Ludco Enterprises Ltd. et al. v. Ministre du Revenu national, 2001 SCC 62

• Judge: Gonthier, Iacobucci, Major, Bastarache, Binnie, Arbour and LeBel, JJ.
• Court: Supreme Court (Canada)
• Case Date: March 19, 2001
• Jurisdiction: Canada (Federal)
• Citations: 2001 SCC 62;(2001), 275 N.R. 90 (SCC);275 NR 90;204 DLR (4th) 590;[2001] SCJ No 58 (QL);[2001] 2 SCR 1082;108 ACWS (3d) 402;[2002] 1 CTC 95;55 DTC 5505

Ludco Ent. Ltd. v. MNR (2001), 275 N.R. 90 (SCC)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Temp. Cite: [2001] N.R. TBEd. SE.026

Ludco Enterprises Ltd., Brian Ludmer, David Ludmer, and Cindy Ludmer (appellants) v. Her Majesty the Queen (respondent)

(27320; 2001 SCC 62)

Indexed As: Ludco Enterprises Ltd. et al. v. Ministre du Revenu national

Supreme Court of Canada

Gonthier, Iacobucci, Major, Bastarache, Binnie, Arbour and LeBel, JJ.

September 28, 2001.

Summary:

Revenue Canada reassessed the taxpayers for the taxation years 1981-1985, disallowing their deduction of interest costs on monies borrowed to purchase shares. The taxpayers appealed.

The Tax Court of Canada affirmed the reassessments. The taxpayers appealed.

The Federal Court of Canada, Trial Divi­sion, in a decision reported 139 F.T.R. 241, dismissed the appeals. The taxpayers appealed.

The Federal Court of Appeal, Létourneau, J.A., dissenting, in a decision reported 240 N.R. 70, dismissed the appeals. The taxpayers appealed.

The Supreme Court of Canada allowed the appeal, set aside the judgment of the Federal Court of Appeal and the taxpayers' reassessments for the 1981 to 1985 taxation years, and remitted the matter back to Rev­enue Canada for reassessment in conformity with its reasons.

Editor's Note: For related proceedings in­volving these parties see 72 F.T.R. 175 and 182 N.R. 125.

Income Tax - Topic 1129

Income from a business or property - De­ductions - Requirement that expense be incurred for producing income - [See all Income Tax - Topic 1130 ].

Income Tax - Topic 1130

Income from a business or property - De­ductions - Expenses incurred in borrowing money - Section 20(1)(c)(i) of the Income Tax Act permitted a deduction respecting a legal obligation to pay interest on bor­rowed money used for the purpose of earning income from a business property - The Supreme Court of Canada stated that three different tests have been advanced for determining whether the requisite income earning purpose was present: the bona fide purpose test, the dominant pur­pose test, and the reasonable expectation of income test - The court rejected the first two tests - The court held that the requisite test was whether, considering all the cir­cumstances, the taxpayer had a reasonable expectation of income at the time the investment was made - See paragraphs 47 to 56.

Income Tax - Topic 1130

Income from a business or property - De­ductions - Expenses incurred in borrowing money - Section 20(1)(c)(i) of the Income Tax Act permitted a deduction respecting a legal obligation to pay interest on bor­rowed money used for the purpose of earning "income" from a business property - The Supreme Court of Canada discussed what was meant by "income" in the con­text of s. 20(1)(c)(i) - Absent a sham or window dressing or similar vitiating cir­cumstances, courts should not be con­cerned with the sufficiency of the income expected or received - "Income" did not refer to net income, but to income subject to tax - It referred to income generally; an amount that would come into income for taxation purposes - See paragraphs 57 to 64.

Income Tax - Topic 1130

Income from a business or property - De­ductions - Expenses incurred in borrowing money - Revenue Canada reassessed the taxpayers for the taxation years 1981-1985, disallowing their deduction of interest costs on monies borrowed ($6.5M) to purchase shares in two Panamanian companies which invested in Canadian and American securities - The trial judge (Federal Court), dismissed the taxpayers' appeals, conclud­ing that the borrowed funds were not used for the purpose of earning income within the meaning of s. 20(1)(c)(i) of the Income Tax Act - The real purpose was to defer taxes and convert income into capital gains - The Federal Court of Appeal dis­missed the taxpayers' appeals - The Supreme Court of Canada allowed the taxpayers' appeals - They had a reasonable expecta­tion of income when they used the bor­rowed money to purchase the companies' shares - Further, the entire amount of the interest payment continued to be deductible after the taxpayers' 1983 share rollover transaction - See paragraphs 66 to 78.

Income Tax - Topic 8002

Returns, assessments, payment and appeals - Appeals to courts - General - Standard of review - Revenue Canada reassessed tax­payers, disallowing their deduction of in­terest costs on borrowed monies - A trial judge dismissed the taxpayers' appeals, con­cluding that the borrowed funds were not used for the purpose of earning income within the meaning of s. 20(1)(c)(i) of the Income Tax Act - The Federal Court of Appeal dismissed the taxpayers' appeals - The Supreme Court of Canada stated that whether or not a taxpayer's purpose in making an invest­ment fell within the ambit of s. 20(1)(c)(i) was a question of mixed fact and law - The main issue in this appeal was to deter­mine and apply the proper test under s. 20 - That was a ques­tion of law - See para­graph 34.

