O'Connor,
T.C.C.J.:—These
matters
were
heard
together
and
on
common
evidence
by
consent
of
the
parties
in
Ottawa,
Ontario,
on
July
12,
1993.
They
are
appeals
pursuant
to
the
informal
procedure
of
this
Court
and
concern
the
appellants'
1987,1988
and
1989
taxation
years.
The
appellants
are
husband
and
wife.
During
the
whole
or
part
of
the
years
under
review
the
appellant
Pearl-Anne
Dick-McLachlin
("Pearl-Anne"),
(a)
in
partnership
with
her
husband
Harvey
A.
McLachlin
(”
Harvey")
owned
until
July,
1989
a
triplex
at
98,
98A
and
100
Graham
Avenue,
Renfrew,
Ontario
("Graham
Avenue"),
two
units
being
rented
out
and
the
third
being
occupied
since
sometime
in
1984
until
July
1987
as
a
principal
residence;
(b)
also
in
partnership
with
Harvey
acquired
land
at
Hurd's
Lake,
Ontario
("Hurd's
Lake"),
built
a
home
thereon,
apparently
as
a
principal
residence,
then
converted
it
to
a
duplex
and
rented
out
one
storey,
occupying
since
July
1987
the
other
storey
as
a
principal
residence;
(c)
operated
a
tax
preparation
business
("tax
preparation
business”);
and
(d)
was
a
real
estate
sales
representative
on
a
commission
basis
("real
estate
operation").
In
filing
income
tax
returns
considerable
expenses
have
been
claimed
relating
to
the
foregoing
operations
and
many
of
those
expenses
have
been
challenged
by
the
respondent.
There
were
also
disputes
as
to
the
calculation
of
the
capital
gain
realized
on
the
sale
of
Graham
Avenue,
the
capital
cost
of
the
building
at
Hurd’s
Lake
and
whether
interest
on
a
certain
loan
was
deductible
from
the
rentals
at
Graham
Avenue.
The
sections
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act")
most
relevant
to
the
determination
of
the
issues
in
this
appeal
are
18(1)(a),
18(1)(b),
18(1)(h),
20(1)(a),
20(1)(c)(i)
and
40(2)(b)
which
provide
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)
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;
(b)
an
outlay,
loss
or
replacement
of
capital,
a
payment
on
account
of
capital
or
an
allowance
in
respect
of
depreciation,
obsolescence
or
depletion
except
as
expressly
permitted
by
this
Part;
(h)
personal
or
living
expenses
of
the
taxpayer,
other
than
travelling
expenses
incurred
by
the
taxpayer
while
away
from
home
in
the
course
of
carrying
on
his
business.
.
.
.
20(1)
Notwithstanding
paragraphs
18(1)(a),
(b)
and
(h),
in
computing
a
taxpayer's
income
for
a
taxation
year
from
a
business
or
property,
there
may
be
deducted
such
of
the
following
amounts
as
are
wholly
applicable
to
that
source
or
such
part
of
the
following
amounts
as
may
reasonably
be
regarded
as
applicable
thereto:
(a)
such
part
of
the
capital
cost
to
the
taxpayer
of
property,
or
such
amount
in
respect
of
the
capital
cost
to
the
taxpayer
of
property,
if
any,
as
is
allowed
by
regulation;
(c)
an
amount
paid
in
the
year
or
payable
in
respect
of
the
year
(depending
upon
the
method
regularly
followed
by
the
taxpayer
in
computing
his
income),
pursuant
to
a
legal
obligation
to
pay
interest
on
(i)
borrowed
money
used
for
the
purpose
of
earning
income
from
a
business
or
property
(other
than
borrowed
money
used
to
acquire
property
the
income
from
which
would
be
exempt
or
to
acquire
a
life
insurance
policy).
.
.
.
40(2)
Notwithstanding
subsection
(1).
.
.
.
(b)
where
the
taxpayer
is
an
individual,
his
gain
for
a
taxation
year
from
the
disposition
of
a
property
that
was
his
principal
residence
at
any
time
after
the
date,
(in
this
section
referred
to
as
the
“acquisition
date")
that
is
the
later
of
December
31,
1971
and
the
day
on
which
he
last
acquired
or
reacquired
it,
as
the
case
may
be,
is
his
gain
therefore
for
the
year
otherwise
determined
minus
that
proportion
thereof
that
(i)
one
plus
the
number
of
taxation
years
ending
after
the
acquisition
date
for
which
the
property
was
his
principal
residence
and
during
which
he
was
resident
in
Canada,
is
of
(ii)
the
number
of
taxation
years
ending
after
the
acquisition
date
during
which
he
owned
the
property
whether
jointly
with
another
person
or
otherwise.
