The taxpayer, which was a non-resident trust, financed its construction of a condominium project in Canada through a loan from a non-resident lender. The interest was paid following the completion of construction.
Mogan J. found that as the interest accruing on the loan to the completion of construction was capitalized as part of the cost of the project under s. 18(3.1), that interest when paid should not be considered to be deductible in computing the taxpayer's taxable income earned in Canada for purposes of s. 212(13.2). Mogan J. noted that when an amount of interest is capitalized, "it loses its character as 'interest' and becomes merged in the overall cost of the building like the cost of the concrete foundation, brick siding, windows, roof and heating plant". Furthermore, it had been established in Oryx (74 DTC 6352) and Shofar (79 DTC 5347) that "when computing the income of a trader, any outlay or expense which becomes part of the cost of inventory is taken into account when computing 'gross profit' but is not deductible in computing income". Accordingly, Part XIII tax was not applicable to the payment of interest that had been capitalized as part of the real estate inventory of the taxpayer.