Mogan,
T.C.C.}.
(orally):—There
are
a
number
of
issues
in
this
appeal
and,
while
the
facts
are
fresh
in
my
mind,
I
propose
to
give
my
decision
this
afternoon
on
certain
issues
and
reserve
with
respect
to
certain
others.
The
appellant
is
a
licensed
airplane
pilot
and
since
1955
he
has
operated
a
successful
air
charter
at
Prince
Albert,
Saskatchewan.
He
also
carries
on
a
ranching
operation.
In
1977
the
appellant
made
his
first
trip
to
the
Bahamas,
partly
in
response
to
an
advertisement
showing
lots
for
sale
on
Whale
Cay,
an
island
approximately
30
miles
north
and
west
of
New
Providence.
He
spent
two
days
on
Whale
Cay
discovering
that
it
was
seven
miles
long;
contained
840
acres
with
a
small
landing
strip;
and
had
a
development
plan
for
152
one-acre
lots.
Beyond
the
plan,
there
was
potential
for
another
300
similar
lots,
still
leaving
an
adequate
reserve
area.
The
appellant
was
favourably
impressed
and
purchased
lots
10
and
11
in
Phase
I
at
prices
of
$18,000
and
$22,000
respectively
(both
amounts
in
American
funds).
He
became
acquainted
with
Messrs.
Penny
and
Sikorsky,
the
two
individuals
responsible
for
the
development
of
Whale
Cay,
and
after
a
number
of
meetings,
he
agreed
to
purchase
a
25
per
cent
interest
in
the
whole
of
Whale
Cay,
except
for
about
50
lots
in
what
was
called
Phase
I
which
were
subject
to
agreements
of
purchase
and
sale.
The
land
comprising
Whale
Cay
was
owned
by
Great
House
Developments
Ltd.
which
I
shall
refer
to
as
"GHD",
a
Bahamian
corporation.
All
of
the
20,000
issued
shares
of
GHD
were
owned
by
Ritz
International
Ltd.
which
I
shall
refer
to
as
“Ritz”,
another
Bahamian
corporation.
Messrs.
Penny
and
Sikorsky
owned
the
issued
shares
of
Ritz.
On
March
30,
1978,
the
appellant
entered
into
a
written
agreement
with
GHD
and
Ritz
under
which
(i)
the
appellant
purchased
for
$5,000
U.S.
from
Ritz
5,000
shares
of
GHD
representing
25
per
cent
of
the
issued
shares
of
GHD;
(ii)
the
appellant
loaned
$295,000
U.S.
to
GHD
without
interest;
and
(ii)
the
loan
was
to
be
repaid
at
the
same
time
as
loans
from
other
shareholders
on
a
pro
rata
basis
out
of
funds
raised
from
the
sale
of
lots.
The
appellant
was
able
to
perform
the
above
transaction
by
raising
his
own
capital
from
his
own
resources
in
Prince
Albert.
Prior
to
1975,
Whale
Cay
had
been
owned
for
approximately
40
years
by
a
woman
named
Marian
Carstairs.
On
May
1,
1975,
Miss
Carstairs
sold
Whale
Cay
to
GHD
for
$950,000
U.S.
and
she
took
back
a
vendor's
mortgage
for
$800,000
U.S.
at
ten
per
cent
per
annum,
with
the
principal
to
be
repaid
in
six
annual
instalments
of
$100,000
each
from
June
1976
to
June
1981,
plus
a
$200,000
final
payment
in
June
of
1982.
Some
time
after
the
appellant
had
purchased
his
25
per
cent
interest
in
GHD,
he
learned
that
the
mortgage
to
Carstairs
was
seriously
in
arrears
and
that
Carstairs
was
taking
some
steps
to
collect.
Apparently,
under
the
laws
of
the
Bahamas,
the
only
remedy
available
to
a
mortgagee
is
to
force
the
sale
of
property.
While
there
was
no
expert
evidence
before
me
concerning
the
laws
of
the
Bahamas,
it
appears
that
the
right
of
foreclosure
which
is
known
in
many
provinces
of
Canada
is
not
available
in
the
Bahamas.
In
any
event,
the
appellant
became
concerned
because
the
Carstairs
mortgage
was
so
much
in
arrears
and,
after
he
had
made
the
loan
to
GHD,
there
were
few
lots
sold.
It
appeared
to
him
that
the
amounts
owing
on
the
Carstairs
mortgage
might
be
equal
to
the
value
of
Whale
Cay,
the
island
itself.
If
that
were
the
case
and
GHD
had
no
assets
other
than
the
island,
there
would
be
nothing
from
which
the
appellant
could
recover
his
$295,000
loan.
He
therefore
commenced
negotiations
with
Carstairs
to
purchase
her
mortgage.
It
is
not
clear
whether
he
conducted
those
negotiations
himself
or
through
his
lawyer
in
Nassau,
Mr.
Christie,
but
there
were
genuine
arm's
length
negotiations
between
the
appellant
and
Carstairs
as
to
the
price
she
would
accept
to
transfer
her
mortgage
to
the
appellant.
In
the
fall
of
1979,
the
appellant
borrowed
approximately
$750,000
(Canadian
funds)
from
the
Bank
of
Montreal
in
Prince
Albert,
and
caused
that
money
to
be
sent
to
the
Bahamas
pending
completion
of
what
he
hoped
would
be
a
transaction
with
Carstairs.
In
April,
1980,
an
agreement
was
stuck
under
which
the
appellant
paid
$500,000
for
what
I
would
call
an
assignment
of
the
Carstairs
mortgage.
It
was
not
a
direct
assignment
because
the
documents
entered
in
evidence
(and
there
were
a
great
number
of
them)
indicate
that
there
was
a
transfer
of
the
mortgage
and
a
trust
agreement
under
which
Carstairs
agreed
to
continue
holding
the
mortgage
in
trust
for
the
appellant;
and
she
gave
a
power-of-attorney
to
someone
designated
by
the
appellant
to
receive
payments
on
the
mortgage
and
transmit
them
to
the
appellant.
There
was
no
real
explanation
for
the
trust
arrangement
concerning
the
mortgage
except
for
a
brief
reference
to
a
stamp
tax
that
was
payable
in
the
Bahamas.
It
may
have
been
that
the
appellant
or
Carstairs
avoided.
payment
of
the
stamp
tax
by
not
registering
the
transfer
of
the
mortgage.
It
is
not
material
but
that
is
the
inference
I
drew.
Soon
after
the
appellant's
acquisition
of
the
Carstairs
mortgage,
he
approached
Messrs.
Penny
and
Sikorsky
informing
them
that
he
was
now
the
owner
of
the
mortgage.
Apparently,
they
were
not
aware
of
the
fact
that
he
was
negotiating
with
Carstairs
for
the
purchase
of
the
mortgage,
and
this
came
as
a
surprise
to
them.
The
appellant
indicated
in
his
evidence
that
as
a
result
of
his
purchase
of
the
mortgage,
relations
between
the
appellant
and
Penny
and
Sikorsky
were
less
cordial
than
they
had
been
before.
