point or the case. The usual and ordinary risks entailed in operating a ship foreseeably involve the risk of collision and there, the plaintiff borrowed money, at interest, with which to discharge its liability for the collision. The Court held that the payments were made by the plaintiff, Imperial Oil, in respect of a liability for a happening which was really incidental to its business from which it earned its income and therefore the payments were deductible. That was the point which does not arise here. So also, in Herald & Weekly Times Ltd. v. Federal Commissioner of Taxation (1932), 48 C.L.R. 113, a decision of the High Court of Australia, the payment of compensation to libel victims was held to be a normal, or not unusual risk in publishing a newspaper. At page 118, Duffy C.J. and Dixon J. said:

None of the libels or supposed libels was published with any other object in view than the sale of the newspaper. The liability to damages was incurred, or the claim was encountered, because of the very act of publishing the newspaper. The thing which produced the assessable income was the thing which exposed the taxpayer to the liability or claim discharged by the expenditure. It is true that when the sums were paid the taxpayer was actuated in paying them, not by any desire to produce income, but, in the case of damages or compensation, by the necessity of satisfying a claim or liability to which it had become subject, and, in the case of law costs, by the desirability or urgency of defeating or diminishing such a claim. But this expenditure flows as a necessary or a natural consequence from the inclusion of the alleged defamatory matter in the newspaper and its publication.

So, according to these cases founded on tort liability, there must be more to the borrowing than simply being led to the indebtedness for the purpose of paying off Anderson's and Trennd (1979)'s debts, which were not a really incidental part of the plaintiff's business from which it earned its income.

The defendant urges that the interest expenses claimed by the plaintiff were properly disallowed and treated pursuant to paragraph 18(1)(a). In particular, the defendant's counsel submitted that Cal-Gas was not in the business of giving guarantees for profit, so it does not proceed in the ordinary course of its business giving and paying on guaranties in the expectation of earning money by so doing. In fact the evidence disclosed that there was no provision made for any repayment to Cal-Gas from Trennd (1979).

The defendant contends, and correctly, that the $1.7 million, lent by Wells Fargo, in order to fulfil Cal-Gas’ obligation was not used directly for the purpose of earning income at all. It did not borrow the funds with any expectation of earnings, much less profit. The defendant submits that Cal-Gas received inadequate consideration, if any at all, and that its payments to CIBC were a capital outlay. Counsel contends, ineffect, that insofar as the handsomely profitable Lloydminster business was concerned this momentary infusion of loan funds into Cal-Gas was entirely post facto, and siphoned off at once to pay off the CIBC for Anderson and Trennd (1979). He contends, still correctly, that the Court must have regard for what was done by the taxpayer, and not what might have been done about the putative deductions which the plaintiff now seeks to be allowed.

The defendant's counsel averred that he would not fly in the face of the department's administrative practices, as set out in Interpretation Bulletin No. IT-445 of February 21, 1981, dealing with the deductibility of interest on borrowed funds which used to honour a guaranty for which adequate consideration has not been received. Indeed counsel further promised that he would not argue that the Court is not bound by such practices. Of course, so long as the department's interpretation of the law be adjudged correct, that is a fortuitous circumstance, despite the Minister's reputed latitude to act beyond the terms of the Act in order to administer it and to collect taxes (Optical Recording Laboratories Inc. v. Canada, [1990] 2 C.T.C. 524, 90 D.T.C. 6647 ((F.C.A.)). Constitutionally, the ordinary, and usually, the superior Courts are the authentic and authoritative interpreters of the law, not the Minister — such is the inherent stuff of the rule of law. However it must be acknowledged that departmental practices and interpretation bulletins serve a purpose in the collection of taxes when certain statutory provisions have not yet been the subject of judicial interpretation, for the Minister is obliged, after all, to administer the Act, and it would seem reasonable to inform taxpayers how the Act is going to be administered. Unfortunate consequences including an upsurge of litigation, attend a departmental interpretation which, as it turns out, is wrong. Here, the Court has already found that the consideration, if any, for Cal-Gas’ giving its guaranty of Anderson's and Trennd (1979)'s indebtedness, inter alia, was surely inadequate and so, IT-445 does not need any further consideration by the Court, herein.

The leading case to invoke in these circumstances is Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 87 D.T.C. 5059. Since its promulgation it has been followed, despite any previous jurisprudence. Of course, the Supreme Court's decision in Bronfman did not invalidate all previous jurisprudence.

It has been long settled that, absent an express statutory allowance, as here provided in subparagraph 20(1 )(c)(i), interest payable on capital indebtedness (and if the ultimate loan here can be traced back to 1978-80, it must be traced straight into borrowings for acquisition of capital assets) was to be non-deductible "payment on account of capital" within paragraph 18(1 )(b) of the Act. Canada Safeway Ltd. v. M.N.R., [1957] S.C.R. 717, [1957] C.T.C. 335, 57 D.T.C. 1239; Interprovincial Pipe Line Co. v. M.N.R., [1967] C.T.C. 180, 67 D.T.C. 5125 (Ex. Ct.); Sherritt Gordon Mines Ltd. v. M.N.R., [1968] C.T.C. 262, 68 D.T.C. 5180 (Ex. Ct.), illustrate the invocation of that paragraph of the Act (or its predecessor). The purpose of paragraphs 20(1)(c) and (d) is to avoid the prohibition in paragraph 18(1 )(b) insofar as interest is concerned and to allow the deduction of a reasonable amount in prescribed circumstances.

