Bowman
J.T.C.C.:—These
appeals
from
assessments
for
the
1989
and
1990
taxation
years
were
heard
together.
The
issue
is
whether
the
Minister
of
National
Revenue
was
justified
in
allocating
a
portion
of
the
interest
expense
claimed
by
Mr.
and
Mrs.
Tsiantoulas
to
their
personal
residence
and
disallowing
it.
Mr.
and
Mrs.
Tsiantoulas
have,
since
1976,
operated
a
turkey
farm
in
partnership.
In
1976
Mr.
Tsiantoulas
bought
a
farm
in
the
township
of
West
Lincoln
containing
about
94
acres
from
Joseph
Rethazy
and
252515
Properties
Ltd.
for
$310,000.
A
total
of
$50,000
was
paid
in
cash
and
a
mortgage
of
$260,000
on
the
property
was
given
to
the
vendors.
A
portion
of
the
cash
paid,
$25,000,
came
from
the
sale
of
Mr.
and
Mrs.
Tsiantoulas’
home
in
Toronto.
The
property
had
on
it
two
large
two-storey
broiler
barns,
a
frame
barn,
several
smaller
frame
buildings,
a
two-storey
brick
house
with
four
bedrooms
and
another
tumbledown
house
that
was
occupied
by
a
pensioner
at
a
nominal
rent
until
his
death
several
years
ago.
Mr.
and
Mrs.
Tsiantoulas
immediately
went
into
the
business
of
raising
turkeys
on
a
large
scale
and
they
lived
in
the
two-storey
brick
house
which
was
their
principal
residence.
Mr.
Tsiantoulas
testified
that
no
money
was
spent
on
renovation
or
expansion
of
the
house.
On
September
1,
1981
the
vendor
take-back
mortgage,
which
had
been
paid
down
to
about
$220,000,
fell
due.
With
interest
there
was
owing
under
it
$235,556.53.
The
appellants
approached
the
Farm
Credit
Corporation,
a
corporation
formed
under
the
Farm
Credit
Act,
and
applied
for
a
loan
of
$200,000.
In
considering
the
application
the
Farm
Credit
Corporation
considered
that
the
property
had
a
value
of
$540,000.
Their
appraisal
attributed
a
replacement
cost
of
$45,000
to
the
house,
and
a
depreciated
cost
of
$26,250.
The
Farm
Credit
Corporation
attributed
a
value
of
$385,000
to
the
turkey
quota
owned
by
the
appellants
and
this
formed
part
of
the
total
appraised
value
of
$540,000.
Mr.
Tsiantoulas
did
not
dispute
the
fact
that
for
insurance
purposes
the
house
was
treated
as
having
a
value
of
about
14
per
cent
of
the
entire
property.
A
loan
of
$200,000
was
made
by
the
Farm
Credit
Corporation
to
Mr.
Tsiantoulas
and
as
security
it
took
a
mortgage
on
the
farm,
including
the
house,
and
an
assignment
under
the
Personal
Property
Security
Act
of
the
turkey
quota.
With
the
$200,000
mortgage
loan
and
$37,615
of
their
own
money
Mr.
and
Mrs.
Tsiantoulas
paid
off
the
original
mortgage.
In
1989
the
appellants
paid
$18,777.68
as
interest
to
the
Farm
Credit
Corporation
under
the
mortgage
and
in
1990
they
paid
interest
of
$16,137.92
under
the
mortgage.
They
deducted
100
per
cent
thereof
in
computing
their
income,
i.e.,
50
per
cent
of
the
entire
amount
for
each
appellant.
On
assessing
the
Minister
disallowed
10
per
cent
of
the
amounts
claimed,
i.e.,
$962
and
$809
for
each
year
in
respect
of
each
appellant
on
the
basis
that
that
amount
was
paid
in
respect
of
the
residence
and
not
in
respect
of
the
business
and
was
therefore
not
laid
out
for
the
purpose
of
gaining
or
producing
income
within
the
meaning
of
paragraphs
18(l)(a)
and
20(l)(c)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act”)
but
was
a
personal
or
living
expense
within
the
meaning
of
paragraph
18(l)(h).
The
evidence
is
unclear
whether
the
appellants’
claim
to
deduct
the
entire
mortgage
interest
was
challenged
by
the
Minister
in
earlier
years.
It
is
not
really
relevant.
The
Minister
is
not
bound
by
the
way
in
which
he
assessed
in
other
years.
The
question
is
whether
he
was
right
in
assessing
for
the
years
under
appeal.
Subsection
20(3)
reads
as
follows:
20(3)
For
greater
certainty,
it
is
hereby
declared
that
where
a
taxpayer
has
used
borrowed
money
(a)
to
repay
money
previously
borrowed,
or
(b)
to
pay
an
amount
payable
for
property
described
in
subparagraph
(1
)(c)(ii)
previously
acquired,
the
borrowed
money
shall,
for
the
purposes
of
section
21
and
paragraph
(l)(c)
or
(k),
be
deemed
to
have
been
used
for
the
purpose
for
which
the
money
previously
borrowed
was
used
or
was
deemed
by
this
subsection
to
have
been
used,
or
to
acquire
the
property
in
respect
of
which
the
said
amount
was
so
payable,
as
the
case
may
be.
