Teitelbaum,
J.:—These
reasons
shall
apply
to
both
file
T-1242-89
and
file
T-2927-90
as
the
parties
to
these
proceedings
and
the
facts
are
the
same
except
that
the
notices
of
reassessments
are
for
different
years,
that
is,
for
the
taxation
years
1985
and
1986
(Tab"O",
agreed
statement
of
facts
and
exhibits).
This
is
an
appeal
by
the
plaintiff,
John
M.
Tennant,
from
the
decision
of
the
Minister
of
National
Revenue
(hereinafter
referred
to
as
the
"M.N.R."),
pursuant
to
notices
of
reassessment
in
respect
of
the
plaintiff's
1985
and
1986
taxation
years
whereby
the
M.N.R.
disallowed
the
plaintiff's
claim
for
the
deduction
of
interest
expenses,
incurred
on
a
loan,
in
accordance
with
paragraph
20(1)(c)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act"),
as
amended.
The
plaintiff
is
seeking
"an
order
that
his
appeal
herein
be
allowed
and
that
the
said
notices
of
reassessment
be
vacated".
The
grounds
for
the
appeal
as
appear
in
the
statement
of
claim
are,
as
the
plaintiff
states:
The
interest
paid
by
the
plaintiff
on
the
Royal
Bank
loan
was
pursuant
to
a
legal
obligation
to
pay
interest
and
the
borrowed
funds
were
used
for
the
purpose
of
earning
income
from
a
property,
namely,
shares
in
the
capital
stock
of
Realwest
and
accordingly,
such
interest
was
properly
deductible
by
the
plaintiff
in
his
1985
and
1986
taxation
years
pursuant
to
the
provisions
of
paragraph
20(1)(c)
of
the
Income
Tax
Act.
The
income
earning
purpose
of
the
Royal
Bank
loan
continued
after
the
property
Originally
purchased
with
the
loan
was
exchanged
for
other
property
namely,
shares
in
TWL
Holdings
Ltd.,
which
like
the
original
property,
were
acquired
for
the
purpose
of
earning
and
accordingly,
the
interest
continued
to
be
deductible
pursuant
to
paragraph
20(1)(c)
of
the
Income
Tax
Act
throughout
the
plaintiff's
1985
and
1986
taxation
years.
Facts
The
parties
proceeded
by
way
of
an
agreed
statement
of
facts
and
issue,
supported
by
an
agreed
number
of
documents,
which
served
as
the
whole
evidence
in
the
present
case.
A
summary
of
those
facts
is
as
follows:
On
May
6
and
13,
1981
the
plaintiff
borrowed
a
total
of
$1,000,000
(hereinafter
referred
to
as
the
"loan")
from
the
Royal
Bank
of
Canada
and
used
the
loan
to
acquire
from
treasury
1,000,000
common,
voting,
participating
shares
of
an
arm's
length
corporation
named
Realwest
Energy
Corporation
(hereinafter
referred
to
as
Realwest)
at
$1
per
share.
These
facts
are
evidenced
by
copies
of
the
plaintiff's
subscription
agreement
with
Realwest,
Realwest's
resolution
to
issue
the
1,000,000
shares
to
the
plaintiff
and
the
share
certificate
for
the
1,000,000
shares
which
was
cancelled
on
July
25,
1985,
as
well
as
two
promissory
notes,
from
the
plaintiff
to
the
Royal
Bank
of
Canada,
for
a
total
of
$1,000,000.
From
May,
1981
to
December
31,
1986
the
plaintiff
had
a
legal
obligation
to
pay
interest
to
the
Royal
Bank
of
Canada
on
the
loan.
Counsel
has
referred
me
to
the
attached
Exhibit
E,
which
is
a
copy
of
a
letter
from
the
Royal
Bank
to
the
plaintiff
with
a
schedule
showing
the
interest
rate
and
the
amount
of
interest
paid
on
the
loan.
By
an
agreement
of
purchase
and
sale
dated
July
25,
1985
the
plaintiff
disposed
of
his
shares
to
an
arm's
length
holding
company
named
TWL
Holdings
Ltd.
(hereinafter
referred
to
as
TWL).
The
consideration
received
by
the
plaintiff
for
the
sale
was
1,000
Class
B
Common,
non-voting,
participating
shares
of
TWL
with
a
par
value
of
$1
per
share.
At
the
time
of
the
disposition
the
declared
fair
market
value
of
the
shares
and
the
agreed
purchase
price
of
the
1,060
Class
B
TWL
shares
was
$1,000.
The
plaintiff
and
TWL
entered
into
the
agreement
of
purchase
and
sale
pursuant
to
section
85
of
the
Income
Tax
Act.
The
plaintiff
and
TWL
jointly
filed
the
election
form
T2057
“Election
on
Disposition
of
Property
by
a
Taxpayer
to
a
Taxable
Canadian
Corporation"
in
respect
of
the
sale.
Between
July
25,
1985
and
December
31,
1986
other
shareholders
of
Realwest
transferred
Realwest
common
shares
to
TWL
in
exchange
for
Class
B
common
shares.
