George Eelkema v. Minister of National Revenue, [1983] CTC 2311, 83 DTC 253

Guy Tremblay:— This case was heard in London, Ontario, on November 1, 1982.

1. The Point at Issue

The point at issue is whether the appellant is correct in deducting $5,299.51 of interest in the computation of his income. This amount of interest was paid in 1979 upon the mortgage of his personal home. The appellant contends that in substance if he had not been in business he would not have had to pay that interest.

Indeed, he used the money received from the sale of his home located in Brantford, Ontario, to pay off loans made for his business. Therefore, there remained not enough money to pay cash for his new home located in Stratford, Ontario, and he had to borrow the balance, which was secured by mortgage.

The respondent contends that the expense is a personal expense.

2. Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment the Court decided that the assumptions of fact on which the respondent based the assessment are also deemed to be correct. In the present case, in paragraphs 4(a) to (e) of the reply to the notice of appeal, the respondent described the facts on which he based his assessment:

4. In so reassessing the Appellant for the 1979 taxation year, the Respondent made the following assumptions:

(a) the Appellant purchased a house in Stratford, Ontario, in 1978, part of the acquisition cost of which was the assumption of a debt of $52,520.00 secured by a first mortgage on the said house;

(b) the Appellant, in 1979, paid interest upon the said mortgage in the amount of $5,299.51;

(c) the said house became the personal residence of the Appellant immediately

following the purchase and remained so throughout the 1979 taxation year;

(d) the said amount of $5,299.51 paid as interest upon the said mortgage was not paid pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business [sic] or property;

(e) the said amount of $5,299.51 paid as aforesaid was a personal expense.

3. Facts

3.01 The appellant admitted the facts alleged in subparagraphs (a), (b) and

(c) quoted above in paragraph 4 of the reply to notice of appeal.

3.02 The appellant testified that in 1978 he got a loan from the Royal Bank in the amount of $20,000, 50% of which was paid to the Bank of Nova Scotia. Indeed he repaid a loan made in 1977 for his business. The other 50% was lent to his company, Stratford Truck Ltd. (Exhibits A-1 and A-2)

3.03 On July 28, 1978, he sold his former home located in Brantford, Ontario, for $79,655.53, and purchased a new home for $63,900 in Stratford, Ontario, where his company is located.

3.04 Exhibit A-3 (a letter received from the appellant’s lawyer) shows the use which was made of the $79,655.53 received from the purchaser of the appellant’s former home.

3.05 Moreover, from the amount of $52,437.01 deposited in the appellant’s bank account #518-598-8 at the Royal Bank, the appellant, on August 1, 1978, paid $20,000 to Stratford Truck Ltd as a loan. On August 2, 1978, he paid $20,000 to the Bank of Nova Scotia. The two cheques were filed as part of Exhibit A-3.

3.06 Exhibit A-4 entitled “Amended Statement of Adjustments” shows the actual amount paid by the appellant for his new home to the vendor, H Becker Construction Limited.

3.07 It is admitted by the appellant that all the business interest paid to the bank was deducted by the respondent. The disallowed amount of $5,299.51 is only the interest on $52,520, secured by a first mortgage on his home in Stratford.

4. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved are sections 18(1 )(a), 18(1 )(h) and 20(1)(c) which read 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;

(h) personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) 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:

(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),

(ii) an amount payable for property acquired for the purpose of gaining or producing income therefrom or for the purpose of gaining or producing income from a business (other than property the income from which would be exempt or property that is an interest in a life insurance policy), or

(iii) an amount paid to the taxpayer under

(A) an Appropriation Act and on terms and conditions approved by the Treasury Board for the purpose of advancing or sustaining the technological capability of Canadian manufacturing or other industry, or

(B) the Northern Mineral Exploration Assistance Regulations made under an Appropriation Act that provides for payments in respect of the Northern Mineral Grants Program,

or a reasonable amount in respect thereof, whichever is the lesser.

4.02 Cases at Law

The Board studied the cases of:

1. Joel Sternthal v The Queen, [1974] CTC 851; 74 DTC 6646;

2. Phyllis Barbara Bronfman Trust v MNR, [1978] CTC 3088; 78 DTC 1752; [1979] CTC 524; 79 DTC 5438;

3. Joseph P Zanyk v MNR, [1981] CTC 2042; 81 DTC 48.

4.03 Analysis

4.03.1 The evidence is clear and not in dispute that the amount of $5,299.51 is interest paid by the appellant in 1979 on the amount of $52,520.00 which he borrowed to pay for his home in Stratford.

4.03.2 The appellant’s contention is to the effect that if he had used the $79,600 received from the sale of his former home located in Brantford to pay for his new home located in Stratford, then he would have had no interest to pay. After the payment on his new home with the said sum, if he had borrowed money for his business needs (to reimburse the banks, etc — see para 3.04), then the interest on the borrowed money would have been deductible. The appellant contends that this is only a technical proceeding and that, in substance, the result is the same — he has to pay interest.

4.03.3 It is true that the final result is the same: the appellant has to pay interest. However, in applying the Income Tax Act, paragraphs 18(1 )(a) and 18(1 )(h) quoted above, the Board must research the substance of the transaction, the substance of each transaction despite the technical proceeding.

4.03.4 It appears from Exhibit A-3 (paras 3.04 and 3.05) that the amount received from the sale of the former home was distributed to the appellant, to creditors, etc on July 28 and at the beginning of August.

4.03.5 At first glance it seems that the loan from the Royal Trust was made on the above-mentioned date, July 28, 1978. If so, the Board would have been inclined to admit that the $20,000 paid to the Bank of Nova Scotia on August 2 was in substance from the borrowed money and hence the interest on this amount would have been deductible. However, the mortgage contract with the Royal Trust in the amount of $52,520 was not filed as an exhibit.

Despite the fact that the purchase of the new home was made on July 28, 1978, it seems from Exhibit A-4 that the loan from the Royal Trust was not made until August 15, 1978. Indeed, as an amount of interest of $265.48 was paid to the vendor for the period of July 28 to August 15, 1978, it seems that the capital amount of $52,520 was paid to the vendor only on August 15, 1978, and therefore that the loan was made only on that date.

4.03.6 It seems obvious to the Board that such a period of 17 days between the date of the use (end of July) of the amount received from the sale of the former house (including payment of capital formerly borrowed for business) and the date of the loan (August 15) to “pay the new home” is significant to determine the substance of the two transactions. The loan definitely was made to pay for the new home, and the interest paid in payment of this loan cannot be considered for the purpose of earning income from a business or property in the sense of paragraphs 18(1 )(a) and 20(1 )(c). Rather, it must be considered as a personal expense which is not deductible in the computation of income.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.