Interprovincial Pipe Line Company v. Minister of National Revenue, [1959] CTC 1, 59 DTC 1018

THURLOW, J.:—This is an appeal from income tax reassessments in respect of the appellant’s income for each of the years 1950 to 1954 inclusive. The matter began as five separate appeals taken in respect of the assessments for each of the years mentioned, but by order of the Court made prior to the filing of the Minister’s reply, these appeals were consolidated into one cause. The problem in each year is the same, namely the extent, if any, to which the appellant is entitled to a deduction from income tax in respect of tax levied by the United States on interest which became payable to the appellant in the United States.

In each of these years, a deduction from income tax in respect of tax paid to a foreign government was permitted by the statute in certain situations, but the wording of the applicable provisions was not precisely the same for all of the years under review. For the years 1950 and 1951 Section 35(1) of The Income Tax Act, Statutes of Canada 1948, c. 52, provided as follows:

" ‘38. (1) A taxpayer who was resident in Canada at any time in a taxation year may deduct from the tax for the year otherwise payable under this Part an amount equal to the lesser of

(a) the tax paid by him to the government of a country other than Canada on his income from sources therein for the year, or

(b) that proportion of the tax for the year otherwise payable under this Part that

(1) that part of the taxpayer’s income

(A) for the year, if section 28 is not applicable, or

(B) if section 28 is applicable, for the period or periods in the year referred to in paragraph

(a) thereof,

from sources in that country that was not exempt from income tax in that country minus amounts that are deductible for the year or such period or periods, as the case may be, under paragraph (d) of subsection (1) of section 27,

is of

(ii) the taxpayer ‘s income

(A) for the year, if section 28 is not applicable, or

(B) if section 28 is applicable, for the period or periods in the year referred to in paragraph

(a) thereof,

minus amounts that are deductible for the year or such period or periods, as the case may be, under section 27.’’

Section 38(1) was amended by Statutes of Canada 1952, c. 9, Section 14(1), applicable to the 1952 taxation year, so as to make clause (a) read as follows:

“(a) the tax paid by him to the government of a country

other than Canada on that part of his income from sources therein for the year upon which he is subject to tax under this Part for the year, or’?

Section 38, as so amended, appears in the same form (save for changes in the numbering of the sections therein referred to) as Section 41(1) of the Income Tax Act, Revised Statutes of Canada 1952, c. 148, applicable to the years 1953 and 1954. The Part referred to in the amendment above quoted is Part I of The Income Tax Act, by Section 3 of which the income of a taxpayer is declared to be his income from all sources inside or outside Canada and to include income from all businesses and property.

The interest in question accrued to the appellant on demand notes and certain bonds of Lakehead Pipe Line Co. Inc. a wholly-owned United States subsidiary of the appellant, hereinafter referred to as Lakehead, and on United States Treasury bills which the appellant held, and it was subjected in the United States to a tax of 15 per cent, calculated on the gross amount of such interest. For each of the years in question, the appellant, in computing its income for income tax purposes, included in its receipts the whole amount of such interest but claimed even greater amounts as deductions for interest paid on its funded debt. Then, after arriving at its profit for the year and computing the tax on it, the appellant, in each year, claimed credits pursuant to the provisions above mentioned in respect of the 15 per cent tax so paid to the United States.

The Minister, in reassessing the appellant, disallowed the foreign tax credits so claimed on the ground that the appellant bad received no net income from such bonds, notes and Treasury bills and, consequently, was entitled to no tax credits pursuant to the provisions above mentioned in respect of the tax paid in the United States on the interest from them.

In support of his position, the Minister relies on the provisions of Section 4, which was the same in both The Income Tax Act and the Income Tax Act, and on the definition of "‘income from a source” which was contained in Section 127(1) (av) of The Income Tax Act, now Section 139(1) (az) of the Income Tax Act, These provisions are as follows:

"‘4. Subject to the other provisions of this Part, income for a taxation year from a business of property is the profit therefrom for the year. ‘

"127. (1) In this Act,

(av) a taxpayer’s income from a business, employment, property or other source of income or from sources in a particular place means the taxpayer’s income computed in accordance with this Act on the assumption that he had during the taxation year no income except from that source or those sources of income and was entitled to no deductions except those related to that source or those sources; . . .’’

The appeal involves two main questions; the first, a question of law as to what is meant by income in the expressions ‘‘income from sources therein for the year and that part of the taxpayer’s income . . from sources in that country’’ in Section 38(1) of The Income Tax Act and in the expression ‘‘income from sources therein for the year upon which he is subject to tax under this Part for the year" in Section 38(1) as amended and as carried into Section 41 of the Income Tax Act; and the second, a question of fact as to whether or not the appellant had any such income from sources in the United States in any of the years under review.

The appellant was incorporated by Statutes of Canada 1949 (1st Sess.), c. 34, its purpose in general being to construct and operate a pipe line system for the transportation of crude oil. Following its incorporation, the appellant proceeded to construct a pipe line from Redwater, Alberta through Edmonton and thence through Regina and other points for a total distance of 703 miles to the Canadian-United States border at Gretna, some 75 miles south of Winnipeg. At the same time, its United States subsidiary, Lakehead, constructed a connecting pipe line from the Canadian-United States border at Gretna for a distance of 324 miles to Superior, Wisconsin, whence oil could be taken by tanker to Sarnia and Toronto. By October, 1950, oil was being delivered by the appellant’s pipe line as far east as Regina, and by the end of December of the same year the whole line from Redwater to Superior was in operation.

The funds required to pay for this pipe line system and to provide the appellant with working capital totalled in amount approximately $90,000,000 and were raised by the sale of shares, debentures, and bonds of the appellant. In August and October, 1949 the appellant sold a total of 20,012 shares of its capital stock, from which it realized $1,000,600. On October 18, 1949, the appellant sold $17,000,000 principal amount of 4% convertible debentures and in January, April, and July, 1950 it sold a total of $37,000,000 principal amount of its 31% first mortgage and collateral trust bonds, series A, and $35,000,000 principal amount of its 314% first mortgage and collateral trust bonds, series B, the latter being payable in American funds and both maturing January 1, 1970.

