[1] This is an application for judicial review by the Minister of National Revenue from a February 15, 2001 decision of the Tax Court of Canada (reasons reported at 2001 D.T.C. 168) in which the respondent's appeal was allowed. There are two issues:

1. Whether an amount paid by the respondent to a fellow employee under an Agreement to Purchase Client Base of Financial Advisor is a deductible current expense or a non-deductible payment on account of capital, having regard to subparagraphs 8(1)(f)(iv) and (v) of the Income Tax Act.

2. Whether interest on the amount borrowed by the respondent for payment of the amount paid under the Agreement is a deductible expense or a non-deductible payment on account of capital, having regard to subparagraphs 8(1)(f)(iv) and (v).

FACTS

[2] The respondent and Scott Bentley were employees of Midland Walwyn in North Bay, Ontario. Each was a financial advisor who served his own group of clients. Bentley wanted to leave Midland Walwyn and the respondent wanted to serve Bentley's clients. They entered into an "Agreement to Purchase Client Base of Financial Advisor" dated December 10, 1995, under which Bentley agreed:

1. to provide a written endorsement of the respondent to each of his clients set out on a client list;

2. not to provide retail securities investment advice to the clients on the client list for a period of 30 months;

3. not to provide material information regarding the client list to anyone without the consent of the respondent; and

4. to direct Midland Walwyn to transfer the clients on the client list to the respondent.

and the respondent agreed:

1. on closing, to pay Bentley $90,000; and

2. on April 8, 1996, to pay Bentley a further maximum amount of $10,000, the $10,000 to be reduced according to a formula based upon erosion of mutual fund assets.

[3] The Branch Manager of the Midland Walwyn office where Bentley and the respondent worked facilitated the Agreement in order to ensure Bentley's clients remained with the Branch.

[4] The respondent was under the impression that, in his 1996 taxation year, he could deduct 7% of 75% of $100,000 or $5,250 in respect of the amount paid to Bentley and he did so. He also deducted $8,608.07 paid as interest and for insurance in respect of the amount he borrowed for the payment to Bentley. The Minister of National Revenue disallowed these deductions.

[5] Before this Court, counsel for the respondent explained that the $5,250 deduction was in error. The sum of $90,000 had been paid in the respondent's 1995 taxation year and was not deductible in the respondent's 1996 taxation year. Counsel's position was that the amount the respondent should have deducted in 1996 was the additional payment of $10,000 made on April 8, 1996. (Counsel explained that the precise amount might be less, according to the formula in the Agreement in respect of erosion of mutual fund assets. The precise amount was not before the Court.) Counsel stated that if the respondent is successful on this application, he will approach the Minister to discuss what arrangements might be effected with respect to the $90,000 paid by the respondent to Bentley in 1995.

RELEVANT STATUTORY PROVISIONS

[6] Subsection 8(1) of the Income Tax Act provides for deductions that employees may make in computing their taxable income from employment. Paragraph 8(1)(f) sets forth deductions that may be made by an employee whose employment is in connection with the selling of property or the negotiating of contracts. For purposes of this case, such employees are entitled to deduct amounts expended for the purpose of earning income. However, payments on account of capital are not deductible. Paragraph 8(1)(f) provides in relevant part:

8. (1) In computing a taxpayer's income for a taxation year from an office or employment, 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

[...]

(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) [...]

(ii) [...]

(iii) [...]

(iv) [...]

amounts expended by the taxpayer in the year for the purpose of earning the income from the employment [...] to the extent that those amounts were not

8. (1) Sont déductibles dans le calcul du revenu d'un contribuable tiré, pour une année d'imposition, d'une charge ou d'un emploi ceux des éléments suivants qui se rapportent entièrement à cette source de revenus, ou la partie des éléments suivants qu'il est raisonnable de considérer comme s'y rapportant:

[...]

f) lorsque le contribuable a été, au cours de l'année, employé pour remplir des fonctions liées à la vente de biens ou à la négociation de contrats pour son employeur, et lorsque, à la fois:

(i) [...]

(ii) [...]

(iii) [...]

(iv) [...]

les sommes qu'il a dépensées au cours de l'année pour gagner le revenu provenant de son emploi [...] dans la mesure où ces sommes n'étaient pas:

v) outlays, losses or replacements of capital or payments on account of capital, except as described in paragraph (j),

(vi) [...]

(vii) [...]

[Emphasis added]

(v) des dépenses, des pertes ou des remplacements de capital ou des paiements au titre du capital, exception faite du cas prévu à l'alinéa j),

(vi) [...]

(vii) [...]

[Je souligne]

The Minister concedes that, except for subparagraph (v), the respondent meets all the requirements of paragraph 8(1)(f). The Minister says that the payment to Bentley and the interest and insurance payments constitute payments on account of capital as described in subparagraph (v) and were, therefore, not deductible.

ISSUE ONE

[7] The first question is whether the payment made to Bentley is a capital expenditure, in which case it is not deductible, or a current expense, in which case it is.

