Taylor,
T.C.C.J.:—
This
is
an
appeal
under
the
informal
procedure,
heard
in
London,
Ontario
on
October
21,
1993,
against
income
tax
assessments
for
the
years
1988,
1989
and
1990,
in
which
the
Minister
of
National
Revenue
assessed
to
tax
the
interest
income
received
from
a
mortgage
held
by
the
appellant
(the
Schlegals
mortgage),
and
disallowed
as
deductions
interest
amounts
paid
on
a
separate
mortgage
(the
Royal
Bank
mortgage).
The
interest
received
arose
from
a
mortgage
taken
back
by
the
appellant
as
part
of
the
proceeds
on
the
sale
of
his
principal
residence.
The
interest
paid
resulted
from
a
mortgage
taken
out
to
complete
the
building
of
a
subsequent
principal
residence.
In
the
first
transaction,
the
appellant
substituted
his
personal
equity
in
the
residence
for
an
income
earning
property
(the
mortgage).
In
the
second
transaction,
he
simply
borrowed
funds
to
acquire
a
personal
asset.
In
my
view
this
is
the
classic
situation
of
leaving
the
interest
paid
outside
the
parameters
for
deductibility
permitted
under
paragraph
20(1)(c)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
It
can
be
said
that
given
these
transactions,
the
taxpayer
ended
up
with
the
worst
of
both
worlds
from
an
income
tax
standpoint.
However,
I
am
not
aware
of
authority
in
the
jurisprudence
which
would
provide
for
the
treatment
of
the
amounts
in
the
manner
which
the
appellant
regards
as
more
equitable.
I
can
appreciate
the
understandable
frustration
of
the
taxpayer
and
the
contention
of
his
counsel
that
the
situation
could
have
been
structured
differently,
thereby
producing
a
different
result.
However
that
is
not
the
case
which
faces
the
Court,
and
the
respondent's
assessment
must
be
upheld.
Paragraph
20(1)(c)
of
the
Act
dealing
with
the
deduction
of
interest,
reads
as
follows,
as
it
is
applicable
to
this
situation:
20(1)(c)
Interest.—
an
amount
paid
in
the
year.
.
.pursuant
to
a
legal
obligation
to
pay
interest
on
(i)
borrowed
money
used
for
the
purpose
of
earning
income
from
a.
.
.-
property.
.
.
.
In
the
instant
case,
the
only
"property"
from
which
interest
was
earned
was
the
Schlegals
mortgage.
The
funds
borrowed
on
the
Royal
Bank
mortgage
were
not
used
for
the
purpose
of
acquirin
or
maintaining
that
property,
but
rather
for
the
acquisition
of
a
personal
residence
.
The
funds
borrowed
on
the
Royal
Bank
mortgage
did
not
earn
any
income
—
therefore
there
is
no
related
income
from
which
the
interest
claimed
may
be
deducted.
This
view
is
expressed
in
the
Bronfman
Trust
v.
The
Queen,
[1987]
1
1S.C.R.
32,
[1987]
1
C.T.C.
117,
87
D.T.C.
5059,
a
Supreme
Court
of
Canada
judgment
and
is
found
on
pages
48-49
(C.T.C.
126,
D.T.C.
5065)
thereof:
In
my
view,
neither
the
Income
Tax
Act
nor
the
weight
of
judicial
authority
permits
the
courts
to
ignore
the
direct
use
to
which
a
taxpayer
puts
borrowed
money.
One
need
only
contemplate
the
consequences
of
the
interpretation
sought
by
the
Trust
in
order
to
reach
the
conclusion
that
it
cannot
have
been
intended
by
Parliament.
In
order
for
the
Trust
to
succeed,
subparagraph
20(1)(c)(i)
would
have
to
be
interpreted
so
that
a
deduction
would
be
permitted
for
borrowings
by
any
taxpayer
who
owned
income
producing
assets.
Such
a
taxpayer
could,
on
this
view,
apply
the
proceeds
of
a
loan
to
purchase
a
life
insurance
policy,
to
take
a
vacation,
to
buy
speculative
properties,
or
to
engage
in
any
other
non-
income-earning
or
ineligible
activity.
Nevertheless,
the
interest
would
be
deductible.
A
less
wealthy
taxpayer,
with
no
income-earning
assets,
would
not
be
able
to
deduct
interest
payments
on
loans
used
in
the
identical
fashion.
Such
an
interpretation
would
be
unfair
as
between
taxpayers
and
would
make
a
mockery
of
the
statutory
requirement
that,
for
interest
payments
to
be
deductible,
borrowed
money
must
be
used
for
circumscribed
income-earning
purposes.
There
is
one
other
case
which
I
have
examined
in
order
to
be
completely
satisfied
that
the
claim
cannot
be
allowed.
It
is
the
case
of
Shore
v.
M.N.R.,
[1986]
1
C.T.C.
2360,
86
D.T.C.
1253
(T.C.C.),
upheld
on
appeal
by
the
Federal
Court-Trial
Division
as
[1992]
1
C.T.C.
34,
92
D.T.C.
6059.
The
situation
in
Shore
was
covered
by
the
provision
of
subsection
20(3)
of
the
Act,
whereas
these
appeals
fall
solely
under
the
provision
of
paragraph
20(1)(c)
of
the
Act.
The
appeals
are
dismissed.
Appeals
dismissed.
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