St-Onge,
T.C.C.J.:-
The
appeal
of
the
company
Parthenon
Investments
Ltd.
was
heard
on
June
8
and
9,
1993
in
the
City
of
Montreal,
Province
of
Quebec,
and
the
issue
is
whether
the
respondent
was
right
in
disallowing
deductions
of
interests
in
the
computation
of
the
appellant's
income
for
the
1985/
86
and
'87
taxation
years.
At
the
hearing
the
question
of
sham
was
abandoned
by
the
respondent.
In
his
reply
the
respondent
made
the
following
assumptions
of
facts,
subparagraph
9
and
paragraphs
12,
13,
14,
16,
17
are
an
integral
part
of
my
judgment.
9.
In
the
agreement
dated
November
13,
1984,
the
appellant
accepted
the
transfer
of
rights
of
the
note
to
Ottawa-Elgin.
12.
The
interest
in
respect
of
the
said
note
has
been
included
in
Ottawa-Elgin's
income
for
the
same
taxation
years.
13.
The
Minister
has
disallowed
such
deduction
of
interest
in
the
computation
of
the
appellant's
income
for
the
1985,
1986
and
1987
taxation
years.
14.
The
issue
to
be
decided
is
whether
the
interest
in
respect
of
the
said
promissory
note
is
deductible
in
computing
the
appellant's
income
for
the
taxation
years
1985,
1986
and
1987.
16.
The
interest
paid
in
respect
of
the
said
promissory
note
by
the
appellant
was
properly
deductible
in
computing
its
income
for
each
of
the
said
taxation
years
on
interest
paid
pursuant
to
a
legal
obligation
to
pay
interest
on
borrowed
money
used
for
the
purpose
of
earning
income
from
a
business
or
property.
17.
The
appellant
is
a
Canadian
controlled
private
corporation
within
the
meaning
of
that
expression
in
the
Act
and
should
be
taxed
accordingly.
According
to
the
proceedings
and
the
evidence
adduced,
the
following
facts
are
established:
1.
The
appellant's
company
was
incorporated
under
the
Quebec
Com-
panies
Act
and
had
its
head
office
and
principal
place
of
business
in
Montreal;
2.
The
appellant's
is
a
wholly-owned
subsidiary
of
Pacific
Canada;
3.
Ottawa-Elgin
Investment
Ltd.
a
corporation
having
its
head
office
and
principal
place
of
business
in
Ottawa
is
also
a
wholly
owned
subsidiary
of
Pacific
Canada;
4.
The
appellant,
its
sister
and
parent
company
held
real
estate
for
rental
purpose;
5.
In
its
1985
taxation
year,
the
appellant
declared
a
dividend
to
Pacific
Canada
in
the
amount
of
$2.6
million
and
substituted
the
debt
thereby
created
by
the
issuance
of
a
promissory
note
in
the
said
account
bearing
interest
at
the
rate
of
12
per
cent
per
annum.
6.
The
said
promissory
note
was
assigned
by
Pacific
Canada
to
Ottawa-Elgin
and
the
appellant
did
accept
the
assignment.
7.
In
filing
its
income
tax
returns
for
1985,
‘
86
and'87,
Ottawa-Elgin
included
interest
in
respect
of
the
said
promissory
note
in
its
income.
Mr.
Maurice
Abdulezer
is
the
general
manager
of
the
appellant
company
and
was
the
controller
of
the
three
Canadian
companies
in
the
years
under
appeal.
He
testified
that:
1.
All
three
Canadian
companies
were
doing
business
in
real
estate
for
the
purpose
of
rental
income
and
have
August
31
as
the
end
of
its
fiscal
period;
2.
That
the
appellant
company
was
a
profitable
one
in
the
years
under
appeal
and
had
realized
a
capital
gain
in
1985
in
the
amount
of
$489,474;
3.
That
the
three
companies
involved
to
know
Pacific
Canada,
Ottawa-Elgin
Investment
Ltd.
and
Parthenon
Investment
Ltd.
were
wholly
owned
by
a
U.S.
company
Pacific
International
Equities
Inc.
whereas
the
appellant
company
and
Ottawa-Elgin
were
wholly
owned
by
Pacific
Canada;
4.
Exhibits
R-2,
3
and
4,
the
income
tax
returns
of
the
appellant
company
show
the
amounts
of
$247,000,
$312,000
and
$377,681
as
interest
accrued
and
claimed
as
expenses
in
the
financial
statement
for
1985,
‘86
and'87
respectively.
The
witness
also
explained
that
the
promissory
note
was
actually
paid
in
1987
by
the
reduction
of
the
amount
owing
(R-24).
In
their
journal
entries
it
was
reported
as
income
and
receivable
being,
according
to
him,
the
normal
method
of
reporting
when
the
payment
is
not
made
in
cash.
Otherwise,
it
would
be
money
received.
And
because
the
interest
was
not
paid
in
each
year,
there
was
an
additional
charge
for
compound
interest.
Exhibit
R-24
prepared
by
the
witness
shows
how
the
interests
were
calculated.
This
exhibit
is
an
integral
part
of
my
judgment.
OTTAWA
ELGIN
—
PARTHENON
NOTE
PAYABLE
AND
INTEREST
1985—1989
Payable
by
Parthenon
to
Ottawa
Elgin
|
Note
|
|
Interest
|
|
$
|
|
$
|
Issuance
of
note
Nov
'84
by
Parthenon
|
|
$2,600,000
|
|
—Interest
for
period
to
Aug.
31/85
|
|
(288/365
x
12
per
cent
x
$2,600,000)
|
|
—
|
$
|
247,000
|
Balance—August
31/85
|
|
2,600,000
|
|
247
,000
|
Interest—Sept.
1/85—Aug.
31/86
|
|
(12
cent
$2,600,000)
|
|
__:_"_
|
|
312,000
|
(12
per
cent
x
$2,600,000)
|
|
Balance—August
31/86
|
|
2,600,000
|
|
559,000
|
Interest
at
12
per
cent
for
1987
|
|
On
$2,600,000
to
Feb.
