William R. Wilson v. Minister of National Revenue, [1990] 2 CTC 2676, 91 DTC 96

Beaubier, T.C.J.:—This appeal was heard in Saskatoon, Saskatchewan, on October 3, 1990.

Three matters are at issue.

In the first, a joint and several promissory note was signed by Mr. Wilson with his son-in-law, Mr. Smith, in the amount of $26,840 on July 12, 1978, in favour of the Shellbrook Credit Union Ltd. Mr. Smith went bankrupt in 1983 and Mr. Wilson paid a balance of $7,100 on account of principal and $2,505.75 on account of interest and deducted the payments in that year. The deductions were made on the basis that they were payments made on account of guarantees of loans which were entered into for the purpose of gaining or producing income from a business or property.

Mr. Smith and Mr. Wilson testified that Mr. Wilson signed a guarantee on the note and that the proceeds were to be used by Mr. Smith to purchase hogs and a bale wagon which were placed on Mr. Wilson's farm near Canwood, Saskatchewan. They also testified that Mr. Smith worked at caring for and marketing the hogs and also worked on Mr. Wilson's dairy farm without charging for labour. However, the documentation respecting the loan itself, which was contained in an Exhibit book filed as A-1 on behalf of Mr. Wilson shows in the application for loan, dated July 4, 1978, that the borrowers are both Ron Smith and William Robert Wilson, the appellant. It also shows that the purpose of the loan is to purchase hogs for $10,000 and to purchase a bale wagon for $13,000. An additional $3,840 was shown as having a purpose "rent one-half section. . ." (with the remainder of the words not clear). In the same Exhibit, Mr. Wilson's income tax return form for 1978, at the bottom of the capital cost allowance schedule shows in writing the words “bale wagon $13,000.00 no C.C.A. used". Then in his 1979 income tax return contained in Exhibit A-1 Mr. Wilson shows a bale wagon as an addition to his capital cost allowance schedule with a cost of $13,000. Furthermore, in 1978, in his statement of farm income and expenses, Mr. Wilson shows a purchase of swine for the price of $10,391. In other words, so far as can be determined from this Exhibit filed, the proceeds of the loan for swine and bale wagon went directly to Mr. Wilson and he depreciated the proceeds used for the bale wagon and deducted the proceeds used for the swine purchase. Nothing can be determined on the evidence concerning the balance of this loan because the application for loan form is indecipherable respecting that matter. Mr. Wilson paid a balance of principal on the note of $7,100 in 1983 and his appeal concerning the reassessment of this payment is denied. He also paid interest on the note in 1983 in the amount of $2,505.75, however, his appeal to deduct the interest so paid is based upon an allegation that Mr. Wilson guaranteed loan to Mr. Smith to purchase a bale wagon and hogs when in fact the evidence is more than conflicting respecting who purchased the hogs and who purchased the bale wagon. Furthermore, the evidence is clear that Mr. Wilson was a borrower, not a guarantor. Finally, and most important, the use of the balance of the loan of $3,840 was not established. Therefore, even if a portion of the interest might be deductible on some basis or other, the appropriate apportionment has not been established in evidence. In these circumstances, the appeal respecting the deduction of payments on account of the alleged guarantee in favour of the Shellbrook Credit Union Ltd. loan is dismissed in its entirety.

The second issue is that on October 23, 1980, Mr. Wilson guaranteed a loan by Farmstart, a Saskatchewan government crown corporation, to Mr. and Mrs. Smith, his son-in-law and daughter. The Smiths failed and went bankrupt in 1983. Mr. Wilson honoured his guarantee and paid Farmstart $57,651 on account of principal and interest in 1983. He deducted this sum in reporting his income in 1983 on the same basis as that already described in issue number one.

The Minister of National Revenue disallowed the deduction of the alleged loss claimed on the basis that it was not incurred for the purpose of gaining or producing income from a business or property of the appellant, The capital claim was disallowed pursuant to paragraph 40(2)(g) of the Income Tax Act. The interest claim was disallowed pursuant to paragraph 20(1)(c) of the Act.