That
may
be
an
understatement.
The
appellant,
however,
negotiated
with
Penny
and
Sikorsky
for
an
amendment
to
the
mortgage
because
it
was
so
seriously
in
arrears.
If
the
mortgage
had
continued,
it
might
have
been
hopeless
for
GHD
to
repay
the
principal
and
interest.
An
agreement
was
made
between
the
appellant,
as
the
new
owner
of
the
mortgage,
and
GHD
under
which
the
terms
of
the
mortgage
were
amended
as
follows.
The
mortgage
as
originally
structured
in
1975
carried
a
flat
rate
of
ten
per
cent
per
annum
on
the
unpaid
principal.
The
appellant
had
borrowed
money
from
the
Bank
of
Montreal
in
Prince
Albert
at
Bank
prime
plus
one
and
one-half
per
cent
in
order
to
purchase
the
mortgage.
It
was
agreed
that
the
mortgage
would
thereafter
bear
interest
at
Bank
of
Montreal
prime
plus
three
per
cent
per
annum.
There
was
a
second
amendment
concerning
repayment
of
the
principal
outstanding
on
the
mortgage.
At
the
time
of
the
appellants
purchase
of
the
mortgage
from
Carstairs,
the
amount
in
arrears
(principal
plus
interest)
was
approximately
$824,000
U.S.
According
to
a
document
entered
in
evidence,
it
was
held
out
to
Messrs.
Penny
ana
Sikorsky
that
the
assignment
of
the
mortgage
had
cost
the
appellant
$650,000
U.S.
when
in
fact
the
cost
was
only
$500,000.
I
am
not
sure
whether
that
statement
is
material
in
the
proceedings
before
this
Court
but
it
is
a
recital
which
stands
out
in
the
document.
It
is
material
in
the
second
amendment,
however,
because
the
agreement
provided
that
if
GHD
paid
an
aggregate
principal
amount
of
$650,000
U.S.
in
the
new
repayment
schedule
plus
interest
on
the
due
dates
for
the
payments
of
principal,
or
within
a
90-day
grace
period
following
such
due
dates,
then
upon
the
payment
of
the
$650,000
principal
plus
interest,
the
mortgage
would
be
discharged,
notwithstanding
the
fact
that
prior
to
the
mortgage
amendment
there
had
been
approximately
$824,000
U.S.
owing
on
the
mortgage.
Soon
after
the
mortgage
amendment
agreement
was
executed,
the
mortgage
fell
into
arrears
again.
GHD
was
unable
to
make
any
payment
of
principal
or
interest.
In
early
1981,
the
appellant
used
the
power
of
sale
provisions
in
the
mortgage
to
cause
the
whole
of
Whale
Cay,
the
island,
to
be
put
up
for
sale
at
auction.
There
was
an
auction
advertised.
A
lawyer
acting
on
behalf
of
an
undisclosed
purchaser
put
in
a
bid
of
$975,000
U.S.
for
all
of
the
island.
The
bid
was
accepted
apparently
in
the
morning
of
a
particular
day
and
the
lawyer
was
to
turn
up
at
a
specific
hour
that
afternoon
with
the
funds.
Prior
to
this
time
or
simultaneous
with
the
announcement
of
the
auction,
an
action
had
been
commenced
by
GHD
and
Ritz
and
Penny
and
Sikorsky
against
the
appellant
(and
perhaps
one
other
person)
to
prevent
the
sale
of
the
property.
The
plaintiffs
in
that
action
obtained
an
interim
injunction
for
ten
days
to
restrain
the
sale
of
the
property.
The
injunction
notice
was
served
on
the
auction
day.
It
had
the
effect
of
blocking
the
auction.
When
the
ten
days
expired,
the
plaintiffs
did
not
attempt
to
have
the
injunction
extended
but,
by
that
time,
the
solicitor
who
had
been
the
successful
bidder
at
the
auction
never
did
show
up
with
the
money.
And
so
the
auction
sale
was
voided.
According
to
the
statement
of
claim
which
was
filed
as
an
exhibit,
there
was
an
ongoing
action
by
GHD,
Ritz,
Penny
and
Sikorsky
against
the
appellant
for
certain
relief
including
a
permanent
injunction.
I
assume
that
action
put
a
cloud
over
the
title
of
Whale
Cay
or
the
lots
on
Whale
Cay
and
would
therefore
make
the
island
difficult
to
sell.
The
appellant
testified
that
he
then
had
further
negotiations
with
his
fellow
shareholders,
Penny
and
Sikorsky,
and
those
negotiations
resulted
in
the
payment
of
$150,000
U.S.
In
consideration
of
that
payment,
the
legal
action
was
discontinued
and
the
appellant
was
given
outright
releases
by
the
four
plaintiffs,
GHD,
Ritz,
Penny
and
Sikorsky.
It
appears
that
this
transaction,
the
payment
of
the
$150,000
and
the
releases,
had
the
effect
of
clearing
title
to
the
island
and
making
it
saleable.
The
appellant
caused
a
company
to
be
incorporated
in
Canada
known
as
109416
Canada
Inc.
The
Carstairs
mortgage
which
he
now
owned
was
even
more
in
arrears
because
no
payments
had
been
made.
Therefore,
in
January,
1982,
the
appellant
used
the
power
of
sale
provisions
in
the
mortgage
to
force
the
sale
of
Whale
Cay
from
GHD
to
109416
at
a
price
of
$975,000.
The
appellant
used
that
price
because
he
concluded
that
it
was
the
fair
market
value
of
the
island
as
determined
by
what
was
apparently
a
bona
fide
bid
at
the
auction
sale
in
the
preceding
year,
even
though
that
auction
had
been
stopped
by
the
injunction.
Most
of
these
amounts
have
been
expressed
in
U.S.
dollars
because
apparently
the
Bahamian
currency
is
pegged
to
the
U.S.
dollar.
Forcing
the
sale
of
the
island
from
GHD
to
the
numbered
company
had
the
effect
of
extinguishing,
in
law,
the
Carstairs
mortgage
which
was
held
by
the
appellant.
Therefore,
he
was
regarded
for
income
tax
purposes
as
having
disposed
of
the
mortgage
for
proceeds
equal
to
$975,000
U.S.
which,
converted
into
Canadian
currency
at
the
prevailing
foreign
exchange
rates
in
January
1982,
was
an
amount
in
the
range
of
$1,100,000
Canadian
dollars.
On
that
transaction,
the
appellant
reported
a
capital
gain
which
he
computed
by
taking
the
proceeds
of
disposition
(approximately
$1,100,000
Canadian
dollars)
and
subtracting
therefrom
certain
amounts
including
the
$500,000
U.S.
he
paid
to
Carstairs
plus
the
$150,000
U.S.
he
paid
to
the
other
shareholders
of
GHD
to
settle
that
legal
action
in
the
Bahamian
courts
and
to
obtain
the
releases.