.
.
.
The
issues
are
as
follows.
Some
were
resolved
prior
to
and
during
the
trial
but
all
are
mentioned
so
as
to
enable
the
Minister
to
make
a
complete
reassessment.
1.
With
respect
to
Graham
Avenue
(a)
The
parties
disagree
on
the
treatment
of
an
expenditure
by
the
appellants
in
the
1987
taxation
year
of
$4,670
for
the
replacement
of
carpeting
and
vinyl
flooring.
The
appellants
desire
to
treat
this
as
an
expense
deductible
in
1987
and
the
respondent
submits
that
it
is
a
capital
outlay
principally
because,
in
the
respondent's
submission,
it
was
made
to
improve
the
property
to
make
it
more
saleable.
The
property
actually
was
sold
in
July
of
1989.
The
appellants
have
testified
that
the
installation
of
the
new
carpeting
and
flooring
was
simply
to
replace
the
former
items
which
had
become
worn
and
that
the
quality
of
the
materials
was
equal
rather
than
superior
to
that
of
the
former
items.
They
have
also
submitted
as
Exhibit
A-1
a
document
signed
by
the
installer,
Mid-Town
Flooring
and
Furnishings,
supporting
their
testimony.
The
Court
accepts
the
position
of
the
appellants
and,
having
reviewed
the
applicable
authorities
and
jurisprudence,
concludes
that
the
expenditure
of
$4,670
was
in
the
nature
of
a
maintenance
expense
fully
deductible
in
1987
from
Graham
Avenue
rentals.
(b)
An
earlier
disagreement
between
the
parties
as
to
the
fair
market
value
of
the
lot
remaining
at
Graham
Avenue
after
the
sale
in
1989
has
been
resolved
by
both
parties
agreeing
to
an
amount
of
$5,000.
(c)
As
to
the
calculation
of
the
principal
residence
exemption
in
relation
to
the
capital
gain
realized
in
1989
on
the
sale
of
Graham
Avenue
the
appellants
submitted
that
they
resided
there
for
six
months
in
1987
and
the
respondent
submits
that
it
was
only
five
months.
The
Court
accepts
the
sworn
testimony
of
Pearl-Anne
that
the
period
of
residence
was
six
months
in
1987.
(d)
A
further
disagreement
as
to
the
treatment
of
interest
deductibility
is
dealt
with
in
paragraph
5
below.
2.
With
respect
to
Hurd's
Lake
(a)
The
respondent
has
allowed
a
previously
disputed
$400
expense
for
wood
in
1987.
(b)
The
appellants
and
the
respondent
have
agreed
that
the
capital
cost
of
the
building
at
Hurd's
Lake
totals
$62,642.86,
one
half,
i.e.
$31,321.43
for
each
of
the
two
appellants.
(c)
An
additional
maintenance
expense
of
$93
raised
at
the
hearing
of
this
appeal
has
been
allowed
by
the
respondent.
(d)
With
respect
to
certain
1988
repair
expenses
at
Hurd's
Lake
the
difference
between
what
the
respondent
would
allow
and
what
the
appellants
claimed
was
$296.34.
The
respondent
was
prepared
to
accept
a
figure
of
$148.17
and
owing
to
the
lack
of
receipts
or
indications
of
what
the
receipts
represented
the
Court
agrees
that
the
correct
figure
be
$148.17.
(e)
Although
not
claimed
on
the
appellants’
financial
statements
they
have
on
the
appeals
claimed
a
mileage
expense
relative
to
Hurd's
Lake
of
$1,062.92.
This
the
respondent
has
refused
and
the
Court,
owing
to
lack
of
receipts
and
the
likelihood
that
the
expenses
were
personal
in
nature,
agrees
with
the
respondent.
3.
With
respect
to
the
taxation
business
carried
on
by
Pearl-Anne
(a)
The
respondent
disallowed
portions
of
"Advertising
and
Promotion"
expenses
claimed
in
the
1987,
1988
and
1989
years.
The
amounts
disallowed
were
$269.35
in
1987;
$1,169,
$339.27
and
$307.80
in
1988
and
$931.09
in
1989.
According
to
the
evidence
given
by
Ms.
Christine
Buck,
auditor
for
the
respondent
who
examined
all
available
receipts
and
questioned
Pearl-Anne
on
non-receipted
items,
the
amounts
disallowed
appeared
to
be
of
a
personal
as
opposed
to
a
business
nature.
The
Court
is
prepared
to
accept
the
position
of
the
respondent
on
all
these
expenses.
