Cattanach,
J:—This
is
an
appeal
from
a
decision
of
the
Tax
Appeal
Board
dated
December
10,
1970,
reported
[1970]
Tax
ABC
1303,
whereby
the
assessment
of
the
appellant
by
the
Minister
with
respect
to
its
1966
taxation
year
was
confirmed.
The
facts
are
not
in
dispute
and
the
issue
is
succinctly
set
out
in
paragraph
21
of
an
agreed
statement
of
facts
which
reads
as
follows:
The
parties
hereto
by
their
respective
solicitors,
hereby
admit
the
facts
and
documents
hereinafter
set
forth
provided
that:
(a)
such
admissions
are
made
for
the
purposes
of
this
appeal
only
and
may
not
be
used
against
either
party
by
any
other
person
or
on
any
other
occasion;
(b)
the
parties
hereto
reserve
their
right
to
object
to
the
relevancy
of
any
of
the
said
facts
and
documents;
and
(c)
either
party
may
adduce
further
and
other
evidence
relevant
to
this
appeal
and
not
inconsistent
with
this
agreement.
1.
The
Appellant
has,
at
all
times
relevant
to
the
appeal
herein,
carried
on
business
in
the
City
of
Edmonton,
in
the
Province
of
Alberta
as
the
owner
and
operator
of
a
hotel.
2.
On
or
about
August
5,
1960,
the
Appellant
borrowed
from
Credit
Foncier
Franco-Canadien
(herein
referred
to
as
Credit
Foncier)
the
sum
of
$375,000,
the
said
sum
to
be
used
for
the
purpose
of
earning
income
from
the
Appellant’s
business.
3.
The
repayment
of
the
said
loan
was
secured
by
a
mortgage,
a
copy
of
which
is
annexed
hereto
as
Exhibit
1,
upon
lands
and
premises
owned
by
the
Appellant
and
described
as:
Parcel
“A”
—
Lot
Two
(2),
containing
2.42
acres,
more
or
less,
in
Block
Eighty-eight
(88),
in
the
City
of
Edmonton,
as
shown
on
Subdivision
Plan
6018
KS
(Allendale
NE
17-52-24-W
4)
Reserving
thereout
all
mines
and
minerals
Parcel
“B”
—
Lot
Two
A
(2A),
containing
0.84
of
an
acre,
more
or
less,
in
Block
Eighty-eight
(88),
in
the
City
of
Edmonton,
as
shown
on
Subdivision
Plan
6018
KS
(Allendale
NE
17-52-24-W
4)
Reserving
thereout
all
mines
and
minerals
21.
The
question
for
the
opinion
of
the
Court
is
whether
the
amount
of
$13,108.27
paid
by
the
Appellant
as
herein
described
was
an
expense
incurred
in
the
course
of
borrowing
money
within
the
meaning
of
section
11
(1
)(cb)(ii)
of
the
Income
Tax
Act,
the
deduction
of
which
is
not
precluded
by
sections
11
(1
)(cb)(iii)
and
11
(1
)(cb)(iv)
of
the
Income
Tax
Act,
so
as
to
be
deductible
in
computing
the
Appellant’s
loss
from
its
business
for
the
1964
taxation
year.
22.
If
the
Court
shall
be
of
the
opinion
that
the
said
amount
is
not
deductible
in
computing
the
Appellant’s
income
then
Judgment
shall
be
entered
for
the
Respondent
dismissing
the
appeal
with
costs.
If
the
Court
shall
be
of
the
opinion
that
the
said
amount
is
deductible
in
computing
the
Appellant’s
income
then
Judgment
shall
be
entered
for
the
Appellant
allowing
the
appeal
with
costs
and
referring
the
assessment
back
to
the
Respondent
for
the
purpose
of
re-assessing
in
accordance
with
the
opinion
of
this
Court.
There
are
five
exhibits
to
the
agreed
statement
of
facts:
Exhibit
1
is
a
copy
of
the
mortgage.
Exhibit
2
is
proposal
for
prepayment
by
the
appellant
as
mortgagor
to
the
mortgagee.
