Singleton, Ludco, and the Deductibility of Interest

Singleton, Ludco, and the Deductibility of Interest

1 Introduction: 2
2 Facts: 2
2.1 Singleton: 3
2.2 Ludco: 3
3 Statute: 4
3.1 Structure of the Income Tax Act: 5
4 Interest: 5
4.1 Characterization of Interest: 6
4.2 Definition of Interest: 7
4.2.1 Use: 7
4.2.2 Purpose of Deducting Interest: 9
4.2.2.1 Reasonable Expectation of Profit: 10
4.2.3 Income Earning Requirement: 13
4.2.4 Net Income: 13
5 What Happened in Ludco and Singleton: 14
5.1 Elements of s. 20(1)(c)(i) 14
5.2 Income should be understood as Gross: 14
5.3 Purpose of Earning Income: 15
5.4 Use of Loan: 16
5.5 Recap: 17
6 How s. 20(1)(c)(i) should be understood: 17
6.2 Tax Planning Opportunities Arising From these Decisions: 18
Example 1: 18
Example 2: 19
Example 3: 19
7 The Department of Finance’s Draft Proposals Regarding the Deductibility of Interest and Other Expenses: 19
8 Future Considerations: 22
9 Bibliography. 23
9.1 Legislation: 23
9.2 Government Publications: 23
9.3 Jurisprudence: 23
9.4 Secondary Sources: 25

1 Introduction:

In recent years, the Federal Government tax policy has been under siege. The courts have whittled away at historic precedent, leaving a jurisprudential terrain unfriendly for the federal government.
The purpose of my paper is to specifically look at how the courts have carved a niche of tax planning under s. 20(1)(c)(i) of the Federal Income Tax Act[1] with the twin decisions of Singleton v. Canada[2]and Ludco Enterprises Ltd. v. Canada,[3] and how the stymied efforts of the federal governmental have left a gaping hole that may be difficult to close.
My paper will first describe the facts of Singleton and Ludco, and then provide a detailed analysis of the core understandings of the relevant parts of the ITA that I deal with. The paper then discusses what the Supreme Court of Canada (S.C.C.) decided in both cases, and analyzes both the tax planning opportunities that have arisen from the S.C.C. decisions, and the the governments attempted response.

2 Facts:
Singleton and Ludco are two cases jointly decided. The issue the Supreme Court dealt in theses case was: whether the money borrowed by the taxpayers was “used for the purpose of earning income from a business or property” within the meaning of s. 20(1)(c) of the ITA.
The facts of Ludco and Singleton are fairly straightforward. The following paragraphs summarize both cases.

2.1 Singleton:
John Singleton, partner of the law firm Singleton Urquhart LLP,[4] took out $300,000 of capital contributions he had invested in the firm, which accumulated without any borrowing. He used the $300,000 to purchase a house.[5]
He replenished his capital contributions by borrowing from a bank.[6] The interest he incurred on this bank loan was subsequently deducted from his income pursuant to s.20(1)(c)(i) of the ITA.[7]

John Singleton takes a bank loan of $300,000
-->
Singleton Urquhart LLP
John Singleton net capital contributions= $300,000
-->
$300,000 used to purschase a new home for John Singleton
John Singleton takes a bank loan of $300,000

The Minister of National Revenue disallowed Singleton to deduct his interest expense from his income on the premise that his borrowing was not done to earn income from a property; rather the transaction was a sham.[8] The Tax Court of Canada upheld the Minister’s finding, whereas the Federal Court of Appeal allowed the appeal, and allowed the interest expense to be deducted from Singleton’s personal income.

2.2 Ludco:
Between 1977 and 1979, Mr. Ludmer, the sole shareholder of Ludco Enterprises Ltd. (Ludco), invested heavily in two companies not resident of Canada or the United States,[9] on behalf of the appellants Ludco, and the Ludmer children.[10] The Ludmer children were the primary shareholders of Ludco.[11]
The two companies operated in investment funds: they invested in debt securities; reinvested the profits; and retained a small portion for the purpose of dividend distribution.[12] The companies were structured carefully (such as being incorporated in Panama, and headquartered in the Bahamas)[13] in order to avoid the application of the Foreign Accrual Property Income (FAPI) rules.[14]
Ludmer’s investment in these companies was financed by way of a long-term mortgage on a Ludco-owned shopping center.[15]
With the change of the FAPI rules in 1985, Ludco sold its investment in these companies.[16] From 1977 to 1985, Ludco earned $600,000 in dividends, incurred approximately $6 million in interest expenses, and received $9.24 million in capital gains.[17]
During the taxation years of 1981 to 1985, the appellants deducted their interest costs pursuant to s. 20(1)(c)(i)[18]. In 1986 and 1987, the Minister of National Revenue (M.N.R.) reassessed the appellants, and disallowed these deductions[19] because the borrowed money was not used “for the purpose of earning income from a business or property.”[20] M.N.R. argued that the real purpose of the investment was to defer taxes and convert income into capital gains.[21]
The Tax Court of Canada and the federal Court of Appeal upheld the M.N.R.’s reassessment.[22]

3 Statute:
Section 20(1)(c)(i) of the ITA states the following:

(1) Deductions permitted in computing income from business or property
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) Interest

an amount paid in the year or payable in respect of the year (depending on the method regularly followed by the taxpayer in computing the taxpayer's 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),

In order to show the requirements of s. 20(1)(c)(i), I will first describe the structure of the ITA, then define what interest is, and how it has been characterized by the relevant authorities.

3.1 Structure of the Income Tax Act:
It is important to know the structure of the ITA in order to understand how a taxpayer can deduct interest expenses under s. 20(1)(c)(i). The following is a brief summary.
The taxable income a taxpayer must declare is outlined under s. 3.[23] For example, the taxpayer must include all income from a business,[24] capital gains,[25] losses,[26] and allowable capital losses. [27]
Income from a business or property is calculated under Part I, sub-division B of the ITA. Capital gains or losses from a property are not counted as income.[28] S. 18(1)(b) of the ITA states no capital expenses or outlays may be deducted in the computation of business or property income with regards to s. 9 of the ITA. S. 20 of the ITA provides for the explicit capital deductions.
The difference between income or loss, and a capital gain or loss refers can generally be characterized as income that comes from a productive source as opposed to income is outside of that source.

4 Interest:
It is important to show how interest has been characterized in Canadian jurisprudence before analyzing what interest is.

