A-251-72
Minister of National Revenue (Appellant)
v.
Yonge-Eglinton Building Limited (Respondent)
Court of Appeal, Thurlow J., Lacroix and Sweet
D.JJ.—Toronto, January 16; Ottawa, February
13 and 25, 1974.
Income tax—Deductions from income—Expense incurred
in the course of borrowing money—Deductible under Income
Tax Act, R.S.C. 1952, c. 148, s. 11(1Xcb), now s. 20(1Xe).
In 1962 the respondent entered into a contract with a
lender corporation for the financing of the respondent in the
construction of an office building. The respondent under
took to pay (1) interest on the moneys advanced, in terms
stated; (2) an additional payment of interest, in each calen
dar year in which it showed a net profit from the operation
of the building, of an amount equal to one per cent of its
gross rental income. The amounts due under heading (2) fell
to be paid in the taxation years 1965-68.
Held, per Thurlow J. and Lacroix D.J., these amounts
were expenses that arose in the course of constructing the
building. They could not be regarded as being incurred until
the years in which the respondent had a net profit and the
amount of such expense could be entertained. The Income
Tax Act, R.S.C. 1952, c. 148, section 11(1)(cb), and 1955, c.
54, s. 1, now section 20(1)(e) did not require that to be
deductible the expense had to be incurred in the year when
the borrowing occurred. The amounts in question were
therefore deductible under subparagraph (ii) of the section
and, not being in the nature of a "bonus" were not caught by
the exception of "commission or bonus" in subparagraph
(iii). The appeal is dismissed.
Per Sweet D.J. (dissenting): to come under section
11(1)(cb) the expenses must not only have been incurred in
the relevant year but must also have been incurred in the
course of borrowing. Since the last borrowing was in 1964
and the first year in which any such expense was incurred
was 1965, the expenses were incurred after the course of
borrowing had ended.
Equitable Acceptance Corporation v. M.N.R. [1964]
Ex.C.R. 859; Consumers Gas Company v. M.N.R.
[1966] Ex.C.R. 46; Sherritt Gordon Mines Ltd. v.
M.N.R. [1968] Ex.C.R. 459; Canada Permanent Mort
gage Corporation v. M.N.R. [1971] C.T.C. 694; Riviera
Hotel Ltd. v. M.N.R. [1972] F.C. 645; and Lomax v.
Dixon [1943] 2 All E.R. 255, considered.
INCOME tax appeal.
COUNSEL:
N. A. Chalmers, Q.C., and M. R. V. Stor-
row for appellant.
J. A. Bradshaw for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Campbell, Godfrey & Lewtas, Toronto, for
respondent.
THURLOW J.—The issue raised by this appeal
is whether certain amounts which the respond
ent paid to Traders Realty Limited in the taxa
tion years 1965 to 1968 inclusive were deduct
ible in computing the respondent's income for
those years.
The amounts in question became payable
under the terms of a contract concluded in July
1962 by which the respondent obtained from
Traders a commitment to provide interim
financing to the extent of $6,500,000 for the
construction of an office building on leasehold
premises of the respondent at the corner of
Yonge and Eglinton Streets in Toronto. The
respondent thereby became entitled to borrow
from time to time from Traders up to the speci
fied limit. In return the contract provided by
clause 3 as follows:
3. Yonge-Eglinton shall pay to Traders interest with respect
to the Credit calculated as follows:
(a) The amount owing from time to time under the Credit
shall bear interest (with interest on overdue interest),
payable quarter-yearly not in advance both before and
after maturity and before and after default on the 30th
days of January, April, July and October in each year at
the rate of 9 % per annum.
(b) In each calendar year in which Yonge-Eglinton earns
a net profit from its operations (as certified by Yonge-
Eglinton's auditors) it shall pay to Traders as an additional
interest charge an amount equal to 1% of its gross rental
income (as certified by Yonge-Eglinton's auditors) from
the Project, such payments to become due and be payable
90 days after the termination of each such calendar year;
the first of such payments to be payable with respect to
the first calendar year after 1964 in which Yonge-Eglinton
earns a net profit and such payments to continue until 25
payments have been made pursuant hereto.