28/87
|
6/12
|
|
156,000
|
Repaid
Feb.
23/87
|
|
(25,000)
|
|
On
$2,575,000
to
June
30/87
|
4/12
|
|
103,000
|
Repaid
June
22/87
($433,000
+
40,000)
|
|
(473,000)
|
|
On
$2,102,000
to
July
31/87
|
1712
|
|
21,020
|
Repaid
July
31/87
($800,000
+
2,000)
|
|
(802,000)
|
|
On
$1,300,000
to
Aug.
31/87
|
1/12
|
|
13,000
|
On
$559,000
of
interest
due
by
Parthenon
at
Aug.
|
|
31/86
(interest
on
interest)
12
per
cent
x
$559,000
+
|
|
12
per
cent
on
average
current
years
interest
|
|
(2982,0202
(A)
|
|
—
|
|
84,661
|
2
|
|
Balance—August
31,
1987
|
|
1,300,000
|
|
936,681
|
Repaid
|
|
Sept.
87
|
appear
to
be
|
|
(119,000)
|
|
Oct.
87
|
payments
made
by
|
|
(10,000)
|
|
March
88
Parthenon
on
behalf
|
|
(35,500)
|
|
April
88
|
of
Ottawa-Elgin
and
|
|
(35,000)
|
|
Unknown
not
by
cheque
directly
to
Ottawa-Elgin
|
(10,500)
|
|
Interest
set-up
to
Aug.
31/88
and
entered
in
books
|
|
262,231
|
Interest
cancelled
by
auditors
adjusting
entry
|
|
—
|
|
(262,231)
|
Balance—Aug.
31/88
|
|
1,090,000
|
|
936,681
|
Balance
forward
|
|
1,090,000
|
|
936,681
|
Repaid
|
|
Sept.
88
|
by
cheque
|
|
(700,000)
|
|
Sept.
88
|
by
transfer
|
|
(390,000)
|
|
(440,000)
|
Oct.
88
|
by
cheque
|
|
-
|
|
(1,500)
|
|
by
transfer
|
|
—
|
|
(40,000)
|
Nov.
88
|
by
cheque
|
|
—
|
|
(10,000)
|
|
by
net
transfers
|
|
—
|
|
(9,000)
|
Dec.
88
|
by
cheque
|
|
|
—
|
(1,300,000)
|
|
received
by
transfer
|
|
—
|
|
40,000
|
Jan.
89
|
received
by
cheque
|
|
10,000
|
Mar.
89
|
transfer
|
|
56,000
|
|
—
|
|
56,000
|
Apr.
89
|
net
transfers
|
—
|
548,000
|
May
89
|
net
transfers
|
—
|
20,000
|
June
89
|
transfer
|
—
|
(42,000)
|
July
89
|
transfer
|
—
|
25,000
|
Balance—Aug.
31/89
|
|
Due
to
Parthenon
|
—
|
(
$206,819)
|
The
witness
also
explained
that
Ottawa-Elgin,
because
of
vacancies,
was
in
the
loss
position
whereas
the
appellant
company
was
in
a
tax
position.
Consequently,
the
directors
were
advised
to
use
the
loss
company
and
the
$2.6
million
promissory
note
was
transferred
to
Ottawa-Elgin.
The
income
was
declared
by
Ottawa-Elgin
and
accepted
by
the
Minister.
The
witness
also
testified
that
for
the
period
from
1976
to
1989
books
were
missing
and
the
resolution
to
declare
dividend
could
not
be
located.
Upon
cross-examination,
he
said
that
all
voting
shares
of
the
appellant
company
and
Ottawa-Elgin
were
held
by
Pacific
Canada
whereas
all
the
voting
shares
of
the
latter
were
held
by
Pacific
U.S.;
that
the
same
persons
were
directors
of
the
three
Canadian
companies
and
of
the
American
companies;
that
Pacific
U.S.
had
six
other
subsidiaries
of
which
directors
live
in
Florida;
that
Pacific
U.S.
was
incorporated
in
U.S.;
that
as
controller
of
the
three
Canadian
companies;
he
was
responsible
for
operating
in
Montreal
and
had
nothing
to
do
with
the
U.S.
companies;
that
Ben
and
Charles
Bedzow
were
Canadian
citizens,
Ben
residing
in
U.S.
and
Charles
in
Canada;
that
Pacific
U.S.
did
not
carry
any
business
in
Canada
because
the
major
part
of
its
business
was
the
holding
of
three
U.S.
companies
and
that
with
respect
to
the
payment
of
dividend
and
interest,
the
books
are
missing
but
with
respect
to
the
resolution
to
declare
dividend
he
had
seen
it
prepared
even
if
he
cannot
tell
the
exact
words
of
it.
Then
A-4
and
A-5
were
filed
to
show
the
existence
of
the
transaction.
These
documents
are
an
integral
part
of
my
judgment.
A-4:
The
agreement
made
November
13,
1984
between
Pacific
International
Equities
Corp.
herein
called
"Pacific"
and
Parthenon
Investment
Limited,
herein
called
“Parthenon”.
1.
Parthenon
recognizes
having
declared
at
this
date
a
dividend
of
$2,600,000
to
its
only
shareholder,
the
company
Pacific.
2.
Parthenon
recognizes
having
issued
in
payment
of
the
dividend
a
promissory
note
with
a
par
value
of
$2,600,000
bearing
interest
at
12
per
cent.
3.
Chaque
soussigné
reconnaît
qu'il
a
exigé
que
ce
qui
précède
soit
rédigé
en
anglais
et
s’en
déclare
satisfait.
And
the
parties
have
signed
at
Montreal,
this
13th
day
of
November
1984.
A-5:
The
agreement
made
November
13,
1984
between
Pacific
International
Equities
Corp.,
herein
called
“
Pacific”
and
Ottawa-Elgin
Investments
Limited,
herein
called
"Ottawa"
and
Parthenon
Investment
Limited,
herein
called
"Parthenon".
