7 January 1991 Ministerial Letter 903188 F - Whether Borrowed Money was Used in Taxpayer's Business to Earn Income

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Subject:  24(1) Subsection 17(3) of the Income Tax Act (the "Act")

This is in response to your memorandum dated November 7, 1990 concerning the application of subsection 17(3) of the Act under the following set of facts:

24(1)

24(1)

In the case of Her Majesty the Queen v. F.H. Jones Tobacco Sales Co. Ltd., 1973 DTC 5577, F.C.T.D. ("F.H. Jones"), which was cited by 24(1) in support of their case, the taxpayer, a tobacco processor, had guaranteed the loans of a company, La Société des Tabacs Québec Inc. ("Tabacs") which was acquiring a customer of the taxpayer, in exchange for an undertaking from Tabacs to direct the customer to purchase all the tobacco used in its business from the taxpayer.  Immediately after the acquisition of the customer by Tabacs through until Tabacs became insolvent, the customer purchased all of its tobacco from the taxpayer.  When Tabacs became insolvent, the taxpayer was forced to come good on the guarantee.  The court found that the evidence had established that the amount paid on the guarantee was incurred for the purpose of gaining or producing income from a business.

In our view F.H. Jones is distinguishable from the case under consideration for a number of reasons.  In F.H. Jones the taxpayer clearly established the purpose of the guarantee by producing a copy of a contract detailing the agreement between F.H. Jones and Tabacs. 24(1) In F.H. Jones the benefit of increased sales to the customer were clearly shown to have occurred.  In our case, 24(1) In F.H. Jones the guarantee was given for no consideration except for an agreement to purchase tobacco products from the guarantor and could therefore produce no income in and by itself.  In our case

24(1)

In our view the case of Canada Safeway Ltd. v. M.N.R., 1957 DTC 1239, S.C.C., ("Safeway") is more on point with the facts in the case at hand than is F.H. Jones.  In Safeway, the taxpayer which owned a chain of retail grocery stores, borrowed money in order that it could purchase the shares of a company whose business was grocery wholesaling purportedly to secure a source of product at low prices.  The issue was whether the borrowed money was used in the taxpayer's business to earn income.  In Safeway the court accepted that the investment would undoubtedly have some beneficial effects on taxpayer's business however those effects were indirect and remote and on that basis it was concluded that the money was not used in the taxpayer's business to earn income but instead was used by the taxpayer to earn non-taxable income (i.e. dividends on the shares).

It is our view that

24(1)

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