Roger Roy

The trustees of the respondent trust elected to make discretionary capital allocations to its beneficiary.

Instead of liquidating capital assets, the trustees retained the investments and financed the allocations by borrowing funds from a bank.

The trust deducted the interest on the borrowed money.

The Minister disallowed the deductions.

The Supreme Court of Canada held that the interest deduction requires tracing the use of borrowed funds to a specific eligible use.

Borrowing money for an ineligible direct purpose (capital allocation) does not entitle a taxpayer to deduct interest payments, even if it indirectly preserves income-earning property.

The appeal was allowed.

The appellant, in operating its open pit mine, purchased peripheral land to maintain the necessary wall slope and angle of repose.

The land did not overlay any ore body and was gradually consumed as the mine deepened.

The Minister assessed the land purchases as capital expenditures.

The Supreme Court of Canada held that the expenditures were incurred in the regular day-to-day business operations to avoid a shutdown, were not part of a plan for assembling assets, and should be allocated to the revenue account as deductible expenses.