ANALYSIS OF ISSUE ONE

Decision of the Tax Court Judge

[8] In considering whether the payment to Bentley constituted a capital expenditure or a current expense, the learned Tax Court Judge found that the amount paid to Bentley was not for an asset or advantage for the enduring benefit of the trade. He determined that no capital asset was acquired or created and no permanent advantage was secured. He stated, at paragraph 13, that the payment made was "part of the recurrent cost of earning the income that must be satisfied out of the revenues generated" and was a current marketing expense.

[9] In concluding that the payment to Bentley was a current expense and not a capital outlay, the Tax Court Judge distinguished the line of cases that are to the effect that payments for client lists are considered to be payments on account of capital, on the basis that Bentley and the respondent were employees and not in business for themselves. In his view, the respondent, as an employee, could not buy a client list from Bentley because the list of clients was not Bentley's to sell. These circumstances, he thought, were in contrast with those cases in which payments for customer lists by businesses were considered to be payments on account of capital. At paragraph 3 of his reasons he stated:

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 business person 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.

At paragraph 8, he expanded on this explanation:

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.

Standard of Review

[10] Whether a payment is a current expense or a capital expenditure had, in the jurisprudence up to Johns-Manville v. The Queen, [1985] 2 S.C.R. 46, almost always been treated as a question of law. At page 62 of Johns-Manville, supra, Estey J. found that the question was one of mixed law and fact.

[11] I accept the facts of this particular case as found by the Tax Court Judge (but not all of his comments about clients generally). The only question is whether he applied the relevant jurisprudence and tests in arriving at his conclusion. I proceed to review whether he applied the relevant jurisprudence and tests on a standard of correctness.

The Jurisprudence Respecting Client Lists

[12] The leading case in this Court on the tax treatment of a client list is Cumberland Investments Ltd. v. Canada (Minister of National Revenue), [1975] C.T.C. 439. In that case, the taxpayer paid $150,000 for the client list of a supervising insurance agency business. Pursuant to the sale, the vendor agreed to cease competition with the taxpayer. The vendor also agreed to write a letter to its clients endorsing the taxpayer. At paragraph 23, Urie J.A. concluded that this sale enlarged the potential income earning structure of the taxpayer and was a payment on account of capital. At paragraph 4, Thurlow J.A. (as he then was), in concurring reasons, found that the client list was an asset purchased for the enduring benefit of the business and was consequently a payment on account of capital.

[13] This Court re-visited the issue of client lists in Canada v. Farquhar Bethune Insurance Ltd., [1982] C.T.C. 282. The facts were similar to those in Cumberland, supra, in that the case involved the purchase of a client list by one insurance agency from another. The purchase included a non-competition clause and the vendor agreed to endorse the purchaser to its clients. The distinguishing feature of Farquhar, supra, was that the client list and restrictive covenant related only to fire and casualty insurance, with the result that the vendor continued to offer insurance services outside of the fire and casualty insurance field. Notwithstanding this difference, Heald J.A., at page 287, concluded that Cumberland, supra, was applicable and characterized the client list purchase as a capital expenditure.

[14] Rouleau J. reached the same conclusion inCanada (Minister of National Revenue) v. Tomenson Inc., [1986] 2 F.C. 413 (T.D.).

[15] Treating the purchase of a client list as a capital expenditure is not restricted to the insurance business. See for example: Aliments CA-MO Foods Inc. v. Her Majesty the Queen, 80 D.T.C. 6043 (F.C.T.D.) (purchase of meat wholesaler's client list); Rigid Box Company Ltd. v. The Minister of National Revenue, 91 D.T.C. 1173 (T.C.C.) (purchase of a client list relating to the rigid box business); Walter J. Burlan v. Her Majesty the Queen, 76 D.T.C. 6444 (F.C.T.D.) (purchase of an accounting partnership's client list), 901659 Ontario Inc. (c.o.b. Dicola Petroleum) v. Canada, [1997] T.C.J. 1110 and R. Bruce Graham Ltd. v. Canada (Minister of National Revenue), 86 D.T.C. 1256 (T.C.C.) (purchase of client lists relating to the residential fuel business); and Today's Business Products Ltd. v. Canada (Minister of National Revenue), 91 D.T.C. 148 (T.C.C.) (purchase of client list relating to the stationary supply business).

[16] An early decision of the Tax Appeal Board that treats a payment for a client list as a current expense, Halliday Fuels Ltd. v. M.N.R., 60 D.T.C. 541, has been found not to be persuasive in view of subsequent authorities at a higher judicial level to the contrary. See, for example, R. Bruce Graham Ltd., supra, at pages 1263-6, and Rigid Box Company Limited, supra, at page 1175. In Aliments CA-MO Foods, supra, Dubé J. noted at page 6045 that:

So far as the purchase of a customer list is concerned, there is a long and nearly consistent line of authority holding that such an expense is on capital account [...]

That observation remains correct some twenty-two years and many cases later.

Application of the Jurisprudence to this Case

[17] I am unable to distinguish this case fromCumberland, supra, or any of the other authorities in any material respect. The jurisprudence has consistently concluded, in a variety of situations, that payment for a client list is a capital expenditure. Frequently, the acquisition is accompanied by a non-compete clause and the vendor endorses the purchaser to his client. These are the circumstances here.