As a part of the transaction, though not of the
formal contract, a further consideration for the
commitment was given by the transfer by the
principal shareholder of the appellant to Traders
of 5% of the issued shares of the respondent for
the total sum of $5.00.
Following the making of this contract the
respondent from time to time borrowed from
Traders amounts which at one time totalled
$900,000, on which interest at 9 % was paid as
provided, but the chief purpose to which the
contract was put by the respondent was to use it
as a security upon which the respondent was
able to borrow some $5,475,000 from the Bank
of Montreal at 5 to 6% interest to finance the
construction of the building. By January 1965
permanent financing at 6i% had been obtained
from an insurance company and the loans from
both Traders and the bank had been repaid with
the interest which accrued thereon. The
respondent's obligation under clause 3(b) of the
contract, however, remained and it is the pay
ments under this clause which became payable
in the taxation years 1965 to 1968 inclusive
which are in issue in the appeal. The amounts in
question are the following:
1965 — $11,695.45
1966 — $12,263.98
1967 — $12,584.86
1968 — $13,143.12
The learned Trial Judge held that these
amounts were not interest and therefore were
not deductible under section 11(1)(c)' of the
Income Tax Act but that they were deductible
under section 11(1)(d) 2 as parts of payments
repaying borrowed money used for the purpose
of earning income from a business or property
that were required by section 7' to be included
in computing the income of the recipient. In
view of this conclusion the learned judge did
not consider or deal with an alternative conten-
1 11. (1) Notwithstanding paragraphs (a), (b) and (h) of
subsection (1) of section 12, the following amounts may be
deducted in computing the income of a taxpayer for a
taxation year:
(c) an amount paid in the year or payable in respect of the
year (depending upon the method regularly followed by
the taxpayer in computing his income), pursuant to a legal
obligation to pay interest on
(i) borrowed money used for the purpose of earning
income from a business or property (other than bor
rowed money used to acquire property the income from
which would be exempt or to acquire an interest in a
life insurance policy),
(ii) 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), or
or a reasonable amount in respect thereof, whichever is
the lesser;
2 11.(1) . . .
(d) such part of a payment
(i) repaying borrowed money used for the purpose of
earning income from a business or property (other than
borrowed money used to acquire property the income
from which would be exempt), or
(ii) for property acquired for the purpose of gaining or
producing income therefrom or for the purpose of gain
ing or producing income from a business (other than
property the income from which would be exempt),
made by the taxpayer in the year as is by section 7
required to be included in computing the recipient's
income for a taxation year;
3 7. (1) Where a payment under a contract or other
arrangement can reasonably be regarded as being in part a
payment of interest or other payment of an income nature
and in part a payment of a capital nature, the part of the
payment that can reasonably be regarded as a payment of
interest or other payment of an income nature shall, irre
spective of when the contract or arrangement was made or
the form or legal effect thereof, be included in computing
the recipient's income.
tion by the respondent that the amounts were
deductible under section 11 (1)(cb) of the Act.
I agree with the conclusion of the learned
judge that notwithstanding the use of the name
"interest" in clause 3(b) of the contract the
payments were not interest within the meaning
of section 11(1)(c) and were not deductible
thereunder but, with respect, I am also of the
opinion that the amounts in question cannot be
regarded, when considered either singly or in
their totality and whether by themselves or in
conjunction with interest and other consider
ations received by Traders, as payments "repay-
ing borrowed money" or as payments "for prop
erty acquired for the purpose of gaining or
producing income therefrom or for the purpose
of gaining or producing income from a busi
ness" within the meaning of section 11(1)(d).
Nor do I regard section 7 as applicable to
require any of the amounts in question to be
included in the income of the recipient.
I am also of the opinion, contrary to the
submission of the respondent, that the obliga
tion to pay the amounts in question was not
incurred in the course of the respondent's busi
ness so as to make their deduction permissible
under section 12(1)(a) of the Act and that they
are expenditures of a capital nature the deduc
tion of which is prohibited by section 12(1)(b).
