Brown v. The Queen, 92 DTC 1105, [1992] 1 CTC 2152 (TCC)

Brulé, T.C.C.J.:—This is an appeal involving the taxation years 1980, 1981, 1982 and 1983 in which the appellant claimed the following:

1980—an allowable business investment loss of $25,406.64

1981— an additional claim for automobile expenses in the amount of $1,170

—interest of $5,950.78 on money borrowed to honour a personal guarantee

1982— interest as in 1981 of $8,057.66

1983— interest as in 1981 of $12,509.23

This investment loss claimed in 1980 should, it was said by the appellant, be applied against 1980 income first with any excess carried forward to 1981 and later years.

The respondent denied the above and these are the issues to be determined. It was agreed that there was no allowable capital loss in any year.

In 1975, the appellant incorporated a company to lease tractors and trailers. The company (307442 Ontario Ltd.) borrowed money for the purchase of equipment. It carried on until May of 1979 when it no longer had any contract for its services. After that date the appellant used a company truck but contracted personally for its use. As well, he worked as a commissioned salesman using his automobile as a part of his work.

The company's truck, used by the appellant, broke down in 1980 and the company was dissolved. Under the terms of money borrowed by the company for its equipment the appellant by his guarantee had to pay the bank a considerable sum. This was in 1978.

The appellant maintained that the company suffered a loss in 1980, the year it ceased operating and that he should be allowed this investment loss beginning in that year. The respondent held the toss to have taken place in 1978. In addition, the appellant paid the bank amounts of interest as set out above and which he claimed were proper income tax deductions. As well he objected to a disallowance of a portion of claimed automobile expenses in 1981 when he worked as a commissioned salesman.

Appellant's Position

Counsel for the appellant felt that because the company was in operation with assets until 1980 that should have been the year that the allowable business investment loss took place. The company still had vehicles, even though the bank loan was called in 1978, and these were used by the appellant but all the money collected went personally to the appellant and none to the company, otherwise the bank may have claimed these.

The Court was also told that the interest payments should be deductible because they involved guarantees by the appellant for funds the company used in earning income.

Automobile expenses were allowed on the basis of $10 per day less ten per cent for personal use in 1980 and this amount was raised to $15 per day for 1981. The increase was disallowed.

The Respondent's Position

The reply to the notice of appeal assumed that the business investment loss occurred in 1978 when the bank called the loans to the company. Counsel for the respondent, at trial, maintained that the capital loss took place in 1979 when the company ceased to carry on business. For this proposition he relied on the case of M.N.R. v. Consolidated Glass Ltd., [1957] C.T.C. 78, 57 D.T.C. 1041, decided by the Supreme Court of Canada. In any event the loss did not take place in 1980 as put forth by the appellant. With respect to the interest paid for money borrowed by the taxpayer himself to honour his own personal guarantee after the bank called the loans in 1978. Such cannot be deducted under paragraph 20(1)(c) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the Act") because the borrowed money was not used for the purpose of earning income from a business or property. The case of Ruth DeZwirek v. M.N.R., [1969] Tax A.B.C. 121, 69 D.T.C. 140, was given as authority.

As to the automobile expense disallowance in 1981 the respondent refused an amount of $1,170 this being an increase over the allowable expense in 1980. The reason given was that no records were produced to justify the increase.

Analysis

It makes little difference whether or not the respondent's contention that the loss took place in 1978 or 1979 as both years are statute barred. What is of importance is that the loss did not take place in 1980. In 1978 for all practical purpose the company was not in business. It held its position only because the appellant was able to make an arrangement with the bank. It carried on until 1979 when its only contract was completed. After that date in May 1979 the company did not function as such. It had a truck as an asset but that truck was not used for company purposes or gain of revenue. Rather the truck was used by the appellant personally with any income being received by the appellant, not the company. While his reason may have been to stop revenue being received by the company and therefore liable for seizure by the bank, nevertheless the appellant did not have the company operate as such even though it owned a truck. When the vehicle broke down in 1980 this was the end of any business, but the Court has no difficulty in determining that the operation of the company, as such, ceased prior to 1980 and therefore no business investment loss was sustained in that year but rather earlier. A careful reading of the Consolidate Glass case, supra, would confirm this.

The interest cannot be deducted as claimed because one of the prerequisites is that in order to be deductible the borrowed money must have been used to earn income. Paying off a guarantee does not qualify as money borrowed to earn income under paragraph 20(1 )(c) of the Act. The DeZwirek case, supra, set this out.

As to the automobile expense increase in 1981 over 1980 being allowable such is only the case where records are produced to the satisfaction of the respondent. The appellant had claimed a 50 per cent increase in a daily automobile allowance but such must be justified by actual disbursements if asked for. The appellant had suggested that Revenue Canada had his records but these can always be obtained for Court purposes. No evidence was given that these could not be obtained.

The net result is that the three issues being appealed, namely the year of the capital loss, the interest deductions and the automobile expenses are disallowed and the appeal is dismissed.

Appeal dismissed.