The farm loan offer summary contained in Exhibit A-1 and dated July 28, 1980, duly signed by Mr. Smith, describes the loan and a grant and the usage of the same as follows:

Amount Approved:

It is a fact that Farmstart would not have made the loan to the Smiths or either of them without Mr. Wilson's guarantee. It is clear that Mr. Wilson guaranteed this loan so he could sell his dairy herd to Mr. and Mrs. Smith. Mr. Wilson claims that he also entered in the guarantee for the purpose of obtaining an agreement [with] Mr. and/or Mrs. Smith for a lease of the farm with option to purchase. As a consequence, he claims that the guarantee was for the purpose of producing income because it would enable Mr. and Mrs. Smith to enter into the lease agreement with him. Mr. Wilson also claims that the lease option agreement was entered into in writing and that it is missing because the realtor who drew it has gone out of business. The only evidence respecting the alleged rent is the fact that in the first year of the alleged lease Mr. Wilson reported $10,000 worth of unidentified rent income on his income tax return. Thereafter, both Mr. Wilson and Mr. Smith testified that no rent was paid or received.

Paragraph 4 of the offer dated July 28, 1980 by Farmstart required as a condition for the loan that Smith obtained a "formal operating agreement with William Robert Wilson covering the use of facilities and machinery". In other words, the Farmstart agreement indicates that an "operating agreement" must be obtained as a condition for approval of the loan. No "operating agreement" was filed as an exhibit.

By contrast Mr. Wilson's statement is that he signed the guarantee for the purpose of a lease and the income to be obtained therefrom. The question is, therefore, was Mr. Wilson's purpose to sell the herd and farm to Mr. Smith or was Mr. Wilson's purpose to lease the farm to Mr. Smith for the purpose of gaining income or was it both? Viewed in total, and having particular regard to certain matters successfully raised by the counsel for the Crown in cross- examination which indicated that Mr. Wilson was not telling the truth, to other questions concerning Mr. Wilson's credibility already raised in this judgment, and to the fact that the lease option agreement and other crucial documents are missing, this Court finds that Mr. Wilson has failed to establish that his purpose for guaranteeing the loan was to obtain rental income. Therefore, his appeal respecting the reassessment of the payment to Farmstart of $57,651 in 1983 is dismissed.

The third matter raised in the appeal relates to the cost to Mr. Wilson of four quarter sections of land sold by him in 1983.

With respect to the adjusted cost base of the four quarter sections sold by the appellant in 1983, the Court accepts the Minister's submission that the value of the land in question as at December 31,1971 is $27,500. In particular, while substantial cross-examination was done respecting comparable sale number four for the purpose of relating certain multipliers, it is to be noted that the appraiser allowed for $1,000 worth of buildings when he dealt with it for the purpose of his final appraisal. Therefore, this comparable, taken with the others, is acceptable and suitable in verifying the Minister's submission that the value of land in question as at December 31,1971 is $27,500.

To the sum of $27,500 now determined as the adjusted cost base of the land in 1971, the taxpayer wishes to add certain improvements made to the land since 1971 which he swore had not been used by him for capital cost allowance because he did not need them in the years between their installation and the sale. However, the taxpayer did not file any copies of his income tax returns for the years from 1971 to 1978, during which period he alleged these capital cost allowance items were not taken. He stated that these returns were missing since a fire which was not otherwise described. On the other hand, the 1978 income tax return does identify certain claims for capital cost allowance that could be interpreted to be some of the improvements discussed in evidence. Mr. Wilson's credibility is not satisfactory and there is no satisfactory corroboration supporting his testimony respecting this issue. His appeal respecting this issue is therefore dismissed.

Therefore, all of the assessments of the Minister of National Revenue which were appealed by the taxpayer are confirmed.

Appeal dismissed.