Date: 20020718
Docket:
2001-2698-IT-I
BETWEEN:
ROBERT
GROSSMAN,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
Reasonsfor
Judgment
McArthur, J.
[1]
The issue is whether the Appellant is entitled to deduct an
interest expense of $21,225 in his 1998 taxation year. The
Minister of National Revenue (the "Minister")
disallowed the deduction on the basis that the borrowed money was
not used for the purpose of earning income from a business or
property. See paragraph 20(1)(c) of the Income Tax
Act (the "Act").
[2]
The Appellant was given several opportunities to appear with
counsel and/or his accountant. He was granted an adjournment
under specific terms on February 27, 2002. He was granted
another adjournment on June 25, 2002.
Surprisingly, he was prepared to proceed alone, on June 27,
2002.
[3]
The Minister withdrew the disallowance of a $9,699 Registered
Retirement Savings Plan contribution for the Appellant's 1999
taxation year. The Appellant sought to establish that he borrowed
$275,000
from Central Guaranty Trust in October or November 1992 to
purchase shares in a corporation, Sterling Recycling Ltd.
("Sterling"), and that he continued to pay interest on
the $275,000 through 1998. He was the only witness and he
represented himself. In contrast to the Appellant's evidence,
his Notice of Appeal, under the heading "Material Facts
Relied Upon", contained the following:
5.
In particular, the appellant borrowed money from his Scotia Line
of Credit (A/c No. 4538 xxx xxx 660) for the purpose of making a
common share investment in a Canadian-controlled private
corporation controlled by the Appellant, called Sterling
Recycling Limited.
...
[4]
It was unclear when the Appellant advanced money to Sterling to
purchase shares. He stated he made advances for the purchase of
the shares in dribs and drabs over the years, commencing with
Sterling's incorporation in February 1991, yet the share
certificate for his total share ownership being 425 shares,
is dated November 18, 1992.
The value of each share was set at US$1,000. As evidence of his
share purchase, the Appellant entered Exhibit A-1, a
bundle of bank transaction slips dated 1992. These transaction
slips appear to indicate deposits by the Appellant into
Sterling's bank account from time to time over the 1992
calendar year commencing in January. They are difficult to
interpret but it would appear that over $60,000 was deposited by
the Appellant into Sterling's account over a twelve-month
period, the largest amounts appear to be deposits of $9,700 and
$9,000 on February 10 and February 21, 1992. There was
no evidence as to the source of this money other than the
Appellant's statements that it must have been proceeds of a
bank line of credit. The Appellant stated that he borrowed
$275,000 from Central Guaranty Trust in October 1992 and
used this money together with over $300,000 of his own savings to
purchase 425 common shares of Sterling at US$1,000 per share. I
believe, in Canadian dollars, the price would exceed $540,000. He
admitted that some of the money deposited to Sterling was from
his family.
[5]
There is no evidence of US$275,000 and US$150,000 being advanced
to Sterling in October or November 1992, or any other time,
for the purchase by the Appellant of the 425 shares issued to
him.
[6]
The Appellant wrote the following explanation to the Canada
Custom and Revenue Agency ("CCRA") on April 27,
2000:
With reference to your
letter of March 27th, 2000, please note that I
have been claiming this interest deduction since 1992 when I took
out a loan from Central Guaranty Trust to purchase shares in
Sterling Recycling Ltd. The amount of the loan originally was
$430,000 but has since been reduced to approximately $300,000.
Each year, since 1992, I have claimed this deduction and
submitted an appropriate statement from the lending institution
to substantiate my claim.
[7]
The Appellant submits that the transactions that led to his
borrowing $275,000 to purchase shares in Sterling included the
following:
(i)
On October 30, 1992, Audrey Grossman purchased a home, their
principal place of residence, for $455,000. I will refer to it as
"Mountbatten Road";
(ii)
On October 30, 1992, immediately after the purchase,
Audrey Grossman granted a mortgage to Central Guaranty Trust
for $420,000 guaranteed by the Appellant;
(iii)
On November 18, 1992, the Appellant sold their former
principal residence, a condominium, for $175,000;
(iv)
On September 13, 1996, Audrey Grossman granted a $280,000
mortgage on Mountbatten Road to the Bank of Nova
Scotia;
(v)
The Central Guaranty Trust mortgage was discharged on
March 16, 1999;
(vi)
On May 26, 1999, Audrey Grossman granted a $500,000 mortgage
on Mountbatten Road to the Hong Kong Bank of Canada;
(vii)
The Bank of Nova Scotia mortgage was discharged on
October 25, 1999.
[8]
During the 1990's, Sterling sold shares to outside investors
to raise working capital. The Appellant stated that he purchased
the majority of Sterling's common shares at the same price as
all other share purchasers. Sterling has ceased
operation.
[9]
The Respondent submits that the Appellant has not established
that he borrowed money and paid interest for the purpose of
earning income from a business or property in accordance with
paragraph 20(1)(c) of the Act.
Legislation
[10]
Paragraph 20(1)(c) reads in part:
20(1)
... 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, ...
pursuant to a legal obligation to pay interest on
(i)
borrowed money used for the purpose of earning income from a
business or property ...
