Minister of National Revenue v. Shell Canada Ltd., (1998) 223 N.R. 122 (FCA)

• Judge: Stone, Strayer and Linden, JJ.A.
• Court: Federal Court of Appeal (Canada)
• Case Date: February 18, 1998
• Jurisdiction: Canada (Federal)
• Citations: (1998), 223 N.R. 122 (FCA)

MNR v. Shell Can. Ltd. (1998), 223 N.R. 122 (FCA)

MLB headnote and full text

Temp. Cite: [1998] N.R. TBEd. MR.014

Her Majesty The Queen (appellant) v. Shell Canada Limited (respondent)

(A-398-97)

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

Federal Court of Appeal

Stone, Strayer and Linden, JJ.A.

February 18, 1998.

Summary:

Shell needed to borrow $100 million (U.S.) for working capital. The prevailing market rate was 9.1%. Shell borrowed the monies in New Zealand dollars at 15.4%. Shell then converted the monies to U.S. dollars (sepa­rate transaction). Since the future rate for New Zealand dollars was discounted against the U.S. dollar, Shell would receive more U.S. dollars with the loan proceeds than it would cost to retire the loan, creating a $21,165,000 (U.S.) gain. Shell deducted the 15.4% interest charge under s. 20(1)(c) of the Income Tax Act and, when the loan was retired, claimed a $21,165,000 (U.S.) capital gain. The Minister of National Revenue, for 1992 and 1993, disallowed the interest de­duction beyond the 9.1% market rate on the ground that interest over that amount was not reasonable, as required by s. 20(1)(c). Further, the Minister determined that the $21,165,000 (U.S.) was income, not a capital gain. Shell appealed.

The Tax Court of Canada allowed the appeal. The entire interest charges were deductible under s. 20(1)(c) and the $21,165,000 (U.S.) was a capital gain, not income. The Minister appealed.

The Federal Court of Appeal allowed the appeal in part. The court affirmed that the $21,165,000 (U.S.) was a capital gain. How­ever, the court held that interest in excess of the 9.1% rate was not deductible under s. 20(1)(c).

Income Tax - Topic 1130

Income from a business or property - Deductions - Expenses incurred in borrow­ing money - Shell needed to borrow $100 million (U.S.) for working capital - The prevailing market rate was 9.1% - Shell borrowed the monies in New Zealand dollars at 15.4%, then converted the monies to U.S. dollars (separate transac­tion) - Since the future rate for New Zealand dollars was discounted against the U.S. dollar, Shell would receive more U.S. dollars with the loan proceeds than it would cost to retire the loan, creating a $21,165,000 (U.S.) gain - Shell deducted the 15.4% interest charge under s. 20(1)(c) of the Income Tax Act - The Federal Court of Appeal held that the amount of interest in excess of 9.1% was not deductible under s. 20(1)(c) - First, the amount paid in excess of 9.1% was not "interest", but in essence principal (i.e., high interest rate coupled with discounted forward rate created a blended payment of interest and principal) - Secondly, the portion over 9.1% was not used for income earning purposes (overriding purpose was reduction of tax liability) - Thirdly, the amount in excess of 9.1% was not "reasonable" (although 15.4% was reasonable in New Zealand, it was not reasonable for Shell to pay that amount) - See paragraphs 45 to 58.

Income Tax - Topic 1130

Income from a business or property - Deductions - Expenses incurred in borrow­ing money - Section 20(1)(c) of the Income Tax Act permitted a taxpayer to deduct interest charges on borrowed monies - The Federal Court of Appeal held that interest was deductible only if (1) the amount was paid in the year; (2) it was paid pursuant to a legal obligation to pay interest on the borrowed monies; (3) the borrowed monies were used for the pur­pose of earning income from a business or property; and (4) the rate of interest was reasonable - The court discussed each of the four conditions - See paragraphs 26 to 44.

Income Tax - Topic 1742

Capital gains and losses - Capital gains - Capital receipt v. income - [See Income Tax - Topic 1751 ].

Income Tax - Topic 1751

Capital gains and losses - Capital gains - Foreign exchange gain on a loan for a capital purpose - Shell needed to borrow $100 million (U.S.) for working capital - The prevailing market rate was 9.1% - Shell borrowed the monies in New Zealand dollars at 15.4%, then converted the monies to U.S. dollars (separate transac­tion) - Since the future rate for New Zealand dollars was discounted against the U.S. dollar, Shell would receive more U.S. dollars with the loan proceeds than it would cost to retire the loan, creating a $21,165,000 (U.S.) gain - In 1993, Shell claimed the $21,165,000 (U.S.) as a capital gain, which was offset against capital losses - The Minister reassessed the gain as income - The Federal Court of Appeal held the borrowed monies provided working capital (a capital transaction) - According­ly, the gain was on account of capital and the $21,165,000 (U.S.) was a capital gain, not income - See paragraphs 59 to 63.

Cases Noticed:

Partington v. Attorney General (1869), 4 L.R.H.L. 100, refd to. [para. 18, footnote 4].

Stubart Investments Ltd. v. Minister of National Revenue, [1984] 1 S.C.R. 536; 53 N.R. 241, refd to. [para. 18, footnote 5].

Phyllis Barbara Bronfman Trust v. Minis­ter of National Revenue, [1987] 1 S.C.R. 32; 71 N.R. 134, refd to. [para. 19, foot­note 7].

British Columbia Telephone Co. v. Minis­ter of National Revenue (1992), 139 N.R. 211; 92 D.T.C. 6129 (F.C.A.), refd to. [para. 20, footnote 9].

