Interest Deductibility, the Reasonable Expectation of Profit Test, and the Supreme Court of Canada: From Bronfman Trust and Moldowan to Singleton, Ludmer, Stewart and Walls
ADVOCACY AND TAXATION IN CANADA, David W. Chodikoff, James L. Horvath, eds., pp. 399-429, Toronto: Irwin Law, 2004
Posted: 20 Aug 2009
Date Written: 2004
Until the 1970s, Canadian courts affirmed a narrow approach to the application of tax legislation, according to which these statutes were interpreted in a strict and literal manner and tax consequences were based on the legal character of transactions and arrangements irrespective of their commercial or economic substance and the absence of any non-tax purpose for their existence. Characterized by one Canadian writer as the two “pillars of tax planning,” these judicially-established norms of literalism and formalism were highly conducive to tax avoidance.
From the late-1970s to the early 1990s, the Supreme Court of Canada adopted a much broader approach to tax statutes, favouring a more purposive method of statutory interpretation, endorsing a more substantive approach to the application of tax rules having regard to “commercial and economic realities, rather than juristic classification of form,” and suggesting that tax-motivated transactions could fail to achieve their intended results where they contradict the “object and spirit” of a relevant statutory provision or the provision itself requires a business purpose.
This article traces the change in the Supreme Court of Canada’s approach to tax legislation by examining the criteria for interest deductibility set out in Bronfman Trust, Singleton and Ludmer, and the role of the reasonable expectation of profit test in Moldowan, Stewart and Walls. Section B reviews the cases on interest deductibility, contrasting the substantive approach employed in Bronfman Trust and various post-Bronfman Trust decisions with the formalist approach adopted in Singleton and Ludmer. Section C considers the reasonable expectation of profit test, contrasting the broad formulation in Moldowan and subsequent Federal Court of Appeal decisions with the much narrower interpretation adopted in Stewart and Walls. Section D offers concluding remarks, considering the reasons for and implications of the Court’s current approach, and the draft legislation released by the Department of Finance.
Keywords: Canada, Tax legislation, Statutory interpretation, Jurisprudence
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