A-718-79
Phyllis Barbara Bronfman Trust (Appellant)
v.
The Queen (Respondent)
Court of Appeal, Thurlow C.J., Pratte J. and
Hyde D.J.—Montreal, January 31; Ottawa, May
27, 1983.
Income tax — Income calculation — Deductions — Appeal
from Trial Division decision affirming reassessments — Min
ister disallowing deductions for interest paid on "borrowed
money used for the purpose of earning income from business
or property" — Trustees borrowing to pay capital allocations
to beneficiary of appellant trust instead of disposing of
income-producing securities — Trustees deducting interest
paid on borrowed money pursuant to ss. 11(1)(c)(i) of old
Income Tax Act and 20(1)(c)(i) of new Act — Appellant
submitting borrowed money used to earn income because en
abling trustees to keep securities which continued to earn
income for trust — Trans-Prairie Pipelines Ltd. v. Minister of
National Revenue (1970), 70 DTC 6351 (Ex.Ct.) applied
Method of accomplishing purpose immaterial — Appeal
allowed — Income Tax Act, R.S.C. 1952, c. 148, s. 11(1)(c)(i)
as am. by S.C. 1968-69, c. 44, s. 2 — Income Tax Act, S.C.
1970-71-72, c. 63, s. 20(1)(c)(i).
Appeal from Trial Division decision affirming income tax
reassessments for 1970, 1971 and 1972. The trustees of the
appellant trust have the discretion to make capital allocations
of the trust property to the beneficiary. In 1969 and 1970, the
trustees decided to pay out of the trust capital $500,000 and
$2,000,000 respectively to the beneficiary. The market value
of the securities being depressed, the trustees borrowed
$2,200,000 to pay the beneficiary rather than selling them. In
computing the income of the trust the trustees deducted the
interest paid on the borrowed amount as "interest on borrowed
money used for the purpose of earning income from a business
or property" pursuant to subparagraph 11(1)(c)(i) of the old
Income Tax Act and subparagraph 20(1)(c)(i) of the new Act.
The Minister disallowed the deductions. The appellant argues
that the borrowed money was used to earn income because it
enabled the trustees to retain the income-producing securities,
which continued to earn income for the trust. The appellant
relied on Trans-Prairie Pipelines Ltd. v. Minister of National
Revenue (1970), 70 DTC 6351 (Ex.Ct.) where the interest on
money borrowed to redeem preferred shares, the money sub
scribed by the preferred shareholders having been used to earn
income from its business, was found to be deductible. This was
compared to the situation if the trust had first sold the securi
ties, paid the beneficiary and then borrowed to finance the
purchase of the securities just sold. The question is whether the
appellant is entitled to interest deductions.
Held (Pratte J. dissenting), the appeal should be allowed.
Per Thurlow C.J. (Hyde D.J. concurring): The use of bor
rowed money to pay the allocations enabled the trustees to keep
and exploit income-yielding securities. Had they given the
beneficiary the securities, the income of the trust would have
been reduced. Thus, it is the effect of the use of the borrowed
money which is of importance. If the purpose of holding the
securities was to earn income from them and the money was
borrowed to enable the trustees to carry out that purpose, the
requirement of the statute is satisfied. The method of accom
plishing the purpose does not matter. The principle in Trans-
Prairie Pipelines Ltd. applies.
Per Pratte J. (dissenting): The interest payments are not
deductible because the borrowed money was not used for the
purpose of earning income from a business or property. The
money was used to pay capital allocations in favour of the
beneficiary. Trans-Prairie Pipelines is not applicable. In that
case the money that had been previously subscribed by pre
ferred shareholders had been used by the company for the
purpose of earning income from the business. Once the pre
ferred shares were redeemed with the borrowed money, the
borrowed money replaced the subscribed money and the com
pany, instead of using the shareholders' money was using the
borrowed money. In this case, the money paid to the benefici
ary had not already been used by the trust for the purpose of
earning income.
CASES JUDICIALLY CONSIDERED
APPLIED:
Trans-Prairie Pipelines Ltd. v. Minister of National
Revenue (1970), 70 DTC 6351 (Ex.Ct.).
