Robert Moysey v. Her Majesty the Queen, [1992] 2 CTC 2657, 92 DTC 1861

Garon, T.C.C.J.:—These four appeals are governed by the informal procedure and, at the Court's request made during the course of the hearing, the arguments at the trial of these appeals were completed by written memoranda of counsel for both parties, the last of such memoranda having been received in the Registry of this Court on May 11, 1992.

Two of these appeals involve loss determinations dated May 21, 1991, for the appellant's 1983 and 1986 taxation years. By his determinations, the Minister of National Revenue (the "Minister") computed the non-capital losses to be $89,760 for the 1983 taxation year and $3,008 for the 1986 taxation year. The other two appeals are from reassessments of tax dated January 22, 1991, in respect of the 1987 and 1989 taxation years. By the reassessment in respect of the 1987 taxation year, the Minister allowed the deduction of non-capital losses from other years in the amount of $3,008 and by the reassessment relating to the 1989 taxation year the Minister disallowed any deduction for non-capital losses of other years.

The issue concerns the computation of losses over a period of time beginning in 1983 and terminating in 1989. The difference in the views between the appellant and the respondent results from the fact that the Minister takes the position that section 80 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), applies to accrued but unpaid interest where section 79 applies to the mortgages in respect of which the interest obligation arose whereas the appellant maintains that section 80 is inapplicable to an interest obligation in a case where section 79 applies to the principal obligation to which the interest relates.

The facts are not in dispute.

The appellant is a businessman who resides in the City of Victoria, British Columbia.

The Minister made the following assumptions of fact in paragraph 4 of the amended reply to the notice of appeal dated August 7, 1991, in the file dealing with the reassessments for the appellants 1987 and 1989 taxation years:

(a) the appellant’s non-capital loss and net capital loss carry forward balances prior to 1986 available for application to subsequent years are nil as a result of the application in the 1986 taxation year of forgiveness of debt in the amount of $164,093 to reduce the amounts or the carry forward balances;

(b) the appellants non-capital loss for the 1986 taxation year available to be applied to other years is $3,008;

(c) there is no non-capital loss for the 1987 taxation year available to be applied to other years;

(d) There are no non-capital losses of other years available to be applied in the 1989 taxation year as the only available carry forward balance of non- capital losses is the amount of $3,008 which was incurred in the 1986 taxation year and which has been deducted in computing income in the 1987 taxation year;

(e) the appellant entered into an agreement in 1981 with Litwin Construction Ltd. (“Litwin”) to agree to purchase three units ("the units") of a multiple unit residential building ("MURB") project under construction known as Qual(sic) Ridge and two units (“the units") of another MURB project under construction known as Resthaven;

(f) the total purchase price of the units was $1,277,872 of which the appellant paid to Litwin a down payment of $154,312 and was indebted to Litwin for $1,123,560;

(g) Litwin obtained a mortgage on each MURB from a credit union and a trust company ("the credit union and trust company”) in order to finance construction of the MURB's;

(h) both MURB projects were under construction by Litwin up to 1983;

(i) in computing his income for the 1981 to 1983 taxation years the appellant deducted some of the construction costs related to the units he had agreed to purchase;

(j) in 1983 the credit union and trust company acquired beneficial ownership of the MURB's in consequence of Litwin's failure to make payments of the mortgages referred to in paragraph 4(g) herein;

(k) as a result of the credit union and trust company acquiring beneficial ownership of the MURB projects in 1983 the appellant's obligation to Litwin in the amount of the principal of $1,123,560 was extinguished in 1983 without any payment of the principal amount of the debt;

(l) in computing his income for the 1981 to 1986 taxation years the appellant deducted accrued interest in the amount of $177,022 on Litwin's mortgages on the MURB's as it related to the units he agreed to purchase in the MURB's;

(m) in 1986 the credit union and trust company had orders absolute of foreclosure issued resulting in the extinguishment of the appellant's obligation to Litwin to pay the accrued interest in the amount of $177,022; and

(n) other than the payment of $154,312 referred to in paragraph 4(f) herein, the appellant made no payments of principal, interest or construction costs related to the units.

