SUPREME COURT OF CANADA

Citation: Moufarrège v. Quebec (Deputy Minister of Revenue), [2005] 2 S.C.R 598, 2005 SCC 53

Date: 20051012

Docket: 30382

Deputy Minister of Revenue of Quebec

Appellant

v.

Richard Moufarrège

Respondent

Official English Translation

Coram: McLachlin C.J. and Major, Bastarache, Binnie, LeBel, Deschamps and Charron JJ.

Reasons for judgment:

(paras. 1 to 7)

Deschamps J. (McLachlin C.J. and Major, Bastarache, Binnie, LeBel and Charron JJ. concurring)

Moufarrège v. Quebec (Deputy Minister of Revenue), [2005] 2 S.C.R. 598, 2005 SCC 53

Deputy Minister of Revenue of Quebec Appellant

v.

Richard Moufarrège Respondent

Indexed as: Moufarrège v. Quebec (Deputy Minister of Revenue)

Neutral citation: 2005 SCC 53.

File No.: 30382.

2005: October 12.

Present: McLachlin C.J. and Major, Bastarache, Binnie, LeBel, Deschamps and Charron JJ.

on appeal from the court of appeal for quebec

Income tax – Deduction – Interest – Interest paid on loan used to earn income from business or property – Source of income ceasing to exist – Interest not deductible – Taxation Act, R.S.Q., c. I-3, ss. 128, 160.

Cases Cited

Referred to: Bronfman Trust v. The Queen, 1987 CanLII 76 (SCC), [1987] 1 S.C.R. 32; Tennant v. M.N.R., 1996 CanLII 218 (SCC), [1996] 1 S.C.R. 305; Shell Canada Ltd. v. Canada, 1999 CanLII 647 (SCC), [1999] 3 S.C.R. 622; Ludco Enterprises Ltd. v. Canada, [2001] 2 S.C.R. 1082, 2001 SCC 62; Stewart v. Canada, [2002] 2 S.C.R. 645, 2002 SCC 46.

Statutes and Regulations Cited

Taxation Act, R.S.Q., c. I-3, ss. 128, 160.

APPEAL from a judgment of the Quebec Court of Appeal (Baudouin, Morin and Rochon JJ.A.), 2004 CanLII 15842 (QC CA), [2004] R.J.Q. 1117, [2004] R.D.F.Q. 19, 2004 D.T.C. 6356, [2004] Q.J. No. 3783 (QL), setting aside a decision of Barbe J., [2002] Q.J. No. 909 (QL). Appeal allowed.

Jean Lepage and Alain‑François Meunier, for the appellant.

Nicolas X. Cloutier and François A. Barette, for the respondent.

English version of the judgment of the Court delivered orally by

1 Deschamps J. — Section 128 of Quebec’s Taxation Act, R.S.Q., c. I-3, authorizes the deduction of expenses relating to a business or property, provided that they were incurred to gain income. Section 160(a) adds that a taxpayer may deduct the interest paid on a loan used to earn income from a business or property.

2 In the case at bar, the Deputy Minister disallowed two deductions claimed by the respondent. The first was for interest paid on a loan initially contracted to purchase real property. The property had been sold by the time the deduction was disallowed. The second disallowed deduction related to interest on a loan that had initially been contracted to purchase shares in a company that went bankrupt before the deduction was claimed.

3 Bronfman Trust v. The Queen, 1987 CanLII 76 (SCC), [1987] 1 S.C.R. 32, established that it is the current rather than the original use that is relevant in assessing the deductibility of interest payments (see to the same effect: Tennant v. M.N.R., 1996 CanLII 218 (SCC), [1996] 1 S.C.R. 305; Shell Canada Ltd. v. Canada, 1999 CanLII 647 (SCC), [1999] 3 S.C.R. 622; Ludco Enterprises Ltd. v. Canada, [2001] 2 S.C.R. 1082, 2001 SCC 62).

4 Stewart v. Canada, [2002] 2 S.C.R. 645, 2002 SCC 46, did not alter the principle that when a reasonable expectation of income disappears, so does the right to a deduction. In that decision, the Court stated that “the deductibility of expenses presupposes the existence of a source of income” (para. 57).

5 In the instant case, once the properties were sold, the source of income ceased to exist and the loan was no longer being used to earn income from property in accordance with ss. 128 and 160. With regard to the shares, the company in question is bankrupt, and nothing in the record indicates a possibility of a resumption of activities, so here too the source of income has disappeared even though the company has not been dissolved.

6 For these reasons, the appeal is allowed, the judgment of the Court of Appeal is reversed, and the judgment of the Court of Québec is restored, with costs.

7 The motion for costs is dismissed.

Judgment accordingly.

Solicitors for the appellant: Veillette, Larivière, Montréal.

Solicitors for the respondent: Davies Ward Phillips & Vineberg, Montréal.