Date: 20010125
Docket: 2000-1044-IT-I
BETWEEN:
FRANK D'ANGELO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
For the Appellant: The Appellant himself
Agent for the Respondent: Geoffrey Roy (Student-at-law)
____________________________________________________________________
Reasons for Judgment
(Delivered orally from the Bench at Toronto, Ontario, on
January 15, 2001)
Bowie J.
[1]
This appeal is brought from income tax reassessments for the
taxation years 1995 and 1996. The facts of the case are not in
dispute. In early 1993, Mr. D'Angelo was living with his
family in a house at 163 Palmer Street, in Guelph, Ontario.
That house had originally been purchased with mortgage financing,
but by February 1993, the mortgage on it had been retired and the
house was owned free and clear of any indebtedness. At that time
he had a prospect of selling the house to a contractor who wished
to make some severances and required consent from the Committee
of Adjustments for the severances and for zoning variances in
order to use the property. Mr. D'Angelo, with such a
sale in anticipation, bought, on an unconditional offer to
purchase, a house at 6 Burton Street in Guelph. The purchase
price of that house was $212,000, and because of the situation of
the vendors, it was necessary to purchase the house with a March
1, 1993 closing date. That closing date was prior to the time
when it was possible to get a decision as to the severances and
variances required by the prospective purchaser of the Palmer
Street residence. Consequently, in order to close the purchase on
March 1, 1993, Mr. D'Angelo supplemented his $32,000
down payment on the property with a first mortgage for $136,000
on the Burton Street property, and with a loan from the bank on a
line of credit which was secured by a collateral mortgage on the
Palmer Street property in the amount of $44,000.
[2]
Using these funds, the transaction was closed. Later in the month
of March, the Committee of Adjustments considered the
applications for severances and variances and turned them down,
with the result that the prospective sale of 163 Palmer Street
fell through. At that point, Mr. D'Angelo attempted to
sell the Palmer Street property, but he was unable to do so, or
at least was unable to do so, at a price that he would find
satisfactory. He then turned the Palmer Street property into a
rental property, and he received rental income in 1995 of $9,200
and in 1996 of $10,800, from which he sought to deduct various
expenses, including the interest being paid on the money borrowed
to complete the purchase of the Burton Street property.
[3]
As a result, the expenses, including that interest, exceeded the
income from the property, and he claimed the right to deduct
rental losses from his other income under section 3 of the
Income Tax Act. He was reassessed by the Minister of
National Revenue to reduce those rental losses by the amounts of
$14,471 for 1995, and $12,154 for 1996, thereby transforming the
losses into profits, upon which the Minister levied income
tax.
[4]
The sole question in dispute is whether or not
Mr. D'Angelo is entitled to include the interest on
borrowed money in the expenses charged against the rental income
from the Palmer Street property.
[5]
The authority for deducting interest from income is to be found
in paragraph 20(1)(c) of the Act. But for that
provision, there would be no entitlement at all to deduct
interest in the computation of income. So far as it is relevant,
it provides that there may be deducted, in computing one's
income, an amount paid in the year, or payable in respect of the
year, by a taxpayer pursuant to a legal obligation to pay
interest on borrowed money used for the purpose of earning income
from a business or property.
[6]
The question, then, is whether the amounts of $136,000 and
$44,000 were borrowed by Mr. D'Angelo for the purpose of
earning income from a business or property. His position is that
it is through the borrowing of that money that he is able to
maintain the Palmer Street property as a rental property, because
if he had not borrowed that money he could not have purchased and
moved to the Burton Road property, and the Palmer Street
property would not have been available to rent. That, I think,
sums up accurately his position.
[7]
Unfortunately, it is necessary to apply unambiguous provisions of
the Act as they are written by Parliament, and I am bound
in this matter by the decision of the Supreme Court of Canada in
Bronfman Trust v. Canada, [1987] 1 S.C.R. 32, a case
which, although not on identical facts, was decided on facts
which cannot on principle be distinguished from those before me.
In that case the Trust borrowed money to make a certain capital
distribution, and having done so then claimed to deduct interest
paid on the borrowed money on the theory that if the money had
not been borrowed then it would have been necessary to sell
assets for the purpose of making the distribution, and that it
was to preserve those income-producing assets that the
money was borrowed.
[8]
Essentially the same argument was advanced to Judge Bowman, as he
then was, in Meggitt v. Canada, [1999] T.C.J. No. 667, in
which the facts are virtually identical to the facts in this
case. There, the taxpayer resided in a property which had a first
mortgage on it, moved to another property, and in order to pay
for the second property increased the financing on the first
property. Judge Bowman held that when the first property became a
rental property, the taxpayer was entitled to deduct the interest
on the financing which existed on the property prior to its being
converted from a residence to a rental property, but was not
entitled to deduct the interest on the incremental financing, the
purpose of which was to assist with the purchase of the second
property, which became the taxpayer's residence.
[9]
Judge Bowman referred to the well-known passage in
Bronfman Trust,supra, in which Mr. Justice
Dickson, as he then was, rejected the same argument when it was
advanced there before the Supreme Court of Canada, and made this
observation:
... 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 with what he might have done
...
I note that the same principle was applied by my colleague
Judge Mogan in Michael v. M.N.R., 91 DTC 1076.
[10] These are
unfortunate cases, in that it would make little sense for the
taxpayer to sell the first property, use the proceeds to buy
another property to use as a residence, and then either
re-purchase the first property or purchase a property
similar to the first property, using financing for that purpose
which would then be deductible. Nevertheless, as I said at the
outset, I am bound by the decision of the Supreme Court of
Canada, and I am bound to apply the clear provisions of paragraph
20(1)(c), which make it clear that it is the direct
purpose to which the funds are put that will determine whether or
not they are deductible. It is clear in the present case that the
borrowed money was used not for the purpose of earning income
from a property, but for the purpose of buying a residential
property. Indeed, the inequities in this case are somewhat
ameliorated by the fact that at the time the Appellant actually
entered into the purchase transaction of the Burton Street
residence and borrowed the funds to close it on March 1, he had
no intention at all of turning the Palmer Street property into a
rental property. It was his intention to sell it, and he thought
when he borrowed the funds that he was borrowing what would be in
effect bridge financing to cover the period between his purchase
of his new residence on March 1 and the date at which he would
sell the Palmer Street property to the developer. When that sale
fell through, he continued with his intention to sell the Palmer
Street property, and it was only when it could not be sold at a
satisfactory price that he decided to turn it into a rental
property.
[11] In any
event, the provisions of the Act are clear. They have been
interpreted numerous times, including, as I have said, by the
Supreme Court of Canada, and by other judges of this Court. I
have no alternative but to dismiss the appeals.
Signed at Ottawa, Canada, this 25th day of January, 2001.
"E.A. Bowie"
J.T.C.C.
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