At
any
particular
time
between
July
25,
1985
and
December
31,
1986,
the
plaintiff's
interest
in
TWL's
Class
B
shares,
expressed
as
a
percentage
of
those
shares,
multiplied
by
the
number
of
Realwest
common
shares
owned
by
TWL,
at
that
time,
equalled
1,000,000.
The
disposition
of
the
plaintiff's
shares
to
TWL
entitled
him
to
claim
an
allowable
business
investment
loss
pursuant
to
paragraphs
38(c)
and
39(1)(c)
of
the
Act.
Based
on
the
agreement
of
purchase
and
sale
between
the
plaintiff
and
TWL
and
the
election
of
$1,000
as
the
tax
cost
of
the
TWL
shares,
the
plaintiff
claimed
a
business
investment
loss
of
$1,004,000
in
his
1985
taxation
year
and
was
allowed
the
business
investment
loss
of
$502,000,
pursuant
to
paragraphs
38(c)
and
39(1)(c)
of
the
Act.
From
July
25,
1985
to
December
31,
1986,
the
plaintiff
had
a
reasonable
expectation
of
earning
a
profit
from
his
investment
in
the
1,000
Class
B
shares
of
TWL
at
a
cost
of
$1
per
share.
In
April
1987
Realwest
underwent
a
significant
share
restructuring
which
required
a
third
party
to
acquire
10,000,000
Realwest
common
shares
and
to
inject
$10,000,000
of
new
capital
by
way
of
Realwest
preferred
shares.
Following
the
restructuring,
on
April
28,
1987,
Realwest
paid
a
dividend
to
the
holders
of
its
common
shares
(including
TWL)
of
$1,892,691.
On
July
20,
1987
TWL
used
a
portion
of
its
Realwest
dividend
to
pay
a
dividend
to
the
plaintiff
on
his
Class
B
shares
of
$316,232.62.
Both
corporations
elected
to
pay
the
dividends
out
of
their
capital
dividend
accounts,
pursuant
to
subsection
83(2)
of
the
Act.
As
is
evidenced
by
the
plaintiff's
Royal
Bank
account
statement,
on
July
20,
1987,
the
plaintiff
paid
$327,088.77
as
a
partial
repayment
of
the
loan.
This
sum
represents
the
$316,233.62
of
dividend
money
plus
an
additional
$10,856.15.
Prior
to
July
25,1985
the
plaintiff
paid
interest
to
the
Royal
Bank
of
Canada
on
the
full
amount
of
the
loan
and,
for
income
tax
purposes,
the
plaintiff
claimed
a
deduction
of
the
full
amount
of
the
interest
under
subparagraph
20(1)(c)(i)
of
the
Act.
This
deduction
was
allowed
by
the
defendant.
However,
after
July
25,
1985
(being
the
date
the
plaintiff
disposed
of
his
Realwest
shares
to
TWL
in
exchange
for
1,000
shares
of
TWL)
the
plaintiff
continued
to
pay
interest
to
the
Royal
Bank
of
Canada
on
the
full
amount
of
the
loan,
and
for
the
1985
and
1986
taxation
years
the
plaintiff
continued
to
claim
a
deduction
for
the
full
amount
of
this
interest.
By
notices
of
reassessment,
the
defendant,
the
Minister
of
National
Revenue,
reassessed
the
plaintiff
in
respect
of
his
1985
and
1986
taxation
years
and
disallowed
the
full
deduction
of
interest
paid
on
the
loan.
The
defendant
allowed
the
plaintiff
a
deduction
pursuant
to
subparagraph
20(1)(c)(i)
of
the
Act
only
for
the
amount
of
interest
which
the
plaintiff
would
have
paid
to
the
Royal
Bank
of
Canada
if
the
loan
had
been
equal
to
the
cost
to
the
plaintiff
of
$1,000
for
his
1,000
Class
B
shares
in
TWL.
As
a
result,
the
plaintiff
filed
two
statements
of
claim
with
the
Federal
Court
of
Canada
and
hence
the
present
proceedings.
Reasons
for
the
Minister's
Ruling
In
assessing
the
plaintiff
as
he
did,
by
disallowing
the
full
deduction
of
interest
paid
on
the
$1,000,000
loan,
the
Minister
did
so
based
on
the
following
assumptions,
as
contained
in
the
statement
of
defence:
1.
After
the
July
25,
1985
transfer,
pursuant
to
subsection
85(1)
of
the
Act,
of
the
plaintiff's
Realwest
shares
to
TWL
in
exchange
for
1000
Class
B
non-voting
participating
shares,
with
an
elected
value
of
$1,000,
the
plaintiff
no
longer
owned
or
controlled
the
1,000,000
shares
in
Realwest.
2.
Being
that
the
Royal
Bank
loan
was
taken
out
to
acquire
the
1,000,000
Realwest
shares,
and
being
that
the
plaintiff
no
longer
owned
the
Realwest
shares,
the
interest
expense
with
respect
to
such
loan
for
the
Realwest
shares
no
longer
qualified
for
deduction
pursuant
to
the
Act.
3.
The
only
remaining
investment
of
the
plaintiff
in
which
money
borrowed
by
him
was
used
for
the
purpose
of
earning
income
from
business
or
property
was
his
investment
of
$1,000
for
the
1000
Class
B
non-voting
participating
shares
in
TWL.
