Minister of National Revenue v. Gifford, (2004) 317 N.R. 1 (SCC)

• Judge: McLachlin, C.J.C. and Major, Bastarache, Binnie, Arbour, Deschamps and Fish, JJ.
• Court: Supreme Court (Canada)
• Case Date: November 14, 2003
• Jurisdiction: Canada (Federal)
• Citations: (2004), 317 N.R. 1 (SCC);2004 SCC 15;[2004] 1 SCR 411;[2004] 2 CTC 1;58 DTC 6120;236 DLR (4th) 1;45 BLR (3d) 1;317 NR 1

MNR v. Gifford (2004), 317 N.R. 1 (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: [2004] N.R. TBEd. MR.007

Thomas Gifford (appellant) v. Her Majesty the Queen (respondent) and Canadian Bankers Association (intervener)

(29416; 2004 SCC 15; 2004 CSC 15)

Indexed As: Minister of National Revenue v. Gifford

Supreme Court of Canada

McLachlin, C.J.C. and Major, Bastarache, Binnie, Arbour, Deschamps and Fish, JJ.

March 4, 2004.

Summary:

A financial advisor purchased a co-work­er's client list. He sought to deduct the amount paid to the co-worker as a current expense. He also sought to deduct interest and insurance paid on a loan used to pay the co-worker as a current expense. The Minister of National Revenue disallowed the deduc­tions, claiming that the payments constituted "payments on account of capital" and were not deductible pursuant to s. 8(1)(f)(v) of the Income Tax Act. The advisor appealed.

The Tax Court of Canada allowed the ap­peal, holding that the payments were current expenses and not capital outlays. Therefore, they were deductible. The Minis­ter applied for judicial review.

The Federal Court of Appeal, in a decision reported at 293 N.R. 111, allowed the appli­cation, holding that the payments were capi­tal outlays. The financial advisor appealed.

The Supreme Court of Canada dismissed the appeal.

Income Tax - Topic 587

Income from office or employment - De­ductions - Sales expenses - Gifford, a financial advisor, purchased a co-worker's client list - The co-worker agreed to en­dorse Gifford to the clients and not to compete - The Supreme Court of Canada affirmed that the purchase price was not a current expense, but constituted a payment "on account of capital" and was not de­ductible (Income Tax Act, s. 8(1)(f)(v)) - The fact that the transaction occurred be­tween two employees instead of two busi­nesses did not, by itself, change the trans­action's characterization - The client list was a capital asset because it signifi­cantly expanded Gifford's client network, the structure within which he earned his em­ployment income; the purchase of someone else's accumulated goodwill was not the same as the recurring marketing expenses Gifford would have had to incur to create his own goodwill; the payment secured the discontinuance of competition; and the pay­ment was made with the inten­tion of securing an asset of enduring bene­fit that would provide Gifford with a last­ing ad­vantage - The fact that the asset might decrease in value could not deter­mine the question of what the asset was to the pur­chaser at the time of acquisition - See paragraphs 19 to 22.

Income Tax - Topic 587

Income from office or employment - De­ductions - Sales expenses - Gifford, a financial advisor, purchased a co-worker's client list - The co-worker agreed to en­dorse Gifford to the clients and not to com­pete - Gifford sought to deduct interest paid on a loan used to pay the co-worker as a current expense - The Supreme Court of Canada affirmed that the interest could not be deducted - The purchase price for the client list was made to create an endur­ing benefit for Gifford and therefore was a payment "on account of capital" under s. 8(1)(f)(v) of the Income Tax Act and was not deductible - The interest payments were also payments "on account of capi­tal", because the funds themselves added to Gifford's financial capital - Therefore, the interest payments were not deductible - See paragraph 42.