[18] Nor am I able to say that Cumberland or the other authorities were wrongly decided and that payments for client lists, endorsements and agreements not to compete should be treated as a current expense and not as a capital outlay. As did the learned Tax Court Judge, I refer to Johns-Manville v. The Queen, supra, at pages 56-62, which summarizes some of the tests used to distinguish between a capital expenditure and a current expense. However, I reach a different conclusion than did the learned Tax Court Judge in respect of the application of these tests in this case.

[19] At the outset, I acknowledge that there are a number of neutral statements in the jurisprudence cited in Johns-Manville that give a trial judge considerable scope in deciding whether a particular expenditure should be treated as an expense or as an outlay on account of capital. For example:

1. At page 56, borderline cases could be decided on the spin of a coin (citing British Salmson Aero Engines, Ltd. v. Commissioner of Inland Revenue (1937), 22 T.C. 29 at 43 (C.A.)).

2. At page 56, no single test is determinative (citing [1968] S.C.R. 447">Minister of National Revenue v. Algoma Central Railway, [1968] S.C.R. 447 at 449).

3. At page 56, the decision depends on the facts (citing [1968] S.C.R. 447">Algoma Central Railway, supra, at 449).

4. At page 57, one is to use common sense in the weight to be attached to any particular test (citing BP Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, [1966] A.C. 224 at 264-5 (H.L.)).

5. At page 59, phrases used in the cases are descriptive and not determinative (citing Commissioner for Taxes v. Nchanga Consolidated Copper Mines Ltd., [1964] A.C. 948 at 959 (H.L.)).

[20] However, virtually all the other relevant tests cited in Johns-Manville would support the decision in Cumberland and the other authorities cited above and would result in the payment to Bentley in this case being treated as capital:

1. Page 57, citing B.P. Australia, supra, at 271. Is the payment for the structure in which profit is to be earned? The respondent will acquire clients he did not previously have and earn commissions from them. That seems very much like the acquisition of an asset used to generate income.

2. Page 58, citing B.P. Australia, supra, at 273. Is the payment part of the current and recurrent struggle to get clients? I accept that it is a payment to get clients, however, there is no evidence that this type of payment recurs. It is a one-time payment to another broker for access to his clients. It is not like periodically taking the clients to lunch to try to ensure their ongoing loyalty.

3. Page 58, citing Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946), 72 C.L.R. 634 at 647 (Aust. H.C.). Is this the acquisition of the means of production or their use? To the extent the analogy is applicable, the one-time introduction and endorsement are the intended acquisition of the clients and not the ongoing servicing of the clients in order to earn commissions.

4. Page 58, citing Hallstroms, supra, at 647. Is this the establishing or extending of a business or the carrying on of the business? Is this the establishment of the enterprise or the sustained effort of those engaged in it? The analogy is not direct, but to the extent it applies, it seems to me that obtaining the client list with an endorsement is more like the establishment than the sustained effort to earn commissions or indeed the sustained efforts to keep the clients satisfied - for example, by entertaining them and discussing their investment objectives or particular purchases or sales of stocks or bonds.

5. Page 58, citing Sun Newspapers Ltd. v. Federal Commissioner of Taxation (1938), 61 C.L.R. 337 at 363 (Aust. H.C.). Are there lasting qualities to the advantage obtained? It is true that clients may be fleeting as the learned Tax Court Judge pointed out. However, the respondent surely did not pay $100,000 for something he thought would be fleeting. The evidence here is that the respondent thought Bentley's clients were loyal, that they would take comfortably to him and that they required low service. At the time he entered into the Agreement, he did not think they would be fleeting. This view is supported by the fact that the respondent only held back $10,000 on account of the possible erosion in the client base. In other words, while he recognized that clients may be fleeting, he took that into account. The fact that he only held back $10,000 indicates that he believed the vast majority of the clients would not be fleeting.

Of course, the value of the client list and the endorsement may be short-lived because, if the respondent does not adequately service the clients, they will switch to someone who will. But it seems to me that the purpose of the Agreement and the payment is to get access to a book of clients by getting Bentley's client list and his endorsement. If, after getting the clients, expenses are incurred in the ongoing struggle to satisfy the clients, those would surely be deductible expenses. But that is different from the cost incurred to get an entire book of clients in the first place. By contrast, taking for lunch an investor who is not a client to see if he can be secured as a client would be an expense because it is part of the recurrent costs of maintaining a client base. But, that is different from paying someone for the purchase of an entire client list with endorsements.

6. Page 58, citing Sun Newspapers, supra, at 363. Is the payment a one-time expenditure or part of an ongoing periodic number of payments? Clearly, here it is a one-time expenditure. However, I acknowledge there are cases that recognize that a one-time expenditure may be an expense, so I do not think this test is useful one way or the other.

7. Page 59. Is it a payment to secure the discontinuance of competition? The respondent did secure an agreement that Bentley would not provide securities investment advice to the clients on the list for thirty months.