It remains therefore to consider whether the
amounts fall within and are deductible under
section 11(1 )(cb). This paragraph, which was
enacted in 1955, expands into another area the
deductibility of expenses relating to capital used
for the purpose of gaining or producing income
which had formerly been provided under sec
tions 11(1)(c) and 11 (1)(ca) only for interest and
compound interest payable in respect of such
capital. The paragraph provides:
11. (1) Notwithstanding paragraphs (a), (b) and (h) of
subsection (1) of section 12, the following amounts may be
deducted in computing the income of a taxpayer for a
taxation year:
(cb) an expense incurred in the year,
(i) in the course of issuing or selling shares of the
capital stock of the taxpayer, or
(ii) in the course of borrowing money used by the
taxpayer for the purpose of earning income from a
business or property (other than money used by the
taxpayer for the purpose of acquiring property the
income from which would be exempt),
but not including any amount in respect of
(iii) a commission or bonus paid or payable to a person
to whom the shares were issued or sold or from whom
the money was borrowed, or for or on account of
services rendered by a person as a salesman, agent or
dealer in securities in the course of issuing or selling the
shares or borrowing the money, or
(iv) an amount paid or payable as or on account of the
principal amount of the indebtedness incurred in the
course of borrowing the money, or as or on account of
interest;
This provision has been considered in a
number of cases 4 and has received in general a
strict and in one case what might be regarded as
a narrow construction. In none of them, how
ever, has a point comparable to the present
arisen.
4 Equitable Acceptance Corporation v. M.N.R. [1964]
Ex.C.R. 859; Consumers Gas Company v. M.N.R. [1966]
Ex.C.R. 46; Sherritt Gordon Mines Ltd. v. M.N.R. [1968] 2
Ex.C.R. 459; Canada Permanent Mortgage Corporation v.
M.N.R. [1971] C.T.C. 694; Riviera Hotel Co. Ltd. v. M.N.R.
[1972] F.C. 645.
The Minister's position, as I understand it, is
not that the amounts were not expenses of
borrowing money but that in order to qualify for
deduction the expense must be one that is
incurred at or around the time the borrowing
takes place and that here the liability to pay the
amounts was not incurred in the course of the
borrowing but in years after the borrowing took
place upon profits being earned from the opera
tion of the building. Counsel for the Minister
further contended that the amounts were
bonuses within the meaning of subparagraph
(iii).
The respondent's position on the other hand
is that the obligation to pay the amounts are
expenses that arose in the course of borrowing
the money to construct the building but that
they could not be regarded as having been
incurred until the years in which by reason of
the respondent having a net profit from its oper
ation the amount of such expense could be
ascertained, that section 11(1)(cb) does not
require that to be deductible the expense must
be incurred in the year when the borrowing
occurs and that the amounts in question accord
ingly fall within subparagraph (ii) and are not
commissions or bonuses within the meaning of
subparagraph (iii).
The general area of what is comprehended in
subparagraphs (i) and (ii) of section 11(1)(cb) is
I think indicated by the scope of what is
expressly excluded by subparagraphs (iii) and
(iv) for the fact that it was considered expedient
to expressly exclude commissions and bonuses
and payments as or on account of principal or
interest, to my mind, shows that what is
referred to as "an expense incurred in the year"
in the course of issuing or selling shares or
borrowing money for the purpose referred to is
capable of embracing a broad class of expendi
tures for such purposes. The easiest cases to
think of are professional fees for necessary
documentation and fees for registering docu
ments but the wording is not confined to these
or like expenses and to my mind it involves no
stretch of the language used to treat it as includ
ing amounts of the kind here in question. I also
think these amounts are to be regarded as
expenses "incurred in the year" in which they
became payable. The difficulty is with the word
ing "in the course of borrowing money" in the
context of "an expense incurred in the year in
the course of borrowing money" etc.