Pursuant to the terms of the indenture securing the first mortgage bonds, the proceeds of the sale of the debentures and of the first mortgage bonds constituted a fund known as the Pipe Line Construction Fund and were held by the Royal Trust Company as trustee and disbursed to the appellant or pursuant to its directions in accordance with the provisions of the indenture. Under these provisions, the proceeds of the sale of the debentures could be withdrawn by the appellant from time to time as obligations in connection with the construction of the pipe line were incurred. Moneys could also be withdrawn from the trustee for the purpose of purchasing shares of Lakehead or of making advances to Lakehead (other than in respect of the first mortgage bonds of Lakehead) or to reimburse the appellant for moneys used to make such purchases or advances. A feature of the terms of the indenture was the right of the appellant to receive from the trustee up to $5,000,000 of the debenture proceeds as working capital without having spent or obligated itself to spend this sum on construction of the pipe line or in purchases of Lakehead shares or in advances to Lakehead. By April 5, 1950 the whole of the proceeds of the sale of these debentures had been withdrawn by the appellant.

The debentures were convertible at the option of the holder at their principal amount into shares of the appellant’s capital stock. In the meantime, until converted or until called for redemption they bore interest at four per cent, payable half- yearly on April 1 and October 1 in each year. By one of the terms it was provided that, on conversion of a debenture, there should be no payment or adjustment by the company or by the debenture holder on account of any accrued interest on the debenture or on account of any dividends on the shares issuable upon such conversion. Ultimately, the whole $17,000,000 debenture issue was converted into shares and became part of the capital of the appellant company. Most of the debentures were converted during the year 1952 when, prior to the October 1 interest date, $13,584,000 had been converted. By the end of January, 1953, all but $18,000 had been converted into shares. Interest payments on the debentures were considerably reduced during 1952 as a result of such conversions and ceased entirely from January 15, 1953, when the outstanding debentures were called for redemption.

The proceeds of sale of the 312% first mortgage and collateral trust bonds, series A and series B, were also paid over from time to time by the trustee to the appellant or in accordance with its directions, but in each instance on receipt of a certificate from the appellant that it had acquired gross property additions to the extent of the sum requested. One kind of property addition in respect of which sums could be withdrawn from the trustee under the terms of the indenture was first mortgage bonds of Lakehead. It was also a term of the indenture that none of the proceeds of sale of the bonds should be withdrawn until all of the proceeds of sale of the debentures had been withdrawn from the trustee. Withdrawal of the proceeds of these bonds commenced on April 6, 1950 and was completed on July 9, 1952.

Funds to finance the construction of the portion of the pipe line system in the United States were provided by the appellant’s purchases of shares and first mortgage bonds of Lakehead and advances to Lakehead on the security of demand notes to the total extent of $24,156,000. These were made as follows :

The 4% demand notes were paid on December 29, 1952. I shall return to these purchases and advances in greater detail later in this judgment, when considering the evidence as to the source of the funds used by the appellant in making them.

In 1953 an extension of the pipe line system was constructed from Superior, Wisconsin, to Sarnia, Ontario, a distance of some 650 miles, of which seven miles were in Canada and the remainder in the United States. Funds for financing this extension and some further improvements to the Canadian line were raised by the appellant by the sale of shares of its capital stock from which it realized nearly twenty-six million dollars and by the sale of its 4% first mortgage and collateral trust bonds, series C, in the principal amount of $60,000,000. In the same year, the appellant purchased shares of Lakehead to the extent of $15,000,000 and 4% third series Lakehead bonds to the extent of $55,000,000. I shall deal with the latter purchases, as well, in greater detail later in this Judgment, when considering the source of the moneys used to make them.

In 1954 further improvements, notably looping in portions of the system and construction of additional pumping stations, were made, and for the purpose of financing these improvements the appellant sold its 354% first mortgage and collateral trust bonds, series D, in the principal amount of $30,000,000. In the same year, the appellant purchased $5,000,000 principal amount of 4% third series Lakehead bonds and $8,000,000 principal amount of 354% fourth series Lakehead bonds, which purchases will also be considered in greater detail later in this judgment.

In its income tax returns for the years in question, the appellant reported operating revenues and claimed deductions including the following :

The interest on funded debt, so claimed as a deduction in each year, was not broken down so as to show how much of it had accrued on the portion of the borrowed moneys included in the funded debt which the appellant had invested in Lake- head securities and United States Treasury bills. Nor was any such breakdown given in evidence.

In reassessing the appellant’s income, the Minister did not disallow any portion of the interest so claimed in any year as a deduction in computing income, and no question is raised in this appeal as to the right of the appellant to deduct the whole of such interest in computing its income for income tax purposes. But, as stated in the reply to the notices of appeal, the Minister disallowed the appellant’s claim for foreign tax credit in respect of the tax paid by the appellant to the United States on interest which accrued on the Lakehead bonds and notes and United States Treasury bills in each of the years in question because he

"‘assumed that the money in respect of which the amount of interest was receivable by the Appellant was money that was borrowed by the Appellant and included as part of its ‘funded debt’ and that there was payable by the Appellant in respect of that money in [the] taxation year an amount of interest equal to or in excess of the amount of interest that was receivable by the Appellant in respect of that money in that year.’’

In the reply, the Minister then went on to plead and submit that the appellant was not entitled to foreign tax credit in any of the years in question (beyond certain amounts which were allowed and which are not in issue in this appeal) because, for the purposes of the provisions respecting foreign tax credits, the appellant’s income from sources in the United States must be computed on the assumption that the appellant had no income except from sources in the United States and was entitled to no deductions except deductions related to those sources, and only that part of the amount payable to the appellant in each year as interest on its money in the United States that remains after deducting from that amount the amount payable by the applicant in that year as interest on that money and any other properly deductible amounts related to that money is profit or income from its money in the United States that is subject to tax under Part I of the applicable Act.

It may here be noted that neither in the plea above quoted nor elsewhere in the reply nor at the trial was any contention advanced that any deduction claimed by the appellant in computing its income other than "‘interest on funded debt” was in any way related to the sources in the United States from which interest receipts accrued. The problem is thus restricted to the relationship of the deduction of interest on funded debt to the United States sources, and none of the other deductions claimed by the appellant need be considered.

