T-6486-81
Geoffrey Sterling (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Rouleau J.—Montreal, April 19;
Ottawa, April 29, 1983.
Income tax — Income calculation — Deductions — Gold
bullion purchased with borrowed money and held for purchas
er under safe-keeping arrangements — Capital gain on dispo
sition — Appeal from Minister's decision disallowing deduc
tion of interest and safekeeping charges related to acquisition
and disposition of gold — Plaintiff arguing charges deductible
as part of costs before disposition — Crown submitting deduc
tions unavailable as situation similar to acquisition and dispo
sition of automobile or summer cottage where carrying charges
not deductible and as charges not specifically provided for in
Act — Pursuant to Interpretation Act, capital gains tax provi
sion given liberal interpretation best ensuring attainment of
object: to tax actual gain — If deduction of costs not allowed
in present case, more than actual gain taxed — Case law
treatment of capital costs of property incorporated into busi
ness or property acquired to produce income considered —
Interest and safe-keeping charges exclusively attributable to
gain from acquisition and disposition of gold — Appeal
allowed — Income Tax Act, S.C. 1970-71-72, c. 63, ss. 3,
18(1)(h), 38(a), 40(1)(a)(î), 53(1)(h), 54(a), 177 — Interpreta
tion Act, R.S.C. 1970, c. I-23, s. 11.
CASES JUDICIALLY CONSIDERED
DISTINGUISHED:
Tuxedo Holding Co. Ltd. v. Minister of National Reve
nue (1959), 59 DTC 1102 (Ex. Ct.); The Queen v.
Canadian Pacific Limited, [1978] 2 F.C. 439; 77 CTC
606 (C.A.); The Lord Mayor, Aldermen and Citizens of
the City of Birmingham v. Barnes (Inspector of taxes),
[1935] A.C. 292 (H.L.); Metropolitan Properties Co.
Limited v. The Minister of National Revenue (1982), 82
DTC 1258 (T.R.B.); Georgia Cypress Co. v. South
Carolina Tax Commission, 22 S.E. (2d) 419 (1942)
(Sup. Ct. S.C.); Fraser v. Commissioner of Internal
Revenue (1928), 25 F.(2d) 653 (2d Cir.).
CONSIDERED:
The Minister of National Revenue v. T. E. McCool
Limited, [1950] S.C.R. 80; Sherritt Gordon Mines, Lim
ited v. The Minister of National Revenue, [1968] 2
Ex.C.R. 459; 68 DTC 5180.
COUNSEL:
Bruce Verchère and- Mario F. Ménard for
plaintiff.
Jacques Côté for defendant.
SOLICITORS:
Verchère, Noël & Eddy, Montreal, for
plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
ROULEAU J.: The plaintiff, during the ,years
1971 through 1975, acquired gold bullion and
disposed of it in the years 1972 and 1975. The
capital gain was declared, less carrying charges
related to the financing of the acquisition as well
as safe-keeping charges. Both were disallowed by
the Minister. Exhibits 2 and 3 filed, are agreed
statements of facts elaborating the preceding
summary.
The question that arises in this appeal, is whe
ther, in computing the capital gain from the dispo
sition, there may be deducted only the price paid
for the bullion; or, may he also deduct the interest
paid on the money owed to the vendor, subsequent
to the purchase, during the period the plaintiff
held the gold; as well as safe-keeping charges paid
by him. We shall be discussing throughout The
Consolidated Income Tax Act 1975-76.
Pursuant to section 3 of the Income Tax Act
[R.S.C. 1952, c. 148, as am. by S.C. 1970-71-72,
c. 63, s. 1], there is a requirement to declare and
pay tax on capital gains, when the income earned
is not as defined under paragraph 3(a):
3. The income of a taxpayer for a taxation year for the
purposes of this Part is his income for the year determined by
the following rules:
(a) determine the aggregate of amounts each of which is the
taxpayer's income for the year (other than a taxable capital
gain from the disposition of a property) from a source inside
or outside Canada, including, without restricting the general
ity of the foregoing, his income for the year from each office,
employment, business and property;
(b) determine the amount, if any, by which
(i) the aggregate of his taxable capital gains for the year
from dispositions of property other than listed personal
property, and his taxable net gain for the year from
dispositions of listed personal property.
Paragraph 38(a) provides that the taxable capital
gain is one half of the gain derived from the
disposition of any property:
38. For the purposes of this Act,
(a) a taxpayer's taxable capital gain for a taxation year from
the disposition of any property is y of his capital gain for the
year from the disposition of that property; ...
Subparagraph 40(1)(a)(i) defines gain as the pro
ceeds of disposition;
40. (1) Except as otherwise expressly provided in this Part
(a) a taxpayer's gain for a taxation year from the disposition
of any property is the amount, if any, by which
(i) if the property was disposed of in the year, the amount,
if any, by which his proceeds of disposition exceeds the
aggregate of the adjusted cost base to him of the property
immediately before the disposition and any outlays and
expenses to the extent that they were made or incurred by
him for the purpose of making the disposition, ...
