Tax Court of Canada Judgments

Date: 20020718

Docket: 2001-2698-IT-I

BETWEEN:

ROBERT GROSSMAN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

McArthur, J.

[1]            The issue is whether the Appellant is entitled to deduct an interest expense of $21,225 in his 1998 taxation year. The Minister of National Revenue (the "Minister") disallowed the deduction on the basis that the borrowed money was not used for the purpose of earning income from a business or property. See paragraph 20(1)(c) of the Income Tax Act (the "Act").

[2]            The Appellant was given several opportunities to appear with counsel and/or his accountant. He was granted an adjournment under specific terms on February 27, 2002. He was granted another adjournment on June 25, 2002.[1] Surprisingly, he was prepared to proceed alone, on June 27, 2002.

[3]            The Minister withdrew the disallowance of a $9,699 Registered Retirement Savings Plan contribution for the Appellant's 1999 taxation year. The Appellant sought to establish that he borrowed $275,000[2] from Central Guaranty Trust in October or November 1992 to purchase shares in a corporation, Sterling Recycling Ltd. ("Sterling"), and that he continued to pay interest on the $275,000 through 1998. He was the only witness and he represented himself. In contrast to the Appellant's evidence, his Notice of Appeal, under the heading "Material Facts Relied Upon", contained the following:

5.              In particular, the appellant borrowed money from his Scotia Line of Credit (A/c No. 4538 xxx xxx 660) for the purpose of making a common share investment in a Canadian-controlled private corporation controlled by the Appellant, called Sterling Recycling Limited.[3]

...

[4]            It was unclear when the Appellant advanced money to Sterling to purchase shares. He stated he made advances for the purchase of the shares in dribs and drabs over the years, commencing with Sterling's incorporation in February 1991, yet the share certificate for his total share ownership being 425 shares, is dated November 18, 1992.[4] The value of each share was set at US$1,000. As evidence of his share purchase, the Appellant entered Exhibit A-1, a bundle of bank transaction slips dated 1992. These transaction slips appear to indicate deposits by the Appellant into Sterling's bank account from time to time over the 1992 calendar year commencing in January. They are difficult to interpret but it would appear that over $60,000 was deposited by the Appellant into Sterling's account over a twelve-month period, the largest amounts appear to be deposits of $9,700 and $9,000 on February 10 and February 21, 1992. There was no evidence as to the source of this money other than the Appellant's statements that it must have been proceeds of a bank line of credit. The Appellant stated that he borrowed $275,000 from Central Guaranty Trust in October 1992 and used this money together with over $300,000 of his own savings to purchase 425 common shares of Sterling at US$1,000 per share. I believe, in Canadian dollars, the price would exceed $540,000. He admitted that some of the money deposited to Sterling was from his family.

[5]            There is no evidence of US$275,000 and US$150,000 being advanced to Sterling in October or November 1992, or any other time, for the purchase by the Appellant of the 425 shares issued to him.

[6]            The Appellant wrote the following explanation to the Canada Custom and Revenue Agency ("CCRA") on April 27, 2000:[5]

With reference to your letter of March 27^th, 2000, please note that I have been claiming this interest deduction since 1992 when I took out a loan from Central Guaranty Trust to purchase shares in Sterling Recycling Ltd. The amount of the loan originally was $430,000 but has since been reduced to approximately $300,000. Each year, since 1992, I have claimed this deduction and submitted an appropriate statement from the lending institution to substantiate my claim.

[7]            The Appellant submits that the transactions that led to his borrowing $275,000 to purchase shares in Sterling included the following:

(i)             On October 30, 1992, Audrey Grossman purchased a home, their principal place of residence, for $455,000. I will refer to it as "Mountbatten Road";

(ii)            On October 30, 1992, immediately after the purchase, Audrey Grossman granted a mortgage to Central Guaranty Trust for $420,000 guaranteed by the Appellant;[6]

(iii)           On November 18, 1992, the Appellant sold their former principal residence, a condominium, for $175,000;

(iv)           On September 13, 1996, Audrey Grossman granted a $280,000 mortgage on Mountbatten Road to the Bank of Nova Scotia;

(v)            The Central Guaranty Trust mortgage was discharged on March 16, 1999;[7]

(vi)           On May 26, 1999, Audrey Grossman granted a $500,000 mortgage on Mountbatten Road to the Hong Kong Bank of Canada;

(vii)          The Bank of Nova Scotia mortgage was discharged on October 25, 1999.

[8]            During the 1990's, Sterling sold shares to outside investors to raise working capital. The Appellant stated that he purchased the majority of Sterling's common shares at the same price as all other share purchasers. Sterling has ceased operation.