The respondent’s first contention in answer to the Minister’s plea raises the question as to what is meant by ‘‘income’’ in the expressions ^his income from sources therein for the year and that part of the taxpayer’s income from sources in that country" in Section 38(1) of The Income Tax Act. Counsel for the appellant contended that, since the 15% tax imposed in the United States was imposed on the gross amount of the interest which accrued in the United States and since, under Section 6(b) of The Income Tax Act, interest must be included in computing income, the word ‘‘income’’ in the expressions above mentioned should be interpreted as referring to the income on which the foreign tax was levied ; that is to say, in the case of the interest in question, the gross amount. In support of this position, he referred to the fact that, by Sections 106 and 108 (which it may be noted are in Part 3 of the Income Tax Act, rather than Part 1), income tax is imposed in Canada on interest payable to nonresidents on the gross amount of such interest as income, and to the several provisions of the Convention and Protocol between Canada and the United States for the Avoidance of Double Taxation, as well as the provisions of The Canada-United States of America Tax Convention Act 1943, Statutes of Canada 1943- 1944, c. 20 (as amended by Statutes of Canada 1950, ce. 27), by which the Convention and Protocol were ratified and declared to have the force of law in Canada, and particularly to Section 3 of that Act, by which it is provided that, in a case of inconsistency between the Convention and Protocol and any other law, the provisions of the Convention and Protocol shall prevail.

In my opinion, despite the claim that the reassessments result in double taxation of the interest in question, and despite the purpose of the Convention, as declared in it, of avoiding double taxation, the Convention goes no further in avoiding double taxation than what is set out in its several Articles, none of which, in my opinion, affords in the present situation relief to any greater extent than what is to be found in the provisions of The Income Tax Act.

Article XV of the Convention as amended, effective January 1, 1949, provides that

"1. As far as may be in accordance with the provisions of The Income Tax Act, Canada agrees to allow as a deduction from the Dominion income and excess profits taxes on any income which was derived from sources within the United States of America and was there taxed, the appropriate amount of such taxes paid to the United States of America.”

This Article refers to The Income Tax Act as it was on January 1, 1949 and the extent of Canada’s agreement under it to give credit for taxes paid to the United States is limited to what was included in the expression, "‘As far as may be in accordance with the provisions of The Income Tax Act’’. In my opinion, Article XV operates as an agreement by Canada not to abolish or decrease the foreign tax credits provided for in The Income Tax Act so far as they are credits for taxes paid to the United States of America. For the purposes of this case, the utmost that can be claimed as tax credit pursuant to the Convention and Protocol is thus that was provided for in The Income Tax Act on January 1, 1949, and in that Act the applicable provision for such a tax credit was Section 38.

By Section 4 of The Income Tax Act, however, income for a taxation year from a business or property is declared, subject to the other provisions of Part 1, to be the profit therefrom for the year and, since the source of the interest in question on which tax was paid to the United States was clearly either a business or property and no other provision of Part 1 declares that interest earnings are to be brought into the computation of income or taxed on any other basis, it follows, in my opinion, that what is to be regarded for the purposes of Part 1 of The Income Tax Act as the income from such business or property is not the gross amount of such interest for each year but the profit from such property or business for the year. If there is no profit from a business or property for any year, there is no income therefrom for that year. Section 38(1) of The Income Tax Act can thus afford a tax credit only in the year in which the appellant had a profit for the year from the business or property in the United States from which the interest in question flowed.

Moreover, in my opinion, the amendment to Section 38(1) made in 1952, as applied to the present situation, does not change the provision. It merely expresses the same meaning in clearer and more definite language.

This brings me to the second of the two main questions mentioned earlier in this judgment, that of whether or not the appellant had any income from sources in the United States in any of the years in question. Before dealing with the evidence on this question, however, I think I should set out my view as to what the source of the interest in question was for the purposes of Section 127(1) (av) and what portion of the interest on funded debt claimed by the appellant in computing its income I regard as related to the source of such interest.

Under Section 127(1) (av), income from sources in a particular place is to be computed in accordance with the Act on the assumption that the appellant had no income from any other source and was entitled to no deductions except those related to those sources. The Act in Section 3 declares that a taxpayer’s income for the purposes of Part 1 is his income from all sources and includes income from all (a) businesses, (b) property, (c) offices and employments. From this it appears to me that what is contemplated as sources of income for the purposes of Part 1 are such things as businesses—of which the taxpayer may have one or more—or offices—of which he may have one or more. Each business is thus a source. Each office is a source. A taxpayer may also have one or more income-producing properties, and each of them may be a source. The word "‘source'' has, I think, the same meaning in Section 127(1) (av). The definition refers to ‘‘income from a business, property employment or other source of income” and directs that income from such a source is to be computed in accordance with the Act, which, I take it, means by following the provisions of the Act applicable to the computation of income from such a source on the assumption that the taxpayer had no income except from that business, employment, property, or other source. By the same reasoning, when Section 127(1) (av) refers to sources in a particular place, it refers, in my opinion, to the business or businesses, employment or employments, office or offices, property or properties, or other sources in that place from which the taxpayer derives income.

Now, in my opinion, the appellant had one and only one business, and that business was its sole source of income. From the time of its incorporation, the appellant’s activities were directed to the carrying out of a project for the construction and operation of a pipe line system for the transportation of crude oil from Western Canada to more easterly points in Canada and the United States. The appellant carried out this project by constructing a pipe line system in Canada and by organizing and financing a subsidiary company to construct and operate the United States portion of the line. The United States portion of the line was a necessary and integral part of the project as a whole. The appellant’s undertaking, in my opinion, comprehended the doing of all things which the appellant did to carry out this project. It included the investment of capital in the pipe line in Canada and in shares, bonds and notes of Lakehead, and it included as well the incidental and temporary investment of capital funds in short term investments pending the need to use them in constructing the line or in making further investments in Lakehead. These investments of capital made by the appellant in shares, bonds and notes of Lakehead were not casual investments of idle funds but were as much a part of the project as were the investments in its Canadian pipe line. And, as I view it, the temporary investment of surplus capital funds in short term securities pending the use of them in carrying out the project was also an incident of and included in the project itself. The holding of these investments both in Lakehead and in short term securities and the controlling of Lakehead were, in my view, part of the original scheme. They constituted but some of the ways by which revenues and profits from the undertaking as a whole were to be obtained. In this view, the appellant’s income-producing process or activities included the transportation of oil in Canada, the controlling of its subsidiary, the holding of its investments in that subsidiary, and the holding of its short term investments, as well. The interest from these investments was, accordingly, revenue from the appellant’s business and was properly included in the computation of profit from that business for each of the years in question.

