Date: 19991007
Docket: 1999-1460-IT-I
BETWEEN:
JACKLYN MEGGITT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman J.T.C.C.
[1] These appeals are from assessments for the appellant's
1995 and 1996 taxation years. They involve the deductibility of
interest on two mortgages that the appellant had on rental
property that she owned at 3690 Milman Road, Merville,
British Columbia.
[2] In those years she deducted $19,537.13 and $9,424.44
against her income from renting the property at Milman Road.
[3] In 1994, the appellant and her husband lived at her home
on Milman Road, which included five acres of land.
[4] In the spring of 1994, she also acquired a mobile home,
which she intended to rent out along with the house. In the fall
of 1994, they moved out to another house at 2395 Valley View
Drive, Courtenay, British Columbia.
[5] The property on Milman Road was rented to tenants
commencing in October 1994. In 1995, the mortgage on the Milman
Road property to the Canadian Imperial Bank of Commerce was
$121,014.69 and in 1996, $117,568.56.
[6] The house on Valley View Drive cost $195,000. The
appellant borrowed $195,000 from Giroday Sawmills Ltd. and placed
a mortgage of $136,500 on the Valley View Drive and a second
mortgage of $58,500 on the property on Milman Road for a total of
$195,000. The result was that the total of the mortgages on
Milman Road was $176,068.56 and on Valley View Drive was
$136,500.
[7] In June of 1996, the property on Milman Road was sold.
Originally the appellant claimed to deduct only the interest on
the mortgage of $195,000 from Giroday Sawmills Ltd. The Minister
disallowed the claim.
[8] Both parties have modified their positions.
[9] The respondent now concedes that the appellant is entitled
to deduct the interest on the CIBC mortgage on Milman Road in the
amount of $8,935.91 in 1995 and $4,450.19 in 1996, the amount of
interest paid up until the date Milman Road was sold.
[10] The appellant asserts that, in addition to the interest
on the CIBC mortgage that the respondent concedes is deductible,
she is also entitled to deduct the interest on the second
mortgage of $58,500 on Milman Road to Giroday Sawmills Ltd.
[11] In analyzing this question one must look to the decision
of the Supreme Court of Canada in Bronfman Trust v. The
Queen, [1987] 1 S.C.R. 32. Paragraph 20(1)(c) of
the Income Tax Act uses the words "used for the
purpose of". Here the appellant stated the purpose of the
mortgage of $58,500 on Milman Road was to enable her to retain
that property rather than sell it to finance the purchase of
Valley View Drive.
[12] On one view of the matter this was the immediate economic
purpose of the borrowing. The true purpose must of course be
determined. In Les Entreprises Ludco Ltée et al. v. The
Queen, 99 DTC 5154 Marceau J.A., speaking for the majority,
said at page 5157:
[20] I said earlier that I had no difficulty aligning myself
among the traditionalists in the interpretation and application
of the Income Tax Act, in the sense that I dispute the
thesis that it is the role of the courts to react against
attempts at tax planning on the ground that the purpose being
pursued appears antisocial. The only relevant considerations are
the legal effect of the transaction that was carried out and the
strict application of the statutory provision in question, not
the intention. But there is an "unless" attached to
this proposition, and it is this: unless the Act in question
makes intention a dominant consideration. And that is clearly the
case with subparagraph 20(1)(c)(i) of the Act.
[21] The wording does not characterize the intention or the
purpose referred to in either the French or English version. I,
too, have some difficulty seeing how one can introduce
characterizations and speak of primary or final or incidental
intention, etc., but no one can be in any doubt that what
Parliament has in mind is the actual or true, not feigned or
merely claimed, intention. It is the factors peculiar to the
search for this actual intention that most of the judgements
cited earlier have sought to define. As I said, the idea that
reliance could be place on the statements of the interested party
was quickly rejected. The intention had to be concretely
expressed in the use of the funds and confirmed by the
circumstances, and accordingly one could speak of "objective
intention", startling as the juxtaposition of these two
words might be, in itself. And that, I submit with respect, is
precisely the approach that the trial judge took in this
case.
[22] I said earlier, and I repeat, that to my way of thinking
the finding reached by the judge at the conclusion of his
analysis was one of fact that this Court should not reject unless
it can detect some egregious error in the assessment of the
evidence.
