Louie Dimillo v. Her Majesty the Queen I, [1996] 3 CTC 2347 (Informal Procedure)

Teskey J.T.C.C.: - The Appellant, in his Notice of Appeal herein, appealed his 1993 assessment of income tax, and elected and to have it heard pursuant to the Informal Procedure.

Issue

The sole issue before me is whether the sum of $340,000 borrowed from the Canadian Imperial Bank of Commerce (the “CIBC”), was borrowed for the purpose of gaining or producing income from a business or property.

Section 18 of the Income Tax Act (the “Act”), under the heading “Deductions-General Limitations” contains subsection (1) which reads:

In computing the income of a taxpayer from a business or property no deduction shall be made in respect of ...

Paragraph (a) thereof reads:

an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

Section 20 of the Act has the heading “Deductions permitted in computing income from business or property.” Subsection (1) reads:

(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:

The applicable portion of paragraph 20(1 )(c) reads:

(c) Interest - 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),

(ii) an amount payable for property acquired for the purpose of gaining or producing income therefrom or for the purpose of gaining or producing income from a business (other than property the income from which would be exempt or property that is an interest in a life insurance policy)

Thus, unless the Appellant’s borrowing fits within the provision of paragraph 20(1 )(c), the interest paid on the borrowed money is not deductible from income.

Facts

The Appellant, for 20 years, has been in the business of land development, house building and the purchase and sale of real estate. He has been involved with many different adventures through numerous corporations. His usual procedure when financing was required was to have the corporate entity borrow the required financing from a lending institution and if necessary, to personally guarantee the loan.

In 1990, Re/Max Ultra Realty Ltd. (“Ultra”) was incorporated for the purpose of purchasing realty sales business, an office building, equipment and a Re/Max real estate franchise. The Appellant apparently put up $100,000 and Ultra borrowed from the CIBC a further $550,000. The CIBC loan was guaranteed by the Appellant, Ronald Murray Hewitt (“Hewitt”), Ralph Tessaro (“Tessaro”) and Edward Fletcher (“Fletcher”). Ultra ceased operation in early 1991.

The Minister of National Revenue assumed, when making his assessment, that:

1. No source of income was derived by the Appellant from the Ultra loan guarantee, and

2. Ultra has not filed any income tax returns.

Although the Appellant was invited to give evidence about the viability of Ultra, no direct evidence was forthcoming. Since the original CIBC loan with Ultra was $550,000 and that as of November, 1991 the amount outstanding was only $339,415.77, I conclude the office building and equip- ment had been liquidated to pay down the loan and that Ultra is a worthless, inactive corporate shell.

Although the Appellant said that Ultra purchased land and building, Exhibit A-1, Tab D has a draft unsigned agreement to purchase the franchise and assets. The Schedule “A” list of the assets is not attached. Tab D2 is an Agreement to Purchase the office building on Argyle Street in the Town of Haldimand. The purchasers therein are Barbara Ann Rendall and Yolande Jeanne Hewitt. This again is incomplete. Both agreements are tied to one another.

In October of 1991 the CIBC demanded the Ultra loan be paid in full by the Appellant. In November 1991, the CIBC assigned to the Appellant all its security interest in the defaulted Ultra Loan (Exhibit A-3). The Appellant said that the CIBC took the position that if he did not honour his guarantee on the Ultra loan that it would call all loans and that this could put him out of business.

The Appellant pleaded in paragraph 14 of his Notice of Appeal that he arranged new credit facilities whereby CIBC advanced $340,000 to him for funding the payment of the Ultra guarantee. The Respondent admits this allegation as a fact. However, the Appellant produced a commitment letter from the CIBC to DiMillo Investments Inc. (“Investments”) dated December 4, 1991 wherein the CIBC agreed to loan Investments $340,000. I assume Investments then loaned the $340,000 to the Appellant on the same terms and conditions. There is no evidence on this point. The financial statement for Investments as of March 28, 1991 shows that the CIBC indebtedness as of that date was only $2,132. Thus it is obvious that the Appellant did not borrow the $340,000 from the CIBC but that Investments borrowed the money.

Notwithstanding this factual problem, and assuming the Appellant did in fact borrow the $340,000 and did personally pay the interest thereon, I believe his appeal must fail. In the normal course of events, the payment by a guarantor of a loan to a third party cannot be said to be for the purposes of earning income.

I have a great deal of difficulty accepting the Appellant’s testimony on its face value, when his own exhibits tend to discredit the accuracy of his statements. There is nothing in the exhibits that show his other legal entities owed CIBC any amount of money other than as stated previously. I do not accept that the CIBC was threatening to call all loans as the only loan that has been established is the Ultra loan. Notwithstanding this, even if this was factual, the argument of the Appellant fails. The $340,000 was not borrowed and spent within the meaning of paragraph 20(1 )(c).

I am reminded by the legal principle that “it is not what the taxpayer might have done to minimize taxation that determines the issue but that the taxpayer must abide by the position taken”. This principle is derived from the words of Lord Simon in Commissioners of Inland Revenue v. Wesleyan, 30 TC 11, where he said, at page 25:

In dealing with Income Tax questions it frequently happens that there are two methods at least of achieving a particular financial result. If one of those methods is adopted tax will not be payable.... The net result from the financial point of view is precisely the same in each case, but one method of achieving it attracts tax and the other method does not....

The Appellant did say that he has taken no action against Hewitt, Tessaro or Fletcher. Even if he did and could recover from them, the most he could recover would be three-quarters of the amount paid to the CIBC. Thus the rights acquired from the CIBC against these three individuals cannot be said to be for the purposes of gaining or producing income.

The only way the outlay could possibly be for the purposes of gaining or producing income would be if Ultra was a viable legal entity, doing business at the time the CIBC assigned its financing agreement to the Appellant.

There is no evidence of this whatsoever. For these reasons, the appeal is dismissed.

Appeal dismissed.