1.
Pacific
recognizes
having
received,
on
this
day,
a
promissory
note
bearing
interest
at
12
per
cent,
in
consideration
for
a
dividend
from
its
subsidiary
Parthenon.
This
note
has
a
par
value
of
$2,600,000.
2.
In
consideration
of
prior
material
advances
made
by
Ottawa
to
Pacific,
the
latter
consents
to
give
the
said
note
of
$2,600,000
to
Ottawa.
3.
By
the
present,
Parthenon
accepts
the
transfer
of
rights
of
Pacific’s
note
to
Ottawa,
and
accepts
that
the
interest
on
the
said
note
be
payable
to
Ottawa.
4.
Ottawa
accepts
the
transfer
of
the
said
note
of
$2,600,000
in
its
favor,
and
will
decrease,
by
as
much,
its
debt
with
Pacific.
5.
Parthenon
will
repay,
on
demand,
to
Ottawa,
the
entire
(or
part
of
the)
note
and
the
accrued
interest.
6.
Chaque
soussigné
reconnaît
qu’il
a
exigé
que
ce
qui
précède
soit
rédigé
en
anglais
et
s'en
déclare
satisfait.
And
the
parties
have
signed
at
Montreal,
this
13th
day
of
November
1984.
A-4
and
A-5
were
signed
by
Charles
Bedzow
for
all
the
companies.
In
the
balance
sheet
of
Ottawa-Elgin
for
1985
the
liability
was
shown
by
a
reduction
of
the
asset
of
$2.6
million.
No
cash
changed
hands
and
a
liability
was
substituted
for
another
one.
As
may
be
seen,
the
note
and
assignment
were
made
the
same
day.
The
witness
admits
that
the
appellant
company
did
not
have
the
cash
available
to
pay
the
dividend
and
did
not
borrow
any
money
but
added
that
even
if
all
the
properties
were
mortgaged,
the
market
value
was
higher
than
the
book
value.
With
respect
to
the
repaid
amount
of
$25,000
in
Exhibit
R-24,
he
does
not
recall
having
seen
the
cheque
but
insisted
on
the
fact
that
it
was
not
a
forgiveness
or
a
write-off.
With
respect
to
the
second
page
of
Exhibit
R-24,
he
stated
that
when
it
is
marked
by
cheque
or
by
transfer,
he
has
seen
the
cheque
or
the
transfer
slip.
Finally
he
admitted
that
by
declaring
the
interest
as
income
in
1985,
'86,
87,
Ottawa-Elgin
did
not
change
anything,
its
income
was
nil
because
of
prior
losses.
Whereas
for
the
appellant
company,
the
amount
of
interest
in
1985,
‘
86
and'87,
would
have
been
an
income
instead
of
an
expense.
In
redirect,
the
witness
said
that
at
no
time
was
Pacific
Canada
a
public
company;
that
the
accountants
in
their
comments
never
said
that
the
method
of
reporting
income
was
improper;
that
the
transfer
of
promissory
note
was
an
assignment
for
value
and
not
a
forgiveness;
that
there
was
no
borrowing
from
a
third
party;
that
the
figures
in
Exhibit
R-24
were
taken
from
the
books
of
the
company
and
that
the
transactions
should
be
looked
at
as
an
economic
whole.
Counsel
for
appellant
argued
that
since
the
respondent
abandoned
the
question
of
sham,
the
alleged
transaction
of
the
appellant
did
occur;
that
even
if
the
minutes
books
were
lost
and
the
resolution
to
declare
dividend
was
not
found
and
filed,
the
witness
has
seen
it
and
dividend
was
in
fact
declared
and
paid.
It
was
a
legal
promissory
note
even
if
the
terms
of
payment
were
not
mentioned.
The
interests
were
accrued
in
the
years
and
paid
in
1988
and
there
was
no
forgiveness
or
write-off.
The
books'
income
tax
returns
and
financial
statements
are
consistent
and
by
the
abandonment
of
sham
the
transaction
did
occur.
According
to
him,
the
respondent
did
not
introduce
any
evidence
to
prove
his
allegation.
His
sole
witness
was
not
called
to
testify
and
his
allegations
have
no
foundation.
His
paragraph
10
of
the
reply
was
only
written
to
colour
the
transactions
and
R-1
and
R-2
clearly
show
that
there
was
cash
available
to
prevent
impairment
of
capital.
Mr.
Kuzak's
testimony
was
contradicted
with
respect
to
the
insinuation
that
the
transactions
were
not
real
and
his
assessment
was
incorrect.
Then
he
refers
to
Stubart
v.
M.N.R.,
[1984]
1
1S.C.R.
536,
[1984]
C.T.C.
294,
84
D.T.C.
6305.
For
the
utilization
of
losses
within
a
corporate
group.
The
transactions
under
appeal
are
not
offensive,
on
the
contrary
they
are
within
the
spirit
of
the
legislation
and
the
interpretation
bulletins.
To
him
the
real
question
is
whether
the
interest
is
deductible
under
paragraph
20(1)(c)
of
the
Act.
The
promissory
note
did
create
an
obligation
to
pay
and
the
interest
was
payable
in
the
year
and
was
accrued
the
appellant
being
on
an
accrued
basis
method.
The
appellant
declared
a
dividend
when
its
retained
earnings
were
close
to
$2.6
million
and
there
is
no
obligation
for
a
company
to
maintain
a
surplus;
and
if
they
impaired
the
capital,
the
directors
would
be
personally
responsible;
consequently
the
nullity
would
not
be
absolute
but
only
relative.
Because
the
obligation
to
pay
a
dividend
was
extinguished
by
the
note
between
the
appellant
and
its
sister
company,
it
did
create
a
debtor-creditor
relationship
with
the
obligation
to
pay
money
on
demand
with
interest.
