The
Chief
Justice:—In
computing
income
for
a
taxation
year,
a
taxpayer
may
deduct
interest
paid
on
borrowed
money
“used
for
the
purpose
of
earning
income
from
a
business
or
property".
In
the
present
appeal,
the
trustees
of
a
trust
elected
to
make
discretionary
capital
allocations
to
Phyllis
Barbara
Bronfman
in
1969
and
1970.
Instead
of
liquidating
capital
assets
to
make
the
allocations,
the
trustees
considered
it
advantageous
to
retain
the
trust
investments
temporarily
and
finance
the
allocations
by
borrowing
funds
from
a
bank.
The
issue
is
whether
the
interest
paid
to
the
bank
by
the
trust
on
the
borrowings
is
deductible
for
tax
purposes;
more
particularly,
is
an
interest
deduction
only
available
where
the
loan
is
used
directly
to
produce
income
or
is
a
deduction
also
available
when,
although
its
direct
use
may
not
produce
income,
the
loan
can
be
seen
as
preserving
income-producing
assets
which
might
otherwise
have
been
liquidated.
A
subordinate
issue
is
whether
the
answer
to
this
question
depends
upon
the
status
of
the
taxpayer
as
a
corporation,
a
trust,
or
a
natural
person.
I
Facts
By
means
of
a
deed
of
donation
registered
in
Montreal
on
May
7,
1942
a
trust
was
established
by
the
late
Samuel
Bronfman
in
favour
of
his
daughter,
Phyllis
Barbara
Bronfman
(“the
beneficiary”
or,
under
Quebec
law,
“the
Institute”)
and
her
children.
Under
the
terms
of
the
deed,
the
beneficiary
has
the
right
to
receive
50
per
cent
of
the
revenue
from
the
trust
property.
In
addition,
the
trustees
“in
their
sole
and
unrestricted
discretion”
are
empowered
to
make
an
allocation
to
the
beneficiary
from
the
capital
of
the
trust
if
they
consider
it
“desirable
for
any
purpose
of
any
nature
whatsoever”.
The
beneficiary
has
no
children
and
in
the
event
she
dies,
without
issue,
the
residue
of
the
trust
accrues
for
the
benefit
of
her
brothers
and
sisters.
The
assets
of
the
trust
consist
of
a
portfolio
of
securities
having
a
cost
base
of
more
than
$15
million.
By
the
end
of
1969
trust
assets
had
a
market
value
of
about
$70
million.
Except
for
a
Rodin
sculpture,
the
holdings
of
the
trust
during
the
material
period
were
in
bonds
and
shares,
assets
which
could
be
characterized
generally
as
of
an
income-earning
nature.
I
should
add,
however,
that
the
investment
portfolio
of
the
trust
produced
a
low
yield:
1969,
1970
and
1971
earnings
amounted
to
$324,469,
$293,178
and
$213,588
respectively,
providing
a
return
of
less
than
one-half
of
one
per
cent
on
the
portfolio's
market
value.
Some
of
the
trust
investments,
although
possibly
bearing
income
in
the
long
run,
did
not
in
fact
earn
any
income
over
the
material
period.
The
financial
statements
of
the
trust
disclose,
for
example,
that
the
trust's
investment
in
2nd
Preferred
Shares
of
Cemp
Investments
Ltd.
(a
private,
family
corporation)
which
had
a
cost
base
of
$3.3
million
yielded
no
income
at
all
in
1969,
1970
and
1971.
Trust
investment
policies
appear
to
have
been
focused
more
on
capital
gains
than
on
income.
Accordingly,
the
trust’s
very
substantial
asset
base
generated
modest
income-tax
liabilities:
the
1970
and
1971
income
tax
returns
filed
by
the
taxpayer
show
federal
tax
payable
of
$12,107.99
and
$15,687.98
respectively
and
in
1972
(when
some
capital
gains
were
realized
and,
for
the
first
time,
taxable)
federal
tax
was
listed
as
$31,878.
The
low-yield
investment
portfolio
of
the
trust
undoubtedly
had
detrimental
consequences
for
the
beneficiary
in
respect
of
the
amount
of
income
available
under
her
50
per
cent
entitlement.
Perhaps
to
mitigate
those
consequences,
or
perhaps
for
some
other
reason
entirely,
the
trustees
chose
to
make
a
capital
allocation
to
the
beneficiary
of
$500,000
(U.S.)
on
December
29,
1969
and
one
of
$2
million
(Can.)
on
March
4,
1970.
There
is
no
suggestion
by
the
trust
that
these
allocations
were
in
any
way
designed
to
enhance
the
income-earning
potential
of
the
trust.
On
the
contrary,
the
inevitable
result
was
to
reduce
the
trust's
net
income-earning
prospects
both
in
the
short-term
and
in
the
long
run
owing
to
the
depletion
of
trust
Capital.
To
make
the
capital
allocations,
the
trust
borrowed
from
the
Bank
of
Montreal
$300,000
(U.S.)
on
December
29,
1969
and
$1.9
million
(Can.)
on
March
9,
1970.
The
amounts
borrowed
went
into
the
account
of
the
trust
and
were
used
to
make
the
capital
allocations
to
the
beneficiary.
The
trust
used
uninvested
earnings
to
finance
the
remaining
approximately
$300,000
of
allocations
to
the
beneficiary.
There
is
no
dispute
concerning
the
immediate
and
direct
use
to
which
the
borrowed
funds
were
put.
They
were
used
to
make
the
capital
allocations
to
the
beneficiary
and
not
to
buy
income-earning
properties.
The
sole
witness
at
trial
was
Mr.
Arnold
Ludwick,
an
accountant,
executive
vice-president
of
Cemp
Investments
and
executive
vice-president
of
Claridge
Investments.