In this situation when, for the purposes of Section 38, one seeks to ascertain how much of the appellant’s income was income from sources in the United States, it becomes necessary, if any of its income can be regarded as having been derived from sources in that country, to ascertain the extent, if any, to which the appellant’s business was carried on there and to make a division of it so as to obtain an answer to the question, ‘‘ How much of the profit or income from the business came from the portion of it carried on there ?" The portion of the appellant’s income-producing process which I think can be regarded as carried on in the United States consisted of the holding of its investments in Lakehead and in United States Treasury bills and the controlling of Lakehead. Certain other incidental operations, such as the maintenance of a bank account through the depositing of funds in it and the payment of current obligations from it, also serve to show that some of the business was carried on in the United States, but they indicate nothing as to the extent to which for this purpose the business can be regarded as carried on there. By Section 127(1) (av) the profit from the appellant’s business in the United States must be ascertained by assuming that there was no income—that is to say, no profit— from the business in Canada. It is not easy to envisage a division of the appellant’s business on such lines, but it is clear that the revenues from the appellant’s investments in Lakehead and in United States Treasury bonds accrued to the appellant in the United States, and taking the holding of these investments as the portion of the business carried on there and the revenue from them as the revenue from that portion of the business, one has a starting point for the necessary computation. It is not difficult to ascertain the gross revenue from that portion of the business, and the problem immediately becomes one of ascertaining what deductions, if any, are related to that portion of it, as contemplated by Section 127(1) (av). It is not necessary, however, for the purposes of this appeal to consider or define exhaustively what is meant by deductions related to a source for, as previously mentioned, of the deductions claimed by the appellant the only one that needs to be considered in this connection is that claimed by the appellant in each year for interest on funded debt.

Now interest on borrowed money, if it is deductible at all in computing income for income tax purposes, is deductible pursuant to Section 11(1) (c), which permits the deduction of interest on borrowed money used to earn income from the taxpayer’s business or property. Interest on borrowed money used by the appellant to make the investments which yielded the interest with which the appeal is concerned is thus deductible in computing income from its business not because the money used was borrowed money, but by reason of the fact that, since it was used to make such investments, in was in that way used to earn income from the appellant’s business. And where such investments have been acquired with borrowed money or with temporary investments which were themselves purchased with borrowed money, I think it is manifest that the interest payable on such borrowed money is a deduction related to the investments so obtained, because it is an expense incident to the money or capital used to acquire them. Moreover, if, as here, the holding of investments so acquired is part of a business which is a source of income, I think it is equally clear that the interest paid on the borrowed money is a deduction, not merely related to the business as a whole, but is also a deduction related to that part of the business which is concerned with the holding of the investments. That the interest paid by the appellant on the portion of the borrowed moneys included in its funded debt which were used to acquire investments in Lakehead and in United States Treasnry bills as a deduction related to such investments and to the holding of them and thus to the portion of the appellant’s business in the United States is, to my mind, quite clear. The borrowed money having been employed in purchasing the investments, the relationship of the interest deduction to them and the holding of them is a direct one. That there may also have been an indirect or remote relationship between such interest deductions and other phases or portions of the business is, In my opinion, immaterial.

What I have said is subject, however, to the limitation that it is not all the interest on borrowed money which the appellant was obliged to pay that can be said to be related to its investments in shares, bonds, and notes of Lakehead and United States Treasury bills. As I see it, only the interest on borrowed money which, directly or indirectly, was used to pay for such investments can be said to be related to them or to the holding of them. And where temporary investments were purchased with borrowed money and later used to buy Lakehead bonds, the amount of borrowed money the interest on which can be said to be related to such bonds is not necessarily equivalent to the principal amount of the bonds. Indeed, there will usually be some difference. The temporary investment may have risen or fallen in value and part of its value, when it was used to purchase a new investment, may have been due to interest or increment which accrued after the temporary investment was purchased. Neither interest nor increment nor rise in value is borrowed money and, to the extent that such increase forms part of the value at which a temporary investment is taken on account of the purchase price of another investment, the latter cannot be said to have been purchased entirely with borrowed money or with funds representing borrowed money. It is purchased with funds representing borrowed money to the extent and only to the extent that borrowed money went into the purchasing of the temporary investment, and it is only the interest on so much and no more borrowed money that can be said to be related to the investment. On the other hand, if the temporary investment, when used to purchase another investment, was worth less than the borrowed money that went into it, it nevertheless represents borrowed money to the extent that borrowed money went into it, and the interest on that amount of borrowed money is, I think, related to the investment acquired with such temporary investment. In the present case, this feature complicates the computation of the amount of interest on funded debt which can be said to be related to an investment in Lakehead in every case where temporary investments such as United States Treasury bills were used to pay for such investments in Lakehead and makes it impossible in such cases to say, from any mere comparison of the rate receivable with the rate payable, whether or not the interest payable would or would not equal or exceed the interest receivable.

In order to determine how much of the interest on funded debt was related to that portion of the appellant’s business which was carried on in the United States, it is necessary, in my opinion, to ascertain what funds were used by the appellant in making each of the advances to Lakehead and each of the purchases of Lakehead bonds and United States Treasury bills from the holding of which the revenues in question were derived, and the extent to which the funds so used were or represented borrowed moneys. In this connection, I am of the opinion that neither the purpose for which moneys were, from time to time, borrowed by the appellant—which, in the case of the appellant’s debentures, included both the making of advances to Lakehead and the reimbursement of the appellant for moneys expended in making such advances and, in the case of the appellant’s bonds, included the purchase of Lakehead bonds and the reimbursement of the appellant for moneys expended in making such purchases—nor the withdrawal of borrowed moneys from the trustee by certificates requesting reimbursement for moneys already used to make advances to or to purchase bonds of Lakehead is sufficient to stamp such advances as having been made or such bonds as having been purchased with such borrowed funds. Nor, to put it the other way, are such facts sufficient to establish that borrowed moneys or funds representing borrowings were used to make such advances or to purchase such bonds. What, in my view, must be ascertained in each case is that money or funds were in fact used to make an advance or to pay for a bond. Was it borrowed money or investments acquired with borrowed money, or was it money or investments acquired with money which the appellant had realized on sale of its shares or as receipts or profits from its operations? The fact that the appellant, subsequent to making an advance to Lakehead or purchasing and paying for a Lakehead bond, may have used the demand note securing the advance or the Lakehead bond so purchased to withdraw borrowed moneys from the trustee and may have pledged the bond or note with the trustee pursuant to the terms of the trust deed, in my opinion, adds nothing one way or the other to the determination of the material fact. Nor is the determination advanced by the fact that the appellant in some years charged to Lakehead stand-by fees equal to the proportion which sums borrowed in the year by the appellant and subsequently loaned to Lakehead bore to the total stand-by fees paid by the appellant in respect of such borrowings. The making of such a charge in such a proportion to the whole confirms the fact that the appellant borrowed the moneys with the intention of lending a portion of them to Lakehead, but the question is what moneys were, in fact, loaned to Lakehead, rather than what was the appellant’s purpose or intention in borrowing money.