Practice - Topic 7103

Costs - Party and party costs - Special orders - For reprehensible or inefficient conduct by party - Revenue Canada re­assessed the taxpayers for the taxation years 1981-1985, disallowing their deduc­tion of interest costs on monies borrowed to purchase company shares - The Su­preme Court of Canada allowed the appeal and set aside the reassessments - The court rejected the taxpayers' request for special costs for Revenue Canada's alleged abuse of its assessment power in this case - In general, special costs ought to be awarded only on the grounds of miscon­duct con­nected with the litigation or other excep­tional circumstances - Although Revenue Canada aggressively pressed its case against the taxpayers, there was no sub­stance to the taxpayers' claims of abuse and misconduct and that the Crown other­wise acted improperly.

Words and Phrases

Income - The Supreme Court of Canada discussed the meaning of this word as used in s. 20(1)(c)(i) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 - See para­graphs 57 to 64.

Cases Noticed:

Singleton v. Minister of National Revenue (2001), 275 N.R. 133 (S.C.C.), refd to. [para. 2].

Bronfman (Phyllis Barbara) Trust v. Minister of National Revenue, [1987] 1 S.C.R. 32; 71 N.R. 134; 87 D.T.C. 5059, refd to. [para. 2].

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

Rizzo & Rizzo Shoes Ltd. (Bankrupt), Re, [1998] 1 S.C.R. 27; 221 N.R. 241; 106 O.A.C. 1, refd to. [para. 37].

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. 37].

Symes v. Minister of National Revenue, [1993] 4 S.C.R. 695; 161 N.R. 243; 110 D.L.R.(4th) 470, refd to. [para. 37].

Antosko v. Minister of National Revenue, [1994] 2 S.C.R. 312; 168 N.R. 16, refd to. [para. 37].

Quebéc (Communauté urbaine) v. Corpora­tion Notre-Dame de Bon-Secours, [1994] 3 S.C.R. 3; 171 N.R. 161; 63 Q.A.C. 161, refd to. [para. 37].

Friesen v. Minister of National Revenue, [1995] 3 S.C.R. 103; 186 N.R. 243, refd to. [para. 37].

Minister of National Revenue v. Schwartz, [1996] 1 S.C.R. 254; 193 N.R. 241, refd to. [para. 37].

Minister of National Revenue v. Alberta (Treasury Branches) et al., [1996] 1 S.C.R. 963; 196 N.R. 105; 184 A.R. 1; 122 W.A.C. 1; 133 D.L.R.(4th) 609, refd to. [para. 37].

65302 British Columbia Ltd. v. Minister of National Revenue, [1999] 3 S.C.R. 804; 248 N.R. 216, refd to. [para. 37].

Will-Kare Paving & Contracting Ltd. v. Minister of National Revenue, [2001] S.C.R. 915; 255 A.R. 208, refd to. [para. 37].

Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411; 208 N.R. 161; 193 A.R. 321; 135 W.A.C. 321, refd to. [para. 38].

Canderel Ltd. v. Minister of National Revenue, [1998] 1 S.C.R. 147; 222 N.R. 81; [1998] 2 C.T.C. 35; 98 D.T.C. 6100, refd to. [para. 38].

Minister of National Revenue v. Shell Canada Ltd., [1999] 3 S.C.R. 622; 247 N.R. 19, refd to. [para. 38].

Neuman v. Minister of National Revenue, [1998] 1 S.C.R. 770; 225 N.R. 190, refd to. [para. 39].

Hickman Motors Ltd. v. Minister of Na­tional Revenue, [1997] 2 S.C.R. 336; 213 N.R. 81, refd to. [para. 39].

Minister of National Revenue v. Duha Printers (Western) Ltd., [1998] 1 S.C.R. 795; 225 N.R. 241, refd to. [para. 39].

Continental Bank Leasing Corp. v. Minis­ter of National Revenue, [1998] 2 S.C.R. 298; 229 N.R. 58, refd to. [para. 52].

Spire Freezers Ltd. v. Minister of National Revenue, [2001] 1 S.C.R. 391; 266 N.R. 305, refd to. [para. 52].

Backman v. Minister of National Revenue, [2001] 1 S.C.R. 367; 266 N.R. 246, refd to. [para. 52].

Moldowan v. Minister of National Reve­nue, [1978] 1 S.C.R. 480; 15 N.R. 476; [1977] C.T.C. 310; 77 D.T.C. 5213; 77 D.L.R.(3d) 112, refd to. [para. 58].

Mark Resources Inc. v. Minister of Na­tional Revenue (1993), 93 D.T.C. 1004 (Tax C.C.), refd to. [para. 60].

Tennant v. Minister of National Revenue, [1996] 1 S.C.R. 305; 192 N.R. 365; 96 D.T.C. 6121, refd to. [para. 63].

Statutes Noticed:

Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 20(1)(c)(i) [para. 22].

Authors and Works Noticed:

Driedger, E.A., Construction of Statutes (2nd Ed. 1983), p. 87 [para. 36].

Krishna, V., The Fundamentals of Cana­dian Income Tax (6th Ed. 2000), pp. 97 to 100 [para. 57].

Counsel:

Guy Du Pont, François Barette and Robert Raizenne, for the appellants;

Pierre Cossette and Sophie-Lyne Lefebvre, for the respondent.

Solicitors of Record:

Davies Ward Phillips & Vineberg, Montréal, Quebec, for the appellants;

The Deputy Attorney General of Canada, Montréal, Quebec, for the respondent.

This appeal was heard on March 19, 2001, before Gonthier, Iacobucci, Major, Basta­rache, Binnie, Arbour and LeBel, JJ. The judgment of the Supreme Court of Canada, was delivered in both official languages on September 28, 2001, and the following opinions were filed:

Iacobucci, J. (Gonthier, Major, Bastarache, Binnie and Arbour, JJ., concurring) - see paragraphs 1 to 80;

LeBel, J. - see paragraphs 81 to 82.