Paragraph 54(a) provides for the general rules
governing "adjusted cost base":
54....
(a) "adjusted cost base" to a taxpayer of any property at any
time means, except as otherwise provided,
(i) where the property is depreciable property of the
taxpayer, the capital cost to him of the property as of that
time, and
(ii) in any other case, the cost to the taxpayer of the
property adjusted, as of that time, in accordance with
section 53,
except that
(iii) for greater certainty, where any property of the
taxpayer is property that was reacquired by him after
having been previously disposed of by him, no adjustment
to the cost to him of the property that was required to be
made under section 53 before its reacquisition by him shall
be made under that section to the cost to him of the
property as reacquired property of the taxpayer, and
(iv) in no case shall the adjusted cost base of any property
at the time of its disposition by the taxpayer be less than
nil;
Section 53 provides for computing the adjusted
cost base of property: there shall be added to the
cost such amounts described in subsection (1) that
are applicable; and there shall be deducted the
amounts described in subsection (2).
The Plaintiff submits that when gold is pur
chased with borrowed money, held for a period of
time under safe-keeping arrangements, that costs
before disposition not only include the price paid
for the gold, but also the interest on the borrowed
money together with safe-keeping charges.
The Minister argues that the latter cannot be
added to make up the adjusted cost, because they
are not provided for under the Income Tax Act.
Counsel for the Minister referred to a series of
authorities: Tuxedo Holding Co. Ltd. v. Minister
of National Revenue (1959), 59 DTC 1102 (Ex.
Ct.); The Queen v. Canadian Pacific Limited,
[1978] 2 F.C. 439; 77 CTC 606 (C.A.); The Lord
Mayor, Aldermen and Citizens of the City of
Birmingham v. Barnes (Inspector of Taxes),
[1935] A.C. 292 (H.L.), as well as some American
rulings: Metropolitan Properties Co. Limited v.
The Minister of National Revenue (1982), 82
DTC 1258 (T.R.B.); Georgia Cypress Co. v.
South Carolina Tax Commission, 22 S.E. (2d)
419 (1942) (Sup. Ct. S.C.); Fraser v. Commis
sioner of Internal Revenue (1928), 25 F.(2d) 653
(2d Cir.).
I have reviewed these authorities and they do
not appear to address the issue which is being
litigated. They demonstrate, in various factual sit
uations, how they arrive at determining whether
monies applied to the acquisition and disposition of
property was "capital cost" or whether it should be
considered a "business expense". Counsel for the
Minister submits that the acquisition and disposal
of gold bullion is akin to a taxpayer acquiring and
financing an automobile or a summer cottage.
Upon the disposition of these items, one cannot
deduct the carrying charges incurred. I find the
analogy irrelevant, since the examples used are not
of the same class and they are provided for specifi
cally under paragraph 18(1)(h)' of the Income
Tax Act.
The Plaintiff suggests that allowing the expense
of the cost of the money and safe-keeping is a fair
reading of the statutory provisions. Though the
matter being litigated is not specifically dealt with
under the Income Tax Act, he submits that by
' paragraph 18(1)(h):
18. (1) ...
(h) ... personal or living expenses of the taxpayer except
travelling expenses (including the entire amount expended
for meals and lodging) incurred by the taxpayer while
away from home in the course of carrying on his business;
section 11 of the Interpretation Act, one is
required, when reading an enactment that it:
"shall be given such fair, large and liberal con
struction and interpretation as best ensures the
attainment of its objects" (section 11 of the Inter
pretation Act, R.S.C. 1970, c. I-23). Only such an
interpretation could ensure the attainment of the
object of the capital gain tax provisions, which
were to bring all gains from disposition of property
into the income base for taxation purposes.
He submits that should I find that the Minister
may exclude such costs from the computation of
the gain, it would result in bringing something
more than the actual gain into the computation of
income; to that extent, the provision would fail in
the attainment of its object, which is to impose a
tax on "actual gain not otherwise subject to tax".
Capital costs of property incorporated into a
business or property acquired to produce income
seems to be well-settled. There is no doubt that
certain items may be added to the price paid for
the property as costs to the vendor; and certain
expenses after acquisition may be deducted upon
disposition.
In The Minister of National Revenue v. T. E.
McCool Limited, [1950] S.C.R. 80, at page 84,
Rand J. states that when an asset is acquired as
part of the capital structure of a business for a
price, plus interest on the unpaid portion thereof,
that interest was part of the "capital cost" to the
taxpayer. Rand J.: "What the vendor did was to
sell his property, for the consideration, in addition
to the shares, of a price plus interest; that interest
is part of the capital cost to the Company."
In Sherritt Gordon Mines, Limited v. The
Minister of National Revenue, [1968] 2 Ex.C.R.
459; 68 DTC 5180, at page 486 Ex.C.R. [page .