8. Because each case must be decided on its own facts, is it appropriate to reason by analogy from prior cases? At page 71 of Johns-Manville, supra, Estey J. quotes Lord Wilberforce in Tucker v. Granada Motorway Services Ltd., [1979] 2 All E.R. 801 at 804:

It is common in cases which raise the question of whether a payment is to be treated as a revenue or as a capital payment for indicia to point different ways. In the end the courts can do little better than form an opinion which way the balance lies. There are a number of tests which have been stated in reported cases which it is useful to apply, but we have been warned more than once not to seek automatically to apply to one case words or formulae which have been found useful in another ... Nevertheless reported cases are the best tools that we have, even if they may sometimes be blunt instruments. [Emphasis added by Estey J.]

I acknowledge that it is inappropriate to automatically apply words or formulae to a case simply because they have been found useful in another case. However, I think this warning was given in the context of prior cases, the facts of which are materially different from the case under consideration. Where the case under consideration is, in all material respects, virtually identical to a line of jurisprudence which points only in one direction, I am of the view that the prior jurisprudence should be followed. Otherwise, the principle of stare decisis is put into question. Here, the prior jurisprudence indicates a payment of the type in question in this case is to be treated as a capital expenditure and, based on the evidence in this case, there is no justification for departing from this approach.

9. Pages 60-61, citing British Insulated and Helsby Cables, [1926] A.C. 205 at 213-214 (H.L.). Is this the acquisition of an asset or advantage for the enduring benefit of trade? The Tax Court Judge found it was not. I am unable to agree. The express words of the Agreement provide that Bentley will not compete for the clients for thirty months. It is implicit that the intention is that the respondent will secure access to Bentley's clients and retain the clients with the help of Bentley's endorsement. It is true that the respondent would have to provide service to the clients to retain them in the longer term, but he would not even have that opportunity without first obtaining the clients from Bentley with Bentley's endorsement. The payment to Bentley was not a current marketing expense that would recur year after year. The payment was to secure an advantage for the enduring benefit of his employment income.

[21] Application of the tests summarized in Johns-Manville, supra, leads me to the conclusion that Cumberland, supra, and the cases that followed it, have been correctly decided and that, based on that jurisprudence, the payment in this case should be treated as a capital expenditure and not a current expense.

Does the Employment Relationship Require a Different Approach?

[22] While of the opinion that no one owns a client, at paragraph 2 of his reasons, the learned Tax Court Judge acknowledged that the clients at issue here, while clients of Midland Walwyn, were also clients of the respondent and Bentley.

Each [Bentley and the respondent] 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.

[23] I agree with the Tax Court Judge that no one owns a client and that clients are free to deal with whomever they wish. However, that is normally the case whether the person providing the services to the clients is an employee or is carrying on his or her own business. I am unable to follow the Tax Court Judge's reasoning that implies that an expenditure that may be capital in nature if Bentley and the respondent were carrying on their own businesses, is a marketing expense because they were employees. Once it is acknowledged that Bentley had a group of clients, even though they could also be considered to be clients of Midland Walwyn, and even though no one owns the clients, I can see no meaningful distinction between this case and those cases of a sale by one business to another of a client list, an endorsement of the purchaser by the vendor and an agreement not to compete for those clients for a specified period.

[24] The one aspect of the transaction in this case that might be considered to distinguish it from the sale of a client list between businesses is that in this case, the employer, Midland Walwyn, had some control over the clients. Midland Walwyn was not a party to the Agreement and on its face, was not bound by it.

[25] However, I do not think Midland Walwyn's involvement is of any significance to the capital-expense issue. The determination of the issue is based on the transaction between the parties at the time it takes place. See The Queen v. Baine Johnstone & Co. Ltd., 77 D.T.C. 5394 at 5397 (F.C.T.D.). The fact that clients may leave at a later date, either because they choose to do so or because they are reassigned by the Branch Manager is a risk that the purchaser of the client list takes. It does not change the character of the payment.

[26] Further, the evidence in this case is that the Branch Manager of the Midland Walwyn office facilitated the Agreement. He was the witness to it. His motivation was to retain Bentley's clients for the Branch and he thought facilitating the Agreement was the best way to do so. In these circumstances particularly, I do not see how Midland Walwyn's involvement, or its ultimate control over the allocation of clients to advisors, changes the character of the payment made from capital to expense. Indeed, although it is not necessary to decide the point, on the facts here it may well be, because of its facilitation of the Agreement and its knowledge of the payment by the respondent to Bentley, that Midland Walwyn would be estopped from reassigning clients from the respondent to other brokers in the office contrary to the Agreement.

[27] In sum, clients are never "owned" and Midland Walwyn's involvement, or the fact that Bentley and the respondent were employees, does not convert a payment that would be capital in nature if between businesses, to one that is an expense.

Conclusion of Issue One

[28] For these reasons, I must conclude that the learned Tax Court Judge erred and that the payment to Bentley was on account of capital. I am not unmindful that this is a harsh result. The respondent has no opportunity for income tax recognition for the payment to Bentley even though the payment was obviously made to earn income. A business could deduct the payment. I see no rationale for treating employees differently from businesses with respect to deductibility of such payments. However, if there is a correction to be made, it must be Parliament that does so.

ISSUE TWO

[29] The second question is whether interest on the amount borrowed by the respondent for payment to Bentley is a deductible expense or a non-deductible payment on account of capital.