REFERRED TO:
Canada Safeway Limited v. The Minister of National
Revenue, [1957] S.C.R. 717; Sternthal v. Her Majesty
The Queen (1974), 74 DTC 6646 (F.C.T.D.).
COUNSEL:
Michael Vineberg for appellant.
Roger Roy for respondent.
SOLICITORS:
Phillips & Vineberg, Montreal, for appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
rendered in English by
THURLOW C.J.: The issue in this appeal [from
the Trial Division decision in [1980] 2 F.C. 453] is
whether the appellant, in computing its income for
tax purposes for the years 1970, 1971 and 1972, is
entitled to deductions for interest amounting to
$110,114 in 1970, $9,802 in 1971 and $1,432 in
1972, which the appellant paid on two bank loans,
one in the amount of $300,000 (U.S.) obtained in
December, 1969, the other in the amount of
$1,900,000 (Can.) obtained in March, 1970. The
latter loan was repaid in full by October 5, 1970,
following the sale of certain investments in Gulf
Canada Ltd. The former was substantially reduced
in 1970 and 1971 and the balance was repaid in
full on January 4, 1972.
The appellant is a trust established in 1942 by
Samuel Bronfman in favour of his daughter.
Under the deed of trust the daughter, as benefici
ary, is entitled to receive annually 50 per cent of
the income from the trust property and may from
time to time be assigned, at the discretion of the
trustees, capital allocations. At the material times
the assets of the trust, almost all of which were
invested in income-earning securities, had a cost
base of about $15,000,000 and a fair market value
estimated at more than $70,000,000. The bulk of
the value was represented by investments in family
enterprises and was not readily realizable. The
remainder was invested in marketable securities.
But at the times when the loans in question were
obtained it was inexpedient to sell some of them
because their market value was depressed and
others could not be sold immediately because they
were temporarily pledged for the indebtedness of a
family holding company. Almost all the invest
ments of the trust were income producing. Income
of the trust investments was:
in 1969 — $324,469
in 1970 — $293,178
in 1971 — $213,588
in 1972 — $209,816
In December, 1969, and March, 1970, capital
allocations were made by the trustees to the
beneficiary in the amounts of $500,000 and
$2,000,000 respectively. The amounts of $300,000
(U.S.) and $1,900,000 (Can.), which were bor
rowed from the bank at or about the same times as
the allocations were made, in each instance formed
part of the amount transferred to the beneficiary.
The issue turns on whether in the taxation years
in question the borrowed money can be said to
have been "used for the purpose of earning income
from ... property" within the meaning of subpara-
graph 11(1)(c)(i) of the Income Tax Act, R.S.C.
1952, c. 148 [as am. by S.C. 1968-69, c. 44, s. 2]
applicable to the taxation years 1970 and 1971,
and subparagraph 20(1)(c)(i) of the Income Tax
Act, S.C. 1970-71-72, c. 63 applicable to the 1972
taxation year.
The appellant's position is that the borrowed
money replaced temporarily a portion of the capi
tal of the trust fund which had been allocated to
the beneficiary, that it enabled the trustees to keep
the income-yielding investments it had at that
time, that the investments continued to earn
income for the trust and accordingly, though the
money received from the borrowings was paid to
the beneficiary, it was used for the purposes of
gaining or producing income from the trust prop
erty. For that position counsel relied on the judg
ment of the Exchequer Court in Trans-Prairie
Pipelines Ltd. v. Minister of National Revenue.'
The position of the respondent was that as the
borrowed moneys were used to pay the allocations
to the beneficiary it cannot be said that they were
used to earn income by the exploitation of the
property of the trust.
I agree with the position taken by the appellant.
