38 R.C. de l'É. COUR DE L'ÉCHIQUIER DU CANADA [1964] 1962 BETWEEN : Jun. 20 lss3 THE MINISTER OF NATIONAL APPELLANT Apr.19 REVENUE AND PENINSULAR INVESTMENTS LIM- RESPONDENT. ITED Revenue—Income tax—Income Tax Act, R.S C. 1952, c. 148, ss. 11(1)(c) (ca), and 70(1)(4)—Non-resident-owned investment corporation— Deductibility of interest paid on bank loan—Whether interest paid on "other indebtedness"—Ejusdem generis rule—Appeal allowed. Section 70(1) of the Income Tax Act provides that in computing its income a non-resident-owned investment company shall not make any deduction in respect of interest on its bonds, debentures, securities or other indebtedness. Respondent in computing its income for 1959 deducted $22,402.12 representing interest on a bank overdraft paid to the Bank of Nova Scotia in New York. This was disallowed by the Minister. An appeal to the Tax Appeal Board was allowed and the Minister appealed to this Court. Held: That the appeal be allowed. 2. That a distinction exists between interest expense incurred in temporary financing which is an integral part of a business being carried on and interest incurred in respect of capital invested in the business. 3. That the only limitation here imposed by the ejusdem generis rule is that the `other indebtedness" should relate to the acquisition of capital assets or the raising of capital to be employed in the business, rather than to indebtedness of the kind incident to and incurred in the day-to-day transactions of the business. 4. That the material before the Court fails to disclose that the respondent was engaged in a business in which the financing of its transactions was itself an integral part and in fact does not establish that the respondent was engaged in a business at all, and fails to show that the indebtedness in question falls outside the meaning of "other indebtedness". 5. That whether the source of respondent's income was the holding of investments or the business of trading in investments, its indebtedness to the bank was indebtedness of a capital nature and the interest in question was interest on such indebtedness and its deduction from income prohibited by s. 70(1) of the Act. APPEAL under the Income Tax Act. The appeal was heard before the Honourable Mr. Justice Thurlow at Halifax. T. E. Jackson and E. E. Campbell for appellant. H. B. Rhude and G. A. Caines for respondent.
Ex C R. EXCHEQUER COURT OF CANADA [1964] 39 The facts and questions of law raised are stated in the 1963 reasons for judgment. MINISTER OF NATIONAL THURLOW J. now (April 19, 1963) delivered the following REVENUE judgment: PENINSULAR INVEST- This is an appeal by the Minister from a judgment of the MENTS LIMITED Tax Appeal Board' allowing the respondent's appeal and vacating an assessment of income tax for the year 1959. The appeal raises a question on the interpretation of s. 70 (1) of the Income Tax Act, R.S.C. 1952, c. 148, the issue being whether the respondent, a non-resident-owned investment corporation as defined in s. 70(4), is entitled in computing its income to deduct an amount of $22,402.12 which it paid to its bank in the year for interest on the debit balance from time to time outstanding on its current account. Section 70 of the Act which deals with the taxation of non-resident-owned investment corporations occurs in Division H entitled "Exceptional Cases and Special Rules". By it provision is made for a special tax rate of 15% on the taxable income of a corporation which can qualify under its definition and elects to do so but while this rate of tax is lower than would otherwise be applicable, the section prescribes certain modifications in the computation of the income and the taxable income of the corporation which may result in it being disadvantageous for the corporation to be taxed under it rather than under the other provisions of Part 1 of the Act. As applicable to the year 1959 s-s. (1) of s. 70 read as follows: 70(1) In computing the taxable income of a non-resident-owned investment corporation for a taxation year, notwithstanding Division C, no deduction may be made from its income for the year, except (a) dividends and interest received in the year from other non-resident-owned investment corporations, and (b) taxes paid to the government of a country other than Canada in respect of any part of the income of the corporation for the year derived from sources therein, and in computing its income no deduction shall be made in respect of interest on its bonds, debentures, securities or other indebtedness. The appeal turns on whether the interest in question was interest on the respondent's "bonds, debentures, securities or other indebtedness" within the meaning of this provision. 128 Tax A.B C. 161.