Claridge
Investments
managed
the
business
affairs
of
the
taxpayer
trust,
subject
of
course
to
the
ultimate
authority
of
the
trustees.
Mr.
Ludwick's
evidence
concerned
the
reasons
for
the
borrowing.
He
testified
that
subject
to
various
constraints
on
the
marketability
of
some
of
the
trust
investments,
“it
certainly
would
have
been
possible
to,
in
an
orderly
way,
liquidate
investments"
to
fund
the
capital
allocation.
The
funds
were
borrowed
because
such
a
disposition
of
assets
would
have
been
commercially
inadvisable.
As
testified
by
Mr.
Ludwick:
.
.
.
my
reasoning
that
existed
then
[in
1969]
still
exists
today,
that
precise
timing
of
the
sale
of
investments
ought
to
be
related
to
the
nature
of
the
investment,
and
not
a
possible
immediate
need
for
cash
on
any
particular
day,
that
the
basic
issue
[is
one]
of
managing
the
assets
side
separately
from
the
liability
and
capital
side.
In
addition,
most
of
the
investments
at
the
time
were
not
readily
realizable,
in
part
because
of
securities
law
constraints
and
in
part
because
the
marketable
securities
that
the
trust
did
hold
had
dropped
in
value.
Accordingly,
the
trustees
considered
it
inappropriate
to
sell
them
at
that
point;
it
appeared
to
be
more
advantageous
for
the
trust
to
keep
the
assets
and
borrow
from
the
bank.
The
evidence
is
unclear
as
to
the
precise
amounts
and
dates
of
the
loan
repayments,
but
it
is
clear
that
the
entire
borrowings
were
repaid
by
1972.
In
1970
the
trust
realized
$1,966,284
and
in
1972,
$1,026,198,
from
the
sale
of
shares
of
Gulf
Oil
Canada
Ltd.
Some
of
the
proceeds
from
these
dispositions
were
used
to
repay
the
bank
loans.
Thus
the
loans
postponed
but
did
not
obviate
the
need
for
an
eventual
reduction
in
the
trust’s
capital
assets.
In
the
meantime,
interest
payments
of
$110,114
in
1970,
$9,802
in
1971,
and
$1,432
in
1972
were
incurred
on
the
debts
to
the
Bank
of
Montreal.
It
is
the
deduction
of
these
interest
payments
from
the
trust's
income
which
is
contested
in
this
appeal.
The
trust
argues
that
even
if
the
loans
were
used
to
pay
the
allocations,
they
were
also
used
for
the
purpose
of
earning
income
from
property
since
they
permitted
the
trust
to
retain
income-producing
investments
until
the
time
was
ripe
to
dispose
of
them.
The
end
result
of
the
transactions,
the
trust
submits,
was
the
same
as
if
the
trustees
had
sold
assets
to
pay
the
allocations
and
then
borrowed
money
to
replace
them,
in
which
case,
it
is
argued,
the
interest
would
have
been
deductible.
The
Crown,
on
the
other
hand,
takes
the
position
that
the
borrowed
funds
were
used
to
pay
the
allocations
to
the
beneficiary,
that
the
amounts
of
interest
claimed
as
deductions
are
not
interest
on
borrowed
money
used
for
the
purpose
of
earning
income
from
a
business
or
property
and
as
such
are
not
deductible.
II
Legislation
For
the
taxation
years
1970
and
1971
the
relevant
legislation
is
paragraph
12(1)(a)
and
subparagraph
11
(1)(c)(i)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148.
The
sections
read
as
follows:
12.
(1)
In
computing
income,
no
deduction
shall
be
made
in
respect
of
(a)
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
property
or
a
business
of
the
taxpayer.
11.
(1)
Notwithstanding
paragraphs
(a),
(b)
and
(h)
of
subsection
1
of
section
12,
the
following
amounts
may
be
deducted
in
computing
the
income
of
a
taxpayer
for
a
taxation
year:
(c)
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
an
interest
in
a
life
insurance
policy)
..
.
These
provisions
were
re-enacted
in
S.C.
1970-71-72,
c.
63.
Sections
18(1)(a)
and
20(1
)(c)(i),
applicable
for
the
1972
taxation
year,
read:
18.
(1)
In
computing
the
income
of
a
taxpayer
from
a
business
or
property
no
deduction
shall
be
made
in
respect
of
(a)
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;
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
reasonably
be
regarded
as
applicable
thereto:
(c)
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)
Counsel
have
not
suggested
that
the
slight
change
in
wording
in
subsection
20(1)
has
any
bearing
on
the
issues
raised
in
this
appeal.
III
Judgments
(a)
Tax
Review
Board
Mr.
Guy
Tremblay
began
his
reasons
for
judgment
by
noting
that
the
burden
was
on
the
trust
to
show
that
the
assessments
were
incorrect.
He
added:
This
burden
of
proof
derives
not
from
one
particular
section
of
the
Income
Tax
Act,
but
from
a
number
of
judicial
decisions,
including
the
judgment
delivered
by
the
Supreme
Court
of
Canada
in
Johnston
v.
M.N.R.,
[1948]
C.T.C.
195;
3
D.T.C.
1182.
Mr.
Tremblay
reviewed
the
jurisprudence,
in
particular
the
main
case
upon
which
the
trust
based
its
contention,
Trans-Prairie
Pipelines
Ltd.
v.
M.N.R.,
[1970]
C.T.C.
537;
70
D.T.C.
6351,
a
decision
of
Jackett,
P.
in
the
Exchequer
Court.
In
that
case
the
taxpayer
corporation
wanted
to
raise
capital
by
way
of
bond
issues
for
expansion
of
its
business.
