Date: 20011018
Neutral citation: 2001 FCA 305
BETWEEN:
DAVID CHRISTOPHER DANSEREAU
Applicant
-and-
HER MAJESTY THE QUEEN
Respondent
Heard at Toronto, Ontario, on October 9, 2001.
Judgment delivered at Ottawa, Ontario, on October 18, 2001.
REASONS FOR JUDGMENT BY: NOËL J.A.
CONCURRED IN BY: LINDEN J.A.
MALONE J.A.
Date: 20011018
Neutral citation: 2001 FCA 305
CORAM: LINDEN J.A.
NOËL J.A.
MALONE J.A.
BETWEEN:
DAVID CHRISTOPHER DANSEREAU
Applicant
-and-
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
[1] This is an application for judicial review of a decision of the Tax Court of Canada under the informal procedure dismissing in part the appeal brought by David Christopher Dansereau (the applicant) from reassessments issued pursuant to the Income Tax Act, S.C. 1970-71-72, c. 63 (the Act), with respect to his 1994 and 1995 taxation years.
[2] The facts briefly stated are as follows. The applicant is a teacher by profession. In 1991 he owned various revenue producing properties which were financed by mortgages. As a result of the real estate recession in Ontario during the early 1990s, all of these properties had to be sold except one described as the "Scone Mill Property".
[3] Some of these properties were sold for less than the mortgaged amounts with the result that the applicant was required by his lenders to place new mortgages on the remaining Scone Mill Property in order to repay these amounts in full. It is the deductibility of the interest payments made on those mortgages that is in issue in the present proceeding.
[4] In disallowing these expenses, the Minister relied on the fact that they were incurred with respect to properties which the applicant ceased to own in 1991. No other assumption appears to have been made.
[5] In support of his appeal before the Tax Court, the applicant argued, based on the decision of the Supreme Court in John M. Tennant v. The Queen [1996] 1 S.C.R. 305, that the borrowed funds could nevertheless be traced to a direct eligible use, namely the preservation of his only remaining income producing property. Alternatively, he argued that the interest payments were made in the course of business and were deductible as such.
[6] The Tax Court Judge disposed of the matter as follows:
In John M. Tennant v. Her Majesty the Queen, Iacobucci, J., speaking for the court, after quoting Dickson, C.J. in Bronfman Trust v. Canada, [1987] 1 S.C.R. 32, stated the following:
Accordingly, in order to deduct interest payments, the taxpayer must establish a link between the current eligible use property, the proceeds of disposition of the original eligible use property, and the money that was borrowed to acquire the original eligible use property.
To repeat, it is implicit in the principles outlined in Bronfman Trust that the ability to deduct interest is not lost simply because the taxpayer sells the income-producing property, as long as the taxpayer reinvests in an eligible use property. However, shares depreciate and appreciate in value, complicating the question of interest deductions. The appellant has replaced one eligible use property with another, and both are directly traceable to the same loan, as the appellant reinvested all the proceeds of disposition.
The Appellant's situation is identical with the situation described by Iacobucci, J. in the above quotations. In other words, the original deductibility of the interest on the loans in question was lost when the power of sale occurred. The Appellant argued that he was in a business and lumped his properties' income and losses together as one entire business. The Appellant did not lead evidence to establish that all of his properties were managed and operated by him as a business, as distinct from being individual properties from which he received rents. Under the precepts adopted by Iacobucci, J., each item of interest is deductible by reference to source and as a result this portion of the appeal must fail.
[7] The applicant attacks this decision on two grounds. First, he submits that the Tax Court Judge misconstrued the decision of the Supreme Court in Tennant when he held that the interest payments could not be deducted because the properties which he owned constituted individual sources of property income. Second, he argues that the Tax Court Judge ignored the evidence before him when he held that no evidence was led to establish that the properties were held in the course of a business.
[8] With respect to the first contention, it is common ground that during the 1994 and 1995 taxation years, the applicant's source of income, if it was from property, had been reduced to the Scone Mill Property. In that context, it cannot be said that interest payments on a loan used to pay back the mortgagees of previously held properties were made for the purpose of earning income from this remaining property.
[9] The Tennant decision is of no assistance to the applicant as no replacement property was acquired with the loans secured by the Scone Mill Property. Rather the funds were used to reimburse the mortgaged amounts on properties which the applicant no longer owned. This is the direct use that was made of the borrowed funds and it is not one that is eligible.
[10] That being said, the use of the borrowed funds takes on an entirely different character if the applicant's rental properties were held in the course of business. If that be the case, what took place in 1991 is the refinancing of these rental properties with the view of allowing the applicant to retain one and remain in business despite the economic downturn.
[11] The Tax Court Judge rejected this contention on the basis that the applicant had not lead evidence establishing that his properties were managed and operated as a business. In my respectful view, the Tax Court Judge in coming to that conclusion either failed to give effect to the meaning of the word "business" under the Act or ignored the evidence before him.
[12] A line must be drawn under the Act between a mere investment in property and an activity or activities that constitute a business. The expansive definition of the term "business" in section 248 is not exhaustive. It extends to any endeavour that occupies time, labour and attention with a view to profit. To the extent that income is derived from human activity rather than from the passive ownership of property, its source can be properly described as business. The distinction must be made in light of the facts and circumstances surrounding each particular case (compare The Queen V. Rockmore Investments Ltd., 76 D.T.C. 6156, per Jackett C.J. at 6157).
[13] Keeping this in mind, these facts and circumstances insofar as they can be gleaned from the evidence are that by 1991, the applicant had an interest in eight properties all of which were rented out to multiple tenants. Some of these tenants rented for five month periods, two month periods and some units were rented during the Christmas period or for weekends (Respondent's application record, p. 35, 36).
[14] The applicant sought out tenants through newspaper advertisements (Respondent's application record, p. 35). The rental and income statements for 1990 and 1991 record in minute details repair and maintenance expenses with respect to all eight properties including - furnace cleaning, painting, cleaning, septic pumping, etc. (Respondent's application record, p. 27, 31, 33, 35, 37). As well these statements reveal that between 1988 and 1991 capital additions, in some cases substantial, were made to six of the eight properties (Respondent's application record, p. 51 to 57).
[15] These properties were all heavily financed and some carried up to four mortgages with different lenders (Respondent's appeal book, p. 59 to 67). All these mortgages had to be negotiated and renewed over time.
[16] No management fee of any sort is shown to have been paid to anyone with the result that the only inference that can be drawn is that the applicant saw to the financing, rental, upkeep and improvement of these properties over the years. The record also reveals that the applicant pooled the income resulting from these endeavours consistent with his view that he ran a business (Respondent's application record, p. 58).
[17] This evidence leads to the inescapable conclusion that the applicant was engaged in the business of managing and operating his properties as opposed to merely collecting rents. As the borrowed funds were used by the applicant to earn income from that business during the two taxation years in issue, the interest paid thereon is deductible pursuant to subparagraph 20(1)(c)(i).
[18] I would allow the judicial review application, set aside the decision of the Tax Court, and remit the matter back with a direction that judgment be given allowing the appeal in full and directing the Minister of Revenue to vacate the reassessments issued with respect to the applicant's 1994 and 1995 taxation years.
"Marc Noël"
J.A.
"I agree.
A.M. Linden J.A."
"I agree.
B. Malone J.A."