5195 DTC] Kerr J. states:
In the absence of any definition in the statute of the expres
sion "capital cost to the taxpayer of property" and in the
absence of any authoritative interpretation of those words as
used in section 11(1)(a) [now 20(1)(a)9, insofar as they are
being considered with reference to the acquisition of capital
2 My change.
assets, I am of opinion that they should be interpreted as
including outlays of the taxpayer as a business man that were
the direct result of the method he adopted to acquire the assets.
In the case of the purchase of an asset, this would certainly
include the price paid for the asset. It would probably include
the legal costs directly related to its acquisition. It might well
include, I do not express any opinion on the matter, the cost of
moving the asset to the place where it is to be used in the
business. When, instead of buying property to be used in the
business, the taxpayer has done what is necessary to create it,
the capital cost to him of the property clearly includes all
monies paid out for the site and to architects, engineers and
contractors. It seems equally clear that it includes the cost to
him during the construction period of borrowing the capital
required for creating the property, whether the cost is called
interest or commitment fee. 3
and continuing at page 487 Ex.C.R. [page 5196
DTC] :
The inclusion of interest during construction as part of the
capital cost of property within the meaning and for the pur
poses of section 11(1) (a) [now 20(1)a 4 ] may present problems
in some instances, but I do not think that an interpretation that
includes such interest is inconsistent with the scheme of the Act
or its capital cost allowance provisions. On the contrary, that
treatment of interest during construction should, I think, help
to accurately reflect the result of each taxation year's opera
tions and the profit therefrom for that year for both business
and income tax purposes, without unduly interfering with the
smooth working of the Act.
Interpretation Bulletin no. IT-174R seems to sum
marize it all and paragraph 1 states as follows:
1. The term "capital cost of property" generally means the
full cost to the taxpayer of acquiring the property. It includes
legal, accounting, engineering or other fees incurred to acquire
the property.
It is important to note that when the capital
gain provisions were added to the Income Tax Act
in 1972, the purpose was to make other incomes
subject to tax; one half of all gains from disposi
tion of property, to the extent that such gains
would not otherwise be included in the income that
is subject to tax. In so doing, land speculators
could no longer depreciate property or charge
expenses incurred against other income, but spe
cial provisions under paragraph 53(1)(h) provided
the necessary relief in arriving at their adjusted
cost base:
3 My underlining.
4 My change.
53. (1) ...
(h) where the property is land of the taxpayer, any amount
paid by him after 1971 and before that time pursuant to a
legal obligation to pay
(i) interest on borrowed money used to acquire the land, or
on an amount payable by him for the land, or
(ii) property taxes (not including income or profits taxes or
taxes imposed by reference to the transfer of property)
paid by him in respect of the property to a province or to a
Canadian municipality
to the extent that that amount was, by virtue of subsection
18(2), not deductible in computing his income from the land
or from a business for any taxation year commencing before
that time;
As Kerr J. puts it in the Sherritt Gordon Mines,
Limited (supra) at page 487 Ex.C.R. [page' 5196
DTC]:
On the contrary, that treatment of interest during construction
should, I think, help to accurately reflect the result of each
taxation year's operations and the profit therefrom for that
year for both business and income tax purposes, without unduly
interfering with the smooth working of the Act.
It is inconceivable to me that the spirit of the Act,
its smooth working and its interpretation would
not take into account the deductions from the gain
that are being claimed by this taxpayer. If we
carry the rationale to its extreme, I would like to
present the following example, submitted by coun
sel, which would focus on an obvious inconsistency:
a taxpayer acquires $100,000 worth of gold and
owes the vendor the entire sum; if, after two years
he has incurred $20,000 worth of interest charges
and sold the gold for $110,000, there would be a
net gain on the acquisition and disposition of the
property, half of which, being $5,000, would have
to be taken into additional income; his net loss
would be $10,000. This seems totally contrary to
the spirit and intent of the law. Had Parliament in
1972 foreseen the buying and selling of gold,
which is more prevalent today, I am sure additio
nal amendments would have been included in sec
tion 53. I agree with section 11 of the Interpreta
tion Act (supra) and give liberal construction and
interpretation, as best ensures the attainment of
the objectives of the Income Tax Act which I find
is to tax actual gain.
I therefore find that when the plaintiff pur
chased gold with borrowed money, held during a
period under safe-keeping arrangements, then sold
it, the cost incurred immediately prior to the dis
position is not only the price paid for the gold, but
the interest on the borrowed money for the period
which it was held, together with the safe-keeping
charges for the same period. The interest and
safe-keeping charges are together and exclusively
attributable to the gain derived from the acquisi
tion and the disposition of the property.
I therefore refer the matter back to the Minister
for reconsideration and reassessment, pursuant to
section 177 of the Income Tax Act, and to look to
Exhibit 3, one of the agreed statement of facts,
which outlines the calculations which were agreed
to by the parties at the outset.
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.