Digests

Canada v. Gifford

A-191-01

2002 FCA 301, Rothstein J.A.

12/8/02

33 pp.

Judicial review of decision of Tax Court of Canada (2001 D.T.C. 168) allowing taxpayer's appeal--First issue: whether amount paid to fellow employee under Agreement to Purchase Client Base of Financial Advisor (client list) deductible current expense or non-deductible payment on account of capital (capital expense) pursuant to Income Tax Act, s. 8(1)(f)(iv), (v) --Second issue: whether interest on money borrowed for purchase of client list deductible current expense or non-deductible capital expense--Taxpayer purchasing client list from fellow employee--Deducting percentage of purchase price and amount for interest and insurance as current expenses for taxation year--MNR disallowing deductions--Deductions permitted for amounts spent for purpose of earning income (Income Tax Act, s. 8(1)(f)), but capital expenses not deducti-ble (s. 8(1)(f)(v))-- Minister conceding but for s. 8(1)(f)(v), taxpayer meeting all requirements of s. 8(1)(f)-- Payment, interest, insurance all capital expenses, therefore not deductible--Tax Court finding amount paid for purchase not for asset or advantage for enduring benefit of trade--Part of recurring expense, therefore current marketing expense and deductible--Tax Court distinguishing case law on basis taxpayer and vendor employees of company--Court unable to distinguish cases; case law holding payment for client list capital expenditure-- Application of tests in John-Mansville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46 yielding different conclusion than that reached by Tax Court--Tests tend to show payment herein for capital asset--No reason to distinguish on basis of employment status; no reason that expenditure may be capital if made by business owners but marketing expense if made by employees--Employer's involvement in transaction not affecting character of payment--Tax Court Judge erring in distinguishing case law--Interest on money borrowed non-deductible capital expenditure: Supreme Court case law, Income Tax Act interest deductibility code preclude deductibility--But for case law and legislation, interest should be current expense--Tax Court precluded from finding interest current expense: Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; Canada Safeway Limited v. The Minister of National Revenue, [1957] S.C.R. 717; Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32--May be time for Supreme Court to revisit question whether interest capital or current expense: Shell (supra); Tennant v. M.N.R. [1996] 1 S.C.R. 305--But lower courts must respect common law until question revisited--Tax Court proposing interest takes on character of principal amount; this Court does not agree, in any case found principal to be capital expense-- Language of Parliament indicating interest capital expense-- Income Tax Act, ss. 8(1)(j), 20(1)(c), other provisions constituting complete code for deductibility of interest at least where borrowing for capital purpose--Parliament has not repudiated Supreme Court case law on deductibility of interest--Regard must be paid to purpose of borrowing or use of funds during relevant period: Wharf Properties Ltd. v. Commr. of Inland Revenue, [1997] 2 W.L.R. 334 (P.C.), but does not necessarily follow that interest on money borrowed for capital purpose always capital expense and interest on money borrowed for current expense always current expense-- Generally, interest paid on amount used to create asset included in other expenditures, therefore capital expense--But need to look at purpose of loan for relevant period--But for Income Tax Act and Supreme Court case law, interest paid by taxpayer should be treated as current expense and therefore deductible--Appeal allowed--Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, ss. 8(1)(f)(iv), (v), (j), 20(1)(c).