By paragraph numbered 1 of the “Reply To Respondent's Written Submissions" the appellant admitted all of the assumptions of fact made by the Minister in all appeals and in particular did not dispute the following facts referred to in paragraph 2 of the Respondent's Written Submissions":

(a) the appellant became indebted to Litwin Construction Ltd. for two mortgages in the total amount of $1,123,560;

(b) those mortgages were foreclosed in 1986 and section 79 of the Income Tax Act, as amended, (the "Act") were applied;

(c) in computing his income for the 1981 to 1986 taxation years the appellant deducted accrued but unpaid interest in the amount of $177,022 on the mortgages to Litwin Construction Ltd.; and,

(d) no payments of principal or interest on the mortgages were made at any time by the appellant to Litwin Construction Ltd.

Appellant's submissions

It was urged on behalf of the appellant that, first of all, section 79 of the Act does not deal with the matter of unpaid interest. The appellant further argued section 80 of the Act did not intend to capture, in its net, the accrued interest on debts or obligations where section 79 applied to the principal amount of these debts or obligations. As regards the applicability of section 80, counsel for the appellant expressed himself in part as follows in his written submissions:

We submit that section 80(1)(e) was inserted to specifically preclude the application of section 80 where section 79 is applicable in respect of the principal amount of the debt or obligation. We would suggest that there is nothing in Section 80 that precludes this interpretation.

It has been suggested by counsel for Her Majesty that the definition of "principal amount" in subsection 248(1) in some way captures the "accrued interest” in question under section 80. It should be noted that subsection 80(4) acts to deem a debt or other obligation to have a principal amount and that it was issued for an amount, etc. subsection 80(4) does not, of course, make accrued interest something that it isn’t; namely, a principal amount pursuant to 248(1). Similar comments apply to the deemed amount for which the obligation was issued.

Subsection 80(4) in effect prior to December 17, 1991 clearly does not capture the “accrued interest” in question because it does not deal with the “amount for which the obligation was issued", presumably nil. Subsection 80(1) states that only the excess of the lesser of the principal amount and the amount for which the obligation was issued shall be applied as prescribed later in this subsection. Note, we also submit this clause fails due to 80(1)(e) and we submit that there is nothing in the subsection that states that the "accrued interest” is deemed separate and distinct and not related to the principal amount of the debt or other obligation mentioned in 80(1)(e) and 80(4).

With respect to subsection 80(4) proclaimed December 17, 1991, it is conceded that this subsection deems an amount of interest payable by a taxpayer on a debt or other obligation to be a debt or other obligation issued by the taxpayer that (a) has a principal amount, and (b) was issued by the taxpayer for an amount, etc. We submit, however, that this amended clause fails to capture the "accrued interest" in question due to the existence of 80(1)(e) which is not negated by 80(4) and there is nothing in this amended Subsection to state that the "accrued interest” in question is deemed a separate and distinct debt not related to principal amount of the debt or other obligation mentioned in 80(1)(e) and 80(4).

We submit that even if it can be established that subsection 80(4) deems interest to be a separate and distinct debt from its principal amount, section (1)(e) is still applicable in respect of the original debt or obligation to which we submit this clause refers or can be readily interpreted to refer and subsection 80(4) still fails with respect to the "accrued interest" in question.

In the “Reply To Respondent's Written Submissions”, the appellant propounded additional propositions which should be referred to.

Counsel for the appellant advanced the proposition that although the 1991 amendment to subsection 80(4) is retroactive, it should not apply to him because to do so would be inequitable firstly, because his income tax return for the 1986 taxation year, but for the existence of a waiver to permit him to appeal this reassessment, would be statute-barred and there was a lengthy delay by Revenue Canada in reassessing his 1986 income tax return. Secondly, he was reassessed prior to the amendment receiving royal assent on December 17, 1991, and the present appeal was also commenced prior to such date.

