A
W
Prociuk:—The
appellant
appeals
from
the
respondent’s
reassessment
dated
May
23,
1973
in
respect
of
the
taxation
year
1970,
and
from
the
reassessment
dated
August
8,
1974
in
respect
of
the
taxation
year
1971
wherein
interest
expenses
claimed
in
the
sums
of
$9,773.34
in
1970
and
$10,384.61
in
1971
were
disallowed
on
the
ground
that
said
expenses
were
not
interest
on
borrowed
money
for
the
purpose
of
earning
income
from
a
business
or
property
within
the
meaning
of
paragraph
11(1)(c)
of
the
Income
Tax
Act,
RSC
1952,
c
148
and
amendments
thereto.
The
appellant
claims
that
the
borrowed
money
was
used
by
him
to
preserve
his
title
to
the
rental
properties
he
owned
and
to
earn
income
therefrom.
At
all
times
material
the
appellant
was
the
president
and
controlling
shareholder
of
the
Neifer
Installations
(1968)
Ltd,
a
company
incorporated
under
the
Companies
Act
of
British
Columbia,
and
a
successor
to
the
older
company
known
as
Neiïfer
Installations
Ltd.
Its
business
was
the
sale,
installation
and
servicing
of
laundromats.
The
company
dealt
with
the
Toronto-Dominion
Bank
and
had
a
line
of
credit
established
in
1961
for
the
purpose
of
financing
the
working
capital
of
its
business.
The
appellant
personally
guaranteed
the
repayment
of
moneys
advanced
to
his
company
under
this
line
of
credit.
Early
in
1968
the
bank
required
further
security
from
the
appellant
to
guarantee
the
loans
to
the
company
which
now
stood
at
approximately
$140,000
and
the
appellant
granted
mortgages
of
two
rental
properties,
which
he
owned,
one
in
Vancouver
and
one
in
Edmonton.
On
or
about
the
end
of
January
1968
the
bank
withdrew
the
line
of
credit
and
demanded
repayment
of
the
outstanding
loans.
Mortgage
foreclosure
proceedings
were
commenced
by
the
bank.
The
appellant
succeeded
in
borrowing
$96,900
from
City
Savings
and
Trust
Company
and
$30,000
from
N
&
L
Enterprises
Ltd
on
the
security
of
mortgages
of
the
two
rental
properties.
The
money
was
used
to
discharge
the
appellant's
obligation
to
the
bank
and
also
in
part
to
refinance
the
rental
properties.
The
appellant
claimed
deduction
of
the
total
amount
of
interest
paid
on
the
said
two
loans
in
the
taxation
years
under
appeal,
that
is
$17,025.03
in
1970
and
$18,966
in
1971.
The
respondent
disallowed
only
the
deduction
of
that
portion
of
the
interest
in
each
year
that
accrued
on
the
portion
of
the
loan
which
the
appellant
re-loaned
to
his
company,
that
is,
by
paying
off
the
indebtedness
to
the
bank
under
his
personal
guarantee.
In
his
Reply
to
the
appellant’s
Notice
of
Appeal,
the
respondent
states,
inter
alia:
(a)
that
the
Appellant
borrowed
monies
from
N
&
L
Enterprises
Ltd
and
City
Savings
and
Trust
Company,
claimed
interest
deductions
and
had
interest
disallowed
in
accordance
with
the
following
amounts:
|
N
&
L
|
City
Savings
&
|
|
Enterprises
|
Trust
|
|
Loan
|
$30,000.00
|
$96,900.00
|
|
Processing
Fee
|
|
6,700.00
|
|
Net
proceeds
of
Loan
|
$30,000.00
|
$90,200.00
|
|
Loans
to
Neifer’s
|
|
|
Companies
|
$13,269.60
|
$53,832.93
|
|
%
of
Funds
Reloaned
|
|
|
to
Companies
|
44.23%
|
59.68%
|
|
Interest
Claimed
—
1970
|
$
5,264.03
|
$11,761.00
|
|
Interest
Disallowed
—
|
|
|
1970
|
$
2,754.38
|
$
7,018.96
|
|
Interest
Claimed
—
1971
|
$
5,400.00
|
$13,566.00
|
|
Interest
Disallowed
—
|
|
|
1971
|
$
2,288.42
|
$
8,096.19
|
(b)
that
only
a
portion
of
the
said
monies
borrowed
from
City
Savings
and
Trust
Company
and
from
N
&
L
Enterprises
Ltd
was
reloaned
by
the
Appellant
and
forwarded
for
use
by
Neifer
Installations
(1968)
Ltd
and
Neifer
Installations
Ltd;
(c)
that
only
the
interest
on
that
portion
of
monies
borrowed
from
City
Savings
and
Trust
Company,
and
from
N
&
L
Enterprises
Ltd
by
the
Appellant
and
which
was
reloaned
by
the
Appellant
to
Neifer
Installations
(1968)
Ltd
and
Neifer
installations
Ltd
was
disallowed.
The
appellant
argues
that
his
companies,
apart
from
being
a
direct
source
of
income
to
him
as
their
employee,
also
rented
portions
of
his
rental
properties
in
Edmonton
and
Vancouver
which
was
an
additional
source
of
substantial
monthly
income
to
him.
The
appellant
further
stated
in
his
evidence
that
his
company
undertook
to
repay
to
him
the
said
loans
with
interest
and
in
fact
commenced
to
do
so
in
1972.
The
appellant
reported
the
interest
portion
received
from
his
company
in
his
return
for
that
year
as
well
as
interest
received
from
his
company
in
1973
and
1974.
(See
Exhibits
A-16
to
A-23.)
It
is
clear
to
me
that
on
the
facts
this
case
is
distinguishable
from
the
case
of
Donald
Preston
McLaws
v
MNR,
[1972]
CTC
165;
72
DTC
6149,
and
the
case
of
Ruth
DeZwîrek
v
MNR,
[1969]
Tax
ABC
121;
69
DTC
140.
While
the
legal
documentation
vis-à-vis
the
appellant
and
his
company
in
the
instant
case
is
not
as
complete
as
one
would
want
to
have,
I
am
satisfied
on
the
evidence
adduced
at
the
hearing,
coupled
with
all
the
exhibits
filed,
that
the
appellant
has
established
his
point
that
the
disallowed
portion
of
the
interest
claimed
by
him
was
payment
in
respect
of
money
borrowed
which
was
used
for
the
purpose
of
earning
income.
The
appeals
are
allowed
and
the
matter
is
referred
back
to
the
respondent
for
reassessment
accordingly.
Appeals
allowed.
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