4.
After
his
disposition
of
the
Realwest
shares
to
TWL
on
July
25,
1985
the
plaintiff
was
not
entitled
to
deduct
interest
in
his
1985
and
1986
taxation
years
on
borrowed
money
in
excess
of
$1,000
as
such
money
was
no
longer
used
for
the
purpose
of
gaining
or
producing
income
from
the
shares
in
Realwest
for
which
the
plaintiff
claimed
a
business
investment
loss
of
$1,004,000
on
disposition.
Minister's
Position
The
Minister
contends
that
the
statutory
scheme
with
regard
to
the
deductibility
of
interest
expenses
is
to
be
found
in
paragraphs
18(1)(a)
and
(b)
and
20(1)(c)
and
subsection
20(3)
of
the
Act.
Specifically,
paragraph
20(1)(c)
contains
the
requirement
that,
for
deductibility,
the
amount
of
money
borrowed
must
be
used
for
the
purpose
of
earning
income
from
a
property,
other
than
a
property
the
income
of
which
is
exempt.
The
Minister
submits
that
originally,
in
the
present
case,
the
plaintiff
borrowed
$1,000,000
from
the
Royal
Bank
for
the
purpose
of
acquiring
the
Real-
west
shares
and
thus
to
earn
income
from
property.
However,
after
July
25,
1985
when
the
Realwest
shares
were
rolled
over
into
TWL,
pursuant
to
subsection
85(1),
the
plaintiff
lessened
his
income
earning
source
when
he
reduced
his
capital
investment
from
$1,000,000
to
$1,000.
This
is
indicated
by
the
fact
that
the
original
$1,000,000
income
earning
source
no
longer
exists.
Here,
the
Minister
refers
to
subsection
85(1)
and
the
claim
thereupon
of
an
allowable
business
investment
loss.
The
plaintiff
himself
claimed
that
all
but
$1,000
of
his
investment
was
lost,
and
thus
the
only
current
income
earning
source
for
the
plaintiff
is
the
$1,000
investment
in
TWL.
The
Minister's
position
is
that
the
interest
deductibility
section
is
related
to
the
current
and
direct
use
of
the
borrowed
money
and
that
in
the
present
case
the
only
source
from
which
the
plaintiff
can
earn
income,
which
relates
to
the
borrowed
money,
is
his
TWL
shares
acquired
at
$1,000.
After
July
25,
1985,
it
cannot
be
said
that
the
borrowed
money
was
used
directly
to
earn
income.
The
direct
use
to
which
the
borrowed
money
was
put,
after
all
the
Realwest
shares
had
been
sold
and
the
loss
on
the
disposition
claimed,
was
only
to
acquire
shares
in
TWL
for
the
$1,000.
Thus,
the
only
source
from
which
the
plaintiff
had
a
reasonable
expectation
of
profit
was
derived
from
his
$1,000
investment
in
TWL.
The
Minister
characterizes
the
section
85
rollover
of
Realwest
shares
into
TWL
as
a
disposition
and
acquisition
of
assets
and
not
as
a
mere
change
in
the
form
of
ownership.
The
Minister
contends
that
the
true
legal
aspect
of
the
transaction
is
that
the
plaintiff
disposed
of
the
Realwest
shares,
claimed
a
loss
in
respect
thereof
and
then
used
the
proceeds
of
the
disposition
to
acquire
$1,000
worth
of
TWL
shares.
Therefore,
the
plaintiff
had
no
control
over
the
Realwest
shares.
The
mere
fact
that
TWL
paid
the
plaintiff
a
dividend
in
1987
as
part
of
the
dividend
payment
made
by
Realwest
to
TWL
does
not
mean
the
plaintiff
can
lift
the
corporate
veil
and
look
through
to
the
Realwest
shares.
The
Minister
submits
that
it
has
been
held
that
the
subparagraph
20(1)(c)(i)
interest
deductibility
provision
requires
that
the
income
be
derived
from
the
property
itself
and
not
from
the
use
of
power
attached
to
that
property
or
the
indirect
actions
taken
by
the
intermediary
TWL
to
pay
dividends
to
their
shareholders
out
of
the
dividend
payments
received
through
TWL's
asset
holdings
in
Realwest.
Taxpayer's
Position
The
plaintiff
submits
that
he
is
entitled
to
the
deduction
of
the
interest
claimed
in
his
1985
and
1986
taxation
years,
with
respect
to
the
$1,000,000
Royal
Bank
loan,
pursuant
to
paragraph
20(1)(c)
of
the
Act,
as
the
full
amount
of
the
borrowed
funds
continued
to
be
used
for
the
purpose
of
earning
income
from
property.
The
plaintiff
maintains
that
the
Minister
erred
in
concluding
that
the
only
remaining
investment
from
which
the
$1,000,000
loan
was
used
for
the
purpose
of
earning
income
from
property
was
$1,000,
representing
the
elected
tax
cost
for
the
1000
Class
B
non-voting,
participating
shares
in
TWL.