4.1 Characterization of Interest:
Canadian jurisprudence characterizes interest as a capital expense rather than a current expense. The distinctions between current and capital expenses are as follows. Current expenses are expenses completely expended at the end of a given period, and capital expenses are expenses not completely attributable to any single period. Generally, one can determine a current expense by: the fact that it is small in relation to the asset at large; it is a cost that regularly occurs; and its purpose is to restore the original asset to its normal operating capacity.[29] A capital expense is where: the cost is large in relation to the asset being repaired or improved; the cost is not the kind that will regularly recur; and the purpose is to improve the quality of the asset substantially beyond its original condition.[30] An example of a current expense would be the pencils used up as office supplies in a year, where an example of a capital expense would be the change of a car engine. The difference between these two types of expenses is by how long the benefit of these expenses endures for the taxpayer.[31]
The S.C.C. held that interest is a capital expenditure[32] because a tax deduction for borrowed money would require a similar deduction for the imputed cost of equity.[33] Thus, the S.C.C. made their decision based on trying to treat like cases alike, rather than looking at the nature of the expense in order to determine whether an interest expense is a current or capital expense, which is clearly incorrect.[34]
The impact of this decision is critical to businesses in general as one cannot deduct any capital expenditure or outlay unless expressly permitted by the ITA,[35] and more specifically, s. 20 of the ITA.

4.2 Definition of Interest:
The word ‘interest’ is not defined in the ITA. It is generally accepted that interest is “the return of consideration or compensation for the use or retention by one person of a sum of money, belonging to, in a colloquial sense, or owed to another.”[36]
In order for a person to deduct interest payments from their personal income under s. 20(1)(c)(i)[37], the interest must: a) represent consideration or compensation for the use or retention of borrowed money;[38] b) be referable to a principal sum (the CRA generally takes the position that the amount must normally be expressed as a percentage of that principal sum); c) and must accrue on a day-to-day basis.[39]
Because interest is recognized as a capital expense, one can only deduct interest if they: a) use; b) for the purpose; c) of earning income.[40]
The next part of my analysis focuses on what the definitions of the above three requirements are, and will discuss how the Canada Customs Revenue Agency has historically dealt with and interpreted these terms.

4.2.1 Use:
The court has been unclear on when the use of a loan to earn income can be deducted under s. 20(1)(c)(i). The following analysis compares and contrasts the two pertinent views on when a transaction can be deducted under s. 20(1)(c)(i).
The courts and the C.R.A. have historically interpreted that in order for interest to be deductible, the amount borrowed must be directly used for the purposes of earning an income from a business or property.[41]
The S.C.C. looked at the issue of direct and indirect use in The Queen v. Phyllis Barbara Bronfman Trust.[42] The trustees borrowed money to make capital allocations to the beneficiary of the trust rather than liquidate certain capital properties in the trust, which the trustee felt was commercially inadvisable. The taxpayer argued that although the borrowed money was used to make the distribution to the beneficiary, it was also used for the purpose of earning income from property because the distribution permitted the trust to retain its income-producing assets.
The S.C.C rejected this argument, and held that the current and direct use of the borrowed money (the distribution to the beneficiary) was not an eligible use, so that the interest expense incurred on the borrowing was not deductible. The S.C.C. held that the interest paid on the borrowed money was not deductible. It was only the direct use to which a taxpayer put borrowed money, and not an indirect use that determined whether the interest payment would be deductible. The S.C.C. stated that “the jurisprudence has generally been hostile to claims based on indirect, eligible uses when faced with direct, eligible uses when faced with direct but ineligible uses of borrowed money.[43]
In obiter, the S.C.C continued to say that the taxpayer may not be allowed to deduct interest payments on borrowed money used to purchase income-producing assets if, shortly before the purchase, the taxpayer sold an income-producing asset and made the capital distribution to the beneficiary. This type of transaction may be considered a sham designed to “conceal the commercial reality of the transaction, namely, the borrowing of money to fund a capital distribution to the beneficiary.”[44]
However, the S.C.C. did not explicitly rule out this type of transaction. This is important to note as existing case law supports this proposition in Trans-Prairie Pipelines Ltd. V. M.N.R.[45] The corporate taxpayer used borrowed money to redeem some of its issued and outstanding shares. Despite the fact that the money was not directly employed in earning income, President Jackett of the Exchequer Court held that the borrowed money replaced the capital obtained in the issuance of the shares. The rationale behind the court’s ruling was that if the redemption of shares of the capital of a corporation is not itself a direct eligible use of borrowed money, it can qualify as an eligible use for the purposes of s. 20(1)(c) to the extent that the share capital was employed in an eligible use.[46]
In Shell Canada v R.,[47] the S.C.C. did not address these issues raised above, but stated that if there is no sham or window dressing of the transaction, then the substance of a particular transaction can never supplant a court's duty to apply a plain and clear provision to the transaction.[48] In the absence of a specific statutory bar to the contrary, taxpayers are allowed to structure their affairs so as to minimize tax.[49]

4.2.2 Purpose of Deducting Interest:
Under s. 20(1)(c)(i) of the ITA, three sets of jurisprudence exist in determining whether a purpose exists for earning income: bona fide purpose test, the dominant purpose test, and the reasonable expectation of profit test. I will look at each of these three types of jurisprudence, as neither of them were conclusive before Ludco and Singleton.

Bona Fide Purpose Test:
The Bona Fide purpose test was advocated in the obiter of Bronfman. The facts are described above. Justice Dickson states:
It seems to me that, at the very least, the taxpayer must satisfy the Court that his or her bona fide purpose in using the funds was to earn income.[50]

Dickson’s rationale was saying that in order for a taxpayer to deduct their interest expense, they must at least have an intention to earn income. Use of the modifier bona fide implies that the purpose of earning income can reasonably ascertained. Dickson rationalized that Bronfman did not have any intention of earning income because of the following fact:

In 1970, the interest costs on the $2,200,000 of loans amounted to over $110,000 while the return from an average $2,200,000 of Trust assets (the amount of capital "preserved") was less than $10,000. The taxpayer cannot point to any reasonable expectation that the income yield from the Trust's investment portfolio as a whole, or indeed from any single asset, would exceed the interest payable on a like amount of debt.[51]

From these facts, one can clearly see that the investor was not looking for an income, but more of an investment for the future.

Dominant Purpose Test:
S. 20(1)(c)(i) of the ITA requires that the interest expense sought to be deducted be on "borrowed money used for the purpose of earning income from a business or property."[52]
This principal is explained in Tennant v. M.N.R..[53] In Tennant, the taxpayer borrowed 1 million to purchase shares (1$ per share). The shares were an income earning property, thus the loan was deductible (s. 20(1)(c)). Using a rollover provision, he exchanged those shares for other shares worth $1000 at fair market value. M.N.R. argued that only $1000 could now be traced to an eligible use, thus only the interest payment on $1000 should be deductible. The issue that was to be determined was whether the taxpayer could continue to deduct the interest on the entire principal sum of $1 million?

The S.C.C. held that the full amount of the loan was deductible, because it was only an exchange of shares from one eligible income earning use to another. The ability to deduct the full amount of the interest depends on the use to which the proceeds of the loan, or any property substituted for the proceeds, are put.[54] Fluctuations in property are irrelevant. The interest deduction was based on the amount of the loan, not on the value or cost of the replacement property. Thus, the S.C.C. rationale was that the purpose of the loan was to earn income.