[13] The trial judge relied upon the decision in this court in
Mark Resources Inc. v. The Queen, 93 DTC 1004 that
"the real purpose of the use of the borrowed funds"
must be determined. The proposition is axiomatic. Mark
Resources is supported by the decision of the Federal
Court of Appeal in Ludco. In addition to the numerous
cases referred to by Linden J.A. in his dissenting judgment in
Singleton v. The Queen, 99 DTC 5362, Mark Resources
has been referred to with approval by the Supreme Court of Canada
in Hickman Motors Limited v. The Queen, 97 DTC 5363 at
page 5372 and by McDonald J.A., speaking for the unanimous
Federal Court of Appeal; in The Queen v. Byram, 99 DTC
5117 at page 5120.
[14] The appellant's position here is somewhat reminiscent
of an argument advanced in Bronfman. At pages 54-55,
Dickson J. said:
Before concluding, I wish to address one final argument raised
by counsel for the Trust. It was submitted — and the Crown
generously conceded — that the Trust would have obtained an
interest deduction if it had sold assets to make the capital
allocation and borrowed to replace them. Accordingly, it is
argued, the Trust ought not to be precluded from an interest
deduction merely because it achieved the same effect without the
formalities of a sale and repurchase of assets. It would be a
sufficient answer to this submission to point to the principle
that the courts must deal with what the taxpayer actually did,
and not what he might have done: Matheson v. The Queen,
74 D.T.C. 6176 (F.C.T.D.), per Mahoney J., at p.
6179. In any event, I admit to some doubt about the premise
conceded by the Crown. If, for example, the Trust had sold a
particular income-producing asset, made the capital allocation to
the beneficiary and repurchased the same asset, all within a
brief interval of time, the courts might well consider the sale
and repurchase to constitute a formality or a sham designed to
conceal the essence of the transaction, namely that money was
borrowed and used to fund a capital allocation to the
beneficiary. In this regard, see Zwaig v. Minister of National
Revenue, [1974] C.T.C. 2172 (T.R.B.), in which the taxpayer
sold securities and used the proceeds to buy a life insurance
policy. He then borrowed on the policy to repurchase the
securities. Under s.20(1)(c)(i) the use of borrowed money
to purchase a life insurance policy is not a use entitling the
taxpayer to an interest deduction. The Tax Review Board rightly
disallowed the deduction sought for interest payments,
notwithstanding that the form of the taxpayer's transactions
created an aura of compliance with the requirements of the
interest deduction provision. 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.
[15] The appellant contends that by borrowing $195,000 she did
not need to sell her house on Milman Road, but could continue to
use it as a rental property.
[16] This, I think, is precisely the type of argument that was
rejected in the passage quoted above from Bronfman.
[17] The real purpose of the use of the borrowed funds here,
in accordance with Bronfman, was the purchase of her house
on Valley View Drive. The purpose of the use of borrowed funds is
not determined by the property against which the borrowing is
secured.
[18] It is useful to compare the ratio in Bronfman with
that of that decision of the Federal Court of Appeal in
Singleton.
[19] Bronfman stands for the proposition that if a
trust borrows money to make a distribution of capital to a
beneficiary the interest is not deductible. Singleton
stands for the proposition that if a partner in a law firm
borrows money to give to his law firm so that it has the funds to
make an immediate distribution to him so that he can buy a house,
the interest is deductible, even though none of the money is used
in the law firm's business.
[20] I need not comment further on the Singleton
decision. I do not think that it supports the appellant's
position. Even if it supported the appellant's position I
would be obliged to follow Bronfman with which
Singleton is impossible to reconcile. I conclude therefore
that the interest on the $58,500 mortgage on Milman Road is not
deductible.
[21] The appeals are allowed and the assessments are referred
back to the Minister of National Revenue to permit the deduction
of $8,935.91 in 1995 and $4,450.19 in 1996, the interest on the
mortgage on Milman Road to the Canadian Imperial Bank of Commerce
as conceded by the respondent.
[22] The appellant having achieved more than 50% success,
albeit as the result of the Crown's concession, is entitled
to her costs, if any.
Signed at Toronto, Canada, this 7th day of October 1999.
"D.G.H. Bowman"
J.T.C.C.