[OFFICIAL ENGLISH TRANSLATION]
Date: 20020319
Docket: 2000-3116(IT)I
BETWEEN:
FRANÇOIS BINETTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal concerning the
1996, 1997 and 1998 taxation years.
[2] The issues are as follows:
- is the appellant
entitled to claim for the 1996, 1997 and 1998 taxation years
rental losses generated by an immovable property not belonging to
him?
- is the appellant
entitled to deduct from his income the carrying charges paid for
his spouse's business for the 1998 taxation year?
[3] In making the reassessments here
under appeal, the Minister of National Revenue (the
"Minister") made the following assumptions of fact,
stated in the Reply to the Notice of Appeal (the
"Reply"):
[TRANSLATION]
(a) Carmelle Mainguy
stated in a notarial contract of sale dated October 30,
1992, that she was married to the appellant, François
Binette, in a first marriage, under the regime of separation as
to property in accordance with a contract of marriage drawn up by
a notary on March 29, 1978, and that there was no agreement
between them to vary their matrimonial regime or contract of
marriage, and that no application for separation from bed and
board, annulment of marriage or divorce had been made;
(b) on
October 30, 1992, Carmelle Mainguy and Lucie Coulombe
(hereinafter the "purchasers") bought a commercial
property located at 959, rue Commercial,
St-Jean-Chrysostôme, (hereinafter the
"property") for the sum of $120,000 from Jean-Guy Rioux
and Joan Proulx (hereinafter the "vendors");
(c) Carmelle Mainguy
and Lucie Coulombe paid the vendors the sum of $34,972.65 and
assumed the balance owing on the existing mortgage, which was
$85,027.35;
(d) the purchasers
and their respective spouses took out mortgages on their personal
residences totalling $45,000, that is, $22,500 on each residence,
to cover the down payment and to make a few improvements;
(e) at the time the
building was purchased in 1992, the monthly rents collected
totalled $1,270, that is, $520 for the notary's office in
the basement, no rent for the business on the ground floor, which
was subsequently occupied by the purchasers, and $750 for the
three offices on the upper floor;
(f) Carmelle
Mainguy and Lucie Coulombe opened a used children's clothing
business called "Boutique Les petits mousses" on the
ground floor;
(g) during the 1995
taxation year (amended at the hearing), the purchasers closed
their store, one tenant went bankrupt and the other tenants left
for various reasons;
(h) during the 1998
taxation year, the property suffered significant water damage and
required major repairs before certain premises could be leased
again;
(i) the
appellant provided a number of copies of legal documents
attesting to various mortgage and other loans, but none of those
documents identifies the appellant as the legal owner of the
property described in subparagraph 12(a);
(j) loan
statements issued by the Caisse populaire Duberger for the 1996
taxation year were in the names of Carmelle Mainguy and
Lucie Coulombe, and the appellant's name does not appear on
them;
(k) the appellant
provided the Minister with a copy of the lease, signed on
June 12, 1999, between the lessors, Carmelle Mainguy
and Lucie Coulombe, and the lessee for the rental of
the property located at 959, rue Commerciale,
St-Jean-Chrysostôme, and the appellant's name
does not appear therein as the lessor;
(l) the two
owners of the property never at any relevant time sold it in
whole or in part to their spouses, one of whom is the
appellant;
(m) there is no legal debt
between the spouses;
(n) the business
income was always reported by the appellant's spouse, Carmelle
Mainguy;
(o) the rental
income was reported by the appellant's spouse, Carmelle Mainguy,
for the 1994 taxation year;
(p) the appellant
reported the following rental losses:
Year
Gross
Income
Net Loss
1995
$6,580
($5,916)
1996
$0
($8,518)
1997
$0
($8,897)
1998
$0
($8,656);
(r) for the 1998
taxation year, the appellant claimed $725 in carrying charges on
a loan taken out on September 28, 1998, a portion of which,
namely $10,000, was purportedly used to help his spouse start up
a new business called "Service à domicile pour
vous".
[4] All the facts assumed were
admitted by the appellant. These facts are highly relevant
facts and, above all, sufficient to dispose of the appeal.
[5] In addition, the appellant
explained the context and circumstances of his case. I
understood from the appellant's testimony that the plan had
originally been conceived in order to enable his spouse to earn
income, which in itself was quite legitimate.
[6] To achieve that objective, the
appellant had foregone taking part in the potentially
income-producing activity, even though he was one of its
principal guarantors. The appellant clearly did not want to
have to be assessed on that potential income; and that was lawful
and legitimate.
[7] The plan never achieved its
goal. On the contrary, things deteriorated to the point
where not only did his spouse not realize any profits, she
incurred losses.
[8] Relying on the attribution
provisions of section 74.1 of the Income Tax Act (the
"Act"), the appellant argued that he could
deduct those losses against his own income.
Section 74.1 reads in part as follows:
74.1(1) Where an individual has transferred
or lent property [...] either directly or indirectly, by
means of a trust or by any other means whatever, to or for the
benefit of a person who is the individual's spouse or common-law
partner or who has since become the individual's spouse or
common-law partner, any income or loss, as the case may
be, of that person for a taxation year from the property or from
property substituted therefor, that relates to the period in the
year throughout which the individual is resident in Canada and
that person is the individual's spouse or common-law partner,
shall be deemed to be income or a loss, as the case may
be, of the individual for the year and not of that person.