ANALYSIS OF ISSUE TWO

Standard of Review

[30] The question of interest deductibility in this case is one of law to be reviewed on a standard of correctness.

Decision of the Tax Court Judge

[31] In respect of interest on the amount borrowed by the respondent for the payment to Bentley, the Tax Court Judge canvassed Supreme Court of Canada, Australian and Privy Council authorities and articles by academics and other authors. He had regard to four considerations:

1. he concluded that interest was not intrinsically or inherently capital in nature;

2. he found that the payment to Bentley was a current expense and not a capital expenditure. On the theory that interest should be considered a current expense or capital expenditure, depending upon the use of the borrowed money, the use of the funds here, being a current expense, permitted the interest to be treated as a current expense;

3. after considering relevant Supreme Court jurisprudence, he concluded that he was not precluded from finding that the interest was a current expense; and

4. he considered whether paragraph 8(1)(j) of the Income Tax Act dealing with employees' automobiles or aircraft used to earn income occupies the entire field of interest deductibility for employees and implicitly excludes interest deductibility not expressly recognized under it. He found that it did not.

He concluded that the interest could be deducted by the respondent.

[32] Like the Tax Court Judge, I too have been greatly assisted by the Privy Council's decision in Wharf Properties Ltd. v. Commissioner of Inland Revenue, [1997] 2 W.L.R. 334 and the Australian High Court's decision in Steele v. Deputy Commissioner of Taxation (1999), 161 A.L.R. 201. I have also been assisted by Brian J. Arnold's article, "Is Interest a Capital Expense?" (1992), 40 Can. Tax J. 533, by Joel Nitikman's article, "Is Interest a Current Expense?" (2000), 48 Can. Tax J. 133, and by Joseph Frankovic's article, "Why Interest Should be Considered a Current Expense" (2002), 49 Can. Tax J. 859. Professor Krishna's text, The Fundamentals of Canadian Income Tax (6^th ed.), has provided further assistance as have the written and oral arguments of Mr. Templeton and Mr. Bourgeois on the controversial subject of whether interest is a capital expenditure or a current expense.

[33] Having regard to these sources and recent Supreme Court of Canada jurisprudence, I have concluded:

1. that the Supreme Court of Canada decisions, which are binding on me, have determined that, absent special provisions for deductibility, such as paragraph 8(1)(j) or 20(1)(c) of the Income Tax Act, interest is a capital expenditure and is not deductible as an expense in calculating income for income tax purposes and that the Tax Court Judge erred in coming to the contrary conclusion; and

2. in any event, that the Income Tax Act provides a complete code dealing with interest deductibility and would preclude deductibility in this case and that the Tax Court Judge erred in coming to the contrary conclusion.

[34] In the absence of Supreme Court jurisprudence and a complete code in the Income Tax Act, there is, in my opinion, nothing inherent in interest that makes it a capital expenditure. Rather, it is more usually a current expense, although the purpose of the borrowing during the relevant period must always be considered. In this case, had it been open to me to do so, I would have found that the interest paid by the respondent would be a current expense.

Supreme Court Jurisprudence

[35] In my respectful opinion, the Tax Court Judge erred in law when he concluded that he was not precluded by Supreme Court jurisprudence from treating interest as a current expense in this case. As I read the relevant decisions, in the absence of statutory provisions permitting the deduction of interest, interest is considered a non-deductible capital expenditure. In Shell Canada Limited v. The Queen (1999), 99 D.T.C. 5669, McLachlin J., as she then was, stated at 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). [Emphasis added]

[36] In Canada Safeway Limited v. Minister of National Revenue (1957), 57 D.T.C. 1239, Rand J. at page 1244:

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.

[37] In The Queen v. Bronfman Trust 87 D.T.C. 5059, Dickson C.J.C. stated at 5064:

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 deduction of a "payment on account of capital" under s. 18(1)(b). [Emphasis added]

Shell Canada, supra, says that in the absence of the statutory provisions for deductibility, interest is, without exception, to be considered a capital expenditure. Even if one were inclined to the view that McLachlin J.'s comment should be interpreted as only characterizing interest as capital when the purpose of the loan is capital, Bronfman Trust would appear to suggest that even interest on loans for working capital, which would certainly include loans to cover current expenses, must be considered as a payment on account of capital.

[38] The learned Tax Court Judge appears to have interpreted McLachlin J.'s observation that the Supreme Court was not invited, in Shell, to revisit the characterization of interest being a capital expenditure, as an invitation for lower courts to do so. I am unable to interpret her words in the same way.

[39] In Tennant v. Her Majesty the Queen 96 D.T.C. 6121 at 6125, Iacobucci J. makes it clear that the Supreme Court is well aware that in academic and practice circles, commentators have suggested that Canada Safeway, supra, and implicitly, decisions that have followed it, were wrongly decided. In my respectful view, I think McLachlin J. was recognizing that it may be timely for the Supreme Court to revisit the question of the characterization of interest as a capital expenditure or as a current expense. However, I do not read her views in Shell, supra, to suggest that until such revisiting takes place, that the common law as developed by the Supreme Court to date is not to be respected by lower courts.

