McArthur T.C.J. (orally):
THE REGISTRAR: The Court will now register its decision on File No. 97-3355(IT) between Richard John Taylor and Her Majesty the Queen.
Mr. Taylor is present and representing himself, and Shalene Curtis- Micallef is here representing Her Majesty the Queen.
HIS HONOUR: The Appellant appeals his 1994 taxation year assessment. The Minister of National Revenue disallowed the Appellant’s deduction for business losses in the amount of $12,778.
$3,688 of that amount was interest paid by the Appellant on money borrowed for the purpose of earning income from a business called Studio Hair Design Dynasty. The remainder of the claimed deductions was for outlays in respect of three separate businesses, namely Suzanne’s Electrolysis, S. Taylor Consulting, and Mary Kay Cosmetics.
I will deal firstly with the interest of $3,688; in all instances I have dropped the cents.
In 1990, the Appellant was married to Suzanne Taylor who commenced a hair salon business with Connie Roberts. The business failed in mid-1991.
In 1992, 1993, and 1994 the Appellant paid interest on a loan acquired by him and his wife to pay off the business debts. The Appellant previously appealed his assessment for the 1991 taxation year.
In his Reasons for judgement, Brulé, J., of this Court found the Appellant had not presented sufficient evidence to prove that he was a partner in the business. At the trial the Appellant was the only witness, his appeal was dismissed.
During the present appeal the Appellant gave evidence, together with Connie Roberts, his former wife Suzanne, his accountant, and five employees of Revenue Canada Appeals Division and/or Audit Division.
Considering all of the evidence, I conclude that the Appellant was a partner in the business Studio Dynasty.
The question remains where a taxpayer has borrowed money for the purpose of earning income from a business in partnership with others, and the partnership has been dissolved, is the interest paid on the continuing debt obligation deductible under the Act?
The deductibility of interest expenses provided under paragraph 20( 1 )(c) of the Act, for the interest expense to be deductible the borrowed money must be used to earn income from a business. The expenses must be connected to a source of income.
Courts look only at the current use of the borrowed funds to determine if they are being used to earn income from a business or property, and I refer to Bronfman Trust v. R. (1987), 87 D.T.C. 5059 (S.C.C.):
If funds are borrowed to earn income from business or property that at a subsequent date are used for a non-income producing use, the interest on the borrowed funds would cease to be deductible at the time when the funds were applied to an ineligible use. It is clear that where there is no longer a source of income there is no longer a current use of funds which would allow for the deductibility of the interest expense.
And I refer to Emerson v. R. (1986), 86 D.T.C. 6184 (Fed. C.A.) and Brill v. R. (1996), 96 D.T.C. 6572 (Fed. C.A.).
This rule was harsh because although the source of income may no longer exist the taxpayer may still be under a legal obligation to make interest payments to a creditor and the Act was amended for the 1994 taxation year with the addition of s. 20.1, which creates an exception for the current use rule. Unfortunately, this new amendment does not assist the Appellant in the present appeal and with respect to the interest monies I find that they are not deductible.
I now turn to the issue with respect to the expenditures claimed by the Appellant concerning the trilogy of separate businesses commenced after the failure of the hair salon, Dynasty, namely number one, Suzanne’s Electrolysis, number two, S. Taylor Consulting, and number three, Mary Kay Cosmetics.
The Appellant submits that while his former wife Suzanne did most if not all of the work with respect to these businesses, he was an equal partner because he advanced funds for the benefit of the businesses and attended one or more conferences.
These amounts included $6,722 for purchases for the three businesses; motor vehicle expenses, $180; office and rent, $1,125 and office supplies, $1,063.
I find as a fact that the Appellant was not a partner of any of these three businesses but a creditor. Mind you he could be a creditor and a partner, but I find as a fact that he was not a partner.
He advanced money by way of loans to his wife in the businesses from time to time.
He expected to be paid back and was paid back in part in cash from time to time in unknown amounts.
For his 1994 return the Appellant demonstrated to his accountant through vouchers, cancelled cheques, and the bank or credit card statements, that he had advanced a total of $6,722 in the years 1992, 1993, and 1994 towards the businesses.
There were no proper sales for profit or loss statements or financial statements. In finding that, the Appellant was not a partner of the trilogy of businesses, the following has to be taken into consideration: Number one, there was no partnership agreement or declaration of partnership and I refer to the case of The Queen v. Friedberg, Federal Court of Appeal. Number two, the Appellant’s former wife, who was a credible witness, testified that she was the sole proprietor.
Number three, the business cheques were signed by Suzanne, the former wife.
Number four, the invoices were directed to Suzanne.
Number five, Suzanne was the only one to apply the services to customers.
Number six, Suzanne did the bookkeeping. Number seven, other than loaning money to the businesses and to Suzanne, the Appellant did not participate in the business activities.
The Appellant submitted that in the event he was found not to be a partner, the loan amounts not repaid, should be attributed back to him under s. 74.1 of the Act which reads:
Where an individual has transferred or loaned property either her directly or indirectly to or for the benefit of a person who is individual’s spouse, any income or loss, as the case may be, of that person for the taxation year from the property or from properties substituted therefore that relates to the period and the year throughout which the individual is a resident in Canada, and that person is the individual’s spouse, shall be deemed to be income or loss of the individual for the year and not of that person.
It is clear that section 74.1 applies to
Attribute back to a lender of property, any income or losses arising from property in the hands of the spouse to whom the property is loaned. It does not apply to attribute back to the lender, the actual property loaned.
Accordingly the Appellant’s submission cannot be accepted. The Appellant may have had a claim for the principal advanced, but there was no evidence of losses arising from the advanced money.
The Appellant submitted that he was a partner under the Family Law Act of Ontario. This argument fails. The partnership referred to in that Act applies to the marriage.
A husband/wife share equal responsibility for child care, household management, and earning income. When the marriage ends the property is divided. The value of the property acquired during marriage is divided equally. This does not make the Appellant a partner of his wife’s businesses during the marriage for the purposes of the Income Tax Act.
It would appear that the three business terminated prior to or at the same time as the marriage of the Appellant and Suzanne in 1994.
For these reasons the appeal is dismissed.
Appeal dismissed.
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