. . .
(3)
For the purposes of subsections (1) and (2), where, at any time,
an individual has lent or transferred property (in this
subsection referred to as the "lent or transferred
property") either directly or indirectly, by means of a
trust or by any other means whatever, to or for the benefit of a
person, and the lent or transferred property or property
substituted therefor is used
(a) to repay, in whole or in
part, borrowed money with which other property was acquired,
or
(b) to reduce an amount payable
for other property,
there shall be included in computing the income from the lent
or transferred property, or from property substituted therefor,
that is so used, that proportion of the income or loss, as
the case may be, derived after that time from the other property
or from property substituted therefor that the fair market value
at that time of the lent or transferred property, or property
substituted therefor, that is so used is of the cost to that
person of the other property at the time of its acquisition, but
for greater certainty nothing in this subsection shall affect the
application of subsections (1) and (2) to any income or loss
derived from the other property or from property substituted
therefor.
[Emphasis added.]
[9] At the hearing, I said to the
appellant that things would probably have been quite different if
there had been profits.
[10] He acknowledged and admitted that a
taxpayer may use every lawful means to prepare a financial plan
that is likely to have the greatest possible beneficial impact on
his tax burden.
[11] Once chosen, however, the plan must be
consistent and be complied with in all respects. In other
words, the income was to go to his spouse so as to create
favourable tax consequences. Thus, under the same plan, he
could not benefit from the losses, because those same losses had
no effect in his spouse's hands. The appellant wanted to
win regardless of the outcome of the venture.
[12] The appellant's method was all the more
unacceptable as the strategy had been the subject of no written
agreement, the obvious purpose of this being to keep all options
open.
[13] In support of his appeal, the appellant
referred to the attribution rules in subsection 74.1(1) of
the Act.
[14] On the one hand, the appellant argued
that his spouse had acted as a nominee, but there was no valid
evidence on that point, the only evidence being the appellant's
highly self-serving oral explanation.
[15] On the other hand, the title of the
appellant's spouse to the property always remained intact; at no
time did the appellant hold any undivided share of his spouse's
title to the property.
[16] The respondent nevertheless admitted
that the mortgage payments and the operating costs with respect
to the property had been paid by the appellant taxpayer and that
he was repaying a debt contracted by his spouse, a situation
within the contemplation of subsection 74.1(3) of the
Act; the respondent thus agreed to a partial consent to
judgment.
[17] The respondent's partial consent to
judgment concerns only a portion of the rental losses claimed,
namely the portion equal to the product of the loss from the
property multiplied by the ratio between the fair market value at
that time of the property transferred by the appellant (the
mortgage payments and the operating expenses for the property)
and the cost of the property at the time it was acquired.
The appellant will thus be entitled to the following amounts:
· For
1996: $8,518 x $9,218 ÷ $60,000 =
$1,308.65
· For
1997: $8,897 x $8,897 ÷ $60,000 =
$1,319.28
· For
1998: $8,656.32 x $8,656.32 ÷
$60,000 = $1,248.86
[18] The second issue is whether the
appellant could deduct from his income the carrying charges on a
loan a significant portion of which-$10,000-was lent to his
spouse without interest to enable her to start up a business.
[19] The appellant admitted that the loan
granted to his spouse was interest-free. The appellant,
though, paid interest on money that he had lent without
interest. He contended that he could deduct the carrying
charges and yet admitted that the interest-free loan was an
absolutely non-income producing debt.
[20] Paragraph 18(1)(a) of the
Act reads as follows:
18(1) In computing the income of a taxpayer
from a business or property no deduction shall be made in respect
of
(a) General limitation - an outlay or expense
except to the extent that it was made or incurred by the
taxpayer for the purpose of gaining or producing income from the
business or property.
[Emphasis added.]
[21] The provisions of the Act are
very clear and absolutely do not allow of the appellant's
interpretation. The carrying charges claimed were not allowable
at all. On this point, I think it useful to reproduce a passage
from the judgment by Thorson P. in Royal Trust Company v.
M.N.R., 57 DTC 1055, at page 1060:
. . . Thus, it may be stated categorically that in a case
under The Income Tax Act the first matter to be determined
in deciding whether an outlay or expense is outside the
prohibition of section [18(1)(a)] of the Act is whether it was
made or incurred by the taxpayer in accordance with the
ordinary principles of commercial trading or well accepted
principles of business practice. If it was not, that is the
end of the matter. But if it was, then the outlay or
expense is properly deductible unless it falls outside the
expressed exception of section [18(1)(a)] and, therefore, within
its prohibition.
[Emphasis added.]
[22] The appellant could not personally
claim the carrying charges paid to enable his spouse to invest in
a business, particularly since the loan charges produced
absolutely no income in his hands.
[23] The appeal is accordingly allowed and
the matter is to be referred back for reconsideration and
reassessment on the basis that the appellant is entitled solely
to the expenses indicated hereunder for the taxation years in
question:
· For
1996:
$8,518 x $9,218 ÷ $60,000 = $1,308.65
· For
1997:
$8,897 x $8,897 ÷ $60,000 = $1,319.28
· For
1998:
$8,656.32 x $8,656.32 ÷ $60,000 = $1,248.86
Signed at Ottawa, Canada, this 19th day of March 2002.
J.T.C.C.
Translation certified true
on this 22nd day of May 2003.
Erich Klein, Revisor
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