Exhibit
3
is
the
acceptance
of
that
proposal
by
the
mortgagee.
Exhibit
4
is
an
agreement
between
the
appellant
and
the
Provincial
Treasurer
of
Alberta.
Exhibit
5
is
a
debenture
of
the
appellant
in
favour
of
the
Provincial
Treasurer.
For
the
purposes
of
these
reasons
I
do
not
consider
it
necessary
to
reproduce
the
exhibits
in
detail.
Their
material
effects
are
reflected
in
the
agreed
statement
of
facts.
However
it
is
advantageous
to
summarize
the
facts
giving
rise
to
this
appeal.
The
appellant
had
borrowed
the
sum
of
$375,000
to
construct
a
hotel,
with
interest
at
734%
secured
by
a
first
mortgage
on
the
premises.
The
mortgage
did
not
provide
for
the
prepayment
of
the
moneys
owing
thereunder.
The
appellant’s
potential
favourable
business
opportunities
dictated
the
expansion
of
its
hotel
accommodation.
To
do
so
required
the
borrowing
of
further
funds.
The
first
lender
refused
to
advance
the
further
funds.
The
appellant
arranged
to
borrow
the
further
funds
required
by
it
from
another
lender
at
6%
but
this
lender
required
that
the
funds
to
be
advanced
by
it
must
be
secured
by
a
first
charge
on
the
appellant’s
premises.
To
satisfy
this
condition
the
appellant
had
to
discharge
the
existing
first
mortgage
which
did
not
contain
a
provision
for
prepayment.
The
first
lender
agreed
to
permit
the
appellant
to
prepay
the
entire
principal
balance
owing
under
the
mortgage
with
interest
to
the
date
of
repayment
plus
a
bonus
equivalent
to
six
months’
interest
which
amounted
to
$13,108.27.
This
the
appellant
did
and
borrowed
money
from
the
second
lender.
The
issue
is
whether
the
amount
of
$13,108.27
so
paid
by
the
appellant
to
the
first
lender
as
a
bonus
to
enable
the
appellant
to
discharge
the
mortgage
held
by
the
first
lender
in
order
that
the
appellant
might
borrow
further
funds
from
the
second
lender
was
an
expense
of
borrowing
money
within
the
meaning
of
subparagraph
11
(1
)(cb)(ii)
of
the
Income
Tax
Act,
the
deduction
of
which
is
not
precluded
by
subparagraphs
11
(1
)(cb)(iii)
and
11
(1
)(cb)(iv)
so
as
to
be
deductible
in
computing
the
appellant’s
income.
Subparagraphs
11
(1
)(cb)(ii),
(iii)
and
(iv)
read
as
follows:
11.
(1)
Notwithstanding
paragraphs
(a),
(b)
and
(h)
of
subsection
(1)
of
section
12,
the
following
amounts
may
be
deducted
in
computing
the
income
of
a
taxpayer
for
a
taxation
year:
(cb)
an
expense
incurred
in
the
year,
(ii)
in
the
course
of
borrowing
money
used
by
the
taxpayer
for
the
purpose
of
earning
income
from
a
business
or
property
(other
than
money
used
by
the
taxpayer
for
the
purpose
of
acquiring
property
the
income
from
which
would
be
exempt),
but
not
including
any
amount
in
respect
of
(iii)
a
commission
or
bonus
paid
or
payable
to
a
person
to
whom
the
shares
were
issued
or
sold
or
from
whom
the
money
was
borrowed,
or
for
or
on
account
of
services
rendered
by
a
person
as
a
salesman,
agent
or
dealer
in
securities
in
the
course
of
issuing
or
selling
the
shares
or
borrowing
the
money,
or
(iv)
an
amount
paid
or
payable
as
or
on
account
of
the
principal
amount
of
the
indebtedness
incurred
in
the
course
of
borrowing
the
money,
or
as
or
on
account
of
interest;
In
British
Columbia
Electric
Railway
Co,
Ltd
v
MNR,
[1958]
SCR
133;
[1958]
CTC
21,
Mr
Justice
Abbott
said
at
page
137
[31]:
Since
the
main
purpose
of
every
business
undertaking
is
presumably
to
make
a
profit,
any
expenditure
made
“for
the
purpose
of
gaining
or
producing
income”
comes
within
the
terms
of
Section
12(1)(a)
whether
it
be
classified
as
an
income
expense
or
as
a
Capital
outlay.
