The Supreme Court of Canada has agreed to hear a tax case that will determine whether commissioned financial advisors can claim tax deductions for business expenses incurred when buying another advisor’s book of business, particularly interest on money borrowed to buy the book.

Notice that the court granted Thomas Gifford’s application for appeal was released Thursday.

The outcome of the Supreme Court’s decision could have implications for a broad range of taxpayers. The Income Tax Act permits commissioned salespeople to deduct non-capital expenses incurred to earn employment income. But capital expenses, other than automobiles or airplanes, are not deductible. If all commissioned salespeople were permitted to deduct interest expenses incurred for the purpose of earning income, it could have a significant impact on tax coffers.

The case began in 1995 when Midland Walwyn Capital Inc. broker Scott Bentley decided to retire. Gifford wanted access to Bentley’s clients and their manager wanted to keep the business within the branch, so Bentley and Gifford signed an “agreement to purchase client base of financial advisor.”

Gifford agreed to pay Bentley $90,000 that year, as well as a second payment in 1996 of $10,000, or less depending on how much the book’s mutual fund assets eroded during the transfer period. When Gifford filed his tax return, he deducted the interest paid on the money borrowed to finance the purchase, as well as a portion of the $100,000 as depreciation of goodwill.

The Canada Customs and Revenue Agency disallowed the deductions, stating that Gifford, as an employee, was not allowed to deduct expenses since in the agency’s view they were related to the purchase of a capital asset. Gifford appealed to the Tax Court of Canada under the informal procedure route, and presented his own case. While capital expenses may not be deducted by an employee, the Tax Court reasoned, the $100,000 could be treated as a current expense.

The second issue facing the Tax Court was the deduction of the interest on the borrowed money used for the purchase. It reasoned the nature of interest depends on how the borrowed money is used. Money borrowed to fund a current expense — as the court decided to treat the $100,000 — should be classified as an expense

The Federal Court of Appeal disagreed. But the Tax Court and the FCA struggled with the fact that Parliament has not made any Income Tax Act amendments dealing with the issue and, therefore, has not provided the courts with the statutory tools to make a definite determination of the nature of interest in situations such as Gifford’s. This is where the Supreme Court’s judgment will be key.