Edward Bowes v. Minister of National Revenue, 91 D.T.C 5310, [1991] 1 CTC 68 (FCTD)

Joyal, J.:—This is an appeal by Mr. Bowes from a reassessment of income tax with respect to his 1981 and 1982 taxation years. In that reassessment, the Minister of National Revenue disallowed interest expenses of $27,456 in 1981 and $23,104 in 1982. Mr. Bowes contends that these particular expenses were incurred for the purpose of earning income from property within the meaning of subparagraph 20(1)(c)(i) of the Income Tax Act, R.S.C. 1952, c. 148 (am. 5.C. 1970-71-72, c. 63) (the "Act") and are therefore deductible. The Minister disagrees. In a decision dated November 18, 1988, Judge Rowe of the Tax Court of Canada dismissed Mr. Bowes' appeal. The latter is now appealing his reassessment before this Court, by way of trial de novo.

The issue therefore is whether the interest expenses incurred by the plaintiff in 1981 and 1982 constituted expenses incurred to earn income from business or property and are therefore deductible from income, within the meaning of subparagraph 20(1)(c)(i) of the Income Tax Act, which reads as follows for the taxation years in question:

20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(c) an amount paid in the year or payable in respect of the year. . . , pursuant to a legal obligation to pay interest on

(i) borrowed money used for the purpose of earning income from a business or property (other than borrowed money used to acquire property the income from which would be exempt or to acquire a life insurance policy).

Subsidiarily, the plaintiff also asks that judgment be entered in the terms of an agreement reached with the Minister with respect to capital loss and terminal loss incurred by the plaintiff upon the sale of a property at 35th West Avenue in Vancouver in 1982.

Background

The plaintiff is a lawyer practising in Vancouver, British Columbia. In 1976, he and his wife acquired a residence as joint tenants at 3375 West 35th Avenue (hereinafter the "35th Avenue property”). Then, in 1979, the plaintiff apparently transferred his interest in the 35th Avenue property to his wife for $30,000, which was never paid. The Bowes continued to reside at the 35th Avenue property until 1981.

In January 1981, Mrs. Bowes bought a property at 3076 West 37th Avenue (hereinafter the "37th Avenue property") at a cost of $195,000. In order to provide his wife with the funds necessary to purchase that property, the plaintiff borrowed approximately $130,000 on a demand note from the Bank of Montreal. The other $65,000 was said to have been taken from a joint bank account. Later that same year, Mr. Bowes borrowed an additional $66,442.67 from the same bank to invest in his law firm, as well as more money to enable his wife to complete construction of their new residence on 37th Avenue. As appears from the building contract executed between Anita Bowes and Calton Holdings Ltd. (” Calton”), dated March 7, 1981and filed in Court, Calton agreed to build a new house on the property at an estimated cost of $105,000, but not to exceed $110,000 in any event.

The Bowes moved into their new home sometime at the end of the summer in 1981, but the plaintiff decided to buy the 35th Avenue property from his wife and to keep it. On August 1, 1981, he bought the 35th Avenue property from her for $1. According to the deed of transfer, the market value of the 35th Avenue property at the time of the sale was actually $300,000 and Mr. Bowes claims that it was understood between him and his wife that he would be indebted to her for the full value of that property. The plaintiff explained at the hearing that the deed of transfer of title to the property was never registered at the Land Titles Office because the bank required possession of the deed as security for the demand loans.

Thus, the plaintiff claims that as of August 1, 1981, he owed his wife $300,000 and she owed him a total of $270,000, comprised of $30,000 representing his share of the joint interest which he had transferred to her in 1979, $130,000 representing the money he had lent her to purchase the 37th Avenue property, and another $110,000 representing the money he lent her for the purposes of construction of the new residence.

The interest rate on the plaintiff's bank loans was well in excess of 20 per cent. As mentioned above, at some point Mr. Bowes had to put up his 35th Avenue property as security for the demand loans. Furthermore, although the 35th Avenue property was said to have at one point a value well over $300,000, the market value of the property was said to be only $145,000 in July 1982 when Mr. Bowes finally sold the property and applied the sale proceeds against the debts outstanding with the bank. For the purposes of assessing capital loss and terminal loss upon the sale of the property in 1982, both parties to the present action agree that in August 1981, when Mr. Bowes bought the 35th Avenue property, it had a fair market value of $250,000, which dropped to $145,000 in 1982, when Mr. Bowes sold the property.

