Date: 20010215
Docket: 2000-2696(IT)I
BETWEEN:
THOMAS GIFFORD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowman, A.C.J.
[1] This appeal is from an assessment
made under the Income Tax Act for the appellant's 1996
taxation year. It concerns the treatment of the sum of $100,000
paid by the appellant, a financial advisor employed by Midland
Walwyn Capital Inc., stock brokers, to a fellow employee,
Scott R. Bentley. It also concerns the deductibility of
interest paid on the amount he borrowed to make the payment.
[2] The circumstances in which the
payment was made are as follows: both the appellant and Scott
Bentley were employed by Midland Walwyn which has since merged
with, or been taken over by, Merrill Lynch Canada. Each had his
own group of clients or customers to whom they gave financial
advice or on whose behalf securities were bought or sold. These
clients would certainly be described as clients of Midland Walwyn
and no doubt they were also clients of the particular financial
advisor such as Mr. Gifford or Mr. Bentley.
[3] It should be observed that no one
"owns" a client. Clients are not a commodity that can
be bought or sold on the open market. It is not uncommon for a
businessperson to sell a customer list but it is obvious that the
clients that make up that list are not being sold. There have
been many cases in the courts that have considered whether
payments for such customer lists were on revenue or capital
account or whether they constituted eligible capital
expenditures. That is not the situation here. Mr. Gifford
could not buy a customer list from Mr. Bentley because
Mr. Bentley did not have one to sell.
[4] Mr. Bentley wanted to leave
Midland Walwyn and Mr. Gifford wanted to be able to service
his clients. In order to affect this desire Mr. Gifford paid
Mr. Bentley $100,000 under the following contract.
Agreement to Purchase Client Base
of
Financial Advisor
Whereas Scott R. Bentley, hereinafter referred to as "the
Vendor" and Thomas D. Gifford, hereinafter referred to as
"the Purchaser", have agreed to the exchange of the
said "Client Base" for cash consideration, the
following terms constitute this agreement:
1. The
"Client Base" is considered to comprise all Midland
Walwyn accounts and all direct mutual fund company accounts with
the Dealer/Representative code 9270/DP1E, which is the
designation for the Vendor as a Midland Walwyn Financial
Advisor.
2. The Vendor
agrees to identify and exclude from the attached client list,
"Exhibit 1", to the best of his ability, any clients
that are no longer coded 9270/DP1E.
3. The Vendor
agrees not to provide retail securities investment advice to
clients identified on the attached client list for a period of
thirty months from the date of this agreement.
4. The Vendor
also agrees not to provide material information regarding the
contents of the Client list to other individuals or institutions
providing financial services without the prior written consent of
the purchaser.
5. The
Purchaser agrees upon closing, to pay the vendor the amount of
$90,000 in consideration of the Vendor providing written
direction to Midland Walwyn Capital Inc. to transfer the Client
Base to Dealer/Representative code 9270/DP1D, which is the
designation for the Purchaser as a Midland Walwyn Financial
Advisor.
6. The
Purchaser further agrees to pay the Vendor on April 8, 1996
the amount of $10,000 conditional upon the following: erosion of
mutual fund assets within the client base due to client transfers
to other institutions or other financial advisors within Midland
Walwyn will amount to no more than $1,500,000 at such time as
this payment is due. The purchaser agrees to exclude any
transfers which are made to other Midland Walwyn Financial
Advisors for cash consideration. The purchaser also agrees to
exclude any transfers that are made to other Midland Walwyn
Financial Advisors as a result of trading clients. Should erosion
of the mutual fund assets as described above exceed $1,500,000,
the payment due April 8, 1996 will be reduced by $1,000 per
$100,000 of mutual fund erosion.
7. The Vendor
agrees to provide a written endorsement of the Purchaser to each
of his clients as per "Exhibit 2" of this
agreement.
[5] In filing his return of income the
appellant deducted $13,258.07, which he claimed represented
depreciation of goodwill ($5,250) and interest and insurance
expense ($8,008.07). The Minister disallowed this amount on the
basis that no provision allowed the appellant to deduct an amount
as depreciation of goodwill or interest for the purchase of a
customer list.
[6] I agree with the Minister's
view that an employee, including an employee paid by commissions,
cannot deduct the capital cost of goodwill as an eligible capital
expenditure within the meaning of section 14 of the
Income Tax Act. Such a deduction is permitted only to
persons carrying on a business and it is common ground that the
appellant's income was from employment.
[7] The reply to the notice of appeal
sets out in paragraph 10 the premise upon which the
assessment is based.
10. In so reassessing the
Appellant's income tax return for the 1996 taxation year on
October 13, 1998, the Minister made the following
assumptions of fact:
(a) during the 1996
taxation year, the Appellant was an employee of Midland Walwyn
Capital Inc. (the "Employer") in receipt of commission
income from the sale of securities;
(b) on
December 10, 1995, the Appellant (the "Purchaser")
paid Scott Bentley (the "Vendor") the sum of
$100,000.00 for a list of clients;
(c) the Vendor was
also an employee of the Employer referred to in subparagraph
10(a) herein;
(d) at all relevant
times, the Employer was the owner of the list of clients referred
to in subparagraph 10(b) herein;
(e) the agreement
between the Purchaser and Vendor contained a restriction clause
that stipulated that the Vendor would not provide advice to the
clients whose names appeared on the list for a period of thirty
months from the date of the transaction referred to in
subparagraph 10(b) herein;
(f) the list
purchased by the Appellant was of enduring value that resulted in
a long term benefit to the Appellant;
(g) the purchase
referred to in subparagraph 10(b) herein constitutes a capital
outlay that qualifies as an eligible capital expenditure; and
(h) there is no
provision in section 8 of the Income Tax Act (the
"Act") for an employee to claim the amounts of
$5,250.00 and $8,008.07 as indicated in paragraph 8 herein.
[8] The premise that the appellant was
acquiring a list of clients and that the agreement set out above
involved the acquisition of a capital asset is in my view
erroneous. What Mr. Gifford was getting was an agreement by
Mr. Bentley to endorse Mr. Gifford to his clients on
the list and not to provide investment advice to them. He was not
buying a list of clients. Mr. Bentley's clients were
clients of Midland Walwyn. There was a procedure, as explained by
the branch manager Mr. Greco, whereby clients could be
"assigned" from one financial advisor to another. The
term "assign" is something of a misnomer in that it
implies that any property or legal rights were being assigned
from one person to another. All it means is that Midland Walwyn
would tell a client that his or her account would henceforth be
handled by a different person. The client was free to deal with
whomever he or she wanted, whether with Midland Walwyn or anybody
else. Indeed, the agreement nowhere says that Mr. Bentley is
selling a client list to Mr. Gifford, although the agreement
is called "Agreement to Purchase Client Base". The list
of clients was not Mr. Bentley's to sell.