The appellant submitted further that if either the 1985 amendment adding subsection 80(4) of the Act or the 1991 amendment to subsection 80(4) of the Act is ruled to apply in these appeals, it should apply only in respect of interest accruing during the period between May 9, 1985 and the date of foreclosure in 1986. The appellant further submitted that of the $177,022 of“ accrued interest” at issue in these appeals, only $40,713 is for interest accruing subsequent to May 9, 1985 to the date of foreclosure.

Accordingly, the appellant submitted that the effect of the application of subsection 80(4) as enacted in 1985 or as amended in 1991 is that, for the purposes of subsections 80(1) and 80(3), "accrued interest” in the amount of $40,713 is included in the "principal amount”, this amount of $40,713 being the interest deducted or deductible during the period of May 9, 1985 to the date of foreclosure.

In the further alternative, the appellant submitted that there is factual ambiguity resulting from a lack of explicitness in sections 79 and 80 of the Act and if either the 1985 amendment adding subsection 80(4) of the Act or the 1991 amendment to subsection 80(4) of the Act is ruled to apply in these appeals, it should be interpreted in favour of the appellant. The appellant further submitted that the interpretation of sections 79 and 80 he proposed are reasonable and should be adopted by this Court. In support of this submission the appellant cited a decision of St-Onge, J. of this Court in Alex Tadman v. M.N.R., [1988] 1 C.T.C. 2281, 88 D.T.C. 1116.

Respondent's submissions

As a general proposition, counsel for the respondent argued that by virtue of subsection 80(4) of the Act, section 80 "applies, inter alia, to accrued but unpaid interest arising on a mortgage in respect of which section 79 has been applied”. In his written submissions, counsel for the respondent also put forward the following propositions:

It is the respondent's further submission that the December 17, 1991 amendment to section 80(4) applies to the appellant.

In the alternative, it is submitted that if section 80(4) as enacted in 1985 is the version applicable to the appellant, then the December 17, 1991 amendment is still relevant to the issue of the purpose of the enactment, which purpose supports the respondent's first argument.

In the further alternative, it is submitted that if this honourable Court rules that the 1985 version of section 80(4) must be interpreted without reference to the December 17, 1991 amendment, the entire context of section 80 is such that it is in no way impeded from encompassing interest on a mortgage to which section 79 applies.

The respondent also advanced other submissions that are worth noting and I will attempt to summarize them.

The respondent contended that when subsection 80(1) of the Act is interpreted with subsection 80(4), it is evident that the “debt or other obligation” contemplated in subsection 80(1) is the accrued but unpaid interest on a mortgage debt and not the parent debt itself.

The respondent also referred to paragraph 4(b) of the Interpretation Bulletin IT-142R3, dated January T1, 1988, whereby the Minister expressed the view that the purpose of subsection 80(4) was to make a taxpayer accountable for accrued interest where there had previously been no accountability. Thus, the respondent submitted that this Interpretation Bulletin confirms his position that subsection 80(4) operates to sever the interest obligation from the parent obligation and to treat it independently.

It was also urged by the respondent that the appellant's interpretation of sections 79 and 80 would result in interest deducted but unpaid on extin- guished debts escaping accountability where the parent obligation is caught by section 79, despite legislation specifically enacted to make interest accountable. Thus, adopting the appellants interpretation would render a major portion of subsection 80(4) to be without effect and, accordingly, the respondent submitted that where there are two conflicting interpretations of a provision and one gives no effect to the provision while the other does, the interpretation giving effect is to be preferred. In support of this proposition the respondent cited the following cases: (Dundas) Ltd. v. Cloverdale Shopping Centre Ltd., [1973] S.C.R. 596 at 603; Qualico Developments Ltd. v. The Queen, [1984] C.T.C. 122, 84 D.T.C. 6119 (F.C.A.), at page 130 (D.T.C. 6122) and Highway Sawmills Ltd. v. M.N.R., [1966] S.C.R. 92, [1966] C.T.C. 150, 66 D.T.C. 5116, at page 156 C.T.C. (D.T.C. 5120).