It
discovered,
however,
that
it
was
impossible,
practically
speaking,
to
float
a
bond
issue
unless
it
first
redeemed
its
preferred
shares,
because
of
the
sinking
fund
requirements
of
its
preferred
share
issue.
Accordingly,
the
taxpayer
borrowed
$700,000,
used
$400,000
to
redeem
the
preferred
shares
and
the
remaining
$300,000
for
expansion
of
its
business.
Jackett,
P.
held
the
interest
payments
on
the
entire
$700,000
loan
deductible.
He
saw
the
borrowed
funds
as
"filling]
the
hole
left
by
the
redemption”.
He
stated,
at
541
(D.T.C.
6354):
Surely,
what
must
have
been
intended
by
section
11(1)(c)
was
that
the
interest
should
be
deductible
for
the
years
in
which
the
borrowed
capital
was
employed
in
the
business
rather
than
that
it
should
be
deductible
for
the
life
of
the
loan
as
long
as
its
first
use
was
in
the
business.
The
main
case
on
which
the
Crown
relied
to
rebut
the
Trans-Prairie
case
was
Sternthal
v.
The
Queen,
[1974]
C.T.C.
851;
74
D.T.C.
6646
(F.C.T.D.).
In
Sternthal,
a
taxpayer
with
a
large
excess
of
asets
over
liabilities
borrowed
a
sum
of
$246,800.
On
the
same
day
he
gave
interest-free
loans
to
his
children
totalling
$280,000.
The
taxpayer
argued
that
he
was
entitled
to
use
his
assets
to
make
loans
to
his
children
and
to
borrow
for
the
purpose
of
“‘filling
the
gap”
left
by
the
making
of
such
loans.
Therefore,
he
argued,
as
long
as
the
assets
which
made
the
loan
possible
were
used
to
produce
income,
interest
on
the
borrowing
was
deductible.
Mr.
Justice
Kerr
did
not
agree.
He
held
that
the
taxpayer
used
the
borrowed
money
to
make
non-interest
bearing
loans
to
his
children,
not
for
the
purpose
of
earning
income.
The
taxpayer
chose
to
find
the
money
for
the
loans
by
borrowing
and
the
fundamental
purpose
of
the
borrowing
was
to
make
the
loans.
Mr.
Tremblay,
in
the
present
case,
was
of
the
opinion
that
the
facts
before
him
were
more
similar
to
Sternthal
than
Trans-Prairie.
He
concurred
in
the
reasoning
of
Justice
Kerr
in
Sternthal
and
concluded
that
he
ought
to
look
at
what
the
interest
expense
was
calculated
to
effect,
from
a
practical
and
business
point
of
view,
in
assessing
whether
it
was
"used
for
the
purpose
of
earning
income
from
a
business
or
property”.
In
attempting
to
apply
such
a
test
to
the
facts,
Mr.
Tremblay
was
not
satisfied
that
the
evidence
was
clear
concerning
the
manner
in
which
the
trust's
income
was
augmented
by
the
incurring
of
the
loan
expense.
In
his
view,
the
trustees’
policy
of
separating
asset
management
from
liability
management
might
have
been
“a
good
administrative
explanation”.
It
was,
however,
"not
sufficient
to
base
a
policy
to
allow
deduction
on
interest
paid
on
all
loans
made
by
the
trust
for
paying
capital
allocation[s]
to
the
beneficiary”.
The
evidence
given
was
not
complete.
Accordingly
the
appeal
was
dismissed.
(b)
Federal
Court,
Trial
Division
The
trust
took
its
suit
to
the
Federal
Court-Trial
Division
where
it
was
heard
de
novo
by
Justice
Marceau
([1980]
2
F.C.
453;
[1979]
C.T.C.
524).
The
trust
maintained
its
contention
that
even
if
the
proceeds
of
the
loans
negotiated
with
the
bank
were
actually
used
to
pay
the
allocations
made
in
favour
of
the
beneficiary,
they
must
still
be
deemed
to
have
been
"used
for
the
purpose
of
earning
income
from
property”
within
the
meaning
of
the
Act,
since
their
use
allowed
the
trust
to
retain
securities
which
were
income
producing
and
which
moreover
increased
in
value
before
the
loans
were
redeemed.
Marceau,
J.
said
at
454
(C.T.C.
525),
“The
defendant
[i.e.,
the
Crown]
disagrees,
and
in
my
view
rightly
so.”
More
detailed
evidence
was
produced
regarding
the
assets
held
by
the
trust.
Nevertheless,
Marceau,
J.
dismissed
the
appeal.
He,
like
Mr.
Tremblay
of
the
Tax
Review
Board,
accepted
the
principle
that
it
is
the
actual
and
real
effect
of
a
transaction
or
series
of
transactions
that
was
relevant,
rather
than
its
“legal’’
or
apparent
aspect.
If
the
transactions
in
the
present
case
had
merely
changed
the
composition
of
the
income-earning
property
of
the
trust
by
liquidating
one
debt
and
substituting
another,
then
he
would
have
accepted
the
proposition
that
the
real
purpose
of
the
transactions
was
to
earn
income
from
the
trust.
He
concluded,
however,
that
the
net
effect
of
the
trustees'
actions
was
to
reduce
the
income-earning
property
of
the
trust
by
some
$2.5
million.
Marceau,
J.
pointed
out
that
at
456
(C.T.C.
526):
.
.
.
the
decision
here
sought
by
the
plaintiff
would
mean
that
without
doing
anything
that
could
enhance
the
value
of
its
property,
nor
even
anything
that
could
change
the
composition
of
its
assets,
the
trust
could
nevertheless
render
non-taxable
part
of
its
income.