4.2.2.1 Reasonable Expectation of Profit:

It is important to note that the S.C.C. has also advocated that earning income is not the only purpose that may count for the deductibility of interest. The S.C.C. has viewed that an enterprise which has a “reasonable expectation of profit” on income generated through a loan may also deduct those expenses. This will be shown in the following paragraphs.
The phrase “reasonable expectation of profit” was first added to the Income Tax Act in a 1939 amendment seeking distinguish “personal and living expenses” from business expenses. The amendment carved out expense areas that would not be tax deductible under the Act. The rationale of the policy was to structure the tax system in a manner that rewarded genuinely business-minded risks without subsidizing the personal or lifestyle choices of taxpayers.
The reasonable expectation of profit test was established (for our purposes) in comments made in obiter in Moldowan v. The Queen.[55] In order to have a ‘source of income’ there must be a reasonable expectation of profit (REOP). Following this decision there have been two approaches to REOP – application of the test as a general requirement for taxpayer activities as opposed to application only where there is a personal or hobby aspect to the activity that would call into question its commercial nature.
In order for income to be taxable, it must come from a “source” such as business, property, office, or employment. “Source” is not defined under the ITA, and courts have interpreted its meaning. The interpretation of “source” is very important to taxpayers because business expenses and losses can only be deducted if they are incurred pursuant to a “source”.
Over the past few years, the CRA has used the REOP test on both purely commercial and non-commercial entities who tried to deduct interest ayments pursuant to s. 20(1)(c)(i).
For example, in Landry v. Canada,[56] the majority of the Federal Court of Appeal upheld the decision of the Tax Court to deny expense deductions to a 71 year old taxpayer who re-started his law practice after a 23-year absence. The decision was shocking because it applied REOP to the practice of law. The majority found that there was simply no reasonable expectation of profit based on sustained losses and the outmoded methodology of the practitioner:
There comes a time in the life of any business operating at a deficit when the Minister must be able to determine objectively… that a reasonable expectation of profit has turned into an impossible dream… He started over in 1979 as he had started out in 1936, without adjusting his method of practice to the new facts of life, without planning a budget, without keeping billings or books of account, without looking for clients other than by publishing his name in the phone directory, and not billing or billing small amounts where the case was unsuccessful.[57]

The majority did not hint that the expenses were personal.
All this changed after Stewart v R.[58] In Stewart, the Supreme Court held a business existed because purchasing properties to rent them out was commercial in nature, and was done to earn a profit.[59] M.N.R. argued a business did not exist because the taxpayer’s (Stewart) activity did not have a “reasonable expectation of profit.”[60] Stewart acquired four condominiums, through a series of highly leveraged transactions, where he earned rental income. Stewart knew there would not be a profit for the first few years as the interest expenses would be greater than the accrued rent.[61]

However, the court set out a two step process to determine if a business exists: first, whether a source of income exists by asking if the taxpayer’s activity is a personal endeavor or if it is undertaken in pursuit of profit, and secondly a categorization of the source of income, as either a business or a property.[62] Pursuit of profit is anything occupying the time, attention and labor of a person for the purpose of profit,[63] which is the same as a view to profit.[64] If personal elements exist in the business calling into question its commerciality, then factors such as the taxpayer’s intent, and reasonable expectation of profit will be looked at to determine the business’ true nature; was it done in the pursuit of profit.[65] The point of this analysis ensures a business is not second-guessed losses, but to look at the nature of the endeavor in determining if a source of income exists.[66]

4.2.3 Income Earning Requirement:
The income earning requirement is arguably the most important prerequisite in the deduction of interest under s. 20(1)(c) the ITA, the C.R.A. has historically viewed that the person must earn a net income, and that the person deducting net income must have a reasonable expectation of profit (REOP).[67] The following describes net income, as well as giving the CRA’s rationale for using these understandings.
4.2.4 Net Income:
Generally, income has traditionally meant net income as opposed to gross income. The CRA held this position because it felt that a person could not earn a profit unless it was net income that was being deducted.[68]
The CRA also employed a contradictory approach in certain situations. For example, the approach employed under former IT-80[69] was to allow a shareholder (partner) to deduct interest if they borrowed money, and lent it to their corporation (partnership) without charging interest. The assumption was that the corporation or partnership earned income subject to Part I of the ITA.

Lender --> Shareholder/Partner -->Corporation/Partnership

Shareholder (partner) borrows from lender, gets charged interest. Shareholder (partner) lends borrowed money to their corporation (partnership), without charging interest


However, one could clearly see that the CRA allowed this type of transaction to take place because the shareholder or partner are clearly in a position of ownership with the corporation/partnership they are lending to, which clearly accords with s. 250 of the ITA, and its purposes of connecting individuals and corporations.[70]

5 What Happened in Ludco and Singleton:

The S.C.C. ruled in favour of the taxpayer in both Ludco and Singleton. The simultaneous decisions created a ripple effect in the instances where interest could be deducted from a person’s income. The next section discusses how the court changed several meanings under s. 20(1)(c)(i) of the ITA, and explores arguments made on behalf of the Crown on how those meanings should be interpreted.
5.1 Elements of s. 20(1)(c)(i)
The S.C.C. confirmed s. 20(1)(c)(i) has four elements: (1) the amount must be paid in the year or be payable in the year in which it is sought to be deducted; (2) it must be paid pursuant to a legal obligation to pay interest on borrowed money; (3) the borrowed money must be used for the purpose of earning non-exempt income from a business or property; and (4) the amount must be reasonable.[71] However, for the purposes of our discussion, the three issues that will be looked at are in the ambit of the third point: what income is; what use should the money be used for, and what the purpose of earning that income is. Specifically, how should the courts look at income in future cases, and what the use of the income should be in order for a person to deduct interest pursuant so s. 20(1)(c)(i).