On the other hand, the Minister, in making the assessment, has assumed that all of the moneys which the appellant used to make advances to Lakehead and to make purchases of Lake- head bonds and United States Treasury bills were borrowed moneys, forming part of the appellant’s funded debt, and it was for the appellant to disprove that assumption, if it could. Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195. For this purpose, mere evidence that the funds used to make an advance or to pay for particular purchases came from the appellant’s general funds, rather than from funds in the hands of the trustee, is, In my opinion, inconclusive, for while the money and funds in the hands of the trustee represented, almost in their entirety, borrowed money, it does not follow that the amount in the appellant’s general funds was not or did not also represent borrowed money either in whole or in part. Indeed, as will appear, it is my opinion that, on some material occasions, what was in the appellant’s general funds was almost entirely borrowed money or funds representing borrowed money. F'or borrowed money, or temporary investments purchased by the trustee with borrowed money, when transferred by the trustee to the appellant, did not by such transfer lose their character as being or representing borrowed money but, in my view, retained that character when they found their way into the appellant ‘s general funds, and this notwithstanding the fact that such moneys or investments had been received from the trustee on the strength of certificates of property additions (for which the appellant had already paid) of the kind required by the particular bond or debenture indenture. Moreover, in instances where moneys were advanced to Lakehead or bonds of Lake- head were purchased with moneys or temporary investments from the appellant’s general funds at times when such general funds contained a mixture of borrowed moneys or investments representing borrowed money and capital or receipts from operations or both and, on the evidence, the character of the moneys or investments used by the appellant to purchase such bonds or notes is left in uncertainty, the burden on the appellant of showing that the advances were not made with borrowed money or that the bonds were not purchased with borrowed money is not discharged. The standard of proof required in these cases is not that applicable in criminal cases. A preponderance of evidence is sufficient. But the Court will not speculate as to the facts, and it will neither disturb an assessment nor refer it back to the Minister unless there is put in evidence sufficient material to satisfy the Court that the facts are such that the appellant not merely may be entitled but is entitled to relief against some or all of the tax as assessed.

The Minister, in making the reassessments, has also assumed a further fact which it was for the appellant to disprove if it could. This was the assumption that there was payable in respect of the borrowed moneys representing funded debt that were used to purchase the Lakehead bonds and notes and the United States Treasury bills sums of interest equal to or in excess of the sums which became receivable by the appellant on such securities. This is, l. think, the more critical assumption of the two, for if it is Shown to be incorrect in fact there would be a profit, and the appellant would be entitled to some tax credit. On the other hand, if this assumption is not shown to be incorrect in fact, there could be no profit whether or not the other assumption were entirely true.

With these considerations in mind, I proceed to consider the facts applicable to each of the years under review.

In 1950 interest accrued to the appellant in the United States on the following Lakehead securities :

At the times of these purchases the appellant’s pipe line was not yet in operation and shares of its capital stock had been sold to the extent of only slightly more than $1,000,000. At the close of business on September 27, 1949, the appellant had in its general funds a total of $164,121.11, which presumably (since no debentures or bonds had yet been sold) was the unexpended balance of the proceeds of the sale of the shares. The debentures were sold on October 18, 1949, and on October 31, 1949, prior to the first of the above purchases, the appellant had already drawn on the proceeds of the sale of the debentures to the extent of $3,166,514.80, of which sum $1,000,000 was withdrawn on account of the $5,000,000 which the appellant was permitted to withdraw for working capital. At the close of business on the day before the first of the above purchases, the funds available in the appellant’s general funds totalled $488,735.66 in cash, and having regard to what it was that the appellant was doing, namely, acquiring materials and rights and constructing the pipe line, as well as to the sequence of events—sale of shares to the extent of about $1,000,000, reduction of the balance on hand to $164,121.11, subsequent withdrawal of $3,166,514.80, of which nearly two million was for expenditures for which the appellant had committed itself, $220,000 was for shares of Lake- head, and $1,000,000 was for working capital—I think the inference is plain that the $488,735.66 on hand at the close of business on December 11, 1949 was, with the exception of $100 received for shares sold on November 29, 1949, in fact part of the $1,000,000 in borrowed money so withdrawn from the proceeds of the debenture issue.

On December 12, 1949, the appellant withdrew from the trustee $221,000, with which it purchased 200,000 United States dollars, and it used these dollars to make the advance secured by the $200,000 4% Lakehead demand note which is the first of the above items. In my opinion, this clearly establishes that the funds used to make this particular advance represented borrowed money, being part of the proceeds of the debenture issue on which the appellant was then obliged to pay interest at four per cent per annum. Moreover, during the whole of the year 1950 the appellant sold shares in its capital stock to the extent of only $400, and it is my opinion that, at the times in that year when the remaining advances to Lakehead and purchases of its bonds as above mentioned were made, the appellant had, with the possible exception of some interest earned on short term investments, no funds but moneys and investments representing proceeds of the debentures and bond issues with which to make them. It had no capital funds remaining in its hands, and it had not yet begun operating its pipe line, and in my view it follows that, except to the extent that interest or increment on short term investments may have entered into the picture, all of these Lakehead securities must have been purchased with funds derived from the proceeds of the sale of the appellant’s debentures and bonds. Having regard to the times when the purchases were made and the times when the debenture proceeds were withdrawn, I conclude that all of the advances making up the $9,200,000 secured by 4% demand notes and the purchase on January 23, 1950 of the $250,000 in 314% Lakehead bonds due January 1, 1970 were made with moneys which were part of the proceeds of sale of the appellant’s 4% convertible debentures. These advances were made in cash, and the bonds were purchased for cash, and there is no evidence that any of the money so advanced or used was interest or increment earned on short term investments. The principal amount of the investments is expressed in United States dollars, and the cost of the investments to the appellant was some ten per cent higher in Canadian dollars, on which interest at four per cent was payable. In its income tax return for 1950, the appellant converted the interest receivable on these investments from United States to Canadian dollars at an exchange rate of 105.9375. Having regard to these differences, as well as to the fact that on the $250,000 in 314% Lakehead bonds the rate of interest receivable was lower than the four per cent payable by the appellant on the money used to buy it, I think the correct inference is that there was no profit but a loss in 1950 on these investments.