The
respondent
reviewed
the
appellants
return
for
1982
showing
this
capital
gain
and
he
appears
to
have
taken
a
broad
overview
of
what
had
been
going
on
between
the
appellant
and
this
enterprise
in
the
Bahamas.
In
1984,
the
respondent
issued
notices
of
reassessment
with
respect
to
the
appellant's
taxation
years
1980,
1981,
1982,
and
1983.
Notices
of
objection
were
filed
by
the
appellant
and,
in
1987,
the
Minister
responded
to
the
objections
by
issuing
fresh
notices
of
reassessment.
It
is
those
four
taxation
years
(1980,
1981,
1982
and
1983)
which
are
before
the
Court
today
in
what
I
call
the
first
appeal.
There
is
a
second
appeal
concerning
the
taxation
years
1984
and
1985,
and
a
third
appeal
concerning
the
taxation
years
1986
and
1987.
Counsel
are
in
agreement
that
the
results
of
the
appeals
for
1984,
1985,
1986
and
1987
will
follow
from
my
determination
of
the
issues
in
the
appeals
for
1980
to
1983
inclusive.
I
think
there
are
only
four
issues
in
the
appeals
for
1980
to
1983.
If
there
are
others
issues
in
the
pleadings
that
I
do
not
identify
now,
I
will
deal
with
them
later.
Firstly,
there
is
an
issue
concerning
the
deductibility
of
the
interest
paid
by
the
appellant
to
the
Bank
of
Montreal
over
many
years
on
the
large
loan
(approximately
$750,000
in
Canadian
funds)
which
he
obtained
in
the
fall
of
1979
to
acquire
the
Carstairs
mortgage.
There
is
a
second
issue
as
to
whether
the
appellant
can
deduct
a
capital
loss
with
respect
to
the
$295,000
U.S.
which
he
loaned
to
GHD.
There
is
a
third
issue
concerning
whether
the
amount
of
$150,000
U.S.
paid
to
the
other
shareholders
of
GHD
to
obtain
the
releases
is
part
of
the
cost
of
the
Carstairs
mortgage
for
purposes
of
computing
any
resulting
gain
or
loss.
And
fourthly,
there
is
an
issue
as
to
whether
what
the
appellant
claims
to
be
a
capital
gain
is
really
a
transaction
on
income
account
being
a
venture
in
the
nature
of
trade.
I
propose
to
reserve
judgment
on
the
first
issue
concerning
the
deductibility
of
interest
because
I
would
like
to
consider
the
many
authorities
cited
to
me
by
counsel.
I
will
also
reserve
judgment
on
the
second
issue
concerning
whether
the
appellant
can
deduct
a
capital
loss
with
respect
to
the
amount
of
$295,000
U.S.
which
he
loaned
to
GHD.
I
will
this
afternoon
decide
the
third
and
fourth
issues
because
they
depend
almost
entirely
upon
the
facts,
and
the
facts
will
never
be
clearer
in
my
mind
than
they
are
now.
The
third
issue
is
whether
the
amount
of
$150,000
U.S.
paid
to
the
other
shareholders
of
GHD
is
part
of
the
cost
of
the
Carstairs
mortgage.
I
go
back
to
the
position
of
the
appellant
in
the
fall
of
1979
and
the
spring
of
1980
when
he
was
negotiating
with
Carstairs
for
the
purchase
of
the
mortgage.
The
price
was
settled
and
paid
at
$500,000
U.S.
Immediately
thereafter,
the
appellant
negotiated
an
amendment
to
the
mortgage
with
GHD
providing
for
a
higher
rate
of
interest
as
described
above.
At
that
time,
the
appellant
thought
that
he
would
make
a
satisfactory
commercial
deal
if
he
could
recover
the
amended
principal
amount
of
$650,000
on
the
mortgage
plus
the
amended
rate
of
interest
with
its
cushion
to
cover
the
interest
on
his
loan
from
the
Bank
of
Montreal.
When
he
tried
to
use
the
power
of
sale
in
his
mortgage
to
force
the
sale
of
the
land
by
GHD,
he
was
blocked
by
his
fellow
shareholders,
Penny
and
Sikorsky,
because
they
and
the
two
corporations
they
controlled,
Ritz
and
GHD,
had
commenced
this
action
in
the
Bahamian
Court.
The
appellant
was
obviously
anxious
to
realize
on
the
mortgage
because
he
arranged
for
the
action
and
proceeded
to
an
actual
auction
with
what
appears
to
have
been
a
bona
fide
buyer
who
bid
$975,000
U.S.
When
that
auction
was
blocked,
he
was
stopped
from
realizing
on
his
mortgage
and,
as
I
interpret
the
evidence,
he
was
forced
to
go
back
to
Penny
and
Sikorsky
and,
in
business
language,
he
had
to
buy
them
off.
I
do
not
know
the
relative
merits
of
the
legal
proceedings
that
were
commenced
in
the
Bahamas
against
the
appellant
by
the
two
corporations
and
Penny
and
Sikorsky.
I
can
only
speculate
what
the
result
might
have
been
if
the
matter
had
gone
to
trial
but
not
every
person
can
afford
to
wait
for
a
final
decision
in
a
court
proceeding.
At
that
time,
particularly
in
the
latter
part
of
1981,
the
prime
interest
rate
in
Canada
reached
a
level
of
approximately
18
per
cent.
I
take
judicial
notice
of
those
interest
rates
because
they
were
well
known
at
the
time.
One
can
imagine
the
amount
of
interest
that
the
appellant
was
paying
to
the
Bank
of
Montreal
at
prime
plus
one
and
one-half
per
cent.
There
must
have
been
great
pressure
on
the
appellant
who
had
borrowed
three-quarters
of
a
million
dollars,
and
I
assume
he
was
anxious
to
have
the
loan
paid
off.
I
accept
the
appellant's
evidence
that
the
$150,000
U.S.
was
closely
related
to
his
acquisition
of
the
Carstairs
mortgage
and
was
tied
in
with
his
very
keen
desire
to
dispose
of
the
enterprise.
I
cannot
reach
any
conclusion
but
that
the
$150,000
U.S.
was
an
integral
part
of
acquiring
the
mortgage
and
being
able
to
use
it
to
force
a
sale.
Without
paying
off
those
plaintiffs
(the
other
shareholders
of
GHD),
there
was
going
to
be
an
indefinite
period
when
the
appellant,
as
holder
of
the
mortgage,
would
be
unable
to
use
the
remedies
that
otherwise
should
have
been
available
to
him
under
the
mortgage.
On
this
third
issue,
I
find
that
the
$150,000
U.S.
is
an
integral
part
of
the
cost
of
the
Carstairs
mortgage
and
must
be
included
when
determining
the
profit
or
gain
realized
by
the
appellant
upon
the
disposition
of
the
mortgage,
whether
that
profit
or
gain
is
on
income
or
capital
account.