5.2 Income should be understood as Gross:
In Ludco, the S.C.C. ruled that interest could be deducted as long as there was an expectation of income being earned, for the purposes of s. 20(1)(c)(i). The income did not have to be net of all expenses.[72] The S.C.C. arrived at a conclusion diametrically opposed to the C.R.A.’s understandings, on what might be described as shaky reasoning.
The S.C.C. first described income as “a measure of gain.”[73] The S.C.C. states how a dividend does not lose its quality of being income despite the fact that the costs of a share may be more than the amount generated by the dividends.[74] Finally, the S.C.C. engages in a statutory construction of the ITA, and comes to the conclusion that had the government wanted to restrict the meaning of the s. 20(1)(c)(i) scope, they had ample opportunity to do so in 1981 and 1991 by restricting interest deductibility to situations where borrowed money is used for the purpose of making a profit was proposed and not enacted.[75] The S.C.C. reasoned that this understanding of income is coherent with the policy behind s. 20(1)(c)(i), which they implicitly assumed to be an exception to when capital expenses may be deducted, in order to encourage the accumulation of capital producing income.[76]

5.3 Purpose of Earning Income:
As discussed above, several streams of jurisprudence exist in determining for what purpose interest can be deducted on s. 20(1)(c)(i). The S.C.C. examined these several streams of jurisprudence: bona fide purpose test, the dominant purpose test, and the reasonable expectation of income test.[77] The S.C.C. ruled that the reasonable expectation of income test would be the test determining whether income could be deducted under s. 20(1)(c)(i).[78] It is interesting to note that a reasonable expectation of income is a play on the words of “reasonable expectation of profit” where the S.C.C. came to this decision only after stating that one should not view profit as being equal to income:
The plain meaning of s. 20(1)(c)(i) does not support an interpretation of "income" as the equivalent of "profit" or "net income".[79]

The effect of this is that a “reasonable expectation of income” has a much larger base than a “reasonable expectation of profit.” The S.C.C. came to this conclusion based on the following reasoning.
With regards to a taxpayer having a bona fide intention to earn income, the S.C.C. stated that this test was not a decision, but rather a “comment made in passing.”[80] As such, this comment should not govern how s. 20(1)(c)(i) should be interpreted in light of the jurisprudence surrounding this section, and principles of statutory construction.[81]
The S.C.C. also ruled that an ancillary purpose is sufficient for a taxpayer to claim the deduction under s. 20(1)(c)(i).[82] The reason for this is based on the words of the statute, where purpose is only preceded by the adjective “the.” As such, the S.C.C. engaged in a plain meaning interpretive exercise in finding out the scope of purpose, and concluded that to give phrase “the purpose” a wider construction than what is stated in the ITA would be a form of judicial law making[83], when the law is explicitly stated.[84] The S.C.C. reconciled the prior case law by stating that looking at dominant purpose should be looked at only when there is a scam or window dressing in order to cover a sham. Thus all that is required is “a purpose,” whether it is dominant, or ancillary, and only when window dressing is not present.[85]
The S.C.C ruled that for the purposes of s. 20(1)(c)(i), the relevant test to be used to determine if a purpose exists is an objective test guided by objective and subjective manifestations.[86] The view held by the S.C.C. is that this view is consistent with the actual language of the statute.[87] As well, it promotes the policy objectives of capital accumulation and investment.[88]

5.4 Use of Loan:
In Singleton, the S.C.C. cleared up when person can deduct a loan under s. 20(1)(c)(i). The majority viewed that:
The borrowed money must be used for the purpose of earning non-exempt income from a business. The Shell case confirmed that the focus of the inquiry is not on the purpose of the borrowing per se, but is on the taxpayer's purpose in using the money.[89]

The S.C.C. believed that the economic realities of a situation should not be used to determine whether the use was valid by the taxpayer, as was advocated in obiter of Bronfman.[90] What is important is if a direct link can be established between the borrowed money and an eligible use.[91]
The majority of the S.C.C. held that the economic realities of the transaction should not have any baring on the eligibility of the deduction, especially when the court's duty is to apply an unambiguous provision of the ITA to a taxpayer's transaction.[92] Where the provision at issue is clear and unambiguous, its terms must simply be applied.
The minority of the S.C.C disagreed with the majority’s contention that clear statutory language overrode the economic realities of the situation.[93] Their reasoning was that Dickson’s reasoning (discussed above in section X) was not merely obiter dicta, but an actual ruling, and as such, should be considered binding on the S.C.C.[94]
For the purposes of this paper, the majority’s view that the economic realities of a situation are not necessary for s. 20(1)(c)(i) to be used by a taxpayer is the one that will govern.

5.5 Recap:
The following section describes what the implications of the Ludco and Singleton decisions by: describing how s. 20(1)(c)(i) of the ITA should be understood in light of the S.C.C. rulings; and proceeds by discussing some tax planning implications that give rise to the new understandings.

6 How s. 20(1)(c)(i) should be understood:

The S.C.C. first ruled that the type the income deductible under s. 20(1)(c)(i) is gross income, which has a much broader scope than net income or profit. The S.C.C. then ruled that as long as there is a reasonable expectation that the taxpayer earns income, the taxpayer can use the deduction under s. 20(1)(c)(i) if the ITA: it does not matter whether the primary motive of the taxpayer was to make capital gains.[95] Finally, the S.C.C. ruled that the s.20(1)(c)(i) deduction is available for a taxpayer as long as the use of the borrowed money can be traced to an income earning requirement.
The effect of these decisions expanded the scope of interest deductibility beyond what the CRA’s general understandings and practices: the CRA took the view that an interest deduction was allowed only if it was reasonable to conclude that the income generated by the investment acquired with the borrowing might eventually exceed the interest of the borrowing.[96]
Singleton reinforced the Ludco decision with respect to the legitimacy of structuring transactions in order to reduce or avoid taxes. It bolstered the S.C.C. consensus that tax motivations did not undermine the legitimacy of the intention to “borrow money for the purpose of earning income”, even if such intentions appeared ancillary to the tax motivations.

6.2 Tax Planning Opportunities Arising From these Decisions:
The potential tax planning opportunities arising from these provisions are of concern to the federal government.[97] The following shows several examples of tax planning opportunities that explicitly go against the S.C.C.

Example 1:
For interest to be deductible, an ancillary purpose is sufficient to meet the purpose test in s. 20(1)(c)(i) of the ITA. This means that a person can invest in business with the objective of making a capital gain, and be allowed to deduct interest charges.[98]
Assume that Mr. X borrows $100,000 personally at an interest rate of 7 percent annually to invest in shares of a real estate corporation, with significant capital appreciation expectations. In years 1 through 10, he earns annual dividend income of $1,000. Therefore, the net effect is that Mr. X loses $6,000 ($1,000 dividend income minus $7,000 of annual interest) per year.
Mr. X can then earn a capital gain on his earnings.[99] Assume Mr. X sells the property for $100,000.00, since capital gains are only taxed at half of what one sells, Mr. X would only have to pay tax on $50,000 worth of the sale of those shares.
This violates the statutory division of the ITA, where s. 20(1)(c)(i) is located in section 1, Subdivision B (Please see above section 4.1) whose purpose is to allow capital deductions for business or property earning income.