[9] Paragraph 8(1)(f) of
the Income Tax Act permits a deduction in computing income
from an office or employment as follows:
(f) where the
taxpayer was employed in the year in connection with the selling
of property or negotiating of contracts for the taxpayer's
employer, and
(i) under the
contract of employment was required to pay the taxpayer's own
expenses,
(ii) was ordinarily
required to carry on the duties of the employment away from the
employer's place of business,
(iii) was remunerated in
whole or part by commissions or other similar amounts fixed by
reference to the volume of the sales made or the contracts
negotiated, and
(iv) was not in receipt of
an allowance for travel expenses in respect of the taxation year
that was, by virtue of subparagraph 6(1)(b)(v), not
included in computing the taxpayer's income,
amounts expended by the taxpayer in the year for the purpose
of earning the income from the employment (not exceeding the
commissions for other similar amounts referred to in subparagraph
(iii) and received by the taxpayer in the year) to the extent
that those amounts were not
(v) outlays, losses
or replacements of capital or payments on account of capital,
except as described in paragraph (j),
(vi) outlays or expenses
that would, by virtue of paragraph 18(1)(l), not be
deductible in computing the taxpayer's income for the year if
the employment were a business carried on by the taxpayer, or
(vii) amounts the payment of
which reduced the amount that would otherwise be included in
computing the taxpayer's income for the year because of
paragraph 6(1)(e).
[10] Subject only to the question of the
year of deductibility I am of the view that all of the conditions
permitting the appellant to deduct the payment have been met and
indeed the Minister in his assumptions stated that he had allowed
the majority of the employment expenses claimed.
[11] Obviously, the $100,000 was expended
for the purpose of earning the income. I do not however think
that it was a capital outlay. Essentially, Mr. Gifford
obtained the opportunity to approach Mr. Bentley's
clients without interference from Mr. Bentley and indeed
with his approval and assistance. This is not an asset or
advantage for the enduring benefit of the trade as that phrase
was used by Viscount Cave L.C. in British Insulated and Helsby
Cables v. Atherton, [1926] A.C. 205. It is one of the
ongoing and recurrent demands that are made on persons who seek
to earn a living as salesmen selling to the public. It is a
current marketing expense.
[12] The authoritative discussion of the
difference between capital expenditures and capital account is
found in the decision of the Supreme Court of Canada in
Johns-Manville Canada v. The Queen, [1985]
2 S.C.R. 46. At pages 56 to 62 Estey J. made
the following observations.
When one turns to the appropriate principles of law to apply to
the determination of the classification of an expenditure as
being either expense or capital, an unnerving starting place is
the comment of the Master of the Rolls, Sir Wilfred Greene in
British Salmson Aero Engines, Ltd. v. Commissioner of Inland
Revenue (1937), 22 T.C. 29, at p. 43:
... there have been ... many cases where this matter
of capital or income has been debated. There have been many cases
which fall upon the borderline: indeed, in many cases it is
almost true to say that the spin of a coin would decide the
matter almost as satisfactorily as an attempt to find reasons
...
This court encountered s. 12(1)(b) in Minister
of National Revenue v. Algoma Central Railway, [1968] S.C.R.
447. Fauteux J., as he then was, at p. 449, stated:
Parliament did not define the expressions "outlay ...
of capital" or "payment on account of capital".
There being no statutory criterion, the application or
non-application of these expressions to any particular
expenditures must depend upon the facts of the particular case.
We do not think that any single test applies in making that
determination ...
The Court thereupon expressed agreement with the decision of
the Privy Council in B.P. Australia Ltd. v. Commissioner of
Taxation of the Commonwealth of Australia, [1966] A.C. 224.
The Privy Council there determined that a payment made by the
taxpayer as an inducement to a service station operator to sign
an exclusive agency contract was an income expenditure and not a
capital outlay. The contract had a life of five years and thus
was an asset of sorts which amounted to an opportunity by the
taxpayer to market its gasoline exclusively through the
operator's outlet. Nonetheless Lord Pearce concluded, at p.
260:
B.P.'s ultimate object was to sell petrol and to maintain or
increase its turnover. There can be no doubt that the only
ultimate reason for any lump sum payment was to maintain or
increase gallonage.
Here the taxpayer made the expenditure not in order to acquire
a piece of land so that it could strip non-ore-bearing rock from
it but in order to derive income from the taxpayer's existing
ore body which was not located underneath the land in question.
After reviewing a number of different approaches to the problem
of classifying in law and accounting the nature of the
expenditure, Lord Pearce stated, at pp. 264-65:
The solution to the problem is not to be found by any rigid
test or description. It has to be derived from many aspects
of the whole set of circumstances some of which may point in one
direction, some in the other. One consideration may point so
clearly that it dominates other and vaguer indications in the
contrary direction. It is a commonsense appreciation of all
the guiding features which must provide the ultimate answer.
Although the categories of capital and income expenditure are
distinct and easily ascertainable in obvious cases that lie far
from the boundary, the line of distinction is often hard to draw
in border line cases; and conflicting considerations may produce
a situation where the answer turns on questions of emphasis and
degree. That answer:
"depends on what the expenditure is calculated to effect
from a practical and business point of view rather than upon the
juristic classification of the legal rights, if any, secured,
employed or exhausted in the process":
per Dixon J. in Hallstroms Pty. Ltd. v. Federal
Commissioner of Taxation (1946) 72 C.L.R. 634, 648.
(Emphasis added.)
The Privy Council applied another test in the course of
characterizing the expenditures in B.P. Australia Ltd.,
supra, at p. 271:
Finally, were these sums expended on the structure within which
the profits were to be earned or were they part of the
money-earning process?
This question is remarkably apt on the circumstances in the
appeal now before this Court. The Privy Council's answer was
that the expenditure was not to be taken as being on the
structure but rather as part of the money earning process. At p.
273, Lord Pearce, in considering the manner in which the benefit
procured by the expenditure was to be used, stated that such
benefit was to be used "in the continuous and recurrent
struggle to get orders and sell petrol". In my view, the
same result is reached on the circumstances existing in this
appeal. The removal of the ore here was obviously the continuous
and recurrent struggle in which the taxpayer was principally
engaged, and the expenditure here was, as revealed by its uniform
history over the years and by its role in the process of the
recovery of ore, part of the essential profit-seeking operation
of the taxpayer.