Income Tax - Topic 595

Income from office or employment - De­ductions - Interest - The Supreme Court of Canada stated that "Under our current [In­come Tax] Act it is not necessary to deter­mine whether [a payment of interest] is a capi­tal expenditure but to determine whe­ther the payment is being made 'on ac­count of capital'. This distinction in terms is par­ticularly important in relation to interest payments, because loan proceeds are sel­dom retained in the form they are received, unlike other capital assets. This distinction means that under our Act it is only necess­ary to consider what the pro­ceeds of the loan are to the borrower when they are received, and does not require an examin­ation of what those loan proceeds are spent on. If the money adds to the fi­nancial capital then the payment of inter­est on that loan will be considered to be a pay­ment 'on account of capital'. If the loan pro­ceeds constitute the inventory of the bor­rower, as is the case with money­lenders, then the payment of interest would be deductible." - See paragraphs 38 to 40.

Income Tax - Topic 595

Income from office or employment - De­duc­tions - Interest - The Minister of Na­tional Revenue argued that the Income Tax Act was a complete code for the de­duct­i­bil­ity of interest as interest pay­ments could only be deducted if they meet the require­ments of specific sections of the Act such as s. 8(1)(j) or s. 20(1)(c) - The Supreme Court of Canada stated that "In circum­stances where interest is not a pay­ment 'on account of capital', it may be deducted as long as it meets the other requirements, such as those set out in s. 8(1)(f) or s. 18(1)(a), and is not precluded by some other section of the Act." - See paragraph 37.

Income Tax - Topic 595

Income from office or employment - De­ductions - Interest - [See second Income Tax - Topic 587 ].

Income Tax - Topic 1141

Income from a business or property - Deductions - General - Interest - [See first and second Income Tax - Topic 595 ].

Cases Noticed:

Johns-Manville Inc. v. Minister of National Revenue, [1985] 2 S.C.R. 46; 60 N.R. 244, appld. [para. 8].

Wharf Properties Ltd. v. Commissioner of Inland Revenue, [1997] 2 W.L.R. 334; 211 N.R. 312 (P.C.), refd to. [para. 9].

Cumberland Investments Ltd. v. Minister of National Revenue, [1975] C.T.C. 439; 11 N.R. 165 (F.C.A.), refd to. [para. 19].

Farquhar Bethune Insurance Ltd. v. Minis­ter of National Revenue, [1982] C.T.C. 282; 43 N.R. 66 (F.C.A.), refd to. [para. 19].

Bennett and White Construction Co. v. Minister of National Revenue, [1949] S.C.R. 287, refd to. [para. 27].

Canada Safeway Ltd. v. Minister of Na­tional Revenue, [1957] S.C.R. 17, consd. [para. 28].

Bronfman (Phyllis Barbara) Trust v. Min­ister of National Revenue, [1987] 1 S.C.R. 32; 71 N.R. 134, consd. [para. 30].

Tennant v. Minister of National Revenue, [1996] 1 S.C.R. 305; 192 N.R. 365, refd to. [para. 31].

Minister of National Revenue v. Shell Canada Ltd., [1999] 3 S.C.R. 622; 247 N.R. 19, consd. [para. 32].

Steele v. Deputy Commissioner of Tax­ation (1999), 161 A.L.R. 201 (H.C.), refd to. [para. 38].

Statutes Noticed:

Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 8(1)(f), sect. 18(1), sect. 20(1) [para. 7].

Counsel:

Michael Templeton and Richard Thomas, for the appellant;

Gordon Bourgard and Wendy Burnham, for the respondent;

Al Meghji and Mahmud Jamal, for the intervenor.

Solicitors of Record:

McMillan Binch, Toronto, Ontario, for the appellant;

Deputy Attorney General of Canada, Ottawa, Ontario, for the respondent;

Osler, Hoskin & Harcourt, Toronto, Ontario, for the intervener.

This appeal was heard on November 14, 2003, by McLachlin, C.J.C. and Major, Bastarache, Binnie, Arbour, Deschamps and Fish, JJ., of the Supreme Court of Canada. The judgment of the Supreme Court of Canada was delivered in both official lan­guages on March 4, 2004, by Major, J.