That
brings
me
to
the
fourth
issue:
whether
the
disposition
of
the
mortgage
resulted
in
a
gain
that
was
income
or
capital.
In
determining
the
question
of
whether
the
acquisition
and
disposition
of
the
mortgage
was
a
trading
venture
or
an
investment
on
capital
account,
I
cannot
separate
that
transaction
from
the
preceding
transaction
in
which
the
appellant
invested
$300,000
in
GHD.
I
use
the
word
"invested"
advisedly
because
that
is
what
I
think
it
was.
He
went
to
the
Bahamas
in
1977
and
1978
in
response
to
an
advertisement
for
lots.
He
flew
his
own
plane
which
is
apparently
small
enough
to
land
on
the
airstrip
on
Whale
Cay.
His
first
purpose
was
to
buy
a
lot
or
two
for
himself.
That
purpose
was
fulfilled
when
he
bought
lots
10
and
11.
He
learned
that
Mr.
Penny
had
been
in
the
RCAF
in
World
War
II,
as
had
the
appellant.
He
said
that
there
was
some
kind
of
friendship
struck
up
on
the
basis
that
they
had
their
RCAF
experience
in
common.
He
was
attracted
by
the
overall
picture
and
so
offered
to
become
an
equity
owner
or
participating
partner
in
the
development
of
the
island.
As
stated
above,
Whale
Cay
is
only
30
miles
from
New
Providence,
the
main
island
in
the
Bahamas,
and
Nassau
is
on
New
Providence.
In
looking
at
the
appellant's
frame
of
mind
at
that
time,
he
bought
two
lots
to
construct
a
winter
home
for
himself.
He
said
that
between
50
and
60
other
lots
had
already
been
sold,
although
only
two
or
three
houses
had
been
constructed.
It
was
a
relatively
new
development
because,
when
GHD
acquired
the
island
from
Carstairs
in
1975,
it
had
been
her
private
domain.
She
was
not
a
developer;
there
was
no
survey;
and
no
plan
for
development.
In
the
period
following
the
purchase
from
Carstairs
and
before
the
appellant
arrived
on
the
scene,
GHD
had
been
active
in
having
the
island
surveyed,
in
preparing
a
plan
of
subdivision
for
Phase
I
containing
152
lots,
and
in
constructing
roads
and
a
small
airstrip.
Apparently,
the
appellant
arrived
just
about
the
time,
two
years
after
1975,
when
Whale
Cay
was
in
the
first
blush
of
development.
He
had
read
an
ad
in
the
magazine
published
by
the
Canadian
Owners
and
Pilots
Association
advertising
these
lots.
I
assume
that
when
he
bought
his
two
lots
and
acquired
a
25
per
cent
interest
in
the
development,
the
enterprise
had
promise;
and
one-third
of
the
152
lots
had
been
sold,
or
agreements
for
purchase
and
sale
had
been
signed.
The
appellant
saw
Whale
Cay
as
a
business
opportunity—and
I
think
that
the
initial
$300,000
that
he
laid
out
was
clearly
an
investment
on
his
part.
He
was
not
a
land
developer.
He
was
buying
a
25
per
cent
interest
in
a
corporation
engaged
in
land
development.
If
the
appellant
had
a
prior
history
of
being
a
land
developer,
or
if
he
were
a
licensed
real
estate
broker
here
in
Canada,
I
might
take
a
different
view
of
this
issue
as
to
whether
he
was
trading
or
investing,
but
it
seems
to
me
that
he
was
a
stable
person
who
had
stuck
to
one
business
which
was
a
charter
aircraft
business
in
Saskatchewan.
Apparently
he
was
very
successful
because
his
business
grew
from
one
plane
to
28
airplanes
and
nine
helicopters
over
a
30-
year
period.
He
could
afford
to
own
and
operate
and
incorporate
a
ranch
which
was
either
ranching
or
farming,
and
those
were
his
only
businesses.
He
could
afford
to
own
his
own
plane
and
fly
it
to
the
Bahamas
where
he
saw
a
business
opportunity
there.
I
have
no
hesitation
in
concluding
that
the
appellant
was
only
an
investor
in
1978
and
that
the
land
developer
was
GHD.
It
may
be
that
Mr.
Penny
was
also
a
land
developer
because
there
is
some
evidence
that
he
and
Sikorsky
lived
in
Toronto
and
that
Penny
was
a
licensed
real
estate
agent
in
Toronto.
I
have
reviewed
that
background
concerning
why
the
appellant
invested
the
first
$300,000
in
1978
because
it
leads
to
the
second
question
of
why
he
purchased
the
Carstairs
mortgage
for
$500,000
two
years
later.
Was
he
trying
to
take
the
island
from
under
the
feet
of
Penny
and
Sikorsky
to
become
the
developer
himself,
or
was
he
only
trying
to
protect
his
initial
investment
of
$300,000?
That
is
the
crucial
question,
in
my
mind,
on
this
fourth
issue.
Higher
courts
have
stated
in
many
cases
that
the
critical
question
in
deciding
an
issue
like
this
is
the
intention
of
the
taxpayer
at
the
time
he
enters
into
the
transaction.
See
Racine
v.
M.N.R.,
C.T.C.
150,
65
D.T.C.
5098,
at
page
159
(D.T.C.
5103)
and
Salaberry
Realties
Ltd.
v.
The
Queen,
[1976]
C.T.C.
656,
76
D.T.C.
6408,
at
page
660
(D.T.C.
6412).
Therefore,
I
have
to
determine
the
intention
of
the
appellant
in
the
spring
of
1980
when
he
acquired
the
mortgage
from
Carstairs.
If
he
was
trying
to
do
a
quick
transaction
in
the
mortgage
or
a
quick
transaction
in
the
land,
then
it
would
be
a
trading
transaction
on
his
part
and
the
gain
he
made
would
be
income
and
not
capital.
If,
on
the
other
hand,
he
was
only
an
investor
trying
to
protect
what
I
have
already
characterized
as
an
initial
investment
position
of
$300,000,
then
he
did
not
have
a
trading
intent
at
the
time
he
purchased
the
Carstairs
mortgage.
These
issues
are
often
difficult
because
much
of
the
evidence
given
by
the
taxpayer
is
self-serving.
I
have
concluded,
however,
that
the
appellant's
acquisition
of
the
Carstairs
mortgage
was
intended
only
as
a
back-up
investment
to
protect
his
initial
$300,000,
and
was
not
part
of
any
desire
on
his
part
to
become
a
speculator
with
the
mortgage
or
the
sole
developer
of
the
island.
I
reach
that
conclusion
for
many
reasons.
There
is
the
amendment
to
the
mortgage
which
was
effected
almost
immediately
after
the
appellant
acquired
it.
That
amendment
had
the
effect
of
giving
GHD
some
breathing
time.
It
took
away
all
of
the
amounts
which
were
then
in
arrears,
and
it
also
gave
GHD
an
opportunity
to
redeem
the
mortgage
at
a
lesser
amount.