[9]            The Respondent submits that the Appellant has not established that he borrowed money and paid interest for the purpose of earning income from a business or property in accordance with paragraph 20(1)(c) of the Act.

Legislation

[10]          Paragraph 20(1)(c) reads in part:

20(1)        ... 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:

...

(c)            an amount paid in the year or payable in respect of the year, ... pursuant to a legal obligation to pay interest on

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

Analysis

[11]          The Appellant had the onus of proving that he paid $21,275 in interest on money borrowed for the purpose of earning income from a business or property. He meets the last criteria in that Sterling is a business or property.

[12]          The problem facing the Appellant is that he has to establish that he in fact paid, with borrowed money, $275,000 to Sterling for common shares. In Singleton v. The Queen, 2001 DTC 5533, at paragraph 29, Major J., stated:

It is now plain from the reasoning in Shell that the issue to be determined is the direct use to which the borrowed funds were put. ...

[13]          I must determine what is the direct use to which the Appellant put the funds that he and Audrey borrowed on Mountbatten road from Central Guaranty Trust. The Notice of Appeal states that the Appellant borrowed "money from his Scotia Line of Credit for the purpose of making a common share investment" in Sterling. The facts do not support this. The Appellant, during his evidence, stated that the $280,000 mortgage (in 1996) proceeds from the Bank of Nova Scotia were used to pay off the Central Guaranty Trust[8] line of credit. The discharge was not registered until March 1999. The Appellant's position at trial was that $275,000 of the $440,000 — Oct. 30/92 Central Guaranty Trust mortgage went towards the purchase of the Sterling shares. These 425 shares had a cost price of US$425,000 or approximately C$540,000.

[14]          The direct use to which the $275,000 was put to must be determined. There is no evidence presented to permit me to conclude that the Appellant used this money to purchase shares. The logical conclusion is that Audrey Grossman used it for the purchase of her new home. The $440,000 mortgage was registered immediately after the deed to her. The deed was registered as #875189 at 4:12 p.m. on October 30, 1992, and the mortgage was registered as #875190 also at 4:12 p.m. on October 30, 1992.

[15]          There was no evidence that the Appellant advanced any significant money to Sterling on or after that date. The Appellant could not explain where the $455,000 came from for Audrey to purchase the Mountbatten home. There is no direct link between the borrowed money and a Sterling share purchase. The documents lead to the conclusion that all the money borrowed by Audrey Grossman on October 30, 1992 was used to purchase the home.

[16]          The often quoted paragraphs in The Queen v. Friedberg, 92 DTC 6031, at page 6033 is equally relevant to the present appeal:

In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax (see The Queen v. Irving Oil 91 DTC 5106, per Mahoney, J.A.). If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the Courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to "correct" documents which clearly point in a particular direction.

[17]          The documents clearly point to a conclusion that the proceeds of the money borrowed from Central Guaranty Trust were used to purchase the home on Mountbatten Road and not to purchase shares in Sterling.

[18]          The appeal for the 1998 taxation year is dismissed, and on consent of the Respondent the appeal for the 1999 taxation year is allowed on the basis that in computing income the Appellant is entitled to claim a deduction in the amount of $13,499.64 as a registered retirement savings plan contribution.

Signed at Ottawa, Canada, this 18th day of July, 2002.

"C.H. McArthur"

J.T.C.C.

COURT FILE NO.:                                                 2001-2698(IT)I

STYLE OF CAUSE:                                               Robert Grossman and

Her Majesty the Queen

PLACE OF HEARING:                                         Toronto, Ontario

DATE OF HEARING:                                           June 25 and 27, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge C.H. McArthur

DATE OF JUDGMENT:                                       July 18, 2002

APPEARANCES:

Agent for the Appellant:                     T. Lacara and the Appellant himself

Counsel for the Respondent:              Joel Oliphant and James Gorham

COUNSEL OF RECORD:

For the Appellant:                

Name:                                N/A

Firm:                  N/A

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-2698(IT)I

BETWEEN:

ROBERT GROSSMAN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal called on June 25 and heard on June 27, 2002, at Toronto, Ontario, by

the Honourable Judge C.H. McArthur

Appearances

Agent for the Appellant:             T. Lacara and the Appellant himself

Counsel for the Respondent:      Joel Oliphant and James Gorham

JUDGMENT

          The appeal from the assessment of tax made under the Income Tax Act for the 1998 taxation year is dismissed.

          On consent of the Respondent, the assessment of tax made under the Act for the 1999 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in computing income the Appellant is entitled to claim a deduction in the amount of $13,499.64 as a registered retirement savings plan contribution.

Signed at Ottawa, Canada, this 18th day of July, 2002.

"C.H. McArthur"

J.T.C.C.