The respondent contended that the 1991 amendment to subsection 80(4) of the Act applies to the appellant. In particular, the respondent submitted that the appellant was assessed prior to the amendment receiving Royal Assent on December 17, 1991, and at the time of the trial of these appeals, this amendment was in force. Furthermore, the respondent submitted that the amendment does not change the law but merely confirms it and the amendment is wholly consistent with the basis on which the appellant was assessed and indeed reflects the basis on which he was assessed. Consequently, the respondent submitted that applying the amendment to the appellant does not change the rules post assessment and is in no way iniquitous to the appellant.

In the alternative, the respondent submitted that if the Court rules that the 1985 version of subsection 80(4) of the Act applies to the appellant, whether or not this subsection is interpreted by reference to the 1991 version of subsection 80(4), the effect is that “the principal amount” referred to in subsection 80(4) represents the deducted or deductible portion, which is $177,022, and “the amount for which the obligation was issued by the taxpayer” is, in this case, the identical amount ($177,022).

Counsel for the respondent also pointed out that if the Court rules that the 1985 version of subsection 80(4) must be interpreted without reference to the December 17, 1991 amendment, the entire context of section 80 is such that it is in no way impeded from encompassing interest on a mortgage to which section 79 applies.

Counsel for the respondent went on to say that by virtue of the 1985 addition of subsection 80(4) of the Act, a special meaning was given to the term “principal amount" for the purposes of subsections 80(1) and (3). This special meaning expressly includes interest, previously excluded by the definition of "principal amount” in section 248(1). Therefore, since 1985, for the purposes of section 80, interest is composed of a principal amount equal to the interest deducted or deductible by the taxpayer. Therefore, the respondent submits that in these appeals, the principal amount pursuant to subsections 80(1) and

(4) is $177,022.

Lastly, the respondent concluded that by the 1991 amendment to subsection 80(4) Parliament thereby clarified and confirmed, firstly, that by the words “is deemed to be” in subsection 80(4), the interest debt or obligation is separate from the parent debt or obligation, secondly, the interest debt or obligation has a principal amount and, thirdly, the interest debt or obligation was issued for an amount equal to the interest deducted or deductible by the taxpayer.

Analysis

It is common ground that the key provisions of the Act that have a bearing on the determination of the matters involved in this litigation are sections 79 and 80. The point in issue in these appeals could be narrowed down to whether section 80 of the Act applies to the extinguishment of the appellant's obligation to Litwin Construction Ltd. in respect of the accrued but unpaid interest on the two subject mortgages where section 79 applied to the extinguishment of the principal amounts of the mortgages in respect of which the interest obligation arose.

Section 79

It seems apposite to begin by an analysis of section 79 of the Act. Section 79 expressly applies to mortgage foreclosures, repossessions of property under conditional sales agreements and to other situations where any property of a debtor is acquired or reacquired, as the case may be, by a creditor, whether secured or unsecured, upon the debtor's failure to pay an amount owing to the creditor. This section does not apply if the property is disposed of to a third party pursuant to a power of sale contained in a mortgage instrument. These circumstances are described in the introductory portion of section 79 in this way:

Where, at any time in a taxation year, a taxpayer who

(a) was a mortgagee or other creditor of another person who had previously acquired property, or

(b) had previously sold property to another person under a conditional sales agreement,

has acquired or reacquired the beneficial ownership of the property in consequence of the other person's failure to pay all or any part of an amount (in this section referred to as the "taxpayer's claim”) owing by him to the taxpayer, the following rules apply:

Section 79 goes on to set out the tax consequences for both the debtor and the creditor arising from this forced disposition of the property in question by the debtor.

The debtor is considered to have disposed of the property for the principal amount of his indebtedness that is extinguished as a result of the creditor's acquisition or reacquisition of the property. Any further amounts paid by the debtor following this involuntary disposition of the property is treated as a loss arising from the disposition of such property.

