Donald Ralph Day v. Minister of National Revenue, [1984] CTC 2200, 84 DTC 1184

Christie, CJTC [ORALLY]:—In his return of income for 1979 the appellant included in his claims for deductions from total income $1,495.94 as interest on money borrowed to earn investment income. The respondent disallowed this claim and hence this appeal.

The relevant facts as related by the evidence are that in October or November, 1972, the appellant purchased a condominium with what he described as “an attractive, long-term 8.75 per cent mortgage”. The term was, in fact, 35 years, and indeed it was an attractive proposition. The mortgagee was the Bank of Nova Scotia. This transaction enabled him, shortly thereafter, to sell his fully paid-up residence at 252 Keele Street in Toronto for $42,000 or $43,000. This gave him capital for the purposes of investment. In 1970 he had sold a small portfolio of securities to enable him to discharge the mortgage on the Keele Street residence just referred to.

In his notice of appeal, which is dated February 18, 1982, he said:

In 1970 I sold a small portfolio of securities to discharge the mortgage on my principal residence, 252 Keele St. Up until that time I reported and paid income tax on the interest earned without claiming interest expense.

In 1972 I attempted to make better use of the equity in my principal residence by making a change, ie a purchase and sale which resulted in a mortgage on my home and some capital to invest.

From 1973 until 1979 I reported the interest earned on my investment capital, deducted the interest expense, and paid income tax on the difference.

In 1979 my claim for interest expense was disallowed.

Included in those deductions was the interest that was payable under the mortgage with the Bank of Nova Scotia.

As I understand it, the appellant’s position is that the correct perspective to take regarding what transpired is that, when he bought the condominium thereby enabling him to sell the Keele Street property and to use the proceeds as investment capital, he was really borrowing money from the Bank of Nova Scotia, up to the amount of the mortgage, to be used for the purpose of earning income from property, and therefore the interest thereon was properly deductible from his total income pursuant to paragraph 20(1)(c) of the Income Tax Act (“the Act”). I cannot accede to that point of view. The true nature and substance of the transaction in respect of the mortgage is that these funds were borrowed for the purpose of purchasing the condominium as the personal residence of the appellant. Interest payable and funds used for such a purpose are not deductible from total income under the Act.

The appellant made reference in the penultimate paragraph of his notice of appeal to a decision of the Tax Appeal Board in C A Auld v MNR, 28 Tax ABC 236; 62 DTC 27, and said with respect to it that it:

. . . appears to suggest that the emphasis should be placed on the use of the capital funds, rather than the manner of acquisition.

The Auld case was concerned with paragraph 1 l(l)(c) of the Act, which was the predecessor of the current paragraph 20(l)(c). In Auld the Board was not addressing itself to the manner of the acquisition of funds, but to the purpose. It was pointed out that it is not the purpose underlying the borrowing of the money which is relevant, it is the purpose underlying the use of what is borrowed. J D C Boland, who delivered the decision of the Board, said at page 30:

It will probably happen in most situations that the purpose is the same for both the borrowing and the use but where the purposes are different, it is the latter one which is decisive. An example makes the distinction apparent. A may borrow $10,000 to assist him in the purchase of a residence in which he intends to live. However, after the borrowing, he decides not to purchase the house and puts the $10,000 in his unincorporated business, where a business use is made of it. In my opinion, the interest paid on the $10,000 clearly is deductible under section 11( l)(c) as the purpose for which it was used, was to earn income. Although the purpose for which it was borrowed had nothing to do with the earning of income, this is irrelevant.

Finally, I mention that in the notice of appeal and in the evidence adduced here today it is said that, from 1973 to 1979, interest on the appellant’s investment capital, in which is included money represented by the mortgage, was deducted, but in 1979 the deduction was disallowed. Nothing adverse to the respondent can be drawn from the fact that in the taxation years preceding 1979 the appellant’s claim for deductions in relation to the mortgage money passed unchallenged. In Kerr and Forbes v MNR, [1984] CTC 2071; which is a judgment I delivered on the 17th of this month in relation to a farming loss case in British Columbia, I said that:

Having regard to the immense volume of returns filed with the Minister of National Revenue pursuant to section 150 of the Act, it is notorious that each return is not and, as a practical matter, cannot be the subject of special investigation or audit.

The fact that a return may have gone unchallenged in one year does not in any way affect the jurisdiction of the Minister of National Revenue to assess or reassess in respect of a different taxation year or years. Having regard to what I have said, the appeal must be and is dismissed.

Appeal dismissed.