The other $14,000,000 of 314% Lakehead bonds due January 1, 1970, purchased in 1950, were bought after the proceeds of the debenture issue had been exhausted, and the inference that they were purchased with borrowed funds representing part of the proceeds of the sale of the appellant’s 314% series A and B bonds is reinforced by evidence that in the case of each of the purchases the funds used to pay for them passed directly from the trustee of the appellant’s series A and series B bond mortgage to the trustee of the Lakehead bond mortgage and in fact represented part of the proceeds of sale of the series B bonds. In this case, there is no complication from exchange differences, since the series B bonds were sold for United States dollars and were payable both as to principal and interest in United States dollars, and the rate payable on them was the same as that receivable on the $14,000,000 in Lakehead bonds so purchased. But the latter were paid for almost entirely with United States Treasury bills in which the proceeds of sale of the appellant’s series B bonds had been invested by the trustee, and some portion of the value at which these Treasury bills were taken in payment for the $14,000,000 in Lakehead bonds may have been due to the increment which had accrued on the Treasury bills since the trustee bought them. This would suggest that a profit equal to the 314% interest on the amount of such increment should result from this investment. But, while I think it is probable that there was some element of increment involved, on the evidence I am neither able to ascertain the amount of it. nor to satisfy myself that it would have had sufficient effect in producing a profit in 1950 on these $14,000,000 in Lakehead bonds to offset the loss which I think must have resulted from the other $5,450,000 invested in Lakehead. No figures showing what such increment amounted to were put in evidence, nor was evidence given of the amounts of interest which became payable by the appellant on the borrowed moneys which the investments made in 1950 represented. In this situation, the evidence does not satisfy me that a profit resulted in 1950 from the interest which accrued on these investments as a whole and, as I see it, I have no alternative but to hold that, while the Minister’s assumption ‘that the money in respect of which the amount of interest so receivable by the appellant was money that was borrowed by the appellant and included as part of its ‘funded debt’ ’’ has been shown to be erroneous to some slight but indefinite extent, the critical assumption “that there was payable by the appellant in respect of that money in the 1950 taxation year an amount of interest equal to or in excess of the amount of interest that was receivable by the appellant in respect of that money in that year’’ is not disproved because it has not been shown that the interest payable on the portion of the funded debt moneys which went into the investments, and which I think is related to them, did not exceed the interest receivable on them. The appeal against the reassessment for 1950 accordingly fails.

What I have already said with respect to the situation in 1950 applies as well to 1951. During 1951 the appellant continued to hold the $5,200,000 in 4% Lakehead demand notes and the $250,000 in 344% Lakehead bonds purchased with proceeds of the sale of the appellant’s 4% debentures and the $14,000,000 in 31/2 % Lakehead bonds purchased for the most part with funds representing proceeds of sale of the appellant’s 314% series B bonds. In addition, on May 18, 1951 the appellant purchased another $4,500,000 in 314% Lakehead bonds which were paid for by the trustee of the appellant’s series A and B bond mortgages with funds representing, in my opinion, proceeds of the sale of the appellant’s series B bonds except to the extent that increment on United States Treasury bills in which the borrowed moneys had been invested may have entered the picture.

For the same reasons already given with respect to 1950, I am unable to conclude that there was any profit from these investments as a whole in 1951,

For 1951 the appellant also reported revenue from United States Treasury bills held during the year, and the Minister’s plea applies to this revenue as well as to that which accrued from securities of Lakehead. As to this, there is, in my opinion, no evidence whatever that any of the United States Treasury bills held by the appellant in 1951 or in 1952, 1953, or 1954 were in fact paid for with funds other than borrowed moneys forming part of the appellant’s funded debt, and accordingly I think the Minister’s assumption as to this fact must be taken as correct. Nor is there any evidence as to the principal amount of such Treasury bills or as to the rate earned on them or as to the length of time they were held. Interest on the appellant’s funded debt was accruing in each of the years 1951, 1952, 1953, and 1954 at 314% per cent or more, and I am unable to conclude that the interest so payable did not equal or exceed the interest earned on such Treasury bills. Even if I were satisfied (which, as above stated, I am not) that some profit resulted in 1951 from the appellant’s investments in Lakehead notes and bonds taken by themselves, I would be unable on the evidence to conclude that there was profit from the notes, bonds, and Treasury bills as a whole, and in this situation the Minister’s assumption that there was no profit has not been disproved. In my opinion, the appellant has shown no sufficient ground for disturbing the reassessment for 1951.

