Eva M Huber v. Minister of National Revenue, [1979] CTC 3161, 79 DTC 936

John B Goetz:—This is an appeal with respect to the appellant’s income tax liability for the taxation year 1976. In assessing the appellant, the respondent relied, inter alia, upon paragraphs 18(1)(h) and 20(1)(c) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Facts

The appellant and her husband owned a principal residence known as 6180 Murray Place in the City of Halifax, Nova Scotia, up to April 30, 1976. On November 20, 1975, the appellant and her husband borrowed from Dalhousie University and College the sum of $35,000, security being by way of mortgage on purchase of their new principal residence at 18 Armshore Drive, in the City of Halifax, Nova Scotia. The proceeds of the mortgage fund were, of course, paid to the vendors of the new residence. On April 30, 1976, the appellant and her husband sold 6180 Murray Place, which property was subject to two mortgages and it would appear that in order to complete the purchase price payable by their purchaser, the appellant and her husband extended credit to the amount of $27,000 by way of a third mortgage bearing interest at the rate of 11.75% per annum compounded semiannually.

The appellant, in her 1976 tax return, declared as income the sum of $2,061.19 being interest earned on her third mortgage, during the period of April 30,1976, up to and including December 30,1976. The appellant, during the same year, sought to deduct, as an expense, the sum of $1,929.62 being interest paid by her on the mortgage on 18 Armshore Drive and payable to Dalhousie University. The Minister disallowed this deduction.

Findings

The appellant relied upon paragraph 20(1)(c) of the Act which reads as follows:

(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),

The Minister relied upon paragraph 18(1)(h) of the Act which reads as follows:

(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(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;

The appellant cited the following cases:

The Estate of W C Cochrane v MNR, [1976] CTC 2215; 76 DTC 1154; TransPrairie Pipelines Ltd v MNR, [1970] CTC 537; 70 DTC 6351; C A Auld v MNR, 28 Tax ABC 236; 62 DTC 27.

The respondent cited the following cases:

John A Matheson v The Queen, [1974] CTC 186; 74 DTC 6176; Trans-Prairie Pipelines Ltd v MNR, [1970] CTC 537; 70 DTC 6351; Joel Sternthal v The Queen, [1974] CTC 851; 74 DTC 6646; Bronfman Trust v MNP, [1978] CTC 3088; 78 DTC 1752; Andrew Kiss v MNR, [1976] CTC 2112; 76 DTC 1093; Forward v MNP, [1978] CTC 2604; 78 DTC 1455; McLeod v MNP, 35 Tax ABC 107; 64 DTC 218; Demers v MNP, 34 Tax ABC 301 ; 64 DTC 82; Davis v MNP, [1971] Tax ABC 314; 71 DTC 242.

Basically what the appellant is seeking to do is to treat two separate transactions as one, whereby she seeks to deduct as a business expense interest payments on the loan that she obtained from Dalhousie University for the purpose of buying a home. These funds of $35,000 were paid directly over to vendor. This was the fundamental purpose and use to which the loan of $35,000 was made.

The appellant sold her former residence on April 30, 1976, which house had remained unoccupied for a period of five months. The sale price was $60,000 and the house at the time of sale had a first and second mortgage registered against it. The difference in interest rate between the mortgage with Dalhousie University and the third mortgage of her former residence was /4 of 1%, that is the Dalhousie mortgage bore interest at the rate of 11 % whereas the third mortgage on 6180 Murray Place was 11 A%. The appellant declared the interest income flowing from her third mortgage and, of course, would receive a $1,000 deduction therefrom. In addition to this the appellant seeks to deduct as a business expense the interest payable by her on the Dalhousie mortgage on 18 Armshore Drive, claiming that that mortgage was for the purpose and use of earning income from property, namely, on the sale of 6180 Murray Place.

I consider this position untenable. The monies borrowed under the Dalhousie mortgage were borrowed clearly for the purpose of purchasing 18 Armshore Drive. The appellant and her husband moved into 18 Armshore Drive on or about November 20, 1975, and the 6180 Murray Place remained vacant until April 30, 1976. I find the borrowing of monies from Dalhousie University has been done in connection with the acquisition of a residence for personal occupation by the appellant and her husband and that interest paid thereon was therefore a personal or living expense within the meaning of paragraph 18(1)(h) of the Act. It therefore follows that the interest received by the appellant on her third mortgage was income in her hands and subject to tax, whereas the interest paid out in respect of her new home was a personal or living expense which is not deductible from income by reason of the provisions of paragraph 18(1 )(h).

For the above reasons, the appeal is dismissed.

Appeal dismissed.