Peter G Alexander and Shirley Alexander v. Minister of National Revenue, [1983] CTC 2516, 83 DTC 459

D E Taylor:—These appeals for the year 1979 were heard on common evidence in Toronto, Ontario, on May 16, 1983. The essence of the dispute was related by the Minister of National Revenue in the reply to notice of appeal: (using that from the file of Shirley Alexander)

4. The Respondent, in so assessing and confirming, relied upon the following findings or assumptions of fact:

(a) prior to August 31, 1978, the Appellant and her spouse operated a business in partnership on an equal basis;

(b) in 1977, the Appellant and her spouse borrowed the sum of $25,000.00 from the bank (by way of a five year loan) to be used for the purpose of gaining or producing income in the business;

(c) on August 31, 1978 the business was dissolved with the result that, as at such date, operations ceased;

(d) as at August 31, 1978, the amount of $20,030.00 remained outstanding on the loan;

(e) in 1978, subsequent to August 31, the Appellant and her spouse mortgaged their residence. The mortgage was for fifteen (15) years; funds raised thereby were used to pay off the bank loan.

(f) the mortgage interest paid by the Appellant and her spouse is not interest on borrowed money used for the purpose of earning income from a business or property.

There was no fundamental difference of opinion with regard to the facts and counsel for the respondent, in support of the assessments, referred the Board to certain jurisprudence from which I quote as follows:

Trans-Prairie Pipelines v Minister of National Revenue, 70 DTC 6351, [1970] CTC 537, at pages 6354 and 541 respectively:

Surely, what must have been intended by section 11 (1 )(c) was that the interest should be deductible for the years in which the borrowed capital was employed in the business rather than that it should be deductible for the life of the loan as long as its first use was in the business.

Lyle A Meredith v Her Majesty The Queen, 75 DTC 5412, [1975] CTC 570 at pages 5417, 5418 and 578 respectively:

While the obligation to pay the interest on the loan continued throughout the plaintiff’s 1969 taxation year, the money borrowed was not being used in that year for the purpose of producing income from a business in that year.

I cannot refrain from pointing out that the plaintiff’s submission that the deductions claimed by him are proper is susceptible of being construed as an admission that they were expenditures laid out for the purpose of producing income from a business. The business of operating the fishing ponds had come to an end. The question would then arise as to what the business was . . .”

Counsel for the Minister also pointed out that these appellants appeared to consider the total amount at issue (some $20,030) as a “loss” and thought that in some manner it should be deductible. That was not the case according to counsel since the Income Tax Act provided relief to a taxpayer for capital — either personal or borrowed — which was injected into a business, because the capital so injected was used to acquire assets, either inventory as a direct expense, or fixed assets which were depreciable; or to pay for business expenses — and any losses resulting from such operations were appropriately deductible from income. Further, at the termination of a business, there were provisions in the Act for a ‘terminal loss”. Counsel’s view was that to allow a further loss (such as the $20,030 in this matter) could easily lead to a duplication of deductions already provided for and taken under the Act. On the specific point at issue, counsel for the Minister proposed that the only conclusion to reach from the judgments of the Courts, (supra), was that the termination of the business brought to an end any right to deduct interest payments as provided for under paragraph 20(1 )(c) of the Act.

The position of the respondent is correct. For the taxation year under appeal, the appellants have not shown that there remained a “source” (subsection 20(1)) from which the interest payment at issue could be deducted. The business, as indicated, had been terminated and the carrying charges from the financial obligations incurred in connection therewith, could not be re-directed and deducted from other income, such as employment income.

The appeals are dismissed.

Appeals dismissed.