The taxpayer is obliged to demonstrate a bona fide, and not farfetched or impossible-of-achievement intention, on the facts, that the taxpayer borrowed the money for the purpose of earning income.

The scope of the “purpose test" in subparagraph 20(1)(c)(i) was, as above noted, explained in the Supreme Court's decision in the Bronfman Trust case. There, the trustees of a family trust borrowed funds, on a short term, from a bank to make discretionary capital allocations to a beneficiary, instead of liquidating capital assets of the trust to do so. Chief Justice Dickson, for the Court, stated, at page 35 (C.T.C. 119, D.T.C. 5060):

The issue is whether the interest paid to the bank by the trust on the borrowings is deductible for tax purposes; more particularly, is an interest deduction only available where the loan is used directly to produce income or is a deduction also available when, although its direct use may not produce income, the loan can be seen as preserving income-producing assets which might otherwise have been liquidated.

The Supreme Court, in reversing the Appeal Division of this Court, held that the original use of the borrowed funds to pay capital allocations to the beneficiary was an ineligible use and it should not be ignored, for the trust received no property or consideration therefor which resulted in any income-earning use. It should be noted that although the allocation was discretionary, paying back the bank loan involved not a discretionary but "a legal obligation to pay interest on (i) [that] borrowed money . . .” which, the Supreme Court held, [was not] “used for the purpose of earning income from . . . property". The fact that the borrowed money indirectly preserved the income-earning trust property was held to be insufficient to permit the deduction of interest on borrowed money used directly for ineligible purposes. Still for the unanimous Supreme Court, Dickson, C.J.C. stated at pages 53-54 (C.T.C. 126, D.T.C. 5067)

In my view, neither the Income Tax Act nor the weight of judicial authority permits the courts to ignore the direct use to which a taxpayer puts borrowed money. One need only contemplate the consequences of the interpretation sought by the trust in order to reach the conclusion that it cannot have been intended by Parliament. In order for the trust to succeed, subparagraph 20(1)(c)(i) would have to be interpreted so that a deduction would be permitted for borrowings by any taxpayer who owned income-producing assets. Such a taxpayer could, on this view, apply the proceeds of a loan to purchase a life insurance policy, to take a vacation, to buy speculative properties, or to engage in any other non-income-earning or ineligible activity. Nevertheless, the interest would be deductible. A less wealthy taxpayer, with no income-earning, assets, would not be able to deduct interest payments on loans used in the identical fashion. Such an interpretation would be unfair as between taxpayers and would make a mockery of the statutory requirement that, for interest payments to be deductible, borrowed money must be used for circumscribed income-earning purposes.

It needs no further elaboration to hold that the principles stated in the Bronfman Trust judgment are quite applicable herein, on the evidence presented in this case. The plaintiff’s counsel could not persuade the Court, that any exceptional circumstances exist in this case, in which Cal-Gas was blatantly manipulated into the position of having to rescue Anderson and Trennd (1979). they did nothing apparently unlawful, but they cannot succeed in creating an eligible purpose out of an obviously ineligible one.

The Court's review of the jurisprudence indicates that the facts of this case are particular to it. The conclusions of cases in which subparagraph 20(1)(c)(i) is invoked do appear to be, as the defendant's counsel put it, “facts driven". That is a principal reason, he posited for the Supreme Court's enunciation of a code of principles in the Bronfman Trust case.

The case of Bowater Canadian Limited v. The Queen, [1987] 2 C.T.C. 47, 87 D.T.C. 5287 (F.C.A.), sheds some light on this Court's treatment of interest paid on money borrowed to satisfy guaranty obligations. The unanimous judgment of the Appeal Division was expressed by Mr. Justice Urie. An application for leave to appeal to the Supreme Court was dismissed in November, 1987. In Bowater, interest on funds borrowed by the corporate taxpayer to satisfy obligations arising out of guaranties given in the course of according financial, administrative and technical services to companies in which it had a substantial interest, was held not to be deductible. Because the original indebtedness incurred to guarantee debts of an operation acquired by the taxpayer and another corporation, and the refinancing following the sale of that operating company were found to have been for capital purposes, the related interest costs were also held to be capital in nature. Those interest payments were not deductible under subparagraph 20(1 )(c)(i), since the use of funds was held to be an eligible use for the purpose of earning income from a business or a property. In arriving at his conclusion, Urie J.A. relied heavily on the Bronfman Trust judgment. Its principles applied in Bowater, as they do herein. Although the cases are not identically the same on their respective facts (that which would be most unlikely) the Bronfman Trust decision’s principles are nevertheless applicable.

So in this Court's view, application of the Bronfman Trust case's principles to the case at bar leads to the conclusion that the plaintiff is not, by law, permitted to deduct from its taxable income the interest paid on the $1.7 million loan used to fulfil its guaranty obligation. Although the plaintiff may have borrowed the money and paid it over to CIBC in order to prevent its business and assets from being put into receivership by the CIBC, the direct purpose of that particular borrowing was to allow its "parents" Anderson and Trennd (1979) to meet their debt obligations.

For all the above reasons the plaintiff's appeal by action de novo is to be dismissed with costs.

Appeal dismissed.