The situation was somewhat different in 1952. In that year there were no new purchases of bonds the interest on which is in issue in this appeal. From the beginning of the year to Decem- ber 29, 1952, the appellant held $5,200,000 in Lakehead 4% demand notes and throughout the year it held $250,000 in 314% Lakehead bonds, all of which had been purchased with proceeds of the sale of the debenture issue. That $17,000,000 issue, however, was in 1952 largely converted into shares of the appellant’s capital stock, with the result that, instead of the appellant being obliged to pay $679,960 for interest which would accrue on the debenture issue as it had been obliged to do in 1951, the interest which accrued on the issue in 1952 was, on a rough calculation based on figures in Exhibit 3 and the appellant’s income tax return, less than $240,000. This reduction in interest payable by the appellant is, in my view, applicable to the debenture issue as a whole, for I know of no principle which enables the Minister to assert that the portion of the debenture proceeds loaned to Lakehead must be taken as the last portion of the debenture issue to be converted, nor, on the other hand, is there any principle which enables the appellant to assert that the portion loaned to Lakehead must be taken as the earliest portion or as any other particular portion of the debenture issue to be converted. In this situation, the appellant would, in my opinion, be entitled to attribute a proportion of the reduction of interest payable on the debenture issue in respect of 1952 to the interest payable on the portion of the debenture proceeds which had been used to make the advances totalling $5,200,000 in United States dollars to Lakehead and to buy the first $250,000 in 314% Lakehead bonds. This would lead to the conclusion that there was less interest payable by the appellant in 1952 on the money used to acquire these particular investments than the interest which accrued on them, because for a substantial part of the year no interest was payable any longer by the appellant on a large proportion of the money so used to buy them. With respect to the other $18,500,000 in 314% Lakehead bonds held by the appellant in 1952, the situation was that 31% per cent accrued on $18,500,000 for the whole year, while the interest payable by the appellant was 314% on a sum somewhat less than $18,500,000, the difference being the amount of the increment on United States Treasury bills which had been used in 1950 and 1951 to pay for these bonds. This would indicate and satisfy me that the interest which accrued in 1952 on the $5,200,000 in 4% demand notes and the $18,750,000 in 314 % Lakehead bonds was not equalled by the interest payable by the appellant on the borrowed money represented by these investments, and there would thus be some profit in respect of the holding of them. But what I have said in relation to interest on United States Treasury bills held in 1951 applies as well to interest on United States Treasury bills held in 1952. On the evidence, IJ am unable to determine whether the revenue from Treasury bills was exceeded or not by the interest payable on the borrowed money used to buy them. Nor am I able because of this to find that there was profit for the year 1952 from the holding of the Lakehead bonds and notes and the United States Treasury bills taken as a whole. The Minister’s assumption with respect to 1952 has thus not been disproved, and it follows that the reassessment for that year must be upheld.

The situation changed again in 1953. At the beginning of the year, the appellant’s United States holdings—apart from Treasury bills—consisted of the $250,000 in 314% Lakehead bonds which had been purchased on January 23, 1950 with debenture proceeds and $15,500,000 Lakehead 314% bonds which had been purchased with proceeds of the appellant’s 314% series B bonds.

From January 15, 1953 onward no interest accrued on any of the debenture issue, since practically all of it had been converted and the remainder had been called for redemption. The money used to purchase the $250,000 in 314% Lakehead bonds was, therefore, no longer borrowed money. It was no longer part of the appellant’s funded debt, nor was any interest whatever payable on it. Nor, in my opinion, could either the withdrawal of a like amount from the trustee of the series A and B bond proceeds on the strength of a certificate that the appellant had acquired this investment, nor the pledging of the investment with the trustee as security for the series A and B bonds either serve to alter the character of the moneys which were used to buy the investment or afford a sufficient relationship between this investment or the holding of it and the appellant’s expenditure of interest on its funded debt to enable it to be said that in 1953 or 1954 interest was payable on the money used to buy this investment. The fact is, no interest was payable in 1953 or 1954 on the money used to buy this investment, because the money used to buy it represented part of the appellant’s capital stock. The Minister’s first assumption for 1953 is, therefore, disproved insofar as it relates to the interest accruing to the appellant on these bonds. Moreover, as previously indicated, I think there would be some slight profit on the other $18,500,000 in Lakehead 314% bonds equal to the 314% interest on the increment on United States Treasury bills which had been used to purchase them. Thus, so far as these 314% bonds alone are concerned, there would, in my opinion, be a profit for the year.

In addition to the appellant’s holdings at the beginning of the year, the appellant in 1953 made purchases of 4% third series Lakehead bonds due March 25, 1973, as follows:

As to the first two of these purchases, the appellant had on April 30, 1953, sold $15,000,000 of its 4% first mortgage and collateral trust bonds, series C, and on July 29, 1953 had sold $30,000,000 of the same series, and in each case the proceeds of such sales were paid directly by the trustee under the indenture securing the appellant’s bonds to the trustee under the indenture securing the Lakehead bonds. There is thus no doubt that the Minister’s assumption that the first two of these purchases were made with moneys included in the appellant’s funded debt is correct. With respect to the remaining purchase, the evidence is also quite clear. It appears that on October 9 the appellant sold $15,000,000 principal amount of its 4% series C bonds and that on October 15 the trustee invested all but $146.02 of this sum in United States Treasury bills due January 14, 1954. On October 23, by three net property addition certificates, the appellant withdrew from the trustee the whole of the funds representing the $15,000,000, and when the $10,000,000 in 4% Lakehead third series bonds were purchased on October 30, 1953, the appellant paid for them with $10,025,000 in United States Treasury bills due January 14, 1954, valued at $9,998,- 197.05 and $1,802.95 in cash to make up the $10,000,000. The United States Treasury bills so used were some of the bills purchased by the trustee on October 15, 1953 with proceeds of sale of the appellant’s 4% bonds. With respect to the $1,802.95 paid in cash, since the appellant had had substantial revenue from its operations for more than a year and in that time had not withdrawn and put into the general funds any borrowed money except the $146.02, I think it is apparent that the difference was not borrowed money. But to the extent of $146.02 the evidence does not satisfy me that the sum in question was not borrowed money which was included in the appellant’s funded debt. Accordingly, I find that, except for the difference between $1,802.95 and $146.02 and except for whatever increment had accrued on the United States Treasury bills, the funds used to purchase the $10,000,000 in 4% Lakehead third series bonds on October 30, 1953 represented borrowed money which w as included in the appellant’s funded debt, being part of the proceeds of the sale of the appellant’s 4% series C bonds. On the evidence, I think it is clear that there could be no profit from the interest on the $45,000,000 in 4% Lakehead bonds, though there would have been some profit in respect of the 4% interest on $1,656.93 of the sum paid in cash and on the increment from Treasury bills used in paying for the $10,000,000 in 4% Lake- head bonds. The year 1953, however, was another in which the appellant reported revenue from United States Treasury bills and, for the reasons already given with respect to 1951 and 1952, I am unable to find on the evidence that the revenue from the appellant’s holdings in 1953 in Lakehead 314% and 4% bonds and United States Treasury bills as a whole exceeded the interest payable on the borrowed money used to acquire them. The reassessment for 1953 must, accordingly, stand.

