Victor Gusso, Jean Gusso v. Minister of National Revenue, [1983] CTC 2266, 83 DTC 226

The Chairman:—The appeals of Victor and Jean Gusso are from assessments with respect to the 1978 taxation year. The appeals were decided on the basis of common evidence given by Victor Gusso.

Issue

The appellants are partners in a house construction business. The issues in the appeals are whether the respondent correctly calculated the profit realized from the sale of a property owned in partnership by Victor Gusso and his spouse Jean Gusso on a / / basis and whether or not mortgage interest payments were deductible from the appellants’ 1978 income.

In the appellants’ notices of appeal for the 1978 taxation year, it is alleged that in previous assessments the respondent wrongly included in the appellants’ income for the 1976 taxation year mortgage proceeds in the amount of $15,739.14 which, it is contended, should be corrected and adjusted as a result of the appellants’ present appeals for the 1978 taxation year.

The factual background of the previous reassessments referred to in the appellants’ notices of appeal, which is not contested by the appellants, is summarized in the Minister’s reply to the notice of appeal at paragraph 5:

5. In reassessing the Appellant’s 1978 taxation year, The Minister of National Revenue relied, inter alia, upon the following further assumptions of fact:

(a) By a Reassessment dated 20 July 1979, the Minister of National Revenue reassessed the Appellant’s 1976 taxation year so as to include, inter alia, a gain from a deemed disposition of the Ennismore property into the Appellant’s income resulting from a change in use of the Ennismore property when the Appellant and his spouse moved into the house.

(b) By a Notice of Objection dated 17 October 1979, the Appellant took the position that there was no deemed disposition during 1976 and that the Ennismore property remained in inventory. A copy of the said Notice of Objection is attached as Annex “A” hereto, the pertinent part of which reads:

“1. That Mrs Jean Gusso, the wife of the taxpayer did in fact contribute capital and effort, in the proportion as allocated on the tax return and therefore the amounts added should be adjusted accordingly.

2. That the deemed disposition is incorrect and the asset taken into income remained as inventory of the business.

3. That the work in progress is the accumulated cost of the inventory of work in progress as at December 31, 1976.”

(c) On consideration of the Notice of Objection, the Minister of National Revenue reached the conclusion that there was no change of use of the Ennismore property and, therefore, no deemed disposition in 1976 with the result that the Ennismore property remained in inventory.

(d) As a result, by a Reassessment dated 9 May 1980, the Minister of National Revenue reassessed the Appellant’s 1976 taxation year so as to eliminate the deemed disposition.

(e) By a Notice of Appeal dated 16 July 1980, the Appellant appealed further to the Tax Review Board with respect to other aspects of his 1976 assessment (Appeal Number 80-977).

(f) Subsequently, the parties filed a Consent to Judgment with respect to the 1976 appeal and the Tax Review Board issued a judgment dated 30 January 1981, a copy of which is attached hereto as Annex “B”, the pertinent part of which reads:

“The Parties Hereto Consent to Judgment allowing, in part, the Appellant’s appeal for his 1976 and 1977 taxation years and referring the matter back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant operated the business of Victor Gusso Construction in partnership with his wife Jean Gusso and that the amounts of $3,968.00 and $5,849.00 represented the Appellant’s share of the net profit derived from the operation of Victor Gusso Construction in the 1976 and 1977 taxation years and are to be included in the income of the Appellant for the 1976 and 1977 taxation years respectively and in all other respects the appeal is dismissed.

DATED at PETERBOROUGH, Ontario this 19th day of January, 1981.

(signed) Richard T McCarthy,

Richard T McCarthy,

Rimar Financial Management Services,

Agent for the Appellant DATED at OTTAWA, Ontario, this 15th day of January, 1981.”

The transactions which give rise to the tax issues with respect to the 1976 taxation year and to which the appellants refer in their appeal for the 1978 taxation year are set out in the following summary of facts, as stated by Mr Victor Gusso in giving his testimony.

Mr Gusso, a one-time bricklayer with very little schooling, some years prior to the taxation years under review immigrated to Canada and brought with him substantial capital from Italy. In partnership with his wife he built a first house, referred to as the first Ennismore house, which was his permanent residence. In 1975 Mr Gusso purchased more land and in May of that year, the partnership started to build a second Ennismore house with the intention of selling the property.

