Pardaman Singh Malik v. Minister of National Revenue, [1985] 1 CTC 2444, 85 DTC 354

Taylor, TCJ:—This is an appeal heard in Toronto, Ontario on November 21, 1984, against an income tax assessment in which the Minister of National Revenue disallowed as deductions, amounts of interest of $16,122 and $11,544 paid in the years 1978 and 1979. As a result of the hearing the Minister conceded that an amount of $3,224 was properly claimed in the year 1978, and should be allowed as a deduction of that year, since it pertained to certain investment securities. It is understood that amount at least, will be the subject of a reassessment. The balance of the amounts at issue (1978 — $12,898 and 1979 — $11,544) arose since they represented carrying charges on borrowed money, which funds had been used for the purpose of rental properties disposed of by the appellant in July of 1977. As a result of this disposition, certain amounts of non-capital losses were available to the appellant as at the end of the 1977 fiscal year, but while discussed at the hearing, these did not seem to be in dispute.

The appellant essentially raised two arguments in support of the interest deductions claimed. First, they related to the residual bank loan, which arose out of the involvement in the real property noted above, and should therefore be included within the phrase from paragraph 20(l)(c) of the Income Tax Act, SC 1970-71-72, c 63, as amended “borrowed money used for the purpose of earning money from a business or property”; and second, that to retain his employment position as an insurance salesman he was required by his employer to keep current with his financial obligations, and technically therefore was unable to avail himself of the possibility of declaring bankruptcy. In disposing of the first point, counsel for the respondent referred to the case of Paul-Emile Deschenes v MNR, [1979] CTC 2690; 79 DTC 461, and I would further cite Peter G Alexander and Shirley Alexander v MNR, [1983] CTC 2516 at 2517; 83 DTC 459 at 460-61:

On the specific point at issue, counsel for the Minister proposed that the only conclusion to reach from the judgment of the Courts (supra), was that the termination of the business brought to an end any right to deduct interest payments as provided for under paragraph 20(l)(c) of the Act.

The position of the respondent is correct. For the taxation year under appeal, the appellants have not shown that there remained a “source” (subsection 20(1)) from which the interest payment at issue could be deducted. The business, as indicated, had been terminated and the carrying charges from the financial obligations incurred in connection therewith, could not be redirected and deducted from other income, such as employment income.

I am satisfied that the original “source of income” for which the loans had been made, had disappeared and the interest in question could not be charged against that non-existent source during the years.

While it might appear that the above decision could also dispose of this appellant’s second argument, it is not evident to me that the issue of “necessity” was raised in the Alexander case. Inded it would not appear that there existed a “source of income” for Alexander which was threatened in any way — the repayment of the outstanding loan was largely a matter of moral obligation. Further in Alexander (supra) the obligation upon which interest was being claimed in the taxation year at issue, was not even the original obligation taken out for business purposes — a personal residence mortgage had been taken out to replace it. I do not believe that Alexander (supra) precludes the Court giving consideration to the “necessity” plea of this appellant, in effect, that the denied interest deduction should be applicable to the commission income earned and reported in 1978 and 1979. The appellant argued that the interest payments at issue (and indeed eventually the principal payments on the loan) were required in order to preserve this remaining source of income — commissions as an insurance salesman. I would have preferred some more substantive independent verification of the assertion of the appellant that he was required by his employer to maintain the payments. However, that assertion was not seriously challenged by the Minister in my view. Leaving aside the right (or lack of it) on the part of the employer to unilaterally discharge the appellant for reasons of financial instability or insolvency, I am satisfied from the testimony and reference data of the appellant, that this was indeed the case, and that dismissal from his employment as a “commission salesman” would have resulted if the loans had not been properly serviced by him. One could even say that the commission income went directly to servicing these loans, as a priority obligation. The question therefore becomes whether the interest, is deductible because his income is from commissions and comes within the parameters of paragraph 8(1)(f) of the Act. There may be no similar possibility for a regular employee as opposed to a commission salesman, but it is only necessary to examine the provisions of paragraph 8(l)(f) of the Act when dealing with a commission income employee such as Mr Malik. If the amounts claimed were “wholly applicable to that source” (subsection 8(1)), and “for the purpose of earning income from the employment” (paragraph 8(l)(f)) then they would appear to be deductible. I am not faced with phraseology such as “in the performance of the duties of his office”, or “in the course of his employment” (paragraph 8( l)(h) ), only the above conditions from paragraph 8(l)(f).

I have given the “principal” payments on the loans no consideration, because they were not put in issue, but also because it would be difficult for them to escape the exclusions under subparagraph 8(l)(f)(v) of the Act. To that extent the parameters for such deduction for a “commission salesman” appear to be more narrow than for a “businessman”, who might, at least attempt, the deduction of the capital losses under other provisions of the Act. Nevertheless, it has been noted frequently in the jurisprudence, that “commission salesmen”, while employees, enjoy a deduction availability status under paragraph 8(1)(f) of the Act which is remarkably similar to that accorded businessmen. I am quite satisfied that had Mr Malik been in “business” (as simple a process as operating in a corporate structure, perhaps) the deduction of amounts similar to those in dispute here today — under the same circumstances — would have been given serious consideration in an appeal. In support of that assertion I would refer to the case of The Queen v F H Jones Tobacco Sales Co Ltd, [1973] CTC 784; 73 DTC 5577, and the subsequent jurisprudence which relied on it. I would quote from 789 (DTC 5580) of Jones (supra):

. . . The payment of the amount of $115,369.55 by the Jones company was undoubtedly made for commercial reasons, in accordance with ordinary business principles. On this see L Berman & Co Ltd v MNR, [1961] CTC 237; 61 DTC 1 [50, per Thorson, P, at page 247 [1156]:

“There is no doubt in my mind that the appellant made the payments in question as a business person intending to continue in business would reasonably do and that consequently, they were made in accordance wtih the ordinary principles of commercial trading or well accepted principles of business practice and I am unable to find any ground in Section 12(l)(a) for their exclusion.

Even if the appellant had not been legally bound to make the payments that did not prevent them from having been made in accordance with the ordinary principles of commercial trading. There is strong authority for this statement in Usher’s Wiltshire Brewery, Limited v Bruce, [1915] AC 433. In that case the tenants of the appellants’ tied houses were by agreement bound to repair their houses and pay certain rates and taxes. They failed to do so. The appellants, though in no way legally or morally bound to do so, paid for these repairs and paid these rates and taxes. They did so not as a matter of charity, but of commercial expediency, in order to avoid the loss of their tenants, and , consequently, the loss of the market for their beer, which they had acquired these houses for the purpose of affording. It was held that, although they were legally or morally bound to make these payments, yet they were, in estimating the balance of the profits and gains of their business for the purposes of assessment of income tax, entitled to deduct all the sums so paid by them as expenses necessarily incurred for the purposes of their business.’’

In addition, the case of Phyllis Barbara Bronfman Trust v The Queen, [1983] CTC 253; 83 DTC 5243, provides some enlightenment.

I can reach no conclusion, other than that the amounts claimed are deductible from the appellant’s commission income, under the circumstances of this case. I am aware the argument could be raised that the appellant was “preserving” a capital asset in treating the source of commission income in such a way, but that point was not raised by the respondent and I need not deal with it.

The appeal is allowed and the matter is referred back to the Minister for reconsideration and reassessment. The appellant is entitled to party and party costs.

Appeal allowed.