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A-62-73
The Canadian Rock Salt Company Ltd. (Appellant)
v.
The Queen (Respondent)
Court of Appeal, Jackett C.J., Thurlow and Pratte JJ.—Ottawa, March 6, September 17 and 27,1974.
Income tax—Interest on sum borrowed from parent com- pany—Claimed as deduction from income of borrower— Moneys used by borrower to earn income from mining opera- tion—Mining income excluded in computing income of oper ator for three years—Interest paid on borrowed sum not deductible—Income Tax Act, ss. 2(3), 3, 4, 6-20, 11(1)(c), 12(3), 83(5), 139(1).
The appellant sought to deduct from its income for the taxation year 1959 the sum of $542,734 which had accrued for three previous years, as interest on moneys amounting to $5,427,000 borrowed from its parent company and used by the appellant to acquire a mine and to bring it into operation.
Held, dismissing the appeal, the interest was deductible in computing the appellant's income for 1959 by virtue of section 12(3) of the Income Tax Act if, apart from section 12(3), it was "otherwise deductible" for the years in which it was payable. But section 83(5), exempting from taxation the income from a mine during the three years after production, had the effect of making interest on moneys borrowed for the operation of mining not "deductible", so that there were no facts to which section 12(3) could be applied.
Held also, section 11(1)(c) of the Income Tax Act could not be invoked to render the interest deductible.
Canadian Safeway Ltd. v. M.N.R. [1957] S.C.R. 717, applied. Interprovincial Pipe Line Co. v. M.N.R. [1959] S.C.R. 763 and Interprovincial Pipe Line Co. v. M.N.R. [1968] S.C.R. 498, considered.
INCOME tax appeal. COUNSEL:
J. Claude Couture, Q.C., and T. S. Gillespie for appellant.
Alban Garon, Q.C., and Mme Louise Lamarre-Proulx for respondent.
SOLICITORS:
Ogilvy, Cope, Porteous, Hansard, Marler, Montgomery & Renault, Montreal, for appellant.
Deputy Attorney General of Canada for respondent.
The following are the reasons for judgment delivered in English by
JACKETT CJ.: The sole question in the appeal is whether interest paid by the appellant in 1959 to its parent company is deductible in comput ing its "income" for that taxation year for the purposes of section 2(3) of the Income Tax Act when section 2 is read with sections 3 and 4. Those provisions, in so far as relevant, read, in respect of the 1959 taxation year, as follows:
2. (1) An income tax shall be paid as hereinafter required upon the taxable income for each taxation year of every person resident in Canada at any time in the year.
(3) The taxable income of a taxpayer for a taxation year is his income for the year minus the deductions permitted by Division C.
3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all
(a) businesses,
(b) property, and
(c) offices and employments.
4. Subject to the other provisions of this Part, income for a taxation year from a business or property is the profit therefrom for the year. '
The interest in question was deductible in computing the appellant's income for 1959 by virtue of section 12(3) of the Income Tax Act if, apart from section 12(3), it was "otherwise deductible" for the years in respect of which it was payable, namely, 1955, 1956 and 1957. Section 12(3) read as follows:
(3) In computing a taxpayer's income for a taxation year, no deduction shall be made in respect of an otherwise deductible outlay or expense payable by the taxpayer to a person with whom he was not dealing at arm's length if the amount thereof has not been paid before the day one year after the end of the taxation year; but, if an amount that was not deductible in computing the income of one taxation year by virtue of this subsection was subsequently paid, it may be deducted in computing the taxpayer's income for the taxation year in which it was paid.
The problem arises because the interest in dispute was payable on borrowed money used for the purpose of earning income from a busi ness consisting of the operation of a mine and was payable in respect of three taxation years to which section 83(5) applied. Section 83(5) read as follows:
(5) Subject to prescribed conditions, there shall not be included in computing the income of a corporation income derived from the operation of a mine during the period of 36 months commencing with the day on which the mine came into production.
In my view, section 83(5) operated, in any of the taxation years to which it applied, to make interest on money borrowed for the business of operating the mine not "deductible" so that there were no facts to which section 12(3) could be applied. I propose to explain how I reach that conclusion.
Section 83(5) lays down one, among many rules to be found in the statute, for computing "annual" income of a corporation, which, to have any meaning, must be the global amount of world income for a year computed for the pur pose of section 2(3) in accordance with the rules in sections 3 and 4. The first step in such a computation (leaving aside offices and employ ments because we are dealing with a corpora tion) is to set up a profit and loss account in which we put the revenues from all the corpora tions, businesses and properties on one side and the costs of earning those revenues on the other side.' The second step in such a computation is to revise that profit and loss account in accord ance with such provisions as sections 6 to 20 and applicable provisions of Division H of Part I of the Act. One of those provisions is section 83(5).
