Date: 19990823
Docket: 97-368-IT-G
BETWEEN:
MICHAEL W. TESLUK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
ISSUE
[1] After some discussion respecting the Notice of Appeal and
after much evidence concerning the unfortunate experiences of the
Appellant, the issue was stated to be whether the Appellant, for
his 1989, 1990, 1991, 1992 and 1993 taxation years, was entitled
to deduct certain legal costs, certain interest costs and a
terminal loss in respect of a building purchased by the Appellant
and his partner for their law practice.
[2] The Appellant and one J. Paul Fletcher
("Fletcher") under an Agreement of Purchase and Sale
dated November 11, 1986 purchased a two-storey house for $10,000.
Penalty amounts totalling $8,000 for non-removal of the building
from its original site increased the property cost to
$18,000.
[3] A document entitled GROUND LEASE is shown to have been
made on May 13, 1987. Under this document one William George Trip
("Trip") leased land to the Appellant and Fletcher.
They planned to move the house to this site. After moving the
building to the leased site the Township refused to issue a
building permit. Litigation resulted in an order of the Supreme
Court of Ontario on December 20, 1989 ordering the Appellant,
Fletcher and Trip to remove the building from the lot and
restraining them from occupying the building so long as it was
located on that lot. In addition, a number of writs of seizure
and sale against the Appellant and Fletcher were issued both with
respect to costs of and connected with the building, and a bank
loan said to have been made for operating purposes.
[4] The Appellant and Fletcher occupied the building until
Township supplied services were terminated. After their departure
they continued to use a portion of the building for file storage
until vandals broke in and set a fire which burned the entire
back portion. The Appellant was unable to specify the date of the
fire. The building was demolished on July 28, 1994.
[5] The Appellant filed returns of income for his 1989 to 1993
years inclusive, all dated January 25, 1995. In those returns he
declared amounts of income and claimed deductions as follows:
1989
Income $35,299.05
Deducted "Allowable business investment loss" re
office building $35,299.05
1990
Income - $69,019.45
Deducted "Allowable business investment loss" re
office building $69,019.45
1991
Income - $38,953.23
Deducted "Allowable business investment loss" re
office building $38,953.23
1992
Income $41,201.00
Deducted "Allowable business investment loss" re
office building $41,201.00
1993
Income $31,958.87
Deducted "Non-capital losses of other years" re
office $31,958.87
[6] Appellant entered as an exhibit a document prepared by
Manik B. Datta CMA, entitled
"Re Your Personal Income Tax
1989-1993
Computation of Losses and
Revised Taxable Income"
He stated that he was seeking relief based upon it. That
document, other than the computation sheets attached to it, reads
as follows:
MANIK B. DATTA, CMA
Certified Management Accountant
_______________________________________________________
Mr. Michael W. Tesluk, LL.B.
Barrister and Solicitor
Pickering, Ontario
March 11, 1999
Re Your Personal Income Tax
1989-1993
Computation of Losses and
Revised Taxable Income
__________________________________
Further to my letter dated February 4, 1999 please note I have
deducted interest costs from your income, based on the
information provided by you. Your revised taxable incomes are as
under:
1989 income as filed $ 35,299
Legal costs (2,215)
Interest costs – See Sch A (741)
32,343
Terminal Loss (32,343)
1989 taxable income Nil
Non-capital loss carried forward:
($92,124 * - $32,343)
*See my letter dated February 4, 1999 $ 59,781
1990 income as filed $ 69,019
Interest costs – See Sch B (5,523)
Non-capital loss brought forward (59,781)
Revised taxable income – 1990 $ 3,715
1991 income as filed $ 38,953
Legal costs (5,215)
Interest costs – See Sch C (14,866)
Revised taxable income – 1991 $ 18,872
1992 income as filed $ 41,201
Legal costs (4,046)
Interest costs – See Sch D (17,525)
Revised taxable income – 1992 $ 19,630
1993 income as filed $ 31,958
Legal costs (6,412)
Interest costs – See Sch E (21,386)
Revised taxable income – 1993 $ 4,160
I hope the above computations meet with your requirements. If
you require any clarification in this regard, please give me a
call.
Yours truly,
"signature"
M. B. Datta
When this document was entered as an exhibit the Appellant set
forth his quest of this Court as outlined in the description of
the issue above.
