Date: 20020523
Docket:
1999-1112-IT-G
BETWEEN:
JEFFREY
WHITE,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
Reasonsfor
Judgment
Bowie J.
[1]
These appeals are from reassessments of income tax for the 1994
and 1995 taxation years. In dispute is the Appellant's claim
that he is entitled to deductions for interest under paragraph
20(1)(c) of the Income Tax Act (the Act) in
the amount of $24,900 in 1994 and $41,700 in 1995. The Appellant
also claims to be entitled to deduct legal fees of $13,943.75 in
1995. He contends that he paid these amounts of interest on funds
borrowed by him and used for the purpose of earning income from a
business or property. His claim in respect of the legal fees is
advanced on the basis that they were incurred in the course of
business, and so are deductible pursuant to subsection 9(1) of
the Act "in computing the Appellant's profit from
a business or property in accordance with ordinary commercial
principles and generally accepted accounting principles".
[2]
The Minister of National Revenue (the Minister) has disallowed
the deductions on the basis that the amounts claimed as interest
were not paid, or payable, by the Appellant pursuant to a legal
obligation to pay interest on borrowed money used for the purpose
of earning income from a business or property; nor were they paid
or payable pursuant to a legal obligation to pay interest on an
amount payable for property acquired for the purpose of gaining
or producing income. As to the legal fees, the Minister's
position is that the amount was not an expense incurred by the
Appellant, or alternatively, it was not incurred for the purpose
of gaining or producing income from a business or
property.
[3]
The Appellant is an insurance broker. In about 1975, his parents
purchased some 150 acres of land in Muskoka, Ontario, on which
they lived and operated a campground. In the late 1980s the
Appellant, his parents and his two sisters decided that they
wished to turn this property into a residential, recreational and
commercial development. The interest that the Appellant claims to
be entitled to deduct under paragraph 20(1)(c) of the
Act was, according to his evidence, paid by him in respect
of amounts that he borrowed and contributed to the joint effort
of the members of his family to bring about such a development.
Some of it was purchase money in respect of certain parcels of
land bought by the Appellant to be included in the project. He
estimated in his evidence that, in all, he and his family spent
approximately $1.3 million in attempting to develop the property,
and that he personally invested $1.1 million of that amount, most
of which he raised through borrowings of one kind or another. The
history of the matter, as recited by the Appellant in his
evidence, follows.
[4]
The concept that the Appellant and his family envisaged for this
property included a residential complex of condominium units, a
hotel and conference centre, and an 18-hole championship golf
course. The Appellant testified that, on the advice of his
accountant, he registered the "White Family
Partnership" (the Partnership), which was to be the vehicle
by which the project would be brought into existence. The
intention was that once the complex had been developed and
reached commercial viability, all of the property would be
conveyed to a new corporation, of which the family members would
become shareholders. No Partnership agreement was put into
evidence, and I am uncertain as to whether any written
Partnership agreement was ever drawn up. A bank account was
opened in the name of the Partnership, however.
[5]
The Appellant purchased two additional parcels of land to
complement the original acreage, and a friend of his, Joe Davies,
agreed to purchase two others. Their intention was to incorporate
these four parcels into the project. All these parcels were of
relatively small acreage, but they were either within the
boundaries of, or contiguous to, the original acreage, and it was
thought that their acquisition would enhance the project. Two of
the parcels were bought and paid for by the Appellant, who took
title in his own name "In Trust". The other two were
bought by Davies, also in trust. When the time came to close one
of these purchases, Davies was unable to pay the purchase price,
and the Appellant paid it from money that he had borrowed,
secured by a second mortgage on his home.
They both considered that the money spent to purchase these
properties was in the nature of a contribution of capital to the
Partnership, according to the Appellant's
evidence.
[6]
The evidence includes a cheque ledger for a bank account at the
Toronto-Dominion Bank in the name of "White Family
Partnership", bank statements for the period between
December 29, 1989 and December 31, 1990 for an account in the
name of "White Family Partnership" at the Bank of Nova
Scotia, and unaudited financial statements for the three years
ending December 31, 1989, 1990 and 1991 for "the White
Family - Joint Venture", which the Appellant testified
was in fact the Partnership. It appears from these financial
statements that the only two partners were the Appellant and one
of his sisters, Julie Ground. Ms. Ground apparently had some
experience in relation to the acquisition of the necessary
approvals required to undertake a land development project.
