74712 Alberta Ltd. v. Minister of National Revenue, (1997) 208 N.R. 348 (FCA)

• Judge: Strayer, Linden and Robertson, JJ.A.
• Court: Federal Court of Appeal (Canada)
• Case Date: November 21, 1996
• Jurisdiction: Canada (Federal)
• Citations: (1997), 208 N.R. 348 (FCA)

74712 Alta. Ltd. v. MNR (1997), 208 N.R. 348 (FCA)

MLB headnote and full text

In Re The Income Tax Act

74712 Alberta Ltd. (formerly Cal-Gas & Equipment Ltd.) (appellant) v. Her Majesty The Queen (respondent)

(A-434-94)

Indexed As: 74712 Alberta Ltd. v. Minister of National Revenue

Federal Court of Appeal

Strayer, Linden and Robertson, JJ.A.

January 29, 1997.

Summary:

74712 Alberta Ltd. deducted the interest paid on a loan from Wells Fargo as a busi­ness expense under s. 20(1)(c)(i) of the Income Tax Act. The Minister of National Revenue disallowed the claim. 74712 Alberta Ltd. appealed.

The Tax Court of Canada dismissed the appeal. 74712 Alberta Ltd. appealed.

The Federal Court of Canada, Trial Di­vision, in a decision reported 78 F.T.R. 259, dismissed the appeal. 74712 Alberta Ltd. appealed.

The Federal Court of Appeal dismissed the appeal.

Income Tax - Topic 1129

Income from a business or property - Deductions - Requirement that expense be incurred for producing income - 74712 Alberta Ltd. (74712) was one of a group of seven companies - As part of a finan­cial reorganization the companies were regrouped under one parent company - 74712 guaranteed the parent company's loan from CIBC - CIBC called in the guarantee - 74712 borrowed $1.7 million from another bank to cover the guarantee - It deducted the interest paid on the loan pursuant to s. 20(1)(c)(i) of the Income Tax Act - 74712 claimed, inter alia, that the money was necessary to preserve its income-producing assets - The Federal Court of Appeal, in rejecting the deduc­tion, affirmed that the direct purpose of the loan was to honour the guarantee on the parent company's debt and not for the direct purpose of earning income - See paragraphs 14 to 15.

Income Tax - Topic 1129

Income from a business or property - Deductions - Requirement that expense be incurred for producing income - 74712 Alberta Ltd. (74712) was one of a group of seven companies - As part of a finan­cial reorganization the companies were regrouped under one parent company and a credit facility was established - 74712 guaranteed the parent company's loan from CIBC - CIBC called in the guarantee - 74712 borrowed $1.7 million from another bank to cover the guarantee - It deducted the interest paid on the loan pursuant to s. 20(1)(c)(i) of the Income Tax Act - 74712 claimed that the purpose of the original credit facility was to permit it to enter into a profitable contract - The Federal Court of Appeal, in rejecting the deduction, held that the current use of the money had to be aimed at earning income, regardless of the original use - The loan was not used to produce income, but to pay off the parent company's debt - See paragraphs 16 to 21.

Income Tax - Topic 1130

Income from a business or property - Deductions - Expenses incurred in bor­rowing money - [See both Income Tax - Topic 1129 ].

Cases Noticed:

Bronfman (Phyllis Barbara) Trust v. Minister of National Revenue, [1987] 1 S.C.R. 32; 71 N.R. 134; 87 D.T.C. 5059, consd. [paras. 6, 28].

Phyllis Barbara Bronfman Trust - see Bronfman (Phyllis Barbara) Trust v. Minister of National Revenue.

Bowater Canadian Ltd. v. Minister of National Revenue, [1987] 2 C.T.C. 47; 78 N.R. 140, refd to. [paras. 9, 91, foot­note 1].

Tennant v. Minister of National Revenue (1996), 192 N.R. 365; 96 D.T.C. 6121 (S.C.C.), refd to. [paras. 12, 33, footnote 6].

Imperial Oil Ltd. v. Minister of National Revenue, [1947] Ex. C.R. 527; 3 D.T.C. 1090; [1947] C.T.C. 353, refd to. [paras. 14, 85].

Herald & Weekly Times Ltd. v. Federal Commissioner of Taxation (1932), 48 C.L.R. 113 (Aust. H.C.), refd to. [para. 14, footnote 7].

Stein Estate v. Ship Kathy K, [1976] 2 S.C.R. 802; 6 N.R. 359; 62 D.L.R.(3d) 1, refd to. [paras. 17, 103, footnote 8].

Interior Breweries Ltd. v. Minister of National Revenue, 55 D.T.C. 1090 (Ex. Ct.), refd to. [paras. 20, 32].

Lyons v. Minister of National Revenue, [1984] C.T.C. 2690; 84 D.T.C. 1633 (Tax C.C.), refd to. [para. 21, footnote 9].