In the Hallstroms case [Hallstroms Pty. Ltd. v. Federal
Commissioner of Taxation (1946), 72 C.L.R. 634] Dixon J., as
he then was, in discussing the difference between capital and
income expenditures, stated, at p. 647, that the difference
lay:
... between the acquisition of the means of production
and the use of them; between establishing or extending a business
organization and carrying on the business; between the implements
employed in work and the regular performance of the work
...; between an enterprise itself and the sustained effort
of those engaged in it.
Other tests have been adopted in other tax systems. Also in
Australia, in the High Court decision in Sun Newspapers Ltd.
v. Federal Commissioner of Taxation (1938), 61 C.L.R. 337,
the court, speaking through Dixon J. enunciated three principles
to be applied in determining the character of an expenditure by a
taxpayer for the purposes of applying the taxation statute. He
stated, at p. 363:
There are, I think, three matters to be considered, (a)
the character of the advantage sought, and in this its lasting
qualities may play a part, (b) the manner in which it is
to be used, relied upon or enjoyed, and in this and under the
former head recurrence may play its part, and (c) the
means adopted to obtain it; that is, by providing a periodical
reward or outlay to cover its use or enjoyment for periods
commensurate with the payment or by making a final provision or
payment so as to secure future use or enjoyment.
On the preceding page, His Lordship, in explaining the test
from another aspect, said:
... the expenditure is to be considered of a revenue
nature if its purpose brings it within the very wide class of
things which in the aggregate form the constant demand which must
be answered out of the returns of a trade or its circulating
capital and that actual recurrence of the specific thing need not
take place or be expected as likely.
The Court on that occasion was concerned with the character to
be ascribed to a payment made by one competitor to another to
secure a discontinuance of a new and threatening adventure. The
Court concluded the payment was capital in nature and should not
be charged to revenue.
There is almost an endless rainbow of expressions used to
differentiate between expenditures in the nature of charges
against revenue and expenditures which are capital. It has been
said that the terminology employed is merely an attempt to
identify particular factors which may tilt the scale in a
particular case in favour of one or the other conclusion. At one
time it was considered helpful to identify the funds expended as
either "circulating capital" of "fixed
capital". The vocabulary has changed but the same problem of
classification survives.
Another example of these helpful but not controlling tests, and
of the changing taxation law vocabulary, is found in the decision
of the Privy Council in Commissioner of Taxes v. Nchanga
Consolidated Copper Mines Ltd., [1964] A.C. 948, where
Viscount Radcliffe stated, at p. 959:
Nevertheless, it has to be remembered that all these phrases,
as, for instance, "enduring benefit" or "capital
structure" are essentially descriptive rather than
definitive, and, as each new case arises for adjudication and it
is sought to reason by analogy from its facts to those of one
previously decided, a court's primary duty is to inquire how
far a description that was both relevant and significant in one
set of circumstances is either significant or relevant in those
which are presently before it.
The judicial committee added, at p. 960, that when defining
what was a capital structure established for "enduring"
benefit, "enduring" did not necessarily mean permanent,
nor did it mean perpetual.
Analogies in this field are infinite. One which comes to mind is
the lump sum payment to an employee in order to terminate an
employment contract or rights on dismissal. This was determined
many years ago to be a payment in the nature of a charge against
revenue rather than capital. In Mitchell v. B.W. Noble,
Ltd., [1927] 1 K.B. 719, Lord Hanworth M.R., at p. 737,
stated that the payment was made "not in order to secure an
actual asset to the company but to enable the company to continue
to carry on, as it had done in the past ...." The
findings in both courts below in the case at bar are that no
intention to acquire a lasting asset is present and indeed no
lasting asset was acquired. Both courts, in slightly different
terminology, found the land to have been consumed in the mining
process. If this analogy is apt, the "expense"
classification is to be preferred in the circumstances here.
At one time, the test applied by the courts in discriminating as
between revenue and capital was the "once and for all"
test. This test was adopted by Viscount Cave L.C. in British
Insulated and Helsby Cables, Ltd. v. Atherton, [1926] A.C.
205 at p. 213. Viscount Cave observed that the finding of revenue
or capital was a question of fact, but then concerned himself
with the answer to the question because of an imprecise finding
below. The test he adopted at p. 213 was "to say that
capital expenditure is a thing that is going to be spent once and
for all, and income expenditure is a thing that is going to recur
every year", although he recognized that this test was not
"to be a decisive one in every case". Later at pp.
213-214 the Lord Chancellor elaborated:
... where an expenditure is made not only once and for
all, but with a view to bringing into existence an asset or an
advantage for the enduring benefit or a trade, I think that is a
very good reason (in the absence of special circumstances leading
to an opposite conclusion) for treating such an expenditure as
properly attributable not to revenue but to capital.
In this the Court relied upon the earlier decision of
Vallambrosa Rubber Co. v. Farmer, [1910] S.C. 519, at p.
525. A few years later in Ounsworth v. Vickers, Ltd.,
[1915] 3 K.B. 267, at p. 273, Rowlatt J. interpreted this test as
not requiring that expenditures be made on an annual basis in
order to qualify them as a deduction from revenue but rather that
the expenditures be "made to meet a continuous
demand".
This discussion of authorities takes one full circle to the words
of Lord Reid in Regent Oil Co. v. Strick, [1966] A.C. 295,
at p. 313:
So it is not surprising that no one test or principle or rule
of thumb is paramount. The question is ultimately a question of
law for the court, but it is a question which must be answered in
the light of all the circumstances which it is reasonable to take
into account, and the weight which must be given to a
particular circumstance in a particular case must depend rather
on common sense than on strict application of any single legal
principle.
(Emphasis added.)
It is of little help, in my respectful opinion, to attempt to
classify the character of the expenditure according to the
subject of that expenditure. Here it was land, and expenditure
for land may be classified in good accounting and in good law as
capital or, in different circumstances, as an expenditure
chargeable against revenue in the computation of profit. In the
words of Romer L.J.:
It depends in no way upon what may be the nature of the asset
in fact or in law. Land may in certain circumstances be
circulating capital. A chattel or a chose in action may be fixed
capital. The determining factor must be the nature of the trade
in which the asset is employed.
Golden Horse Shoe (New), Ltd. v. Thurgood, [1934] 1
K.B. 548 (C.A.), at p. 563.
The interest in the land there involved was large piles of
tailings, and the courts found the purchase of that interest was
a cost in the nature of expense and not capital.
[13] The tests enunciated in the many cases
cited by Estey J. clearly point to the $100,000 being an
expense on revenue account. No capital asset was acquired or
created. No permanent advantage was secured. If we ask, to use
the words of Dixon C.J. in Hallstroms, what was the
payment calculated to effect from a practical and business point
of view, the answer is obvious - to get more clients. Clients are
fleeting, volatile and evanescent. The cost of attracting them is
the part of the recurrent cost of earning the income that must be
satisfied out of the revenues generated. The $100,000 is a
marketing expense and is deductible under
paragraph 8(1)(f). It is not a capital outlay or a
payment on capital account.