Although the Appellant's evidence was often vague and
confused, I accept that both he and his sister spent considerable
time, effort and energy attempting to obtain the various
municipal and provincial approvals, and contracting for the
necessary soil, water and other tests required for that purpose.
They also appear to have spent considerable money on this,
although unfortunately no proper books of account were ever kept.
The Appellant's estimate that he spent $1.1 million is simply
that. I do accept, however, that he invested a considerable
amount of money, much of which was raised through borrowing. His
evidence suggests that his parents and Mr. Davies were also to be
considered members of the Partnership, as they were contributing
land to the project. However, the Partnership's financial
statements do not show any of them as having an interest in the
Partnership.
[7]
By 1992 the necessary government approvals had, for the most
part, been obtained, and the new project might have proceeded to
fruition, but for two unfortunate events. One of those was the
election of a new provincial government in Ontario, which was
less cooperative with the developers of such lakeside
recreational developments than the previous government had been.
The other was the onset of a serious economic recession. The
result of these two events, together with the family's
inability to obtain outside financing for the hotel and
conference centre, was that the Appellant and his family decided
to scale the project back substantially. The concept was changed
to provide for the sale of prefabricated mobile homes installed
on concrete pads, rather than the townhouses originally planned,
and to provide a 9-hole golf course rather than the originally
planned 18-hole course. Plans for the hotel and conference centre
were scrapped. It appears to have been at about this time that a
corporation called "The Maples of Muskoka Inc." (Maples
of Muskoka) was incorporated to own the trailer park, and another
corporation called Diamond in the Ruff Inc. was incorporated to
own the golf course. According to the Appellant's evidence,
he and the other four members of his family received 90% of the
shares of Maples of Muskoka, divided evenly among them, so that
each held 18%. Diamond in the Ruff was to be owned by the
Appellant and four other partners, each of whom would put in
$185,000. According to his evidence, the interest for which he
claims the deductions was not related to his investment in the
golf course, but only to Maples of Muskoka.
[8]
Soon after Maples of Muskoka was incorporated a rift developed in
the family, according to the Appellant's evidence. His sister
Julie Ground and her husband effectively assumed control of the
company. They brought in a new partner who was to contribute
additional financing to the project. As time went on this rift
became more serious. The Grounds made frequent calls for cash to
finance the project, and the Appellant was forced to borrow money
from various sources as he endeavoured to keep it afloat. The
Grounds refused to let him have access to the financial records
of Maples of Muskoka. Eventually a complete impasse was reached
and the Appellant stopped contributing funds to the project, and
as a result it foundered. His evidence was vague as to how the
project was terminated. He said simply "I brought the
project down", but he did not explain exactly what that
meant. I take it, however, that some kind of involuntary
liquidation took place, and that the shares ceased to have any
value. By this time, all the real estate (other than the golf
course) was owned by Maples of Muskoka. The Appellant, his
parents and Mr. Davies apparently lost everything they had put
into the venture.
[9]
As I have said, the Appellant's evidence was imprecise.
However, I am satisfied that during the period between 1989 and
1992, or even later, he borrowed large amounts of money which he
put into the project. I am satisfied, too, that the assets of the
Partnership were used for the purpose of acquiring the shares of
Maples of Muskoka, at a time when it was reasonable to expect
that company to produce dividend income for the Appellant in due
course. Although it was not well documented, I believe that the
Appellant's oral evidence has established a link between the
borrowed funds that he put into the Partnership and his
shareholding in Maples of Muskoka. His difficulty in this branch
of these appeals is to establish the extent of his borrowings for
that purpose, and the amount that he paid in each of the years
under appeal as interest on those borrowings. Without evidence to
trace the borrowed funds to the Partnership, and ultimately the
corporation, the Appellant cannot establish the right to deduct
the interest.
