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.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.