(b)
The
respondent
disallowed
a
wage
expense
of
$510
claimed
in
the
1987
year
as
no
receipt
or
other
evidence
was
submitted
by
Pearl-Anne;
the
latter
maintained
that
this
item
represented
cash
wages
paid
to
a
person
who
later
moved
abroad
and
could
not
be
reached.
It
is
the
burden
on
the
appellant
to
prove
an
expenditure
and
in
the
present
instance
this
burden
has
not
been
discharged
and
consequently
the
disallowance
of
$510
is
found
to
be
correct.
(c)
The
respondent
disallowed
an
amount
of
$1,000
claimed
in
each
of
the
1988
and
1989
years
as
capital
cost
allowance
on
Harvey's
car
which
he
allegedly
used
to
pick
up
tax
returns
and
other
documents
from
clients
of
Pearl-Anne.
This
amount
has
been
properly
disallowed
by
the
respondent
because
Pearl-Anne
cannot
claim
capital
cost
allowance
on
a
vehicle
owned
by
her
husband
nor
is
she
entitled
to
consider
it
a
"freight"
expense,
as
she
suggested
at
trial,
because
no
payment
to
the
husband
was
made.
Nor
is
Pearl-Anne
entitled
to
the
additional
mileage
expense
claims
presented
immediately
prior
to
the
trial
of
$1,152
for
1988
and
$1,000
for
1989
because,
in
the
Court's
opinion,
the
respondent
has
properly
allowed
all
claimable
car
expenses
such
as
gas
and
oil
bills
and
consequently
the
additional
mileage
expenses
are
not
admissible.
(d)
The
respondent
originally
disallowed
certain
maintenance
expenses
claimed
for
1988
but
at
trial
reduced
the
total
disallowed
amount
to
$140.
Owing
to
the
fact
that
the
receipts
produced
relative
to
this
amount
of
$140
indicate
they
did
not
relate
to
the
business,
the
disallowance
of
this
amount
of
$140is
maintained.
(e)
The
respondent
disallowed
as
office
expenses
an
amount
of
$792.07
and
a
further
claim
of
$386.13.
The
Court
agrees
with
these
disallowances
owing
to
absence
of
receipts,
or
lack
of
indication
on
the
receipts
of
details
proving
a
business
relationship
or
because
it
seems
many
items
appear
to
be
of
a
personal
nature.
(f)
A
1988
expense
of
$329
for
a
phone
has
been
allowed
by
the
respondent.
(g)
A
claim
by
Pearl-Anne
for
the
capitalization
of
that
portion
of
Hurd's
Lake
used
as
an
office
for
the
tax
preparation
business
(i.e.,
1/3
of
the
unit
occupied
by
the
appellants
as
a
principal
residence)
has
been
allowed
by
the
respondent.
It
must
be
noted
that
in
agreeing
with
most
of
the
respondent's
disallowances,
the
Court
has
taken
into
consideration
the
relatively
small
gross
revenues
realized
by
Pearl-Anne's
tax
preparation
business
($4,350
in
1987,
$6,110
in
1988
and
$7,185
in
1989)
and
the
fact
that
the
respondent
has
allowed
numerous
other
deductions
which
were
claimed.
4,
With
respect
to
the
real
estate
operations
carried
on
by
Pearl-Anne
(a)
The
respondent
has
disallowed
the
following
amounts
claimed
as
"Advertising
and
Promotion”,
namely
$1,041
in
1987
(of
an
amount
claimed
of
$1,320.92),
$2,516.16
in
1988
(of
an
amount
claimed
of
$3,190.16)
and
$2,877
in
1989
(of
an
amount
claimed
of
$2,877).
The
reasons
for
the
disallowances
are
similar
to
those
expressed
above,
namely
the
absence
of
receipts
in
some
cases,
lack
of
detail
in
others
and
a
conclusion
that
the
expenses
were
more
of
a
personal
than
business
nature
in
some
cases.
In
reviewing
these
items
the
Court
recognizes
that
Pearl-Anne
was
essentially
an
independent
real
estate
agent
working
strictly
on
a
commission
basis.
She
was
responsible
for
her
own
advertising
and
promotion
and
she
submits
this
involved
entertaining
clients,
prospective
clients
and
other
contacts
in
the
real
estate
field.
In
the
circumstances
the
Court
believes
that
some
higher
amount
of
the
expenses
claimed
should
be
allowed
in
the
circumstances.
The
Court
observes
that
the
gross
commissions
earned
were
$14,374.90
in
1987,
$29,543.50
in
1988
and
$18,902.70
in
1989.
