Interest Deductibility, the Reasonable Expectation of Profit Test, and the Supreme Court Of Canada: From Bronfman Trust and Moldowan to Singleton, Ludmer, Stewart and Walls

• Author: David Duff
• Profession: Professor
• Pages: 399-429

Chapter Seventeen

Interest Deductibility, the

Reasonable Expectation of Profit

Test, and the Supreme Court of

Canada: From Bronfman Trust

and Moldowan to Singleton,

Ludmer, Stewart, and Walls

David G. Duff

A. INTRODUCTION

Until the 1970s, Canadian courts affirmed a narrow approach to the appli-

cation of tax legislation, according to which these statutes were interpreted

in a strict and literal manner and tax consequences were based on the legal

character of transactions and arrangements irrespective of their commer-

cial or economic substance and the absence of any non-tax purpose for

their existence.1Characterized by one Canadian writer as the two “pillars of

tax planning,”2these judicially-established norms of literalism and formal-

399

1 The leading example of this approach is C.I.R. v. Duke of Westminster, [1936] A.C. 1 (H.L.).

2 Douglas J. Sherbaniuk, “Tax Avoidance — Recent Developments, in Report of the Pro-

ceedings of the Twenty-First Tax Conference, 1968 Conference Report (Toronto: Canadian

Tax Foundation, 1969) 430–42 at 430.

ism were highly conducive to tax avoidance. They also account for much of

the length and complexity of Canadian tax legislation, which has been

drafted and amended in order to anticipate and respond to restrictive inter-

pretations by the courts and taxpayer efforts to avoid tax burdens that

might otherwise apply.3

From the late-1970s to the early 1990s, the Supreme Court of Canada

adopted a much broader approach to tax statutes, favouring a more purpo-

sive method of statutory interpretation,4endorsing a more substantive

approach to the application of tax rules having regard to “commercial and

economic realities, rather than juristic classification of form,”5and suggest-

ing that tax-motivated transactions could fail to achieve their intended

results where they contradict the “object and spirit” of a relevant statutory

provision or the provision itself requires a business purpose.6Leading

examples of this broader approach include the Court’s decisions in Bronf-

man Trust and Moldowan, which addressed respectively the deductibility of

interest expenses and the concept of a reasonable expectation of profit.

In the past decade, the Supreme Court of Canada has returned to the

narrow approach of earlier tax jurisprudence, restoring a version of literal-

ist interpretation in the form of a “plain meaning” rule,7reasserting the for-

ADVOCACY AND TAXATION IN CANADA400

3 See, e.g., S. W. Bowman, “Interpretation of Tax Legislation: The Evolution of Purpo-

sive Analysis” (1995) 43: 5 Canadian Tax Journal 1167–89 at 1183–84.

4 See especially the rejection of strict construction in Stubart Investments Ltd. v. The

Queen, [1984] C.T.C. 294; 84 D.T.C. 6305 (S.C.C.); and The Queen v. Golden, [1986] 1

C.T.C. 274, 86 D.T.C. 6138 (S.C.C.). For other leading decisions during this period in

which the Court emphasized the purpose of the applicable statutory provision, see

Moldowan v. The Queen, [1977] C.T.C. 310, 77 D.T.C. 5213 (S.C.C.) [Moldowan]; The

Queen v. Savage, [1983] C.T.C. 393, 83 D.T.C. 5409 (S.C.C.); The Queen v. Bronfman

Trust, [1987] 1 C.T.C. 117, 87 D.T.C. 5059 (S.C.C.) [Bronfman Trust]; and The Queen v.

McClurg, [1991] 1 C.T.C. 169, 91 D.T.C. 5001 (S.C.C.) [McClurg]. For a detailed analysis

of different approaches to the interpretation of tax legislation, see D. G. Duff, “Inter-

preting the Income Tax Act — Part 1: Interpretive Doctrines” (1999) 47: 3 Canadian

Tax Journal 464-533, and “Interpreting the Income Tax Act — Part 2: Toward a Prag-

matic Approach” (1999) 47: 4 Canadian Tax Journal 741–98.

5Bronfman Trust, above note 4 at para. 40. See also McClurg, above note 4 at para. 46.

6Stubart, above note 4 at para. 65.

7 See, e.g., Antosko v. The Queen, [1994] 2 C.T.C. 25, 94 D.T.C. 6314 (S.C.C.) at para. 29

(suggesting that the context and purpose of a provision “cannot alter” its interpreta-

tion “where the words of the statute are clear and plain”); Friesen v. The Queen, [1995]

2 C.T.C. 369, 95 D.T.C. 5551 (S.C.C.) at para. 16 (“the plain meaning of the relevant

sections of the Income Tax Act is to prevail unless the transaction is a sham”); 65302

British Columbia Ltd. v. Canada, [2000] 1 C.T.C. 57, 99 D.T.C. 5799 (S.C.C.) at para. 51

(“in applying the principles of interpretation to the Act, attention must be paid to the

fact that the Act is one of the most detailed, complex, and comprehensive statutes in

our legislative inventory and courts should be reluctant to embrace unexpressed