[10]
I turn now to a consideration of the specific items that the
Appellant seeks to deduct. His claim is quantified this way in
paragraph 21 of the Notice of Appeal:
|
|
1995
|
1994
|
|
Legal
Fees
|
13,943.75
|
--
|
|
Interest
|
|
|
|
-
Second Mortgage on 30 Owlsfoot Cres.
|
14,700.00
|
14,700.00
|
|
- Third
Mortgage on 30 Owlsfoot Cres.
|
--
|
10,200.00
|
|
-
Credit card interest
|
27,000.00
|
_________
|
|
Total
carrying charges claimed
|
55,643.75
|
24,900.00
|
|
Total
carrying charges allowed
|
________
|
________
|
|
Total
carrying charges disallowed
|
55,643.75
|
24,900.00
|
legal
fees
[11]
Tab 50 of Exhibit A-1 is a handwritten list of items which add up
to $13,943.75. The first five items are unrelated to the matter
of legal fees, so far as I can tell. They include such things as
a hydro bill and a bill for hardware at Raymond's General
Store. The last three items in that list are:
McPherson,
Shugart
5,000 - 12/8/94
McPherson,
Shugart
2,500 - 1/11/94
McPherson,
Shugart
2,500 - 15/12/94
At Tabs 67, 71 and
73 of that exhibit are photocopies of three cheques bearing those
dates and drawn on the account of the Partnership at the Bank of
Nova Scotia, 3169 Yonge Street at Lawrence, in the amounts of
$5,000, $2,500 and $2,500 respectively, payable to McPherson,
Shugart.
[12]
McPherson, Shugart is the firm of lawyers that was retained by
Mr. White and the other members of the Partnership to defend
a number of actions brought against them. These
included:
i)
a claim of some kind by Joe Davies, presumably having to do with
the parcel of land which he purchased and which was to be
included in the resort development;
ii)
a claim by a numbered company, apparently having to do with funds
to be invested in the Maples of Muskoka project, or perhaps the
golf course;
iii)
a claim by Terra-Tory Management Ltd., the Appellant's
sister's company, for loss of profits in connection with the
project;
iv) a
defamation action against the Appellant brought by his
brother-in-law; and
v)
a claim by an investor for damages arising out of a refusal to
sign a joint venture agreement.
[13]
With the exception of the defamation action, these proceedings
were brought against all the members of the Partnership, and the
Partnership paid the legal bills. Mr. White's evidence was
that payments were made on a regular basis to McPherson, Shugart
against their account for litigation services to the Partnership,
because there simply was not enough cash to pay the accounts in
full as they were rendered. To a considerable extent, the source
of those funds used by the Partnership to pay McPherson, Shugart
was Mr. White. He obtained funds, mostly by borrowing, which
he deposited to the Partnership account. The litigation costs,
however, were those of the Partnership, not of Mr. White
personally, except for the defamation action.
[14]
The position taken by the Minister in assessing the Appellant,
and by counsel at trial, is that these amounts were not expenses
of the Appellant, and in any event they were not incurred for the
purpose of producing income from a business or property. Mr.
White's evidence as to the litigation, like most of his
evidence, was both rambling and imprecise. However, it was
consistent with the Minister's assumption that the expenses,
if incurred at all, were incurred for the purpose of preserving
capital rather than to gain income from a business or property.
In fact, the Appellant did not personally have a business that
could be considered a source of income against which legal
expenses might be charged, at the relevant time. His insurance
business was conducted through a corporation, Jeffrey H. White
and Associates Insurance Agencies Inc. The development in Muskoka
was never his business; if it was a business at all, it was that
of the Partnership, and later Maples of Muskoka.
[15]
Finally, I note that the Appellant appears to be claiming amounts
paid by the Partnership in 1994 as deductions from his own income
in 1995. I should note, however, that behind Tab 77 in Exhibit
A-1 are photocopies of three cancelled cheques, drawn on the
Partnership account, dated February 14, 1995, March 31, 1995 and
August 3, 1995 and payable to McPherson, Shugart, for $2,500,
$2,000 and $2,205.45. There was no explanation in the evidence as
to why the amount paid in 1994 was claimed in 1995, and the
amount paid in 1995 was not claimed in that year. However, that
is of no consequence, as the Appellant's claim to deduct any
legal fees must necessarily fail because the Appellant had no
business in the course of which he could claim to have incurred
the expenses, and also because the sole purpose for which he
engaged counsel to oppose these suits was not to gain income, but
to preserve his capital assets.
interest
i)
the second and third mortgages
[16]
On May 26, 1989, the Appellant and his wife borrowed $138,100
from the Bank of Nova Scotia, secured by a second mortgage on
their home at 30 Owl's Foot Crescent in Aurora. He
claims to deduct interest of $14,700 on this mortgage in each of
1994 and 1995. The interest rate during 1994 was 7.5% and during
1995 it was 10.5%. According to an amortization table at Exhibit
A-1, Tab 19, the total interest payable in 1994 was
$11,535.58, and in 1995 it was $14,207.27.