[40] I am also aware that some commentators have argued, as did Mr. Templeton before this Court, that early Supreme Court jurisprudence leading to Canada Safeway, supra, and subsequent cases, did not stand for the proposition that interest must always be treated as a capital expenditure or if it did, that it was wrongly decided. See Arnold, supra, at 536 et seq. and Nitikman, supra, at 134 et seq. Nonetheless, the most recent jurisprudence, i.e. Shell, supra, and Bronfman Trust, supra, appears to provide that interest is always, in the absence of statutory provisions to the contrary, to be considered a capital expenditure. I am bound by Shell and Bronfman Trust.

[41] Having regard to Supreme Court jurisprudence, I am unable to see any leeway for the Tax Court or this Court to adopt any approach other than, in the absence of statutory provisions treating interest as a current expense, to treat interest as a capital expenditure.

[42] The learned Tax Court Judge was of the view that interest takes on the character of the purpose of the borrowing - if the borrowing was for a capital expenditure, the interest would be considered a payment on account of capital; if the borrowing was for the payment of current expenses, the interest would be considered a current expense. Even if the learned Tax Court Judge is correct, this would not assist the respondent in this case. I have found that his payment to Bentley was a capital expenditure. Therefore, the funds he borrowed to provide payment to Bentley were for a capital purpose and the interest on the loan would also be considered a capital expenditure.

[43] In the result, I am led to the conclusion that, for purposes of this case, where interest is not deductible under any special provision of the Income Tax Act, it is to be treated as a capital expenditure which, in this case, is not deductible by reason of subparagraph 8(1)(f)(v) Act. The learned Tax Court Judge was in error in reaching the contrary conclusion.

Does the Income Tax Act provide a complete code for the treatment of interest for income tax purposes?

[44] If this case were to be appealed, and should the Supreme Court conclude that interest need not necessarily be characterized as a capital expenditure, would such conclusion entitle the respondent to deduct interest on the funds he borrowed for payment to Bentley? More specifically, does the Income Tax Act provide that in the absence of express provisions to the contrary, interest is, always, or at least when the purpose of the borrowing is for a capital expenditure, to be considered a capital expenditure and not a current expense?

[45] The learned Tax Court Judge was of the opinion that the statute did not oust the possibility of interest deductibility if interest was judicially determined to be a current expense and not a capital expenditure. To come to that conclusion, he had regard to paragraph 8(1)(j) of the Act which provides for the deduction of interest on borrowed money used to acquire a motor vehicle or aircraft by an employee. Paragraph 8(1)(j) provides for the deduction of interest as follows:

(j) where a deduction may be made under paragraph 8(1)(f), 8(1)(h) or 8(1)(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 [...]

j) lorsqu'un montant est déductible en application des alinéas f), h) ou h.1) dans le calcul du revenu que le contribuable tire d'une charge ou d'un emploi pour une année d'imposition:

(i) les intérêts payés par le contribuable au cours de l'année soit sur de l'argent emprunté et utilisé pour acquérir un véhicule à moteur utilisé dans l'exercice des fonctions de sa charge ou de son emploi ou un aéronef nécessaire à cet exercice, soit sur un montant payable pour l'acquisition d'un tel véhicule ou aéronef [...]

(A) à un véhicule à moteur utilisé dans l'exercice des fonctions de sa charge ou de son emploi,

(B) à un aéronef qui est nécessaire à l'exercice de ces fonctions;

[46] The Tax Court Judge recognized that paragraph 8(1)(j) was a derogation from the prohibition against the deduction of capital expenditures under subparagraph 8(1)(f)(v). As indicated earlier, I believe his view is that interest is to be considered a capital expenditure when the borrowed funds are used for a capital purpose. On that approach, interest is assimilated to the purpose of the borrowing. He concluded that, because interest could be considered either a capital expenditure or a current expense, depending on the use of the funds, paragraph 8(1)(j) was needed to expressly permit the deduction of interest when the borrowing was for a motor vehicle or aircraft which were considered to be capital expenditures. However, when interest is paid or payable on funds borrowed for current expenses, the interest is not inherently capital and would be deductible under paragraph 8(1)(f). At paragraph 44 he stated:

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.

[47] The Tax Court Judge went on to compare paragraph 8(1)(j) to paragraph 20(1)(c) of the Act in respect of the deduction of interest from business or property income. He reached the conclusion that paragraph 20(1)(c) was not the exclusive route to the deductibility of interest as a business or property expense. Because of the more restricted opportunity to deduct interest in paragraph 8(1)(j), he concluded that paragraph 8(1)(j) did not oust the deductibility under paragraph 8(1)(f) of interest that was not on capital account. At paragraph 48, he concluded:

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.

[48] Although I am not in agreement with the Tax Court Judge's analysis on this point, I will accept, for the purposes of this issue, that interest takes on the character of the purpose for which the principal amount was borrowed. If that is the case, I have found here that the principal sum was borrowed for a capital purpose, that is, that the payment to Bentley was a capital expenditure and not a current expense. As a result, the interest here would be characterized as a payment on account of capital. As it is not for a motor vehicle or aircraft, the payment does not come under the paragraph 8(1)(j) exception against non-deductibility of payments on account of capital in subparagraph 8(1)(f)(v). Therefore, the interest in this case would not be deductible.