The
plaintiff's
position
is
that
the
section
85
rollover
of
the
Realwest
shares
into
TWL
in
exchange
for
the
1000
TWL
shares
in
no
way
altered
the
income
earning
purpose
of
the
full
original
$1,000,000
loan.
Plaintiff's
counsel
states
that
at
all
times
the
investment
vehicle
which
was
acquired
by
use
of
the
$1,000,000
loan
continued
to
be
in
existence
even
after
the
section
85
rollover
was
effected.
The
plaintiff
submits
that
the
Minister
erred
in
concluding
that
the
interest
deductibility
provision
is
tied
to
the
concept
of
cost.
Based
on
a
strict
interpretation
of
the
deductibility
provision,
paragraph
20(1)(c)
only
requires
that
the
borrowed
money
currently
be
used
to
acquire
property
which
has
the
potential
to
earn
income,
but
does
not
require
that
the
“current
value”
of
the
asset
be
equal
to
the
amount
of
money
borrowed.
Thus,
the
mere
fact
that
the
TWL
shares
had
an
elected
tax
cost
of
$1,000
should
not
undermine
the
fact
that
the
full
$1,000,000
loan
was
being
used
to
acquire
property
from
which
the
plaintiff
had
a
reasonable
expectation
of
earning
profit.
In
addition,
counsel
for
the
plaintiff
argues
that
I
must
look
beyond
the
form
of
the
investment
and
instead
focus
on
the
substance
and
commercial
reality
of
the
situation.
Here
it
is
submitted
that
although
after
July
25,
1985
the
form
of
the
investment
was
in
the
TWL
shares
and
thus
the
plaintiff
no
longer
retained
an
equitable
or
legal
title
to
the
Realwest
shares,
it
was
to
those
shares
that
the
plaintiff
continued
to
look
to
derive
his
profit.
Thus
the
remaining
investment
acquired,
using
the
$1,000,000
loan,
remained
intact
as
an
economic
interest,
which
is
a
recognizable
interest
in
law.
Plaintiff's
counsel
argues
that
where
the
words
of
the
interest
deductibility
provision
are
ambiguous,
reference
should
be
made
to
Parliament's
intent.
Here
it
is
argued
that
a
schematic
and
purposive
interpretation
of
the
Act
reveals
that
the
plaintiff
is
not
automatically
precluded
from
taking
advantage
of
the
interest
deductibility
provision
merely
because
he
effected
a
section
85
rollover
and
claimed
an
allowable
investment
loss
with
respect
to
the
exchange
of
Realwest
shares
for
shares
in
TWL.
Both
the
allowable
business
loss
provision
and
paragraph
20(1)(c)
are
incentive
provisions
of
which
nothing
in
the
legislative
history
indicates
that
a
taxpayer
was
to
be
prevented
from
taking
advantage
of
the
two
incentives
at
the
same
time.
It
has
also
been
submitted
that
paragraph
20(1)(c),
the
section
85
rollover
provision
and
the
paragraphs
38(c)
and
39(1)(c)
allowable
business
loss
provisions,
are
all
contained
in
completely
separate
parts
of
the
Act
and
therefore
are
indicative
of
Parliament's
intent
to
keep
these
concepts
of
income
tax
distinct
and
independent
of
the
other.
From
this,
it
follows
that
interest
deductibility
is
not
limited
by
the
fact
that
the
plaintiff,
on
one
hand,
based
on
the
continued
existence
of
the
Realwest
shares,
disposed
of
his
Realwest
shares
and
claimed
a
business
investment
loss
while,
on
the
other
hand,
he
continued
to
claim
a
deduction
of
interest
on
the
full
$1,000,000
loan.
Issue
The
issue
to
be
determined
centres
upon
the
deductibility
of
interest
from
a
loan
used
for
the
purpose
of
earning
income
from
property.
That
issue
in
turn
raises
the
following
question:
Is
the
plaintiff
entitled
by
subparagraph
20(1)(c)(i)
of
the
Act
to
deduct
the
full
amount
of
interest
paid
on
the
loan
after
disposing
of
the
shares
on
July
25,
1985
pursuant
to
a
section
85
rollover
for
the
1,000
Class
B
shares
of
TWL?
Relevant
Statutory
Provisions
For
the
taxation
years
1985
and
1986
the
relevant
statutory
provisions
are
paragraphs
18(1)(a)
and
(b),
subparagraph
20(1)(c)(i),
and
paragraphs
38(c)
and
39(1)(c)
of
the
Income
Tax
Act.
The
relevant
parts
of
the
sections
read
as
follows:
18(1)
In
computing
the
income
of
a
taxpayer
from
a
business
or
property
no
deduction
shall
be
made
in
respect
of
(a)
General
Limitation.—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)
Capital
outlay
or
loss.—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
be
reasonably
regarded
as
applicable
thereto:
(c)
Interest.—an
amount
paid
in
the
year
or
payable
in
respect
of
the
year
(depending
upon
the
method
regularly
followed
by
the
taxpayer
in
computing
his
income),
pursuant
to
a
legal
obligation
to
pay
interest
on
(i)
borrowed
money
used
for
the
purpose
of
earning
income
from
a
business
or
property
(other
than
borrowed
money
used
to
acquire
property
the
income
from
which
would
be
exempt
or
to
acquire
a
life
insurance
policy).
