Johnston v. The Queen, docket 2001-1952(IT)I (Informal Procedure)

Date: 20020321

Docket: 2001-1952-IT-I

BETWEEN:

MURRAY G. JOHNSTON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

(Edited from the transcript of Reasons delivered orally from the Bench at Winnipeg, Manitoba on February 14, 2002)

Hershfield, J.T.C.C.

[1]            This appeal will be dismissed. I will give reasons from the Bench today. It will take me about half an hour to review the facts for the records and to provide the reasons for not allowing the appeal.

[2]            This is an appeal of a reassessment of the 1999 taxation year which denied an interest expense claim of $3,675.00, which amount was claimed pursuant to paragraph 62(3)(g) of the Income Tax Act (the "Act").

[3]            Subsection 62(3) sets out a definition of "moving expenses" where a person has moved to take up employment, in this case from Toronto to Winnipeg. It permits deducting interest in respect of an old residence. Paragraph 62(3)(g) provides as follows:

62(3) "moving expenses" In subsection (1), "moving expenses" includes any expense incurred as or on account of

...

(g) interest, property taxes, insurance premiums and the cost of heating and utilities in respect of the old residence, to the extent of the lesser of $5,000 and the total of such expenses of the taxpayer for the period

(i) throughout which the old residence is neither ordinarily occupied by the taxpayer or by any other person who ordinarily resided with the taxpayer at the old residence immediately before the move nor rented by the taxpayer to any other person, and

(ii) in which reasonable efforts are made to sell the old residence, and

...

but, for greater certainty, does not include costs (other than costs referred to in paragraph (f)) incurred by the taxpayer in respect of the acquisition of the new residence.

[4]            Dealing first with the provisions in subparagraphs (i) and (ii), I am satisfied that they have been met. The interest expense claimed was for the period throughout which the old residence was neither ordinarily occupied by the taxpayer or by any other person who ordinarily resided with the taxpayer at the old residence immediately before the move nor rented by the taxpayer to any other person, and, there were reasonable efforts made to sell the old residence. That is, the denial of the expenses does not relate to a failure to meet those requirements. The issue is whether the "for greater certainty" provision at the end of paragraph 62(3)(g) applies to deny the interest expense claim.

[5]            The amount of $3,675.00 comes about by virtue of total interest expenses of $4,873.00 consisting of $4,129.00 on a secured loan and $744.00 on an unsecured loan, which the Appellant arranged in the course of his move from Toronto to Winnipeg. The $4,873.00 expense was only claimed as to $3,675.00, as he had used up the balance of the $5,000.00 limit in other expenses allowed under the section that are not in dispute. It is only the portion of the $4,873.00 that was claimed within the $5,000.00 limit that is at issue in this appeal.

[6]            For the most part the facts of this case are not in dispute. Indeed there was an agreed statement of facts, or partial agreement as to facts, that was submitted by the parties and I will refer to that, not in its entirety but, for the purposes of this oral judgment, just pick what I think are the most material aspects:

                  -              In August of 1999 the Appellant was living in Toronto in a mortgage free home, which was his old residence;

                  -              On August 21, the Appellant became employed in Winnipeg;

                  -              On August 23, or thereabouts, the Appellant placed the old residence on the market, i.e. listed it for sale;

                  -              On August 29, the Appellant and his family flew to Winnipeg and took up residence at a temporary residence in Winnipeg;

                  -              On August 30, the Appellant started his work in Winnipeg;

                  -              A new home was acquired in Winnipeg and title passed on September 16;

                  -              The Appellant and his family moved into that new Winnipeg residence on September 17. Although not in the agreed statement of facts, the purchase price according to the testimony of the Appellant was $340,000.00. Deposits and closing proceeds totalling this amount were funded by bank loans.

                  -              On October 6, the Appellant sold his old residence in Toronto for $412,000.00;

                  -              On November 12, the sale of the old residence in Toronto closed and the proceeds of that sale became available on November 16. Although not in the Agreed Statement of Facts, according to the testimony of the Appellant, the proceeds of that sale were applied to retire the loans in full;

                  -              The interest expense was incurred during the period from when the old residence became vacant to when the proceeds from the sale of the old residence were received by the Appellant.

[7]            The documentary evidence is that there were two loans: one for $290,000.00 secured by the Toronto residence; and another $50,000.00 unsecured line of credit, both with the Toronto-Dominion Bank in Winnipeg.

[8]            The $290,000.00 loan does not have a security agreement, as such, attaching itself to the property, but is simply evidenced by a demand promissory note. However, it is clear from correspondence included with the agreed statement of facts that the bank was relying on the equity in the home as the means by which the Appellant would repay the loan. There was a direction to the Appellant's solicitor that when the solicitor did receive funds from the sale of the old residence, those proceeds would be turned over to the bank. This is a rather loose security arrangement in that it does not afford the bank ultimate protection. For example, it does not appear from the documentation that there is any guarantee that that particular solicitor would ever actually be involved in the sale of the old residence. Nonetheless this is a transaction between the bank and an individual with whom there is perhaps a sufficient relationship that the direction sufficed as their security for the loan.