[14] The one problem - and it is one that
was not raised by the respondent - is the year of payment. The
appeal is from an assessment for 1996.
Paragraph 8(1)(f) permits the deduction of amounts
"expended by the taxpayer in the year". It is not
entirely clear when the payment was made. The agreement
contemplates that at least $10,000 was to be made in 1996.
However the appellant was not clearly put on notice that this was
to be an issue. I propose to allow the appeal and refer the
matter back to the Minister for reconsideration and reassessment
to allow the deduction of such portion of the $100,000 that was
paid in 1996. Also, the respondent raised no issue with respect
to subsection 8(10). The Minister seems to have accepted
that the paragraph 8(1)(f) requirements were met as
the majority of the employment expenses claimed by the appellant
were allowed. Therefore the appellant had no onus in this
regard.
[15] I turn now to a more difficult
question. The appellant borrowed money to make the $100,000
payment. The deduction of interest on that borrowing was
disallowed by the Minister on the basis that the interest was not
incurred for the purpose of gaining or producing income from
business or property within the meaning of
paragraph 20(1)(c) and the interest was not otherwise
deductible pursuant to subsection 8(2). As I will discuss
below, paragraph 20(1)(c) clearly has no application
here. It is of very little assistance to state, as the reply
does, that a section that patently has no application does not
apply. There are about 250 other sections that do not apply. They
do not need to be referred to either.
[16] Here we have interest on money borrowed
for the purpose of earning employment income. It therefore does
not fall within paragraph 20(1)(c).
Paragraph 8(1)(j) provides a limited deduction for
interest on money borrowed to acquire aircraft or automobiles
used by an employee who is entitled to a deduction under
paragraph 8(1)(f). It reads as follows:
(j) Where a
deduction may be made under paragraph (f), (h) or
(h.1) in computing the taxpayer's income from an
office or employment for a taxation year,
(i) any
interest paid by the taxpayer in the year on borrowed money used
for the purpose of acquiring, or on an amount payable for the
acquisition of, property that is
(A) a motor vehicle that
is used, or
(B) an aircraft that is
required for use
in the performance of the duties of the taxpayer's office or
employment, and
(ii) such part, if
any, of the capital cost to the taxpayer of
(A) a motor vehicle that
is used, or
(B) an aircraft that is
required for use
in the performance of the duties of the office or employment as
is allowed by regulation.
[17] Obviously it is of no application
here.
[18] If the interest is deductible at all it
must be under paragraph 8(1)(f). The initial question
is, therefore, whether it is an amount "expended by the
taxpayer ... for the purpose of earning the income from the
employment". Since I have concluded that the $100,000 paid
to Mr. Bentley is such an amount, it follows ineluctably
that the interest on the money borrowed is also such an amount.
That part of the inquiry is easy. The harder part is whether the
interest is on capital account and is therefore excluded from
paragraph 8(1)(f) by subparagraph (v). The answer to
this question requires a four part analysis.
(a) Is the interest on money
borrowed to make a capital payment?
(b) Is interest on borrowed money
invariably and by its very nature intrinsically and inherently
capital?
(c) Am I precluded by binding
precedent from holding that interest can be a current as opposed
to a capital expense. Specifically, does the judgment of the
Supreme Court of Canada in Shell Canada Limited v. The Queen
et al., 99 DTC 5669, hold that interest on borrowed
money is invariably and as a matter of law capital?
(d) Does the reference to interest in
paragraph 8(1)(j) preclude the deduction of interest
as being incurred for the purpose of earning employment income
under paragraph 8(1)(f)?
[19] For reasons that I will develop more
fully below, I have concluded that the answer to all four
questions is "no".
[20] (a) The
answer to the first question is obviously "no" in light
of my conclusion with respect to the characterization of the
$100,000 payment.
[21] (b) I see
nothing in the law or in logic or as a matter of principle that
would dictate that any expenditure is inherently of a capital or
a revenue nature. The inquiry must go further. As Estey J.
said in Johns-Manville at page 61:
It is of little help, in my respectful opinion, to attempt to
classify the character of the expenditure according to the
subject of that expenditure. Here it was land, and expenditure
for land may be classified in good accounting and in good law as
capital or, in different circumstances, as an expenditure
chargeable against revenue in the computation of profit. In the
words of Romer L.J.:
It depends in no way upon what may be the nature of the asset
in fact or in law. Land may in certain circumstances be
circulating capital. A chattel or a chose in action may be fixed
capital. The determining factor must be the nature of the trade
in which the asset is employed.
[22] In my opinion, whether interest is of a
capital or a revenue nature depends on what the borrowed money is
used for. I am fortified in this view by the article written by
Mr. Brian J. Arnold, "Is Interest a Capital
Expense?" (1992) 40 Canadian Tax Journal No. 3, page
533. The article contains a thorough analysis of Canadian
jurisprudence up to 1992. At page 545 he refers to
Bennett and White Construction Co. Ltd. v. M.N.R., [1949]
C.T.C. 1, as follows: (footnotes omitted)
On appeal, the Supreme Court, noting that guarantee fees were not
interest, held unanimously that the fees were not deductible
expenses because they were not incurred in earning income from
the business (on the basis of the reasoning in the Montreal
Coke case) and that they were expenses incurred on account of
capital. Once again, the Supreme Court seemed to confuse the
prohibitions in paragraphs 18(1)(a) and (b). The early English
cases were cited extensively without reservation. Indeed, Mr.
Justice Rand stated,
In the absence of statute, it seems to be settled that to
bring interest paid on temporary financing within deductible
expenses requires that the financing be an integral part of the
business carried on. That is clearly exemplified where the
transactions are those of daily buying and selling of securities:
Farmer v. Scottish Trust, [1912] AC 118: or conversely
lending money as part of a brewery business: Reid's
Brewery v. Mail, [1891] 2 Q.B. 1.
The distinction between fixed and circulating capital,
however, was not dealt with explicitly in the case.
[23] In Wharf Properties Ltd. v.
Commissioner of Inland Revenue, [1997] N.L.O.R. No. 59,
[1997] 2 W.L.R. 334 (P.C.) the Judicial Committee, on
appeal from Hong Kong, held that interest claimed was not
deductible because it was of capital nature. However, the Privy
Council did not base its decision on any inherent quality of
interest as capital or revenue. Lord Hoffman said:
9 Mr.
Gardiner made no point of the tramway licence fees but did
advance several other arguments against the conclusion that the
interest payments were expenses of a capital nature. First, he
said that interest was by definition a revenue payment and could
not be anything else. Their Lordships think that this confuses
the position of payer and recipient. It is true that in the hands
of the recipient, interest will be either the earnings of capital
advanced or, in some cases, additional income derived from
trading in money. In either case, it will have the character of
income. From the point of view of the payer, however, a payment
of interest may be a capital or revenue expense, depending upon
the purpose for which it was paid. The fact that it is income in
the hands of the recipient and a recurring and periodic payment
does not necessarily mean that it must be a revenue expense.