38.
Meaning
of
taxable
capital
gain
and
allowable
capital
loss.
For
the
purposes
of
this
Act,
(c)
a
taxpayer’s
allowable
business
investment
loss
for
a
taxation
year
from
the
disposition
of
any
property
is
/2
of
his
business
investment
loss
for
the
year
from
the
disposition
of
that
property.
39.
Meaning
of
capital
gain
and
capital
loss.
(1)
For
the
purposes
of
this
Act,
(c)
a
taxpayer's
business
investment
loss
for
a
taxation
year
from
the
disposition
of
any
property
is
the
amount,
if
any,
by
which
his
capital
loss
for
the
year
from
a
disposition
after
1977
(i)
to
which
subsection
50(1)
applies,
or
(ii)
to
a
person
with
whom
he
was
dealing
at
arm's
length
of
any
property
that
is
(iii)
a
share
of
the
capital
stock
of
a
Canadian-controlled
private
corporation
exceeds
the
aggregate
of
.
.
.
.
Analysis
Subparagraph
20(1)(c)(i)
was
the
subject
of
consideration
by
the
Supreme
Court
of
Canada
in
The
Queen
v.
Bronfman
Trust,
[1987]
1
S.C.R.
32,
[1987]
1
C.T.C.
117,
87
D.T.C.
5059,
where
Chief
Justice
Dickson
(as
he
then
was)
assessed
the
purpose
of
the
provision
and
provided
for
what,
in
my
view,
is
the
proper
interpretation
of
the
provision.
The
facts
of
the
case
are
worthy
of
summary.
The
trustees
of
the
Phyllis
Bronfman
Trust
arranged
bank
loans
to
partially
fund
capital
distributions
made
to
the
beneficiary
of
the
trust.
The
trustees
preferred
to
borrow
money
to
make
a
payment
rather
than
sell
income
producing
property
of
the
trust.
Revenue
Canada
sought
to
disallow
the
deduction
of
interest
paid
by
the
trust,
on
the
borrowed
money,
on
the
grounds
that
the
money
had
not
been
"used
for
the
purpose
of
earning
income
from
a
business
or
property"
as
required
by
subparagraph
20(1)(c)(i).
In
deciding
the
case,
the
Chief
Justice
eloquently
appraised
the
purpose
of
the
interest
deductibility
section
as
follows,
at
pages
124-25
(D.T.C.
5064):
It
is
perhaps
otiose
to
note
at
the
outset
that
in
the
absence
of
a
provision
such
as
paragraph
20(1)(c),
specifically
authorizing
the
deduction
from
income
of
interest
payments
in
certain
circumstances,
no
such
deductions
could
generally
be
taken
by
the
taxpayer
.
.
.
.
I
agree
with
Marceau,
J.
as
to
the
purpose
of
the
interest
deduction
provision.
Parliament
created
subparagraph
20(1)(c)(i),
and
made
it
operate
notwithstanding
paragraph
18(1)(b),
in
order
to
encourage
the
accumulation
of
capital
which
would
produce
taxable
income
.
.
.
.
The
statutory
deduction
thus
requires
a
characterization
of
the
use
of
borrowed
money
as
between
the
eligible
use
of
earning
nonexempt
income
from
a
business
or
property
and
a
variety
of
possible
ineligible
uses.
The
onus
is
on
the
taxpayer
to
trace
the
borrowed
funds
to
an
identifiable
use
which
triggers
the
deduction
.
.
.
.
The
interest
deduction
provision
requires
not
only
a
characterization
of
the
use
of
borrowed
funds,
but
also
a
characterization
of
"purpose".
Eligibility
for
the
deduction
is
contingent
on
the
use
of
borrowed
money
for
the
purpose
of
earning
income.
It
is
well
established
in
the
jurisprudence,
however
that
it
is
not
the
purpose
of
the
borrowing
itself
which
is
relevant.
What
is
relevant,
rather,
is
the
taxpayer's
purpose
in
using
[emphasis
in
original]
the
borrowed
money
in
a
particular
manner:
Auld
v.
M.N.R.
(1962),
28
Tax
A.B.C.
236,
62
D.T.C.
27
(T.A.B.)
Consequently,
the
focus
on
the
inquiry
must
be
centred
on
the
use
to
which
the
taxpayer
put
the
borrowed
funds.
[Emphasis
added.]
Dickson,
C.J.
then
went
on
to
emphasize
that
it
is
the
current
use
and
not
the
original
use
of
the
borrowed
money
that
determines
the
eligibility
of
the
deduction.
The
Chief
Justice
stated
that
the
focus
must
be
on
the
direct
use
to
which
a
taxpayer
puts
borrowed
money.
In
this
regard
he
emphasized,
at
pages
126-27
(D.T.C.
5065-66),
that
the
Court
should
not
overlook
an
ineligible
direct
use
of
borrowed
money
for
the
sake
of
finding
an
indirect
eligible
use
of
borrowed
funds:
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
finds
in
the
Act
not
only
the
distinction
within
subparagraph
20(1)(c)(i)
between
eligible
and
ineligible
uses
of
funds
but
other
provisions
which
also
require
the
tracing
of
funds
to
particular
use
in
a
manner
inconsistent
with
the
argument
of
the
Trust.
