Zeitz v. The Queen, docket 2002-725(IT)I (Informal Procedure)

Date: 20020813

Docket: 2002-725-IT-I

BETWEEN:

ROLAND R. ZEITZ,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Beaubier, J.T.C.C.

[1]      This appeal pursuant to the Informal Procedure was heard at Nanaimo, British Columbia, on July 26, 2002. The Appellant testified and called Robert Campbell. The Respondent called the auditor on the file, Michael Hoddinott, to testify.

[2]      Paragraphs 1 to 7, inclusive of the Reply to the Notice of Appeal outline the matters at issue. They read:

1.          He admits the following allegations of fact stated in the Notice of Appeal:

a)          the mortgage was obtained solely for the development of our farm;

b)          there was no other need for these monies;

c)          we spent all of the mortgage monies on our farm.

2.          He has no knowledge of and does not admit any of the other allegations of fact stated in the Notice of Appeal and puts the Appellant to the strict proof thereof.

3.          The Minister of National Revenue (the "Minister") initially assessed the Appellant for the 1998 and 1999 years on May 6, 1999 and May 4, 2000.

4.          In computing income for the 1998 and 1999 taxation years the Appellant reported revenue and expenses from Blueberry Lane Farm as detailed on Schedule "A".

5.          By reassessments, notices of which were dated June 21, 2001, the Minister reassessed the Appellant's 1998 and 1999 taxation years to disallow expenses claimed by the Appellant as detailed on Schedule "A".

6.          In so assessing the Appellant, the Minister relied on the following assumptions:

a)          the Appellant purchased a 6.3 acre farm and personal residence in October, 1995 in Duncan, B.C. (the "Property") on which he operates as a sole-proprietorship a U-pick blueberry farm called Blueberry Lane Farm;

b)          the Property consists of 6.3 acres of which 1.30 acres is for personal use and 5.00 acres is for farm use;

c)          1500 blueberry plants were planted on the Property in 1995;

d)          the purchase of the Property was financed in part with a mortgage of $145,541.00 which was increased to $158,500.00 in 1996 (the Mortgage);

e)          the principal balance of the Mortgage at January 1, 1998 was $154,834.43;

f)           the value of the Property at September 27, 1995 as appraised for the Royal Bank of Canada for the purpose of a mortgage assessment was as follows:

Land	$110,000.00
Residence and improvements	91,863.00
Farm buildings	16,000.00
Total	$217,863.00

                                                                                                                              

g)        a reasonable allocation of the appraised value of the Property to farm use is as follows:

	Appraised Value	Percentage Allocation to Farm Use	Farm Use
Land	$110,000.00	5/6.3 = 79%	$ 86,900.00
Farm Building	16,000.00	100%	16,000.00
Residence	91,863.00
Total	$217,863.00		$102,900.00

h)        interest paid on the Mortgage in 1998 and 1999 was $8,695.37 and $9,215.29, respectively;

i)         a reasonable allocation of total interest paid on the Mortgage to the business use of the borrowed funds in 1998 and 1999 is as follows:

                      1998 - $8,695.37 X 102,900/217,863 = $4,086.82

                      1999 - $9,215.29 X 102,900/217,863 = $4,331.49

j)         interest expense claimed by the Appellant in the amounts of $3,738.00 in 1998 and $2,983.00 in 1999 (the "Disallowed Interest Expense") were not amounts paid in the year pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business or property;

k)        the Appellant and his spouse own a dog and cat as family pets residing on the Property (the "Family Pets");

l)         the Appellant deducted from farm income the following amounts in the 1999 taxation year as expenses in respect of the care of the Family Pets (the "Pet Expenses"):

Item	Amount
Veterinary bills for dog	346.00
Pet food (claimed as feed expense)	392.00
Electric fence to contain dog	441.00

                     

m)       the Pet Expenses are personal living expenses of the Appellant.