It appears to me that, contrary to the respondent's
submission, when the borrowed money had been
added to the trust property and there were alloca
tions to be made to the beneficiary, the use of that
money, rather than the investments, to pay the
allocations was what enabled the trustees to keep
the income-yielding trust investments and to
exploit them by obtaining for the trust the income
they were earning. Had the trustees sold income-
yielding investments to pay the allocations, the
income of the trust would have been reduced
accordingly. Had they given the beneficiary
income-yielding investments in lieu of cash, the
income of the trust would have been reduced
accordingly. By not doing either, by borrowing
money and using it to pay the allocations, the
trustees preserved intact the income-yielding
capacity of the trust's investments. That, as it
1 (1970), 70 DTC 6351 (Ex.Ct.).
seems to me, is sufficient, in the circumstances of
this case, to characterize the borrowed money as
having been used in the taxation years in question
for the purpose of earning income from the trust
property.
It is, I think, unrealistic to focus attention on the
use of the borrowed money to pay the capital
allocations. What appears to me to matter for this
purpose is the effect which the use of the borrowed
money to pay the allocations had on the ability of
the trustees to keep the income-earning invest
ments and continue to earn for the trust the whole
of the income therefrom. What the statute refers
to is the purpose of earning income from property,
by the exploitation of that property itself. See
Rand J. in Canada Safeway Limited v. The Min
ister of National Revenue. 2 In this case property
to be exploited consisted of the trust investments
being held by the trustees. The focus of the statute
is thus the purpose of the trustees in continuing to
hold the investments. If that purpose was to earn
income from them and the money was borrowed to
enable them to do so—to carry out that purpose—
the requirement of the statute is satisfied. It does
not matter that the method of accomplishing the
purpose was not to buy securities with the bor
rowed money rather than to continue to hold what
the trust already had by using the proceeds of the
loans to discharge an obligation which if not dis
charged in that way would have made it necessary
to give up a portion of the income earning invest
ments of the trust. Nor, in my opinion, does it
matter that the trustees in continuing to hold the
investments may have had as well an eye to the
possible appreciation of their capital value.
It should be noted that a trust such as that here
in question has no purpose and the trustees have
no purpose save to hold trust property, to earn
income therefrom and to deal with such income
and the capital of the trust in accordance with the
provisions of the trust instrument. In that respect a
trust differs from an individual person who may
have many purposes, both business and personal.
Compare Sternthal v. Her Majesty The Queen 3
where the taxpayer, an individual, had no obliga
tion to lend money to his children but invested his
2 [1957] S.C.R. 717 at p. 728.
3 (1974), 74 DTC 6646 (F.C.T.D.).
borrowings in interest-free loans to them. There
may be differences, as well, between the present
situation and that in Trans-Prairie Pipelines Ltd.
v. Minister of National Revenue since the situa
tion considered in that case concerned borrowed
money used for the purpose of replacing capital
used to earn income from a business rather than
from property.
But, in my opinion, the same 'principle applies.
The trustees having on hand as trust assets
income-yielding investments to a certain value or
amount and having determined that $2,500,000 of
its capital should be withdrawn from the trust, the
capital they were subsequently using to earn the
income of the trust consisted of the remaining
assets, that is to say, the former trust assets minus
$2,500,000, and the borrowed money.
I would allow the appeal and refer the matter
back to the Minister of National Revenue for
reconsideration and reassessment on the basis that
the appellant is entitled to deductions in respect of
the interest payments in question. The appellant
should have its costs of the appeal and of the
proceedings in the Trial Division.
HYDE D.J.: I agree with the Chief Justice.
* * *
The following are the reasons for judgment
rendered in English by
PRATTE J. (dissenting): This is an appeal from a
judgment of the Trial Division (Marceau J.) dis
missing an appeal by the appellant from income
tax reassessments for the 1970, 1971 and 1972
taxation years. It raises only one issue: was the
Trial Judge right in deciding that the appellant
could not deduct, in computing its income for
those three years, the interest it had paid on money
borrowed from the Bank of Montreal?