[7] The Appellant cannot succeed in his argument respecting
the deduction of a "terminal loss". The combination of
subsection 20(16) and 13(21) of the Income Tax Act
("Act") provides that a terminal loss arises at
the end of a taxation year when a taxpayer has an undepreciated
capital cost of appropriate depreciable property and no longer
owns any property of that class. The evidence indicated that the
purchase price of the building by the Appellant and Fletcher, as
aforesaid, $18,000.
[8] The Appellant explained that an additional sum of $74,124
should be added to the total capital cost of the building thereby
totalling $92,124. The sum of $74,124 is made up as follows:
(a) $25,000 awarded to 376314 Ontario Limited by order of the
Ontario Court (General Division) payable by the Appellant and
Fletcher,
(b) $12,402.16 awarded to the Canadian Imperial Bank of
Commerce by the Ontario Court of Justice (General Division)
payable by the Appellant and Fletcher,
(c) $25,299.45 awarded to The Royal Bank of Canada pursuant to
Court Order payable by the Appellant and Fletcher, and
(d) $11,422.35 awarded to The Royal Bank of Canada pursuant to
Court Order payable by the Appellant and Fletcher.
[9] The Appellant alleges that the above sum of $25,000
related to a loan which he and Fletcher used primarily to move
the building. The Appellant was not able to confirm the exact
amount of the loan proceeds used for that purpose and no
documentation in respect thereof was presented. He also
acknowledged that any amounts in excess of payments for moving
the building would be included in the general accounts for their
law practice.
[10] The Appellant alleges that the execution in favour of the
Canadian Imperial Bank of Commerce related to funds borrowed to
pay a commission to a real estate broker in acquiring the
building and negotiating the lease for the land to which the
building was moved. The Appellant was unable to confirm the exact
amount of the loan or the commission payments and provided no
documentation with respect thereto.
[11] Both the Appellant and Fletcher confirmed that the two
execution amounts in favour of The Royal Bank of Canada
represented an operating loan and overdraft for their law
practice, thus having nothing to do with the cost of the
building.
[12] The Appellant alleges that the disposition of the
building took place in 1989 and that the terminal loss arose at
that time. No evidence was adduced as to the value of the
building in that year and no evidence was adduced to indicate
that the building was not used by them in that year.
[13] The aforesaid sums could not all be added to the cost of
the building. In addition, the Appellant had a half interest only
in the building and even if such terminal loss arose the
Appellant would be entitled to only one-half thereof.
[14] The evidence indicated that even after the Appellants
moved their law practice from this building they continued to use
a portion of the second floor to store closed files from their
law practices until a portion of the building was damaged by
fire. The testimony of neither the Appellant nor Fletcher
produced a date or year in which the fire occurred. It is,
therefore, not clear that the building was disposed of before its
demolition in 1994. Accordingly, it was not established that a
terminal loss arose during any of the years under appeal and the
deduction claim for same is disallowed.
[15] The Appellant also claimed as a deduction for legal costs
and interest the following amounts:
|
Year
|
Legal Costs
|
Interest Costs
|
|
|
|
|
|
1989
|
$2,215
|
nil
|
|
1990
|
nil
|
$ 5,523.00
|
|
1991
|
5,215
|
14,866.00
|
|
1992
|
4,047
|
17,525.00
|
|
1993
|
6,412
|
21,383.00
|
|
|
|
|
|
Total
|
$17,888
|
$59,297.00
|
[16] The Appellant explained that such costs related to
judgments against him and Fletcher. Both of them acknowledged
that the interest amounts had not been paid. Paragraph
20(1)(c) of the Act provides that in computing
income from a business or property, there may be deducted an
amount paid in the year or payable in respect of the year
(depending upon the method regularly followed in computing
income) pursuant to a legal obligation to pay interest on
borrowed money used for the purpose of earning income of a
business or property. The Appellant failed to establish that he
followed a method of accounting which would permit the deduction
of interest on an accrual basis. Further, the Appellant failed to
establish what proportion of the interest expense above described
was payable by him. Accordingly, no deduction is allowed with
respect to the interest claimed.
[17] The Appellant testified that the legal costs had not been
paid. Apart from the fact that the Appellant did not establish
that such costs were made or incurred by the taxpayer for the
purpose of gaining or producing income from a business or
property he did not establish that he was employing a method of
computing income which might permit deduction on an accrual
basis. Further, it appears that his portion of such costs could
not exceed 50% in any event.
[18] In result, the Appellant fails in respect of all three
claims and his appeal is dismissed.
Signed at Ottawa, Canada this 23rd day of August,
1999.
"R.D. Bell"
J.T.C.C.
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