B.         ISSUES TO BE DECIDED

7.          The issue is whether the Minister has properly disallowed the Disallowed Interest Expense and the Pet Expenses.

[3]      Assumptions a) to j) inclusive and l) were not refuted by the evidence. Assumptions k) and m) are in dispute.

[4]      Subparagraph 1c) is wrong. Mr. Zeitz testified that the funds received on account of the mortgage were put in a bank account and that not all of them have been used as yet. He did not provide cheques or an accounting of the mortgage funds to the auditor or to the Court. He testified that he had mixed funds from his pensions and the mortgage for the purpose of spending on the farm. Thus, these two references to the mortgage funds are somewhat at odds to one another. However, Mr. Zeitz either could not, or would not, trace the mortgage funds.

[5]      In Bronfman Trust v. Canada, [1987] 1 S.C.R. 32, the Supreme Court of Canada said:

I agree with Marceau J. as to the purpose of the interest deduction provision. Parliament created s. 20(1)(c)(i), and made it operate notwithstanding s. 18(1)(b), in order to encourage the accumulation of capital which would produce taxable income. Not all borrowing expenses are deductible. Interest on borrowed money used to produce tax exempt income is not deductible. Interest on borrowed money used to buy life insurance policies is not deductible. Interest on borrowings used for non-income earning purposes, such as personal consumption or the making of capital gains is similarly not deductible. 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: see, for example, Mills v. Minister of National Revenue, 85 D.T.C. 632 (T.C.C.); No. 616 v. Minister of National Revenue, 59 D.T.C. 247 (T.A.B.).

Mr. Zeitz failed to trace the mortgage funds so as to account for their use for deductible purposes. Therefore this portion of the appeal is dismissed.

[6]      Mr. Zeitz testified that the dog and cat in question (the "animals") are kept outside and that they never had animals for 25 years before they acquired the farm. Neither is purebred. The cat was a wild cat. The dog is a mongrel. He roamed at first and bothered the neighbour's sheep. Mr. Zeitz testified that the fencing was used to train the dog. He testified that wild animals, such as deer and rats, love to eat blueberries and that the cat and dog were acquired to, and are able to keep them away. He is believed. Questions were raised about pet food being necessary if these animals eat mice and rats, but the "frightening" aspect of these animals on a small berry acreage in a rural setting appears to the Court to warrant their business use to help preserve the berry crop. For this reason, this portion of the appeal is allowed.

[7]      The appeal is allowed in the foregoing basis and this matter is referred to the Minister of National Revenue for reconsideration and reassessment accordingly.

          Signed at Saskatoon, Saskatchewan, this 13^th day of August, 2002.

"D.W. Beaubier"

J.T.C.C.

COURT FILE NO.:                             2002-725(IT)I

STYLE OF CAUSE:                           Roland R. Zeitz v. Her Majesty the Queen

PLACE OF HEARING:                      Nanaimo, British Columbia

DATE OF HEARING:                        July 26, 2002

REASONS FOR JUDGMENT BY:     The Honourable Judge D. W. Beaubier

DATE OF JUDGMENT:                     August 13, 2002

APPEARANCES:

For the Appellant:                      The Appellant himself

Counsel for the Respondent:      Victor Caux

COUNSEL OF RECORD:

For the Appellant:

Name:                

Firm:                 

For the Respondent:                  Morris Rosenberg

                                                Deputy Attorney General of Canada

                                                          Ottawa, Canada

2002-725(IT)I

BETWEEN:

ROLAND R. ZEITZ,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on July 26, 2002 at Nanaimo, British Columbia, by

the Honourable Judge D.W. Beaubier

Appearances

For the Appellant:                                The Appellant himself

Counsel for the Respondent:                Victor Caux

JUDGMENT

          The appeals from the reassessments made under the Income Tax Act for the 1998 and 1999 taxation years are allowed, without costs, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.

          Signed at Saskatoon, Saskatchewan, this 13^th day of August, 2002.

"D.W. Beaubier"

J.T.C.C.