Wages and rent are income in the hands of their recipients;
periodic payments, in return for services or the use of land or
chattels respectively. But whether such payments are of a capital
or revenue nature depends on their purpose. The wages of an
electrician employed in the construction of a building by an
owner who intends to retain the building as a capital investment
are part of its capital cost. The wages of the same electrician
employed by a construction company, or by the building owner in
maintaining the building when it is completed and let, are a
revenue expense.
10 For this purpose,
their Lordships consider that there is no material distinction
between interest and other periodic payments. As Lord Upjohn said
in Chancery Lane Safe Deposit and Offices Co. Ltd. v. Inland
Revenue Commissioners [1966] A.C. 85, 124 (in a passage quoted by
the Commissioner in his correct and succinct reasons for
disallowing the deduction): "the cost of hiring money to
rebuild a house is just as much a capital cost as the cost of
hiring labour to do the rebuilding".
11. Mr. Gardiner said that
it was not legitimate to examine the purpose for which the money
was borrowed in order to ascertain whether the interest paid in
consideration of the borrowing had been for a capital or revenue
purpose. Their Lordships agree with Litton V-P. that, on the
contrary, there is no other way in which the nature of the
interest payment can be discovered. The immediate consideration
for each payment of interest is, of course, the use of money
during the period in respect of which the interest has been paid,
but since money is no more than a medium of exchange which may be
expended for either capital or revenue purposes, the question can
be answered only by ascertaining the purpose for which the loan
was required during the relevant period.
[24] After referring to and distinguishing
the decision of the House of Lords in Beauchamp v. Woolworth
Plc., [1990] 1 A.C. 478, Lord Hoffman
concluded:
14 Thus, while the
question of whether money is intended to be used for a capital or
revenue purpose is inconclusive as to whether its receipt is a
revenue receipt or an addition to the company's capital, the
purpose of the loan during the period for which the interest
payment was made is critical to whether it counts as a capital or
revenue expense. In the present case, during the whole of the two
years in question, the loan was clearly being applied for the
purpose of acquiring and creating a capital asset rather than
holding it as an income-producing investment. It follows that the
interest was being expended for a capital purpose.
[25] The decisions of the Privy Council are
not binding on Canadian courts, but the correctness of the
reasoning in the above quotations is unassailable.
[26] I complete this part of the analysis
with two quotations from the article of Mr. Arnold, with
which I am in full and respectful agreement.
Interest on borrowed money used to finance the current
expenses of a business, such as the payment of salaries, should
be deductible currently. Such interest is a cost of earning
income. Since the interest does not relate to the creation of
value beyond the current year, it must be deductible currently to
achieve an accurate portrayal of the taxpayer's income for
the year. This result is required by both the matching and the
ability-to-pay principles. (The interest expense represents a
reduction in the taxpayer's wealth, since it produces no
future benefits.)
...
This article makes two simple points. First, the case law does
not support the well-established proposition that interest is an
expenditure on account of capital. Second, from a tax policy
perspective, interest is sometimes a current expense and
sometimes a capital expense, depending on the use of the borrowed
funds. Both points accord with a common-sense view of interest
expense.
[27] (c) So far as
the third question is concerned, all this discussion of what a
principled and common-sense approach to the deductibility of
interest should be is interesting but academic if the Supreme
Court of Canada has held that interest on borrowed money is
invariably capital. I do not however think that the Supreme Court
of Canada has held that interest expenses are invariably on
capital account.
[28] I start with the most recent decision
of the Supreme Court of Canada in Shell at
page 5681:
Furthermore, it is important to underline that interest
expenses on money used to produce income from a business or
property are only deemed by s. 20(1)(c)(i) to
be current expenses and, in the absence of that provision, would
be considered to be capital expenditures: Canada Safeway,
supra, per Rand, J., at p. 727. This Court was not invited on
this appeal to revisit this characterization of such interest
expenses: they therefore remain capital expenses which s.
20(1)(c)(i) deems to be deductible from Shell's gross
income notwithstanding the general prohibition of such capital
deductions in s. 18(1). Accordingly, even if the general analysis
in Ikea applied to this case, it would tend to support the
conclusion that the gains should be treated as being on capital
account.
It seems obvious to me that the Supreme Court of Canada has
left the door open with the words "This Court was not
invited on this appeal to revisit this characterization of such
interest expenses".
[29] The only reference in the Supreme Court
of Canada judgment to the purpose for the borrowing is found at
page 5671: "In 1988, Shell required approximately $100
million in United States currency ("US$") for general
corporate purposes". There was no need to reconsider the
position because the court held that the interest fell within the
provisions of paragraph 20(1)(c). Moreover, in all
probability the purpose of the use of the funds was, given the
magnitude and term of the borrowing, of a capital nature.
[30] It is useful, in considering the case
law that preceded Shell, to quote again from
Brian Arnold's article.
Under paragraph 20(1)(c) of the Income Tax Act,1
interest paid or payable in respect of borrowed money or the
unpaid purchase price of property is deductible if the money or
property is used for the purpose of earning income from a
business or property. The question examined in this paper is
whether interest (or other financing expenses) is deductible in
computing income for tax purposes under section 9. Or, to put the
question another way, would interest be deductible in the absence
of a specific statutory provision such as paragraph 20(1)(c)?
It is well established that amounts are deductible in computing
income if they are deductible in accordance with accounting
principles and practices and their deduction is not prohibited by
statue or by fundamental principles of income tax
law.2 Interest is a deductible expense in computing
profit for accounting purposes. Paragraph 18(1)(b) of the Act,
however, prohibits the deduction of "an outlay, loss or
replacement of capital, a payment on account of capital or an
allowance in respect of depreciation, obsolescence or
depletion," except as expressly permitted by part I of the
Act.
The accepted wisdom is that, in the absence of a specific
statutory provision, interest would not be deductible in
computing income because it is a payment on account of capital.
This proposition was recently reiterated by the Supreme Court of
Canada in the Bronfman Trust case:
It is perhaps otiose to note at the outset that in the absence
of a provision such as s. 20(1)(c) specifically authorizing the
deduction from income of interest payments in certain
circumstances, no such deductions could generally be taken by a
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 s.