Example 2:
Based on Ludco, interest expenses incurred on a capital gains investment should be fully deductible as long as there is a reasonable expectation that some amount of ordinary income will be generated from the investment.[100]
For example, if Mr. X started up a business and created massive debt in starting this business up, Mr. X would only need to generate money in order for him to deduct incurred eligible capital expenses. And as long as the business is made on commercial grounds, it will not matter how viable the business is for these interest expenses to be deducted. In a sense, the government would be potentially financing inefficiency.
Example 3:
The Singleton decision may create skepticism about how far the courts would go in addressing the “window dressing” concerns. This concern is especially in light of the fact that Singleton’s only purpose in rearranging his affairs was to take advantage of the deduction under s. 20(1)(c)(i).
Similarly, for example, one might argue that interest is fully deductible on borrowed money that is in turn lent out at a lower rate of interest. The only obstacle in regard to the quantum of income generated by the use of the borrowed money appears to be the so-called window dressing exception.[101]

7 The Department of Finance’s Draft Proposals Regarding the Deductibility of Interest and Other Expenses:

The Ludco decision caused a minor stir in government circles. The CCRA and the Department of Finance did not take sufficient comfort from the “window dressing” comments made by the S.C.C.,[102] and on October 31, 2003, the Department of Finance rallied from the Ludco and Singleton decisions and released proposed amendments to the Income Tax Act called “Draft Proposals Regarding the Deductibility of Interest And Other Expenses For Income Tax Purposes.”

The legislation did not focus on particular expense interest deductions under section 20(1)(c)(i), but affected all such deductions indirectly by denying deductions for losses generally where there was an absence of a reasonable expectation of profit. The proposed new section to the ITA, section 3.1, was to function the same way that REOP did before Stewart (see above section 4.2.2.1): by denying the existence of income from a “source” unless the particular loss was sustained where there was a reasonable expectation of profit.
The proposed amendment reads as follows:[103]
Limit on loss

3.1 (1) A taxpayer has a loss for a taxation year from a source that is a business or property only if, in the year, it is reasonable to expect that the taxpayer will realize a cumulative profit from that business or property for the period in which the taxpayer has carried on, and can reasonably be expected to carry on, that business or has held, and can reasonably be expected to hold, that property.

Determination of Profit

(2) For the purpose of subsection (1), profit is determined without reference to capital gains or capital losses.

The proposal called for a legislated re-instatement of the reasonable expectation of profit test with respect to business or property losses. The proposed legislation required taxpayers to satisfy the REOP test each year[104] in which they applied for a related deduction.[105] The taxpayer would be required to demonstrate that she had a reasonable expectation of net profit for the cumulative period that she could reasonably be expected to conduct the business or hold the property.[106]
The Department of Finance’s rationale for these proposed legislative changes was to prevent situations in which taxpayers could claim full tax deductions for losses highly-leveraged real properties (the examples above) and then turn around and avoid tax on one-half of the capital gain earned.[107]
The proposal was widely criticized by the financial community for a three primary reasons: a) the requirement to test the loss each year; b) the requirement to test for cumulative profit; and c) the potential to change commercial decisions.[108]
It was argued that the requirement to test the loss each year is a fundamental shift in policy, that has the effect of penalizing small business owners who may be going out of business.[109] The fact is that the survival rates of new small firms decreases rapidly after the first 3 years,[110] which may be attributable to the fact that these new businesses require new investment and take on more risk in order to grow.[111] Penalizing small businesses with the spectre of not being able to deduct losses will only hurt investment in an important sector of the Canadian economy. The second point to this argument was that testing for a loss each year in the new proposal is incoherent s 20.1 of the ITA, which permits the continual deduction of interest even if the source of income fails to exist.[112]
The second argument was that the requirement to test for cumulative profit is unfair in the sense that it second-guesses the business decisions. The test is for cumulative profits, and not by the expected profitability of a business in the future.[113] Thus, second-guessing the business-decisions brings an element of arbitrariness, especially when a judge has the ability to judge business decisions in hindsight.
Finally, these factors will be a disincentive for small business owners to invest in a small business, especially when they factor in the potential costs of not being able to deduct their expenses if they fail. This inequity violates the tax principle of neutrality, as only the most risk-seeking of individuals will be willing to take a chance and invest in small business.[114]
In the end, opponents of the proposed legislation won, and the Department of Finance did not legislate reasonable expectation of profit into the ITA.

8 Future Considerations:

With the failed attempt to legislate s 3.1[115], the C.R.A. is left with the potential problems of tax planning, that are discussed above. The only solace that the C.R.A. may have is in the solace that the courts may not look too favourably to some transactions as they may consider these transactions to be a case of “window dressing.” However, this does not look like a good possibility, especially when it could be argued that the transaction in Singleton had no other economic reality but to take advantage of the provision under s. 20(1)(c)(i) of the ITA.
It will be interesting to see how the courts decide these future cases, especially if a barrage of realtors begin taking advantage of these provisions when it is plainly obvious that their intention is to make a capital gain, as opposed to creating a business that produces income, something which s.20(1)(c)(i) of the ITA was designed for in the first place (please see section 4.1), or if the government attempts to close these gaps by threatening legitimate business owners. However, as seen above, attempting to close the above gaps could lead to serious consequences to the promotion of small businesses in Canada, which have important lobby groups in Ottawa.


9 Bibliography

9.1 Legislation:

Federal Income Tax Act, R.S.C. 1985, (5th Supp.), c. C-46.

9.2 Government Publications:

M.N.R., Interpretation Bulletin IT-533, “Interest Deductibility and Related Issues” (October 31, 2003).

M.N.R. Interpretation Bulletin IT-80 (archived), “Interest on Money Borrowed to Redeem Shares, or to Pay Dividends” (27 November 1972).

9.3 Jurisprudence:

Bronfman Trust v R.., 36 D.L.R. (4th) 197, [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 25 E.T.R. 13, 71 N.R. 134, 1987 CarswellNat 335, 1987 CarswellNat 901, 87 D.T.C. 5059, [1987] S.C.J. No. 1, REJB 1987-67274 (S.C.C. Jan 29, 1987), Rev’g 36 D.L.R. (4th) 197, [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 25 E.T.R. 13, 71 N.R. 134, 1987 CarswellNat 335, 1987 CarswellNat 901, 87 D.T.C. 5059, [1987] S.C.J. No. 1, REJB 1987-67274 (S.C.C. Jan 29, 1987), aff’g Bronfman Trust v. R., [1980] F.C. 453, [1979] C.T.C. 524, 1979 CarswellNat 290, 79 D.T.C. 5438 (Fed. T.D. Nov 28, 1979), aff’g Bronfman Trust v. R., [1978] C.T.C. 3088, 1978 CarswellNat 423, 78 D.T.C. 1752 (T.R.B. Sep 15, 1978).

Canada Safeway Ltd. v. Minister of National Revenue, [1957] S.C.R. 717, (1957) 11 D.L.R. (2d) 1, [1957] C.T.C. 335, (1957) 57 D.T.C. 1239, 1957 CarswellNat 265.

Landry v. Canada, [1995] 2 C.T.C. 3, 173 N.R. 213, 1994 CarswellNat 1335, 94 D.T.C. 6499 (Fr.), 94 D.T.C. 6624 (Eng.) (Fed. C.A. Jul 05, 1994)], aff’g [1994] 1 C.T.C. 2049, 1993 CarswellNat 1217 (T.C.C. May 20, 1993).