During the period from September 1981 to April 1982, Mr. Bowes rented out the 35th Avenue property for $1,200 a month. He then tried to deduct the interest he had paid on his bank loan in 1981 and 1982 from his income tax as an expense incurred to earn income from the 35th Avenue property. He took the position that although he initially borrowed this money to permit his wife to purchase the 37th Avenue property, when he bought the 35th Avenue property from his wife in August 1981, he became indebted to her. As a result, the borrowed funds were actually used to pay his wife the balance of the purchase price allegedly remaining outstanding on the 35th Avenue property. Because he bought the 35th Avenue property for rental purposes, the plaintiff claimed that he used the borrowed money for the purpose of earning income from that property and that he could therefore deduct his interest payments.

The Minister disallowed these interest expenses in his reassessment of income tax owed by the plaintiff for the 1981 and 1982 taxation years. The Minister believed that the loan was used by the Bowes to acquire a personal residence at 37th Avenue and thus, the interest payments were not deductible from income.

Evidence

Plaintiff

The plaintiff, who represented himself at the hearing, filed several exhibits, the first of which contained a copy of the interim agreement signed by Anita Bowes indicating the payment of a $5,000 deposit with respect to the purchase of the 37th Avenue property. The total price of that property is stated to be $195,000. There is also a copy of the deed of transfer of title to the 35th Avenue property from Anita Bowes to the plaintiff, dated August 1, 1981, "in consideration of $1 and other good and valuable consideration . . . paid to me".

The second exhibit is a copy of the building contract, to which I have already referred, between Anita Bowes and Calton for the construction of a residence on 37th Avenue at a cost not to exceed $110,000. Exhibit P-3 is a copy of a letter sent by the plaintiff to the Bank of Montreal, in which the plaintin indicates that he is enclosing the deed of title to the 35th Avenue property as security for his loan. The fourth exhibit filed contains a series of monthly bank statements for a joint account of the Bowes. The statements go from the beginning of January 1981 to the end of December 1981 and then from July 1982 to the end of December 1982. On the last page of Exhibit P-4 is an application for credit by Mr. Bowes for the purpose of injecting capital into his law firm.

The last two exhibits are certificates from the Bank of Montreal with respect to interest paid by the plaintiff on his loans in 1981 and 1982 respectively. On the first certificate for the 1981 period, the purpose of the loan declared by the borrower is recorded as being "To purchase 3375 West 35th Avenue”. The purpose recorded on the 1982 certificate is threefold: "To purchase 3076 West 37th Avenue; To purchase 3375 West 35th Avenue; Capital injection into firm— Maddin, Suderman, Malach & Bowes".

In addition to this documentary evidence, both Mr. and Mrs. Bowes testified at the hearing before this Court. They related the events which took place from 1976, when the Bowes acquired the 35th Avenue property, up until July 1982, when Mr. Bowes finally disposed of that property. These events have already been described as part of the Background" leading up to the present litigation, so I see no reason to reiterate them here. According to Mr. Bowes, it was only in the summer of 1981 that he and his wife financially diverged". Mrs. Bowes wanted to sell the 35th Avenue property, but the plaintiff wanted to keep it as an investment property. As a result, Mr. Bowes decided to purchase the 35th Avenue property from his wife at the estimated market value of that property. His resulting indebtedness towards his wife would be set off against what she owed him in relation to the purchase and construction of the 37th Avenue residence.

