Bowater Canada Ltd. v. Minister of National Revenue, (1987) 78 N.R. 140 (FCA)

• Judge: Urie, Mahoney and Stone, JJ.
• Court: Federal Court of Appeal (Canada)
• Case Date: June 03, 1987
• Jurisdiction: Canada (Federal)
• Citations: (1987), 78 N.R. 140 (FCA)

Bowater Can. Ltd. v. MNR (1987), 78 N.R. 140 (FCA)

MLB headnote and full text

Bowater Canadian Limited (appellant) v. Her Majesty The Queen (respondent)

(No. A-31-86)

Indexed As: Bowater Canada Ltd. v. Minister of National Revenue

Federal Court of Appeal

Urie, Mahoney and Stone, JJ.

June 15, 1987.

Summary:

Bowater and Bathurst equally controlled Bulkley and equally guaranteed its bank loans. Bulkley was sold to Northwood and the financing agreements were reorganized. The loans were refinanced with Series B notes to the banks. Bowater and Bathurst each guaranteed 1/2 of the notes. As payments were made the notes were assigned to Bowater and Bathurst. In 1977 Bathurst purchased the balance of the notes and Bowater agreed to its indebtedness for 1/2 of the purchase price plus interest. In 1977 Bowater paid Bathurst $75,898.00 in interest. In 1978 Bowater paid Bathurst $105,937.00 in interest and $148,692.00 in interest to the Bank of Montreal on funds borrowed to repay Bathurst. In 1979 Bowater paid $238,604.00 in interest to the Bank of Montreal. In 1977-1979, Bowater claimed the interest payments as a deduction under s. 20(1)(c)(i) of the Income Tax Act, claiming the payments were interest payable on money borrowed to produce income from a business. The Minister of National Revenue disallowed the deduction and treated the payments as allowable capital losses. Bowater appealed.

The Federal Court of Canada, Trial Division, in a decision reported at (1986), 1 F.T.R. 109, dismissed the appeal and held that the interest payments were not deductible under s. 20(1)(c)(i), but were allowable capital losses. Bowater appealed.

The Federal Court of Appeal dismissed the appeal. The court held that the interest payments in issue were made on capital account.

Income Tax - Topic 1130

Income from business or property - Deductions - Expenses incurred in borrowing money - Bowater and Bathurst equally controlled Bulkley and equally guaranteed its bank loans - Bulkley was sold - The bank loans were refinanced with Series B notes to the banks - Bowater and Bathurst each guaranteed 1/2 of the notes - When Bathurst purchased the notes, Bowater became indebted for 1/2 of the purchase price plus interest - In 1977 and 1978 Bowater paid the interest to Bathurst on the balance of its portion of the purchase price - In 1978 and 1979 Bowater paid interest to the Bank of Montreal on monies borrowed to repay Bathurst - The Federal Court of Appeal affirmed that the interest payments were not allowable as deductions under s. 20(1)(c)(i) of the Income Tax Act as interest payable on money borrowed to produce income from a business.

Income Tax - Topic 1130

Income from business or property - Deductions - Expenses incurred in borrowing money - In determining whether interest payments were made for the purpose of producing income from a business and therefore deductible under s. 20(1)(c)(i) of the Income Tax Act, the Federal Court of Appeal discussed the factors considered by the Supreme Court of Canada in Bronfman Trust v. M.N.R. (1987), 71 N.R. 134.

Income Tax - Topic 1784

Capital gains and losses - Capital loss - What constitutes - Bowater and Bathurst equally controlled Bulkley and equally guaranteed its bank loans - Bulkley was sold - The bank loans were refinanced with Series B notes to the banks - Bowater and Bathurst each guaranteed 1/2 of the notes - When Bathurst purchased the notes, Bowater became indebted for 1/2 of the purchase price plus interest - In 1977 and 1978 Bowater paid the interest to Bathurst on the balance of its portion of the purchase price - In 1978 and 1979 Bowater paid interest to the Bank of Montreal on monies borrowed to repay Bathurst - The Federal Court of Appeal affirmed that the interest payments were allowable capital losses, not allowable deductions under s. 20(1)(c)(i) of the Income Tax Act.

Cases Noticed:

Farmer v. Scottish North American Trust Limited, [1912] A.C. 118 (H.L.), dist. [para. 23].

Fraser's (Glasgow) Bank Ltd. v. C.I.R. (1963), 40 T.C. 698 (H.L.), dist. [para. 23].

Consolidated Mogul Mines Ltd., [1968] C.T.C. 429, dist. [para. 24].

Phyllis Barbara Bronfman Trust v. Minister of National Revenue, [1987] 1 S.C.R. 32; 71 N.R. 134; 87 D.T.C. 5059, consd. [para. 25].

Bronfman Trust - see Phyllis Barbara Bronfman Trust.

B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, [1966] A.C. 224 (P.C.), consd. [para. 52].

Statutes Noticed:

Income Tax Act, S.C. 1970-71-72, c. 63, sect. 18(1) [para. 20]; sect. 20(1) [paras. 20, 38]; sect. 20(1)(c)(i) [paras. 43 to 48].

Counsel:

D. Bowman, Q.C. and A. Dunbar, for the appellant;

A. Garon, Q.C. and P. Barsalou, for the respondent.

Solicitors of Record:

Stikeman, Elliott, Toronto, Ontario, for the appellant;

Frank Iacobucci, Q.C., Deputy Attorney General of Canada, Ottawa, Ontario, for the respondent.

This appeal was heard on June 3, 1987, at Toronto, Ontario, before Urie, Mahoney and Stone, JJ., of the Federal Court of Appeal. The decision of the Court of Appeal was delivered by Urie, J., on June 15, 1987.