[17]
Exhibit A-1, Tab 36 is a photocopy of the passbook for a chequing
account covering the period May 26, 1989 to January 9, 1991. The
account was in the name of the Appellant and his wife. It shows
the deposit to that account of the second mortgage proceeds on
May 26, 1989. On May 30, 1989, a cheque was written against this
account for $50,000, which according to the Appellant's
evidence went to pay off his line of credit at the CIBC. On
July 10, 1989, the account was debited $27,000, which the
Appellant said went to purchase the Roosen property. This was a
parcel of land adjacent to the Whites' property in Muskoka
which was acquired in January 1990 in the name of "Joe
Davies in Trust". The Appellant stated in a general way in
his evidence that this account was used by him to fund the
Partnership account. Apparently there was an arrangement with the
bank that when cheques were written on the Partnership account
for which there were no funds on deposit they were paid by a
transfer from this account to the Partnership account. By July
10, 1989 the opening balance of $137,950 had all been disbursed
from the account, along with some $350 interest credited to it,
by 13 transactions. As to this, the following exchange took place
between the Appellant and his counsel at the trial:
Q.
Okay. Can you - there's cheque numbers here 1 to
11.
A.
M'hmm.
Q.
The second one is a big item, it's $50,000.00. Do you
remember where that money went?
A.
Yes. It went to repay the line of credit at the CIBC.
Q.
Subsequently did you use that CIBC line of credit
again?
A.
Oh yes, definitely.
Q.
Did it ever get back up to maximum again?
A.
Yes, almost immediately.
Q.
The others in various amounts, cheques 1 through 11
-
A.
M'hmm.
Q.
-- can you remember anything about what those cheques were
about?
A.
I would suggest to you that they were servicing or consultant
fees that had been incurred at that date.
Q.
On July 10th there's an item -
A.
M'hmm.
Q.
-- with a CTD beside it and $27,000.00 and that brings the
account down to about $150.00. What was that
$27,000.00?
A.
That was an internal transfer and that monies were for the Roosen
property.
Q.
Internal transfer for what?
A.
That would go to the White Family Partnership account which is
227-13. What happened was, in those days you couldn't
make an instant teller, you know, deposit to a corporation, you
could only do it to a personal account.
Q.
Yes.
A.
So what would happen is, I would write cheques on the White
Family Partnership account and then, as soon as they came into
the bank to be cleared, the bank would automatically debit this
8004420 to cover off the outstanding obligation.
[18]
The Appellant and his wife borrowed a further $85,000 from
private lenders, secured by a third mortgage on their home. The
proceeds, $80,198.71, were deposited to their account No.
10-29932 at the CIBC on February 5, 1990. On February 9 a
cheque for $50,081.06 was drawn on that account to pay down the
Appellant's line of credit. Cheque No. 591 for $16,000 dated
February 12, 1990 and drawn on that account, was deposited to the
account of the White Family Trust.
[19]
Cheque number 567 for $1,800 dated January 23, 1990 and payable
to the Partnership was drawn on this account and cleared on
January 24. However, these funds could not have come from the
proceeds of the second mortgage, which had been fully disbursed
by July 1989, or from the proceeds of the third mortgage, which
were not credited to the account until February 5, 1990. I am
simply unable to tell from the evidence where they came
from.
[20]
A hand-written single entry ledger purports to show the
disbursements from the Appellant's account No. 10-29932.
Photocopies of the entries from June 1989 to August, 1995
are found at Tabs 37 to 41 of Exhibit A-1. The only cheques
payable to the Partnership that are recorded there
are:
January 23,
1990
$ 1,800
February 12,
1990
$16,000
June 26,
1990
$10,000
Many of the other
cheques, but by no means all of them, were written in favour of
the Appellant. His oral evidence was that much, if not all, of
those cheques, as well as many internal bank transfers, went to
satisfy the cash requirements of the Partnership.