Counsel
for
the
respondent
has
argued
in
support
of
the
trading
position
that
it
also
gave
the
appellant
time.
Mr.
Penny
was
the
principal
promoter
behind
this
development
and
the
appellant
would
have
needed
someone
to
replace
Penny
if
he
was
going
to
take
over
the
island.
The
appellant
ended
up
controlling
the
island,
and
this
may
have
been
just
the
first
step
in
a
thought
process
that
he
developed
between
1978
and
1980
with
the
kind
of
insider
information
that
was
available
to
him
through
his
being
a
25
per
cent
owner
in
GHD.
That
is
not
an
unreasonable
inference
to
draw
on
the
respondent's
part,
looking
at
the
transaction,
but
I
am
more
inclined
to
accept
not
just
the
oral
evidence
of
the
appellant,
but
the
subsequent
events
which
run
against
the
conclusion
drawn
by
the
respondent.
Those
events
are
summarized
below.
Having
bought
the
Carstairs
mortgage
for
$500,000,
he
need
not
have
entered
into
the
amending
agreement
with
GHD.
He
could
have
simply
become
a
persistent,
consistent,
harassing
mortgagee,
driving
GHD
either
into
bankruptcy
or
a
forced
sale.
I
give
the
appellant
the
benefit
of
the
doubt
on
the
amendment
to
the
mortgage
and
conclude
that
he
really
wanted
the
development
to
go
ahead
and
that
Mr.
Penny
was
in
a
better
position
to
make
it
happen
than
the
appellant.
The
appellant
still
owned
his
two
lots;
there
had
been
50
lots
sold;
and
it
was
going
to
be
better
for
everybody
if
the
development
kept
moving
ahead
and
if
people
started
to
build
houses
and
establish
a
residential
community.
There
is
no
question
that
Mr.
Penny
was
in
a
better
position
to
advance
the
development
than
the
appellant.
The
inference
that
I
draw
from
the
amendment
to
the
mortgage
is
more
favourable
to
the
appellant
than
the
respondent.
There
is
the
attempted
auction
the
following
year.
Mr.
Penny
had
contracted
cancer
of
the
throat.
I
assume
he
was
terminally
ill
because
the
evidence
was
that
he
ultimately
died
from
the
cancer.
By
the
fall
of
1981,
interest
rates
had
reached
those
very
high
levels
in
the
North
American
economy
that
I
referred
to
earlier
and
those
rates
would
have
inhibited
most
persons
from
investing
money
in
winter
homes
in
the
Bahamas.
Therefore,
I
assume
that
the
market
for
buyers
of
lots
on
Whale
Cay
was
drying
up
fast.
The
appellant's
first
move
was
not
to
seize
the
island.
His
first
move
could
have
been
to
incorporate
a
Canadian
company
and
buy
the
island
from
GHD
in
a
forced
sale,
which
is
what
ultimately
happened,
but
he
took
other
moves
first.
In
the
statement
of
claim,
there
is
an
allegation
that
he
had
tried
to
sell
it,
and
there
was
the
actual
auction
sale.
Basically,
he
was
trying
to
push
the
island
out
the
door
and
get
rid
of
it
in
the
hope
of
recovering
his
initial
investment
of
$300,000
plus
the
cost
of
the
Carstairs
mortgage.
It
appears
that
the
value
of
the
land
had
either
shrunk
or
not
grown,
and
that
the
value
of
the
land
was
very
close
to
the
cost
of
the
Carstairs
mortgage
plus
accrued
interest.
The
appellant's
initial
$300,000
may
have
been
lost
by
1980/81
but
he
could
not
have
known
that
when
he
bought
the
mortgage.
And
lastly,
having
been
unable
to
auction
the
island,
his
other
acts
appear
to
be
more
acts
of
desperation
than
a
long,
careful
plan
to
achieve
total
control
of
an
undeveloped
island.
He
put
in
the
first
$300,000
and
watched
in
dismay
while
he
became
an
unsecured
creditor
for
$300,000
with
probably
no
equity
behind
it.
Sikorsky
and
Penny
apparently
had
no
more
capital
to
put
in.
Therefore,
he
did
what
I
think
a
prudent
person
would
have
done.
He
took
away
the
threat
of
foreclosure
and
power
of
sale
by
purchasing
the
mortgage.
His
acquisition
of
the
mortgage
gave
the
enterprise
new
life.
When
develop-
ment
did
not
proceed
and
interest
rates
went
into
orbit,
he
tried
to
force
a
sale
but
was
thwarted
by
legal
action.
He
bought
off
the
plaintiffs
and,
at
that
point
in
time,
he
took
what
appeared
to
be
the
fair
market
value
(being
the
highest
bid
at
the
prior
auction)
and
used
that
amount
to
transfer
the
whole
island
from
GHD
to
his
own
numbered
company
in
Canada.
The
appellant
tried
a
number
of
times
to
sell
the
island
out
of
his
numbered
company
at
prices
in
the
range
of
$975,000
but
no
sales
were
achieved
because
there
was
a
law
passed
in
the
Bahamas
which
placed
restrictions
on
foreigners
or
non-residents
of
the
Bahamas
acquiring
land
there.
The
appellant
was
fortunate
that
he
had
the
capital
resources
to
be
able
to
go
to
a
bank
and
take
these
steps
to
try
and
protect
his
initial
$300,000.
I
do
not
interpret
his
subsequent
conduct
to
be
that
of
a
trader
or
developer
but
more
of
an
investor
with
resources
desperate
to
get
out
of
the
enterprise
he
got
himself
into.
Considering
that
he
has
had
to
own
the
island
right
through
until
the
hearing
of
this
appeal
and
receive
nothing
from
it
except
for
a
$500,000
deposit
(apparently
forfeited
in
a
1989
transaction
which
the
purchasers
could
not
complete),
he
has
had
to
carry
most
of
his
bank
loan
from
1979
to
1989,
when
he
used
the
$500,000
deposit
to
pay
off
the
balance
of
the
loan.
In
my
view,
he
has
just
been
trying
to
get
out
of
what
turned
out
to
be
an
unwise
investment
although
it
looked
promising
in
1977/78.
While
the
bloom
may
have
been
off
the
rose
in
the
winter
of
1979
and
spring
of
1980
when
he
bought
the
mortgage,
I
conclude
that
that
transaction
had
the
same
capital
character
as
the
initial
$300,000
transaction.
He
made
a
business
decision
to
take
over
that
mortgage
as
a
means
of
salvaging
at
least
a
portion
of
his
initial
$300,000
investment,
rather
than
simply
watching
the
initial
$300,000
disappear.
For
the
above
reasons,
I
conclude
that
the
appellant
was
an
investor
and
not
a
trader
when
he
acquired
the
Carstairs
mortgage.
I
shall
reserve
on
the
first
and
second
issues
concerning
the
deductibility
of
interest
paid
to
the
bank
in
Canada
and
whether
any
portion
of
the
initial
$295,000
amount
can
be
deducted
as
a
capital
loss.
