October 07, 2011

Barbican Properties Inc. (Appellant) v. Her Majesty the Queen (Respondent)

97 DTC 5008
Federal Court of Appeal
November 20, 1996

(Court File No. A-321-96.)

Deductions — Interest — Corporate taxpayer permitted to defer payment of interest for limited time on its bank loans, if its operating revenues from the properties securing such loans insufficient to cover such payment — Whether such deferred interest still payable “pursuant to a legal obligation to pay interest” and hence deductible — Income Tax Act, R.S.C. 1985, Chapter 1 (5th Supp.), ss. 18(1)(i) and 20(1)(c).

During 1985 and 1986, the corporate taxpayer’s predecessors borrowed money from a chartered bank and used this to buy income earning properties from the bank. Under the terms of these bank loans (each of which was secured by a mortgage on a particular property), the taxpayer (and its predecessors) were required to pay interest at a stipulated rate, accrued daily and payable monthly. If the operating revenues from any property (net of operating costs) in any year were insufficient to cover the loan interest payable in that year, however, the taxpayer was entitled to defer payment of that interest for a limited period of time. Any deferred interest and interest thereon, however, was due and payable at the latest upon the maturity of the loan, or upon the sale of the relevant property, whichever occurred first. In assessing the taxpayer for 1989, 1990, and 1991, the Minister disallowed its deduction of the said deferred interest amounts. The taxpayer’s appealed to the Tax Court of Canada was dismissed on the grounds (1) that the deferred interest amounts were not payable “pursuant to a legal obligation to pay interest”, in accordance with paragraph 20(1)(c) of the Act, and (2) that they were non-deductible contingent liabilities within the meaning of paragraph 18(1)(i) of the Act. The taxpayer appealed to the Federal Court of Appeal.

Held: The taxpayer’s appeal was dismissed. The Tax Court Judge was correct in his conclusions.