Court rules on interest deductibility

By Steven Lamb | March 5, 2004 | Last updated on March 5, 2004
4 min read

(March 5, 2004) The Supreme Court of Canada has ruled on the much-talked about case of Gifford v. Canada — the income tax appeal of a financial advisor who wrote off the interest on a loan used to buy a colleague’s book.

“The agreement to pay $100,000 to purchase accumulated goodwill and the agreement not to compete were made to create an enduring benefit for the appellant taxpayer Gifford and therefore the payment was ‘on account of capital,'” said Justice John C. Major in the decision handed down by the court. “The interest payment in this case, under current Canadian law, was also a payment ‘on account of capital,’ because the funds, borrowed to make the payment to Bentley, themselves added to the financial capital of the appellant.

“As both payments in question were ‘on account of capital,’ s. 8(1)(f)(v) [of the Income Tax Act] prevents a deduction from being made for either expense.”

Thomas Gifford was an advisor with Midland Walwyn in North Bay, when he took out a loan of $100,000 to buy the client list of a departing colleague, Scott Bentley. He deducted the interest paid on the loan when he filed his income tax.

The deduction was denied by the Ministry of National Revenue on the grounds the tax code did not expressly allow it and Gifford appealed to the Tax Court. He won, but the government appealed that decision and won the subsequent hearing at the Federal Court of Appeal.

Gifford in turn appealed this decision and the case wound up in front of the Supreme Court of Canada, which had to decide whether the payment to Bentley was a deductible current expense, or a non-deductible capital expense.

“The important question is not whether the payment is a capital expenditure but whether it is ‘on account of capital,'” read the Supreme Court ruling. “If, as here, the money adds to the financial capital, then the payment of interest on that loan will not be considered to be a payment ‘on account of capital’.

“The funds borrowed to make the payment to [Bentley] themselves added to the financial capital of the appellant and as such are expressly denied deductibility under s. 8(1)(f)(v) of the [Income Tax] Act.”

“It’s what we were expecting,” says Jamie Golombek, vice-president of tax and estate planning at AIM Trimark Investments. “It’s unfortunate, not that the courts could have done anything about it. I think the problem is that the legislation itself is outdated.”

He says the problem lies in the unfair treatment of employees, who are denied deductions that self-employed advisors are allowed to claim.

“Employees are only allowed to capitalize and depreciate two types of things, automobiles and airplanes — not client lists, not computers, not anything,” says Golombek. “The message in the Supreme Court if you read paragraph 18 of the ruling, really proves there is an inequity here.”

In paragraph 18 of the ruling, Justice Major said, “If the payment to Bentley or the interest payment are payments ‘on account of capital,’ the appellant, as an employee, will not be able to make any deductions from his income for these expenses. Conversely, if the appellant was earning income from a business and not from employment, he would likely be able to deduct both these payments in calculating his profit for the year. This seemingly inequitable result for the appellant is the result of the structure of the Act but cannot alter the characterization of these payments.”

Ted Ballantyne, director of advanced tax policy for the Conference for Advanced Life Underwriting (CALU) agrees with Golombek, saying the court had little choice if it was to follow the letter of the law.

“We’re disappointed. The court certainly notes the discrepancy in their ruling, but they don’t make any comment about whether that should be rectified in the law,” says Ballantyne. “They’ve done that in the past where they have commented that the law seems to be inappropriate, or outdated in this particular case.”

He says there is no lobbying effort currently underway, as groups representing those affected were waiting for the outcome of the Gifford case.

“The hope was that the court would have had a more activist approach to provide encouragement for the law to change,” says Ballantyne.

What do you think of the Supreme Court’s ruling on this case? Is the Act outdated? Share your thoughts about this issue with your peers in the Talvest Town Hall on

Filed by Steven Lamb,,


Steven Lamb