Crown

The Crown filed as its only two exhibits the income tax returns of the plaintiff for the 1981 and 1982 taxation years. Counsel for the Crown did not call any witnesses, but did cross-examine Mr. Bowes. During that cross- examination, the plaintiff stated that the 35th Avenue property, which the Bowes had acquired in 1976, was not their first personal residence. They had paid $90,000 for that property in 1976, $30,000 of which was borrowed from the bank. The rest of the purchase price was paid for with capital accumulated from the sale of earlier homes and other moneys available from savings at the time. The plaintiff also indicated in cross-examination that Mrs. Bowes did not work after 1976, except as an organist for the First Baptist Church in Vancouver and as a piano teacher, for which she received a small amount of income. He indicated that he had transferred his joint interest in the 35th Avenue property to Mrs. Bowes in 1979 in order to protect the house, as he had just become a partner in a small firm in Vancouver. It was understood between the two that Mrs. Bowes owed her husband the $30,000 for the transfer of the joint interest and that she would repay the money at some indefinite future time.

Argument

Plaintiff

Mr. Bowes argued, on the basis of The Queen v. Bronfman Trust, [1987] 1 S.C.R. 32; [1987] 1 C.T.C. 117; 87 D.T.C. 5059, that it is the current use, rather than the original use, of borrowed funds which must be considered when determining if interest payments are deductible. Initially, Mr. Bowes' loan from the bank was used by his wife to purchase the 37th Avenue property and was therefore used for an ineligible purpose. However, when the plaintiff bought the 35th Avenue property from his wife in August 1981, he used the borrowed money instead to help pay his wife the $300,000 he owed her as a result of that purchase. From that point on in time, the borrowed funds were used for an eligible purpose, since the 35th Avenue property was an income-producing property. Thus, from August 1, 1981 onwards, the plaintiff could deduct the interest expenses incurred on the bank loans from his income.

The plaintiff tried to explain the lack of documentary evidence pertaining to the various loan transactions by invoking the Minister's delay in reassessing the plaintiff. He also suggested that the certificates of interest payments issued by the bank and filed with the Court constituted sufficient evidence of the plaintiff's intentions regarding the use of the borrowed funds.

Apart from Bronfman Trust, supra, the plaintiff mentioned two other decisions, Attaie v. Canada, [1987] 2 C.T.C. 212; 87 D.T.C. 5411 (F.C.T.D.); revd [1990] 2 C.T.C. 157; 90 D.T.C. 6413 (F.C.A.) and Anglemont Estates Ltd. v. M.N.R., [1989] 1 C.T.C. 2004; 88 D.T.C. 1770 (T.C.C.), apparently as additional authority for the proposition that it is the current use of borrowed money which determines whether interest payments are deductible, and also to indicate that a lack of documentation to support an alleged change in the use of borrowed money is not necessarily fatal to the taxpayer's claim.

In Anglemont Estates, supra, a company borrowed money from the bank and lent the funds to its subsidiary holding company. The company then declared a dividend in favour of the holding company for an amount equivalent to the loan and accounts receivable which had also been advanced. The holding company used this money in return to repay the appellant company for the loan. The appellant argued that once the $400,000 loan was repaid by the holding company, that money became part of the appellant's working capital. From that point on, the bank loan was used by the appellant to earn income from business and the company claimed that it should be able to deduct the interest payments. The Minister argued that there was an insufficient paper trail documenting the alleged transactions. Because the appellant company could not prove the date of the payment of the dividend, Judge Brûlé dismissed the appeal for the 1978 taxation year. In the absence of evidence of the date of the dividend, the Judge could only accept the date of the audited financial statements, i.e., December 30, 1978, as being the date of payment. However, the judge allowed the appeal with respect to the 1979 taxation year.

In Attaie, supra, the taxpayer, an immigrant from Iran, purchased a house and negotiated a mortgage. The following year, he received $200,000 from Iran, which was more than sufficient to repay the mortgage. However, he decided to maintain the mortgage and to invest his $200,000 in term deposits. The trial judge allowed the taxpayer to deduct his interest expenses in relation to the mortgage from income on the ground that although the borrowed money had initially been used for an ineligible purpose, it was subsequently used for an eligible purpose.

However, this decision was recently reversed by the Federal Court of Appeal, which held that the interest payments were not deductible because they were simply used to finance the purchase of the taxpayer's personal residence. The borrowed money was only indirectly related to the term deposits and could not be traced to the income earned from them. Thus, the Crown's appeal was allowed.