40 R.C. de l'É. COUR DE L'ÉCHIQUIER DU CANADA [1964] 1963 By s-s. (4) of s. 70 as applicable to the year 1959 a non- MINISTER OF resident-owned investment corporation was defined as NATIONAL REVENUE meaning V. PENINSULAR a corporation incorporated in Canada that during the whole of the taxa-INVEST- tion year in respect of which the expression is being applied complied L M IM E IT N E T D S with the following conditions: (a) at ],east 95% of the aggregate value of its issued shares and all of Thurlow J. its bonds, debentures and other funded indebtedness were (i) beneficially owned by non-resident persons, (ii) owned by trustees for the benefit of non-resident persons or their unborn issue, or (iii) owned by a corporation, whether incorporated in Canada or elsewhere, at least 95% of the aggregate value of the issued shares of which and all of the bonds, debentures and other funded indebtedness of which were beneficially owned by nonresident persons or owned by trustees for the benefit of nonresident persons or their unborn issue or by several such corporations; (b) its income was derived from (i) ownership of or trading or dealing in bonds, shares, debentures, mortgages, hypothecs, bills, notes or other similar property or any interest therein, (ii) lending money with or without security, (hi) rents, hire of chattels, charterparty fees or remunerations, annuities, royalties, interest or dividends, or (iv) estates or trusts; (ba) not more than 10% of its gross revenues was derived from rents; (c) its principal business was not (i) the making of loans, or (ii) trading or dealing in mortgages, hypothecs, bills, notes or other similar property or any interest therein; (d) it has, not later than 90 days after the commencement of the taxation year, elected m prescribed manner to be taxed under this section; and (e) it has not, before the taxation year, revoked in a prescribed manner the elections so made by it. It may be noted at this point that a corporation of the kind defined may derive its income from the simple holding of investments or from the carrying on of a business or businesses of the kind contemplated by clauses (b), (ba) and (e) of the definition. I turn now to the facts. On the hearing of the appeal no evidence was offered by either party but a written agreement as to facts was filed and it was agreed by counsel that this together with the respondent's income tax return for the year including the financial statements attached thereto, the notice of assessment, the respondent's notice of objec-
Ex. C.R. EXCHEQUER COURT OF CANADA [1964] 41 tion, the Minister's notification in reply and the admitted 1963 fact that the respondent was incorporated under the laws MINISTER of of Nova Scotia would constitute the material upon which REVENUE the appeal should be determined. V. PENINSULAR The agreement as to facts is short and rather than INVEST- MENTS attempt to paraphrase it, I shall quote it in full. LIMITED 1. At all times during the taxation year 1959 the Taxpayer was a Thurlow J non-resident-owned investment corporation as defined in Section 70(4) of the Income Tax Act. 2. The 1959 taxation year of the Company ended April 30, 1959. 3. The financial statements of the Taxpayer for the year ended April 30, 1959, disclose no bonds, debentures or securities issued by the Taxpayer. 4. During the taxation year 1959 the Taxpayer borrowed money from the Agent of The Bank of Nova Scotia at 37 Wall Street, New York, U S A., for the purpose of purchasing investments. 5. On April 30th, 1959, the Company owed the Bank on current account the sum of $445,832 21 (U S) which had been used by it to purchase investments. During the 1959 taxation year the Company paid interest to the Bank on the debit balance from time to time outstanding in its current account in the amount of $22,402.12. 6. The investments purchased by the Company with the money borrowed from the Bank on current account were lodged with the Bank under the terms of two agreements, copies of which are attached hereto. 7. By Notice of Assessment dated February 11, 1960, the Minister of National Revenue assessed the Taxpayer for tax in the sum of $11,352 80 and in so doing treated the interest payment of $22,402 12 as a charge not properly deductible in the computation of income. 8. On or about the 6th day of May, 1960, the Taxpayer filed with the Minister of National Revenue a Notice of Objection against its assessment dated the 11th day of February, 1960, in respect of income for the taxation year 1959. By Notice dated September 1, 1960, the Minister of National Revenue confirmed the said assessment. 9. On or about the 29th day of September, 1960, the Taxpayer filed a Notice of Appeal to the Tax Appeal Board against the confirmation of the said assessment by the Minister of National Revenue. This appeal was subsequently heard and was allowed by the Tax Appeal ,Board on a Judgment dated November 20, 1961. To this were attached copies of two agreements between the respondent and the Bank of Nova Scotia hypothecating certain securities to the bank as security for any indebtedness of the respondent to the bank. The earlier of these agreements was dated October 24, 1957 that is, prior to the commencement of the taxation year, and the later Decem-ber 11, 1958.