According
to
him,
the
money
needed
was
borrowed
in
the
corporate
group
and
it
was
used
in
the
course
of
its
business.
Consequently
paragraph
20(1)(c)
was
met.
Counsel
for
respondent
gives
to
the
Court
a
written
submission
to
follow.
Pages
8
to
20
of
the
said
submission
are
an
integral
part
of
my
judgment.
Il.
The
issues
27.
The
issues
in
this
appeal
are
twofold:
(1)
Was
the
appellant
in
its
1985,
1986
and
1987
taxation
years
a
"Canadian-
controlled
private
corporation”
within
the
meaning
of
paragraph
125(7)(b)
of
the
Income
Tax
Act,
so
as
to
be
entitled
to
claim
the
deductions
provided
in
subsection
125(1)
of
the
Income
Tax
Act
[R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the"Act")]?
(2)
Was
the
interest
on
the
alleged
promissory
note
that
was
accrued
as
payable
in
its
1985,
1986
and
1987
taxation
years
in
the
amounts
of
$247,000,
$312,000
and
$377,681,
respectively,
deductible
by
the
appellant
in
computing
its
income
for
those
years?
III.
Argument
Canadian-controlled
Private
Corporation
28.
On
the
undisputed
evidence
all
of
the
appellants
issued
voting
shares
in
the
1985,
1986
and
1987
taxation
years
were
owned
by
Pacific
International
Equities
Corporation
and
all
of
the
issued
voting
shares
of
that
company
were
owned
in
those
years
by
a
nonresident
of
Canada,
i.e.,
Pacific
International
Equities
Inc.
29.
Control
of
a
corporation
rests
in
the
owners
of
the
majority
of
the
voting
power
in
it.
M.N.R.
v.
Dworkin
Furs
(Pembroke)
Ltd.,
[1967]
S.C.R.
223,
[1967]
C.T.C.
50,
67
D.T.C.
5035,
at
pages
227-28
(C.T.C.
52-53;
D.T.C.
5036).
30.
The
respondent
therefore
submits
that
in
law
the
appellant
was
at
the
material
times
indirectly
controlled
by
a
nonresident
of
Canada
and
was
thus
not
a
"Canadian-controlled
private
corporation",
within
the
meaning
of
paragraph
127(7)(b)
of
the
Income
Tax
Act.
31.
In
the
respondent's
submission,
it
is
immaterial
that
at
the
material
times
the
appellant
may
have
been
ultimately
indirectly
controlled
by
a
resident
of
Canada,
i.e.,
through
Mr.
Charles
Bedzow's
ownership
of
the
shares
of
F.M.E.
Holdings
Ltd.
For
paragraph
127(7)(b)
of
the
Income
Tax
Act
does
not
require
ultimate
control
as
a
test
of
indirect
control.
Produits
Alimentaires
Anco
(1961)
Inc.
v.
M.N.R.,
[1979]
C.T.C.
2669,
79
D.T.C.
573
(T.C.C.).
32.
The
respondent
accordingly
submits
that
since
the
appellant
was
not
a
Canadian-controlled
private
corporation
during
its
1985,
1986
and
1987
taxation
years,
within
the
meaning
of
paragraph
125(7)(b)
of
the
Income
Tax
Act,
it
was
not
entitled
to
the
small
business
deduction
provided
by
subsection
125(1)
of
the
Income
Tax
Act.
Deductibility
of
Interest
33.
The
respondent
submits
that
the
interest
on
the
alleged
promissory
note
is
not
deductible
by
the
appellant,
because:
(a)
it
does
not
meet
the
requirements
of
subparagraph
20(1)(c)(i)
of
the
Income
Tax
Act,
and
(b)
alternatively,
even
if
it
does,
its
deduction
is
prohibited
by
subsection
245(1)
of
the
Income
Tax
Act.
Subparagraph
20(1)
(c)(i)
34.
Interest
is
generally
a
payment
on
account
of
capital,
whose
deduction
is
prohibited
by
paragraph
18(1)(b)
of
the
Income
Tax
Act
and
is
deductible,
if
at
all,
only
if
it
meets
the
requirements
of
paragraph
20(1)(c)
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
at
page
727
(C.T.C.
344-45,
D.T.C.
1244);
The
Queen
v.
Bronfman
Trust,
[1987]
1
S.C.R.
32,
[1987]
1
C.T.C.
117,
87
D.T.C.
5059
at
C.T.C.
page
124
(D.T.C.
5064);
The
Queen
v.
MerBan
Capital
Corp.
Ltd.,
[1989]
2
C.T.C.
246,
89
D.T.C.
5404
(F.C.A.)
at
258
(D.T.C.
5412);
B
o
water
Canadian
Ltd.
v.
The
Queen,
[1987]
2
C.T.C.
47,
87
D.T.C.
287
(F.C.A.),
at
pages
52-56
(D.T.C.
5291-94);
and
D.W.S.
Corp.
v.
M.N.R.,
[1968]
C.T.C.
65,
68
D.
T.C.
5045
(Ex.
Ct.)
at
pages
72-73
(D.T.C.
5050).
35.
While
the
modern
approach
to
statutory
interpretation
should
not
ignore
commercial
realities,
this
does
not
mean
that
provisions,
such
as
subparagraph
20(1)(c)(i)
of
the
Income
Tax
Act
which
by
their
very
text
are
made
available
to
taxpayers
in
limited
circumstances
are
to
lose
their
strictures.
The
Queen
v.
Bronfman
Trust,
supra,
at
C.T.C.
pages
128-29
(D.T.C.
5067).
36.
The
respondent
therefore
submits
that
unless
the
interest
that
was
accrued
by
the
appellant
as
payable
on
the
alleged
promissory
note
falls
squarely
within
the
ambit
of
subparagraph
20(1)(c)(i)
of
the
Income
Tax
Act,
it
is
not
deductible
by
the
appellant.
37.