In 1954 the appellant continued to hold the $250,000 in 314% Lakehead bonds, the $18,500,000 in 314% Lakehead bonds (except to the extent that they had been redeemed pursuant to sinking fund provisions), and the $55,000,000 in 4% Lakehead bonds purchased in 1953. What I have said about these holdings in 1953 applies as well to 1954. It indicates that, taken by themselves, there would be some excess of interest receivable over what was payable by the appellant on the borrowed money used to acquire them.

In addition, two more purchases of Lakehead securities were made. The first of these was a purchase on June 11, 1954 of $5,000,000 of Lakehead 4% third series bonds due March 25, 1973. The appellant on April 28, 1954 had sold $15,000,000 of its 354% first mortgage and collateral trust bonds, series D, and on April 29, 1954, had withdrawn from the trustee $10,000,- 000 of the proceeds in cash. On the evidence, I would infer that this sum was deposited in the appellant’s account with the Agency Bank of Montreal in New York. On May 5, 1954, the trustee invested the remaining $5,000,000 in United States Treasury bills due July 29, 1954, which were withdrawn from the trustee by the appellant on May 21. The appellant had previously invested some $6,000,000 of its funds in United States Treasury bills maturing on the same day, some or all of which funds may on the evidence have been part of the $10,000,000 so withdrawn in cash. When, on June 11, 1954, the purchase of the $9,000,000 in Lakehead 4% bonds above mentioned was made, the appellant paid for them with United States Treasury bills due July 29, 1954 in the amount of $4,500,000, valued at $4,496,508.75, and by a cheque for $503,491.25 drawn on the appellant’s account at the Agency Bank of Montreal at New York. There is evidence that the United States Treasury bills used may have been the same ones transferred to the appellant by the trustee. They may, I think, also have been United States Treasury bills purchased with part of the $10,000,000 withdrawn in cash from the trustee. In either case, they would have been funds representing borrowed money. Or they may have been wholly or partly United States Treasury bills purchased with moneys that had not been borrowed. In this situation, however, the onus resting on the appellant to show that the funds used to make the purchase were not borrowed moneys or investments representing borrowed moneys has not been discharged. The same observation applies to the $503,491.25 which was paid in cash, there being no evidence to show that it was not borrowed money which the appellant had withdrawn from the trustee. Accordingly, I find that these $5,000,000 in 4% Lakehead bonds were purchased with funds included in the appellant’s funded debt, except to the extent that the value of such United States Treasury bills may have been due to increment accruing since their purchase. On this money, however, the rate of interest payable by the appellant was 35% per cent, which is not equal to the four per cent which accrued on the Lakehead bond so purchased. It follows that there could be some small amount of profit resulting from the difference in the rate and from the four per cent on the portion of the $5,000,000 representing increment on Treasury bills used to pay for the bonds.

In the other purchase, the appellant on August 12, 1954, bought $8,000,000 of Lakehead 854% fourth series bonds. Three weeks earlier, on July 21, 1954, the appellant had sold an additional $15,000,000 of its 354% first mortgage and collateral trust bonds, series D, and on the same day had withdrawn from the trustee sums of the proceeds totalling $12,185,472.11. This sum was deposited in the appellant’s account at the Agency Bank of Montreal in New York. On the same day, the appellant bought United States Treasury bills due October 21, 1954 in the amount of $10,300,000, and on August 12, 1954 it used $7,715,000 of the same Treasury bills valued at $7,701,113 and a cheque on its account at the Agency Bank of Montreal at New York for $298,887 to pay for the $8,000,000 of 354% Lakehead bonds purchased as above mentioned. While it is conceivable that funds other than those withdrawn from the trustee may have been used by the appellant to purchase the United States Treasury bills, on the evidence as a whole I see nothing to indicate that any other moneys were used to purchase them or that any other moneys which might have been used were not borrowed moneys which had been withdrawn from the trustee on some earlier occasion, and the onus of demonstrating that the $8,000,000 in Lakehead bonds was not paid for with borrowed money and investments representing borrowed money which was included in the appellant’s funded debt is not discharged. In this situation, I find that the $8,000,000 in Lakehead 354% bonds were purchased with borrowed money on which the appellant was obliged to pay interest at 354 per cent except to the extent, if any, to which increment which accrued on United States Treasury bills used by the appellant to pay for the Lakehead bonds entered into the picture. There could thus be profit in the case of this $8,000,000 in 354% Lakehead bonds to the extent of 352% interest on such increment. However, despite the indications that there may have been some amount of profit from the Lakehead holdings by themselves in 1954, the appellant in this year as well reported revenue from United States Treasury bills and, viewing such Lakehead holdings and holdings of United States Treasury bills as a whole, I am unable, for the reasons already given with respect to 1951, 1952 and 1953, to conclude that the revenue from such holdings exceeded the interest payable by the appellant on borrowed money used to acquire them. It follows that the reassessment for 1954 must also be allowed to stand.

The appellant also made an alternative submission that, as it had never received the 15 per cent of the interest which was deducted in payment of the tax in the United States, only 85 per cent of the interest which accrued in the United States should have been included in the computation of its income for each year. However, such information as appears in the record respecting the 15% tax suggests that it was an obligation that arose after the interest had accrued and upon its being paid to the person entitled to receive it. While it may be that the appellant could not obtain or recover the money representing the 15 per cent because, as a result of the statute imposing the tax, the 15 per cent had at some stage been lawfully diverted to payment of such tax, the fact is that the whole of the interest accrued to and belonged to the appellant. But for the taxing statute it was receivable by the appellant and, when diverted, it paid a tax levied on what belonged to the appellant; that is to say, the interest which had accrued to it. Accordingly, I think the whole amount of such interest must be brought into the computation of the appellant’s income for the purposes of The Income Tax Act and the 15% tax paid on it can be brought into such computation only if it can qualify as an allowable deduction. In my opinion, it does not qualify as such a deduction because it was not an incident of the process or means by which income was produced but was an application or use—though an involuntary one—of so much of such interest after it had been earned.

In my opinion, the appeal fails as to all of the years under review, and it will be dismissed with costs.

Judgment accordingly.