[21]
The Appellant also testified that his line of credit, which was
paid off at least twice, once with proceeds of the second
mortgage and once with proceeds of the third mortgage, had been
used to fund the various studies required in connection with the
development project. He had little or no specific recollection of
the details of these transactions, and virtually no useful
corroborating evidence to establish these expenditures. Cheque
No. 591 was drawn against the account on February 12, 1990,
payable to the Partnership for $16,000. The next cheque payable
to the Partnership is No. 693 on June 26 for $10,000. However,
the account was overdrawn before the end of February,
so that amount cannot be traced back to the third
mortgage.
[22]
It is possible, therefore, to trace $27,000 of the proceeds of
the second mortgage and $16,000 of the proceeds of the third
mortgage to the Partnership account. Although there is no
corroborating document, I accept the Appellant's statement
that it went to that account and was used for the purchase of
part of the property eventually transferred to Maples of Muskoka.
As to the rest of the proceeds, the Appellant's evidence is
much too vague to convince me that any specific amount went to
the Partnership account. Of the $50,000 applied to the
Appellant's line of credit, there is no way to know how much
went to pay interest and how much went to pay principal; nor does
the evidence give any reliable information as to the use made of
the borrowings against that line of credit that were repaid. The
Appellant's simple averments that the borrowed funds were put
into the project is insufficient.
[23]
In Bronfman Trust v. Canada,
Dickson C.J.C. said, for the Court:
... The statutory deduction
thus requires a characterization of the use of borrowed money as
between the eligible use of earning non-exempt income from a
business or property and a variety of possible ineligible uses.
The onus is on the taxpayer to trace the borrowed funds to an
identifiable use which triggers the deduction. Therefore, if the
taxpayer commingles funds used for a variety of purposes only
some of which are eligible he or she may be unable to claim the
deduction: ...
Counsel for the
Appellant argued that in order to succeed, the Appellant need
only give an oral account of the use of the funds, and be found
to be a credible witness. In a case involving only a few
relatively straight-forward transactions that might be so.
However, in this case there are hundreds of transactions
undertaken over a period of several years, and the
Appellant's record-keeping and that of the Partnership have
been woefully inadequate. No records at all from Maples of
Muskoka were produced, nor was there any attempt to subpoena
them. The Appellant did not, I think, set out to deceive in
giving his evidence. Nonetheless, I do not find that his bald
assertions that the borrowed funds all went into the project are
adequate to permit a finding that all of the interest on the
second and third mortgages is deductible. It was clear from his
evidence as a whole that he made little or no distinction in his
mind between his personal transactions and those of the
Partnership. Nor did he show any appreciation of the distinction
between his own funds and those of Aurora Financial Management
Inc. I have said more than once that the Appellant's evidence
was vague. This is perhaps not surprising, given the large number
of transactions, the lapse of time since they took place, and the
emotional consequences of the family disagreements and resulting
financial disaster. At one point in his evidence the Appellant
referred to the ongoing series of transactions as a financial
juggling act. At another point he said: "I was just
scrambling at that time to sort out the financial jumble".
All of these factors disincline me to accept the Appellant's
evidence as to the use of borrowed money where it is not
corroborated by documentary evidence. His oral evidence is simply
not sufficiently reliable.
[24]
The only amounts satisfactorily traced to the mortgages,
therefore, are:
Second
mortgage:
$27,000
Third mortgage: $16,000
Applying the
interest rates of 7.75% for 1994 and 10.5% for 1995 to the amount
of $27,000, and the rate of 12% for 1994 to the amount of
$16,000, the Appellant is entitled to deductions of
1994 $2,095 + 1,920 =
$4,015
1995 $2,835
[25]
I should note here that Mr. Sood argued on behalf of the
Respondent that any interest deduction, at least in respect of
the $27,000 that was used for the purchase of land, is precluded
by subsection 18(3) of the Act. There is a precise factual
basis required for that subsection to disentitle a taxpayer who
would otherwise be entitled to a deduction for interest. No
attempt was made in the Reply to plead that factual foundation.
