Said M Attaie v. Minister of National Revenue, [1985] 2 CTC 2331

Goetz, TCJ [ORALLY]:—This is an appeal by the appellant with respect to his 1980, 1981 and 1982 taxation years. In 1978, the appellant purchased a residence and at that point in time he was expecting money to come from Iran. He took out an open mortgage which left him the option of paying out the mortgage at any time. The amount of the mortgage was $54,000 bearing interest at the rate of 10 /4 per cent. When his money arrived from Iran, in the amount of approximately $96,000, because the market interest rates on term deposits was rising and at that point in time was approximately 14-16 per cent on term deposits, he decided rather than pay out his open mortgage to invest his money in term deposits thereby availing himself of the benefits of earning interest from the term deposits. In his tax returns for the relevant years, he declared as income the moneys he earned on these term deposits as being the difference between the interest rate on his mortgage of 10 /4 per cent and the going interest rate on the term deposits.

In February of 1983, in that the interest rates were now falling in the open market, he decided that he would pay out his mortgage which did not mature for eight or nine months down the line. At the same time, during the relevant taxation years, the appellant deducted the interest that he was paying on his open mortgage as being a cost to him for the moneys that were available to him to earn income. The said deductions were declared in his tax returns. The relevant section of the Income Tax Act, SC 1970-71-72, c 63, as amended, is, of course, paragraph 20(1 )(c) which reads as follows:

20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (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:

(c) an amount paid in the year or payable in respect of the year (depending upon the method regularly followed by the taxpayer in computing his 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),

The question before me is to decide whether it was open to the appellant to deduct the interest payments as an expense, that is, the interest payments on his open mortgage. To do that he has to satisfy the Court that the moneys upon which he was paying interest were the funds or a part of the funds that were enabling him to earn income.

used for the purpose of earning income from a business or property . . .”. The income from the term deposits would clearly be a basis upon which he would have to pay tax, which he did. It comes down to whether I have to follow the decision in Eva M Huber v MNR, [1979] CTC 3161; 79 DTC 936. I note that at the time that that decision was rendered by me, counsel for the Minister cited to me the case of Phyllis Barbara Bronfman Trust v MNR, [1978] CTC 3088; 78 DTC 1752, a decision of the Tax Review Board dismissing the appellant’s appeal, which was also dismissed by the Federal Court — Trial Division ([1979] CTC 524; 79 DTC 5438). These decisions were reversed by the Federal Court of Appeal ([1983] CTC 253; 83 DTC 5243) in favour of the taxpayer-appellant. I can only conclude that I was guided in my decision in the Huber case by the fact that the law that was extant at the time was such that the appellant could not make the deduction sought for in the Huber case which involved a mortgage on a second residential piece of property.

The appellant, in the case before me relies on the decision of the Federal Court of Appeal in Phyllis Barbara Bronfman Trust (supra). That was a case where the trustees of the Bronfman Trust were obligated to make certain allocations to a trust in the relevant taxation years, but rather than encroach upon the trust funds which were earning income, the trustees borrowed money and paid out each year to the trust the amount that they were obligated to pay under the trust, and then they charged the interest on the borrowed money as an expense. Chief Justice Thurlow, in effect says that his attention should not be focused on the use of borrowed money for the capital allocation. He felt that what was important was the effect of such use of borrowed funds. In the Bronfman case (supra), it was to preserve the corpus of the Trust as opposed to this case.

What makes this case different than both the Huber and the Bronfman cases (supra) is, as I pointed out earlier, that the appellant had sufficient funds available to him after having paid interest and principal on his residential mortgage. At that time, he was in the fortuitous position of having a large amount of capital in his hands which he could have deposited and did actually use for the purchase of term deposits on which he earned interest, at the same time he could have paid out the open mortgage on his residential property. I feel that the appellant is in no different position than if the residential property title was clear and he would have been able to, at that point in time, take out a mortgage on the residence and use the funds from that mortgage to earn income from term deposits. Rather than doing that, he took the position that the mortgage funds could be better used in the open market with term deposits. He was happily in a position where he was able to take advantage of a rapidly rising interest rate and, as a result, he decided not to pay off his mortgage, but instead retain the funds that he received from Iran and bought the term certificates.

The fact that the appellant found himself in the position of having money available to take advantage of the rapidly rising interest rates in the open market, to me, puts him in a position where his option of paying out his residential mortgage was dealt with in what I consider a clever and prudent way. If he had tried to borrow money at the point in time, he said the going rates of interest were between 14 and 16 per cent. He would have been foolish in the circumstances to pay off his mortgage and then try to borrow again from whomsoever he borrowed money in the first instance on the residence. Rather, he just let it sit. As I mentioned earlier, had the property been clear, if he had taken out a mortgage for the purpose of purchasing term deposits and charging the interest, he would have been able to do that. I find the appellant in no different position in deciding not to pay out his mortgage at that time. He did pay out the mortgage in 1983 at about the time when the term deposits matured. As the interest rates were going down, there was no advantage to him any longer to maintain the residential mortgage and he paid it out.

The appellant openly declared income in the relevant taxation years on the difference between the mortgage interest rate and the market interest rate. That was his area of income. In his tax returns for the said years, he also declared as a charge the interest rate on the corpus of the mortgage funds. It is somewhat analogous to the Bronfman Trust case (supra), but nevertheless different. To sum it up, the situation was indeed unique. The appellant took advantage of the position in which he found himself and, in my view, he acted quite astutely in doing what he did. His actions were completely open for those relevant taxation years, complete disclosure.

I find on all of the evidence that the deductions that he made on account of the interest on the residential mortgage, under the circumstances — as I says, I repeat unique circumstances of his case — are properly deductible as expenses on funds used for the producing of income from term deposits. I grant the appeal.

Appeal allowed.