Once
it
is
determined
that
a
particular
expenditure
is
one
made
for
the
purpose
of
gaining
or
producing
income,
in
order
to
compute
income
tax
liability
it
must
next
be
ascertained
whether
such
disbursement
is
an
income
expense
or
a
Capital
outlay.
The
leading
authority
for
the
proposition
that
the
cost
of
financing
a
business
is
a
capital
expense
is
in
Montreal
Coke
and
Manufacturing
Co
v
MNR,
[1944]
AC
126;
[1944]
CTC
94.
In
that
case
interest
bearing
bonds
were
converted
into
other
securities
carrying
lower
rates
of
interest.
It
was
claimed
that
the
expenses
of
conversion
were
incurred
“for
the
purpose
of
earning
income”.
The
Supreme
Court
of
Canada
held
([1942]
CTC
1)
that
the
payments
on
that
account
were
not
for
that
purpose
and
that,
in
any
event,
the
expenses
were
outgoings
of
capital
and
accordingly
were
not
deductible.
This
decision
was
upheld
by
the
Privy
Council
on
the
first
ground.
This
decision
was
followed
by
the
Supreme
Court
of
Canada
in
Bennet
&
White
Construction
Co
Ltd
v
MNR,
[1949]
SCR
287;
[1949]
CTC
1,
where
it
was
held
that
commission
payments
were
not
allowable
as
deductible
expenses
since
they
were
incurred
in
connection
with
the
financing
of
the
business
and
were
not
related
to
the
income
earning
process.
Paragraph
11
(1)(cb)
was
added
to
the
Income
Tax
Act
by
subsection
1(1),
Statutes
of
Canada,
1955,
chapter
54
applicable
to
the
1955
and
subsequent
taxation
years.
The
obvious
purpose
of
this
section
is
to
permit
the
deduction
of
certain
expenses
incurred
in
raising
funds
by
borrowing
or
by
the
issue
of
capital
stock
which
were
previously
not
deductible,
as
indicated
in
the
two
decisions
referred
to
immediately
above,
because
those
expenses
were
not
directly
related
to
the
earning
of
income
or
were
outlays
or
payments
on
account
of
capital
or
replacement
of
capital
within
the
meaning
of
paragraphs
12(1)(a)
and
(b).
In
paragraphs
2,
5
and
10
of
the
agreed
statement
of
facts
it
is
agreed
between
the
parties
that
the
money
originally
borrowed
by
the
appellant
from
the
first
lender,
the
additional
money
sought
to
be
borrowed
by
the
appellant
from
the
first
lender
which
was
refused
and
the
money
subsequently
borrowed
by
the
appellant
from
the
second
lender
was
for
use
by
the
appellant
“for
the
purpose
of
earning
income
from”
its
business.
In
view
of
the
statement
of
Mr
Justice
Abbott
in
British
Columbia
Electric
Railway
Co,
Ltd
case
(supra)
quoted
above
to
the
effect
that
since
the
purpose
of
any
business
is
to
make
a
profit,
it
follows
most
expenditures
are
made
for
the
purpose
of
gaining
or
producing
income
from
the
business
and
deductibility
thereof
for
income
tax
purposes
is
dependent
upon
the
outlay
or
expense
being
an
income
expense
or
a
capital
outlay.
I
agree
that
moneys
which
were
borrowed
by
the
appel-
lant
from
both
the
first
lender
and
the
second
lender
was
“money
used
by
the
taxpayer
for
the
purpose
of
earning
income
from
a
business”
within
the
meaning
of
those
words
as
they
appear
in
subparagraph
11
(1)(cb)(ii).
Accordingly
it
follows
that
whether
the
sum
of
$13,108.27
paid
out
by
the
appellant
in
the
circumstances
above
described
is
“an
expense
incurred
in
the
year
in
the
course
of
borrowing
money”
falls
to
be
determined
on
the
interpretation
of
paragraph
11
(1)(cb)
without
reference
to
section
12.