As for the creditor, he is considered to have acquired the property at a cost to him of the debt owing at the time by the debtor minus the amount claimed as a reserve in computing his income or gain for the immediately preceding year under paragraph 20(1) (n), subparagraph 40(1)(a)(iii) or 44(1)(e)(iii) of the Act depending upon whether the property disposed of was capital property or inventory in the hands of the debtor. Such reserve is deemed to be nil for the purposes of computing the creditor's income for the year in which the disposition of the property took place. The adjusted cost base to the creditor of his claim against the debtor is also deemed to be nil. The creditor is no longer entitled to any further reserves for doubtful accounts or bad debts.

From the above, it is to be noted that the debtor's proceeds of disposition of the property only takes the principal amount of the creditor's claim into account. This is clearly set out in paragraph 79(c) which reads as follows:

(c) there shall be included, in computing the other person's proceeds of disposition of the property, the principal amount of the taxpayer's claim plus all amounts each of which is the principal amount of any debt that had been owing by the other person, to the extent that it has been extinguished by virtue of the acquisition or reacquisition, as the case may be;

If the matter of the tax treatment of the extinguishment of a debt is looked at from the creditor's angle, the amount of interest owing to the creditor at the time of the disposition of the property is not included in the adjusted cost base of the creditor's claim, since by virtue of paragraph 79(g) "the adjusted cost base to the taxpayer of the taxpayer's claim shall be deemed to be nil”. However, the amount of interest outstanding at that time is included in the cost to the creditor of the property acquired or reacquired, as the case may be, as appears from paragraph 79(f) which provides as follows:

(f) the taxpayer shall be deemed to have acquired or reacquired, as the case may be, the property at the amount, if any, by which the cost at that time of the taxpayer's claim exceeds the amount described in subparagraph (e)(i) or (ii), as the case may be, in respect of the property;

The expression "taxpayer's claim” used in paragraph 79(f) refers to a debtor's "failure to pay all or any part of an amount owing” to the creditor, as spelled out in the opening provisions of section 79, and is to be contrasted with the phrase "the principal amount of the taxpayer's claim" mentioned in paragraph 79(c). The interest liability, along with carrying charges, is therefore part of the taxpayer's claim to which reference is made in paragraph 79(f).

It should be pointed out that the phrase “principal amount" used in paragraph 79(c) is defined in subsection 248(1) as follows:

Principal amount. —"principal amount” in relation to any obligation means the amount that, under the terms of the obligation or any agreement relating thereto, is the maximum amount or maximum aggregate amount, as the case may be, payable on account of the obligation by the issuer thereof, otherwise than as or on account of interest or as or on account of any premium payable by the issuer conditional upon the exercise by the issuer of a right to redeem the obligation before the maturity thereof;

It is therefore apparent, inter alia, that when determining the tax consequences, to the debtor, under paragraph 79(c) the amount of interest owing by the debtor to the creditor, in cases where the disposition of the property arises from the debtor's failure to pay an amount in the circumstances described in the opening provisions of section 79, is not taken into account. This is because paragraph 79(c) impliedly excludes interest from the debtor's proceeds of disposition of property. In this connection, counsel for both the appellant and the respondent were in agreement that section 79 of the Act applied to determine, as far as the debtor is concerned, the tax consequences regarding only the extinguishment of the principal portion of the indebtedness.

Bearing in mind the general thrust of section 79, it is now necessary to examine the provisions of section 80 of the Act.

