On February 5, 2004, the Supreme Court of Canada released its decision in Gifford. Gifford involved a case where a Merrill Lynch broker (Bentley) "sold" a block of his accounts to another Merrill Lynch broker (Gifford) for $100,000. However, Gifford had obtained a loan in order to pay Bentley the $100,000. Bentley deducted his interest as a sales cost when preparing his personal income tax return. The Minister reassessed Gifford's personal income tax return so as to deny the deductibility of the interest expense and also to deny the amortization of the "client list" asserting that both the amortization and the interest expense were not employment expenses that were available to employees.
At Tax Court, Mr. Justice Bowman reversed the Minister's reassessment and allowed the deduction of interest and the full deduction of the client list cost of $100,000 asserting that both costs were sales costs that were incurred in order to enhance Mr. Gifford's employment income. Later, the Federal Court of Appeal overturned the Tax Court's decision stating that the acquisition of the client list was capital property and therefore should not be allowed as deduction. In addition, the Federal Court of Appeal denied the interest deduction stating that the Supreme Court had, in earlier decisions, held that interest expense was always of a capital nature (and therefore not deductible as a current expense), and that the Income Tax Act was a complete code on the deductibility of interest thereby not allowing such interest costs to be deducted as a current expense.
The March 4, 2004 decision of Gifford reaffirmed the Federal Court of Appeal's finding that the acquisition of the client list was of a capital nature, and therefore was not able to be deducted as a sales cost by Mr. Gifford. With the facts at hand, the Court also found that the interest costs incurred by Mr. Gifford were also of a capital nature, and therefore he was not able to deduct such costs against his employment income. However, what was interesting was that the Court analyzed the nature of interest expenses and commented that interest is not always on account of capital. Instead, the Court stated that when the proceeds of a loan add to the "financial capital" of the borrower, any interest paid on that loan will be considered a payment "on account of capital". However, to the extent that the proceeds of a loan would not add to the financial capital of the borrower, perhaps the interest would not be on account of capital and may be allowed as a current expense. The Supreme Court also stated that the Canadian Income Tax Act is not a complete code on interest deductibility.
The Gifford decision is a very interesting decision that will be analyzed for years to come. Planning opportunities may arise as a result of such decision. However, given that interest deductibility is currently a "hot topic" in taxation matters in Canada, it will be interesting to see how the government of Canada may respond to such a decision.
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