If
a
factor
of
five
per
cent
of
gross
commissions,
which
the
Court
considers
appropriate,
were
to
be
used
the
advertising
and
promotion
expenses
allowable
would
be
$718.75
in
1987,
$1,477.17
in
1988
and
$945.13
in
1989.
The
Court
considers
this
reasonable
and
so
rules.
(b)
The
respondent
has
allowed
50
per
cent
of
automobile
expenses
for
each
of
1987,1988
and
1989
and
Pearl-Anne
claims
90
per
cent.
She
points
out
that
her
car
is
indispensable
to
carry
out
her
real
estate
duties
and
testified
that
she
may
have
used
it
as
much
as
99
per
cent
for
business
purposes.
The
respondent
points
out
that
much
of
the
travel
relates
to
trips
from
Renfrew,
where
Pearl-Anne
lived,
to
Ottawa
and
back
and
that
a
large
portion
of
those
trips
should
be
considered
as
personal
driving
to
and
from
work
as
opposed
to
driving
while
working.
Ottawa
is
not
a
major
location
for
Pearl-Anne's
sales
of
real
estate
but
she
testified
that
she
had
to
go
there
frequently
to
meet
clients
and
contacts
and
arrange
mortgage
financing.
The
Court
recognizes
some
validity
in
both
positions
and
concludes
that
the
proper
percentage
to
be
used
is
80
per
cent.
The
Court
also
finds
that
the
only
individual
items
of
car
expense
not
allowed
by
the
respondent
of
$750,
$205.60
and
$300
are
to
be
allowed.
5.
Deductibility
of
interest
(a)
In
1987
the
appellants
increased
their
mortgage
loan
on
Graham
Avenue
from
$43,094.44
to
$70,000,
an
increase
of
$26,905.56
and
they
seek
to
deduct
the
interest
on
the
said
$26,905.56
from
the
rentals
of
Graham
Avenue
with
respect
to
parts
of
1987
and
1989
and
all
of
1988.
The
respondent
has
disallowed
the
deductions
because
they
were
not
interest
on
money
borrowed
for
the
purpose
of
earning
income
from
a
business
or
property.
What
were
the
funds
used
for?
Pearl-Anne
testified
that
when
the
property
was
acquired
in
1984
she
alone
out
of
her
own
available
funds
made
the
down
payment
of
$15,375
and
to
that
extent
the
additional
funds
borrowed
were
paid
to
her,
i.e.,
not
one
half
to
her
and
one
half
to
Harvey.
In
the
Court's
view
this
payment
does
not
result
in
a
conclusion
that
the
interest
on
said
amount
constitutes
interest
on
money
borrowed
to
produce
income.
It
would
be
different
if
she
had
originally
borrowed
the
$15,375
with
interest.
In
that
event
the
$15,375
would
be
considered
as
replacement
financing
and
the
interest
thereon
would
normally
be
deductible.
The
balance
of
the
$26,905.56,
namely
$11,530.56,
the
appellants
submit
was
used
to
pay
for
repairs
and
maintenance,
the
acquisition
of
equipment
and
appliances
and
other
miscellaneous
items,
all
with
regard
to
Graham
Avenue.
The
respondent
submits
that
most
of
the
$26,905.56,
and
therefore,
at
the
very
least,
the
said
$11,530.56
was
used
to
construct
the
property
at
Hurd's
Lake.
This
appears
to
be
the
case
from
an
examination
of
withdrawals
from
the
bank
account
into
which
the
$26,905.56
was
deposited.
The
respondent
further
argues
that
the
rentals
from
Graham
Avenue
could
easily
have
supported
these
expenses
of
$11,530.56
and
that
therefore
there
was
no
need
to
borrow.
After
considering
the
testimony
and
reviewing
certain
exhibits
the
Court
concludes
that
the
respondent
is
correct
and
that
the
interest
on
the
$26,905.56
is
not
deductible
from
the
Graham
Avenue
rents.
The
respondent
agreed
that
such
interest
could
be
deducted
from
the
rentals
at
Hurd's
Lake.
(b)
The
respondent
has
attempted
to
allocate
interest
charged
on
two
visa
accounts
and
a
checking
account
in
each
of
the
1987,
1988
and
1989
years
in
varying
percentages
to
the
four
operations
discussed
above.
The
amounts
of
interest
(which
are
not
great)
have
been
agreed
on
but
the
respondent
has
assessed
the
said
amounts
as
25
per
cent
business
and
75
per
cent
personal
and
based
on
the
evidence
submitted
the
Court
finds
the
respondent's
assessments
correct.
Appeal
allowed
in
part
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