Reasons for judgment
Deschamps J. — Section 128 of Quebec’s Taxation Act, R.S.Q., c. I-3, authorizes the deduction of expenses relating to a business or property, provided that they were incurred to gain income. Section 160(a) adds that a taxpayer may deduct the interest paid on a loan used to earn income from a business or property.
In the case at bar, the Deputy Minister disallowed two deductions claimed by the respondent. The first was for interest paid on a loan initially contracted to purchase real property. The property had been sold by the time the deduction was disallowed. The second disallowed deduction related to interest on a loan that had initially been contracted to purchase shares in a company that went bankrupt before the deduction was claimed.
Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32, established that it is the current rather than the original use that is relevant in assessing the deductibility of interest payments (see to the same effect: Tennant v. M.N.R., [1996] 1 S.C.R. 305; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; Ludco Enterprises Ltd. v. Canada, [2001] 2 S.C.R. 1082, 2001 SCC 62).
Stewart v. Canada, [2002] 2 S.C.R. 645, 2002 SCC 46, did not alter the principle that when a reasonable expectation of income disappears, so does the right to a deduction. In that decision, the Court stated that “the deductibility of expenses presupposes the existence of a source of income” (para. 57).
In the instant case, once the properties were sold, the source of income ceased to exist and the loan was no longer being used to earn income from property in accordance with ss. 128 and 160. With regard to the shares, the company in question is bankrupt, and nothing in the record indicates a possibility of a resumption of activities, so here too the source of income has disappeared even though the company has not been dissolved.
For these reasons, the appeal is allowed, the judgment of the Court of Appeal is reversed, and the judgment of the Court of Québec is restored, with costs.
The motion for costs is dismissed.
Cases cited
- Bronfman Trust v. The Queen 17811-1987-01-29 ¶ 3
- Tennant v. M.N.R. 24339-1996-02-22 ¶ 3
- Shell Canada Ltd. v. Canada 26596-1999-10-15 ¶ 3
- Ludco Enterprises Ltd. v. Canada 2001 SCC 62 ¶ 3
- Stewart v. Canada 2002 SCC 46 para 57 ¶ 4