Ludco Enterprises Ltd. v. Canada, [2001] S.C.J. No. 58, 2001 S.C.C. 62, [2001] 2 S.C.R. 1082, (2001) 204 D.L.R. (4th) 590, (2001) 275 N.R. 90, (2001) J.E. 2001-1806, [2002] 1 C.T.C. 95, 2001 D.T.C. 5505, 2001 CarswellNat 2017, rev’g Ludmer c. Ministre du Revenu national, [1999] 3 C.T.C. 601, 169 F.T.R. 119 (note), 240 N.R. 70, 1999 CarswellNat 415, 1999 CarswellNat 416, 99 D.T.C. 5153 (Eng.), [1999] F.C.J. No. 402 (Fed. C.A. Mar 30, 1999), rev’g Ludmer c. Ministre du Revenu national, [1998] 2 C.T.C. 104, 139 F.T.R. 241, 1997 CarswellNat 2232, 98 D.T.C. 6045 (Eng.), [1997] F.C.J. No. 1707 (Fed. T.D. Dec 09, 1997), rev’g Ludmer c. Ministre du Revenu national, [1993] 2 C.T.C. 2494, 1993 CarswellNat 1050, 93 D.T.C. 1274 (Fr.), 93 D.T.C. 1351 (Eng.), [1993] T.C.J. No. 1 (T.C.C. Jan 05, 1993).




Moldowan v. The Queen, D.L.R. (3d) 112, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 15 N.R. 476, 1977 CarswellNat 243, 1977 CarswellNat 539, 77 D.T.C. 5213 (S.C.C. May 31, 1977), aff’g [1976] 1 F.C. 355, [1975] C.T.C. 323, 1975 CarswellNat 171, 1975 CarswellNat 369, 75 D.T.C. 5216 (Fed. C.A. Jun 02, 1975), aff’g [1974] C.T.C. 638, 1974 CarswellNat 207, 74 D.T.C. 6496, [1974] F.C.J. No. 801 (Fed. T.D. Sep 05, 1974), aff’g [1973] C.T.C. 2294, 1973 CarswellNat 285, 73 D.T.C. 228 (T.R.B. Oct 26, 1973).

Shell Canada v R., 178 D.L.R. (4th) 26, [1999] 3 S.C.R. 622, [1999] 4 C.T.C. 313, 247 N.R. 19, 1999 CarswellNat 1808, 1999 CarswellNat 1809, 99 D.T.C. 5682 (Fr.), 99 D.T.C. 5669 (Eng.), [1999] S.C.J. No. 30 (S.C.C. Oct 15, 1999), rev’g 157 D.L.R. (4th) 655, [1998] 3 F.C. 64, [1998] 2 C.T.C. 207, 223 N.R. 122, 1998 CarswellNat 170, 1998 CarswellNat 1643, 98 D.T.C. 6177, [1998] F.C.J. No. 194 (Fed. C.A. Feb 18, 1998), aff’g [1997] 3 C.T.C. 2238, 1997 CarswellNat 401, 97 D.T.C. 395, [1997] T.C.J. No. 285 (T.C.C. Mar 11, 1997).

Sherway Centre Ltd. V. R, [1998] 2 C.T.C. 343, 1998 CarswellNat 67, 1998 CarswellNat 1639, 98 D.T.C. 6121, aff’g [1996] 3 C.T.C. 2687, 1996 CarswellNat 1649, 96 D.T.C. 1640 (T.C.C. Jul 31, 1996).

Singleton v. Canada, [2001] S.C.J. No. 59, 2001 S.C.C. 61, [2001] 2 S.C.R. 1046, (2001) 204 D.L.R. (4th) 564, (2001) 275 N.R. 133, (2001) J.E. 2001-1807, [2002] 1 C.T.C. 12, 2001 D.T.C. 5533, 2001 CarswellNat 2020 aff’g [1999] F.C.J. No. 864, [1999] 4 F.C. 484, (1999) 177 D.L.R. (4th) 461, (1999) 243 N.R. 110, [1999] 3 C.T.C. 450, (1999) 99 D.T.C. 5362, 1999 CarswellNat 1009, rev’g [1996] T.C.J. No. 1101, [1996] 3 C.T.C. 2873, (1996) 96 D.T.C. 1850.

Stewart v R., 212 D.L.R. (4th) 577, [2002] 2 S.C.R. 645, [2002] 3 C.T.C. 439, 50 R.P.R. (3d) 157, 288 N.R. 297, 2002 CarswellNat 1070, 2002 CarswellNat 1071, 2002 D.T.C. 6983 (Fr.), 2002 D.T.C. 6969 (Eng.), 2002 S.C.C. 46, J.E. 2002-962, [2002] S.C.J. No. 46, REJB 2002-31852 (S.C.C. May 23, 2002), rev’g [2000] 2 C.T.C. 244, 254 N.R. 326, 2000 CarswellNat 259, 2000 D.T.C. 6163, [2000] F.C.J. No. 238 (Fed. C.A. Feb 18, 2000) rev’g [1998] 3 C.T.C. 2662, 1998 CarswellNat 653, 98 D.T.C. 1600, [1998] T.C.J. No. 310 (T.C.C. Apr 24, 1998).

Tennant v. M.N.R.,132 D.L.R. (4th) 1, [1996] 1 S.C.R. 305, [1996] 1 C.T.C. 290, 108 F.T.R. 80 (note), 192 N.R. 365, 1995 CarswellNat 888, 1996 CarswellNat 421F, 96 D.T.C. 6121, [1996] S.C.J. No. 16, REJB 1996-67207 (S.C.C. Feb 22, 1996), rev’g 2 C.T.C. 113, 85 F.T.R. 38 (note), 175 N.R. 332, 1994 CarswellNat 984, 94 D.T.C. 6505 (Fed. C.A. Jun 21, 1994), rev’g Tennant v. R., [1993] 1 C.T.C. 148, 59 F.T.R. 258, 1993 CarswellNat 850, 93 D.T.C. 5067 (Fed. T.D. Jan 15, 1993).

Trans-Prairie Pipelines Ltd. V. M.N.R., [1970] C.T.C. 537, 1970 CarswellNat 280, 70 D.T.C. 6351 (Can. Ex. Ct. Nov 03, 1970).


9.4 Secondary Sources:

Frankovic, Joseph. Deductibility of Interest Expense : Commentary, Cases and Materials, (Toronto : CCH Canadian Limited, 2004).

Industry Canada, Key Small Business Statistics (January 2005) at 2 (Source: Statistics Canada, Survey of Financing of Small and Medium-sized Enterprises, 2000).

Krishna, Vern. The Fundamentals of Canadian Income Tax, 8th ed. (Toronto: Carswell, 2004).