The
words
of
subsection
11(1)
are,
“Notwithstanding
paragraphs
(a),
(b)
and
(h)
of
subsection
(1)
of
section
12,
the
following
amounts
may
be
deducted
in
computing
the
income
of
a
taxpayer
for
a
taxation
year”
and
paragraph
(cb)
is
included.
In
commenting
on
paragraph
11(1)(cb)
my
brother
Heald
said
in
Canada
Permanent
Mortgage
Corporation
v
MNR,
[1971]
CTC
694
at
699;
[1971]
DTC
5409
at
5412:
This
subsection
operates
to
permit
a
taxpayer
to
deduct
expenses
incurred
in
the
course
of
borrowing
money
used
by
the
taxpayer
to
earn
income
from
his
business
whether
or
not
it
is
prohibited
by
section
12(1)(a),
(b)
and
(h).
.
.
.
Reverting
to
the
facts
in
this
appeal
it
is
significant
to
recall
that
there
were
two
different
and
distinct
borrowings.
The
appellant
sought
to
obtain
further
funds
from
the
first
lender.
Under
the
mortgage
held
by
the
first
lender
principal
and
interest
remained
unpaid
and
the
mortgage
contained
no
provision
for
prepayment
to
the
first
lender.
The
appellant,
having
made
the
commercial
decision
to
expand
its
hotel
facilities
by
which
it
expected
to
earn
still
further
money
from
its
business,
was
compelled
to
seek
the
further
necessary
funds
from
another
source.
This
the
appellant
succeeded
in
doing
but
subject
to
the
second
lender
having
a
first
charge
on
the
appellant’s
premises.
To
meet
this
condition
required
by
the
second
lender
the
appellant
was
compelled
to
pay
all
arrears
of
principal
and
interest
and
in
addition
was
obliged
to
pay
to
the
first
lender
the
sum
of
$13,108.27
as
a
bonus,
computed
by
the
yardstick
of
the
equivalent
of
interest
for
six
months,
for
the
privilege
of
discharging
the
mortgage
before
maturity.
Basically
the
position
taken
by
counsel
for
the
appellant
was
that
the
payment
of
$13,108.27
to
the
first
lender
was
an
expense
in
the
course
of
borrowing
from
the
second
lender.
I
do
not
accept
that
proposition.
The
payment
of
$13,108.27
by
the
appellant
was
not
a
payment
of
interest
nor
a
payment
in
lieu
of
interest
to
the
first
lender
and
it
most
certainly
was
not
a
payment
on
account
of
principal.
It
was
a
bonus.
In
Puder
v
MNR,
[1963]
CTC
445,
Mr
Justice
Thurlow
pointed
out
that
a
mortgagee
has
other
rights
besides
the
payment
of
principal
and
interest.
One
of
those
rights
would
be
to
hold
the
mortgage
until
its
maturity.
The
first
lender,
in
the
facts
of
the
present
appeal,
undoubtedly
wished
to
avail
itself
of
that
right
because
it
did
not
include
a
provision
in
the
mortgage
permitting
of
prepayment
by
the
mortgagor.
Despite
the
pronounced
trend
in
modern
advertising
by
money
lenders
to
emphasize
the
ease
of
obtaining
money
on
loans
and
omitting
a
reference
to
or
placing
minimal
emphasis
on
the
fact
that
the
lender
expects
to
be
repaid,
nevertheless,
as
was
said
by
Buckley,
J
in
In
re
Southern
Rio
Grande
Do
Sol
Railway
Company
Limited,
[1905]
2
Ch
78
at
83,
“borrowing
necessarily
implies
repayment
at
some
time
and
under
some
circumstances”.
The
payment
of
$13,108.27
by
the
appellant
to
the
first
lender
was
not
a
payment
for
the
use
of
the
money
obtained
from
the
first
lender.