Crown

In assessing the plaintiff for his 1981 and 1982 taxation years, the Minister of National Revenue relied upon the following assumptions of fact:

—the plaintiff and his wife acquired the 35th Avenue property in 1976 and resided there until the summer of 1981;

—on February 2, 1979, there was a transfer of joint ownership of the 35th Avenue property to the plaintiff's wife;

—on August 1,1981, Mrs. Bowes transferred title to the 35th Avenue property to the plaintiff ;

—the plaintiff rented the 35th Avenue property from September 1981 until April 1982 at a rate of $1,200 per month;

—the 35th Avenue property was sold in July 1982 for $145,000; and

—the funds borrowed by the plaintiff, resulting in interest expenses of $27,456 in 1981 and $23,104 in 1982, were funds used for the purpose of constructing a personal residence for the plaintiff and his wife at 3076 West 37th Avenue and were not used for the purpose of earning income from the 35th Avenue property.

In particular, counsel for the Minister stated that the borrowed money must be traced to an eligible use, within the meaning of paragraph 20(1)(c) of the Income Tax Act, and that indirect uses to which the money is put are ineligible uses, relying upon Bronfman Trust, supra. The defendant submitted that the bank statements produced by the plaintiff do not enable us to trace the loan proceeds through the various transactions which are said to have occurred between the plaintiff and his wife.

Furthermore, the plaintiff did not file any documents with the Court to show that a debtor-creditor relationship was established with his wife either when he gave her the money to purchase the 37th Avenue property or when he purchased the 35th Avenue property from her in August 1981. These alleged loan transactions or debts did not carry with them any terms of repayment. The deed of transfer of title to the 35th Avenue property to Mr. Bowes in 1981 was never registered with the Land Titles Office, but was simply placed in the possession of the bank as security for the demand loans made by Mr. Bowes. At best, there was a notional debt created in Mrs. Bowes' favour when her husband purchased the 35th Avenue property from her in 1981.

Crown counsel referred me to Sedelnick Estate v. M.N.R., [1986] 2 C.T.C. 2102; 86 D.T.C. 1563 (T.C.C.) where Associate Chief Judge Christie had to determine if a deceased taxpayer and his wife had carried on a farming business in partnership. The Minister had included all of the farming income in the taxpayer's income. The Associate Chief Judge dismissed the estate's appeal, because the evidence it had presented failed to establish the existence of a partnership. The conduct of the parties was (at page 2103 (D.T.C. 1564)): ” . . . equally consistent with conduct arising out of the community of interests created by the marriage."

Similarly, counsel drew my attention to Barakauskas v. M.N.R., [1967] Tax A.B.C. 672; 67 D.T.C. 466 (T.A.B.) in which the appellant claimed that he had made a loan of half of the downpayment on a house to his wife. Thus, he argued that he was not liable for gift tax. The Board took a different view, however. There was no evidence of such a loan and the circumstances indicated that at the time the couple took title to the house in joint tenancy, they were completely unaware of any potential liability for gift tax.

Reference was made to Mills v. M.N.R., [1985] 2 C.T.C. 2334; 85 D.T.C. 632 (T.C.C.) as well, where the Tax Court held that a taxpayer could not deduct interest expenses on a personal loan, even though the bank had mistakenly applied capital payments to the appellant's investment loans instead of his personal loan.

The final decision mentioned by counsel for the defendant was No. 616 v. M.N.R. (1959), 22 Tax A.B.C. 31 ; 59 D.T.C. 247 (T.A.B.). In that case, a dentist had initially borrowed money to buy office equipment and to have an office building constructed. In later years he borrowed additional sums of money for various reasons. The assistant bank manager testified that the appellant had borrowed money at times to pay income taxes and for the purposes of stock market transactions. The Chairman of the Tax Appeal Board concluded it was (at page 34 (D.T.C. 250)):

. . . impossible to distinguish loans obtained for personal reasons from any balance Which may have been outstanding in respect of loans obtained to purchase equipment, . . .

There should be acceptance of the argument of counsel for the respondent that the original loan obtained by the appellant had been discharged . . . there must be shown a causal connection between money borrowed and the earning of income and this must not be too remote a connection . . .