In
the
respondent's
submission,
none
of
the
requirements
of
subparagraph
20(1)(c)(i)
of
the
Income
Tax
Act,
have
been
met
by
the
appellant;
(a)
It
is
clear
from
the
evidence
that
no
money
was
borrowed
by
the
appellant
on
which
it
might
be
said
interest
was
payable.
Assuming
that
Pacific
International
Equities
Corp.
did
become
entitled
to
receive
$2.6
million
from
the
appellant
by
way
of
dividends
and
that
the
appellant's
obligation
to
pay
them
was
substituted
by
another
obligation
constituted
by
the
alleged
promissory
note,
any
interest
that
became
payable
by
the
appellant
thereon
became
payable
by
virtue
of
a
debtor-creditor
relationship,
rather
than
by
virtue
of
a
borrower-lender
relationship,
between
the
appellant
and
Pacific
International
Equities
Corp.
or
its
assignee,
Ottawa
Elgin
Investments
Ltd.
(b)
In
the
respondent's
submission,
the
borrowing
requirement
of
subparagraph
20(1)(c)(i)
of
the
Income
Tax
Act
contemplates,
at
least
initially,
that
a
borrower-lender
relationship
come
into
existence
between
the
claimant
and
another
person;
it
is
impermissible
to
ignore
this
plain
requirement
and
substitute
therefor
a
mere
debtor-creditor
relationship.
See:
Stock
Exchange
Building
Corp.
v.
M.N.R.,
[1955]
S.C.R.
235,
[1955]
C.T.C.
5,
55
D.T.C.
1014,
at
pages
242-43
(C.T.C.
9,
D.T.C.
1015);
and
The
Queen
v.
MerBan
Capital
Corp.,
supra,
at
pages
258-59
(D.T.C.
5412-13).
(c)
In
addition
to
the
requirement
that
the
interest
sought
to
be
deducted
must
be
paid
or
payable
pursuant
to
a
legal
obligation
to
pay
interest
on
borrowed
money,
subparagraph
20(1)(c)(i)
of
the
Income
Tax
Act
further
stipulates
that
such
borrowed
money
must
be
used
for
the
purpose
of
earning
income
from
a
business
or
property,
and
(i)
the
use
of
the
borrowed
money
to
earn
income
from
a
business
or
property
must
be
direct:
a
mere
causal
connection
between
the
use
of
the
money
and
any
benefit
ultimately
received
is
insufficient:
Canada
Safeway
Ltd.
v.
M.N.R.,
supra,
at
pages
724-25
(C.T.C.
342,
D.T.C.
1243).
The
Queen
v.
Bronfman
Trust,
supra,
at
C.T.C.
page
126
(D.T.C.
5065).
(ii)
the
borrowed
money
must
be
used
for
the
borrower's
own
business
or
property
and
not
that
of
another
person:
Canada
Safeway
Ltd.
v.
M.N.R.,
supra,
at
page
728
(C.T.C.
345-46,
D.T.C.
1244-45).
D.W.S.
Corp.
v.
M.N.R.,
supra,
at
73
(D.T.C.
5050-51).
(iii)
Income
from
a
business
or
property"
in
subparagraph
20(1)(c)(i)
of
the
Income
Tax
Act
describes
income
from
a
source
and
I
is
synonymous
with
profit
or
a
reasonable
expectation
of
profit,
and
not
revenue,
hence
if
the
pursuit
for
which
borrowed
funds
are
used
is
incapable
of
producing
a
profit,
it
is
not
a
source
of
income,
and
the
interest
paid
for
borrowed
money
used
in
such
a
pursuit
is
not
used
for
the
purpose
of
earning
income.
Moldowan
v.
The
Queen,
[1978]
1
S.C.R.
480,
[1977]
C.T.C.
310,
77
D.T.C.
5213,
at
page
485
(S.C.R.,
C.T.C.
313,
D.T.C.
5215);
Associated
Investors
of
Canada
Ltd.
v.
M.N.R.,
[1967]
C.T.C.
138,
67
D.T.C.
5096
at
143
(D.T.C.
5098)
(Ex.
Ct.);
The
Queen
v.
Bronfman
Trust,
supra
at
C.T.C.
page
126
(D.T.C.
5067);
and
D./M.N.R.
(Quebec)
v.
Lipson,
[1979]
1
S.C.R.
833,
[1979]
C.T.C.
247,
at
page
839
(C.T.C.
250).
(iv)
Income"
or"
profit”
for
income
tax
purposes
is
the
difference
between
receipts
from
a
business
or
property
and
the
expenditures
laid
out
to
earn
those
receipts,
and
since
tax
is
imposed
on
such
income
or
profit,
the
profits
must
be
made
before
the
tax
can
come
into
existence,
as
the
tax
is
the
Crown's
share
of
the
profits
which
have
been
made.
M.N.R.
v.
Anaconda
American
Brass
Ltd.,
[1955]
C.T.C.
311,
55
D.T.C.
1220
(P.C.)
at
page
319
(D.T.C.
1224);
Roenisch
v.
The
Queen,
[1928-34]
C.T.C.
69,
1
D.T.C.
199
(Ex.
Ct.),
at
page
70
(D.T.C.
200);
and
Moloney
v.
The
Queen,
[1992]
2
C.T.C.
227,
92
D.T.C.
6570
(F.C.A.),
at
pages
227-28
(D.T.C.
6570).
(d)
On
the
evidence,
the
$2.6
million
on
which
the
interest
of
$247,000,
$312,000
and
$377,681
was
accrued
as
payable
was
clearly
not
used
by
the
appellant
to
earn
income
from
its
business
or
property.
This
$2.6
million
was
from
the
beginning
and
remained
thereafter
a
mere
burden
of
the
appellant,
rather
than
a
receipt
of
funds
from
whatever
source.
Nor
was
this
$2.6
million
capable
of
producing
a
pretax
profit
for
the
appellant.