On this point I am of the opinion that the
Minister's position is not sound. It does not
seem to me to be a sensible or practical inter
pretation (and counsel for the Minister did not
so contend) to hold that the deduction can only
be made when the taxation year in which shares
are issued or sold or money is borrowed is the
same as that in which the expense is incurred
because such a construction would arbitrarily
exclude the deduction, for example, of profes
sional fees incurred in connection with a share
issue or a borrowing in a taxation year prior to
the share issue or borrowing. It would also
exclude the deduction, again for example, of
expenses for formal documentation contemplat
ed by the arrangements but incurred in a taxa
tion year after that in which money has been
borrowed on the strength of temporary or infor
mal arrangements. There seems to be no good
reason based on the language of the statute why
the expenses referred to in either example
should be excluded. But the Minister's sugges
tion that the incurring of the expense must be at
or around the time of the issuing or selling or
the borrowing if it is to be "in the course of" the
issuing or selling or borrowing appears to me to
leave the deductibility of such expenses subject
to a vague and uncertain test. It would be unten
able if it meant that the expense must be
incurred in the taxation year of the issuing or
selling or borrowing and since it is impossible to
know what is included in "around the time" it
seems to me to be untenable on that basis as
well. What appears to me to be the test is
whether the expense, in whatever taxation year
it occurs, arose from the issuing or selling or
borrowing. It may not always be easy to decide
whether an expense has so arisen but it seems
to me that the words "in the course of" in
section 11(1)(cb) are not a reference to the time
when the expenses are incurred but are used in
the sense of "in connection with" or "incidental
to" or "arising from" and refer to the process of
carrying out or the things which must be under-
taken to carry out the issuing or selling or
borrowing for or in connection with which the
expenses are incurred. In my opinion therefore
since the amounts here in question arose from
and were incidental to the borrowing of money
required to finance the construction of the
respondent's building they fall within section
11(1)(cb)(ii) as expenses incurred in the year in
the course of borrowing money etc. and it
becomes necessary to consider whether they are
excluded therefrom as being commissions or
bonuses within the meaning of section
11(1)(cb)(iii). It was not suggested that they
were excluded by section 11(1)(cb)(iv) as being
payments as or on account of interest.
Omitting wording concerned with the issue
and sale of shares section 11(1)(cb)(iii) refers to
and excludes any amount in respect of
(iii) a commission or bonus paid or payable to a person
... from whom the money was borrowed or for or on
account of services rendered by a person as a salesman,
agent or dealer in securities in the course of ... bor
rowing the money, ... .
On the evidence there is no basis for thinking
that the amounts in question were payments for
services of the kind referred to in the second
portion of the provision but as a part of the
money was borrowed from Traders, to whom
the amounts in question were paid it becomes
necessary to determine whether they fall within
the meaning of "a commission or bonus" in the
subparagraph. I do not recall counsel for the
Minister having suggested that the word com
mission was apt to describe the amounts and I
do not think that it is. The Shorter Oxford
Dictionary meaning of commission in such a
context is "a pro rata remuneration for work
done as agent" and a similar definition is given
in The Living Webster Encyclopedic Diction
ary. On the other hand I understood counsel to
contend that the word bonus was applicable and
in this connection there was a reference to the
judgment of Lord Greene M.R. in Lomax v.
Dixons. However, the question in that case was
not whether the amounts under consideration
were bonuses but whether they were of a capital
or of an income nature and for that reason I do
not find the judgment helpful in the present
situation. Here again the two dictionaries to
which I have referred define the word "bonus"
in similar terms, the definition in the Shorter
Oxford Dictionary being "a boon or gift over
and above what is normally due, a premium for
services rendered or expected, an extra divi
dend paid out of surplus profits, etc." I do not
think this definition fits the amounts here in
question but apart from that it appears to me
that in ordinary usage a bonus in the issuing and
selling of shares refers to some portion of the
shares issued or sold and in borrowings refers to
some additional amount of principal or interest
to be paid. It does not in my opinion connote an
amount of the kind in issue here; that is to say,
an amount that is to be paid whether or not
money is borrowed from the person who is to
receive the amount, without reference or rela
tion to any principal sum or any interest to be
paid thereon and which is not in any sense a
payment for the use of the money to be bor
rowed but simply a part of the consideration for
a commitment to lend money on certain terms
when and if called upon to do so. In my opinion
therefore the amounts in question were not
bonuses within the meaning of subparagraph
(iii) and it follows from the foregoing that the
amounts were deductible under section
11(1)(cb).