In
the
opinion
of
the
trial
judge
the
interest
deduction
was
designed
to
encourage
accretions
to
the
total
amount
of
tax-producing
capital.
Nothing
was
added
to
the
capital
base
by
the
transactions
of
the
trust.
It
followed
that
the
Minister
was
right
in
disallowing
the
deductions.
In
summary,
it
appears
that
the
critical
factor
for
Justice
Marceau
was
that
the
borrowed
money
was
used,
directly
or
indirectly,
to
fund
a
reduction
in
the
taxpayer's
capital.
(c)
Federal
Court
of
Appeal
In
the
Federal
Court
of
Appeal
([1983]
2
F.C.
797,
[1983]
C.T.C.
253),
Thurlow,
C.J.,
Hyde,
D.J.
concurrring,
allowed
the
trust's
appeal.
Thurlow,
C.J.
held
that
the
use
of
the
borrowed
money
to
pay
the
capital
allocations
was
what
enabled
the
trustees
to
keep
the
income-yielding
trust
investments
and
to
exploit
them
by
obtaining
for
the
trust
and
the
income
they
were
earning.
Chief
Justice
Thurlow
said
at
800-801
(C.T.C.
255):
Had
the
trustees
sold
income
yielding
investments
to
pay
the
allocations,
the
income
of
the
trust
would
have
been
reduced
accordingly.
Had
they
given
the
beneficiary
income-yielding
investments
in
lieu
of
cash,
the
income
of
the
trust
would
have
been
reduced
accordingly.
By
not
doing
either,
by
borrowing
money
and
using
it
to
pay
the
allocations,
the
trustees
preserved
intact
the
income-yielding
capacity
of
the
trust's
investments.
That,
as
it
seems
to
me,
is
sufficient,
in
the
circumstances
of
this
case,
to
characterize
the
borrowed
money
as
having
been
used
in
the
taxation
years
in
question
for
the
purpose
of
earning
income
from
the
trust
property.
[Emphasis
added.]
With
respect,
I
have
some
difficulty
with
this
passage.
In
a
narrow
sense
it
might
be
said
that
the
trustees
preserved
intact
the
income-yielding
capacity
of
the
trust's
investments
but
the
practical
and
business
reality
of
the
situation
was
that
the
net
income-yielding
capacity
of
the
trust
was
reduced
by
the
annual
debt
load
from
the
bank
borrowings
which,
as
I
have
said,
amounted
to
$110,114
in
1970.
Thurlow,
C.J.,
however,
characterized
the
borrowed
money
as
having
been
used
for
the
purpose
of
earning
income
from
property
and
it
made
no
difference,
according
to
him,
that
the
immediate
use
of
the
funds
was
to
pay
directly
the
capital
allocations
rather
than
to
repurchase
investments
which
might
have
been
liquidated
to
pay
the
allocations.
In
his
view,
the
focus
of
the
statute
was
on
the
income-earning
purpose
of
the
trustees
in
continuing
to
hold
the
trust
investments.
Moreover,
it
did
not
matter
that
the
trustees,
in
continuing
to
hold
the
investments,
might
also
have
had
an
eye
to
the
possible
appreciation
of
their
capital
value.
The
majority
of
the
Court
did,
however,
express
one
important
reservation
on
the
scope
of
its
holding.
The
majority
was
careful
to
limit
the
ratio
of
its
decision
to
trusts,
as
distinct
from
individuals:
It
should
be
noted
that
a
trust
such
as
that
here
in
question
has
no
purpose
and
the
trustees
have
no
purpose
save
to
hold
trust
property,
to
earn
income
therefrom
and
to
deal
with
such
income
and
the
capital
of
the
trust
in
accordance
with
the
provisions
of
the
trust
instrument.
In
that
respect
a
trust
differs
from
an
individual
person
who
may
have
many
purposes,
both
business
and
personal.
Compare
Sternthal
v.
Her
Majesty
The
Queen
[(1974),
74
D.T.C.
6646
(F.C.T.D.)]
where
the
taxpayer,
an
individual,
had
no
obligation
to
lend
money
to
his
children
but
invested
his
borrowings
in
interest-free
loans
to
them.
Pratte,
J.
dissented.
He
agreed
with
Marceau,
J.
that
the
borrowed
funds
were
in
fact
used
to
pay
capital
allocations
in
favour
of
the
beneficiary.
The
allocations
could
not,
by
any
stretch
of
the
imagination,
be
considered
as
having
been
used
for
the
purpose
of
earning
income.
In
his
view,
TransPrairie
was
not
applicable.
Unlike
Trans-Prairie,
where
the
money
previously
subscribed
by
preferred
shareholders
had
been
used
by
the
company
for
the
purpose
of
earning
income
from
the
business,
in
this
case
the
money
paid
to
the
beneficiary
had
not
already
been
used
by
the
trust
for
the
purpose
of
earning
income.
Justice
Pratte
said
at
804
(C.T.C.
257):
Pursuant
to
the
relevant
provisions
of
the
Income
Tax
Act,
the
interest
here
in
question
was
not
deductible
unless
the
money
borrowed
from
the
Bank
of
Montreal
had
been
“used
for
the
purpose
of
earning
income
from
a
business
or
property”.
It
was
not
so
used
but
was,
in
fact,
used
to
pay
the
capital
allocations
made
by
the
Trustees
in
favour
of
Miss
Bronfman.
The
appellant’s
argument,
in
my
view,
ignores
the
language
of
the
Act.
With
respect,
I
agree.
IV
Eligible
and
Ineligible
Uses
of
Borrowed
Money
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.
