DR Anthony Youatt v. Minister of National Revenue, [1980] CTC 2778

John B Goetz:—This is an appeal by the appellant with respect to his 1973,1974 and 1975 taxation years. The respondent disallowed a portion of the appellant’s automobile expenses attributable to personal use by him of his automoblie. He also disallowed a portion of the interest expense attributable to loans required to pay personal living expenses and capital items of a personal nature. In assessing the appellant, the Minister relied, inter alia, upon paragraphs 18(1)(a) and (h) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

The position of the appellant throughout the appeal is basically set forth in the following quotation from his notice of appeal:

I believe we are in disagreement over the flow of available funds. It is my opinion that revenues generated are firstly applied to provide a reasonable cost of living to the proprietor (including the payment of personal income taxes) and are secondly applied to provide for the payment of operating costs. It follows then that loans are incurred for the purpose of settling the unpaid operating costs due to a shortfall in revenue.

Facts

The appellant, Dr Anthony Youatt, after leaving a group of doctors, practising together, established his own practice in Nipawin, Saskatchewan, in 1972. At that time (in May 1972) he borrowed $14,000 and also the sum of $8,750 in October 1974. All interest on these loans was claimed by him as a business expense but disallowed by the Department. Dr Youatt, in giving evidence, stated that at the time of establishing his practice in January 1972 he was in debt and that expenses exceeded income. He established what he called “a revolving credit account” which was secured by various assets owned by him. He admitted that he over-extended his credit level and hoped that he would succeed and admitted that the $14,000 loan was personal to him. The building in which he worked had been purchased by him and transferred to “Seagull Services Ltd” which performed managerial and administrative services for his medical practice. Seagull Services Ltd provided him with a receptionist/secretarial service, collection records, and handled rental from the Seagull building where Dr Youatt carried on his practice of medicine. Seagull was a company owned by the appellant’s wife which performed all of the above services.

Exhibit A-2 filed by the appellant is a letter from the Canadian Imperial Bank of Commerce to the appellant, dated June 20, 1980. The said letter reads as follows:

Dr Anthony Youatt

Nipawin, Sask

SOE 1E0

Dear Dr Youatt:

Further to your call at our office regarding the purpose of various loans that were granted to you in the past several years, we have found in our files only the purposes of the loans of May 1972 and October 1974. To that end we record the following amounts and the relative purposes:

The May loans were:

$8,000 to purchase equipment and furnishings, including an EKG Machine. $7,000 to pay income taxes.

$7,000 to purchase lots adjoining your residence and to cover cost overruns in the construction of your residence.

The October loans were:

$3,600 for income taxes assessed against 1972 income.

$500 for income taxes assessed against 1973 income.

$1,000 for registered retirement plan.

We trust that the foregoing is satisfactory.

	Yours truly,
	(Signature)
RJK/sp	R J Kloppenburg
	Manager:

Mrs Youatt had a station wagon which was registered in her name and the appellant owned a Thunderbird which was registered in his name. He stated that he was on call all the time and that his home was approximately a mile from his office. He admitted that he would take off weekends and that he would have holidays at Christmas and Easter. He included, in his travelling expenses, driving to his office. He was presented with an Exhibit filed by the respondent which was a statement from the Canadian Imperial Bank of Commerce of his capital loan. This communication is undated but reads as follows:

Statement of Capital Loan

		Balance
Balance as at January 1, 1973		$34,000
(1) March 18, 1973	New additional loan of $8,000 granted for	42,000
	operating expenses and to cover overdraft.
(2) August 23, 1973	New loan of $11,000 granted for following	53,000
	$7,000 payout Bankplan loan (which
	Originated in July 1970 for $11,000 to
	payout Bank of Nova Scotia $9,268; IAC
	$1,867; $2,865 for furnishings and new
	house. Refinanced in September 1971 to
	provide $1,000 to trade 1969 Mustang off
	on a T-Bird)
	$4,000 Pay off “Simpsons Sears” charge
	account	787
	Pay off “Eatons”	963
	Pay off “Bay”	592
	Pay off “Chargex”	1,645
(3) October 28, 1974 New loan of $8,750 granted to cover overdraft.
(4) November 20, 1975 New loan of $3,910 granted to cover overdraft.
(5) October 21, 1975 New loan of $3,175 to cover legal costs.

Dr Youatt stated that overdrafts occurred in his clinic chequing account when he transferred funds to his personal chequing account to cover his personal expenses. His credit cards were all in his own name and he indicated that some of the charges thereon may related to the clinic but he could not itemize them.

His accountant, O C Ramstead, testified on behalf of the appellant. He Stated that in 1975 when preparing the appellant’s financial return, he saw the bank liability ledger covering operating and capital account for the first time. These ledger sheets were filed, three in number, the first page of which apparently disclosed interest accruing on the account and payments made on the account of the appellant’s loan. Dr Youatt requested a statement from the Bank covering his loan. He received back a typewritten confirmation sheet indicating the loan balance of $68,848.37 and a demand loan bearing interest at the rate of 12%. The accountant says he contacted the Bank, at which time he was told this was an “operating loan” which he took as meaning money flowing into the business of the appellant and, therefore, interest thereon was deducted as an interest expense when he prepared the appellant’s 1975 tax return.

