Navid Afsharian v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2830

Taylor, J.T.C.C. (orally):—I think that's the summary of it as far as Mr. Afsharian is concerned and I take your point with regard to the paucity of information quite seriously, Mr. Bundgard, and quite frankly I’d like you to summarize very briefly the Minister’s position on the lack on information available to you and the reasons which bring the Minister to the conclusion that these amounts are not deductible by the appellant and then I’ll make a determination. You might as well be comfortable, Mr. Afsharian. Just very briefly because I know we can't depend on too much of what we've heard here this morning, but perhaps you can summarize the Minister’s position.

MR. BUNDGARD: Yes, Your Honour, l’Il be brief. I provide the Court with the relevant statutory provisions as well as some case law that I may refer to.

HIS HONOUR: Yes, sir.

Argument by Mr. Bundgard

MR. BUNDGARD: As you're aware, Your Honour, this appeal relates to the 1989 and 1990 tax years and the issue is whether in computing income for the 1989 taxation year the appellant is entitled to deduct $56,561 as an interest expense. The issue with respect to 1990, as we've noted, is whether or not the appellant can deduct $21,798 as a non-capital loss carry forward. Essentially, Your Honour, 1990 will be determined by your resolution with respect to 1989.

The respondent submits that the appellant is not entitled to deduct the $56,000-odd under paragraph 20(1 )(c) of the Income Tax Act [R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act")] in 1989. The most salient fact, Your Honour, before the Court today is that there was a loan from the appellant to the corporation Colango allegedly and there is nothing to substantiate in documentation this loan or any interest payments that would be flowing to the appellant by virtue of this loan. The fact also, Your Honour, is that the appellant is presently living in this home, which appears to be financed essentially through the good graces of his father.

There is little indication that there was marketing of this home, or at least substantial marketing of this home before construction, during construction, and perhaps towards the end of construction there were attempts to market the home but nothing has been resolved until perhaps this year.

But the most crucial issue, Your Honour, is the nexus that must be made between an expense which is deducted and the possibility of getting income from the loan which incurred the expense. Paragraph 20(1 )(c) of the Income Tax Act describes situations where amounts can Pe deducted by an appellant when money has been borrowed and that money has been used to gain income from property or business. The paragraph is quite clear that amounts paid as interest can be deducted in computing a taxpayer’s income in a given year where the money borrowed was borrowed pursuant to a legal obligation to pay interest and where that money was used to earn the taxpayer income.

The leading case on the application of this paragraph 20(1 )(c) is, of course, Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 87 D.T.C. 5059, a decision of the Surpreme Court of Canada which I have provided to you. Briefly, Your Honour, the gist of this case is that it’s not the purpose of the borrowing of funds itself which is relevant. Rather what is relevant to the application of paragraph 20(1 )(c) is a taxpayer's purpose in the use of the borrowed funds. As well, the case stands for the proposition that it’s only the direct use of the money which is borrowed which determines whether interest can be deducted. The Court is quite clear that the direct use of these funds cannot be ignored.

The respondent submits that the appellant has not satisfied this test enunciated in Bronfman Trust. He has not shown that the direct use of these funds would increase his income for the year in question. There is nothing to substantiate the allegation that he would acquire interest by virtue of his loan to Colango. That's what it comes down to, Your Honour. I can cite other cases that are also relevant to that proposition, but I’m not sure if it’s really important since that is the main crux.

Regarding the intention that might be that the corporation eventually pay the appellant for the borrowed funds, interest and principal, Your Honour, intention is very much an objective thing. Case law, again which I have provided to you, indicates that subjective intention is not determinative. There must be concrete facts laid before the Court to give flesh to this intention and simply there is nothing before the Court of a concrete nature.

With respect to the situation where intention relates to an arrangement between an individual and a corporation, there's a higher onus on the individual to demonstrate intention where one of the parties is a corporation. Greater formality must be given credence to, Your Honour, and that formality, again, is not present here. There is no documentation to indicate what the intention of the corporation was when it received the funds.

Without any documentation, Your Honour, the respondent submits that there was no source of income that can be demonstrably indicated on the evidence. That's why, Your Honour, the respondent submits that the appeal be dismissed.

HIS HONOUR: Thank you kindly, Mr. Bundgard.

Appeal dismissed.