COURT OF APPEAL FOR ONTARIO

DATE: 20000602

DOCKET: C30199

RE: WILDENBURG HOLDINGS LIMITED (Appellant) v. THE
MINISTER OF REVENUE (Respondent)

BEFORE: OSBORNE A.C.J.O., WEILER and CHARRON JJ.A.

COUNSEL: Cozimo Fiorenza
for the appellant

Chia-yi Chua and Michael Waterston
for the respondent

HEARD: May 25, 2000

Appeal from the judgment of Pitt J. dated May 27, 1998

E N D O R S E M E N T

[1] This is an appeal by Wildenburg Holdings Limited from the judgment of the Honourable Mr. Justice Pitt dismissing Wildenburg’s appeal from the reassessments of corporation’s tax assessed by the respondent Minister of Revenue under the Corporations Tax Act, R.S.O. 1980, c. 97.

[2] The facts are not in any real dispute. For the most part they have been agreed upon and need not be set out for our purposes in any detail. It will be sufficient to note that the appellant and Orlando, another Canadian resident corporation, bought real property purporting to be partners. Title to the real property was held by the two corporations which carried on business under a partnership name. $1.2 million was borrowed from Hatzfeldt, the appellant’s sole shareholder in order to generate business and property income. The appellant and Orlando secured the loan with a mortgage to Hatzfeldt who was a non- resident of Canada. It is accepted that the liability of each of Wildenburg and Orlando was limited to 50% of the mortgage debt. Thus the partners’ liability was several, not joint.

[3] Section 18(4) of the Income Tax Act of Canada, which is incorporated by reference in s. 12 of the Corporations Tax Act for provincial purposes, restricts the amount of interest expense paid to a non-resident lender that a corporation may deduct in computing its income. Section 18(4) provides:

18. (4) Notwithstanding any other provision of this Act, in computing the income for a taxation year of a corporation resident in Canada from a business or property, no deduction shall be made in respect of that proportion of any amount otherwise deductible in computing its income for the year in respect of interest paid or payable by it on outstanding debts to specified non-residents that

(a) the amount, if any, by which

(i) the greater amount that the corporation’s outstanding debts to specified non-residents was at any time in the year,

exceeds

(ii) 3 times the aggregate of (A) the retained earnings of the corporation at the commencement of the year, except to the extent that those earnings include retained earnings of any other corporation, (B) the corporation’s contributed surplus at the commencement of the year, and (C) the greater of the corporation’s paid-up capital at the commencement of the year and the corporation’s paid-up capital at the end of the year,

(b) the amount determined under subparagraph (a)(i) in respect of the corporation for the year.

[4] The principal issue before us is whether the appellant was immune from the application of s. 18(4) of the Income Tax Act. The resolution of this issue raises two further issues. They are:

a) was the mortgage debt assumed by the partners through the partnership or separately on their own accounts; and

b) if we find that the debt was assumed through the partnership, does the finding of partnership property insulate the appellant from the application of s. 18(4) of the Income Tax Act?

[5] We accept the respondent’s position on issue (a) above. Thus it is not necessary to deal with the other issues. Pitt J. found that:

In the circumstances outlined in the facts agreed upon by the parties, it seems clear that the mortgage loan was a debt of the appellant and Orlando with the latter’s responsibility being limited to one-half, and not a debt of the partnership.

[6] In our view, there was sufficient evidence to support this finding, a critical part of which is that the debt in issue, as secured by the mortgage, was not a debt of the partnership, but rather a debt of the partners. Since this finding was supported by the evidence, our interference with it is not warranted. It follows that the thin capitalization rules of s. 18(4) of the Income Tax Act apply and it is not therefore necessary or desirable for us to deal with the other issues raised in Mr. Fiorenza’s able argument.

[7] Accordingly, the appeal is dismissed with costs fixed at $1,500.

“C.A. Osborne A.C.J.O.”
“K.M. Weiler J.A.”
“Louise Charron J.A.”