[49] More generally, I think that the language used by Parliament in subparagraph 8(1)(f)(v) and paragraph 8(1)(j) suggests that in respect of deductions from employment income, Parliament views interest, at least when the funds are borrowed for a capital purpose, as a payment on account of capital.

[50] Subparagraph 8(1)(f)(v) excludes from deductibility payments on account of capital, "except as described in paragraph (j)". Paragraph (j) provides for the deductibility of interest paid on borrowed money used for the acquisition of specific assets only - a motor vehicle or aircraft. On their face, these two provisions are related, one precluding deduction of payments on account of capital, except as provided by the other provision, and the other allowing such deduction in limited circumstances. The limited circumstances include the deductibility of interest in relation to a motor vehicle or aircraft. When the general provision is read with the limiting one, the general provision would appear to preclude interest deductibility in all other circumstances, or at least when the borrowing was for a capital purpose other than for a motor vehicle or aircraft.

[51] I think the same conclusion would be applicable to interest deductibility in the case of business or property. Like subparagraph 8(1)(f)(v), paragraph 18(1)(b) precludes deductibility of payments on account of capital "except as expressly permitted by this Part". Paragraph 20(1)(c), which is in "this Part" provides that, notwithstanding paragraph 18(1)(b), subject to specified conditions, interest that is paid or payable in respect of the year is deductible. Again, reading paragraphs 18(1)(b) and 20(1)(c) together, it would appear that except as provided in paragraph 20(1)(c), at least when the borrowing is for a capital purpose, interest is considered to be a capital expenditure and is not deductible.

[52] As a result, paragraphs 8(1)(j) and 20(1)(c), and the other provisions of the Income Tax Act dealing with interest, constitute a complete code for the deductibility of interest under the Income Tax Act, at least when the borrowing is for a capital purpose. I think this view is supported by the fact that in its re-enactments and amendments of these provisions, Parliament has never repudiated Supreme Court jurisprudence to the effect that interest is, except as permitted by the Act, not deductible as constituting payments on account of capital. While I acknowledge that it is not permissible to automatically equate Parliament's legislative inaction with its adoption of Supreme Court jurisprudence (see subsection 45(4) of the Interpretation Act), I think it is permissible to draw an inference to that effect in appropriate circumstances. (See R. Sullivan, ed., Driedger on the Construction of Statutes, 3d ed. (London: Butterworths, 1994) at 477; and [1951] S.C.R. 450">Studer v. Cowper, [1951] S.C.R. 450 at 453-454.) There is probably no Act of Parliament that is subject to as many legislative actions on an ongoing basis as the Income Tax Act. Parliament often amends the Act in response to decisions of the Supreme Court and even lower courts. I think it is a reasonable inference that Parliament has had a real opportunity to amend the Income Tax Act to provide that, notwithstanding Supreme Court jurisprudence, interest should not be treated as a payment on account of capital. It has not done so. As a result, I think it is reasonable to conclude that the Parliamentary intention is, consistent with Supreme Court jurisprudence, that interest is a payment on account of capital and is not a deductible expense, except as provided by express provisions of the Income Tax Act such as paragraphs 8(1)(j) and 20(1)(c).

Is Interest Inherently a Capital Expenditure or a Current Expense?

[53] While I have expressed the view that the Income Tax Act provides a complete code for the deductibility of interest, I acknowledge that my determination is based largely on the inference that Parliament has agreed with the Supreme Court of Canada characterization of interest as always being on account of capital. In the event this inference is incorrect, and should the matter be appealed further, I will take this opportunity to provide some foundation for my view that interest, by its nature, is generally a current expense, although regard must always be had to the purpose of the borrowing. I emphasize, however, that these comments are about the inherent nature of interest and they are made without regard to provisions such as paragraphs 8(1)(j) or 20(1)(c), which provide a statutory basis for the deductibility of interest.

[54] While I think interest is usually a current expense, I also agree that one must look to the purpose of the borrowing or the use of the funds during the relevant period. In Wharf Properties Ltd. v. Commissioner of Inland Revenue, supra, Lord Hoffmann explained this approach succinctly at page 338:

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.

However, I do not think Wharf Properties, supra, stands for the proposition, expressed by the learned Tax Court Judge, that interest on funds used for a capital purpose must always be treated as a capital expenditure and interest on funds used for current expenses must always be treated as a current expense. Stating a rule at that level of generality, it may be incorrectly thought that because a borrowing is for the purpose of acquiring and holding an asset for use in a business, the interest should always be considered as a capital expenditure.

[55] From my reading of Wharf Properties, supra, I think a distinction is to be drawn between funds borrowed to create an asset that is ultimately intended to produce income on the one hand, and funds borrowed to hold an asset during the period when it is intended to produce income on the other. In Wharf Properties, supra, Lord Hoffmann analogizes to the wages paid in the construction versus the maintenance of a building, noting that the wages paid to construct the building would be on account of capital, while the wages paid to maintain the building when it is completed would be a current expense. At page 338, he stated:

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.

By analogy, interest paid during the construction of the building would be on account of capital, but once the building was completed and capable of producing income, interest on funds borrowed in order to continue to hold the building would be a current expense. At page 339, Lord Hoffmann explained:

[...] 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.

