Bowater Canadian Ltd. v. Minister of National Revenue, (1986) 1 F.T.R. 109 (TD)

• Judge: Cullen, J.
• Court: Federal Court (Canada)
• Case Date: December 17, 1985
• Jurisdiction: Canada (Federal)
• Citations: (1986), 1 F.T.R. 109 (TD)

Bowater Cdn. Ltd. v. MNR (1986), 1 F.T.R. 109 (TD)

MLB headnote and full text

Bowater Canadian Limited v. Minister of National Revenue

(No. T-7626-82)

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

Federal Court of Canada

Trial Division

Cullen, J.

January 7, 1986.

Summary:

Bowater and Bathurst equally controlled Buckley and equally guaranteed its bank loans. Buckley 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, dismissed the appeal and held that the interest payments were not deductible under s. 20(1)(c)(i), but were allowable capital losses.

Income Tax - Topic 1130

Income from business or property - Deductions - Expenses incurred in borrowing money - Bowater and Bathurst equally controlled Buckley and equally guaranteed its bank loans - Buckley 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 Canada, Trial Division, held 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 - The court held, inter alia, that the interest paid to Bathurst in 1977 and 1978 was not interest on money "borrowed" from Bathurst and Bowater was not the "business" contemplated in s. 20(1)(c)(i).

Income Tax - Topic 1784

Capital gains and losses - Capital loss - What constitutes - Bowater and Bathurst equally controlled Buckley and equally guaranteed its bank loans - Buckley 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 Canada, Trial Division, held that the interest payments were allowable capital losses, not allowable deductions under s. 20(1)(c)(i) of the Income Tax Act.

Cases Noticed:

Canada Safeway Limited v. M.N.R., [1957] D.T.C. 1240, refd to. [para. 8].

Sherritt Gorden Mines v. M.N.R., [1968] D.T.C. 5180, refd to. [para. 9].

R. v. Marchand, 78 D.T.C. 6507, refd to. [para. 10].

Daley v. M.N.R., [1950] C.T.C. 254, refd to. [para. 10].

Johns-Manville Canada Inc. v. M.N.R., [1985] 2 C.T.C. 111; 60 N.R. 244 (S.C.C.), dist. [para. 12].

Stewart & Morrison Limited v. M.N.R., [1972] D.T.C. 6049 (S.C.C.), refd to. [para. 15].

Mathison v. The Queen, [1974] D.T.C. 6176, refd to. [para. 17].

Trans-Prairie Pipelines Ltd. v. M.N.R., [1970] D.T.C. 6351, refd to. [para. 18].

Emmerson v. H.M.T.Q., [1985] D.T.C. 5236, refd to. [para. 19].

Commissioners of Inland Revenue v. Holder, [1930] K.B. 567, refd to. [para. 20].

Statutes Noticed:

Income Tax Act, S.C. 1970-71-72, c. 63, sect. 20(1)(c)(i).

Counsel:

Appearances: D.G.H. Bowman, Q.C., and A.E. Dunbar, for the plaintiff;

Alban Garon, Q.C., and E. Atkinson, for the defendant.

Solicitors of Record:

Stikeman, Elliott, Toronto, for the plaintiff;

Frank Iacobucci, Deputy Attorney General of Canada, for the defendant.

This appeal was heard on December 17, 1985, at Toronto, Ontario, before Cullen, J., of the Federal Court of Canada, Trial Division, who delivered the following decision on January 7, 1986.