42 R.C. de 1'É. COUR DE L'ÉCHIQUIER DU CANADA [1964] 1963 The balance sheet which accompanied the respondent's MINISTER OF income tax return for the year in question indicates that NA E T V IO E NA N L U R E o ' n A prril 30 7 the r res p o o n ndent had assets totalling P $754,046.88 of which $752,560.43 was represented by invest- ENI NsuLAa INVEST- ments in stocks and bonds. The shareholders' equity in the MENTE LIMITED com l p ~ a n y y at that date consisted of $10 f 000 in paid upshare — ThurlowJ. capital and $68,292.83 in earned surplus. Liabilities totalled $675,754.05 and included what was referred to as a deferred liability of $198,317.36, the respondent's overdraft at the Bank of Nova Scotia in New York of $445,314.71 and a number of other smaller liabilities. Included with the statements accompanying the return was one entitled "Statement of Investment Income and Expenditures" which showed under Revenue Dividends $ 5,852.00 Bond Interest 57,368.75 Premium on Exchanges 11,698.64 Profit on Sale of Investments 1,376.34 Sundry Interest 3.70 $ 76,299.43, and under Expenditures the following: Interest Bond charges and Brokerage fees $ 22,700.15 Miscellaneous expenses 174.34 $ 22,874.49 Also included with the statements were schedules entitled "Schedule of Share Investments and Income Thereon" and "Schedule of Bond Investments and Income Thereon". The first of these showed investments held at the beginning of the year totalling $188,575 in shares of 18 companies, purchases of shares in two other companies during the year amounting to $14,835 and no disposals during the year, leaving investments held at the end of the year totalling $203,410 in shares of 20 companies. The schedule of bond investments listed 15 investments on hand at the beginning of the year totalling '$703,574, 14 additions during the year totalling $325,626.42 and six disposals during the year totalling $481,426.33, leaving investments on hand at the end of the year totalling $549,150.43. Five of the six disposal transactions related to investments which were on
Ex C R. EXCHEQUER COURT OF CANADA [1964] 43 hand at the beginning of the year and three of these resulted 1963 in gains totalling $4,319.22 while the other two resulted in M INISTER OF I losses totalling $4,224.14 leaving a net gain of $95.08. The REV ENDE other disposal was of an investment acquired during the PENI NSULAR year and it resulted in a gain of $1,281.26 making with the INVEST- $95.08 the amount of $1,376.34 which as previous4y men- LIMITED tioned appeared in the Statement of Investment Income Thurlow J. and Expenditures. The one investment which was acquired and disposed of during the year amounted to $48,781.24 and 10 of the investments held at the beginning of the year totalling $272,305.25 were still on hand at the end of the year. There is no other indication of how long any of the bond investments were held but combining the figures for shares and bonds it becomes apparent that the respondent continued to hold at the end of the year investments in shares of 18 companies and in 10 issues of bonds totalling $460,880.25 all of which had been on hand at the beginning of the year and which exceeded by a considerable amount the shareholders' equity in the company and the deferred loan. It would seem to follow as a matter of inference that a substantial portion at least of the overdraft in question was outstanding at the beginning of and throughout the year. There was no explanation of the revenue item of $11,698.64 entitled "Premium on Exchanges". In the return itself on the line provided on p. 1 for a statement by the tax- payer of the nature of its business the answer given is "non- resident-owned investment corporation". There appears to be nothing further in the return or the financial statements which accompanied it or in the other material before the Court to indicate that the respondent was actually engaged in any business and the material as a whole leaves me unsatisfied that the respondent was engaged in a business as opposed to merely holding investments and changing them from time to time as occasion to do so arose. More- over even if the respondent should be regarded as having been engaged in a business of trading in investments dur- ing the year the material does not indicate the manner in which the transactions were carried out or what the ordinary course of the business involved. The Minister's case for disallowing the deduction of the interest in question is that the amount in question is interest on the respondent's "securities or other indebtedness" within