Indeed, subsection 18(3) is not given even a passing mention in
the Reply. Contrary to what seems to be a common belief among
those drawing pleadings for the Crown, pleadings are still an
important element of litigation. They draw the lines of battle,
and a taxpayer cannot be expected to respond at trial to legal or
factual issues not raised in the Reply. Whatever the merit of
this argument might have been, it is not available to the
Respondent because it has not been pleaded.
credit cards
and lines of credit
[26]
The Appellant stated candidly that his claim for interest in
respect of his many credit card accounts and lines of credit was
arrived at simply by assuming that at all times during 1995 these
accounts were all borrowed upon to their maximum permissible
limits, that that limit was $150,000, and that interest was paid
on them at 18% per annum. This led to a claim for $27,000. The
Appellant gave a long and imprecise oral account of the flow of
at least some of the borrowings on these accounts through various
bank accounts to be deposited in the Partnership account, or to
pay bills on behalf of the Partnership. The claim to deduct this
interest must fail for at least two reasons.
[27]
The first and most obvious reason is that the claim is not based
upon any records that could be said to establish either the use
to which the funds were put or the interest charges actually
paid. A lot of copies of statements of account bank statements,
and cheques were included in Exhibit A-1. Exhibit A-2 is a large
bundle of cancelled cheques drawn on the account of the
Partnership between December 1989 and November 1993. Exhibit A-3
is a summary of the various institutions and private lenders to
whom the Appellant owed money on June 27, 1996, which is said to
represent his investment in Maples of Muskoka. It shows, among
others, this item:
Detail
Start
Rate
Balance Interest
Various credit
cards
1990
18%
$150,000 $27,000
[28]
Although nothing in this case is clear, except that the Appellant
has no meaningful records of his investment, it is not really
disputed that of the $150,000 debt which is said to give rise to
the claim to deduct $27,000 in 1995, $50,000 was borrowed by the
Appellant's mother. Even if he could establish that he paid
$9,000 interest in respect of it, it clearly was not an amount
that he was under a legal obligation to pay. No deduction is
permitted for voluntarily discharging another person's
obligation to pay interest.
[29]
The forlorn nature of this aspect of the Appellant's claim is
evident from the following excerpt from the argument of his
counsel:
... The credit cards are problematic. They are problematic for a
couple of reasons. One, the Scotia line of credit was in the name
of Anne White, but the funds were put into the project and
Jeffrey White serviced the interest. Unfortunately that may not
be an eligible use.
His
Honour: As
you say, the mortgages on the house are clear, but there was
obviously money being borrowed to pay interest as all this was
going on, and it is a little difficult to trace just where the
money came from to pay his mother's line of credit and where
the money came from that paid Mr. Davies' mortgage. How do I
sort that out?
Mr.
Langley: Well,
credit card interest is a problem. The accountants obviously
threw up their hands.
My friend, in his cross-examination, said, "Why didn't
you sit down and try and figure out where every dollar was".
And obviously nobody was able to come to grips with that. So they
made a ballpark estimate that the amount of borrowings on some 16
credit cards was at least $150,000.00 and they did a calculation
of 18%. And they came up with the figure which is in the appeal
which is $27,000.00.
We cannot account for every dollar; it is impossible. We
haven't attempted to do that at this trial.
And my friend, in his cross-examination, did pick away at
different parts of it and perhaps the $50,000.00 part of it that
is paying interest for Anne White is not going to be
sustainable.
Nevertheless, the evidence of the taxpayer was that he did take
all of his credit cards, his own credit cards, up to the limit
and put all of that money into the project in some fashion,
running it through the accounts and into accounts that paid
suppliers.
Except for his Laurentian Visa, which we produced the records of,
and if we look at those you will see that is the one he
segregated for his personal use. And if you look at those
statements you will see it paying for Sunoco gas and pet food and
so on.
We have to fall back, I think, on the words at the end of
20(1)(c), the usually forgotten words, "or a reasonable
amount in respect thereof, whichever is the lesser", and ask
the court to consider that if the accountant's estimate of
$27,000.00 is too generous, that the court come to a conclusion
that there is some portion of an interest component there on his
own credit cards that he did pay in 1995 that should be
deductible.
If the Anne White credit card is one-third of that, because it is
a $50,000.00 debt, then perhaps the figure is about 14 or
$15,000.00 is the balance. Because all the rest of the credit
cards, I believe, are in his name.