“S. 20(1)(c): Interest,” Canadian Tax Reporter (CCH Online).
[1] Federal Income Tax Act, R.S.C. 1985, (5th Supp.), c. C-46, s. 20(1)(c)(i) [ITA].
[2] [2001] S.C.J. No. 59, 2001 S.C.C. 61, [2001] 2 S.C.R. 1046, (2001) 204 D.L.R. (4th) 564, (2001) 275 N.R. 133, (2001) J.E. 2001-1807, [2002] 1 C.T.C. 12, 2001 D.T.C. 5533, 2001 CarswellNat 2020 [Singleton, S.C.C. cited to S.C.J.], aff’g [1999] F.C.J. No. 864, [1999] 4 F.C. 484, (1999) 177 D.L.R. (4th) 461, (1999) 243 N.R. 110, [1999] 3 C.T.C. 450, (1999) 99 D.T.C. 5362, 1999 CarswellNat 1009, rev’g [1996] T.C.J. No. 1101, [1996] 3 C.T.C. 2873, (1996) 96 D.T.C. 1850.
[3] [2001] S.C.J. No. 58, 2001 S.C.C. 62, [2001] 2 S.C.R. 1082, (2001) 204 D.L.R. (4th) 590, (2001) 275 N.R. 90, (2001) J.E. 2001-1806, [2002] 1 C.T.C. 95, 2001 D.T.C. 5505, 2001 CarswellNat 2017 [Ludco, S.C.C. cited to S.C.J.], rev’g Ludmer c. Ministre du Revenu national, [1999] 3 C.T.C. 601, 169 F.T.R. 119 (note), 240 N.R. 70, 1999 CarswellNat 415, 1999 CarswellNat 416, 99 D.T.C. 5153 (Eng.), [1999] F.C.J. No. 402 (Fed. C.A. Mar 30, 1999), rev’g Ludmer c. Ministre du Revenu national, [1998] 2 C.T.C. 104, 139 F.T.R. 241, 1997 CarswellNat 2232, 98 D.T.C. 6045 (Eng.), [1997] F.C.J. No. 1707 (Fed. T.D. Dec 09, 1997), rev’g Ludmer c. Ministre du Revenu national, [1993] 2 C.T.C. 2494, 1993 CarswellNat 1050, 93 D.T.C. 1274 (Fr.), 93 D.T.C. 1351 (Eng.), [1993] T.C.J. No. 1 (T.C.C. Jan 05, 1993).
[4] Singleton, supra note 2 at para. 4.
[5] Ibid.
[6] Ibid., at para. 6.
[7] Ibid.
[8] Ibid., at para. 9.
[9] Ludco, supra note 3 at para 11.
[10] Ibid., at para. 10.
[11] Ibid.
[12] Ibid ,at para 4.
[13] Ibid., at para 6.
[14] Ibid., at para 4.
[15] Ibid., at para 11.
[16] Ibid., at para 11.
[17] Ibid., at para 18.
[18] ITA, supra note 1.
[19] Ludco, supra note 2 at para 19.
[20] ITA, supra note 1 at s. 20(1)(c)(i).
[21] Ludco, supra note 2 at para 19.
[22] Ibid., at para 21.
[23] ITA, supra note 1 at s. 3.
[24] Ibid., at s. 3(a).
[25] Ibid., at s. 3(b)(i)(A).
[26] Ibid., at s. 3(c).
[27] Ibid., at s. 3(b)(ii).
[28] Ibid., at s. 9(3).
[29] Vern Krishna, The Fundamentals of Canadian Income Tax, 8th ed. (Toronto: Carswell, 2004) at 345 [Krishna].
[30] Ibid.
[31] Ibid., at 346.
[32] Canada Safeway Ltd. v. Minister of National Revenue [1957] S.C.R. 717, (1957) 11 D.L.R. (2d) 1, [1957] C.T.C. 335, (1957) 57 D.T.C. 1239, 1957 CarswellNat 265 [Safeway, S.C.C. cited to C.T.C.] at 344.
[33] Krishna, supra note 29 at 345.
[34] Bronfman Trust v R.., 36 D.L.R. (4th) 197, [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 25 E.T.R. 13, 71 N.R. 134, 1987 CarswellNat 335, 1987 CarswellNat 901, 87 D.T.C. 5059, [1987] S.C.J. No. 1, REJB 1987-67274 (S.C.C. Jan 29, 1987) [Bronfman, S.C.C. cited to D.T.C.] at para. 32, Rev’g 36 D.L.R. (4th) 197, [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 25 E.T.R. 13, 71 N.R. 134, 1987 CarswellNat 335, 1987 CarswellNat 901, 87 D.T.C. 5059, [1987] S.C.J. No. 1, REJB 1987-67274 (S.C.C. Jan 29, 1987), aff’g Bronfman Trust v. R., [1980] F.C. 453, [1979] C.T.C. 524, 1979 CarswellNat 290, 79 D.T.C. 5438 (Fed. T.D. Nov 28, 1979), aff’g Bronfman Trust v. R., [1978] C.T.C. 3088, 1978 CarswellNat 423, 78 D.T.C. 1752 (T.R.B. Sep 15, 1978).
[35] ITA, supra note 1 at s. 18(1)(b).
[36] Sherway Centre Ltd. V. R, [1998] 2 C.T.C. 343, 1998 CarswellNat 67, 1998 CarswellNat 1639, 98 D.T.C. 6121, [Sherway, Federal Court of Appeal cited to C.T.C.] at 347, aff’g [1996] 3 C.T.C. 2687, 1996 CarswellNat 1649, 96 D.T.C. 1640 (T.C.C. Jul 31, 1996).
[37] ITA, supra note 1.
[38] “s. 20(1)(c): Interest” Canadian Tax Reporter (November 2005), at para. 5062,[CTR interest], (CCH Online).
[39] Ibid.
[40] ITA, supra note 1 at s. 20(1)(c)(i).
[41] CTR interest, supra note 28 at para. 5064.
[42] Bronfman, supra note at para. 34.
[43] Ibid.
[44] Ibid., at para. 35.
[45] [1970] C.T.C. 537, 1970 CarswellNat 280, 70 D.T.C. 6351 (Can. Ex. Ct. Nov 03, 1970) .[Trans-Prairie, Can. Ex. Ct cited to CarswellNat] at para. 11.
[46] CTR interest, supra note 28 at para. 5064.
[47] 178 D.L.R. (4th) 26, [1999] 3 S.C.R. 622, [1999] 4 C.T.C. 313, 247 N.R. 19, 1999 CarswellNat 1808, 1999 CarswellNat 1809, 99 D.T.C. 5682 (Fr.), 99 D.T.C. 5669 (Eng.), [1999] S.C.J. No. 30 (S.C.C. Oct 15, 1999) [Shell, S.C.C. cited to CarswellNat], rev’g 157 D.L.R. (4th) 655, [1998] 3 F.C. 64, [1998] 2 C.T.C. 207, 223 N.R. 122, 1998 CarswellNat 170, 1998 CarswellNat 1643, 98 D.T.C. 6177, [1998] F.C.J. No. 194 (Fed. C.A. Feb 18, 1998), aff’g [1997] 3 C.T.C. 2238, 1997 CarswellNat 401, 97 D.T.C. 395, [1997] T.C.J. No. 285 (T.C.C. Mar 11, 1997)
[48] Ibid., at para 39.
[49] Ibid., at para. 46.
[50] Bronfman, supra note at para. 52.
[51] Ibid.
[52] M.N.R., Interpretation Bulletin IT-533, “Interest Deductibility and Related Issues” (October 31, 2003) at para. 9.
[53] 132 D.L.R. (4th) 1, [1996] 1 S.C.R. 305, [1996] 1 C.T.C. 290, 108 F.T.R. 80 (note), 192 N.R. 365, 1995 CarswellNat 888, 1996 CarswellNat 421F, 96 D.T.C. 6121, [1996] S.C.J. No. 16, REJB 1996-67207 (S.C.C. Feb 22, 1996) [Tennant, S.C.C. cited to CarswellNat], rev’g 2 C.T.C. 113, 85 F.T.R. 38 (note), 175 N.R. 332, 1994 CarswellNat 984, 94 D.T.C. 6505 (Fed. C.A. Jun 21, 1994), rev’g Tennant v. R., [1993] 1 C.T.C. 148, 59 F.T.R. 258, 1993 CarswellNat 850, 93 D.T.C. 5067 (Fed. T.D. Jan 15, 1993).
[54] Ibid., at para. 24.
[55] D.L.R. (3d) 112, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 15 N.R. 476, 1977 CarswellNat 243, 1977 CarswellNat 539, 77 D.T.C. 5213 (S.C.C. May 31, 1977) [Moldowan, S.C.C. cited to CarswellNat], aff’g [1976] 1 F.C. 355, [1975] C.T.C. 323, 1975 CarswellNat 171, 1975 CarswellNat 369, 75 D.T.C. 5216 (Fed. C.A. Jun 02, 1975), aff’g [1974] C.T.C. 638, 1974 CarswellNat 207, 74 D.T.C. 6496, [1974] F.C.J. No. 801 (Fed. T.D. Sep 05, 1974), aff’g [1973] C.T.C. 2294, 1973 CarswellNat 285, 73 D.T.C. 228 (T.R.B. Oct 26, 1973).
[56] [1995] 2 C.T.C. 3, 173 N.R. 213, 1994 CarswellNat 1335, 94 D.T.C. 6499 (Fr.), 94 D.T.C. 6624 (Eng.) (Fed. C.A. Jul 05, 1994) [Landry, F.C.A. cited to D.T.C. (Eng.)], aff’g [1994] 1 C.T.C. 2049, 1993 CarswellNat 1217 (T.C.C. May 20, 1993).