44 R.C. de l'É. COUR DE L'ÉCHIQUIER DU CANADA [19647 1963 the meaning of the prohibition of s. 70(1). His argument in MINISTER OF support of this contention was that the scheme of the Act NATIONAL REVENUE was such as to indicate an intention to tax the non-resident- v PENINSULAR owned investment corporation on the same basis as non- INVEST- residents are taxed by s. 106 on dividends, interest, rents, MENTE LIMITED ro Y y alties , , etc., and that in anycase the onlyg enus sug g g g e sted by the words bonds,' debentures and securities in s. 70(1) ThnrlowJ. was that of secured indebtedness which was exhausted by the three words themselves leaving the words "other indebtedness" to . be ; given their broadest meaning which would include the overdraft in question. The respondent on the other hand submitted that the overdraft was obviously not indebtedness on bonds or debentures, that though the bank held security for the overdraft it was not indebtedness on "securities" within the ordinary meaning of the word in the context in which it is found, and that the amount was not interest on "other indebtedness",within the meaning of s. 70 (1) because the scope of that expression was as a matter of interpretation limited by the e jusdem generis rule to other indebtedness like that upon bonds, debentures and securities and the overdraft was not an indebtedness of that kind. In support of his contention counsel argued that if the legislative intention was to prohibit the deduction of interest paid on all indebtedness it would have been easy to say so in a word or two and there would have been no occasion first to single out bonds, debentures and securities and then to follow this enumeration with the expression "or other indebtedness" and he went on to submit that the overdraft in question did not have the attributes of bonds, debentures or securities, that it_ was merely a current liability on an open account, an overdraft and part of the circulating capital of the company, that its amount was not formalized by an instrument, and that the time for repayment was not fixed, all of which distinguished it from indebtedness like that on bonds, debentures and securities. In approaching the question of the interpretation to be put upon the words of s. 70 (1) it is, I think, important to bear in mind several things which are part of the setting in which the subsection is found. The first of these is that the Income Tax Act is a statute which imposes a tax on income and that in applying it the distinction between receipts and disbursements of an income nature and receipts
Ex. C.R. EXCHEQUER COURT OF CANADA [1964] 45 and disbursements of a capital nature is one of general 1963 importance, The second is that by s. 4 ,g of the Act income MINISTER OF from a business or,pro NATIONAL Y p ert Y i s declared, subj ect to the other REVENIIE provisions of Part 1 of the Act, to be the profit therefrom PENINSULAR for the year. The third is that while express provisions with INVEST- resp p e e c t t to the deduction of interest payments in computing MENTS p g LIMITED the income of a taxpayer for the purposes of Part 1 of the Thurlow J Act are contained in paragraphs (c) and (ca) of s-s. (1) of s. 11, such payments would not ordinarily enter into a computation of the profit either from a property or from a business except in cases falling within the principle of Farmer v. Scottish North American Trust Ltd.' where the incurring. of the liability to pay the interest is itself an ordinary incident of the business. In Bennett & White Construction Co. Ltd. v. M.N.R.2, a case which arose under the Income War Tax Act Rand J. put the matter thus at p. 292: The acquisition of capital may be by various methods including stock subscriptions, permanent borrowings through issues of securities, or term loans; and ordinarily it should make no difference in taxation whether a company carried on financially by one means or another. In the absence of statute, it seems to be settled that to bring interest paid on temporary financing within deductible expenses requires that the financing be an integral part of the business carried on. That is exemplified where the transactions are those of daily buying and selling of securities: Farmer v. Scottish North American Trust [1912] A.C. 118; or conversely lending money as part of a brewery business: Reid's Brewery v. Mail [1891] 2 Q.B. 1. Now the Crown has allowed the deduction of interest paid to the bank, and it must have been either on the footing that the day-to-day use of the funds was embraced within the business that produced the profit, or that the interest was within section 5, paragraph (b). It may also be well to note at this stage that what may be deducted under s. 11(1) (c) in computing the income of a taxpayer for the purposes of Part 1 of the Act is interest on (i) borrowed money used for the purpose of earning. income from a business or property; 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; and that what is deductible under s. 11(1) (ca) is interest on an amount that would be deductible under para. (c). These provisions are no doubt broad enough to authorize the 1 [19127 A.C. 118. 2 [19497 S C.R. 287.