Analysis
[11]
The Appellant had the onus of proving that he paid $21,275 in
interest on money borrowed for the purpose of earning income from
a business or property. He meets the last criteria in that
Sterling is a business or property.
[12]
The problem facing the Appellant is that he has to establish that
he in fact paid, with borrowed money, $275,000 to Sterling for
common shares. In Singleton v. The Queen, 2001 DTC
5533, at paragraph 29, Major J., stated:
It
is now plain from the reasoning in Shell that the issue to
be determined is the direct use to which the borrowed funds were
put. ...
[13]
I must determine what is the direct use to which the Appellant
put the funds that he and Audrey borrowed on Mountbatten road
from Central Guaranty Trust. The Notice of Appeal states that the
Appellant borrowed "money from his Scotia Line of Credit for
the purpose of making a common share investment" in
Sterling. The facts do not support this. The Appellant, during
his evidence, stated that the $280,000 mortgage (in 1996)
proceeds from the Bank of Nova Scotia were used to pay off the
Central Guaranty Trust
line of credit. The discharge was not registered until March
1999. The Appellant's position at trial was that $275,000 of
the $440,000 — Oct. 30/92 Central Guaranty Trust
mortgage went towards the purchase of the Sterling shares. These
425 shares had a cost price of US$425,000 or approximately
C$540,000.
[14]
The direct use to which the $275,000 was put to must be
determined. There is no evidence presented to permit me to
conclude that the Appellant used this money to purchase shares.
The logical conclusion is that Audrey Grossman used it for
the purchase of her new home. The $440,000 mortgage was
registered immediately after the deed to her. The deed was
registered as #875189 at 4:12 p.m. on October 30, 1992,
and the mortgage was registered as #875190 also at 4:12 p.m.
on October 30, 1992.
[15]
There was no evidence that the Appellant advanced any significant
money to Sterling on or after that date. The Appellant could not
explain where the $455,000 came from for Audrey to purchase the
Mountbatten home. There is no direct link between the borrowed
money and a Sterling share purchase. The documents lead to the
conclusion that all the money borrowed by Audrey Grossman on
October 30, 1992 was used to purchase the home.
[16]
The often quoted paragraphs in The Queen v. Friedberg,
92 DTC 6031, at page 6033 is equally relevant to the
present appeal:
In
tax law, form matters. A mere subjective intention, here as
elsewhere in the tax field, is not by itself sufficient to alter
the characterization of a transaction for tax purposes. If a
taxpayer arranges his affairs in certain formal ways, enormous
tax advantages can be obtained, even though the main reason for
these arrangements may be to save tax (see The Queen v. Irving
Oil 91 DTC 5106, per Mahoney, J.A.). If a taxpayer
fails to take the correct formal steps, however, tax may have to
be paid. If this were not so, Revenue Canada and the courts would
be engaged in endless exercises to determine the true intentions
behind certain transactions. Taxpayers and the Crown would seek
to restructure dealings after the fact so as to take advantage of
the tax law or to make taxpayers pay tax that they might
otherwise not have to pay. While evidence of intention may be
used by the Courts on occasion to clarify dealings, it is rarely
determinative. In sum, evidence of subjective intention cannot be
used to "correct" documents which clearly point in a
particular direction.
[17]
The documents clearly point to a conclusion that the proceeds of
the money borrowed from Central Guaranty Trust were used to
purchase the home on Mountbatten Road and not to purchase shares
in Sterling.
[18]
The appeal for the 1998 taxation year is dismissed, and on
consent of the Respondent the appeal for the 1999 taxation year
is allowed on
the basis that in computing income the Appellant is entitled to
claim a deduction in the amount of $13,499.64 as a registered
retirement savings plan contribution.
Signed at Ottawa, Canada, this 18th day of
July, 2002.
"C.H. McArthur"
J.T.C.C.
COURT FILE
NO.:
2001-2698(IT)I
STYLE OF
CAUSE:
Robert Grossman and
Her Majesty the Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
June 25 and 27, 2002
REASONS FOR JUDGMENT
BY: The Honourable Judge C.H.
McArthur
DATE OF
JUDGMENT:
July 18, 2002
APPEARANCES:
Agent for the
Appellant:
T. Lacara and the Appellant himself
Counsel for the
Respondent:
Joel Oliphant and James Gorham
COUNSEL OF RECORD:
For the
Appellant:
Name:
N/A
Firm:
N/A
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-2698(IT)I
BETWEEN:
ROBERT GROSSMAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal called on June 25 and heard on June 27,
2002, at Toronto, Ontario, by
the Honourable Judge C.H. McArthur
Appearances
Agent for the
Appellant:
T. Lacara and the Appellant himself
Counsel for the Respondent: Joel
Oliphant and James Gorham
JUDGMENT
The appeal from the assessment of tax made under the Income
Tax Act for the 1998 taxation year is dismissed.
On consent of the Respondent, the assessment of tax made under
the Act for the 1999 taxation year is allowed and the assessment is referred back to the Minister
of National Revenue for reconsideration and reassessment on the
basis that in computing income the Appellant is entitled to claim
a deduction in the amount of $13,499.64 as a registered
retirement savings plan contribution.
Signed at Ottawa, Canada,
this 18th day of July, 2002.
J.T.C.C.
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