Written
reasons
continued
at
Ottawa,
Ontario
I
reserved
judgment
on
the
second
issue
concerning
whether
the
appellant
could
deduct
an
allowable
capital
loss
with
respect
to
the
$295,000
(U.S.)
which
was
loaned
to
GHD.
When
deciding
the
fourth
issue,
I
characterized
the
original
$300,000
(U.S.)
as
an
"investment"
and
went
on
to
conclude
that
the
appellant
had
realized
a
capital
gain
on
the
disposition
of
the
Carstairs
mortgage.
By
similar
reasoning,
I
conclude
that
the
appellant
suffered
a
capital
loss
of
$300,000
(U.S.)
in
1982
when
Whale
Cay
(the
island)
was
sold
to
109416
Canada
Inc.
The
loss
was
not
actually
realized
until
the
date
of
that
sale
because
only
then
did
the
shareholders
of
GHD
know
with
certainty
that
there
were
no
“excess
proceeds"
from
the
forced
sale
which
would
have
been
payable
to
GHD
by
the
appellant
(as
the
assignee
of
the
Carstairs
mortgage)
and
would
have
been
available
to
pay
back
shareholder
loans
and
return
paid-
up
capital.
Without
such
"excess
proceeds"
the
shareholders
of
GHD
did
not
recover
any
of
the
money
they
had
invested
by
way
of
shareholder
loans
or
paid-up
capital.
Although
the
original
$300,000
(U.S.)
was
clearly
a
capital
outlay,
the
respondent
argues
that
the
capital
loss
of
$295,000
(U.S.)
resulting
from
the
appellants
loan
to
GHD
is
deemed
to
be
nil
under
subparagraph
40(2)(g)(ii)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act")
because
the
loan
was
not
made
for
the
purpose
of
gaining
or
producing
income
from
a
business
or
property.
The
Act
provides
as
follows:
40
(2)(g)
a
taxpayer's
loss,
if
any,
from
the
disposition
of
a
property,
to
the
extent
that
it
is
(i)
.
.
.
(ii)
a
loss
from
the
disposition
of
a
debt
or
other
right
to
receive
an
amount
unless
the
debt
or
right,
as
the
case
may
be,
was
acquired
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income
from
a
business
or
property
(other
than
exempt
income)
or
as
consideration
for
the
disposition
of
capital
property
to
a
person
with
whom
the
taxpayer
was
dealing
at
arm's
length,
(iii)
.
.
.
or
(iv)
.
.
.
is
nil;
According
to
the
evidence,
the
$295,000
loan
to
GHD
was
without
interest.
Therefore,
at
first
blush,
it
may
be
said
that
the
"debt
or
other
right
to
receive
an
amount”
from
GHD
was
not
acquired
for
the
purpose
of
gaining
or
producing
income
within
the
meaning
of
subparagraph
40(2)(g)
(ii).
That
first
blush
position
is
not
necessarily
conclusive,
however,
because
the
appellant
made
the
loan
in
question
to
a
corporation
in
which
he
was
a
25
per
cent
shareholder
and
as
a
condition
for
acquiring
his
shares.
A
shareholder
may
provide
capital
to
his
corporation
using
different
methods
which
include
(i)
the
subscription
for
additional
shares
to
increase
paid-up
capital;
(ii)
making
an
unsecured
loan
to
the
corporation
with
or
without
interest;
and
(iii)
making
a
contribution
to
surplus.
Each
method
increases
the
financial
strength
of
the
corporation
and
thereby
increases
its
opportunity
to
earn
profits.
Also,
each
method
places
the
shareholder
at
a
financial
risk
behind
arm's
length
creditors
of
the
corporation.
Normally,
a
shareholder
is
willing
to
incur
the
risk
in
order
to
increase
the
opportunity
for
profit.
In
those
circumstances,
the
"debt
or
other
right
to
receive
an
amount"
from
the
corporation
may
have
been
acquired
by
the
shareholder
for
the
purpose
of
gaining
or
producing
income
from
business
or
property.
I
am
supported
in
this
conclusion
by
the
following
statements
of
Rip,
J.
in
Business
Art
Inc.
v.
M.N.R.,
[1987]
1
C.T.C.
2001,
86
D.T.C.
1842,
at
page
2008-9
(D.T.C.
1848):
The
fact
that
there
may
have
been
no
interest
attached
to
the
debts
in
question
is
not
relevant
in
deciding
whether
they
were
acquired
for
the
purpose
of
gaining
or
producing
income.
Although
the
shareholder
is
a
creditor
of
the
corporation
when
he
advances
money
to
the
corporation
the
shareholder
does
not
see
his
advance
of
money
to
the
corporation
and
his
subscription
for
shares
of
the
corporation
as
separate
investments
in
two
watertight
compartments;
rather
he
sees
his
money
entering
two
compartments
which
open
up
into
a
single
compartment
for
the
use
of
the
corporation.
Purchasing
shares
and
advancing
money
to
a
corporation
are
two
ways
of
making
an
investment
in
the
corporation.
This
is
a
sensible
interpretation.
.
.
.
It
is
not
unusual
for
a
person
to
invest
in
a
corporation
by
subscribing
for
share
capital
and
lending
money
without
interest;
as
far
as
he
is
concerned
the
shares
and
his
loans
constitute
a
single
investment
and
if
later
on
he
is
called
on
to
advance
further
funds
without
interest
he
is
only
increasing
his
investment.
I
cannot
subscribe
to
the
theory
that
in
such
an
example
the
non-interest
bearing
loans
were
not
incurred
for
the
purpose
of
earning
income
from
property;
if
the
loans
were
not
advanced
the
corporation
may
have
become
bankrupt
and
the
shares
may
have
become
worthless.
Clearly
the
loans
were
made
to
earn
income
from
property;
that
is,
to
place
the
corporation
in
a
position
where
it
will
be
successful
and
pay
dividends.
The
respondent
has
issued
an
Interpretation
Bulletin
(IT-239R23,
February
9,
1981)
in
which
he
acknowledges
(paragraph
6)
that
a
shareholder's
loan
to
his
corporation
"at
less
than
a
reasonable
rate
of
interest"
may
result
in
deductible
capital
loss.
This
Bulletin
contains
an
explicit
statement
that
the
respondent,
as
a
matter
of
policy,
will
not
regard
the
loss
on
such
a
shareholder's
loan
as
being
nil
by
virtue
of
subparagraph
40(2)(g)(ii)
if
certain
conditions
are
satisfied.
The
stated
conditions
may
be
a
reasonable
limitation
on
the
respondent's
policy
but,
for
me,
it
is
worth
noting
that
even
the
respondent
concedes
in
this
Bulletin
that
the
loss
on
a
shareholder's
loan
"at
less
than
a
reasonable
rate
of
interest”
need
not
be
nil
under
subparagraph
40(2)(g)(ii).
The
appellant
was
providing
additional
capital
to
GHD
when
he
made
the
loan
of
$295,000.