Legislative history of section 80

The only provisions in section 80 that need to be considered for our present purposes are those found in subsections (1) and(4) of this section. The present version of subsection 80(1) is applicable to all the years under appeal, with the exception of the 1983 taxation year. Therefore, subsection 80(1), as it presently reads, applies to the 1986, 1987 and 1989 taxation years and reads as follows:

(1) Where at any time in a taxation year a debt or other obligation of a taxpayer to pay an amount is settled or extinguished after 1971 without any payment by him or bY the payment of an amount less than the principal amount of the debt or obligation, as the case may be, the amount by which the lesser of the principal amount thereof and the amount for which the obligation was issued by the taxpayer exceeds the amount so paid, if any, shall be applied

(a) to reduce, in the following order, the taxpayer's

(i) non-capital losses,

(i.1) farm losses,

(ii) net capital losses, and

(iii) restricted farm losses, for

preceding taxation years, to the extent of the amount of those losses that would otherwise be deductible in computing the taxpayer's taxable income for the year or a subsequent year, and

(b) to the extent that the excess exceeds the portion thereof required to be applied as provided in paragraph (a), to reduce in prescribed manner the capital cost to the taxpayer of any depreciable property and the adjusted cost base to him of any capital property,

unless

(c) the taxpayer is, at that time, a bankrupt within the meaning of section 128,

(d) the debt or obligation was such that

(i) where interest was paid or payable by the taxpayer in respect of it pursuant to a legal obligation, or

(ii) if interest had been paid or payable by the taxpayer in respect of it pursuant to a legal obligation,

no amount in respect of the interest was or would have been deductible under this Part in computing his income if this Act were read without reference to subsections 18(2), (3.1) and (4) and section 21,

(e) section 79 is applicable in respect of the debt or obligation,

(f) the excess is otherwise required to be included in computing his income for the year or a preceding taxation year or to be deducted in computing the capital cost to him of any depreciable property, the adjusted cost base to him of any capital property or the cost amount to him of any other property,

(g) the excess would be deemed by subsection 39(3) to be a capital gain of the taxpayer for the year from the disposition of a capital property if this Act were read without reference to this subsection, or

(h) the debt or obligation is settled or extinguished by way of bequest or inheritance.

The only parts of the present version of subsection (1) that do not apply to the 1983 taxation year relate to paragraphs (d), (g) and (h). The latter two paragraphs were added by subsection 37(2) of c. 45 of the Statutes of Canada for 1985. Paragraph 80(1)(d) in its version applicable, inter alia, to the 1983 taxation year read as follows:

(d) the debt or obligation was such that, if interest had been paid by the taxpayer in respect of it, no deduction would have been permitted by this Part in respect of that interest in computing the taxpayer's income.

Subsection 80(4) was added by subsection 37(4) of c. 45 of the Statutes of Canada for 1985 (assented to on October 29, 1985) and is referred to below as the “1985 version”. This subsection then read as follows:

(4) For the purposes of subsections (1) and (3), an amount of interest payable by a taxpayer on a debt or other obligation shall be deemed to have a principal amount equal to the portion thereof that was deducted, or would, but for subsection 18(2) or (3.1) or section 21, have been deductible, in computing his income for a taxation year under this Part.

By subsection 37(5) of the same amending Act, the 1985 version of subsection 80(4) was made" applicable with respect to debts and obligations settled or extinguished after May 9, 1985”.

By subsection 58(1) of c. 49 of the Statutes of Canada for 1991 (assented to December 17, 1991) the 1985 version of subsection 80(4) was repealed and a new subsection 80(4) was substituted for the former version. The new subsection 80(4) was enacted in these terms:

(4) For the purposes of subsections (1) and (3), an amount of interest in respect of a debt or other obligation of a taxpayer shall be deemed to be a debt or other obligation issued by the taxpayer that

(a) has a principal amount, and

(b) was issued by the taxpayer for an amount

equal to the portion of the amount of such interest that was deductible, or would, but for subsection 18(2) or (3.1) or section 21, have been deductible, in computing the taxpayer's income for a taxation year under this Part.

Subsection 80(4) in the form in which it appears in the preceding paragraph, is referred to below as the 1991 version of subsection 80(4).