[9]            The $50,000.00 unsecured line of credit has no connection, if you will, to the old residence.

[10]          The funds were accessed by the Appellant on three occasions: First on August 27 when $20,000.00 was paid by the Appellant to the vendor of the Winnipeg property as a deposit and that cheque was honoured by the bank on the same day, taking funds from the demand loan account. Secondly in respect of that demand loan, there was an additional $30,000,00 paid to the vendor of the Winnipeg residence on September 14. Lastly, on September 14 there was $290,000.00 paid to the vendor of the Winnipeg residence and the source of those funds was a loan evidenced of the promissory note and secured by the old residence. This totals $340,000.00; $50,000.00 from the unsecured line of credit in two instalments of $20,000.00 and $30,000.00 and one instalment of $290,000.00 in respect of the so-called secured loan.

[11]          The loans were repaid in November with proceeds from the sale of the residence. That is clear from the documentation of the balance of the loan accounts that were submitted with the agreed statement of facts.

[12]          As I have stated, all the requirements of paragraph (g) of subsection 62(3) are met with the possible exception of the limitation set out in the suffix to that paragraph which I have noted. Again that suffix reads as follows:

... for greater certainty, does not include costs (other than costs referred to in paragraph (f)) incurred by the taxpayer in respect of the acquisition of the new residence.

[13]          The Appellant has argued that if he meets the tests in paragraph (g) which includes a finding that the interest expense was "in respect of the old residence" then that should suffice and one should not then be, in effect, given the deduction in one part of the subsection and then have it taken away in another part.

[14]          Indeed that is a dilemma in the application of this section, for I agree with the Appellant that this loan is properly regarded, for the purposes of paragraph (g), as being "in respect" of his old residence at least to the extent that there is a connection between the interest expense and the old residence.

[15]          I would go so far as to say, in this case, that even the loosely arranged security is a sufficient "connection", and I say that with the authority of a definition, if you will, of the term "in respect of" provided some years ago by the Supreme Court of Canada in the Nowegijick v. The Queen et al., 83 DTC 5041 at p. 5045.

[16]          In that case Dickson, J. (as he then was) defined what "in respect of" means in a legislative context. He said you must give the phrase the widest possible scope. It imports a meaning which includes "in connection with". He said the phrase "is probably the widest of any expression intended to convey some connection between two related subject matters" (emphasis added).

[17]          Giving the phrase "in respect of" such wide scope means the loans in this case are in respect of both the old and the new residences.

[18]          The taxpayer has asserted, and I agree, that he borrowed these funds, at least the secured loan, as a way of accessing the equity in his old residence. The interest expense is then a cost of accessing his equity in his old residence, at least for the secured loan. Is there a sufficient connection between the equity in his old residence and the interest costs for the purposes of paragraph (g)? In my view, absolutely yes. You must give it the widest meaning. There is a connection.

[19]          On the other hand, we must give that phrase the same wide meaning when we get to the suffix, which says that the interest expense cannot be a cost "in respect of" the acquisition of the new residence. It is undeniable that this is a cost in respect of, connected to, the new residence as well. The loan financed the purchase of the new residence. The testimony was that the cheques to the vendor of the new residence were covered by funds arranged for by these loans. That is a clear connection to the new residence. There were no intervening events, no intervening deposits or withdrawals. I accept that the fungibility of funds does not permit an exact tracing, but no better case for tracing could likely exist. The connection between the borrowed funds and the acquisition of a new residence are undeniable.

[20]          So as between the two connected events, or the connected matters, which prevails is the ultimate question.

[21]          I will deal with the Appellant's arguments which were well reasoned and had some merit although ultimately notpersuasive. One argument was that the section does not speak to "connections" and for the Respondent to rely on connections is just not something that is found in the words of the Act. However, as I said, the words "in respect of" do import the need to look for "connections" to each of the respective residences. That to me is absolutely clear in law.

[22]          The other arguments that the Appellant urged in a cogent and reasonable way, speak to the issue of timing and discrimination.

[23]          The Appellant suggested that one cannot or should not construe these provisions in such a way that it would put so much emphasis on timing, where timing is not a concept that is even mentioned in these provisions particularly where such emphasis would have a discriminatory effect.

[24]          The timing and discrimination issue is that the Appellant ends up not being able to deduct an interest cost in respect of accessing his equity simply because he did not borrow the funds until after he made the move. This discriminates against him relative to persons who have accessed equity earlier or used their funds otherwise available for equity for other purposes.

