The taxpayer, a Canadian chartered bank, was assessed in 2004 and 2006 for additional U.S. federal income tax and interest, or New York City municipal income tax and interest, in respect of business profits attributed to its US branch operations for its 1997 to 2001 taxation years. It claimed a deduction in computing its income for its 2004 and 2006 taxation years in respect of such interest.
MacPhee J applied the Roenisch principle, as “updated” in Potash (that “an expenditure which will not be incurred unless there is income is not an expenditure in order to earn income”) in confirming (in the context of a Rule 58 question) the denial of such deductions for interest. He stated (at para. 60) that the “US income tax paid by the Appellant to foreign tax authorities was not an expense incurred to produce income for the business, but rather was a consequence of the Bank of Montreal having earned income attributable to its US establishment”. As the tax arrears thus were not deductible pursuant to s. 18(1)(a), it followed that the deduction of the arrears interest was also denied pursuant to s. 18(1)(a), i.e., it was “an expenditure which would not have been incurred except for the income earned by the Appellant” (para. 62).
In rejecting an argument of the taxpayer based on the Irving Oil and Munich Re decisions, he stated (at para. 56):
The Irving Oil and Munich Re decisions do not stand for the proposition that every decision to pay or not to pay income tax qualifies as a business decision, let alone that such decisions are made for the purpose of earning income under the principles governing section 9 and paragraph 18(1)(a) … .
Regarding a submission that since s. 18(1)(t) referred only to amounts payable under the Act, the interest arrears should be deductible, MacPhee J indicated (at para. 70) that “there is nothing precluding paragraph 18(1)(a) - as a general-purpose test - from disallowing expenses that may also fall within the more specific prohibitions set out in paragraph 18(1)(t)”.