Likewise, counsel for the Crown argued that the plaintiff has not established a causal connection between the borrowed money and the income received from the 35th Avenue property. The plaintiff, he says, has failed to produce documentary evidence to contradict the presumption that he and his wife were at all relevant times simply acting in furtherance of their community of interests. Thus, the defendant feels that the plaintiff has not demonstrated that the borrowed money was used to earn income from business or property, Within the meaning of paragraph 20(1)(c) of the Income Tax Act. He concludes that the plaintiff is not entitled to deduct 1981 and 1982 interest expenses from his income for those years.

Findings

Apart from the testimony of the Bowes, there is very little evidence to prove the existence of a debt owing to Mrs. Bowes in relation to the purchase of the 35th Avenue property. The certificates of interest payments issued by the bank merely record the purposes declared by Mr. Bowes to the bank and are, therefore, to a large extent, self-serving. Furthermore, the bank statements filed by the plaintiff indicate that the Bowes had a joint account and it is impossible to decipher any transfers of large sums of money from one spouse to the other. Indeed, the plaintiff himself admitted during cross-examination that he could not explain the various credits and debits indicated in those statements. He was also at a loss to explain how the specific amounts of interest which he sought to deduct as expenses incurred inrelation to the 35th Avenue property were calculated by the bank or by his accountant, on the grounds that the bank records had all been destroyed and that he had completely entrusted the preparation of his tax returns to his professional accountant.

With respect to the $300,000 market value figure appearing on the Land Titles form, that form specifically states that it is for " Land Title Office Use Only”. The form describes the transfer of an estate in fee simple to Edward Bowes from Anita Bowes " in consideration of $1 and other good and valuable consideration paid to me". There is no indication on this form that any other sum of money remained outstanding and due to Anita Bowes as a result of the sale. As counsel for the defendant indicated, while there may have been a notional transfer of funds between the spouses, these transfers did not materialize in any written form.

In a recent decision of this Court by Mr. Justice Collier (Toolsie v. The Queen, [1986] 1 C.T.C. 216; 86 D.T.C. 6117), the taxpayer sought to deduct certain interest payments on a residential mortgage by claiming that he in fact used the borrowed proceeds in his capacity as apartment building owner to partially repay himself in his personal capacity for money previously lent to the apartment building business. The somewhat complex and nebulous argument was rejected by the learned trial judge (at page 218 (D.T.C. 6119)):

There is, at the outset, one practical difficulty with this. There are no records supporting this alleged contractual arrangement between the plaintiff in one capacity, and the plaintiff in another capacity. Nor is there any hard evidence of money changing hands. All that really happened is that J. Vincent Toolsie bor- rowed money to purchase a home. In my view, the Minister’s assessment is correct. The mortgage interest and placement fee are not deductible.

Likewise, in the present case, there is no hard evidence of money having changed hands between Mr. Bowes and his wife. There are no records supporting the alleged arrangement between the two that he would owe her money representing the full market value of the 35th Avenue property. The cases cited by Crown counsel indicate that where a taxpayer's conduct is equally consistent with two different courses of action, only one of which produces favourable tax consequences, then a lack of documentary evidence to support his contention that he indeed took the most favourable course of action may prove fatal to his claim. As I indicated in Maritime Forwarding Ltd. v. The Queen, [1988] 1 C.T.C. 186; 88 D.T.C. 6114 (at page 189 (D.T.C. 6116)): ”. . . assertions by a taxpayer as to his intentions are only persuasive to the extent that they may be directly or indirectly confirmed by or be consistent with overt and objective fact."

It may be that in other cases which come before the Court, the special relationship that exists between spouses will help to explain such a lack of proper documentary proof. It is quite conceivable that transactions between spouses would not be documented as extensively and be made subject to the same formalities as transactions between strangers. This was recognized by the Tax Appeal Board in Weiser v. M.N.R. (1955), 12 Tax A.B.C. 382; 55 D.T.C. 221 where the Board allowed an appeal from an assessment of gift tax although the taxpayer did not provide any documentary evidence to show that he had indeed lent his wife the $10,000 at issue. In view of the special relationship existing between the parties, the Board accepted the taxpayer's statement that he had not requested any such evidence.

