Bidhu B P Sinha v. Minister of National Revenue, [1981] CTC 2599

D E Taylor:—This is an appeal heard in the City of London, Ontario, on June 25, 1981, against an income tax assessment for the year 1978. There were two specific matters placed in issue — the taxpayer had reported accrued interest income of $2,107.35 in 1978 (which the Minister had allowed in the amount of $527); and the Minister had disallowed as a deduction from interest income an amount of $311.83 of interest paid by the appellant. Further, the appellant raised a question regarding a note on the reassessment notice which read:

Your deduction for non-capital losses of other years for $3,693 has been disallowed.

It was agreed between the parties that the matter of the $3,693 non-capital loss claim would not be placed before the Board — although the Minister’s counsel took on the obligation to review it separately after the hearing. The Board accepted that undertaking from counsel. With regard to the item of $2,107.35 “accrued interest”, the testimony of the appellant showed clearly that such an amount could not have been either “received” or “receivable” in the year 1978) paragraph 12(1)(c) of the Act) and that there was no reason to disturb the assessment in that regard.

On the $311.83 interest expense, the position of the Minister was as indicated in the reply to notice of appeal:

— in or about December, 1977, the appellant negotiated with the Bank of Montreal to repay in installments the principal sum of $4,530 previously borrowed by him as a Canada Student Loan;

— the sum of $311.83 was interest paid by the appellant with respect to the aforementioned loan in the 1978 taxation year;

— the sum of $311.83 was not expended by the appellant for the purpose of gaining or producing income from a business or property;

— the sum of $311.83 was a personal and living expense of the appellant;

— sums expended on account of interest payable for a Canada Student Loan are not deductible by the appellant in the computation of his income as such amounts were not expended for the purpose of gaining or producing income from a business or property within the meaning of paragraph 20(1)(c) of the Income Tax Act, but were personal and living expenses of the appellant within the meaning of paragraph 18(1 )(h) of the Act.

As I understand the history of the $311.83 from the testimony of the appellant, when the time came in 1978 at which he should pay back the loan (as a lump sum), he found he had the option of retaining the funds at a relatively low interest rate, investing them at a higher rate, and paying them back later. He did so, reported the income earned (some $475) in his 1978 tax return, and claimed the interest paid. According to his testimony, he had never required the use of the funds and had reported as income the interest earned by keeping the funds on deposit right from their receipt by him in 1977. Apparently there had been a period when the student loan was interest-free to him. The total of $4,530 was therefore readily available to him at the date in 1978 when he could have repaid it. Good business sense dictated to him that he not repay it but earn some marginal interest by continuing to invest it.

The Minister’s position was that since the funds were borrowed originally for personal reasons, they retained that character during the time material. In support of that proposition, counsel submitted the following case law:

Joel Sternthal v The Queen, [1974] CTC 851; 74 DTC 6646;

Manfred Holmann v MNR, [1979] CTC 2653; 70 DTC 594;

Eva M Huber v MNP, [1979] CTC 3161; 79 DTC 936;

Phyllis Barbara Bronfman Trust v The Queen, [1979] CTC 524; 79 DTC 5438.

The bottom line of the respondent’s position is that the appellant was required in the instant case to report the interest income as taxable income, but not entitled to deduct the alleged “carrying costs” of $311.83 since the money was not borrowed for the purpose of earning income. On the surface that may appear as a rather strange proposition, and it was evident at the hearing that it totally perplexed the appellant. The fact of the matter is that the Minister in this instance is not taking issue that the money was borrowed

— that is clear. The Minister is really saying that the purpose for which the money was borrowed must be to earn income, and unless that purpose (for earning income) is evident in any associated carrying costs, no deduction under paragraph 12(1 )(c) of the Act is permitted.

I have considerable difficulty following the Minister’s line of reasoning when the words of the Act are examined and the cited jurisprudence is reviewed. The critical words in the Act are:

20(1 )(c)(i) “borrowed money used for the purpose of earning income from a business or property. . .

lt is common ground between the parties that the appellant did indeed use the money from the student loan plan to purchase a form of term deposit (a property) from which the interest income some $475) was earned. It is equally common ground that the money was borrowed from the student loan plan. It is the testimony of the appellant that during the year in question the money was not used for the reason it was loaned to him (to further his education) but instead was used to earn income. I fail to see support in the leading case of Sternthal (supra) for the proposition that to claim deductibility of interest paid, the money must be borrowed for the purpose of earning income. At pages 856 and 6649 respectively of Sternthal (supra), the learned judge noted:

Counsel for the Crown argued that . . . in the present case the plaintiff borrowed for the purpose of making loans to his children, not for the purpose of earning

income, and the borrowed money was used for such loans;

However, I do not see the critical part of that phrase to be “borrowed for the purpose of making loans to his children, not for the purpose of earning income” but rather the critical phrase is . . and the borrowed money was used for such loans” (italics mine). Further, on the same page 856 (6649) of that judgment, in reference to the Trans-Prairie case (39 Tax ABC 243; 65 DTC 642; [1970] CTC 537; 70 DTC 6351, it is noted:

and he reasoned that what must have been intended by the section was that the

interest should be deductible for the years in which the borrowed capital was employed in the business . ..

To the degree that one can substitute the term “investment” for business, as it applies to this case, it would seem to me that in the absence of any evidence to the contrary, the appellant is entitled to have the Minister regard his use of the subject borrowed money during the year in question as for “earning income” rather than personal, irrespective of the purpose for which the loan was originally made.

Based upon my appreciation of the Sternthal case (supra), I am prepared to allow that part of the appeal and I find nothing in the other case law cited by counsel which would conflict with that decision. I would also make reference to C A Auld v MNR, 28 Tax ABC 236 and 62 DTC 27 in particular to certain relevant comments made at 236 and 27 respectively.

The appeal is allowed in part in order that the amount of $311.83 should be deducted as an interest expense and the matter is referred back to the respondent for reconsideration and reassessment accordingly. In all other respects the appeal is dismissed.

Appeal allowed in part.