The appellant sought to deduct 100% of the expenses relating to the use of his Thunderbird car in his medical practice. He states that he only used this car whereas his wife used the station wagon in operating Seagull. This was done on the advice of his accountant who considered it “reasonable for tax purposes to charge all his expenses on his Thunderbird as business

expense” and his wife, in operating Seagull, made no deductions in her tax return. The accountant’s explanation for this is that it would all come out the same on the bottom line, even though he must have been aware that Seagull was a separate legal entity to that of the operations of Dr Youatt.

This was basically all the evidence called on behalf of the appellant in support of his appeal.

The respondent called Phillip Griffin-Warwicke, an auditor with Revenue Canada, Taxation. At the time of the events in this appeal he was appeal officer for Revenue Canada. He reviewed the work of the Revenue auditor covering the taxation years under consideration in this appeal and with these references Mr Griffin-Warwicke states that he was able to identify each loan and the purpose for each loan. The basis of the computations by the auditor for the 1973 and 1974 taxation years (and relating to interest charges) is clearly set forth in Exhibit R-5 which was filed and which involves a sheet covering each year. Said Exhibit reads as follows:

Dr Anthony Youatt

1973 Interest Dr Anthony Youatt

Agreement of sale—Lockwood							$2,405.80
Demand Loan—CIBC							520.14
Service charges and Overdraft interest expense							55.75
C/U Loans personal to pay income tax and pay Avco for
personal living expenses
Capital Loan						$4,492.07
May 2,1972			$14,000			($7,000 to pay Income Tax and
					balance for lots and over-run
					costs of residence)
Sept 24,1972			8,000			(Furnish and redecorate clinic
					office)
Oct 16,1972			12,000			($7,000 operating expenses and
					$5,000 down payment building)
March 8,1973			8,000			(Cover overdraft and
					expenses)(Unable to work)
Aug 23,1973			11,000			(Consolidate loans and credit
					card balances outstanding
					$4,000)
			$53,000
Personal Loans
		— %		x	interest
Total Loans
$14,000	26.4%	x $4,492.07
$53,000	- personal $1,185.91
Allowable							3,306.16
							$6,287.85
Claim		$7,134.00
Allowable		6,287.85
Adjustment
required		$	846.16
DD/car
May 13, 1977
cc O C Ramstead

1974 Interest

Agreement of sale—Lockwood—1 month						$	196.00
Demand loan—CIBC							749.48
Service charges and Overdraft interest						1,046.57
C/U—personal loan taxes and Avco personal living
Longterm interest (Accrued
payable) Dec 31/74						$5,775.15
Longterm interest (Paid during year)						1,518.85
						$7,294.00
Oct 28,1974		$8,750.00		($500 RRSP interest payment
				capital loan $159.33 + $222.36
				balance personal for 1972 and
				1973 income taxes)
				Therefore, $7,868.31 personal.
Personal loans
		/o x interest
Total loans
$21,868.31	=	35.4%	x $7,294.00		- $2,582.08
$61,750.00	- personal		$2,582.08			4,711.92
Total Allowable						$6,703.97
Total claimed						5,218.00
Allow additional						$1,485.97
Accrued interest payable Dec 27/74						$5,684.35
Accrued interest 4 days @ $22.70						90.80
Accrued interest to Dec 31/74						$5,775.15
DD/car
May 13, 1977
cc O C Ramstead

Demand loan CIBC										$	395.06
S/C and Overdraft—interest											207.63
Nipawin C/U—loans personal
Capital	loan		(Accrued		in
terest payable) Dec 31/75									*$8,378.02
Capital loan (Interest paid during year)									2,132.41
									$10,510.43
Jan 20/75			$6,225.07			Interest capitalized 35.4% per
						sonal ($2,203.67)
Oct 21/75				31.75		Interest capitalized
Nov 20/75			3,910.00			Operating loan
Personal loans
			%	x interest
Total loans
$24,071.98		34.9%		x $10,510.43			=	$3,668.14
$71,916.82		- personal
		portion		$ 3,668.14							6,842.29
Total interest allowable										$ 7,444.98
Total interest claimed										14,962.00
Adjustment required										$ 7,517.02
**Total accrued, interest to Dec 31/75									$14,153.17
—Accrued interest to Dec 31/74									5,775.15
									*$ 8,378.02

Accrued interest to Jan 9/76	$14,357.47
— Accrual rate ($22.70 x 9)	204.30
(used same as 1974)	**$14,152.17
DD/car
May 13, 1977
cc O C Ramstead

It will be seen in the 1973 taxation year that the sum of $2,000 was determined from the ledger sheets of the Bank to be personal expenses covering income tax and the balance was for payment of lots adjacent to the residence of Dr Youatt. This was then related to the balance of the total loan at that time which was $53,000, disclosing personal interest of $1,185.91. Dr Youatt in his return for that year had claimed, as deductible interest relating to business expense, the sum of $7,134 whereas the allowable amount pursuant to the working papers of the auditor was $6,287.85, requiring an adjustment of $846.15. It is not necessary to go into detail with respect to the balance of the statements, because the same procedure was followed for the three taxation years, the assessments of which are in dispute.