However, in the final analysis, it must be remembered that the circumstances of each case before the Court will differ. It is a combination of the particular facts of a case, as well as the evidence adduced by the parties, which will determine whether the Court is satisfied that the taxpayer's allegations reflect the reality of the situation. The absence of documentary evidence or objective proof is not necessarily determinative of an issue of this nature, but is one element which must be considered in arriving at a proper finding.

Another element of the present case which poses great difficulty for me is the fact that the interest which Mr. Bowes was required to pay on his bank loan greatly exceeded the income he received from his rental of the 35th Avenue property. That property was clearly not providing Mr. Bowes with a profit and it did not generate non-exempt income of the type that is supposed to be encouraged by subparagraph 20(1)(c)(i) of the Income Tax Act. Mr. Bowes finally had to sell the property at a time when its market value had fallen substantially in order to help pay off his bank loans. Did he therefore entertain a reasonable expectation of earning income from the 35th Avenue property when he bought it? As former Chief Justice Dickson stated in Bronfman Trust, supra (at page 129 (D.T.C. 5067)):

It seems to me that, at the very least, the taxpayer must satisfy the Court that his or her bona fide purpose in using the funds was to earn income. In contrast to what appears to be the case in Trans-Prairie, the facts in the present case fall far short of such a showing. Indeed, it is of more than passing interest that the assets which were preserved for a brief period of time yielded a return which grossly fell short of the interest costs on the borrowed money . . . The taxpayer cannot point to any reasonable expectation that the income yield from the trust's investment portfolio as a whole, or indeed from any single asset, would exceed the interest payable on a like amount of debt. . .

To understand my concern in this regard, one need only examine the tax returns of the plaintiff for the 1981 and 1982 taxation years. In 1981, the gross rental income from the 35th Avenue property was $4,800. Miscellaneous expenses, apart from interest expenses, in connection with the renting out of this property amounted to $2,152. On top of this, the plaintiff paid interest expenses on his bank loans in the sum of $27,456. In 1982, rental income from the 35th Avenue property was $4,800 and miscellaneous expenses, apart from interest, amounted to $2,760. Interest expenses, in contrast, amounted to $23,104. As can be seen from these figures, interest expenses paid by the plaintiff in 1981 and 1982 were approximately five times the rental income he obtained from the 35th Avenue property—hardly a profitable adventure.

According to Mrs. Bowes' testimony, the value of the 35th Avenue property at one point well exceeded $300,000. By the time that Mr. Bowes bought the property from his wife, real estate prices had started to fall. Yet the plaintiff would have us believe that he was willing to pay $300,000 for a property whose value is said to have dropped to $145,000 in less than a year. Meanwhile, the plaintiff was paying interest in excess of 20 per cent on well over $200,000 worth of bank loans.

The statistics do not support Mr. Bowes' contention that he intended to keep the 35th Avenue property as an investment property when he acquired it in August 1981. The plaintiff stated during cross-examination that there are two factors involved in purchasing a rental property: the income that it will generate on a monthly basis and the anticipated increase in its capital value. If the plaintiff's real intention at the time he bought the property was to wait until the real estate market improved to enhance his capital gains or to stave off a capital loss, then that did not constitute an eligible use of borrowed funds for the purposes of subparagraph 20(1)(c)(i) of the Income Tax Act. In the Bronfman Trust case, Chief Justice Dickson, as he then was, explained the purpose behind subparagraph 20(1)(c)(i) as being to encourage the accumulation of capital which would produce taxable income. As a result (at page 124 (D.T.C. 5064)):

Interest on borrowed money used to produce tax-exempt income is not deductible. Interest on borrowed money used to buy life insurance policies is not deductible. Interest on borrowings used for non-income earning purposes, such as personal consumption or the making of capital gains is similarly not deductible.

[Emphasis added.]

Again at page 129 (D.T.C. 5067), he reiterated this principle: “The fact that the loan may have prevented capital losses cannot assist the taxpayer in obtaining a deduction from income, which is limited to use of borrowed money for the purpose of earning income.”