While
the
accrual
of
the
interest
on
the
alleged
promissory
note
might
have
produced
a
financial
benefit
for
the
appellant,
this
could
only
have
been
so
if
that
interest
was
deductible
for
income
tax
purposes;
in
other
words,
such
a
benefit
could
only
come
out
of
the
Crown's
share
of
the
appellant's
profits
—
an
endeavour
that
might
more
appropriately
be
described
as
an
attempted
raid
on
the
Crown's
treasury
rather
than
as
a
business
undertaking.
Ministerial
Policy
in
making
Income
Tax
Assessments
38.
Interpretation
Bulletins
and
Information
Circulars
issued
by
the
Department
of
National
Revenue,
Taxation,
contain
Departmental
interpretations
of
various
provisions
of
the
Income
Tax
Act.
They
do
not
have
the
force
of
law
and
cannot
alter
it.
They
might,
in
areas
of
ambiguity
as
to
the
meaning
of
provisions
of
the
Income
Tax
Act,
be
of
assistance
in
interpreting
them:
Harel
v.
Deputy
Minister
of
Revenue
(Quebec),
[1978]
1
S.C.R.
851,
[1977]
C.T.C.
441,
77
D.T.C.
5438
at
pages
858-59
(C.T.C.
447-48,
D.T.C.
5441-42);
Nowegijick
v.
The
Queen,
[1983]
1
S.C.R.
29,
[1983]
C.T.C.
20,
83
D.T.C.
5041,
at
page
37
(C.T.C.
24,
D.T.C.
5044)
39.
The
respondent
submits
that
in
light
of
the
ample
and
authoritative
interpretation
of
subparagraph
20(1)(c)(i)
of
the
Income
Tax
Act
already
submitted,
there
can
be
no
doubt
whatever
as
to
its
meaning.
Any
Interpretation
Bulletins
and
Circulars
relied
upon
by
the
appellant
can
therefore
not
be
accorded
any
higher
status
than
the
expression
of
opinions
regarding
the
legal
meaning
of
that
provision
that
can
have
little
weight
in
the
adjudication
of
assessments
made
under
it.
See:
Scott
v.
M.N.R.,
[1989]
1
C.T.C.
2305,
89
D.T.C.
218
(T.C.C.),
at
page
2307
(D.T.C.
220).
40.
Furthermore,
none
of
the
Interpretation
Bulletins
and
Information
Circulars
address
the
fact
situation
in
the
present
case,
so
that
their
status
is
in
any
event
academic
to
the
adjudication
of
this
Appeal.
41.
The
respondent
submits
that
the
"Advance
Tax
Rulings”,
"Roundtable
Discussions"
and
Information
replies
given
to
anonymous
taxpayers'
inquiries
can
similarly
be
nothing
more
than
Ministerial
or
Departmental
opinions
as
to
the
applicability
of
particular
provisions
of
the
Income
Tax
Act
to
particular
hypothetical
facts
and
expressions
of
intentions
about
how
assessments
may
be
made.
The
matter
is,
however,
in
any
event
academic
to
the
adjudication
of
the
present
appeal,
as
none
of
these
documents
relied
upon
by
the
appellant
specifically
address
the
facts
in
the
present
case
and
could
therefore
not
be
said
to
be
binding
on
the
Minister
of
National
Revenue.
42.
Assuming,
however,
that
it
could
be
said
that
in
making
the
assessments
under
appeal
the
Minister
of
National
Revenue
somehow
contravened
any
general
assessing
policy
that
“bound”
him,
it
is
submitted
that
such
a
finding
would
be
totally
irrelevant
to
the
adjudication
of
the
correctness
of
these
assessments.
43.
For
it
has
been
amply
established
that
an
appeal
from
an
income
tax
assessment
is
an
appeal
from
the
amount
of
the
tax
that
has
been
assessed,
and
not
from
the
reasons
of
the
Minister
of
National
Revenue
in
making
it,
or
from
his
calculation
of
the
tax
or
otherwise
from
the
thought
processes
that
actuated
him
in
arriving
at
it,
and
the
Court's
jurisdiction
is
limited
to
adjudicating
upon
the
correctness
of
the
amount
of
the
income
tax
that
has
been
assessed.
Harris
v.
M.N.R.,
[1964]
C.T.C.
562,
64
D.T.C.
5332
(Ex.
Ct.),
at
page
571
(D.T.C.
5337);
Vineland
Quarries
and
Crushed
Stone
Ltd.
v.
M.N.R.,
[1970]
C.T.C.
12,
70
D.T.C.
6043
(Ex.
Ct.)
at
pages
15-16
(D.T.C.
6045);
M.N.R.
v.
Minden,
[1962]
C.T.C.
79,
62
D.T.C.
1044
(Ex.
Ct.),
at
page
89
(D.T.C.
1050);
The
Queen
v.
Riendeau,
[1991]
2
C.T.C.
64,
91
D.T.C.
5416
(F.C.A.),
at
page
65
(D.T.C.
5417);
The
Queen
v.
Consumers’
Gas
Co.,
[1987]
1
C.T.C.
79,
87
D.T.C.
5008
(F.C.A.),
at
pages
83-84
(D.T.C.
5012);
The
Queen
v.
Bowater
Mersey
Paper
Co.
Ltd.,
[1987]
2
C.T.C.
159,
87
D.
T.C.
5382,
(F.C.A.),
at
page
161
(D.T.C.
5383);
The
Queen
v.
Simard-Beaudry
Inc.,
[1971]
F.C.
396,
71
D.T.C.
5511
(T.D.),
at
page
5515
(F.C.
403);
Okalta
Oils
Ltd.
v.
M.N.R.,
[1955]
S.C.R.
824,
[1955]
C.T.C.
271,
55
D.T.C.
1176,
at
page
825
(S.C.R.,
C.
T.C.
273,
D.T.C.
1177);
The
Queen
v.
Garry
Bowl
Ltd.,
[1974]
C.T.C.
457,
74
D.T.C.
6401
(F.C.A.);
and
Income
Tax
Act,
subsections
152(1),
152(3),
152(8),
165(1),
165(3),
section
169
and
subsection
171(1).