I would dismiss the appeal with costs.
* * *
LACROIX D.J.—I concur with Mr. Justice
Thurlow and adopt his conclusion as to the fact
that this appeal should be dismissed with costs.
5 [1943] 2 All E.R. 255.
In his reasons for judgment, Mr. Justice Thur-
low referring to section 11(1)(cb)(ii) outlines the
fact that:
This provision has been considered in a number of cases
and has received in general a strict and in one case what
might be regarded as a narrow construction. In none of
them, however, has a point comparable to the present
arisen.
Precisely because this seems to be a new
point submitted to the Court, I made a special
study concerning the interpretation which, in
my humble opinion, should be given to this
section 11(1)(cb)(ii) and the application that
should be made of the same section. This is why
I take the liberty to add my own notes and
reasons for judgment.
The main goal of the taxpayer in the present
case was to build an office building for the
purpose of earning income therefrom.
First: He bought the air rights where the
building was to be erected;
Second: He had to obtain the money neces
sary for that purpose.
After having made, with the Manufacturer's
Life Company, arrangements, which proved
inadequate, the respondent-taxpayer entered
into an agreement with Traders Realty, in the
form of a long term revolving credit for the sum
of $6,500,000.00. This is Exhibit 8 (page 112—
Appeal Book).
Naturally, in order to obtain or secure such
money or credit, the taxpayer had to pay the
cost or the price for it. In other words, he had,
in the terms of section 11(1)(cb) of the Income
Tax Act, R.S.C. 1952, c. 148, to incur an
expense in order to obtain money for the pur
pose of earning income.
An expense, according to Webster's diction
ary is a direct outlay or a financial burden.
In the present case, this expense or financial
burden seems to be clearly expressed in the
contractual obligation entered into on July 3rd,
1962, by which the respondent-taxpayer binds
himself to pay for the money he borrows by a
twofold form of payment or disbursement, but
in both cases amounting to an expense incurred
by the taxpayer for the same purpose; this form
of payment of expense is:
First: 9 % interest on any amount borrowed
from the Traders Realty according to the credit
given by the terms of Exhibit 8 and,
Second: in each calendar year in which
Yonge-Eglinton earns a net profit from its oper
ations to pay an amount equal to 1% of its gross
rentals -income, and this for a period of 25
years.
This is the cost or the price the taxpayer had
to pay, or in the words of the statute (11 (1)(cb))
this is the expense it had to incur or the finan
cial burden it had to assume, in order to obtain
the needed money for the purpose of earning
income from its business or property.
Now, in my view it is difficult not to say that
this expense was incurred or that financial
burden was assumed or accepted by the taxpay
er, in the course of borrowing money for the
purpose of earning income from a business or
property, according, this time, to the terms of
section 11(1)(cb)(ii).
It is all in the same contractual obligation
entered into on July 3rd, 1962 (Exhibit 8), and it
matters not whether the payments were to be
made at a later date.
The obligation arose with the agreement, but
the expenses or part of the price or cost to be
paid could naturally only be ascertained in the
years when the rentals were being paid and
consequently the expense or part of the price
should be deducted in the year they were
incurred.
The appellant seems to contend that the
amounts allocated by the respondent to each of
the years 1965 to 1968 inclusive, are expenses
respectively incurred in those years, within the
meaning of paragraph (cb) and that those
expenses to qualify, should have been incurred
in the course "of borrowing the money".
In the years 1965 to 1968 inclusive, the
respondent-taxpayer was not borrowing money,
he was paying the expenses incurred or the
financial burden assumed on July 3rd, 1962,
when he was then, and for the only time, in the
course of borrowing money from Traders
Realty.
