William W. Hastings v. Minister of National Revenue, [1988] 2 CTC 2001, 88 DTC 1391

Goetz, T.C.J. [Orally]:—The appellant is appealing his assessment for the 1981 taxation year wherein the Minister disallowed the sum of $9,949 claimed by the appellant as interest expense on money borrowed to invest in commodities.

Testifying as a witness, the appellant stated that he made a voluntary election some time ago in his market activities to utilize the capital account basis and he acknowledges that he has stuck with it.

As I pointed out to the appellant, the allegations of the Minister stand unless refuted. He was indeed in commodity investment activities. The deduction that he wants to make would have to fit within the provisions of paragraph 20(1)(c) of the Income Tax Act (the "Act"). Subsection 9(3) of the Act reads as follows:

9. (3) Gains or losses not included. In this Act, "income from a property" does not include any amount that is, or that would but for subparagraph 39(1)(a)(v) be, a capital gain from the disposition of that property or any amount that is a capital gain (within the meaning assigned by paragraph 47.1(1)(6)) from an indexed security investment plan and "loss from property" does not include any amount that is, or that would but for subparagraph 39(1)(a)(v) be, a capital loss from the disposition of that property or any amount that is a capital loss (within the meaning assigned by paragraph 47.1(c)) from an indexed security investment plan.

It is through that that the appellant says logically, "I am entitled to deduct whatever expenses relate to the acquisition of my commodities".

The Minister has made an alternative plea, if one went beyond the capital account system adopted by the appellant, that if that is not correct, then the profit derived from his commodity investment activities would be income and should be declared as such. The gain realized by the appellant from his trading in these commodities in the taxation year in question total $42,803.24. As counsel for the Crown has pointed out, the investment is for capital purposes and not for the purpose of earning income from a business within the meaning of paragraph 20(10)(c) of the Act. The key to the whole appeal is that section 9 is not applicable when one comes to dealing with the calculation of capital gains or capital losses, as the case may be.

I need only cite from the case of Geoffrey Stirling v. The Queen, [1983] C.T.C. 220; 83 D.T.C. 5252, a decision of Mr. Justice Rouleau, which was appealed to the Federal Court of Appeal. I need only refer to a portion of that judgment of Justice Rouleau wherein he was seeking to interpret the intention of Parliament in promulgating certain sections of the Act. Ms. Boris has referred to page 224 (D.T.C. 5256) of that judgment wherein the learned Justice says:

I therefore find that when the plaintiff purchased gold with borrowed money, held during a period under safe keeping arrangements, then sold it, the cost incurred immediately prior to the disposition is not only the price paid for the gold, but the interest on the borrowed money for the period which it was held, together with the safe keeping charges for the same period. The interest and safe keeping charges are together and exclusively attributable to the gain derived for the acquisition and the disposition of the property.

This would seemingly back up the appellant in his position, but that decision was appealed to the Federal Court of Appeal ([1985] 1 C.T.C. 275; 85 D.T.C. 5199). In that case Mr. Justice Pratte, among other things said at page 276 (D.T.C. 5200):

In trying to support that judgment, counsel for the respondent argued in substance that capital gain should be computed according to the same rules as income from a business or property. That argument, while attractive, does not find any support in the Income Tax Act which provides special rules for the computation of capital gain. Under those rules, as they are found in subparagraph 40(1)(c)(i) and section 54, the interest and safe keeping charges here in question could be deductible only if they were part of the cost of the bullion. In our opinion, they were not. As we understand it, the word "cost" in those sections means the price that the taxpayer gave up in order to get the asset; it does not include any expense that he may have incurred in order to put himself in a position to pay that price or to keep the property afterwards.

That is virtually quoting from The Queen v. Canadian Pacific Limited, [1977] C.T.C. 606; 77 D.T.C. 5383. In substance, the position of the Crown is correct in saying that the ordinary rules relating to expenses being deducted in the income earning process, do not apply to the capital gain sections. As has been mentioned in argument, there is a dividing line there when capital gains were introduced into the Income Tax Act in 1971 and there does not seem to be a bridge between the ordinary deduction process and the capital gains sections.

For those reasons, I must dismiss the appeal.

Appeal dismissed.