This
payment
was
made
to
the
first
lender
as
an
inducement
or
bonus
for
the
first
lender
to
forego
its
right
to
hold
its
first
mortgage
to
maturity
and
to
accord
to
the
appellant
the
privilege
of
paying
the
balance
of
principal
and
interest
under
the
mortgage,
which
it
was
the
appellant’s
obligation
to
do
ultimately,
prior
to
the
due
dates.
The
payment
of
the
sum
of
$13,108.27
was
an
expense
incurred
for
this
purpose.
The
payment
was
not
made
in
the
course
of
borrowing
money
from
the
first
lender
but
it
was
made
in
the
course
of
repaying
that
money.
This
being
so
it
follows
that
the
payment
to
the
first
lender
cannot
be
construed
as
an
expense
incurred
by
the
appellant
in
the
course
of
borrowing
money
from
the
second
lender.
I
would
add
that
the
foregoing
reasoning
is
substantially
the
same
as
that
adopted
by
the
Chairman
of
the
Tax
Appeal
Board
in
Dominion
Electrohome
Industries,
Ltd
v
MNR,
29
Tax
ABC
159;
62
DTC
256.
in
that
case
the
appellant
arranged
a
$1,000,000
debenture
issue
to
provide
further
working
capital.
It
was
a
condition
that
to
arrange
this
subsequent
debenture
issue
a
prior
$250,000
debenture
issue
had
to
be
discharged.
In
order
to
retire
the
first
debenture
issue
the
appellant
was
obliged
to
pay
a
premium
of
$6,117.
The
appellant
sought
to
deduct
this
premium
as
an
expense
incurred
in
the
course
of
borrowing
money
used
for
the
purpose
of
earning
income
from
the
appellant’s
business
within
the
meaning
of
paragraph
11(1)(cb).
The
Minister
disallowed
the
deduction
so
claimed.
On
appeal
to
the
Tax
Appeal
Board,
the
Chairman
held
that
the
premium
of
$6,117
paid
by
the
appellant
was
not
deductible
and
dismissed
the
appeal.
He
said
at
pages
168-9
[261-2]:
There
is
no
doubt
that
the
payment
of
$6,117
was
made
with
a
view
to
increasing,
eventually,
the
appellant’s
income.
However,
in
order
to
benefit
by
the
provisions
of
paragraphs
(c)
or
(cb)
of
section
11(1)
—
which
deal
specifically
with
payments
made
in
connection
with
borrowing
money
for
use
in
a
taxpayer’s
business
—
a
taxpayer
must
show
that
the
amount
was
paid
either
as
interest
on
borrowed
money
used
for
the
purpose
of
earning
income
from
its
business
or
that
it
was
an
expense
incurred
in
the
year
in
the
course
of
borrowing
money
used
for
the
purpose
of
earning
income
from
its
business.
Clearly
the
payment
of
$6,117
was
not
made
for
the
use
of
money
borrowed
under
the
first
debenture
issue,
and
it
was
not
an
expense
arising
in
the
course
of
borrowing
money
for
which
the
debentures
were
issued.
Instead
this
payment
was
made
because
the
appellant
wished
to
repay
and
did
repay
the
balance
outstanding
on
the
first
debenture
issue.
No
provision
is
made
in
the
Income
Tax
Act
for
the
deduction
of
interest
or
bonus
paid
in
the
course
of
repaying
borrowed
capital.
The
reasoning
adopted
by
the
Chairman
commends
itself
to
me
as
being
irreproachable
and
it
coincides
with
the
reasoning
I
have
adopted
in
the
present
appeal.
In
view
of
the
conclusion
I
have
reached,
which
is
that
the
expense
incurred
by
the
appellant
herein
was
not
an
expense
incurred
in
the
course
of
borrowing
money
from
the
second
lender
but
was
an
expense
incurred
in
the
course
of
repaying
the
money
borrowed
from
the
first
lender
and
accordingly
the
expense
does
not
fall
within
subparagraph
11
(1
)(cb)(ii),
it
is
not
necessary
for
me
to
consider
whether
the
deduction
is
precluded
by
subparagraphs
11
(1
)(cb)(iii)
and
(iv).
The
appeal
is
dismissed
with
costs.