At the risk of repeating myself, I may say that
at the time he actually borrowed (1962) or while
"in the course of borrowing", he could not
ascertain the amounts that would be due in 1965
to 1968 inclusive, he could only assume the
obligation to pay them and this is exactly what
he did during the years in litigation.
This part of the cost of the borrowing money
is not interest. At the time it was paid and
deducted, Traders Realty had been reimbursed
of the money borrowed by the taxpayer. No
capital being due there was no basis for the
calculation of interest.
It is not a commission nor a bonus. Can we
call it a payment in the nature of an income or a
commitment fee? It is clearly part of the cost of
borrowing the capital required for creating prop
erty for the purpose of earning income.
As a matter of fact, the agreement of July
3rd, 1962 (Exhibit 8) served as a security for
the taxpayer to borrow money elsewhere at a
lower rate and allow the completion of the
project or undertaking.
The evidence shows that the respondent used
the contract of July 3rd, 1962 giving him a
revolving credit as a security which enabled him
to borrow $5,000,000.00 from the Bank of
Montreal at 5 to 6% interest to finance the
construction of the building.
Finally, the taxpayer reached his goal which
was to build an office building from which he
would derive income.
He had to borrow money for that purpose and
in conformity with the dispositions of section
11(1)(cb) of the statute he had to make or incur
an expense in the course of the process of
borrowing this money (section 11(1)(cb)(ii)).
One cannot overlook the fact that in the Act
itself the title of section 11(1)(cb) allowing these
deductions is precisely "expense of borrowing
money".
In conclusion, therefore, the respondent-tax
payer should benefit of the right to the deduc
tions contemplated and authorized by the
above-mentioned section, that is 11(1)(cb)(ii).
For these reasons, the present appeal should
be dismissed with costs.
* * *
SWEET DJ. (dissenting)—This is an appeal
from a judgment of the Trial Division which
allowed the appeal of the respondent from
assessments of income tax for the years 1965 to
1968 inclusive. The question raised with respect
to the assessments in each of the years is the
same,—that is, whether certain amounts paid by
the respondent to Traders Realty Limited
(which will be referred to as Traders) are
deductible in computing the respondent's
income for tax purposes.
In 1961 the respondent acquired leasehold
interests in air rights over property owned by
Toronto Transit Commission adequate for an
office building. The building was erected. To
obtain interim financing for its construction the
respondent entered into an agreement with
Traders, which is dated "as of the 3rd day of
July 1962". It will be referred to as the Traders
agreement. It provided for Traders extending to
the respondent "a long term revolving credit"
"in a maximum amount of $6,500,000". It also
provided that all loans made thereunder were to
be repaid by June 30, 1965 or sooner under
circumstances therein set out.
The respondent, inter alia, agreed therein as
follows:
3. Yonge-Eglinton shall pay to Traders interest with respect
to the Credit calculated as follows:
(a) The amount owing from time to time under the Credit
shall bear interest (with interest on overdue interest),
payable quarter-yearly not in advance both before and
after maturity and before and after default on the 30th
days of January, April, July and October in each year at
the rate of 9% per annum.
(b) In each calendar year in which Yonge-Eglinton earns a
net profit from its operations (as certified by Yonge-Eglin-
ton's auditors) it shall pay to Traders as an additional
interest charge an amount equal to 1% of its gross rental
income (as certified by Yonge-Eglinton's auditors) from
the Project, such payments to become due and be payable
90 days after the termination of each such calendar year;
the first of such payments to be payable with respect to
the first calendar year after 1964 in which Yonge-Eglinton
earns a net profit and such payments to continue until 25
payments have been made pursuant hereto.
As I construe it the respondent was obliged to
make the payments provided for in the above-
quoted section 3(b) regardless of the amount
borrowed from Traders and regardless of the
time any such amount was outstanding and even
if nothing was borrowed.