Chief Justice Dickson acknowledged that there had been a recent trend in tax cases to attempt to ascertain the true commercial and practical nature of a taxpayer's transactions. However, he also cautioned that (at page 128 (D.T.C. 5067)): "This does not mean, however, that a deduction such as the interest deduction in subparagraph 20(1)(c)(i), which by its very text is made available to the taxpayer in limited circumstances, is suddenly to lose all its strictures.”

As in the present case, the income generated from the trust assets in Bronfman, supra, fell far short of the interest costs incurred by the trust as a result of the loan from the bank and the Supreme Court concluded that there was no reasonable expectation of earning income from those assets (at page 130 (D.T.C. 5068)):

The characterization of taxpayers' transactions according to their true commercial and practical nature does not always favour the taxpayer. The taxpayer trust in this appeal asks the Court for the benefit of a characterization based on the alleged commercial and practical nature of its transactions. At the same time, however, it seeks to have the commercial and practical nature of its transactions determined by reference to a hypothetical characterization which reflects the epitome of formalism. I cannot accept that it should be allowed to succeed.

As a result, I do not believe the plaintiff has demonstrated that the Minister erred in his assumption that the borrowed funds were used to finance the construction of a personal residence at 37th Avenue and were not used for the purpose of earning income from the 35th Avenue property. The plaintiff has failed to provide any objective proof that in August 1981, he became indebted to his wife for $300,000 as a result of his purchase of the 35th Avenue property. He was also unable to explain how various large sums of money were going to or from the Bowes' joint account. He could not identify those interest payments indicated in the bank statements which specifically related to the $130,000 demand loan, as opposed to various other loans which he also had outstanding at that time. In short, not only was the plaintiff unable to use his bank statements to trace the application of the borrowed funds at issue throughout the various alleged transactions which are said to have taken place between himself and his wife, but he was also unable to provide any explanation whatsoever of how his accountant calculated the amount of interest pertaining to the $130,000 loan for the 1981 and 1982 taxation years.

As was stated by former Chief Justice Dickson in the Bronfman Trust decision (at pages 124-25 (D.T.C. 5064)): "The onus is on the taxpayer to trace the borrowed funds to an identifiable use which triggers the deduction. Therefore, if the taxpayer commingles funds used for a variety of purposes only some of which are eligible he or she may be unable to claim the deduction."

As authority for this proposition, he refers to two of the authorities mentioned by Crown counsel in the present case: Mills, supra, and No. 616, supra.

Finally, as regards the plaintiff's alleged intention to keep the 35th Avenue property for investment purposes, I cannot conclude from the figures that were put before me that the plaintiff had a reasonable expectation of earning income from the 35th Avenue property which would even come close to compensating him for the excessive interest he was paying on his bank loans. The only logical explanation can be that the plaintiff borrowed the money in question to finance the purchase of a new family residence at 37th Avenue. Although this hearing was a trial de novo, Mr. Bowes did bear the onus of proving that the Minister erred in fact or in law when he reassessed the plaintiff. (See Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182; M.N.R. v. Simpsons Ltd., [1953] C.T.C. 203; 53 D.T.C. 1127 (Ex. Ct.); M.N.R. v. Robertson, [1954] C.T.C. 110; 54 D.T.C. 1062 (Ex. Ct.).) I do not believe that Mr. Bowes has met this onus.

Subsidiarily, there is another issue which requires formal clearance by this Court. Before the Tax Court of Canada, the parties had agreed that the plaintiff's net capital loss and terminal loss for the 1982 taxation year would be $67,149 and $40,000 respectively. By inadvertence, the Tax Court failed to endorse that agreement. I should do so now.

Conclusion

In conclusion, I do not believe the taxpayer has met the burden of proving that the Minister erred in his assumption that the loan proceeds were used for the purpose of constructing a new personal residence at 37th Avenue. Therefore, the interest paid on the loan in 1981 and 1982 is not deductible under subparagraph 20(1)(c)(i) of the Income Tax Act. As stated earlier, the agreement with respect to the plaintiff's net capital loss of $67,149 and terminal loss of $40,000 for the 1982 taxation year is endorsed.

The defendant is entitled to his costs.

Appeal dismissed.