18(1)(b).3
Thirty years earlier, the Supreme Court was equally confident
about this proposition:
It is important to remember that in the absence of an express
statutory allowance, interest payable on capital indebtedness is
not deductible as an income expense.4
Commentators have espoused, almost unanimously, the same
proposition, sometimes in an even more sweeping manner than that
expressed by the Supreme Court.5 At least one
commentator, however, has questioned it.6 Most
commentators suggest that there may be a narrow exception to the
general rule that interest is a non-deductible capital
expenditure. The exception has been variously described. Interest
is deductible as a current expense if the taxpayer is in the
business of lending money; if the borrowed funds are used to
acquire current assets; if the borrowing is temporary and does
not add to the fixed assets of the business; if the interest is
attributable to a transaction on income account.7
Apparently, however, Revenue Canada does not recognize any
exceptions to the general rule.
Although the statement that interest is a non-deductible
expenditure on account of capital is frequently made, it is
seldom accompanied by any analysis. Commentators usually cite the
cases as authority for their proposition; the cases cite other
cases or consider the proposition to be self-evident.
The issue is not one of purely academic interest. Although the
deductibility of interest and other financing expenses is
governed by specific statutory provisions, there are many
situations in which those provisions do not apply for one reason
or another. For example, financing expenses may not be deductible
because they do not fit within the narrow judicial definition of
interest; or interest may not be deductible because a requirement
of borrowed money in paragraph 20(1)(c) is not met. In these
situations, the deductibility of the expenses under
section 9 is crucial.8 More fundamentally, if
interest is not generally an expenditure on account of capital,
paragraph 20(1)(c) and the related provisions dealing with
the deductibility of interest are of limited significance.
Interest would be generally deductible under section 9 in
accordance with accounting practice and would probably be subject
to the same tracing test that the courts have developed under
paragraph 20(1)(c).
________________
1 RSC 1952, c. 148, as amended by SC 1970-71-72, c.
63, and as subsequently amended (herein referred to as "the
Act"). Unless otherwise stated, statutory references in this
article are to the Act.
2 B.J. Arnold, Timing and Income Taxation: The
Principles of Income Measurement for Tax Purposes, Canadian
Tax Paper no. 71 (Toronto: Canadian Tax Foundation, 1983).
3 The Queen v. Bronfman Trust, 87 DTC 5059, at
5064; [1987] 1 CTC 117, at 124 (SCC).
4 Canada Safeway Ltd. v. MNR, 57 DTC 1239, at
1244; [1957] CTC 335, at 344 (SCC) (Rand J).
5 See, for example, Vern Krishna, The Fundamentals
of Canadian Income Tax: An Introduction, 3d ed. (Toronto:
Carswell, 1989), 342: "Interest on borrowed money is an
expenditure on account of capital. Thus, in the absence of
specific authority, expenditures on account of interest would not
be deductible as an expense." See also Canada Tax
Service (Don Mills, Ont.: De Boo) (looseleaf), at 20-1052:
"It has been long settled that in the absence of an express
statutory allowance ... interest payable on capital
indebtedness would be regarded as a non-deductible 'payment
on account of capital' within paragraph 18(1)(b) of the Act
." Canadian Tax Reporter (Don Mills, Ont.: CCH
Canadian) (looseleaf), paragraph 5061: "in the absence of
paragraph 20(1)(c), interest payments on loans to purchase
capital assets would not be deductible by virtue of the
prohibition under paragraph 19(1)(b)." Nathan Boidman and
Bruno Ducharme, Taxation in Canada: Implications for Foreign
Investment (Deventer, the Netherlands: Kluwer, 1985), 79-80:
"As a rule of common law, interest is a capital outlay,
unless it is accessory to a taxpayer's stock in trade, which
would only be the case of taxpayers who are in the business of
lending money." Brian J.Arnold and Tim Edgar, eds.,
Materials on Canadian Income Tax, 9th ed. (Don Mills,
Ont.: De Boo, 1991), 522: "The deduction of interest on
borrowed capital would normally be prohibited by paragraph
18(1)(b) as a 'payment on account of capital.'"
Edwin C. Harris, Canadian Income Taxation, 4th ed.
(Toronto: Butterworths, 1986), 239-40: "Except to the extent
that the Act specifically grants the right to a deduction,
interest and other financing costs incurred by a taxpayer, even
though related to the earning of income, are nondeductible
because they are considered to be 'payments on account of
capital.' The only exception that appears to have been
recognized is where the borrowed money is required for a very
temporary purpose and does not add to the permanent working
capital or to the fixed assets of the business." Robert
Couzin, "Income Tax Treatment of Financing Charges," in
Income Tax Aspects of Corporate Financing, 1980 Corporate
Management Tax Conference (Toronto: Canadian Tax Foundation,
1981), 191-228, at 191: "absent the statutory provisions,
many or all of the [financing] charges would not be deductible,
at least to most taxpayers."
6 See David A. Ward, "Interest
Deductibility," paper delivered at a National Tax Centre
conference on tax reform, Toronto, May 27, 1988.
7 See the excerpts quoted in footnote 5, supra, and
Income Taxation in Canada (Scarborough, Ont.:
Prentice-Hall Canada) (looseleaf), vol. 2, at 19,856-57.
8 Consider, for example, a securities lending
arrangement involving debt securities.
[31] In my view the statements made by the
learned commentators in footnote 5 of the article go farther
than they need to go, and farther than the case law warrants. The
proposition that interest "payable on capital
indebtedness" is capital is understandable if "capital
indebtedness" means borrowed money used for capital
purposes, as it certainly was in Canada Safeway.
Rand J. in Canada Safeway was merely stating the
obvious. Similarly the statement by Dickson C.J. in
Bronfman at page 5064 that interest 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 s. 18(1)(b)" merely
reiterates the point that interest on borrowed money used for a
capital purpose is itself capital. It is difficult to know just
what Dickson C.J. was referring to when he spoke of
"working capital". The term is one of some elasticity.
If he meant money used for a capital purpose, it is one thing. If
he meant money used to meet a payroll it is another. In the
context of the Bronfman case, where the money was borrowed
to make a distribution of capital to a beneficiary of the trust
it seems obvious he was referring to borrowings used to meet a
capital requirement.
[32] In Tennant v. The Queen,
96 DTC 6121 at page 6125, Iacobucci J. made
the following observation:
In my opinion, s. 20(1)(c)(i) is not ambiguous. It clearly
states that interest can be deducted as an expense when the
interest is paid or payable in the taxation year pursuant to a
legal obligation to pay interest, and when the interest is
payable on money borrowed for the purpose of earning income from
a business or property. The purpose of the interest deduction
provision is to encourage the accumulation of capital which would
produce taxable income, as Dickson, C.J. noted in Bronfman
Trust, supra, at p. 45. But for s. 20(1)(c)(i), the
deduction of interest payments would be prevented by s.
