October 07, 2011

Central City Financial Services Ltd. (Appellant) v. Her Majesty the Queen (Respondent)

98 DTC 1021
Tax Court of Canada
August 27, 1997

(Court File No. 95-1839(IT)G.)

Deductions — Interest — Corporate taxpayer purporting to deduct interest in respect of a debenture issued by it — Whether such debenture “settled” or “extinguished”, thus disentitling taxpayer to interest deductions claimed in respect thereof — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 20(1)(c) and 80(1).

C owned fifty per cent of the shares of the corporate taxpayer. The taxpayer’s bank held a Debenture secured against all of its assets (“the Debenture” ). The taxpayer encountered financial difficulties and its bank sued C on his personal guarantee. C defended the action, alleging unlawful actions by the bank. During the trial a settlement was reached, which was recorded in a handwritten agreement of April 12, 1988. Such agreement, however, made no reference to the Debenture, although in a subsequent agreement dated May 22, 1988, the bank assigned the Debenture to C. In assessing the taxpayer for 1989, the Minister assumed that the Debenture had been “settled” or “extinguished” (within the meaning of section 80 of the Act) by virtue of the said agreement of April 12, 1988. Hence, the deduction by the taxpayer of interest in respect of the Debenture (in computing its income for 1989) was disallowed. The taxpayer appealed to the Tax Court of Canada.

Held: The taxpayer’s appeal was dismissed. On the evidence, the agreement of April 12, 1988 clearly “settled” or “extinguished” the Debenture under section 80 of the Act. Hence the taxpayer was not entitled to the interest deductions which it claimed. The Minister’s assessment on this issue was affirmed accordingly. The Minister, however, was ordered to reassess to give effect to a Partial Consent to Judgment concerning other issues relating to the taxpayer’s 1992 and 1993 taxation years.