The Queen v. Shore, 92 DTC 6059, [1992] 1 CTC 34 (FCTD)

Strayer, J.:—This is an appeal by way of trial de novo from the decision of Taylor, J. ([1986] 1 C.T.C. 2360, 86 D.T.C. 1253). The evidence presented before me did not differ materially from what appears to have been presented to him and I make the same finding of facts as are set out in his decision.

In that decision the learned judge relied in part on the decision of the Federal Court of Appeal in the case of Phyllis Barbara Bronfman Trust v. The Queen, [1983] C.T.C. 253, 83 D.T.C. 5243. That decision was subsequently reversed by the Supreme Court of Canada ([1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 87 D.T.C. 5059), and it was argued by counsel for the Minister in the present appeal that the decision of the Supreme Court in the Bronfman case required a reversal of the decision of the Tax Court in the present case. Both parties, indeed, relied on the Supreme Court decision in Bronfman to support their respective positions.

I believe that the rationale of the Supreme Court in the Bronfman case supports the position of the defendant taxpayer in the present case. In interpreting subparagraph 20(1)(c)(i) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") in that case, the Supreme Court stressed the need to determine the” direct use" for which money was borrowed, in order to determine whether in the words of that subparagraph it is “used for the purpose of earning income from a business . . .”. As Dickson, C.J. said at page 124 (D.T.C. 5064):

It is well established in the jurisprudence, however, that it is not the purpose of the borrowing itself which is relevant. What is relevant, rather, is the taxpayer's purpose in using the borrowed money in a particular manner . . .

Therefore, he said that the inquiry must be centred on the use to which the taxpayer put the borrowed funds. In that case the Court came to the conclusion that the direct use being made of the funds was for capital allocations to the beneficiary of the trust, a purpose ineligible for interest deductibility.

Each case must turn on its own facts when a court is obliged to make such a characterization. In the present case when one looks at the commercial reality of the situation one sees that there was a series of transactions the net result of which was to enable the taxpayer to borrow money in order to earn income from his business, using his private homes as collateral for the loan. It is important to note that at the beginning of these transactions the taxpayer and his wife were owners of their Thamesford home. (There is some indication in the material that there was a previous mortgage on the home but this was discharged prior to the registration of the mortgage in favour of Guaranty Trust.) It is not disputed that the taxpayer and his wife gave a mortgage on their home to Guaranty Trust in order to raise approximately $42,000 to use in their new business, Joli ne Automobiles Ltd. and that the net proceeds of that mortgage were loaned to the business. That amounted to a direct use of the money for purposes of the business. Later, when they needed to change homes, they were not able to repay the loan to Guaranty Trust out of the sale proceeds from their Thamesford home because the only practicable way of selling it in that market was on the basis of cash to mortgage. Therefore the mortgage in favour of Guaranty Trust had to remain on the house in Thamesford. Similarly, in buying a house in Stratford, then, it became very important for the taxpayer and his wife to find a house with a similar mortgage and preferably with a similar rate of interest (interest rates having gone up substantially since the time they had granted a mortgage to Guaranty Trust). As they had not sold their house in Thamesford for cash but only cash to mortgage, they were not in a position to pay the total price of another house in cash. They found a house in Stratford which was encumbered by a mortgage of a similar amount to the mortgage on their previous house, and they were thus able to pay cash to mortgage to acquire the house in Stratford. In my view the reality of that transaction, in taking on a house encumbered by the mortgage in favour of Victoria and Grey Trust similar to the one on their previous residence, was in essence the replacement of one borrowing of money for the purpose of their business by another borrowing of money for the same purpose, thus bringing it within subsection 20(3) of the Income Tax Act so that such "borrowed" money could be deemed to be used for the same purpose as the original money borrowed from Guaranty Trust.

Therefore I find on the facts that the direct use of the money borrowed on the security of the family home was, and remained throughout, for the purposes of the automobile business and that the interest paid on the mortgage in the 1980, 1981, 1982 taxation years was properly deductible from the defendant's income.

The appeal is therefore dismissed. As this appeal comes within subsection 178(2) of the Income Tax Act as it stood at the time this appeal was launched, the Minister is ordered to pay all reasonable and proper costs of the taxpayer in connection with this appeal.

Appeal dismissed.