Smithers v. R., [1998] 3 CTC 2849

Beaubier T.C.J.:

This appeal pursuant to the Informal Procedure was heard at Castlegar, British Columbia on June 11, 1998. The Appellant was the only witness.

The Appellant and his agent stated that they appealed his reassessment for 1993, but there is no record of that Notice of Appeal being filed in the Tax Court of Canada. The only year appealed to this Court is the Appellant’s 1992 taxation year. Paragraphs 6 and 7 of the Reply to the Notice of Appeal read:

6. In reasssessing the Appellant for the 1992 taxation year, the Minister of National Revenue (the “Minister”) disallowed the amount of $10,475.00.

7. In so assessing the Appellant, the Minister made the following assumptions of fact:

(a) expenses in excess of the amount allowed by the Minister were not incurred for the purpose of gaining or producing income from a business or property, but were personal or living expenses of the Appellant;

(b) interest in the amount of $10,757.28 was not deductible as the property on which the mortgage was taken had been disposed of;

(c) interest in the amount of $399.08 on charge card expenditures was incurred with respect to personal or living expenses of the Appellant and was not incurred in order to gain income from a property or business;

(d) disallowed motel expenditures were personal or living expenses of the appellant.

In 1982 the Appellant placed a mortgage with Castlegar Savings Credit Union for $96,000 on his home to secure a loan of that sum. He testified that he used the funds for two purposes:

(i) To pay $60,000 of a $65,000 purchase price for a home in Castlegar. He fixed it up and sold it to Susuts. He had to repossess it and in 1989 he realized the sum of $42,000 from its sale. But he did not pay that to the Castlegar Savings Credit Union. He says he used it in his business. His testimony is that he lost from $11,789 to $36,396 per year in the business from 1982 to 1988 inclusive. In cross- examination the Appellant admitted that he was allowed a capital loss of $15,800 on the Susut house deal in 1987. This testimony, while somewhat disjointed respecting dates, is sufficient to refute assumptions 7(a) and 7(b) insofar as the sum of $60,000 is concerned. In particular, assumption 7(b) is refuted because the property on which the mortgage was taken was the Appellant’s home and it is still owned by the Appellant and subject to the mortgage for $96,000. His testimony that the $42,000 recovered was used in his business was not refuted in any way and is verified by the business losses which, from his testimony, appear to have continued through 1992. The fact that the Appellant was allowed a capital loss on the Susut house deal in 1987 merely means that the sum received from the credit union was capital to finance the house and, on the Appellant’s testimony, thereafter the business. In either event, the interest is deductible. For this reason the Appellant is allowed his appeal insofar as he claims interest respecting $42,000 of the total mortgage of $96,000.

(ii) The Appellant stated that the rest of the money (i.e. $36,000), was used to purchase the Sterling house. However, he had no figures on this transaction or the years in which it occurred. He admitted that he owed the Castlegar Savings Credit Union $122,000 plus some additional money and that it was all mixed up. The evidence did not trace the funds in any manner. Indeed, there were times when the Susut transaction was described as a 1981 deal. Because the evidence before the Court did not meet the necessary standards of tracing funds to establish that the $36,000 relating to the Sterling house was used in 1992 for producing income from a business or property, the claim to deduct interest respecting the $36,000 is dismissed. He failed to meet the onus upon him to refute the Minister of National Revenue’s assumptions respecting this matter.

The Appellant has been a small contractor. He successfully identified the disputed expenditures of $399.08 respecting his charge card and motel expenditures as constituting business expenses. These claims are allowed.

This matter is referred to the Minister of National Revenue for reconsideration and reassessment on the foregoing basis.

., Appeal allowed.