44.
The
respondent
submits
that
redress
from
ministerial
conduct
that
is
alleged
to
be
contrary
to
Ministerial
policy
or
undertakings
given
is
available,
if
it
is
available
at
all,
only
by
way
of
judicial
review
in
the
Federal
Court
of
Canada.
However,
the
Federal
Court
Act
expressly
deprives
that
Court
of
any
judicial
review
jurisdiction
with
respect
to
income
tax
assessments,
and
the
Tax
Court
of
Canada
has
no
judicial
review
jurisdiction
at
all,
its
jurisdiction
being
confined
to
an
adjudication
of
the
amount
of
tax
assessed,
as
is
that
of
the
Federal
Court
of
Canada.
Federal
Court
Act,
R.S.C.
1986,
c.
F-8,
sections
18,
29
as
amended
by
S.C.
1990,
c.
8,
sections
18,
18.5;
M.N.R.
v.
Parsons,
[1984]
C.T.C.
352,
84
D.T.C.
6345,
at
pages
352-53
(D.T.C.
6346)
(F.C.A.);
McMillen
Holdings
Ltd.
v.
M.N.R.,
[1987]
2
C.T.C.
2327,
87
D.T.C.
585
(T.C.C.),
at
page
2336
(D.T.C.
591-92).
Subsection
245(a)
—
Artificiality
45.
The
respondent
submits
in
the
alternative
that
if
the
appellant
could
be
said
to
meet
the
requirements
for
the
deductibility
of
the
interest
accrued
on
the
alleged
promissory
note
that
are
imposed
by
subparagraph
20(1)(c)(i)
of
the
Income
Tax
Act,
its
deductibility
was
nevertheless
barred
by
subsection
245(1)
of
the
Act,
because
it
was
a
disbursement
or
expense
made
or
incurred
in
respect
of
a
transaction
or
operation
that,
if
allowed,
would
unduly
or
artificially
reduce
its
income.
46.
A
transaction
which
lacks
commercial
reality
and
is
entered
into
solely
for
the
purpose
of
avoiding
the
payment
of
income
tax
may
attract
the
sanction
of
subsection
245(1)
of
the
Income
Tax
Act.
Stubart
Investments
Ltd.
v.
The
Queen,
[1984]
1S.C.R.
536,
[1984]
C.T.C.
294,
84
D.T.C.
6305,
at
page
579
(C.T.C.
316,
D.T.C.
6323);
and
Consolidated
Bathurst
Ltd.
v.
The
Queen,
[1987]
1
C.T.C.
55,
87
D.T.C.
5001
(F.C.A.),
at
page
62-63
(D.T.C.
5006).
47.
Thus
any
artificiality
in
a
transaction
may
taint
the
deductibility
of
a
disbursement
or
expense
resulting
from
it.
Shulman
v.
M.N.R.,
[1961]
C.T.C.
385,
61
D.T.C.
1213
(Ex.
Ct.),
at
page
400
(D.T.C.
1221);
aff'd
62
D.T.C.
1166
(S.C.C.);
Harris
v.
M.N.R.,
[1966]
S.C.R.
489,
[1966]
C.T.C.
226,
66
D.T.C.
5189,
at
page
505
(C.T.C.
241,
D.T.C.
5198);
and
Seramco
Ltd.
Superannuation
Fund
Trustees
v.
Income
Tax
Commissioner,
[1976]
2
All
E.R.
28,
[1977]
A.C.
287
at
page
35
(A.C.
297-98)
(P.C.).
48.
To
begin
with,
the
respondent
submits
that
a
serious
doubt
exists
whether
the
appellant's
directors
had
any
intention
to
declare
a
dividend,
or
if
there
was,
whether
there
was
an
intention
to
pay
it
or
to
pay
interest
thereon.
Certainly,
no
interest
was
never
in
fact
paid.
While
Mr.
Abdulezer
testified
that
the
principal
amount
of
the
alleged
promissory
note
was
"repaid"
by
1988,
there
is
no
concrete
evidence
before
the
Court
that
this
was
what
in
fact
happened.
49.
The
appellant
did
not
have
the
means
to
pay
such
a
dividend
short
of
borrowing
the
funds
or
selling
most
of
its
assets,
neither
of
which
in
fact
occurred.
This
dividend
demonstrably
put
the
capital
account
of
the
appellant
into
a
deficit
position,
contrary
to
the
prohibition
of
such
a
result
imposed
by
subsection
79(1)
of
the
Quebec
Companies
Act.
Exhibit
R-2
(Statement
of
Retained
Earnings
(Deficit))
Companies
Act,
R.S.Q.,
c.
C-38,
subsection
79(1).
50.
The
respondent
submits
that
the
appellant's
obligation,
if
any,
to
pay
such
a
dividend
was
unenforceable
against
it.
For
the
courts
will
not
enforce
a
right
founded
on
breaches
of
public
policy
or
of
a
statute.
Chitty
on
Contracts,
24th
ed.,
pages
416-22.
51.
Nor
was
the
enforceability
of
such
an
obligation
enhanced
by
its
replacement
by
the
alleged
promissory
note.
For
it
is
the
respondent's
submission
that
the
alleged
promissory
note
was
not
a
promissory
note
at
all,
but
rather
a
mere
acknowledgement
or
an
indebtedness.
52.
À
promissory
note
is
an
unconditional
promise
in
writing
made
by
one
person
to
another,
signed
by
the
maker,
engaging
to
pay
on
demand
or
at
a
fixed
or
determinable
future
time,
a
sum
certain
in
money
to,
or
to
the
order
of,
a
specified
person
or
to
its
bearer.
Bills
of
Exchange
Act,
R.S.C.
c.
B-4,
subsection
176(1).
53.
A
mere
implication
that
payment
may
be
made
is
insufficient
to
constitute
an
instrument
a
promissory
note.
Palmer
v.