.
.
The
leading
case
from
this
Court
on
the
availability
of
the
interest
deduction,
Canada
Safeway
Ltd.
v.
M.N.R.,
also
demonstrates
a
reluctance
to
overlook
a
clearly
ineligible
direct
use
of
borrowed
money
in
order
to
favour
the
taxpayer
by
characterizing
the
transaction
on
the
basis
of
a
less
direct
eligible
use
of
borrowings.
Based
on
the
foregoing,
the
Supreme
Court
of
Canada
held
that,
except
in
exceptional
cases,
paragraph
20(1)(c)
of
the
Act
requires
that
the
use
of
bor-
rowed
money
be
traced
to
a
specific
eligible
use,
and
that
it
be
demonstrated
that
the
borrowed
funds
are
used
directly
and
immediately
to
earn
income
from
a
business
or
property
(see
also
Livingston
International
Inc.
v.
Canada,
[1991]
1
C.T.C.
155,
91
D.T.C.
5066
at
pages
159-60
(D.T.C.
5069)
where
Pinard,
J.
restated
and
applied
the
principles
of
law
enunciated
in
Bronfman
Trust,
Supra).
In
the
present
case,
the
plaintiff
did
not
dispute
the
principle
of
law
enunciated
in
Bronfman
Trust,
supra,
which
requires
that
a
taxpayer
trace
the
borrowed
funds
through
to
a
current,
direct
and
eligible
use.
However,
the
plaintiff
claimed
that
the
decision
in
Bronfman
Trust
is
distinguishable
from
the
present
facts
at
hand
in
that
the
tracing
principle
was
only
meant
to
apply
in
situations
where
the
second
investment
was
a
separate
income
earning
property
which
was
purchased
with
the
proceeds
of
the
sale
of
the
first
investment.
Counsel
for
the
plaintiff
submitted
that
unlike
the
Bronfman
Trust
scenario,
here
the
TWL
shares
were
not
a
second,
separate
investment
vehicle,
apart
from
their
ability
to
pass
onto
the
plaintiff
the
dividends
received
from
the
Realwest
shares.
It
was
argued
that
at
all
times
the
source
of
income,
which
was
acquired
by
the
plaintiff
using
the
$1,000,000
borrowed
funds,
remained
intact.
Accordingly,
the
section
85
rollover
did
not
change
the
real
source
of
the
plaintiff's
income,
rather
it
was
only
the
form
of
the
investment
which
was
altered.
Thus,
counsel
for
the
plaintiff
contended
that
there
is
no
need
to
point
out
the
existence
of
an
indirect
source
of
income
when,
from
an
economic
and
practical
point
of
view,
the
real
source
of
income,
being
the
Realwest
shares,
continued
to
exist.
Counsel
for
the
plaintiff
put
great
emphasis
on
the
need
for
the
Court
to
look
beyond
the
mere
form
of
the
investment
to
the
substance
and
economic
reality
of
the
situation.
In
Bronfman
Trust,
supra,
at
page
128
(D.T.C.
5067)
where
Dickson,
C.J.
stated
that
when
faced
with
an
attempt
to
counter
the
words
of
a
taxing
statute,
instead
of
extending
its
meaning
the
courts
should
look
at
the
economic
reality
of
what
was
done
by
the
taxpayer
to
determine
whether
or
not
it
has
met
the
object
and
the
spirit
of
the
legislation:
This
is,
I
believe,
a
laudable
trend
provided
it
is
consistent
with
the
text
and
purposes
of
the
taxation
statute.
Assessment
of
taxpayers’
transactions
with
an
eye
to
commercial
and
economic
realities,
rather
than
juristic
classification
of
form,
may
help
to
avoid
the
inequity
of
tax
liability
being
dependent
upon
the
taxpayer's
sophistication
at
manipulating
a
sequence
of
events
to
achieve
a
patina
of
compliance
with
the
apparent
prerequisites
for
a
tax
deduction.
The
plaintiff
attached
a
considerable
amount
of
importance
to
the
fact
that
irrespective
of
the
fact
that
after
July
25,
1985
he
did
not
retain
an
equitable
or
legal
title
to
the
Realwest
shares,
those
shares
and
his
remaining
$999,000
investment
remained
intact
as
an
economic
interest
because
the
dividends
he
received
were
dividends
that
flowed
from
Realwest
through
TWL,
which
would
not
have
been
possible
had
the
plaintiff
disposed
of
his
shares
to
a
third
party
and
then
used
the
proceeds
thereof
to
acquire
a
second
independent
investment
vehicle.
I
have
weighed
the
plaintiff's
submissions,
and
while
I
am
in
agreement
that
I
must
give
consideration
to
the
economic
and
commercial
reality
of
the
transfer
of
Realwest
shares
to
TWL,
in
my
mind,
the
plaintiff's
characterization
of
the
facts
is
fallacious.