Interest
expenses
on
loans
to
augment
fixed
assets
or
working
capital
would
fall
within
the
prohibition
against
the
deduction
of
a
“payment
on
account
of
capital”
under
paragraph
18(1)(b):
Canada
Safeway
Ltd.
v.
M.N.R.,
[1957]
S.C.R.
717;
[1957]
C.T.C.
335,
at
722-23
(C.T.C.
339-40)
per
Kerwin,
C.J.
and
at
727
(C.T.C.
344)
per
Rand,
J:
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.
Not
all
borrowing
expenses
are
deductible.
Interest
on
borrowed
money
used
to
produce
tax
exempt
income
is
not
deductible.
Interest
on
borrowed
money
used
to
buy
life
insurance
policies
is
not
deductible.
Interest
on
borrowings
used
for
non-income
earning
purposes,
such
as
personal
consumption
or
the
making
of
capital
gains
is
similarly
not
deductible.
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.).
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
the
borrowed
money
in
a
particular
manner:
Auld
v.
M.N.R.,
28
Tax
A.B.C.
236;
62
D.T.C.
27
(T.A.B.).
Consequently,
the
focus
of
the
inquiry
must
be
centred
on
the
use
to
which
the
taxpayer
put
the
borrowed
funds.
In
my
opinion,
the
distinction
between
eligible
and
ineligible
uses
of
borrowed
funds
applies
just
as
much
to
taxpayers
who
are
corporations
or
trusts
as
it
does
to
taxpayers
who
are
natural
persons.
While
it
is
true
that
corporations
or
trusts
are
less
likely
to
be
motivated
by
personal
consumption
purposes,
there
remains
nevertheless
a
variety
of
ineligible
uses
for
borrowed
money
which
apply
to
artificial
persons.
A
trust
may,
for
example,
purchase
assets
for
the
purpose
of
capital
gain.
Or,
as
in
the
present
instance,
it
may
distribute
capital
to
a
trust
beneficiary.
It
follows,
with
respect,
that
I
cannot
accept
the
suggestion
of
the
majority
of
the
Federal
Court
of
Appeal
that
virtually
any
use
of
borrowed
funds
by
a
trust,
rather
than
by
an
individual,
will
satisfy
the
requirements
of
the
statutory
interest
deduction.
Fairness
requires
that
the
same
legal
principles
must
apply
to
all
taxpayers,
irrespective
of
their
status
as
natural
or
artificial
persons,
unless
the
Act
specifically
provides
otherwise.
V
Original
or
Current
Use
of
Borrowed
Money
The
cases
are
consistent
with
the
proposition
that
it
is
the
current
use
rather
than
the
original
use
of
borrowed
funds
by
the
taxpayer
which
is
relevant
in
assessing
deductibility
of
interest
payments:
see,
for
example,
Lakeview
Gardens
Corporation
v.
M.N.R.,
[1973]
C.T.C.
586;
73
D.T.C.
5437
(F.C.T.D.),
per
Walsh,
J.,
for
a
correct
application
of
this
principle.
A
taxpayer
cannot
continue
to
deduct
interest
payments
merely
because
the
original
use
of
borrowed
money
was
to
purchase
income-bearing
assets,
after
he
or
she
has
sold
those
assets
and
put
the
proceeds
of
sale
to
an
ineligible
use.
To
permit
the
taxpayer
to
do
so
would
result
in
the
borrowing
of
funds
to
finance
the
purchase
of
income-earning
property
which
could
be
re-sold
immediately
without
affecting
the
deductibility
of
interest
payments
for
an
indefinite
period
thereafter.
Conversely,
a
taxpayer
who
uses
or
intends
to
use
borrowed
money
for
an
ineligible
purpose,
but
later
uses
the
funds
to
earn
non-exempt
income
from
a
business
or
property,
ought
not
to
be
deprived
of
the
deduction
for
the
current,
eligible
use:
Sinha
v.
M.N.R.,
[1981]
C.T.C.
2599;
81
D.T.C.
465
(T.R.B.);
Attaie
v.
M.N.R.,
[1985]
2
C.T.C.
2331;
83
D.T.C.
613
(T.C.C.)
(presently
under
appeal).
For
example,
if
a
taxpayer
borrows
to
buy
personal
property
which
he
or
she
subsequently
sells,
the
interest
payments
will
become
prospectively
deductible
if
the
proceeds
of
sale
are
used
to
purchase
eligible
income-earning
property.
There
is,
however,
an
important
natural
limitation
on
this
principle.
The
borrowed
funds
must
still
be
in
the
hands
of
the
taxpayer,
as
traced
through
the
proceeds
of
disposition
of
the
preceding
ineligible
use,
if
the
taxpayer
is
to
claim
the
deduction
on
the
basis
of
a
current
eligible
use.
Where
the
taxpayer
has
expended
the
borrowings
on
an
ineligible
use,
and
has
received
no
enduring
benefit
or
saleable
property
in
return,
the
borrowed
money
can
obviously
not
be
available
to
the
taxpayer
for
a
subsequent
use,
whether
eligible
or
ineligible.
A
continuing
obligation
to
make
interest
payments
to
the
creditor
therefore
does
not
conclusively
demonstrate
that
the
borrowed
money
has
a
continuing
use
for
the
taxpayer.
In
the
present
case
the
borrowed
money
was
originally
used
to
make
capital
allocations
to
the
beneficiary
for
which
the
trust
received
no
property
or
consideration
of
any
kind.
That
use
of
the
borrowings
was
indisputably
not
of
an
income-earning
nature.
Accordingly,
unless
the
direct
use
of
the
money
ought
to
be
overlooked
in
favour
of
an
alleged
indirect
incomeearning
use,
the
trust
cannot
be
permitted
to
deduct
the
interest
payments
in
issue
in
this
appeal.