46 R.C. de l'É. COUR DE L'ÉCHIQUIER DU CANADA [1964] 1963 deduction in computing the income of a taxpayer of both MINISTER OF interest which would be deductible under the principle of NATIONAL REVENUE Farmer v. Scottish North American Trusts in computing the PENI vs profit from a business and other interest, such as interest in uLnR INVEST- respect of capital invested in the business, as well but the MENTS LIMITED distinction between interest of the former kind which is a — business expense and the latter which is a capital expense Thurlow J. nevertheless exists. Turning then to s. 70(1) it appears to me that the words "bonds", "debentures" and "securities" suggest a class of obligation which while generally arising from borrowings may arise from other types of transactions as well—which may account for the reference to "other indebtedness" in the words which follow "bonds, debentures, securities" rather than to the more restricted connotation of "other borrow-ings", and that indebtedness represented by the bonds, debentures and securities of a corporation ordinarily at least is indebtedness arising from the acquisition of capital assets or the raising of capital to be employed in its business rather than indebtedness of the kind incident to and incurred in the day-to-day transactions of the business. In my opinion this is the only limitation which the application of the ejusdem generis rule would impose on the broad ordinary meaning of the words "other indebtedness" for I am unable to discern in the context any sufficient reason for thinking that the fact that ordinarily obligations arising on bonds, debentures and securities are secured in some manner and are evidenced by formal documents which state the amount of the indebtedness and prescribe a fixed time for payment and a fixed rate of interest should be held to limit the meaning of the words "other indebtedness" in s. 70 (1) to obligations so secured or evidenced. In the present case, the material before the Court, in my opinion, does not show that the indebtedness in respect of which the interest in question was paid falls outside the meaning of "other indebtedness" in s. 70 (1) as so interpreted. It could fall outside such meaning only if the respondent was in fact engaged in a business in which the financing of its transactions was itself an integral part and as previously mentioned it does not clearly appear from the material that the respondent was engaged in a business at 1 [1912] A.C. 118.
Ex. C.R. EXCHEQUER COURT OF CANADA [1964] 47 all and even less does it appear that it was engaged in a 1963 business in which the financing of the transactions was an MINISTER or integral part. For this purpose the submission that the uE moneys in respect of which the indebtedness arose were 1,ENIxs ulnR used as circulating capital if correct in my opinion disposes INVEST- of the matter in favor of the Minister since money used as LIasT ED circulating capital is nevertheless capital (vide European ThurlowJ Investment Trust Co. Ltd. v. Jacksons) and may itself be — raised through the issue of bonds, debentures and securities as well as in other ways including other types of borrowing. In the view I take of the facts while the overdraft may have been of uncertain and in that sense temporary dura- tion because no time for repayment had been set, the mate- rial is just as consistent with the view that the respondent was simply engaged in holding investments paid for largely with capital borrowed from the bank and changing them from time to time as occasion arose as with the view that it was engaged in trading in investments. It is thus in my view not established that the respondent was engaged in a business at all. But even if contrary to this view the respondent's purchases, holding and sales of investments indicate the carrying on of a business of trading in such investments, having regard to the size of the amounts, other than those borrowed on overdraft, which were available to the respondent as capital for the carrying on of such a busi- ness on the scale indicated and having regard also to the absence of evidence that the investments were being actively traded by the respondent rather than held for lengthy periods it appears to me that the proper inference to draw is that the moneys borrowed on the overdraft were obtained and employed not as mere temporary accommodations in- cidental to the carrying on of a business of which the obtain- ing of such accommodations was an integral part but were in truth moneys obtained and employed as additional cir- culating capital in the business. Thus whether the source of the respondent's income is regarded as the holding of investments or as a business of trading in investments the amount in question was interest on indebtedness of a capital nature the deduction of which in computing its income was prohibited by s. 70 (1) if the respondent was to be taxed as 1 (1932) 18 T.C. 1.
48 R.C. de l'É. COUR DE L'ÉCHIQUIER DU CANADA [1964] 1983 a non-resident-owned investment corporation. I am accord- MINISTER of ingly of the opinion that no error in the assessment has been NATIONAL REVENUE established. V. PENINSULAR The appeal will therefore be allowed and the assessment INVEST- restored. The a p p p p e llant is entitled to his costs of appeal. LIMITED ThurlowJ. Judgment accordingly.
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.