The
transfer
of
the
Realwest
shares
to
TWL,
pursuant
to
the
section
85
rollover,
does
not,
in
my
view,
constitute
a
mere
change
in
the
form
of
the
investment
but
a
change
of
investment.
This
conclusion
is
clear
on
the
basis
that
the
plaintiff
was
allowed
to
claim
a
business
investment
loss
under
paragraphs
38(c)
and
39(1)(c)
upon
the
transfer
of
the
Realwest
shares
to
TWL.
According
to
the
language
of
paragraph
38(c)
a
taxpayer
will
be
allowed
to
claim
a
business
investment
loss
“from
the
disposition
of
that
property".
The
word
"disposition"
is
defined
in
Black's
Law
Dictionary
as
follows:
Disposition.
Act
of
disposing;
transferring
to
the
care
or
possession
of
another.
The
parting
with,
alienation
of,
or
giving
up
property.
This
definition
appears
to
suggest
that
where
a
person
is
said
to
have
"disposed"
of
property,
then
that
person
has
not
only
formulated
the
intention
to
give
up
the
property
but
that
he
has,
in
fact,
alienated
the
property
to
the
point
where
he
no
longer
retains
a
legal
interest
in
it.
Thus,
once
a
taxpayer
has
"disposed"
of
an
asset
and
claimed
a
business
investment
loss,
he
therefore
should
be
precluded
from
maintaining
the
position
that
this
original
investment
vehicle
did
not
disappear,
but
merely
changed
its
form.
Moreover,
by
virtue
of
paragraph
39(1)(c)
a
business
investment
loss
will
be
allowed
where
the
disposition
of
property
is
made
"to
a
person
with
whom
he
was
dealing
at
arm's
length”.
Turning
to
the
present
set
of
facts,
I
find
that
since
the
plaintiff
was
dealing
at
arm's
length
with
TWL
he
cannot
now
say
that
the
transfer
of
the
Realwest
shares
to
TWL,
in
exchange
for
1000
shares
of
TWL
constitutes
the
mere
insertion
of
a
holding
company
between
himself
and
Realwest.
Having
regard
to
the
economic
and
legal
reality
of
the
transaction
leads
me
to
the
conclusion
that
after
July
25,
1985
the
plaintiff's
only
source
of
income
which
remained
was
the
TWL
shares
acquired
at
a
cost
of
$1,000.
Although
the
plaintiff
was,
as
a
shareholder
of
TWL,
entitled
to
receive
dividends
from
TWL
whatever
the
source
of
such
amounts
to
be,
the
plaintiff
did
not
retain
control
over
the
flow
of
the
dividend
income
from
Realwest
through
TWL
to
himself.
As
such
the
plaintiff
could
not
be
said
to
have
any
legal
or
equitable
interest
in
the
Realwest
shares.
Counsel
for
the
plaintiff
is
asking
me
to
lift
the
corporate
veil
and
look
through
to
TWL's
assets
in
Realwest
as
being
a
direct
investment
of
the
plaintiff.
In
support
of
this
argument
I
have
been
referred
to
Kosmopoulos
v.
Constitution
Insurance
Co.,
[1987],
1
S.C.R.
2,
34
D.L.R.
(4th)
208
and
C./.R.
v.
Brierly,
[1990]
3
N.Z.L.R.
303
(C.A.).
In
Kosmopoulos,
supra,
the
Supreme
Court
of
Canada
went
beyond
the
strict
interpretation
of
a
transaction
and
applied
the
economic
reality
test
in
order
to
pierce
the
corporate
veil.
The
majority
of
the
Court,
per
Madame
Justice
Wilson
(as
she
then
was),
allowed
the
sole
shareholder
of
a
corporation
to
insure
the
assets
of
the
corporation
to
which
he
had
no
legal
or
equitable
title.
The
decision
centred
on
the
fact
that
the
shareholder
had
a
sufficient
interest,
in
the
assets,
on
the
basis
that
he
looked
to
those
assets
to
derive
a
benefit
(i.e.,
income
via
dividends).
In
my
opinion,
Kosmopoulos,
supra
is
inapplicable
to
the
case
at
bar
because
the
decision
in
Kosmopoulos
was
so
affected
by
its
facts.
There
the
Court
was
willing
to
lift
the
corporate
veil
and
find
that
Mr.
Kosmopoulos
had
a
clear
economic
interest
in
those
assets
largely
because
he
remained
the
sole
shareholder
of
the
corporation.
Similarly
in
Brierly,
supra,
the
Court
lifted
the
corporate
veil
on
the
basis
that
the
taxpayer
remained
a
shareholder
of
the
company
from
which
he
received
dividends.
These
cases
are
distinguishable
from
the
present
set
of
facts
since,
here,
the
plaintiff
is
no
longer
a
shareholder
of
Realwest
but
is
merely
one
of
many
shareholders
of
TWL.
The
principle
of
law,
enunciated
in
Bronfman
Trust,
supra,
as
it
relates
to
when
a
paragraph
20(1)(c)
interest
deduction
may
be
made
is
clear,
in
that
it
is
the
direct
and
actual
use
of
the
borrowed
money
that
is
important
and
not
an
indirect
use
from
which
a
benefit
might
be
derived.
