Byram v. Canada
A-684-94
McDonald J.A.
25/1/99
12 pp.
Capital losses-Appeal from Trial Division decision ([1995] 1 F.C. 705) allowing appeal from reassessments of income under Income Tax Act, s. 40(2)(g)(ii)-Whether taxpayer can claim allowable capital loss under s. 40(2)(g)(ii) for losses incurred on interest-free loans issued to corporation for purpose of earning dividend income-In early 1970's, taxpayer starting oilfield consulting, maintenance, construction company, Byram Industrial Services Ltd. (BISL) in Alberta-Only shareholders, managers of BISL taxpayer, members of immediate family-In 1979, taxpayer incorporating company known as Elkhound Resources Ltd. (ERL) to explore, develop oil, gas in Alberta-In March 1981, incorporating Elkhound Resources Inc. (USCO) in Kansas-From April 1982 until trial, taxpayer, wife, son only shareholders of USCO-Taxpayer officer, director of USCO since incorporation-In June 1981, USCO acquired oil, gas rights in Kansas (Kansas Property)-Following purchase, USCO unable to borrow additional funds-Respondent making 9 interest-free loans to USCO from March 1981 to October 1982, totalling $336,799.15 in order to finance operations of company, development of Kansas property-By 5 notices of reassessment, Minister denying taxpayer's loss as claimed, including offset, deductions claimed in respect of 1982 to 1986 taxation years-Taxpayer objecting to reassessments-Trial Judge allowing appeals-Taxpayer issuing interest-free loans to USCO for purpose of earning income in form of dividends from company-Disputed loan device for financing operations of USCO-Expected return from loan through dividend income-Appellant relying on S.C.C. decision in Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32-Case dealing with deductibility of interest under Act, s. 20(1)(c)-S. 20(1)(c)(i) allowing for deduction of interest where money borrowed, then used for purpose of earning income from business or property-S. 40(2)(g)(ii) providing capital loss from disposition of debt deemed to be nil, unless debt acquired for purpose of gaining, producing income from business, property-Unlike s. 20(1)(c), s. 40(2)(g)(ii) only requires single-stage inquiry, namely purpose of acquiring debt-Inappropriate to apply to latter provision direct/indirect use limitation imposed in Bronfman-Language of s. 40 clear-Issue not use of debt but purpose for which acquired-No need for income to flow directly to taxpayer from loan-Approach consistent with commercial reality-Commercial reality to be considered by Courts in interpreting tax provisions like s. 40(2)(g)(ii) so long as consistent with text, purpose of provision-Anticipation of dividend income cannot be too remote-Deduction cannot be so far removed from corresponding income stream as to render connection to anticipated income tenuous at best-Where loan made for purpose of earning income through payment of dividends, connection sufficient to satisfy purpose requirement of s. 40(2)(g)(ii)-Taxpayer directly linked to income generating stream when shareholder in USCO-Entitled to capital loss deduction in respect of $115,417.55 in loans made during that period-Connection between loans, potential dividend income sufficient to invoke exclusionary clause in s. 40(2)(g)(ii)-Appeal dismissed-Income Tax Act, S.C. 1970-71-72, c. 63, ss. 20(1)(c), 40(2)(g)(ii).