McLennan
(1873),
22
U.C.C.P.
565,
at
page
572
(C.A.).
54.
Semble,
a
mere
acknowledgement
of
indebtedness.
Poirer
v.
Dumoulin
(1936),
61
Que.
K.B.
429
and
431-32
(C.A.);
Choquette
v.
Viau
(1925),
63
Que.
S.C.
529,
at
pages
530-31;
Byles
on
Bills
of
Exchange,
25th
ed.,
page
325.
55.
In
the
respondent's
submission,
the
alleged
promissory
note
in
the
present
case
is
clearly
a
mere
acknowledgement
of
indebtedness,
as
there
is
no
express
promise
to
pay
the
amount
in
question.
56.
Assuming,
however,
that
the
alleged
promissory
note
was
in
fact
and
law
a
promissory
note,
Ottawa
Elgin
Investments
Ltd.
to
which
it
was
purportedly
endorsed
was
not
a
holder
in
due
course,
as
it,
in
the
person
of
Mr.
Charles
Bedzow,
had
notice
of
the
illegality
of
the
dividend
declared
by
the
appellant
(also
in
the
person
of
Mr.
Charles
Bedzow).
57.
All
these
transactions,
beginning
with
the
alleged
declaration
of
the
dividend
and
ending
with
the
accrual
and
nonpayment
of
interest
were
on
the
evidence
not
entered
into
for
the
purpose
of
commercial
gain,
but
rather
for
the
purpose
of
consolidating
the
profits
and
losses
of
the
appellant,
Pacific
International
Equities
Corporation
and
Ottawa
Elgin
Investments
Ltd.
in
order
to
avoid
the
payment
of
income
tax.
58.
For
all
these
reasons
the
respondent
therefore
submits
that
these
transactions
giving
rise
to
the
deduction
of
the
interest
were
artificial,
within
the
meaning
of
subsection
245(1)
of
the
Income
Tax
Act.
59.
The
respondent
appreciates
that
in
order
for
disbursements
or
expenses
to
be
prescribed
by
subsection
245(1)
of
the
Income
Tax
Act
it
is
not
sufficient
that
they
arise
from
artificial
transactions,
they
must
also
unduly,
i.e.,
significantly
in
a
quantitative
sense,
or
artificially,
reduce
the
claimant's
income.
The
Queen
v.
Irving
Oil
Ltd.,
[1991]
1
C.T.C.
350,
91
D.T.C.
5106,
at
page
360
(D.T.C.
5113-14)
(F.C.A.).
60.
In
the
present
case,
the
interest
deductions
of
$247,000
and
$312,000
converted
what
would
otherwise
have
been
pre-income
tax
profits
of
the
appellant
in
the
amount
of
$129,752
in
its
1985
taxation
year
and
$262,904
in
its
1986
taxation
year
to
losses
of
$117,248
and
$49,096,
respectively.
In
its
1987
taxation
year
the
interest
deduction
of
$377,681
reduced
the
appellant's
pre-income
tax
profits
from
the
$425,291
they
would
otherwise
have
been
to
$47,610.
In
the
respondent's
submission
such
large
eliminations
or
reductions
of
the
appellant's
pre-income
tax
profits
are
quantitatively
significant
and
are
therefore
undue.
61.
For
all
of
the
foregoing
reasons
the
respondent
submits
that
the
interest
in
issue
is
not
deductible
in
computing
the
appellant's
income
for
its
1985,
1986
and
1987
taxation
years,
and
that
the
appellant's
appeal
should
accordingly
be
dismissed
with
costs.
ALL
FOR
WHICH
is
respectfully
submitted.
According
to
the
evidence
adduced,
it
is
obvious
that
the
relationship
between
the
appellant
company
and
Ottawa-Elgin
is
a
debtor-creditor
relationship.
There
is
no
evidence
whatsoever
to
show
that
the
appellant
company
borrowed
money
to
be
used
for
the
purpose
of
earning
income
from
a
business
or
property
because:
1.
Nothing
shows
that
there
was
a
borrower-lender
relationship;
2.
Nothing
shows
that
the
borrowed
money
was
used
directly
in
the
appellant
owned
business;
3.
On
the
contrary,
what
happened
was
for
the
benefit
of
another
taxpayer;
4.
The
Income
Tax
Act
describes
income
from
a
source
and
is
synonymous
with
profit
or
unreasonable
expectation
of
profit.
So
if
borrowed
funds
used
is
incapable
of
producing
profits,
it
is
not
a
source
of
income
and
consequently
not
used
for
the
purpose
of
earning
income.
As
may
be
seen,
the
appellant
is
far
from
meeting
the
requirements
of
paragraph
20(1)(c).
The
Court
should
not
BO
too
far
from
basic
principle
in
income
tax.
The
exemption
provisions
of
a
taxing
act
must
be
construed
strictly,
taxation
is
the
rule
and
exemption
the
exception,
Sheppard
Pen
v.
M.N.R.
(1953),
53
D.T.C.
1223.
In
order
to
benefit
from
paragraph
20(1)(c)
the
appellant
should
fall
squarely
within
the
full
corners
of
the
said
section.
In
the
light
of
the
decision
cited
by
counsel
for
the
respondent,
the
appeal
is
dismissed.
In
view
of
my
decision
on
paragraph
20(1)(c)
there
is
no
need
to
deal
with
the
other
issues,
to
know:
1.
Was
the
appellant
in
its
1985,
'86,
'87
taxation
years
a
Canadian
controlled
private
corporation
within
the
meaning
of
paragraph
125.7(b)
of
the
Act
so
as
to
be
entitled
to
claim
the
deduction
provided
in
subsection
125(1)
of
the
Income
Tax
Act.
2.
Were
the
transactions
giving
rise
to
the
deduction
of
the
interest,
artificial
and
unduly
reducing
the
appellant's
income.
Consequently,
for
the
above
reasons,
the
appeal
is
dismissed
with
costs.
Appeal
dismissed.