Citation: 2008 TCC 455
Date: 20080807
Docket: 2004-2257(IT)G
BETWEEN:
ROBERT SCRAGG,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowie J.
[1] Mr Scragg appeals from assessments under the Income
Tax Act
(the Act) for the 1999, 2000 and 2001 taxation years. His appeals for
1999 and 2000 are from the disallowance by the Minister of National Revenue of
his claim to deduct interest paid by him during those years on borrowed money
in the computation of his income. His claim for 2001 is for a loss carry-forward,
and it will be governed by the result of the other two appeals.
[2] The deduction that
the appellant claims to be entitled to is governed by subparagraph 20(1)(c)(i)
of the Act, the relevant part of which reads:
20(1) Notwithstanding paragraphs 18(1)(a),
18(1)(b) and 18(1)(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
(a) …
(c) an amount paid in the year or
payable in respect of the year (depending on the method regularly followed by
the taxpayer in computing the taxpayer’s 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),
…
or a reasonable amount in respect thereof,
whichever is the lesser;
I
have emphasized the words that are the subject of controversy in this case.
[3] The appellant is a management consultant, and he has
engaged in a number of businesses over the years, many of them through
corporations owned by him, or possibly in one case by a family trust. His evidence
was that in 1996 he was under considerable financial pressure, and needed funds
to support certain of his business activities. The respondent does not dispute
that Mr. Scragg borrowed $150,000.00 from a business associate on August 6,
1996. Nor is it disputed that he repaid the loan by way of transfer of 30,000
shares in a corporation called Sonic Systems Corporation. The repayment took
place in April 2000, and it is not disputed that the interest was paid, in the
years and in the amounts claimed. The respondent’s position is simply that Mr.
Scragg has not been able to show how the $150,000.00 was used by him for the
purpose of gaining or producing income during the years under appeal.
[4] When he assessed Mr.
Scragg, the Minister assumed the following facts:
a) the appellant has insufficient documentation to support his
claims of interest deductions in the 1999 and 2000 taxation years;
b) the
appellant borrowed $150,000 in August 1996 (the “Loan”);
c) the appellant did not use the proceeds of the Loan to make loans
to the corporations that he wholly owned;
d) the
appellant did not use the Loan for a particular shareholder use;
e) the
appellant cannot trace the proceeds of the Loan to a particular use;
f) the
appellant did not use the Loan to earn income;
g) the appellant received no interest, income or dividend in
respect to any loans made to his wholly owned corporations; and
h) the appellant did not use the loan for the purposes of
earning income from a business or property.
[5] The appellant’s
position is that he used the borrowed funds to provide working capital for
various of his corporations, that those corporations produced income for him in
the form of both profits and management consulting fees, and so the interest
must be deductible under paragraph 20(1)(c)(i) of the Act. The
problem that Mr. Scragg faces in this case, and that he has not been able to
overcome, is the requirement that he discharge the onus of showing that he put
the borrowed funds to an eligible use. The applicable principle was put this
way by Chief Justice Dickson in Bronfman Trust v. The Queen:
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: (emphasis
added)
[6] Mr. Scragg was not
able to produce the books and records of his various companies to which he
testified that he had lent the borrowed money. His evidence was that these were
in the possession of his accountant, and that his accountant had dissolved his
practice without giving Mr. Scragg the records that he requires to prove his
claim. He did, however, have yearend unaudited financial statements for Scragg
Development Corporation (SDC) and 286603 B.C. Ltd. (286603), and a bank
statement of SDC for the month of August 1996. That bank statement shows a
deposit to the bank account of SDC on August 7, 1996 in the amount of
$73,403.41. Mr. Scragg testified that this amount was part of the loan
proceeds, and that it was credited to his shareholder loan account. The balance
sheets of the corporations show the following yearend balances in the
shareholder loan accounts:
|
|
SDC
|
286603
|
|
1995
|
$192,936
|
$121,824
|
|
1996
|
205,632
|
139,469
|
|
1997
|
217,877
|
104,020
|
|
1998
|
200,591
|
|
|
1999
|
176,730
|
|
|
2000
|
270,617
|
|
[7] Mr. Scragg’s
testimony was both confused and confusing. He referred repeatedly to SDC and
286603, as well as three other companies that were at one time involved in the
entertainment industry, as being his companies, without ever making clear how
the shares were actually held, or whether he held shares carrying a right to
receive dividend income. He identified the August 7, 1996 deposit as part of
the loan proceeds, but was unable to say exactly what he had done with the
remaining $76,596.59, other than to aver that some $32,970 of it was applied to
pay his obligation as guarantor of a bank loan for one of his screen production
companies. Here, as elsewhere, he was vague as to the exact amount of the
obligation that he paid.