Turning
to
the
present
facts
at
bar,
I
cannot
accept
the
plaintiff's
contention
that
the
original
$1,000,000
loan
continued
to
be
used
during
his
1985
and
1986
taxation
years
to
earn
income
from
property.
After
July
25,
1985,
the
only
source
from
which
the
plaintiff
continued
to
directly
earn
income,
which
related
to
the
borrowed
funds,
was
via
his
1,000
TWL
shares.
The
fact
that
the
plaintiff
indirectly
earned
income
from
Realwest
through
TWL
does
not
mean
that
the
Realwest
shares
survived
as
a
source
of
income
to
the
plaintiff.
It
became
a
source
of
income
for
TWL.
On
the
facts
as
outlined,
I
am
satisfied
that
it
cannot
be
said
that
the
full
$1,000,000
Royal
Bank
loan
continued
to
be
used
directly
and
actually
by
the
plaintiff
to
earn
income
from
the
Realwest
shares,
as
he,
as
of
July
25,
1985
no
longer
legally
or
equitably
owned
the
shares.
They,
the
shares,
were
owned
by
TWL.
I
do
not
believe
it
is
necessary
for
me
to
consider
a
schematic
interpretation
of
the
Act
or
to
examine
extrinsic
evidence
of
Parliamentary
intent
in
regards
to
subparagraph
20(1)(c)(i)
and
the
plaintiff's
ability
to
take
advantage
of
both
an
allowable
business
investment
loss
and
the
interest
deductibility
provision.
In
my
opinion
the
language
of
paragraph
20(1)(c)
is
not
ambiguous
when
read
in
conjunction
with
subsection
20(1).
It
is
clear
that
the
amount
borrowed
by
the
taxpayer
must
relate
to
a
source
from
which
the
taxpayer
has
a
reasonable
expectation
of
profit.
As
previously
stated
the
plaintiff
upon
effecting
the
section
85
rollover
disposed
of
his
Realwest
shares,
and
received
as
proceeds
from
the
disposition
1,000
shares
of
TWL
of
a
par
value
of
$1
each.
Therefore,
I
conclude
that
as
of
July
25,
1985
the
plaintiff
only
invested
$1,000
of
the
$1,000,000
original
investment
and
thus
the
TWL
shares
are
the
only
source
to
which
the
interest
expense
can
be
applied.
In
the
event
that
I
am
incorrect
in
concluding
that
the
language
of
the
interest
deductibility
provision
is
unambiguous,
the
recent
decision
of
the
Supreme
Court
of
Canada
in
Stubart
Investments
Ltd.
v.
The
Queen,
[1984]
1
S.C.R.
536,
[1984]
C.T.C.
294,
84
D.T.C.
6305
is
of
assistance
in
regards
to
the
appropriate
method
of
interpreting
taxing
statutes.
Mr.
Justice
Estey
said,
at
page
316
(D.T.C.
6323),
that
the
taxing
statute
should
be
interpreted
"with
the
words
used
therein
read
in
their
entire
context
and
in
harmony
with
the
scheme
of
the
Act,
the
object
of
the
Act,
and
the
intention
of
Parliament.”
His
reasoning
is
contained
at
page
315
(D.T.C.
6322)
where
he
states:
In
short,
the
tax
statute,
by
this
interpretative
technique,
is
extended
to
reach
the
conduct
of
the
taxpayer
which
clearly
falls
within
"the
object
and
spirit"
of
the
taxing
provisions
.
.
.
.
The
desired
objective
is
a
simple
rule
which
will
provide
uniformity
of
the
application
of
the
Act
across
the
community
and,
at
the
same
time,
reduce
the
attraction
of
elaborate
and
intricate
tax
avoidance
plans,
and
reduce
the
rewards
to
those
best
able
to
afford
the
service
of
the
tax
technicians.
Therefore,
since
the
plaintiff
has
claimed
the
allowable
business
investment
loss
he
is
deemed
to
have
disposed
of
the
Realwest
shares.
I
believe
it
would
be
contrary
to
Parliament's
intent
to
allow
a
taxpayer
to,
at
one
level,
defer
a
capital
gain
where
a
disposition
of
property
has
occurred,
and
at
another
level
to
allow
the
taxpayers
to
bring
themselves
within
the
interest
deductibility
provision
that
requires
that
the
source
of
the
income
continue
to
exist.
Conclusion
Relating
the
above
analysis
to
the
facts
of
the
present
case,
I
am
satisfied
that,
after
July
25,
1985
only
$1,000
of
the
$1,000,000
loan
continued
to
be
used
for
the
purpose
of
earning
income
from
property
within
the
meaning
of
subparagraph
20(1)(c)(i)
of
the
Act.
As
such,
it
is
consistent
with
paragraph
20(1)(c)
that
for
the
1985
and
1986
taxation
years
the
plaintiff
be
entitled
to
deduct
only
the
interest
paid
on
$1,000
of
the
$1,000,000
Royal
Bank
loan.
Therefore
plaintiff's
appeal
is
denied
and
the
Minister's
notices
of
reassessment
for
the
1985
and
1986
taxation
years
are
upheld.
Appeal
dismissed.
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