Pursuant to that section 3(b) the respondent
made payments to Traders as follows:
1965 — $11,695.45
1966 — $12,263.98
1967 — $12,584.86
1968 — $13,143.12
Those are the payments which the appellant
disallowed and which are the subject-matter of
this appeal.
Also in connection with the proposed financ
ing Gerhard W. Moog, a shareholder of the
respondent, transferred to Traders 5% of the
respondent's outstanding common stock at the
total price of $5.00.
From July 16, 1962 to December 23, 1964
there were advances by Traders pursuant to the
Traders agreement. During that time balances in
varying amounts were outstanding, the lowest
being $200,000 and the highest, $900,000. By
January 15, 1965 the respondent had paid the
total amount owing and no further advances
were made by Traders pursuant to the Traders
agreement.
The respondent also obtained financing from
the Bank of Montreal. In connection with that
financing the respondent agreed that when
requested by that bank it would apply to Trad-
ers for payments to be made under the Traders
agreement and would require such payments to
be made to the bank and if any such payments
were received by the respondent while the
bank's loan or any part thereof was outstanding
such payments would be received by the
respondent as trustee to pay the same to the
bank.
It appears to me that those amounts, which
are the subject-matter of this appeal, are not
outlays or expenses made or incurred by the
respondent for the purpose of gaining or pro
ducing income from property or a business of
the respondent within the exception in section
12(1)(a) of the Income Tax Act.
Even if, in a very broad sense, they could be
considered to have been made or incurred for
that purpose, they, having regard to their use in
connection with the erection of a capital asset,
namely an office building, are amounts of a
capital nature, the deduction of which is prohib
ited by section 12(1)(b) of the Income Tax Act.
Accordingly, the matter falls for determina
tion on whether the relevant items are deduct
ible under any other provisions of the Income
Tax Act.
Counsel for the respondent submits they are
deductible by virtue of section 11(1)(c), section
11(1)(cb) and section 11(1)(c) of which the fol
lowing are parts:
11. (1) Notwithstanding paragraphs (a), (b) and (h) of
subsection (1) of section 12, the following amounts may be
deducted in computing the income of a taxpayer for a
taxation year:
(c) an amount paid in the year or payable in respect of the
year (depending upon the method regularly followed by
the taxpayer in computing his income), pursuant to a legal
obligation to pay interest on
(i) borrowed money used for the purpose of earning
income from a business or property ...,
(ii) 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 .. .
or a reasonable amount in respect thereof, whichever is
the lesser;
(cb) an expense incurred in the year,
(ii) in the course of borrowing money used by the
taxpayer for the purpose of earning income from a
business or property ...,
but not including any amount in respect of
(iii) a commission or bonus paid or payable to a person
... from whom the money was borrowed, or for or on
account of services rendered by a person as a salesman,
agent or dealer in securities in the course of ... bor
rowing the money, or
(iv) an amount paid or payable as or on account of the
principal amount of the indebtedness incurred in the
course of borrowing the money, or as or on account of
interest;
(d) such part of a payment
(i) repaying borrowed money used for the purpose of
earning income from a business or property ..., or
(ii) for property acquired for the purpose of gaining or
producing income therefrom or for the purpose of gain
ing or producing income from a business ...,
made by the taxpayer in the year as is by section 7
required to be included in computing the recipient's
income for a taxation year;
Section 11(1)(c) deals with "interest". The
Traders agreement refers to the payments in
question as interest. It is a commonplace that
merely calling payments interest does not make
them interest. If the payments do not have the
necessary characteristics properly to categorize
them as interest the designating of them as
interest does not make them such. The learned
Trial Judge held that the payments in issue were
not interest and with that conclusion of his I
respectfully agree.
Here the obligation of the respondent to pay
an amount equal to one per cent of the gross
annual rentals from the building existed regard
less of the quantum of money lent. It was not
computed upon the sums advanced nor on the
time they were outstanding. The amounts pay
able pursuant to that obligation were not refer-
able to a principal in money. By the wording of
the document those amounts were payable even
if no money had been borrowed from Trader's.