VI
Direct
and
Indirect
Uses
of
Borrowed
Money
As
I
have
indicated,
the
respondent
trust
submits
that
the
borrowed
funds
permitted
the
trust
to
retain
income-earning
properties
which
it
otherwise
would
have
sold
in
order
to
make
the
capital
allocations
to
the
beneficiary.
Such
a
use
of
borrowings,
it
argues,
is
sufficient
in
law
to
entitle
it
to
the
interest
deduction.
In
short,
the
Court
is
asked
to
characterize
the
transaction
on
the
basis
of
a
purported
indirect
use
of
borrowed
money
to
earn
income
rather
than
on
the
basis
of
a
direct
use
of
funds
that
was
counter-productive
to
the
trust's
income-earning
capacity.
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
need
only
contemplate
the
consequences
of
the
interpretation
sought
by
the
trust
in
order
to
reach
the
conclusion
that
it
cannot
have
been
intended
by
Parliament.
In
order
for
the
trust
to
succeed,
subparagraph
20(1)(c)(i)
would
have
to
be
interpreted
so
that
a
deduction
would
be
permitted
for
borrowings
by
any
taxpayer
who
owned
incomeproducing
assets.
Such
a
taxpayer
could,
on
this
view,
apply
the
proceeds
of
a
loan
to
purchase
a
life
insurance
policy,
to
take
a
vacation,
to
buy
speculative
properties,
or
to
engage
in
any
other
non-income-earning
or
ineligible
activity.
Nevertheless,
the
interest
would
be
deductible.
A
less
wealthy
taxpayer,
with
no
income-earning
assets,
would
not
be
able
to
deduct
interest
payments
on
loans
used
in
the
identical
fashion.
Such
an
interpretation
would
be
unfair
as
between
taxpayers
and
would
make
a
mockery
of
the
statutory
requirement
that,
for
interest
payments
to
be
deductible,
borrowed
money
must
be
used
for
circumscribed
income-earning
purposes.
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
uses
in
a
manner
inconsistent
with
the
argument
of
the
trust.
Subsection
20(3)
(formerly
subsection
11(3b))
stipulates,
for
example,
that
interest
on
money
borrowed
to
repay
an
existing
loan
shall
be
deemed
to
have
been
used
for
the
purpose
for
which
the
previous
borrowings
were
used.
This
provision
would,
of
course,
be
unnecessary
if
interest
on
borrowed
money
were
deductible
when
the
taxpayer
had
income-earning
properties
to
preserve.
On
the
contrary,
however,
for
taxation
years
prior
to
the
enactment
of
subsection
11
(3b)
in
S.C.
1953-54,
c.
57,
s.
2(6),
it
had
been
held
that
such
interest
was
not
deductible
since
the
borrowings
were
used
to
repay
a
loan
and
not
to
earn
income:
Interior
Breweries
Ltd.
v.
M.N.R.,
[1955]
C.T.C.
143
at
148;
55
D.T.C.
1090
at
1093
(Exch.
Ct.).
It
is
not
surprising,
therefore,
that
the
cases
interpreting
subparagraph
20(1
)(c)(i)
and
its
predecessor
provisions
have
not
favoured
the
view
that
a
direct
ineligible
use
of
borrowed
money
ought
to
be
overlooked
whenever
an
indirect
eligible
use
of
funds
can
be
found.
See
Sternthal
and
also
Carneau
Marine
Co.
v.
M.N.R.,
[1982]
C.T.C.
2191;
82
D.T.C.
1171
(T.R.B.).
In
a
similar
vein,
it
has
been
held
repeatedly
that
an
individual
cannot
deduct
interest
paid
on
the
mortgage
of
a
personal
residence
even
though
he
or
she
claims
that
the
borrowing
avoided
the
need
to
sell
income-producing
investments.
Some
of
the
more
recent
cases
include:
Tootsie
v.
The
Queen,
[1986]
1
C.T.C.
216;
86
D.T.C.
6117
(F.C.T.D.),
Jordanov
v.
M.N.R.,
[1986]
1
C.T.C.
2183;
86
D.T.C.
1136
(T.C.C.),
Day
v.
M.N.R.,
[1984]
C.T.C.
2200;
84
D.T.C.
1184
(T.C.C.),
Eelkema
v.
M.N.R.,
[1983]
C.T.C.
2311;
83
D.T.C.
253
(T.R.B.),
Zanyk
v.
M.N.R.,
[1981]
C.T.C.
2042;
81
D.T.C.
48
(T.R.B.),
Holmann
v.
M.N.R.,
[1979]
C.T.C.
2653;
79
D.T.C.
594
(T.R.B.),
Huber
v.
M.N.R.,
[1979]
C.T.C.
3161;
79
D.T.C.
936
(T.R.B.),
Dorman
v.
M.N.R.,
[1977]
C.T.C.
2355;
77
D.T.C.
251
(T.R.B.),
and
Verhoeven
v.
M.N.R.,
[1975]
C.T.C.
2292;
75
D.T.C.
230
(T.R.B.).
It
has
also
been
held
in
a
number
of
cases
that
an
estate
cannot
deduct
interest
paid
on
borrowings
used
to
pay
succession
duties
or
taxes
even
though
the
estate
claims
to
have
borrowed
in
lieu
of
selling
income-producing
investments:
Shields
v.
M.N.R.,
[1968]
Tax
A.B.C.
909;
68
D.T.C.
668,
Auld
v.
M.N.R.,
Cutten
v.
M.N.R.,
16
Tax
A.B.C.
1;
56
D.T.C.
454,
No.
228
v.
M.N.R.,
12
Tax
A.B.C.
83;
55
D.T.C.
39,
No.
185
v.