The retrospective operation of the 1991 version of subsection 80(4) is dealt with by subsection 58(2) of c. 49 of the Statutes of Canada for 1991 as follows:

(2) Subsection (1) is applicable with respect to interest in respect of debts or other obligations settled or extinguished after May 9, 1985, except that, in its application with respect to interest accruing before July 14, 1990, subsection 80(4) of the said Act, as enacted by subsection (1), shall be read as follows:

(4) For the purposes of subsections (1) and (3), an amount of interest in respect of a debt or other obligation of a taxpayer shall be deemed to be a debt or other obligation issued by the taxpayer that

(a) has a principal amount, and

(b) was issued by the taxpayer for an amount, equal to the portion of the amount of such interest that was deducted, or would, but for subsection 18(2) or (3.1) or section 21, have been deductible, in computing the taxpayer's income for a taxation year under this Part.

The version of subsection 80(4) quoted in the preceding paragraph is referred to below as the transitional 1991 version of subsection 80(4). The only difference between the 1991 version of subsection 80(4) and the transitional 1991 version is that the word "deducted" is employed in the latter version rather than the word “ deductible” after the words “ equal to the portion of the amount of such interest that was” appearing in the closing portion of these two versions.

Subsection 80(1)

Subsection 80(1) of the Act sets out the tax treatment that is applicable to the situation of a debtor where in a taxation year a debt or other obligation for which he was liable was settled or extinguished without any payment by him or by the payment of an amount less than the principal amount of the debt or obligation. In view of the definition of the phrase “principal amount" in subsection 248(1) of the Act, subsection 80(1) by its terms in the absence of subsection 80(4) would not apply to the extinguishment of an interest obligation.

Subsection 80(4)

However, for the purposes of subsections (1) and (3) of section 80 there is no doubt that by the 1991 version of subsection 80(4), an amount of interest owing by a person must be considered an obligation that has a principal amount and that was issued by a debtor for an amount. This is said in express terms in the 1991 version of subsection 80(4). In effect, subsection 80(4) provides that "for the purposes of subsections (1) and (3), an amount of interest in respect of a debt or other obligation of a taxpayer shall be deemed to be a debt or other obligation issued by the taxpayer that (a) has a principal amount, and (b) was issued by the taxpayer for an amount”.

It follows from this deeming clause that an interest debt or obligation must be viewed as separate and distinct from the main debt or obligation to which it relates, since the interest indebtedness itself is deemed to have a principal amount and to be issued for an amount. The parent obligation continues, of course, to have a separate principal amount.

Subsection 80(1) and subsection 80(4)

Read together, subsections 80(1) and 80(4) apply both to the principal amount of a debt or obligation, taken in its ordinary sense and to the amount of debt or obligation that is made up exclusively of interest deducted or deductible by the debtor. In the present case, the principal amount of the interest obligation, pursuant to subsections 80(1) and 80(4) is $177,022. I also agree with counsel for the respondent that the amount for which the obligation was issued refers to the actual amount of unpaid interest that was accrued and deducted.

Relationship between sections 79 and 80

Paragraph 80(1)(e) provides, in substance, that subsection 80(1) does not apply where section 79 is applicable in respect of the debt or obligation".

In my view, the reference in paragraph 80(1)(e) to the" debt or obligation” to which section 79 applies is a reference to the principal amount of that debt or obligation construed according to its ordinary meaning. In effect, as I have established earlier, to the extent that the debtor is involved, section 79 deals only with the tax treatment of the principal amount of his indebtedness and not with the debtor's interest liability. It should not be overlooked that the deeming provision in subsection 80(4), that interest payable shall be considered as a principal amount, does not apply for the purposes of section 79 of the Act but applies only for the purposes of subsections 80(1) and 80(3) of the Act.