The appellant is a trust established in favour of
Phyllis Barbara Bronfman and her children pursu
ant to a deed of donation between Samuel Bronf-
man, as donor, and three named trustees. Under
that deed, Miss Bronfman has the right to fifty
percent (50%) of the revenues from the trust prop-
erty; in addition, the trustees have the discretion to
make capital allocations of the trust property in
her favour. In December, 1969, and March, 1970,
the trustees decided to exercise that power and pay
Miss Bronfman, out of the capital of the trust,
amounts of $500,000 (U.S.) and $2,000,000
(Can.) respectively. In order to have the funds to
pay those amounts, the trustees borrowed $2,200,-
000 from the Bank of Montreal. True, instead of
borrowing, they could have disposed of some of the
income-producing securities owned by the trust.
However, they considered that it was far more
advantageous for the trust to keep those securities
and borrow from the Bank. The amount borrowed
from the Bank was used to pay the capital alloca
tions made to Miss Bronfman and the trust was
thus enabled to keep valuable income-producing
securities. In computing the income of the trust for
the years 1970, 1971 and 1972, the trustees
deducted the interest paid during those years on
the amount borrowed from the Bank. The Minister
disallowed those deductions on the ground that the
interest in question was not interest on "borrowed
money used for the purpose of earning income
from a business or property" within the meaning
of subparagraph 11(1)(c)(i) of the Income Tax
Act as it read in 1970 and 1971 and subparagraph
20(1)(c)(î) of the same Act as it stood in 1972.
The Trial Judge confirmed that decision. Hence
this appeal.
In 1970 and 1971, the relevant provision of the
Income Tax Act was subparagraph 11(1)(c)(i); it
read as follows :
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 borrowed
money used to acquire property the income from which
would be exempt or to acquire an interest in a life insur
ance policy),
In 1972, a similar provision was found in sub-
paragraph 20(1)(c)(i) which read as follows:
20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in
computing a taxpayer's income for a taxation year from a
business or property, there may be deducted such of the
following amounts as are wholly applicable to that source or
such part of the following amounts as may reasonably be
regarded as applicable thereto:
(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 borrowed
money used to acquire property the income from which
would be exempt or to acquire a life insurance policy),
It was argued on behalf of the appellant that the
money borrowed from the Bank had been "used
for the purpose of earning income" within the
meaning of those provisions because the trustees
had used it so as to be able to keep income
producing securities that they, otherwise, would
have had to sell. Counsel contended that the situa
tion was, in substance, the same as if the appellant
had, first, sold securities, paid Miss Bronfman and,
then, borrowed from the Bank to finance the pur
chase of the securities it had just sold. In support
of his argument, he invoked the decision of the
Exchequer Court in Trans-Prairie Pipelines Ltd.
v. Minister of National Revenue ((1970), 70 DTC
6351 (Ex.Ct.)) where it was held that interest paid
by a company on money borrowed by it to redeem
its preferred shares was deductible in the computa
tion of its income pursuant to subparagraph
11(1) (c) (i) of the Income Tax Act.
I agree with Mr. Justice Marceau and cannot
accept the appellant's argument. Pursuant to the
relevant provisions of the Income Tax Act, the
interest here in question was not deductible unless
the money borrowed from the Bank of Montreal
had been "used for the purpose of earning income
from a business or property". It was not so used
but was, in fact, used to pay the capital allocations
made by the trustees in favour of Miss Bronfman.
The appellant's argument, in my view, ignores the
language of the Act. Moreover, I am of opinion
that the decision rendered in Trans-Prairie Pipe
lines Ltd. v. Minister of National Revenue has no
application here. In that case, a company had
borrowed money and used it to redeem its pre
ferred shares; the money that had been previously
subscribed by the preferred shareholders had
clearly been used by the company for the purpose
of earning income from its business; once the
preferred shares had been redeemed with the bor
rowed money, it could be said that that money
had, in effect, replaced the money subscribed by
the preferred shareholders and that, thereafter, the
company, instead of using their money in its busi
ness was using the borrowed money. In the present
case, the situation is entirely different. The money
paid to Miss Bronfman cannot be considered as
money substituted for money already used by the
trust for the purpose of earning income; and by no
stretch of the imagination can the appellant be
considered as having used for the purpose of earn
ing income the money paid to Miss Bronfman.
I would dismiss the appeal with costs.
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.