18(1)(b) (Canada Safeway Ltd. v. Minister of National
Revenue [57 DTC 1239], [1957] S.C.R. 717; some commentators
suggest that Canada Safeway is wrongly decided; see P.W.
Hogg and J.E. Magee, Principles of Canadian Income Tax Law
(1995), at p. 221, note 36; however, I need not address that
issue in these reasons).
[33] This comment was noted by
Robertson J.A. in 74712 Alberta Limited v. The Queen,
97 DTC 5126 at pages 5133-4.
I note that the Supreme Court recently acknowledged the view held
by some commentators that Canada Safeway was
"wrongly" decided: see Tennant v. The Queen, 96
DTC 6121 at 6125, Iacobucci, J. I presume that that
acknowledgment stems from and is limited to the holding in
Canada Safeway that interest is necessarily an outlay on
capital: see P.W. Hogg and J.E. Magee, Principles of Canadian
Income Tax Law (Carswell, 1995) at 221, note 36; and B.J.
Arnold, "Is Interest a Capital Expense?" (1992) 40
Can. Tax J. 533. If I am mistaken on this point then
obviously the Supreme Court would have to re-evaluate
Bronfman as well.
[34] I have concluded that this court is not
precluded from considering whether interest may be a revenue
expense. The Supreme Court of Canada has not conclusively held it
to be invariably capital. The door is open and this case is
obviously an ideal one in which to reconsider the question. We
have an interest expense that does not fall within either
paragraph 20(1)(c) or 8(1)(j) and a statutory
provision in paragraph 8(1)(f) that permits an
employee to deduct certain expenses that are expended to the
earning of the commission employment income. The sole question is
whether the interest is a capital expense.
[35] I have obtained great assistance from a
case comment on Shell in the Canadian Tax Journal "Is
Interest a Current Expense?" by Mr. Joel Nitikman
(Canadian Tax Journal, 2000 Vol. 48, No. 1,
page 133).
[36] I shall not repeat what was said in
that article beyond referring to an Australian case mentioned in
it, Steele v. Deputy Commissioner of Taxation, (1999)
161 A.L.R. 201, [1999] H.C.A. 7 (4 March
1999) where the majority of the Australian High Court made the
following observation: (footnotes omitted)
29 ... interest
is ordinarily a recurrent or periodic payment which secures, not
an enduring advantage, but, rather, the use of borrowed money
during the term of the loan. ... [I]t is therefore
ordinarily a revenue item. This is not to deny the possibility
that there may be particular circumstances where it is proper to
regard the purpose of interest payments as something other than
the raising or maintenance of the borrowing and thus,
potentially, of a capital nature. However, in the usual case, of
which the present is an example, where interest is a recurrent
payment to secure the use for a limited term of loan funds, then
it is proper to regard the interest as a revenue item, and its
character is not altered by reason of the fact that the borrowed
funds are used to purchase a capital asset. The fact that the
asset has not yet become, and may never become, income-producing
may be relevant to a decision as to whether the case falls within
the first limb of s 51(1). However, once it is
determined, or accepted by hypothesis, that the interest is,
during the relevant year, an outgoing incurred in gaining or
producing the taxpayer's assessable income, (even though no
assessable income is derived during that year, and no such income
may ever be derived), the circumstance that the capital asset has
produced no income is not a reason to conclude that the interest
is an outgoing of a capital nature.
[37] The portion of the majority judgment
that I have quoted above goes farther than I would consider it
necessary to go, at least in Canadian law, in that it implies
that interest on money borrowed to acquire a capital asset is
itself of a revenue nature. In this regard the majority judgment
in Steele appears to reject the reasoning of the Judicial
Committee in Wharf Properties.
[38] If one is to reconcile these opposing
points of view - and it may not be possible - it may be on the
basis that the majority appears to be of the view that the
Australian tax law does not draw a distinction between interest
incurred in order to earn profits and interest incurred in order
to obtain capital - a distinction that in my view is not
meaningful under Canadian income tax law. The Australian law
requires a determination whether the interest is paid on money
borrowed for the purpose of acquiring an income-producing asset.
Where the asset is income-producing, interest is a current
expense whether or not the underlying acquisition is a capital
asset. The Australian law therefore appears to presume that
interest is on income account whenever money is borrowed to
acquire an income-producing asset.
[39] It is interesting to refer to the
dissenting decision of Kirby J. in the Steele case
where he stated: (footnotes omitted)
51. The decision of the
Full Court of the Federal Court of Australia, from which this
appeal comes, caused a certain amount of consternation when it
was published. The opinion was expressed that the treatment of
interest deductions required by the decision was in conflict with
more than 50 years of case law. And that it even challenged the
understandings of that law held by the Commissioner of Taxation
(the Commissioner) who was obliged, as a consequence, to withdraw
a number of his rulings. The Full Court decision was denounced as
"heresy".
52. When fresh eyes are
focused on a statutory text, it sometimes happens that new
insights are secured. Assumptions, long accepted, when placed
under a judicial microscope, are found to be wanting. Those
regularly engaged in the application of legislation such as the
Income Tax Assessment Act 1936 (Cth) (the Act)
enjoy the advantage of affectionate familiarity with its terms.
But it is no more than a statute enacted by the Parliament. It is
to be construed, as every statute must, in accordance with its
purpose as disclosed in its language. Decisional authority
provides necessary guidance, not least because of the complexity
and size of the Act, the subtlety of some of its concepts
and the high desirability that its application should be clear
and predictable, without the need for undue litigation in the
huge number of cases to which it is applied. But when an appeal
comes, there is no substitute for a study of the legislative
language and purpose.
53. At the risk of
intruding a jarring note into the response to the appeal (and the
critics) I am obliged by my opinion to offer a dissenting view
from that reached by the majority of this Court. I can derive a
measure of comfort from Bertrand Russell's assurance that
every advance in civilisation has been denounced as unnatural
while it was recent. I am reassured by the fact that my
dissenting view is harmonious with the recent unanimous judgment
of the Privy Council in Wharf Properties Ltd v Commissioner of
Inland Revenue.