The
loan
was
made
in
a
business
context
as
a
condition
for
his
acquisition
of
a
25
per
cent
shareholder
interest
in
GHD.
The
purpose
of
the
loan
was
to
assist
GHD
with
its
development
of
Whale
Cay
so
that
the
shareholders'
loans
could
be
repaid
and
the
shareholders
could
participate
in
the
profits
of
GHD
by
way
of
dividends
on
their
shares.
At
that
time
(1977-78),
the
appellant
genuinely
believed
that
Whale
Cay
was
a
good
development
(he
purchased
two
lots
for
his
personal
use)
and
he
thought
that
a
25
per
cent
interest
in
GHD
was
a
good
investment.
In
1982
when
Whale
Cay
was
sold
to
109416
Canada
Inc.,
the
appellant
knew
that
his
loan
of
$295,000
would
never
be
repaid.
Notwithstanding
the
provision
of
subparagraph
40(2)(g)(ii),
I
find
that
the
appellant
realized
a
capital
loss
of
$295,000
(U.S.)
in
1982
when
it
was
determined
with
certainty
that
his
shareholder
loan
could
not
be
repaid.
The
first
issue
concerns
the
deductibility
of
interest
paid
by
the
appellant
on
approximately
$775,000
(Canadian
funds)
borrowed
from
the
Bank
of
Montreal
to
purchase
the
Carstairs
mortgage.
The
funds
were
borrowed
in
October
1979
and
the
mortgage
was
purchased
in
April,
1980.
In
January,
1982,
the
mortgage
was
extinguished
when
Whale
Cay
was
sold
to
109416
Canada
Inc.
In
the
reply
to
notice
of
appeal,
the
respondent
alleges
in
paragraph
7(e)
that
he
assumed
the
following
fact
when
making
the
assessments
for
1980,
1981,
1982
and
1983:
7
(e)
In
acquiring
the
mortgage
to
Great
Whale
Cay
the
appellant
acquired
a
legal
interest
in
the
property
and
did
not
have
a
reasonable
expectation
of
earning
income
in
the
form
of
interest
in
connection
with
the
said
mortgage;
When
deciding
the
fourth
issue
above,
I
described
how
the
appellant
renegotiated
some
important
terms
of
the
Carstairs
mortgage.
Those
new
terms
gave
GHD
some
breathing
time
but
also
giving
the
appellant
a
rate
of
interest
on
the
mortgage
(prime
plus
three
per
cent)
which
was
higher
than
the
rate
(prime
plus
1.5
per
cent)
which
he
was
paying
to
the
Bank
of
Montreal.
On
the
evidence,
I
have
concluded
that
there
was
a
reasonable
expectation
of
earning
income
(i.e.,
interest)
from
the
Carstairs
mortgage
when
the
appellant
acquired
that
mortgage.
Although
the
respondent
assumed
that
the
appellant
had
no
reasonable
expectation
of
earning
interest
from
the
Carstairs
mortgage
and
I
have
found
that
the
appellant's
evidence
rebutted
that
assumption,
the
respondent
pleaded
a
different
argument
in
paragraph
9
of
his
reply
to
notice
of
appeal
when
he
stated:
9.
He
says
that
he
properly
disallowed
the
appellants
claim
for
a
deduction
of
interest
on
money
borrowed
from
the
Bank
of
Montreal
pursuant
to
subsection
18(2)
of
the
Income
Tax
Act
on
the
basis
that
the
appellant
did
not
hold
the
land
in
(Great
Whale
Cay)
primarily
for
the
purpose
of
gaining
or
producing
income
from
such
land
but
rather
in
the
course
of
a
business
in
the
ordinary
course
of
which
the
land
was
held
primarily
for
the
purpose
of
resale
or
development
and
for
the
1982
and
1983
taxation
years
for
the
additional
reason
that
he
did
not
own
the
land.
For
the
years
1980
to
1982,
subsection
18(2)
of
the
Act
provided
as
follows:
18
(2)
Notwithstanding
paragraph
20(1)(c),
in
computing
the
taxpayer's
income
for
a
taxation
year
from
a
business
or
property,
no
deduction
shall
be
made
in
respect
of
any
amount
paid
or
payable
by
the
taxpayer
in
the
year
and
after
1971
as,
on
account,
or
in
lieu
of
payment
of,
or
in
satisfaction
of,
(a)
interest
on
borrowed
money
used
to
acquire
land,
or
on
an
amount
payable
by
him
for
land,
or
(b)
property
taxes
.
.
.
.
if,
having
regard
to
all
the
circumstances,
including
the
cost
to
the
taxpayer
of
the
land
in
relation
to
his
gross
revenue,
if
any,
therefrom
for
that
or
any
previous
year,
the
land
cannot
reasonably
be
considered
to
have
been,
in
that
year,
(c)
used
in,
or
held
in
the
course
of,
a
business
carried
on
in
the
year
by
the
taxpayer,
or
(d)
[Repealed]
(e)
held
primarily
for
the
purpose
of
gaining
or
producing
income
of
the
taxpayer
from
the
land
for
the
year.
except
to
the
extent
.
.
.
.
In
my
view,
the
respondent's
argument
concerning
subsection
18(2)
shows
a
misunderstanding
of
the
appellant's
position
as
purchaser/assignee
of
the
Carstairs
mortgage.
The
$775,000
which
the
appellant
borrowed
from
the
Bank
of
Montreal
was
not
"borrowed
money
used
to
acquire
land”
within
the
meaning
of
paragraph
18(2)(a)
because
the
money
was
used
to
acquire
a
mortgage.
In
a
legal
sense,
if
the
real
property
law
of
the
Bahamas
was
based
on
the
laws
of
England,
GHD
as
mortgagor
probably
conveyed
to
Carstairs
as
mortgagee
an
estate
in
fee
simple
in
the
land
of
Whale
Cay
subject
to
GHD's
equity
of
redemption.
But
in
a
business
sense,
Carstairs
held
only
a
mortgage
and
the
appellant
borrowed
the
money
in
question
to
purchase
only
the
mortgage
and
not
the
land.
Indeed,
it
was
the
appellant's
hope
that
GHD
would
proceed
with
the
development
of
the
land.
Even
when
the
mortgage
was
hopelessly
in
arrears,
the
appellant
could
not
foreclose
and
acquire
clear
title
to
the
land
but
was
required
to
use
the
power
of
sale
provisions
to
force
a
sale.
It
was
in
the
forced
sale
proceedings
that
the
appellant
used
his
corporation
(No.
109416)
to
purchase
Whale
Cay.
I
therefore
conclude
that
subsection
18(2)
has
no
application
to
the
facts
of
this
case;
but
I
am
left
to
decide
whether
the
interest
paid
by
the
appellant
to
the
Bank
of
Montreal
is
deductible
under
paragraph
20(1)(c)
of
the
Act,
another
statutory
provision
pleaded
by
the
respondent.
Before
considering
that
issue,
I
shall
attempt
to
characterize
the
status
of
the
relevant
parties
at
various
times.