M.N.R.,
11
Tax
A.B.C.
173;
54
D.T.C.
395.
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.
The
taxpayer
corporation
in
that
case
sought
to
deduct
the
interest
on
a
series
of
debentures
which
the
corporation
used
to
finance
the
purchase
of
shares
in
another,
related
corporation.
In
the
period
in
question,
1947-1949,
dividends
from
shares
of
Canadian
corporations
were
exempted
from
taxable
income.
To
the
extent
to
which
the
debentures
were
used
to
produce
dividend
income
from
shares,
the
taxpayer
was
accordingly
ineligible
for
the
interest
deduction.
The
taxpayer
corporation
argued
however
that
the
share
purchase
not
only
provided
dividend
income,
but
also
increased
the
taxpayer’s
income
from
its
existing
business
operations
by
giving
it
control
over
a
wholesale
supplier.
This
conferred
a
considerable
advantage
on
the
taxpayer
relative
to
its
competitors
and
allowed
it
to
increase
significantly
its
net
income.
Nevertheless,
the
Court
held
that
the
interest
payments
were
not
deductible,
Locke,
J.
dissenting.
Justice
Rand
stated,
at
726
(C.T.C.
343):
No
doubt
there
is
in
fact
a
causal
connection
between
the
purchase
of
the
stock
and
the
benefits
ultimately
received;
but
the
statutory
language
cannot
be
extended
to
such
a
remote
consequence;
it
could
be
carried
to
any
length
in
a
chain
of
subsidiaries;
and
to
say
that
such
a
thing
was
envisaged
by
the
ordinary
expression
used
in
the
statute
is
to
speculate
and
not
interpret.
Referring
to
the
interest
expense
deduction
for
borrowed
money
used
for
the
purpose
of
earning
income
from
business,
Rand,
J.
concluded
at
727
(C.T.C.
345):
What
is
aimed
at
by
the
section
is
an
employment
of
the
borrowed
funds
immediately
within
the
company's
business
and
not
one
that
effects
its
purpose
in
such
an
indirect
and
remote
manner.
Turning
to
borrowings
used
to
generate
income
from
property,
he
said
:
There
is
nothing
in
this
language
to
extend
the
application
to
an
acquisition
of
“power”
annexed
to
stock,
and
to
the
indirect
and
remote
effects
upon
the
company
of
action
taken
in
the
course
of
business
of
the
subsidiary.
Although
the
Canada
Safeway
case
did
not
relate
specifically
to
an
alleged
indirect
use
of
funds
to
preserve
income-producing
assets,
the
emphasis
on
directness
of
use
of
borrowed
funds
in
the
reasons
of
Justice
Rand
is
antithetical
to
the
submission
of
the
taxpayer
in
the
present
appeal.
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.
I
acknowledge,
however,
that
just
as
there
has
been
a
recent
trend
away
from
strict
construction
of
taxation
statutes
(see
Stubart
Investments
Ltd.
v.
The
Queen,
[1984]
1
S.C.R.
536
at
573-79;
[1984]
C.T.C.
294
at
313-316
and
The
Queen
v.
Golden,
[1986]
1
S.C.R.
209
at
214-15;
[1986]
1
C.T.C.
274
at
277),
so
too
has
the
recent
trend
in
tax
cases
been
towards
attempting
to
ascertain
the
true
commercial
and
practical
nature
of
the
taxpayer’s
transactions.
There
has
been,
in
this
country
and
elsewhere,
a
movement
away
from
tests
based
on
the
form
of
transactions
and
towards
tests
based
on
what
Lord
Pearce
has
referred
to
as
a
"common
sense
appreciation
of
all
the
guiding
features”
of
the
events
in
question:
B.P.
Australia
Ltd.
v.
Commissioner
of
Taxation
of
Australia,
[1966]
A.C.
224
at
264;
[1965]
3
All
E.R.
209
at
218
(P.C.).
See
also
F.H.
Jones
Tobacco
Sales
Company
Ltd.,
[1973]
F.C.
825
at
834;
[1973]
C.T.C.
784
at
790
(T.D.)
per
Noel,
A.C.J.;
Hallstroms
Pty.
Ltd.
v.
Federal
Commissioner
of
Taxation
(1946),
8
A.T.D.
190
(High
Ct.)
at
196
per
Dixon,
J.;
and
Cochrane
Estate
v.
M.N.R.,
[1976]
C.T.C.
2215;
76
D.T.C.
1154
(T.R.B.),
per
Mr.
A.
W.
Prociuk,
Q.C.
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.
This
does
not
mean,
however,
that
a
deduction
such
as
the
interest
deduction
in
subparagraph
20(1)(c)(i),
which
by
its
very
text
is
made
available
to
the
taxpayer
in
limited
circumstances,
is
suddenly
to
lose
all
its
strictures.
It
is
not
lightly
to
be
assumed
that
an
actual
and
direct
use
of
borrowed
money
is
any
less
real
than
the
abstract
and
remote
indirect
uses
which
have,
on
occasion,
been
advanced
by
taxpayers
in
an
effort
to
achieve
a
favourable
characterization.
In
particular,
I
believe
that
despite
the
fact
that
it
can
be
characterized
as
indirectly
preserving
income,
borrowing
money
for
an
ineligible
direct
purpose
ought
not
entitle
a
taxpayer
to
deduct
interest
payments.
The
taxpayer
in
such
a
situation
has
doubly
reduced
his
or
her
long
run
income-earning
capacity:
first,
by
expending
capital
in
a
manner
that
does
not
produce
taxable
income;
and
second,
by
incurring
debt
financing
charges.