[40] After referring to a number of previous
Australian decisions, Kirby J. continues: (footnotes
omitted)
73. ... the
suggestion that, of its very nature, the payment of
interest is of an "income" character and not "of a
capital ... nature" is totally inconsistent, with the
foregoing authority. It is also inconsistent with the recognition
by this Court that, for some circumstances, interest may take on
the characteristic of capital - not, of course, in the hands of
the recipient (for whom it will be income) but in the hands of
the payer. Whatever criticisms exist of the analysis of
Munro in the Full Court, by reference to the statutory
regime applicable in 1926, the basic principle cannot be
gainsaid. It is a simple matter of statutory law. Interest may
certainly be a loss or outgoing within s 51(1). Whether it
is of a capital or non-capital nature depends upon the facts of
the particular case. No hard and fast, and certainly no absolute,
rule can be adopted. This is because, as a matter of law, the
Act denies such a possibility. Convenient and congenial as
absolute rules are for those who live their lives in the company
of the Act, they are fundamentally incompatible with the
task of characterisation which the exception in the Act
calls forth. Necessarily, that task requires evaluation and
judgment of each particular loss and outgoing, including where it
is in the form of interest and where it is propounded as an
allowable deduction.
74. Where the Commissioner
suggests that, in the particular circumstances, the interest
payment, although undoubtedly a loss or outgoing to the taxpayer,
is "of a capital ... nature" it is therefore no
valid answer to that proposition to assert, as the taxpayer did,
that all interest payments, of their essence, are non-capital in
nature. Such a proposition may have been accepted or assumed in
earlier cases. It may have been assumed by the Commissioner in
his earlier rulings. It may even have provided a false foundation
for particular provisions of the Act 1936, drafted and
enacted upon an assumption about the universal character of
interest. But that assumption simply will not stand with the
legal characterisation which the exception to s 51(1)
requires. The common likelihood that, in most circumstances,
interest payments will not be characterised as capital in nature
cannot deny the possibility that, in particular circumstances
they can, and should be so classified.
[41] I agree with Kirby J. Whether
interest is an outgoing on revenue or capital account cannot be
determined without a consideration of the facts of the particular
case, and specifically the purpose for which the borrowed funds
are used.
[42] (d) Finally, I
must deal with the question whether paragraph 8(1)(j)
occupies the entire field of interest deductibility for employees
and impliedly excludes any other deduction of interest.
[43] It is clear that
paragraph 8(1)(j) is limited to interest on money
borrowed to acquire a particular type of capital asset. For the
reasons that follow, I do not think that
paragraph 8(1)(j) is the only route to the
deductibility of interest as an expense to earn commission
employment income. Even if the interest does not fall within
paragraph 8(1)(j), it is in my view deductible under
paragraph 8(1)(f) provided of course that the other
requirements of 8(1)(f) are met.
[44] Paragraph 8(1)(f) provides
that amounts are deductible where they were expended for the
purpose of earning commission employment income to the extent
that those amounts are not payments on account of capital except
as provided in paragraph 8(1)(j). Therefore,
paragraph 8(1)(j) is a derogation from the
prohibition of the deduction of capital expenditures in
subparagraph 8(1)(f)(v).
Subparagraph 8(1)(f)(v) is only necessary where the
interest expense is on capital account. For that reason
paragraph 8(1)(j) is not an exclusive code relating
to the deduction of interest. It is needed because interest is
sometimes a capital outlay on the basis that it is assimilated to
the purpose for which the funds are borrowed. Interest on
borrowed money is not inherently anything - revenue or capital -
it is simply the price paid for the use of borrowed money.
[45] Paragraph 8(1)(j) provides
for the deduction of interest from commission employment income
whereas paragraph 20(1)(c) provides, in a similar
manner, for the deduction of interest from business or property
income. The structure of the two provisions is different, but
that difference is not substantial enough to detract from their
similarities. Consistently with my view on
paragraph 8(1)(j), I do not think
paragraph 20(1)(c) is the only route to the
deductibility of interest as a business or property expense and
that a deduction under section 9 is possible provided it is
not prohibited by such provisions as
paragraphs 18(1)(a), (b) or (h).
[46] My conclusion that
paragraphs 8(1)(j) or 20(1)(c) do not provide
an exclusive code for the deduction of interest is supported by
the decision of the Federal Court of Appeal in The Queen v.
Boulangerie St-Augustin Inc., 97 DTC 5012 affirming
95 DTC 56, which held that the failure of an expense to
come within subparagraph 20(1)(g)(iii) was not fatal
to its deductibility under section 9 provided it was not
prohibited by paragraph 18(1)(a) or (b).
[47] The notion that a specific provision
impliedly ousts a more general one is, as a matter of statutory
construction, of somewhat limited assistance and of no assistance
at all here. In Associated Investors of Canada Ltd. v.
M.N.R., 67 DTC 5096, it was unsuccessfully argued
that paragraph 11(1)(f) (now 20(1)(p)) which
permitted the deduction of bad debts in certain circumstances
impliedly prohibited the deduction of bad debts that did not fall
within that provision. Jackett P. (as he then was) rejected
the contention. At page 5102 he said:
Section 11(1)(f) does not, in terms, prohibit any
deduction for "bad debts". It does, however, expressly
authorize in qualified terms a deduction that could have been
made, in accordance with ordinary business principles, in the
computation of profit from a business. It might therefore have
been thought, as the respondent contends, that a deduction for a
"bad debt" that is excluded from section
11(1)(f) by the qualifications expressed in it is
impliedly prohibited. Such an interpretation would, however, have
results that cannot, in my view, have been contemplated. For
example, a bond dealer, who, in effect, buys and sells
"debts", would, on such an interpretation, be precluded
from taking into account losses arising from bonds becoming
valueless by reason of the issuing company becoming insolvent. If
section 11(1)(f) is not to be interpreted as impliedly
prohibiting such an obvious and necessary deduction in arriving
at the profits of a business, I am of opinion that it is not to
be interpreted as impliedly excluding the deduction of the losses
that are in question in this appeal, which, in my opinion, are
just as obvious and necessary in computing the profits from the
appellant's business.
[48] It follows that if
paragraph 20(1)(c) does not exclude the deductibility
of interest under section 9 a fortiori the extremely
restricted deduction of interest on a specific form of capital
indebtedness in paragraph 8(1)(j) does not oust the
deductibility under paragraph 8(1)(f) of interest
that is not on capital account.
[49] My conclusion therefore is that neither
the $100,000 paid to Mr. Bentley nor the interest paid to
borrow that amount is on capital account and that they are
deductible under paragraph 8(1)(f) of the Income
Tax Act.
[50] The appeal is allowed and the
assessment is referred back to the Minister of National Revenue
for reconsideration and reassessment on the basis that the
$100,000 paid by the appellant to Mr. Bentley and the
interest paid on the amount borrowed for that purpose are
deductible by the appellant under paragraph 8(1)(f)
to the extent that they were paid in the taxation year 1996.
[51] The appellant is entitled to his costs
if any.
Signed at Ottawa, Canada, this 15th day of February 2001.
A.C.J.
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