[57] Ibid., at 6625-6626.
[58] 212 D.L.R. (4th) 577, [2002] 2 S.C.R. 645, [2002] 3 C.T.C. 439, 50 R.P.R. (3d) 157, 288 N.R. 297, 2002 CarswellNat 1070, 2002 CarswellNat 1071, 2002 D.T.C. 6983 (Fr.), 2002 D.T.C. 6969 (Eng.), 2002 S.C.C. 46, J.E. 2002-962, [2002] S.C.J. No. 46, REJB 2002-31852 (S.C.C. May 23, 2002), [Stewart, S.C.C. cited to S.C.R.] at 646, rev’g [2000] 2 C.T.C. 244, 254 N.R. 326, 2000 CarswellNat 259, 2000 D.T.C. 6163, [2000] F.C.J. No. 238 (Fed. C.A. Feb 18, 2000) rev’g [1998] 3 C.T.C. 2662, 1998 CarswellNat 653, 98 D.T.C. 1600, [1998] T.C.J. No. 310 (T.C.C. Apr 24, 1998).
[59] Ibid.
[60] Ibid., at 650.
[61] Ibid., at 651
[62] Ibid., at 673.
[63] Ibid.
[64] Ibid., at 650.
[65] Ibid., at 674.
[66] Ibid., at 675.
[67] Joseph Frankovic, Deductibility of Interest Expense : Commentary, Cases and Materials, (Toronto : CCH Canadian Limited, 2004) at 21, [Frankovic].
[68] CTR interest, supra note 28 at para. 5064.
[69] M.N.R. Interpretation Bulletin IT-80 (archived), “Interest on Money Borrowed to Redeem Shares, or to Pay Dividends” (27 November 1972).
[70] ITA, supra note 1 at s. 250.
[71] Singleton, supra note 2 at para. 25.
[72] Ludco, supra note 3 at para. 61.
[73] Ibid., at para. 57.
[74] Ibid., at para. 60.
[75] Ibid., at para. 61.
[76] Ibid., at para. 62.
[77] Ibid., at para. 47.
[78] Ibid., at para. 55.
[79] Ibid., at para. 59.
[80] Ibid., at para. 49.
[81] Ibid., at para. 49.
[82] Ibid., at para. 50.
[83] Ibid., at para. 53.
[84] Ibid., at para. 51.
[85] Ibid., at para. 52.
[86] Ibid., at para. 54.
[87] Ibid., at para. 56.
[88] Ibid., at para. 55.
[89] Singleton, supra note 2 at para. 26.
[90] Ibid.
[91] Ibid.
[92] Ibid.at para. 27.
[93] Ibid.at para. 53.
[94] Ibid.at para. 55.
[95] Joseph Frankovic, “No Surprises in Supreme Court Decisions on Interest Deductibility” in Frankovic, supra note 67, 206 at 210-211.
[96] Ibid., at 209.
[97] Ibid., at 210.
[98] Ibid.
[99] ITA, supra note 1 at s. 53.
[100] Joseph Frankovic, “No Surprises in Supreme Court Decisions on Interest Deductibility” in Frankovic, supra note 67, 206 at 210.
[101] Ibid., at 209-210.
[102] Ibid., at 210.
[103] ITA, supra note 1, Proposed Addition – s. 3.1.
[104] The Joint Committee on Taxation of the Canadian Bar Association and the Canadian Institute of Chartered Accountants “Re: October 31, 2003 Draft Proposals Regarding the Deductibility of Interest and Other Expenses” in Frankovic, supra note 67, 225 at 229, [Draft Response].
[105] Ibid., at 228.
[106] Ibid.
[107] Ibid., at 229.
[108] Ibid., at 228-230.
[109] Ibid., at 229
[110] Industry Canada, Key Small Business Statistics (January 2005) at 2 (Source: Statistics Canada, Survey of Financing of Small and Medium-sized Enterprises, 2000) [Key Small Business Statistics].
[111] Ibid. at 10.
[112] Draft Response, supra note 105 at 229.
[113] Ibid.
[114] Ibid., at 230.
[115] ITA, supra note 1, Proposed Addition – s. 3.1.