Emerson v. R., [1986] 1 C.T.C. 422; 86 D.T.C. 6184 (F.C.A.), leave to appeal denied (1986), 70 N.R. 160 (S.C.C.), refd to. [paras. 21, 34, footnote 9].

Corbett v. Minister of National Revenue (1996), 205 N.R. 365 (F.C.A.), refd to. [para. 21, footnote 10].

Tonn et al. v. Minister of National Reve­nue (1995), 191 N.R. 182; 96 D.T.C. 6001 (F.C.A.), dist. [paras. 24, 106].

Mark Resources Inc. v. R., [1993] 2 C.T.C. 2259 (Tax C.C.), refd to. [para. 28].

Canada Safeway Ltd. v. Minister of National Revenue, [1957] S.C.R. 717, refd to. [para. 30].

Symes v. Minister of National Revenue, [1993] 4 S.C.R. 695; 161 N.R. 243; [1994] 1 C.T.C. 40; 110 D.L.R.(4th) 470; 19 C.R.R.(2d) 1; 94 D.T.C. 6001, refd to. [para. 40].

Minister of National Revenue v. Placer Dome Inc. (1996), 206 N.R. 12 (F.C.A.), refd to. [para. 40].

Auld v. Minister of National Revenue, 62 D.T.C. 27 (Tax App. Bd.), refd to. [para. 42].

Minister of National Revenue v. Steer, 66 D.T.C. 5481 (S.C.C.), refd to. [para. 47].

Trans Prairie Pipelines Ltd. v. Minister of National Revenue, [1970] C.T.C. 537 (Ex. Ct.), consd. [para. 51].

Minister of National Revenue v. Attaie, [1990] 2 C.T.C. 157; 109 N.R. 232 (F.C.A.), refd to. [para. 53].

Sternthal v. Canada, 74 D.T.C. 6646 (F.C.T.D.), refd to. [para. 53].

Stubart Investments Ltd. v. Minister of National Revenue, [1984] 1 S.C.R. 536; 53 N.R. 241; 84 D.T.C. 6305; [1984] C.T.C. 294, refd to. [para. 71].

Holder v. Commissioners of Inland Reve­nue (1932), 16 Tax Cas. 540 (H.L.), refd to. [para. 90].

McLaws v. Minister of National Revenue, [1974] S.C.R. 887; 72 D.T.C. 6149 (S.C.C.), refd to. [para. 91].

R. v. MerBan Capital Corp., 89 D.T.C. 5404 (F.C.A.), refd to. [para. 91].

Minister of National Revenue v. Schwartz (1996), 193 N.R. 241; 96 D.T.C. 6103 (S.C.C.), refd to. [para. 103].

Statutes Noticed:

Income Tax Act, S.C. 1970-71-72, c. 63, sect. 18(1)(a), sect. 18(1)(b) [para. 29]; sect. 20(1)(c)(i) [paras. 3, 29].

Income Tax Act, Interpretation Bulletin, IT-445, generally [para. 22].

Authors and Works Noticed:

Arnold, B.J., Is Interest a Capital Expense (1992), 40 Can. Tax J. 533, generally [para. 33].

Couzin, R., Tax Treatment of Interest: Bronfman Trust and the June 2, 1987 Release, Corporate Management Tax Conference of Canadian Tax Foundation (1987), p. 10:1 [para. 45].

Dixon, G.D., and Arnold, B.J., Rubbing Salt into the Wound: The Denial of the Interest Deduction After the Loss of a Source of Income (1991), 39 Can. Tax J. 1473, generally [para. 34].

Hogg, Peter W., and Magee, Joanne E., Principles of Canadian Income Tax Law (1995), pp. 221, note 36 [para. 33]; 222 [para. 21]; 457, note 32 [para. 71].

Jones, J.F. Avery, Nothing Either Good or Bad, But Thinking Makes It So -- The Mental Element in Anti-Avoidance Legislation (1983), Brit. Tax Rev. 9, generally [para. 40].

Krishna, Vern, The Fundamentals of Ca­nadian Income Tax (5th Ed. 1995), pp. 714 [paras. 39, 58]; 1373, 1374 [para. 71].

Counsel:

C.D. O'Brien and Al Meghji, for the ap­pellant;

Michael Curley and Rhonda Nahorniak, for the respondent.

Solicitors of Record:

Bennett Jones Verchere, Calgary, Alberta, for the appellant;

George Thomson, Deputy Attorney Gen­eral of Canada, for the respondent.

This appeal was heard in Calgary, Alberta, on November 21, 1996, by Strayer, Linden and Robertson, JJ.A., of the Federal Court of Appeal. The judgment of the court was delivered on January 29, 1997, including the following opinions:

Linden, J.A. (Strayer, J.A., concurring) - see paragraphs 1 to 25;

Robertson, J.A. - see paragraphs 26 to 106.