I dislike having to
do so, but like the accountant I too must throw up my hands. I
simply cannot tell from the evidence what amounts were borrowed
on these accounts and invested by Mr. White in the Partnership or
in Maples of Muskoka. Nor do I believe that the evidence is
sufficient to allow me to make a reasonable estimate. Like the
accountant, who understandably did not testify, I could only
guess.
[30]
Equally problematic is that the Appellant did not actually make
the payments to the credit cards and the line of credit. They
were made by Aurora Financial Management Inc. on his behalf. The
Appellant and his counsel seemed to take the view that this was
an unimportant detail. The Appellant said that he supplied Aurora
Financial with the funds to make the payments. Mr. Sood suggested
to him that the funds came not from himself personally, but from
his operating company, J.W. White Associates. Mr. White denied
that, but it is a point on which the evidence is simply not
there. I accept that if, for some reason, a taxpayer chooses to
borrow money, incurring an obligation to pay interest, and then
puts funds in the hands of a corporation with which it, as his
agent, discharges that obligation, then the taxpayer has made the
payment and is entitled to the deduction. Here, however, the fact
that the payments were made by Aurora Financial came out only in
cross-examination, and I was shown no evidence to establish where
it obtained the funds with which it made those payments. The
Appellant testified that Aurora Financial was a corporation owned
by him which he used in connection with this development project.
He should be in a position to show where it obtained its funds,
but that was not done.
[31]
I am not unsympathetic to the position in which this Appellant
finds himself. He is, I think, essentially an honest person who
attempted to carry out this development project for the benefit
of his parents as well as for himself. Events beyond his control
caused it to fail, or at least contributed substantially to that
failure. As I have explained, I have not accepted much of his
evidence, not because he was deliberately untruthful, but because
I find that his vague generalizations were not adequately
corroborated; they were self-serving, and they frequently
appeared to be founded more on what he thinks is fair and
reasonable than on a clear recollection of what actually
happened. In short, his evidence was based largely on guesswork.
He is, unfortunately, a victim of his own failure to keep proper
records from which his borrowing, the application of the borrowed
funds, and the payment of interest in respect of those borrowings
could be demonstrated. By moving funds about through numerous
bank accounts, by failing to have proper books for the
Partnership to record his investment in it, and by failing to
have proper records of his own, he made it impossible to prove
his case. I am, of course, empowered to make reasonable estimates
based on evidence sufficient to support them. However, I am not
empowered to allow deductions based on what would be no more than
a slightly educated guess.
[32]
The appeals will be allowed and the assessments referred back to
the Minister for reconsideration and reassessment on the basis
that the Appellant is entitled to deductions from income under
paragraph 20(1)(c) in the amount of $4,013 for 1994 and
$2,835 for 1995. Counsel may make submissions in writing as to
costs, to be filed with the Registry on or before June 24,
2002.
Signed at Ottawa, Canada, this 23rd day of
May, 2002.
"E.A. Bowie"
J.T.C.C.
COURT FILE
NO.:
1999-1112(IT)G
STYLE OF
CAUSE:
Jeffrey White and
Her Majesty the Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
June 6 and 7, 2001
REASONS FOR JUDGMENT
BY: The Honourable Judge E.A.
Bowie
DATE OF
JUDGMENT:
May 23, 2002
APPEARANCES:
Counsel for the Appellant: Douglas D.
Langley
Counsel for the
Respondent:
Bobby Sood
COUNSEL OF RECORD:
For the
Appellant:
Name:
Douglas D. Langley
Firm:
Wilson, Vukelich
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-1112(IT)G
BETWEEN:
JEFFREY WHITE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on June 6 and 7, 2001, at
Toronto, Ontario, by
the Honourable Judge E.A. Bowie
Appearances
Counsel for the
Appellant:
Douglas D. Langley
Counsel for the Respondent: Bobby
Sood
JUDGMENT
The appeals from assessments of tax made under the Income Tax
Act for the 1994 and 1995 taxation years are allowed and the
assessments are referred back to the Minister of National Revenue
for reconsideration and reassessment on the basis that the Appellant is
entitled to deductions from income under paragraph
20(1)(c) of the Act in the amounts of $4,015 for
1994 and $2,835 for 1995.
Signed at Ottawa, Canada,
this 23rd day of May, 2002.
J.T.C.C.
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