And at page 340, he stated:

Each payment of interest must be considered in relation to the purpose of the loan during the period for which interest was paid. Once the asset has been acquired or created and is producing income, the interest is part of the cost of generating that income and therefore a revenue expense.

[56] In his article, supra, Frankovic explains that interest should be treated as a current expense, even if the borrowing is to finance the holding of an asset. Frankovic notes that, in general, a capital expenditure is one that generates utility or value that endures beyond the year of the expenditure. A capital expenditure does not decrease a taxpayer's wealth, it only changes the form of that wealth. However, if the value of an expenditure is consumed in the year of the expenditure, the expenditure should be treated as a current expense because it represents a decrease in the taxpayer's wealth in that year. Frankovic says that the decrease in wealth sustained by interest being paid or payable, is independent of the purpose of the expenditure made with the borrowed funds. In other words, whether the loan is for a capital investment or to pay current expenses, interest is a cost that decreases the taxpayer's wealth and should, therefore, be considered a current expense.

[57] I agree with this analysis at a general level. However, in my view, there may be exceptions. For example, where funds are borrowed to create an asset, I think the approach of Lord Hoffman in Wharf Properties, supra, is persuasive. In such case, the interest, just as the other expenditures incurred in creating the asset, would be on account of capital. The cost of the asset will reflect all the expenditures made to create it, including the expenditure for interest. In such case, where the ultimate value of the asset reflects its cost, including its interest cost, the interest is transformed into wealth in the form of the asset. It does not represent a decrease in wealth and should, therefore, be treated as an outlay on account of capital.

[58] In his argument, Mr. Templeton analogized interest to rent. Rent paid for the lease of premises used to earn income is generally an expense in the year incurred. Interest paid for the funds used to earn income should be treated the same way. In other words, rent paid for the use of the premises is, in essence, the amount paid for borrowing the owner's premises for the period the rent covers. It is an expense attributable to that period. Interest is the amount paid for borrowing someone else's funds for the period the interest covers. It should be considered an expense attributable to that period. Again, I agree with this analysis, subject to my reservation with respect to interest paid to create an asset, as opposed to holding the asset for the purpose of earning income.

[59] I do not say that the only time interest should be treated as a capital expenditure is when it is incurred during the period of the creation of an asset and before the asset is available to earn income. As Lord Hoffman stressed in Wharf Properties, supra, it is the purpose of the loan for the period to which the interest is attributable that will determine whether the interest is a current expense or capital expenditure. But the purpose is not determined by simply looking at whether the principal sum borrowed is for a capital expenditure or the payment of current expenses. Thus, when the principal sum is paid to acquire and hold an asset to earn income, even though the purpose is asset-related, the interest is a current expense.

[60] As I have noted earlier, the Supreme Court has not had occasion to deal with the issues I have addressed in this portion of these reasons and, in particular, has not had occasion to have regard to Wharf Properties, supra.

[61] In this case, I have determined that the payment from the respondent to Bentley was a capital expenditure. The funds borrowed by the respondent were for the purpose of acquiring an advantage of enduring value - Bentley's client list, his endorsement and his agreement not to compete for thirty months. The purpose of the borrowing was for the opportunity to earn income immediately upon the acquisition of Bentley's client list. Therefore, if the Income Tax Act does not provide a complete code for the deductibility of interest and the Supreme Court was to find that interest was not always, by its nature, a capital expenditure, the interest paid by the respondent in this case should be treated as a current expense and should be deductible from his employment income.

CONCLUSION

[62] While I am sympathetic to the result reached by the learned Tax Court Judge, I am unable to agree with it because, in my respectful view, it does not accord with Supreme Court jurisprudence and the provisions of the Income Tax Act. I would allow the appeal, quash the decision of the Tax Court and confirm the assessment of the Minister of National Revenue. In accordance with section 18.25 of the Tax Court of Canada Act, R.S. 1985, c. 51 (4th Supp.), s. 5, the respondent should be allowed his reasonable and proper costs in respect of this judicial review application by Her Majesty the Queen.

"Marshall Rothstein"

J.A.

"I agree

A.J. Stone J.A."

"I agree

J. Edgar Sexton J.A."

FEDERAL COURT OF CANADA

Names of Counsel and Solicitors of Record

DOCKET: A-191-01

STYLE OF CAUSE: Her Majesty The Queen v. Thomas Gifford

DATE OF HEARING: May 16, 2002

PLACE OF HEARING: Toronto, Ontario

REASONS FOR JUDGMENT BY: Rothstein J.A.

CONCURRED IN BY: Stone J.A.

Sexton J.A.

DATED: August 12, 2002

APPEARANCES BY:

Mr. Daniel Bourgeois

Mr. Pascal Tétrault

For the Applicant

Mr. Gregory J. DuCharme

Mr. Michael Templeton

For the Respondent

SOLICITORS OF RECORD:

Morris Rosenberg

Deputy Attorney General of Canada

For the Applicant

McLachlan Froud & DuCharme

North Bay, Ontario

For the Respondent

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Canada v. Gifford, 2002 FCA 301

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2002 FCA 301