André Rancourt, Antoine Dionne v. Minister of National Revenue, [1985] 1 CTC 2411, 85 DTC 370

Cardin, TCJ [TRANSLATION]:—With the consent of the parties, the appeals by Antoine Dionne and André Rancourt were heard on common evidence in the City of Québec on October 16, 1984. By notice of assessment dated November 19, 1982, the Minister of National Revenue added to the income of each appellant the sums of $1,500, $2,867.50 and $2,557.50 for the 1978, 1979 and 1980 taxation years respectively, as benefits conferred on each of the appellants by the company, Adélard Ouellet & Fils Inc, within the meaning of paragraph 15(l)(c) of the Income Tax Act, RSC 1952, c 148.

In 1978, Antoine Dionne and André Rancourt each acquired one half of all the shares of Adélard Ouellet & Fils Inc, held by Adélard Ouellet. The purchase price and interest were paid in full by Adélard Ouellet & Fils Inc, on behalf of the two purchasers (the appellants).

For accounting purposes, the sum of $3,500 paid on the principal each month by Adélard Ouellet & Fils Inc was entered in the company’s books as a shareholders’ advance. The interest on the purchase price, however, was claimed by the company as a current expense.

During the years in question, the company paid, on behalf of Antoine Dionne and André Rancourt, the following interest to Adélard Ouellet:

It was the half of the interest thus paid by the company to Adélard Ouellet, on behalf of the two purchasers (the appellants) that the respondent regarded as a benefit conferred by the company on each of the appellants pursuant to paragraph 15(l)(c) of the Act.

In their notices of appeal, the appellants submitted the following facts:

In 1978, 1979 and 1980, Adélard Ouellet & Fils Inc paid interest, and the amounts are recorded as interest on loans, whereas in reality, they should have been debited as advances to a shareholder, which would have later been charged as a benefit to a shareholder, therefore charged to expense. However, these amounts would have been claimed as a deduction from my income because they represented interest paid for investments.

It is therefore normal to add these amounts to my income, but since they represent interest paid to earn income, they should therefore be deducted from my income.

The appellants therefore admitted that the interest was correctly added to their respective incomes for each of the years in question. On the other hand, counsel for the respondent did not deny that the interest on an amount payable for property acquired for the purpose of gaining income is deductible. What he said was that such interest can be deducted only by the taxpayer who paid it.

The evidence is clear in that the company, Adélard Ouellet & Fils Inc, and not the appellants, paid the interest to Adélard Ouellet. There is an important distinction to be drawn between the company, Adélard Ouellet & Fils Inc, which is a legal entity in itself, and its shareholders, Messrs Dionne and Rancourt. The company has income, expenses and obligations distinct from those of the appellants, even as shareholders of the company, which are not interchangeable.

The relevant section reads as follows:

20. (1) Deductions permitted in computing income from business or property.— Notwithstanding paragraphs 18(l)(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(c) interest. — an amount paid in the year or payable in respect of the year (depending upon the method regularly followed by the taxpayer in computing his income), pursuant to a legal obligation to pay interest on

(i) an amount payable for property acquired for the purpose of gaining or producing income therefrom or for the purpose of gaining or producing income from a business (other than property the income from which would be exempt or property that is an interest in a life insurance policy),

The interpretation that counsel for the respondent gives to the provisions of subparagraph 20( l)(c)(ii) is affirmed by a decision of the Federal Court of Canada, Trial Division, in Byke Estate v The Queen, [1979] CTC 763; 74 DTC 6585, cited by the respondent. One of the points at issue in that case was precisely the interpretation to be given to paragraph 1 l(l)(c) (now 20(1)(c)).

The following briefly summarizes the facts in Byke (supra), which are relevant to the case at bar: the members of the Byke family had purchased all the shares of a hotel operating as a company. A part of the purchase price was financed by a $45,000 bank loan granted to the purchasers. The hotel company paid the principal and interest on the loan on behalf of the purchasers. In its books, the company treated the principal payments as shareholders’ dividends and, of particular concern to us here, treated the payments of interest on the loan as operating expenses. By notice of reassessment, the Minister of National Revenue rejected the interest payments as operating expenses and included those amounts as being a benefit conferred by the company on the shareholders. The Byke family objected and appealed to the Tax Review Board (now the Tax Court of Canada), which dismissed the appeal. The Byke family then appealed to the Federal Court, Trial Division. Before that Court, the family conceded that the payments of interest on the bank loan were income for the shareholders, but it claimed the right, however, to deduct the interest payments under paragraph 1 l(l)(c) (now 20(1)(c)). The point at issue was therefore identical with the one which must be determined in the case at bar.

In dismissing the appeal by the Byke family, Mahoney, J of the Federal Court explained in his reasons for judgment that the basic scheme of the Income Tax Act as it bears on a Canadian resident is to impose tax on that taxpayer’s income and not on anyone else’s income.

Similarly, paragraph 1 l(l)(c), now 20(l)(c), of the Act permits a deduction by the taxpayer who paid the interest and not by some other taxpayer.

The members of the Byke family, like the appellants, contended that if the interest was to be included in their income they should be allowed an offsetting deduction under subparagraph 1 l(l)(c)(ii) (now 20(l)(c)(ii)).

The learned judge interpreted this subparagraph as follows:

An amount paid in the year pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from property may be deducted in computing the income of a taxpayer in a taxation year.

The learned judge concluded that in the context of the basic scheme of the Income Tax Act, the deduction permitted under the said subparagraph is permitted only to the taxpayer who actually paid the interest. The members of the Byke family, like the appellants in the case at bar, had not paid the interest themselves, and Mahoney, J dismissed their appeal. This Federal Court decision, which constitutes a precedent, must be followed by this Court.

Even though the item “interest” for each of the years in question could perhaps have been treated differently in accounting terms, as suggested by Mr Dionne in his “comparative computations of tax payable” (Exhibit A-1), the respondent could not do anything else but assess the appellants by applying the relevant provisions of the Act to the computations, as was done in the appellants’ tax returns for the 1978, 1979 and 1980 taxation years. I conclude that the respondent’s assessment is well founded in fact and in law.

Accordingly, the appeals are dismissed.

Appeals dismissed.