Before
April,
1980,
the
appellant
was
a
25
per
cent
shareholder
of
GHD
with
a
substantial
shareholder
loan
($295,000
U.S.)
to
that
corporation;
and
Carstairs
held
a
mortgage
from
GHD
on
Whale
Cay.
From
April,
1980
to
January,
1982,
the
appellant
was
still
a
25
per
cent
shareholder
of
GHD
with
a
substantial
shareholder
loan
but
the
appellant
had
also
acquired
the
Carstairs
mortgage.
After
January,
1982,
No.
109416
had
purchased
the
island,
Whale
Cay,
at
a
cost
of
$975,000
(U.S.)
or
approximately
$1,100,000
(Canadian
funds);
all
of
the
proceeds
of
sale
went
to
the
appellant
as
holder
of
the
Carstairs
mortgage
because
such
proceeds
were
less
than
the
aggregate
amounts
owing
on
the
mortgage;
the
appellant
held
a
non-interest
bearing
promissory
note
for
approximately
$1,100,000
from
No.
109416
as
consideration
for
the
purchase
of
Whale
Cay;
the
Carstairs
mortgage
was
extinguished
by
the
sale
of
Whale
Cay
under
the
power
of
sale
provisions
of
the
mortgage;
and
GHD
was
insolvent
with
no
assets
following
the
sale
of
Whale
Cay.
In
my
view,
the
interest
paid
to
the
Bank
of
Montreal
in
1980
and
1981
was
deductible
under
paragraph
20(1)(c)
of
the
Act
because
the
money
borrowed
from
the
Bank
was
used
for
the
purpose
of
earning
income
from
property
being
interest
payable
with
respect
to
the
Carstairs
mortgage.
The
fact
that
GHD
was
not
able
to
pay
interest
on
the
Carstairs
mortgage
is
not
conclusive
against
the
appellant.
I
have
already
held
that
there
was
a
reasonable
expectation
of
earning
income
(i.e.,
interest)
from
the
Carstairs
mortgage
in
April,
1980;
and
subsection
18(2)
does
not
apply
because
the
borrowed
money
was
not
used
to
buy
land.
The
appellant
was
not
at
any
time
the
direct
owner
of
Whale
Cay
although
he
had
purchased
two
building
lots
on
the
island
in
1977/78.
I
do
not
see
how
the
appellant
can
deduct
interest
paid
to
the
Bank
of
Montreal
after
January,
1982
because,
from
that
time,
he
no
longer
held
the
Carstairs
mortgage
and,
in
lieu
thereof,
he
held
only
a
non-interest
bearing
promissory
note
from
No.
109416.
In
recent
years,
the
leading
authority
on
the
deductibility
of
interest
is
the
decision
of
the
Supreme
Court
of
Canada
in
The
Queen
v.
Bronfman
Trust,
[1987]
S.C.R.
32,
[1987]
1
C.T.C.
117,
87
D.T.C.
5059
in
which
Chief
Justice
Dickson,
delivering
the
judgment
for
the
Court,
referred
to
paragraph
20(1)(c)
and
stated
at
pages
124-5
(D.T.C.
5064):
The
statutory
deduction
thus
requires
a
characterization
of
the
use
of
borrowed
money
as
between
the
eligible
use
of
earning
non-exempt
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.
Therefore,
if
the
taxpayer
commingles
funds
used
for
a
variety
of
purposes
only
some
of
which
are
eligible
he
or
she
may
be
unable
to
claim
the
deduction:
see,
for
example,
Mills
v.
M.N.R.,
[1985]
2
C.T.C.
2334,
85
D.T.C.
632
(T.C.C.),
No.
616
v.
M.N.R.,
22
Tax
A.B.C.
31,
59
D.T.C.
247
(T.A.B.).
In
this
case,
the
appellant
can
trace
the
borrowed
funds
to
an
identifiable
use
(i.e.,
the
purchase
of
the
Carstairs
mortgage)
which,
in
my
opinion,
triggers
the
deduction
for
1980
and
1981.
But
after
January,
1982,
when
the
Carstairs
mortgage
was
extinguished
and
replaced
by
a
non-interest
bearing
note
from
No.
109416,
I
cannot
find
an
income
earning
use
to
which
the
borrowed
funds
have
been
applied.
In
Bronfman
Trust,
Chief
Justice
Dickson
stated
further
at
page
128
(D.T.C.
5066):
The
respondent
Trust
prefers
the
decision
of
Jackett,
P.
in
Trans-Prairie.
In
that
case,
as
I
have
already
indicated,
Jackett,
P.
relied
on
the
proposition,
perfectly
correct
in
so
far
as
it
goes,
that
it
is
the
current
use
and
not
the
original
use
of
borrowed
money
that
determines
eligibility
for
a
deduction.
As
stated
previously,
however,
the
fact
that
the
taxpayer
continues
to
pay
interest
does
not
inevitably
lead
to
the
conclusion
that
the
borrowed
money
is
still
being
used
by
the
taxpayer,
let
alone
being
used
for
an
income-earning
purpose.
For
example,
an
asset
purchased
with
borrowed
money
may
have
been
disposed
of
while
the
debt
incurred
in
its
purchase
remains
unpaid.
With
the
exception
of
Trans-Prairie,
then,
the
reasoning
of
which
is,
in
my
opinion,
inadequate
to
support
the
conclusion
sought
to
be
reached
by
the
respondent
Trust,
the
jurisprudence
has
generally
been
hostile
to
claims
based
on
indirect,
eligible
uses
when
faced
with
direct
but
ineligible
uses
of
borrowed
money.
After
the
sale
of
Whale
Cay
and
the
extinction
of
the
Carstairs
mortgage,
I
think
that
the
money
borrowed
from
the
Bank
of
Montreal
could
no
longer
be
traced
to
an
eligible
income-producing
source.
In
Business
Art
Inc.,
supra,
an
interest-free
loan
from
a
corporation
to
an
affiliated
company
was
held
to
have
been
made
for
the
purpose
of
gaining
or
producing
income
for
the
purposes
of
subparagraph
40(2)(g)(ii)
but
the
same
reasoning
would
not
apply
to
paragraph
20(1)(c)
because
the
Courts
have
consistently
maintained
that
the
deductibility
of
interest
is
dependent
upon
a
direct
link
between
the
loan
and
the
property
which
produces
income.
Chief
Justice
Dickson
further
stated
at
page
5065:
.
.
.
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.
In
my
view,
interest
paid
to
the
Bank
of
Montreal
after
January,
1982
is
not
deductible
in
computing
income.
In
accordance
with
the
above
reasons,
the
appeals
for
1980
and
1981
are
allowed;
the
appeal
for
1982
is
allowed
in
part;
and
the
appeals
for
1983
and
subsequent
years
are
dismissed.
The
appellant
is
entitled
to
costs
because
he
achieved
significant
success
on
most
of
the
issues.
Appeal
allowed
in
part.
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