In my opinion the payments required to be
made to Traders computed on the gross rentals
were not interest within the meaning of section
11(1)(c). That, in my view, is not changed
because there were advances of money in
respect of which interest was payable at 9% per
annum under another clause in the agreement.
In my opinion there is nothing in section
11(1)(c) which permits the deduction.
Nor do I think that section 11(1)(cb) permits
the deduction.
It occurs to me that the expenses dealt with in
paragraph (cb) might merely be those incidental
costs often incurred by a borrower, for exam
ple, professional fees, and not extended periodi
cal payments as here. However that was not a
contention of the appellant and was not put in
issue. In any event in the view which I take I
need not decide it and I do not. I proceed to
deal with the matter as though the amounts in
question are "expenses" within the meaning of
the paragraph.
Governing wording in paragraph (cb) is: "an
expense incurred in the year ... in the course
of borrowing money".
I understand it to be common ground of the
parties that the relevant amounts allocated by
the respondent to each of the years 1965 to
1968, inclusive, are expenses incurred in those
years within the meaning of paragraph (cb). If I
should be under a misapprehension as to the
position of the parties in this regard it is, in any
event, my opinion that the words "expenses
incurred" are to be construed as actual expendi
tures made.
For those expenses to qualify for deduction
under paragraph (cb) they must not only be
"incurred in the year" but must also have been
incurred "in the course of borrowing".
The respondent's obligation to make the ex
penditures arose pursuant to the Traders agree
ment dated "as of the 3rd day of July 1962". As
I see it, then, the Traders agreement would be
said to have been entered into in the course of
borrowing and the respondent's obligations
under that agreement created in the course of
borrowing. However the agreement to make an
expenditure under certain circumstances in the
future and the expenditure itself if and when
those circumstances arise are not the same
thing.
Since the last borrowing from Traders was on
December 23, 1964 and the first year in which
any such expense was incurred was 1965 those
expenses, having been incurred after the last
instalment had been lent, could not, in my opin
ion be said to have been incurred in the course
of borrowing.
Had Parliament intended that all expenses
incurred pursuant to an agreement made in the
course of borrowing money be deductible it
could, easily enough, have said just that. How
ever that it did not say. By its wording para
graph (cb) refers only to expenses incurred in
the course of borrowing.
This leaves section 11(1)(d to be dealt with.
To qualify for deduction under it the "payment"
must, in any event, either be one repaying bor
rowed money (subparagraph (i)) or for property
acquired (subparagraph (ii)). The payments were
neither of those. They were not the repayment
of borrowed money. The money borrowed had
all been repaid by January 15, 1965. Neither
were they for acquiring property.
Even if the payments had been such as to fall
within the wording of either subparagraph (i) or
subparagraph (ii) of paragraph (d they would,
nevertheless, only be deductible by the taxpayer
if by section 7 they were required to be included
in computing the recipient's income for a taxa
tion year. (The emphasis is mine.)
The only portion of section 7 which could
have relevance here would be subsection (1),
which is:
7. (1) Where a payment under a contract or other
arrangement can reasonably be regarded as being in part a
payment of interest or other payment of an income nature
and in part a payment of a capital nature, the part of the
payment that can reasonably be regarded as a payment of
interest or other payment of an income nature shall, irre
spective of when the contract or arrangement was made or
the form or legal effect thereof, be included in computing
the recipient's income.
By its terms that subsection only deals with
payments which are in part a payment of inter-
est or other payment of an income nature and in
part a payment of a capital nature.
There is no element of blending in the pay
ments made pursuant to section 3(b) of the
Traders agreement. In my opinion those pay
ments were not of a kind described in section 7.
That, in any event, would make section 7(1)
inapplicable here and in turn make section
1 1(1)(d) inapplicable.
In my opinion, the following items respective
ly claimed by the respondent to be deductible in
computing its income in the following years,
namely
1965 - $11,695.45
1966 - $12,263.98
1967 - $12,584.86
1968 - $13,143.12
were not so deductible and that the appellant
was correct in disallowing them.
I would allow this appeal with costs here and
below.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.