Minister of National Revenue v. Sherway Centre Ltd., (1998) 223 N.R. 93 (FCA)

• Judge: Linden, Létourneau and McDonald, JJ.A.
• Court: Federal Court of Appeal (Canada)
• Case Date: November 12, 1997
• Jurisdiction: Canada (Federal)
• Citations: (1998), 223 N.R. 93 (FCA)

MNR v. Sherway Centre Ltd. (1998), 223 N.R. 93 (FCA)

MLB headnote and full text

Temp. Cite: [1998] N.R. TBEd. MR.007

Her Majesty The Queen (appellant) v. Sherway Centre Limited (respondent)

(A-741-96)

Indexed As: Minister of National Revenue v. Sherway Centre Ltd.

Federal Court of Appeal

Linden, Létourneau and McDonald, JJ.A.

February 5, 1998.

Summary:

To finance construction of a large shopping centre, Sherway Centre Ltd. issued $21.5M in bonds at the below-market coupon rate of 9.75% per annum plus participatory interest each year equal to 15% of the "Operating Surplus" of the company in excess of $2.9M. The purpose of the participating interest was to compensate for having to issue the bonds at a lower interest rate (9.75% as opposed to the prevailing market interest rate of 10.25%). Sherway sought to deduct the participating interest payments in its 1987 and 1988 taxation years. The Minister of National Revenue disallowed the deduction on the grounds that the participating interest neither qualified as interest within the mean­ing of s. 21(1)(c) of the Income Tax Act nor as an expense incurred in the year in the course of borrowing money used by the taxpayer for the purpose of earning income from a business pursuant to s. 20(1)(e). Sherway appealed.

The Tax Court of Canada allowed the appeal, holding that Sherway was entitled to deduct the participating interest payments under s. 20(1)(e). It held that the payments were not interest under s. 21(1)(c). The Minister appealed.

The Federal Court of Appeal dismissed the appeal, stating that the deduction for partici­pating interest should have been allowed under both ss. 20(1)(c) and 20(1)(e).

Income Tax - Topic 1130

Income from a business or property - Deductions - General - Expenses incurred in borrowing money - To finance construc­tion of a large shopping centre, Sherway Centre Ltd. issued $21.5M in bonds at the below-market coupon rate of 9.75% per annum plus participatory interest each year equal to 15% of the "Operating Surplus" of the company in excess of $2.9M - The Minister of National Revenue disallowed Sherway's deduction of the participating interest payments as an expense incurred in borrowing money (Income Tax Act, s. 20(1)(e)) - The Federal Court of Appeal agreed the participating interest payments were deductible under s. 20(1)(e) - The payments could be characterized as a cost of borrowing money or as being made for the use of borrowed money because they were "in connection with," "incidental to," or "arising from" the borrowing - See paragraphs 9, 19 and 20.

Income Tax - Topic 1141

Income from a business or property - Deductions - General - Interest payments (other than on borrowed money) - To finance construction of a large shopping centre, Sherway Centre Ltd. issued $21.5M in bonds at the below-market coupon rate of 9.75% per annum plus participatory interest each year equal to 15% of the "Operating Surplus" of the company in excess of $2.9M - The Minister of National Revenue disallowed Sherway's deduction of the participating interest payments as interest within the meaning of s. 20(1)(c) of the Income Tax Act - The Federal Court of Appeal reviewed the definition of interest and held that the deduction should have been allowed under s. 20(1)(c) - See paragraphs 9 to 18.

Words and Phrases

Interest - The Federal Court of Appeal discussed the meaning of the word "in­terest" as used in s. 20(1)(c) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 - See paragraphs 9 to 18.

Cases Noticed:

Minister of National Revenue v. Yonge-Eglinton Building Ltd., [1974] C.T.C. 209; 2 N.R. 125 (F.C.A.), refd to. [para. 6].

Reference Re validity of Section 6 of the Farm Security Act, 1944 (Sask.), [1947] S.C.R. 394; affd. [1949] A.C. 110 (P.C.), refd to. [para. 10].

Saskatchewan (Attorney General) v. Canada (Attorney General) - see Reference Re validity of Section 6 of the Farm Security Act, 1944 (Sask.).

Ontario (Attorney General) v. Barfried Enterprises Ltd., [1963] S.C.R. 570, refd to. [para. 10].

Balaji Apartments Ltd. v. Manufacturers Life Insurance Co. (1979), 100 D.L.R. 695 (Ont. H.C.), refd to. [para. 11].

Statutes Noticed:

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

Authors and Works Noticed:

Krishna, Vern, The Fundamentals of Ca­nadian Income Tax (5th Ed. 1995), p. 337 [para. 10].

Counsel:

Donald G. Gibson, for the appellant;

Warren J.A. Mitchell, for the defendant.

Solicitors of Record:

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

Thorsteinssons, Vancouver, British Colum­bia, for the respondent.

This appeal was heard on November 12, 1997, at Ottawa, Ontario, before Linden, Létourneau and McDonald, JJ.A., of the Federal Court of Appeal. McDonald, J.A., delivered the following reasons for judgment for the court on February 5, 1998.