[8] The following
excerpts from the appellant’s evidence illustrate the lack of precision that
characterized virtually everything he had to say about his business dealings in
general, and his use of the borrowed funds in particular.
The point I’m
trying to make here now is that I in fact was trying to earn income, and that I
was putting this money into general-purpose use for the capital requirements of
my companies, either to pay me back some of the capital – I had paid-up equity
in the companies – pay off loans which I had incurred because of the business,
or to put capital directly into the companies, which the companies subsequently
used as working capital.
…
Now I am under
the impression, rightly or wrongly, if I have paid-up capital in the company
and I am not a large corporation who’s able to have significant capital beyond
my immediate needs, where I can’t have several buckets of money that I can keep
separate from one another, that the CRA recognizes this as being a situation
where money can be and is usually commingled. In this particular case I was the
commingling of that money. If a company needed money, I had to put it in. All
of the companies had paid-up capital and owed money to me. At no time during
the period of that loan did that capital owed to me by Scragg Development, by
the numbered company, by City Centres, reduce below the amount of money of this
loan. In fact it was always significantly higher.
He
said a number of times in one way or another that his companies required the
borrowed funds for their continued existence, and that he had borrowed the
money at a very high rate of interest, and on other unfavourable terms, only in
order to keep his businesses afloat. He also argued at some length that an
examination of the yearend balances of his loan accounts in the various
corporations somehow demonstrated that he had injected the loan proceeds into
these corporations, and that it remained there throughout the period that the
loan was outstanding. His submission was that he needed to say no more than
that to be entitled to deduct the interest that he paid on the loan.
[9] All this evidence
falls far short of discharging the onus that Chief Justice Dickson spoke of in Bronfman
Trust.
The only information concerning the appellant’s shareholder loan accounts
is the yearend balances shown on the balance sheets of the corporations. It is
impossible to tell from these to what extent, if any, the appellant advanced
the loan proceeds to any of these corporations. The increase of about
$12,000.00 in the SDC loan account between 1996 and 1997 certainly does not
corroborate Mr. Scragg’s account of the $73,403.41 deposit as being a credit to
his loan account in that company. Nor is there any useful evidence from which I
could conclude that the borrowed funds, even if they were initially put to an
eligible use, continued in the same use. It was quite apparent from Mr.
Scragg’s evidence that he simply did not know either how he applied the
proceeds initially, or their use in later years, other than in the most general
terms.
[10] I do not wish to
leave the impression that Mr. Scragg was not an honest witness. I have no doubt
that he believed quite sincerely that he had put these loan proceeds to an
eligible use in one or more of his corporations. It was clear throughout his
evidence, however, that he did not have any clear recollection of the specific
application of the funds in question, either initially or throughout the period
of almost four years between the initial borrowing and the repayment. The
quality of the evidence before me as to the use of the borrowed funds is simply
not sufficient to support a claim to deduct the interest that was paid.
Although it was said in a somewhat different context, the following passage
from the unanimous judgment of the Federal Court of Appeal in Njenga v. The
Queen
is equally apposite here:
The Income tax
system is based on self monitoring. As a public policy matter the burden of
proof of deductions and claims properly rests with the taxpayer. The Tax Court
Judge held that persons such as the Appellant must maintain and have available
detailed information and documentation in support of the claims they make. We
agree with that finding. Ms. Njenga as the Taxpayer is responsible for
documenting her own personal affairs in a reasonable manner. Self written
receipts and assertion without proof are not sufficient.
Mr.
Scragg’s evidence can only be characterized as “assertion without proof”, and
as such it is insufficient to discharge the burden of proof that was on him.
[11] The appeals are
dismissed. The respondent is entitled to costs.
Signed at Ottawa, Canada, this 7th day of August, 2008.
“E.A. Bowie”
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