In attempting to apply section 83(5) read liter ally, in the process of calculating income for a year for section 2(3), it is found that it has no application because what it says is that "in computing the income of [the] corporation", there shall not be included "income derived from the operation of [the] mine" and one does not find that "income" from the operation of
I There is much authority for the proposition that profit from a business or property is to be computed on business or commercial principles and that is how, generally speak ing, profit is computed in accordance with such principles.
the mine would, as such, be otherwise included in the computation of the corporation income for a year for the purposes of section 2(3) of the Income Tax Act. What would be included in such computation are the revenues of the mine on the one side of the profit and loss account and the expenses and other deductions related to the earning of those revenues on the other side. The income (profit) derived from the oper ation of the mine is the result obtained by adding up such deductions and deducting them from the aggregate of such revenues. It follows, in my view, that what section 83(5) in effect requires, when it provides that the income from operating the mine is not to be included, is the elimination of the revenues and the deductions that are used to calculate "income" from the mine for the year from the profit and loss account that would otherwise be used to pro duce the corporation's world income for the taxation year for the purpose of section 2(3) of the Income Tax Act.
It follows therefore, in my view, that, in com puting income for a taxation year to which section 83(5) applies, interest on money used for operating the mine is not deductible.'
In reaching the above conclusion, I have given consideration to Interprovincial Pipe Line Co. v. M.N.R. 3 I have concluded, however, with considerable doubt, that it does not affect the conclusion that I have reached. It dealt with a different question (namely, the so-called "income" tax on certain gross receipts from other countries) and I cannot find that it laid
x See: 139. (1) In this Act,
(az) a taxpayer's income from a business, employment, property or other source of income or from sources in a particular place means the taxpayer's income computed in accordance with this Act on the assumption that he had during the taxation year no income except from that source or those sources of income and was entitled to no deductions except those related to that source or those sources; and
If this provision does not apply, the results in connection with such matters as business losses and deductions such as those for capital costs would be so unrealistic as not to be acceptable.
' [1959] S.C.R. 763.
down any principle that is inconsistent with the reasoning by which I reached the above result.
I agree with my brother Thurlow's reasons for rejecting the argument that section 11(1)(c) can be read as specifically authorizing the deduction of the interest quite apart from its being an item in the mine's profit and loss account.
In my opinion, the appeal should be dismissed with costs.
* * *
PRATTE J.: I agree.
* * *
The following are the reasons for judgment delivered in English by
THURLOW J.: During its 1959 taxation year, and more particularly in September and Decem- ber of that year, the appellant, as required by the terms of a contract to which it was a party, paid to a corporation with which it did not deal at arm's length amounts totalling $542,734.00 for interest which had accrued between Septem- ber 1, 1956 and August 31, 1958 on money borrowed from the corporation amounting to some $5,427,000 which had been used by the appellant in acquiring a mine and bringing it into operation. The income derived from the opera tion of the mine in the period when the interest accrued was exempt from income tax under subsection 83(5) 4 of the Income Tax Act. The question that arises on this appeal is whether the interest payments so made in 1959 are deductible in computing the appellant's income for that year. The learned Trial Judge held that the deduction could not be made [[1973] F.C. 174].
°83...
(5) Subject to prescribed conditions, there shall not be included in computing the income of a corporation income derived from the operation of a mine during the period of 36 months commencing with the day on which the mine came into production.
The basis of the appellant's claim to deduct the payments in 1959 rather than in the taxation years in which they accrued is subsection 12(3) which at the material times read as follows:
12. ...
(3) In computing a taxpayer's income for a taxation year, no deduction shall be made in respect of an otherwise deductible outlay or expense payable by the taxpayer to a person with whom he was not dealing at arm's length if the amount thereof has not been paid before the day one year after the end of the taxation year; but, if an amount that was not deductible in computing the income of one taxation year by virtue of this subsection was subsequently paid, it may be deducted in computing the taxpayer's income for the taxation year in which it was paid.
By its terms this subsection applies only to and permits the deduction in the year of pay ment only of "an otherwise deductible outlay or expense", and it poses the question whether the amounts of interest here in question would otherwise have been deductible outlays or expenses in computing the income of the appel lant for the years in which they accrued.
The only basis for contending that, apart from subsection 12(3), such interest would have been deductible outlays or expenses in computing income for the purposes of the Act for the years in which it accrued was subsection 11(1)(c)
which provided that:
11. (1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year:
(c) an amount paid in the year or payable in respect of the year (depending upon the method regularly followed by the taxpayer in computing his income), pursuant to a legal obligation to pay interest on
(i) borrowed money used for the purpose of earning income from a business or property (other than bor rowed money used to acquire property the income from which would be exempt), or
(ii) an amount payable for property acquired for the purpose of gaining or producing income therefrom or for the purpose of gaining or producing income from a business (other than property the income from which would be exempt),
or a reasonable amount in respect thereof, whichever is the lesser;
The appellant's position is that the interest in question falls within this provision as being in terest on borrowed money used for the purpose of earning income from a business, that is to say, the operation of its mine. This is not disput ed and no one contends that the amounts were interest on borrowed money used to acquire property the income from which would be exempt.
