Majority reasons in the Supreme Court by Major J. in Singleton v. Canada, [2001] 2 S.C.R. 1046 (introduction):
1. This appeal raises the issue of whether borrowed money was “used for the purpose of earning income” within the meaning of s. 20(1)(c)(i) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the “Act”). The respondent had at least $300,000 of equity in his law firm. He decided to use this money to purchase a house and to refinance his law firm equity with borrowed money. The respondent then deducted the interest payments made on the borrowed money pursuant to s. 20(1)(c)(i) of the Act, claiming that the borrowed money now represented his investment in the law firm. The Minister of National Revenue denied the deduction on the grounds that the borrowed money was used to finance the purchase of the house and not as a business investment.
2. The question is whether the borrowed money was used for the purpose of earning income from the law firm or for the purpose of financing the purchase of his house. If the former, the interest is deductible; if the latter, it is not.
3. I conclude that the borrowed money was used for the purpose of earning income from the law firm. As such, the interest is deductible pursuant to s. 20(1)(c)(i) of the Act. Accordingly, the appeal is dismissed.
In the Federal Court of Appeal, [1999] 4 FC 484:
Rothstein, J.A.
1. This is an appeal from the Tax Court of Canada involving the deductibility of interest under paragraph 20(1)(c) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended. Subparagraph 20(1)(c)(i) permits the deduction of:
20. (1) . . .
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(c) an amount paid in the year or payable in respect of the year . . . , pursuant to a legal obligation to pay interest on |
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(i) borrowed money used for the purpose of earning income from a business or property . . . |
or a reasonable amount in respect thereof, whichever is the lesser;
2. The issue is whether money borrowed by the appellant was used for the purpose of earning income from his law firm or whether it was used for the purpose of financing the purchase of a home. If the former, the interest is deductible; if the latter, it is not.
Linden, J.A. (dissenting) –
1. A man takes $300,000 out of his law firm and buys a house. On the same day, he borrows $300,000 from a bank and deposits it with his law firm, replacing what he took out. He seeks to deduct the interest on the borrowed money pursuant to paragraph 20(1)(c) of the Income Tax Act [S.C. 1970-71-72, c. 63] (ITA or the Act), which reads:
20. (1) 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:
. . .
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(c) an amount paid in the year or payable in respect of the year (depending upon the method regularly followed by the taxpayer in computing his income), pursuant to a legal obligation to pay interest on |
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(i) borrowed money used for the purpose of earning income from a business or property . . . |
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or a reasonable amount in respect thereof, whichever is the lesser; |
2. The issue in this case is whether the interest on the loan is deductible. Specifically, the focus of the case is whether the borrowed funds were used for the purpose of earning income.
3. The facts of the case are adequately summarized by my colleague and by Bowman T.C.J. at the Tax Court. Unlike my colleagues, I have come to the conclusion that the Tax Court Judge was correct in deciding these borrowed funds are not properly deductible under paragraph 20(1)(c) of the Act. I have three reasons for my conclusion, which are as follows:
1. The determination of the purpose for which borrowed money was used is primarily a factual determination which should not be interfered with.
2. Past cases have, without exception, denied the deductibility of interest in transactions such as these.
3. The task of the Court under paragraph 20(1)(c) of the Act is to examine the commercial and economic realities underlying the transaction to determine if the borrowed funds were "used for the purpose of earning income," which, in my view, they were not.