It is therefore apparent that paragraph 80(1)(e) would exclude a debt or obligation from the application of section 80 only in the event that the debt or obligation fell within the purview of section 79 or the Act. Thus, it makes sense for Parliament in enacting paragraph 80(1)(e) to provide that where both sections 79 and 80 might apply to the particular situation of a debtor section 79 is to override section 80 of the Act. Otherwise, section 80 is to be given full effect. It is to be borne in mind that the income tax treatment of the debtor's situation under section 79 with respect to the principal amount of his indebtedness is substantially different from that accorded to the debtor by section 80. Thus, the tax treatment applicable to the accrued but unpaid interest in respect of a principal amount to which section 79 applies is left open and by virtue of the operation of subsection 80(4) of the Act is dealt with by section 80 of the Act.

There is the further point that if this Court were to accept the appellant's submission the result would be to permit for instance, accrued but unpaid interest on mortgage debts, for which deductions have been regularly taken by a taxpayer, to escape accountability in cases where section 79 applied to the parent obligation. This result must be contrasted with the situation of a taxpayer where his interest obligation has been extinguished without any payment by him or by the payment of a lesser amount in which case the taxpayer would be governed by section 80. Such taxpayer would be required to account for the interest deductions already taken and to reduce his losses and, if necessary, the cost base of any capital property in the manner set out in subsection 80(1) of the Act. Such an interpretation would give rise to a drastically different tax treatment of a debtor with respect to his interest obligation where such obligation has been extinguished otherwise than by the payment by him of the full amount of his interest obligation. Such a result should not be accepted unless clearly intended by Parliament.

The respondent's interpretation of the relationship of sections 79 and 80, which I accept, has the advantage of ensuring the smooth workin of both sections 79 and 80 of the Act, in that section 79 would deal with, to the extent that the debtor is concerned, the extinguishment of the principal amount of debts in the circumstances set out in that section and section 80 would apply to the tax treatment of a debtor relating to the forgiveness of the principal amounts of debts and to the forgiveness of an interest obligation whether or not such interest obligation relates to a principal obligation dealt with in section 79 or in section 80.

I am therefore of the opinion that by virtue of subsection 80(4) of the Act, subsection 80(1) applies to debtors where the accrued interest outstanding is extinguished in circumstances where section 79 also applies to the principal amount of the parent obligation.

Retrospective operation of subsection 80(4)

It remains for the Court to consider the retroactive operation of subsection 80(4) with respect to the precise situation with which this Court is confronted in the present appeals.

The 1985 version of subsection 80(4), as pointed out earlier, applied to "debts and obligations settled or extinguished after May 9, 1985”. The 1991 version of subsection 80(4) was also made "applicable with respect to interest in respect of debts or other obligations settled or extinguished after May 9, 1985". This retrospective operation is also applicable to the 1991 transitional version of subsection 80(4).

Since it was agreed by the parties that the appellants debt to Litwin Construction Ltd. in respect of the principal amount of the two mortgages ($1,123,560) was extinguished in 1983, as assumed by the Minister in paragraph 4(k) of the "amended reply to the notice of appeal” dated August 7, 1991, in the file relating to the reassessments for the 1987 and 1989 taxation years, it follows that subsection 80(4), in its 1985 version or in either of its 1991 versions, is not applicable to the interest obligation that is in issue in these appeals. Even though this point concerning the retroactive operation of subsection 80(4) as a result of the enactment of subsection 37(5) of c. 45 of the Statutes of Canada for 1985 and subsection 58(2) of c. 49 of the Statutes of Canada for 1991, was not raised at the hearing of these appeals or subsequently discussed in the written submissions by counsel of either party, I have decided not to seek further observations of counsel on this specific question bearing in mind the time constraints and the general philosophy found in the provisions of the Income Tax Act dealing with the informal procedure which governs the present four appeals.

Before concluding, I should add that it has not been suggested that other provisions of the Act or general principles of income tax law might require the appellant to include in his income the amount of interest forgiven or extinguished in the circumstances of the present case.

Conclusion

For these reasons, the appeals are allowed with costs and the determinations and reassessments are referred back to the Minister of National Revenue for reconsideration on the basis that in making the necessary calculations of income and losses he is to act on the basis that subsection 80(4) is not applicable to the extinguishment of the interest obligation in issue in these appeals.

Appeal allowed.