Tennant v. M.N.R.
T-1242-89 / T-2927-90
Teitelbaum J.
15/1/93
17 pp.
Appeal from reassessments for 1985, 1986 disallowing deduction of interest expenses -- Plaintiff borrowed $1,000,000 from bank to acquire 1,000,000 shares in arm's length corporation (Realwest) -- By agreement of purchase and sale pursuant to Income Tax Act, s. 85, dated July 25, 1985, sold shares to arm's length company (TWL) in consideration for 1,000 Class B common, non-voting, participating shares therein having fair market value of $1,000 -- Plaintiff and TWL filed joint election form entitled "Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation" -- Plaintiff claimed $1,004,000 allowable business investment loss on disposition of shares to TWL in 1985, and allowed $502,000 pursuant to ss. 38(c), 39(1)(c) -- Prior to July 25, 1985 plaintiff paid interest on full amount of loan and claimed full amount of interest under Income Tax Act, s. 20(1)(c)(i) -- Continued to do so even after that date for 1985, 1986 -- Minister allowed deduction only for amount of interest plaintiff would have paid on $1,000 loan -- Assumed (1) once no longer owned Realwest shares acquisition of which purpose of loan, interest expense no longer deductible; (2) $1,000 for TWL shares only remaining investment in which borrowed money used to earn income from business or property; (3) after disposition of Realwest shares, plaintiff entitled to deduct interest only on borrowed $1,000, as excess no longer used to gain or produce income from shares in Realwest -- Appeals dismissed -- Principle enunciated in Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32 that borrowed funds must be traced through to current, direct and eligible use applied -- Transfer of Realwest shares to TWL pursuant to s. 85 rollover not mere change in form of investment, but change of investment -- Fact plaintiff allowed to claim business investment loss under ss. 38(c) and 39(1)(c) upon transfer of Realwest shares to TWL supporting conclusion -- Under s. 38(c) taxpayer allowed to claim business investment loss "from disposition of that property" -- Definition of "disposition" suggesting where person "disposed" of property, person not only formulated intention to give up property, but alienated property to point where no longer retains legal interest in it -- Once taxpayer "disposed" of asset and claimed business investment loss, precluded from saying original investment vehicle not disappearing, but merely changing form -- Under s. 39(1)(c) business investment loss allowed where disposition of property made "to person with whom he was dealing at arm's length" -- Since plaintiff dealt at arm's length with TWL, cannot say transfer of Realwest shares to TWL in exchange for 1,000 shares of TWL mere insertion of holding company between himself and Realwest -- After July 25, 1985, TWL shares acquired at cost of $1,000 plaintiff's only remaining source of income -- Although entitled as shareholder to receive dividends from TWL whatever source of such amounts, plaintiff not retaining control over flow of dividend income from Realwest through TWL to himself -- No legal or equitable interest in Realwest shares -- Plaintiff effectively asking Court to lift corporate veil and look through to TWL's assets as being direct investment of plaintiff -- Cases where corporate veil pierced distinguished on facts -- Loan not used in 1985, 1986 to earn income from property -- Fact plaintiff indirectly earned income from Realwest through TWL not meaning Realwest shares survived as source of income to plaintiff -- Becoming source of income for TWL -- Loan not continuing to be used directly and actually by plaintiff to earn income from Realwest shares as plaintiff no longer legally or equitably owned shares -- As of July 25, plaintiff only invested $1,000 of original loan, and TWL shares only source to which interest expense can be applied -- Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536 holding taxing statute should be interpreted "with the words used therein read in their context and in harmony with the scheme of the Act, the object of the Act, and the intention of Parliament" -- Since plaintiff claimed allowable business investment loss, deemed to have disposed of Realwest shares -- Contrary to Parliament's intent to allow taxpayer to, at one level, defer capital gain where disposition of property occurred and at another level to allow deduction of interest pursuant to provision requiring source of income to exist -- Income Tax Act, S.C. 1970-71-72, c. 63, ss. 18(1)(a), (b), 20(1)(c), 38(c) (as am. by S.C. 1977-78, c. 42, s. 2), 39(1)(c) (as am. by S.C. 1979, c. 5, s. 11), 85.