Since
the
loan
from
Farm
Credit
Corporation
was
taken
out
to
pay
off
the
earlier
mortgage
the
purpose
of
the
borrowing
is
assimilated
to
that
of
the
original
mortgage.
Counsel
for
the
appellants
argued
that
the
obligation
to
Farm
Credit
Corporation
was
a
new
obligation,
with
additional
security,
the
assignment
of
the
turkey
quota,
and
that
the
amounts
of
the
appellants’
own
funds
put
in
originally
and
on
the
refinancing
far
exceeded
the
value
of
the
residence.
Moreover,
he
contended
that
under
the
Planning
Act
of
Ontario
the
house
could
not
have
been
severed
from
the
rest
of
the
farm.
I
accept
that
all
this
is
so
but
this
does
not
take
the
appellants
as
far
as
they
need
to
go.
Counsel
in
effect
is
asking
me
to
make
a
notional
severance
of
the
turkey
farm
from
the
residence,
and
to
treat
this
transaction
as
analogous
to
one
in
which
a
taxpayer
buys
two
pieces
of
property,
a
residence
and
a
farm
with
no
house
on
it.
Interest
on
money
borrowed
to
buy
the
residence
is
not
deductible,
whereas
interest
on
money
borrowed
to
buy
the
farm
is
fully
deductible.
Therefore,
he
pays
for
the
residence
out
of
his
own
resources
and
borrows
money
to
buy
the
farm,
giving
as
security
a
mortgage
against
both
the
farm
and
the
residence.
The
interest
is
fully
deductible.
The
security
given
for
the
loan
has
nothing
to
do
with
the
purpose
for
which
the
money
is
borrowed.
The
plan
works
and
is
entirely
in
accordance
with
dicta
in
The
Queen
v.
Bronfman
Trust,
[1987]
1
S.C.R.
32,
[1987]
1
C.T.C.
117,
87
D.T.C.
5059.
It
is
not,
however,
what
we
have
here.
We
have
a
purchase
of
one
asset,
comprising
both
a
personal
residence
and
a
business
asset.
Paragraph
4(1
)(a)
of
the
Income
Tax
Act
provides,
in
essence,
that
in
computing
income
from
a
particular
source
one
must
allocate
to
that
source
only
such
deductions
or
such
parts
of
deductions
as
are
reasonably
attributable
thereto.
The
concluding
words
of
paragraph
20(1
)(c)
also
emphasize
the
criterion
of
reasonableness.
Reasonableness
is
a
question
of
fact
and
requires
the
application
of
a
measure
of
judgment
and
common
sense.
I
do
not
think
it
is
reasonable,
where
one
asset
is
purchased
such
as
the
farm
here,
and
it
has
both
personal
and
business
aspects,
to
allocate
the
entire
interest
expense
to
the
business
aspect
of
the
property.
It
is
true,
the
10
per
cent
allocation
to
the
residence
may
be
a
little
rough
and
ready
but
there
is
no
evidence
that
would
justify
a
lower
percentage.
Such
evidence
as
there
is
before
the
Court
would
appear
to
indicate
that
the
value
of
the
residence
made
up
at
least
ten
per
cent
of
the
value
of
the
entire
property.
In
this
case
there
is
no
evidence
upon
which
I
could
conclude
that
the
appellants’
own
cash
was
used
to
purchase
the
residence
and
that
the
mortgage
and
the
interest
thereon
was
entirely
allocable
to
the
turkey
business.
Both
the
cash
payment
of
$50,000
and
the
mortgage
obligation
constituted
the
means
of
satisfying
the
purchase
price
for
the
entire
property.
In
the
absence
of
persuasive
evidence
such,
for
example,
as
was
before
Christie
A.C.J.
in
Wilson
v.
M.N.R.,
[1988]
2
C.T.C.
2053,
88
D.T.C.
1418
(T.C.C.),
I
think
in
a
case
of
this
type
it
is
reasonable
to
allocate
interest
expense
pro
rata
to
the
personal
and
business
assets
in
accordance
with
their
respective
values.
In
this
regard
I
am
in
agreement
with
the
approach
adopted
by
Mogan
J.
in
Lee
et
al.
v.
M.N.R.,
[1989]
2
C.T.C.
2228,
89
D.T.C.
443
(T.C.C.)
and
Wong
et
al.
v.
M.N.R.,
[1990]
2
C.T.C.
2123,
90
D.T.C.
1710
(T.C.C.).
It
may
be
that
other
cases
will
arise
where
a
different
allocation
formula
is
more
appropriate
but
in
this
case
the
method
adopted
by
the
Minister
is
a
practical
and
reasonable
one.
Since
I
have
concluded
that
the
90/10
split
was
reasonable
in
respect
of
the
original
mortgage
the
same
proportions
would
apply
to
the
interest
paid
under
the
new
loan
from
Farm
Credit
Corporation.
I
do
not
think
that
the
fact
that
this
constituted
a
fresh
obligation
for
which
additional
security
was
given
or
that
the
appellants
put
in
more
of
their
own
money
warrants
a
different
allocation
of
the
interest
expense.
The
appeal
is
dismissed
with
costs.
Appeal
dismissed.
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