However, at all material times subsection 12(1)(c) provided:
12. (1) In computing income, no deduction shall be made in respect of
(c) an outlay or expense to the extent that it may reason ably be regarded as having been made or incurred for the purpose of gaining or producing exempt income or in connection with property the income from which would
be exempt,
The appellant sought to avoid the application of this provision on two grounds.
It was said first that the provision refers only to ordinary operating expenses that would be deductible under accounting principles for com puting profit and not to interest which was deductible only under the specific statutory authorization contained in subsection 11(1)(c). In support of this contention it was urged that subsection 11(1)(c) was a self-contained provi sion dealing with the deductibility of interest which had its own definition of what interest should not be deductible by reason of the exemption of the income to which it was related and that the effect was to exclude interest from the operation of subsection 12(1)(c).
The words in parenthesis in subsection 11(1)(c) may, when the subsection is read by itself, give rise to a prima fade impression or inference that what is not embraced in the parenthesis is not intended to be excluded and thus that the subsection authorizes the deduc tion of interest not referred to in the parenthe sis. On the other hand it is no less clear that the opening words of the subsection expressly over ride only paragraphs (a), (b) and (h) of subsec tion 12(1) and thus give rise to an equally cogent inference that it was not intended that
the subsection should override paragraph (c) of subsection 12(1).
In my view the purpose of subsection 11(1)(c) is to authorize and define the scope of a deduc tion that would not otherwise be allowable and it appears to me that the words in parenthesis are simply a part of the description of what is allowable. The subsection as a whole by its wording thus embraces interest on money invested in a business whether the income of the business is exempt or not but no inference should be drawn from the wording that it is somehow a complete code in itself on the sub ject of deduction of interest where the income is exempt and no inference should be drawn that the subsection overrides subsection 12(1)(c). There may be some area of redundancy in the two provisions but while an express particular enactment may take precedence over a general enactment I do not think a mere inference drawn from subsection 11(1)(c) by the applica tion of the maxim, expressio unius est exclusio alterius, can override the express general provi sion of subsection 12(1)(c). The contention in my opinion accordingly fails.
The other submission was that interest on borrowed capital invested in a business is not an outlay or expense made or incurred for the purpose of gaining or producing income from the business as contemplated by subsection 12(1)(c). In connection with this submission it was contended that what was authorized by subsection 11(1)(c) was a deduction of interest in computing global income of the taxpayer and that the deduction could not be related to any particular source of income of the taxpayer such as, in this case, the operation of the appel lant's mine and this even though that was the only business carried on by the appellant.
In my opinion the appellant's submission is answered by the reasoning of the Supreme Court in Canada Safeway Ltd. v. M.N.R. 5
5 [1957] S.C.R. 717.
There Kerwin C.J., with whom Taschereau J. (as he then was) and Cartwright J., (as he then was) concurred, referring to the corresponding provisions of the Income War Tax Act, said at page 722:
Under the authorities there is a great deal to be said for the argument of the respondent that the payments of interest were disbursements or expenses not wholly, exclusively and necessarily laid out or expended for the purpose of earning the income within subs. (1Xa) of s. 6, and that they were outlays of capital within subs. (1)(b) of s. 6, but I do not pause to consider the points. In view of the fact that by virtue of s. 4(n) the dividends received by the appellant from Macdonalds in 1947 and 1948 are not taxable, they are expenses incurred by the appellant to earn non-taxable income and, therefore, are not to be allowed as a deduction in computing the income to be assessed (s.6(5)).
Later after citing the provisions of the 1948 Income Tax Act subsection 11(1)(c) of which was not materially different for this purpose during the years involved in the present appeal the learned Judge said at page 724:
Generally speaking, these enactments have the same effect as those applicable to the 1947-1948 taxation years and, if anything, the definitions included in the Income Tax Act clarify the situation.
The foregoing is in my view sufficient to indicate that the appeal must fail but I should not part with it without observing that there is nothing in the judgment of the Supreme Court in Interprovincial Pipe Line Co. v. M.N.R. 6 , on which the appellant relied, which appears to me to conflict in any way with my conclusions or which, in view of the language "to the extent that it may reasonably be regarded", in subsec tion 12(1)(c), would even prevent an allocation for the purposes of that subsection of a single amount of interest among several sources of income if the circumstances so required. See Interprovincial Pipe Line Co. v. M.N.R. 7
In my opinion the appeal should be dismissed with costs.
6 [1959] S.C.R. 763.
7 [1968] S.C.R. 498.
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