It appears to me that Revenue Canada acted quite fairly throughout and in a proper way, and the officials were totally fair and reasonable with the appellant, allowing him additional interest in the amount of $1,485.97 which would be deductible as an expense in his 1974 taxation year. The information upon which the auditor’s work was based was provided him by the Bank, by the tax returns and by information provided him by Dr Youatt’s accountant. Apparently, each year the Bank capitalized the accured interest and never at any time made demand upon Dr Youatt. Consequently, capitalization included interest on loans relating to personal expenses. In the 1975 taxation year, the total “personal loans interest” involved in the equation by which the auditor computed personal and business portions of the interest included in the total personal loans outstanding in 1975, was $2,203.67.

All of the calculations of the auditor were checked by Mr Griffin- Warwicke. This witness, in checking the Revenue auditor’s figures, got information from the Canadian Imperial Bank of Commerce as to the nature of the loans, from the accountant in some cases and directly from the Bank in other cases, as to the nature and purposes of the loans. On this basis, he prepared a statement which was provided to Dr Youatt and was filed as Exhibit R-6. A portion of this statement reads as follows:

According to this witness, this portion of the calculations shows the loan (which is a personal loan of $25,000), less personal repayments over the total loans outstanding, times the interest payable in that calendar year, and he thus derived the personal portion of the interest expense. That applies to all the taxation years. Mr Griffin-Warwicke stated that from his calculations based on new evidence, he would have allowed less for the business portion of the interest expense than had been allowed by the auditor but no action was taken on this and the Department of National Revenue assessed from the basis of the auditor’s original figures. This witness also filed Exhibit R-7 giving a recap of all the figures including the appellant’s equity as per returns of December 31,1972,1973,1974 and 1975. These figures are self-explanatory.

Findings

Dealing first with the claim by the appellant for 100% of automobile expenses, I can only say that he obviously was given improper advice by his accountant in following a number of cases and in particular that of Dr Robert H Gourlay v MNR, [1973] CTC 2282; 73 DTC 222. I find that having regard to the evidence adduced in this appeal, the appellant should only be allowed 75% of the automobile expenses to be calculated as a business expense. This was the figure allowed by the Department. See also Jean- Charles Beauchemin v MNR, [1977] CTC 2029; 77 DTC 26.

The appellant was operating under a complete misapprehension of accounting and tax principles when he felt that, in order to establish his practice when he had a “short fall’’ of income in the carrying on of his practice, he could borrow money in order to maintain his living standards (apparently to quite a high degree), and the records of the returns and the auditor’s working papers clearly set this out. He admitted the borrowing of $14,000 in 1972, $7,000 of which related to income tax, the balance being an overrun on his existing advances and an overrun of cost of his residence in the amount of $4,500. The appellant was unable to differentiate between personal and business loans during the relevant taxation years, and neither was his accountant able to do so. If the taxpayer cannot bring himself clearly within the expressed terms of the provision enabling him to deduct business expenses such as interest on business loans, he should refer to Sheaffer Pen Co of Canada Ltd v MNR, [1953] Ex CR 251; [1953] CTC 345; 53 DTC 1223. In other words, taxation is the rule and the exemption the exception. Obviously, those portions of the loans not used to carry on his medical practice fall in the category of loans for personal use.

The evidence adduced by the Minister on the appeal was thorough and complete, and is the only evidence that I can rely on to determine the issue here as to what may be deducted as a business expense by way of payment of interest on loans. The figures as set forth speak for themselves. In this case there was a double audit, the second of which would have resulted in the imposing of a larger tax levy on the appellant but which was not followed in the final assessment. Rather the assessment of the field auditor, upon which his assessments were based, was followed. There are numerous cases dealing with this question, none of which are quite the same, but the basic principle is. There was a strict burden upon the appellant to establish an exemption and further a stronger burden upon him to be able to differentiate between monies borrowed for business purposes as opposed to monies borrowed for personal use. See No 616 v MNR, 9 Tax ABC 97; 59 DTC 247; Robert B Forward v MNR, [1978] CTC 2604; 78 DTC 1455; Manfred Holmann v MNR, [1979] CTC 2653; 79 DTC 594; Steven Chan v MNR, [1980] CTC 2261; 80 DTC 1239.

For the above reasons, the appeal is dismissed.

Appeal dismissed.