The
taxpayer,
of
course,
has
a
right
to
spend
money
in
ways
which
cannot
reasonably
be
expected
to
generate
taxable
income
but
if
the
taxpayer
chooses
to
do
so,
he
or
she
cannot
expect
any
advantageous
treatment
by
the
tax
assessor.
In
my
view,
the
text
of
the
Act
requires
tracing
the
use
of
borrowed
funds
to
a
specific
eligible
use,
its
obviously
restricted
purpose
being
the
encouragement
of
taxpayers
to
augment
their
incomeproducing
potential.
This,
in
my
view,
precludes
the
allowance
of
a
deduction
for
interest
paid
on
borrowed
funds
which
indirectly
preserve
incomeearning
property
but
which
are
not
directly
“used
for
the
purpose
of
earning
income
from
.
.
.
property”.
Even
if
there
are
exceptional
circumstances
in
which,
on
a
real
appreciation
of
a
taxpayer's
transactions,
it
might
be
appropriate
to
allow
the
taxpayer
to
deduct
interest
on
funds
borrowed
for
an
ineligible
use
because
of
an
indirect
effect
on
the
taxpayer’s
income-earning
capacity,
I
am
satisfied
that
those
circumstances
are
not
presented
in
the
case
before
us.
It
seems
to
me
that,
at
the
very
least,
the
taxpayer
must
satisfy
the
Court
that
his
or
her
bona
fide
purpose
in
using
the
funds
was
to
earn
income.
In
contrast
to
what
appears
to
be
the
case
in
Trans-Prairie,
the
facts
in
the
present
case
fall
far
short
of
such
a
showing.
Indeed,
it
is
of
more
than
passing
interest
that
the
assets
which
were
preserved
for
a
brief
period
of
time
yielded
a
return
which
grossly
fell
short
of
the
interest
costs
on
the
borrowed
money.
In
1970,
the
interest
costs
on
the
$2.2
million
of
loans
amounted
to
over
$110,000
while
the
return
from
an
average
$2.2
million
of
trust
assets
(the
amount
of
capital
“preserved”)
was
less
than
$10,000.
The
taxpayer
cannot
point
to
any
reasonable
expectation
that
the
income
yield
from
the
trust's
investment
portfolio
as
a
whole,
or
indeed
from
any
single
asset,
would
exceed
the
interest
payable
on
a
like
amount
of
debt.
The
fact
that
the
loan
may
have
prevented
capital
losses
cannot
assist
the
taxpayer
in
obtaining
a
deduction
from
income
which
is
limited
to
use
of
borrowed
money
for
the
purpose
of
earning
income.
Before
concluding,
I
wish
to
address
one
final
argument
raised
by
counsel
for
the
trust.
It
was
submitted
—
and
the
Crown
generously
conceded
—
that
the
trust
would
have
obtained
an
interest
deduction
if
it
had
sold
assets
to
make
the
capital
allocation
and
borrowed
to
replace
them.
Accordingly,
it
is
argued,
the
trust
ought
not
to
be
precluded
from
an
interest
deduction
merely
because
it
achieved
the
same
effect
without
the
formalities
of
a
sale
and
repurchase
of
assets.
It
would
be
a
sufficient
answer
to
this
submission
to
point
to
the
principle
that
the
courts
must
deal
with
what
the
taxpayer
actually
did,
and
not
what
he
might
have
done:
Matheson
v.
The
Queen,
[1974]
C.T.C.
186
at
189;
74
D.T.C.
6176
at
6179
(F.C.T.D.)
per
Mahoney,
J.
In
any
event,
I
admit
to
some
doubt
about
the
premise
conceded
by
the
Crown.
If,
for
example,
the
trust
had
sold
a
particular
income-producing
asset,
made
the
capital
allocation
to
the
beneficiary
and
repurchased
the
same
asset,
all
within
a
brief
interval
of
time,
the
courts
might
well
consider
the
sale
and
repurchase
to
constitute
a
formality
or
a
sham
designed
to
conceal
the
essence
of
the
transaction,
namely
that
money
was
borrowed
and
used
to
fund
a
capital
allocation
to
the
beneficiary.
In
this
regard,
see
Zwaig
v.
M.N.R.,
[1974]
C.T.C.
2172,
74
D.T.C.
1121
(T.R.B.),
in
which
the
taxpayer
sold
securities
and
used
the
proceeds
to
buy
a
life
insurance
policy.
He
then
borrowed
on
the
policy
to
repurchase
the
securities.
Under
subparagraph
20(1)(c)(i)
the
use
of
borrowed
money
to
purchase
a
life
insurance
policy
is
not
a
use
entitling
the
taxpayer
to
an
interest
deduction.
The
Tax
Review
Board
rightly
disallowed
the
deduction
sought
for
interest
payments,
notwithstanding
that
the
form
of
the
taxpayer's
transactions
created
an
aura
of
compliance
with
the
requirements
of
the
interest
deduction
provision.
The
characterization
of
taxpayers’
transactions
according
to
their
true
commercial
and
practical
nature
does
not
always
favour
the
taxpayer.
The
taxpayer
trust
in
this
appeal
asks
the
Court
for
the
benefit
of
a
characterization
based
on
the
alleged
commercial
and
practical
nature
of
its
transactions.
At
the
same
time,
however,
it
seeks
to
have
the
commercial
and
practical
nature
of
its
transactions
determined
by
reference
to
a
hypothetical
characterization
which
reflects
the
epitome
of
formalism.
I
cannot
accept
that
it
should
be
allowed
to
succeed.
It
follows
that
I
would
allow
the
appeal
and
restore
the
assessments
of
the
Minister
of
National
Revenue,
with
costs
in
this
Court,
the
Federal
Court
of
Appeal
and
the
Federal
Court
—
Trial
Division.
Appeal
allowed.