[25]          Of course the Appellant is right. If the timing had been different and the situation had been different, the likelihood is that he would be allowed to take the interest deduction. The Appellant argues that it is discriminatory to put persons in his circumstances at a disadvantage and that such discrimination should not be allowed by the Court because it goes contra to the very purpose of the section, which is to encourage mobility to help with the move to the new employment.

[26]          I understand and have considered these agreements but they cannot prevail.

[27]          That accessing equity before a move would allow for the interest expense, is not a compelling reason to allow for the expense when accessing equity after a move has commenced. We considered an example during the hearing. If a loan against the Appellant's equity had been taken sometime before the move, days before cuts the example a bit thin, but say months before or a year before, and the proceeds had been used to go for a trip or to buy bonds, then, in that case, when the new residence was acquired there would be no connections between the old and the new residence. In that case the borrower has not used any of the equity in his old residence to buy the new residence. The sole connection is with the old residence and the borrowing, prior to the move, has added a hardship to making the move. The Act relieves that hardship.

[28]          In the case at bar the Appellant wanted or needed to use the equity of the old residence to finance the purchase of the new residence. This has resulted in a connection between his equity loan and the new residence. The loan in such case is not a hardship that made the move more difficult. The loan facilitated the move but the "for greater certainty" provision in subsection (3) expressly denies costs in respect of the acquisition of the new residence - regardless that allowing such costs would facilitate mobility.

[29]          I did point out in respect of the above example that if, before the move, funds were borrowed, even with the possibility of a move in mind, and bonds were bought with the borrowed funds, then when it came time to buy the new house, the bonds could be cashed and, in that circumstance, the connection between the borrowing and the acquisition of the new house would likely be broken because you have an intervening event. That this type of planning might avoid the problem that the Appellant faces in the case at bar is not relevant. In the case at bar there is no intervening event.

[30]          In this context I might draw an analogy with the recent case decided by the Supreme Court, in The Queen v. John R. Singleton, 2001 DTC 5533. In the simplest terms that case dealt with a person buying a new home who had no funds for the purchase of the home, although he had equity in his business partnership sufficient to pay for the new home. He drew out the equity in the partnership and bought the home with those withdrawn funds. He then went to the bank and borrowed money to meet the equity requirements of the partnership or, if you will, to replace the equity that he had just drawn out. Since the actual borrowing was used for and employed in the partnership, he successfully claimed the interest deduction.

[31]          In that case, which dealt with a different interest deduction provision of the Act where the purpose for incurring the interest expense was the issue, Revenue Canada said the interest expense was not deductible as it was obvious that the real economic effect, the substance of the transaction, if you will, the purpose of all this was to borrow funds for the acquisition of the house and as such the interest was not deductible.

[32]          The Supreme Court basically said that you cannot look at the overall economic impact and you must look at the actual transactions. It said that the actual borrowing was to finance the partnership and the interest was thereby deductible. The fact that it enabled financing the purchase of a house does not matter. You are allowed to structure your affairs so as to fit within the wording of the Act. If you do not organize your affairs to fit into the wording of the Act, you lose. This is not discriminatory. Some people will not use their equity in a tax efficient way. That is what happened to the Appellant in this case. That he might have planned for a prospective move does not help him. I am required to look at what actually happened. In doing so I must find that the loans in this case were directly linked to the purchase of the new residence in Winnipeg.

[33]          Here the taxpayer has arranged his affairs in such a way as to fall squarely within the "for greater certainty" provision, which denies certain expenses, including expenses that would otherwise be allowed by subparagraph (g).

[34]          On that basis, although the taxpayer will assert that it is not fair, that he could have rearranged his affairs in a different way, and that different people in different circumstances will be treated differently, the appeal fails. He cannot claim the deduction where the interest expense is connected to the acquisition of a new residence and here that connection is absolutely clear.

[35]          The appeal is dismissed.

Signed at Ottawa, Canada, this 21st day of March 2002.

"J.E. Hershfield"

J.T.C.C.

COURT FILE NO.:                                                 2001-1952(IT)I

STYLE OF CAUSE:                                               Murray G. Johnston and

                                                                                                Her Majesty the Queen

PLACE OF HEARING:                                         Winnipeg, Manitoba

DATE OF HEARING:                                           February 14, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge J.E. Hershfield

DATE OF JUDGMENT:                                       March 21, 2002

APPEARANCES:

For the Appellant:                                                 The Appellant himself

Counsel for the Respondent:              Jodi McFetridge

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-1952(IT)I

BETWEEN:

MURRAY G. JOHNSTON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard and judgment rendered orally on February 14, 2002

at Winnipeg, Manitoba, by

the Honourable Judge J.E. Hershfield

Appearances

For the Appellant:                      The Appellant himself

Counsel for the Respondent:      Jodi McFetridge

JUDGMENT

          The appeal from the reassessment made under the Income Tax Act for the 1999 taxation year is dismissed in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 21st day of March 2002.

"J.E. Hershfield"

J.T.C.C.