The partnership received an offer to purchase the said land and the house which was not completed at that time, for $47,700. The offer however was subject to the condition that the purchaser first find a buyer for his own home which he failed to do. The transaction was never completed. Mr Gus- so’s evidence was that in 1976 he decided to move into the partly completed house and to complete the house while occupying it. There is no evidence that the partnership sought to find other purchasers and the house was apparently not listed for sale. The appellants at that time sold their permanent Ennismore residence for $85,000. The property was free of any mortgage and Mr Gusso’s evidence was that the partnership had at that time some $80,000 cash.

Mr Gusso testified that a mortgage of $16,000 on the partially built Ennismore property was obtained and that the interest expenses on the mortgage was $155 a month. In 1976 and 1977 the partnership also built two other houses on Pigeon Lake.

In June of 1978 the second Ennismore property was sold for $46,000. Neither of the appellants reported any gain from the disposition of the property. In assessing the appellants with respect to the 1978 taxation year the respondent calculated that a gain was realized on the sale of the property in the amount of $11,237.68. Mr Gusso’s share of the profit (%) therefore was $7,491.79 and Mrs Gusso’s share was $3,745.89 to be included in the appellants’ business income.

3. (j) The gain should be calculated as follows:

Gross sale price of

Ennismore property			$46,000.00
Less: Work in progress inventory			20,487.00
Subtotal			25,513.00
Less: Additional Expenses of
Cost of Lot		$8,300.00
Legal Expenses
—on purchase $160.25
—on sale	533.50	693.75
		693.75
Real Estate Commission		2,530.00
Trent Valley Concrete Invoice		181.17	11.704.92
			11,704.92

Adjustment to Business Income
before CCA	13,808.08
Deduct Maximum CCA	2,570.40
Net Adjustment to Business Income	$11,237.68

The respondent assessed the appellants for the 1978 taxation year on the basis that the money borrowed by means of the mortgage was not to earn income from a business or property; that the interest expense of $155 per month paid by the appellants represented only a part of the value of the benefit derived by the appellants from the personal use of the house during the period of time they occupied it and was therefore not deductible from the appellants’ income.

Findings

Though related, there are two distinct points raised by the appellants in their 1978 appeals. The first point is that the appellants were wrongly assessed for their 1976 taxation year. Mr Richard T McCarthy, a registered industrial accountant with Rimar Financial Management Services, who represented the appellants, admitted that the respondent’s first assessment of the 1976 taxation year was correct in deeming that there was at the time the appellants occupied the partially completed Ennismore property a deemed disposition, and that the accountant, Mr Peter Best then representing the appellants, was wrong in holding that a deemed disposition did not take place. Mr McCarthy however contends that the Minister’s figure for the value of the property was wrong in that he incorrectly added to the appellants’ partnership 1976 income the proceeds from the mortgage received in 1976.

Neither the notice of objection signed by Mr Best, dated October 17, 1979 (above) nor the consent judgment filed by the parties dated January 15, 1981 and signed by Mr McCarthy make reference to an error in the computation of the value of the property by the Minister in 1976. However, whether or not the Minister’s assessments for the appellants’ 1976 assessments were wrong for whatever reasons, the Board clearly has no jurisdiction to correct, adjust or even consider in an appeal with respect to assessments for the appellants’ 1978 taxation year an error which may or may not have existed in the Minister’s assessments for the 1976 taxation year which has already been disposed of by the Board as a result of a consent judgment for that year. The appeals must therefore fail on that point.

The second point is whether the interest expense on the $16,000 mortgage is deductible. It is well established that, for purposes of the Minister’s 1976 assessments, the respondent considered the second Ennismore house to be part of the appellants’ (partnership) inventory and was treated as such by him. The uncontradicted evidence was that the appellants used the proceeds of the mortgage to complete the construction of the house. Immediately prior to its sale in 1978 the house still remained part of the partnership’s inventory, even though the appellants may have occupied it for a period of time. The value of the benefit derived by the appellants in occupying the house for their personal use should, in my opinion, have been computed and the amount either deducted from the partnership’s operational expenses or added to the partnership’s taxable income.

While the difference between the $155 monthly interest payments on the mortgage and the value of the benefit derived from the appellants’ occupancy of the property may be mathematically minimal, I do not believe that the respondent can, under the circumstances, rightly conclude in law that the interest expense was not deductible because the moneys borrowed by way of mortgage were not used by the appellants to earn income for the partnership.

For these reasons, judgment will go allowing the appeals and referring the matter back to the Minister for reconsideration and reassessment on the basis that the interest expense on the mortgage paid by the appellants in the 1978 taxation year, if any, is deductible. In all other respects, the appeals are dismissed.

Appeals allowed in part.