Joseph Michaelson v. Her Majesty the Queen, [1995] 1 CTC 2316

O’Connor J.T.C.C.:—This matter was heard in Toronto, Ontario, on May 13, 1994. It is an appeal pursuant to the informal procedure of this Court concerning the appellant’s taxation years ending January 31, 1988 and January 31, 1989.

Facts In the years in question and prior thereto the appellant carried on his dental practice as a sole proprietorship as required by law. For diverse reasons he ran into financial problems. This necessitated the borrowing of large sums of money. In his income tax returns the appellant sought to deduct from his income the interest on these loans. For the fiscal year ending January 31, 1988 he deducted interest of $28,668 and for the fiscal year ending January 31, 1989 he deducted interest of $40,818. The Minister of National Revenue ("Minister”) assessed and disallowed portions of these amounts. After notices of objection were filed the Minister reduced the "disallowed amounts” to $11,080 and $23,180 respectively.

In the reply to the notice of appeal the respondent states as follows:

6. In so reassessing the appellant, the Minister made the following assumptions of fact:

(i) the appellant operated his dental practise as a sole proprietorship;

(ii) the disallowed amounts were paid in respect of borrowed funds that the appellant withdrew for his own use as drawings from his dental practise;

and

(iii) the appellant did not pay the disallowed amounts in the 1988 and 1989 taxation years pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business or property.

10. He further submits that the disallowed amounts were personal or living expenses of the appellant and that the appellant was properly assessed in accordance with paragraph 18( 1 )(h) of the Act.

At the hearing neither the appellant nor his agent, Alan Kasloff, a chartered accountant, offered satisfactory proof in support of the appellant’s submission that the disallowed amounts should not have been disallowed in whole or in part. The appellant simply stated that the interest expenses related to the running of the business, 1.e., that the amounts borrowed, or a larger portion thereof than what the Minister accepted, were used for the purpose of earning income from the business.

In my opinion the appellant has not discharged the onus of proof which he has. He has not weakened, let alone demolished the Minister’s assumptions.

The only authority cited (by the respondent’s counsel) was the Tax Review Board’s ruling in Kiss v. M.N.R., [1976] C.T.C. 2112, 76 D.T.C. 1093.

The facts in that decision were quite similar to those in the present case. The Board Chairman, Lucien Cardin, Q.C., stated, at pages 2113-14 (D.T.C. 1094-95) as follows:

However, in each of the years 1970, 1971 and 1972 the appellant’s drawings were greater than his net income, and the Minister concluded that a portion of the bank loans negotiated by the appellant in the pertinent years were for the purpose of financing his drawings and his cost of living expenses, and that, consequently, some portions of the interest payments were not amounts of interest paid on money borrowed for the purpose of earning income from the appellant’s practice.

The appellant’s witness, Mr. Irvin W. Harendorf, a chartered accountant, testified that, according to him, the method of calculation used by the assessor was wrong, because it did not take into account the flow of working capital throughout a taxation year, and that there could have been periods in which the bank interest was high because the receivables were not collected quickly enough. This, according to the witness, would not necessarily mean that the appellant withdrew more money for personal expense than his earnings justified.

Even though Mr. Harendorf’s opinion could be partly justified, the onus of proving that the Minister’s calculations are wrong is incumbent on the appellant and, in my opinion, he has not discharged that onus. In the absence of any further evidence, or any suggestion on the part of the appellant as to an alternative method of making the necessary calculations, I can only conclude that the Minister’s assumptions are correct and his method of calculating the allowable portion of the appellant’s interest payments is logical and reasonable....

Although in the Kiss decision there was some analysis of the Minister’s calculations, that was not done in the present case. Nevertheless I am prepared to accept the general principle of that decision that the appellant has the onus to prove that the Minister’s calculations are incorrect. This was not done and consequently the appeals are dismissed.

Appeals dismissed.