Canada Safeway Ltd. v. Minister of National Revenue, [1957] S.C.R. 717, refd to. [para. 21, footnote 11].

Validity of Section 6 of the Farm Security Act 1944 (Sask.), Re, [1947] S.C.R. 394, refd to. [para. 29, footnote 22].

Ontario (Attorney General) v. Barfried Enterprises Ltd., [1963] S.C.R. 570, refd to. [para. 29, footnote 24].

Balaji Apartments Ltd. v. Manufacturers Life Assurance Co. (1979), 100 D.L.R.(3d) 695 (Ont. H.C.J.), refd to. [para. 29, footnote 25].

Miller v. Minister of National Revenue (1985), 85 D.T.C. 5354 (F.C.T.D.), refd to. [para. 29, footnote 27].

Groulx v. Minister of National Revenue, [1966] D.T.C. 5126 (Ex. Ct.), affd. [1968] S.C.R. 6, refd to. [para. 30, foot­note 29].

74712 Alberta Ltd. v. Minister of National Revenue (1997), 208 N.R. 348; 97 D.T.C. 5126 (F.C.A.), refd to. [para. 32, footnote 31].

Mark Resources Ltd. v. Minister of National Revenue (1993), 93 D.T.C. 1004 (T.C.C.), refd to. [para. 35, foot­note 37].

Canwest Broadcasting Ltd. v. Minister of National Revenue (1996), 96 D.T.C. 1375 (T.C.C.), refd to. [para. 36, foot­note 40].

Robitaille v. Minister of National Revenue (1997), 97 D.T.C. 1286 (T.C.C.), refd to. [para. 37, footnote 42].

Moloney et al. v. Minister of National Revenue (1992), 145 N.R. 258; 92 D.T.C. 6570 (F.C.A.), refd to. [para. 54, footnote 48].

Alberta Gas Trunk Line Co. v. Minister of National Revenue, [1972] S.C.R. 498, refd to. [para. 60, footnote 50].

Columbia Records of Canada Ltd. v. Minister of National Revenue, [1971] C.T.C. 839 (F.C.T.D.), refd to. [para. 61, footnote 52].

Minister of National Revenue v. Fording Coal Ltd., [1996] 1 F.C. 518; 190 N.R. 186 (F.C.A.), refd to. [para. 67].

Minister of National Revenue v. Central Supply Co. (1972) Ltd., [1997] 3 F.C. 674; 215 N.R. 46 (F.C.A.), refd to. [para. 67].

Tennant v. Minister of National Revenue, [1996] 1 S.C.R. 305; 192 N.R. 365, refd to. [para. 70, footnote 53].

Hickman Motors Ltd. v. Minister of National Revenue, [1997] 2 S.C.R. 336; 213 N.R. 81, refd to. [para. 70].

Statutes Noticed:

Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 20(1)(c) [para. 17]; sect. 245(1) [para. 66].

Authors and Works Noticed:

Arnold, Brian J., Is Interest a Capital Expense? (1992), 40 Can. Tax J. (No. 3) 533, generally [para. 21, footnote 13].

Arnold, Brian J., and Edgar, Tim, Deductibility of Interest Expense (1995), 43 Can. Tax J. (No. 5) 1216, generally [para. 25, footnote 20].

Bowman, Stephen W., Interpretation of Tax Legislation: The Evolution of Pur­posive Analysis (1995), 43 Can. Tax J. (No. 5) 1167, generally [para. 18, foot­note 4].

Broadhurst, David G., Tax Considerations for Hedging Transactions, in Taxation of Financial Transactions (1991), pp. 6 to 9 [para. 49, footnote 44].

Canada, Hansard, House of Commons Debates (June 27, 1923), p. 4494 [para. 24, footnote 18].

Canadian Bar Association and Canadian Institute of Chartered Accountants, Joint Committee on Taxation, Submissions to the Minister of Finance on the Issue of Deductibility of Interest, Canadian Tax Reports, Special Report No. 964 (Aug. 1990), generally [para. 23, footnote 16].

Edgar, Tim, and Arnold, Brian J., Re­flections on the Submission of the CBA-CICA Joint Committee on Taxation Concerning the Deductibility of Interest (1990), 38 Can. J.T. (No. 3) 847, p. 848 [para. 23, footnote 16].

Hogg, Peter W., and Magee, Joanne, Prin­ciples of Canadian Income Tax Law (1995), p. 221, note 36 [para. 21, foot­note 13].

Krishna, Vern, The Fundamentals of Ca­nadian Income Tax (5th Ed. 1995), pp. 381, 382 [para. 21, footnote 13].

Richardson, Grant, and Anderson, Helen, The Deductibility of Interest: An Asia-Pacific Comparison, 23 Intnl. Tax J. (No. 3) 6, generally [para. 23, footnote 16].

Ruby, Stephen S., Hedging Transactions, in Taxation of Financial Transactions (1991), p. vii-33 [para. 50, footnote 46].

Counsel:

Harry Erlichman and Patricia Lee, for the appellant;

Al Meghji, Ronald B. Sirkis and Gerald Grenon, for the respondent.

Solicitors of Record:

George Thomson, Deputy Attorney Gen­eral of Canada, Ottawa, Ontario, for the appellant;

Bennett Jones Verchere, Calgary, Alberta, for the respondent.

This appeal was heard at Montreal, Que­bec, on November 17-19, 1997, before Stone, Strayer and Linden, JJ.A., of the Federal Court of Appeal.

On February 18, 1998, the judgment of the Federal Court of Appeal was delivered and the following opinions were filed:

Linden, J.A. (Strayer, J.A., concurring) - see paragraphs 1 to 64;

Stone, J.A. - see paragraphs 65 to 71.