[OFFICIAL ENGLISH TRANSLATION]
2000-3116(IT)I
BETWEEN:
FRANÇOIS BINETTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on July 20, 2001, at Québec, Quebec, by
the Honourable Judge Alain Tardif
Appearances
For the appellant: The appellant himself
Counsel for the respondent: Pascale O'Bomsawin
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1996, 1997 and 1998 taxation years is allowed in accordance with the attached reasons for judgment.
Signed at Ottawa, Canada, this 19th day of March 2002.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 22nd day of May 2003.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20020319
Docket: 2000-3116(IT)I
BETWEEN:
FRANÇOIS BINETTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal concerning the 1996, 1997 and 1998 taxation years.
[2] The issues are as follows:
- is the appellant entitled to claim for the 1996, 1997 and 1998 taxation years rental losses generated by an immovable property not belonging to him?
- is the appellant entitled to deduct from his income the carrying charges paid for his spouse's business for the 1998 taxation year?
[3] In making the reassessments here under appeal, the Minister of National Revenue (the "Minister") made the following assumptions of fact, stated in the Reply to the Notice of Appeal (the "Reply"):
[TRANSLATION]
(a) Carmelle Mainguy stated in a notarial contract of sale dated October 30, 1992, that she was married to the appellant, François Binette, in a first marriage, under the regime of separation as to property in accordance with a contract of marriage drawn up by a notary on March 29, 1978, and that there was no agreement between them to vary their matrimonial regime or contract of marriage, and that no application for separation from bed and board, annulment of marriage or divorce had been made;
(b) on October 30, 1992, Carmelle Mainguy and Lucie Coulombe (hereinafter the "purchasers") bought a commercial property located at 959, rue Commercial, St-Jean-Chrysostôme, (hereinafter the "property") for the sum of $120,000 from Jean-Guy Rioux and Joan Proulx (hereinafter the "vendors");
(c) Carmelle Mainguy and Lucie Coulombe paid the vendors the sum of $34,972.65 and assumed the balance owing on the existing mortgage, which was $85,027.35;
(d) the purchasers and their respective spouses took out mortgages on their personal residences totalling $45,000, that is, $22,500 on each residence, to cover the down payment and to make a few improvements;
(e) at the time the building was purchased in 1992, the monthly rents collected totalled $1,270, that is, $520 for the notary's office in the basement, no rent for the business on the ground floor, which was subsequently occupied by the purchasers, and $750 for the three offices on the upper floor;
(f) Carmelle Mainguy and Lucie Coulombe opened a used children's clothing business called "Boutique Les petits mousses" on the ground floor;
(g) during the 1995 taxation year (amended at the hearing), the purchasers closed their store, one tenant went bankrupt and the other tenants left for various reasons;
(h) during the 1998 taxation year, the property suffered significant water damage and required major repairs before certain premises could be leased again;
(i) the appellant provided a number of copies of legal documents attesting to various mortgage and other loans, but none of those documents identifies the appellant as the legal owner of the property described in subparagraph 12(a);
(j) loan statements issued by the Caisse populaire Duberger for the 1996 taxation year were in the names of Carmelle Mainguy and Lucie Coulombe, and the appellant's name does not appear on them;
(k) the appellant provided the Minister with a copy of the lease, signed on June 12, 1999, between the lessors, Carmelle Mainguy and Lucie Coulombe, and the lessee for the rental of the property located at 959, rue Commerciale, St-Jean-Chrysostôme, and the appellant's name does not appear therein as the lessor;
(l) the two owners of the property never at any relevant time sold it in whole or in part to their spouses, one of whom is the appellant;
(m) there is no legal debt between the spouses;
(n) the business income was always reported by the appellant's spouse, Carmelle Mainguy;
(o) the rental income was reported by the appellant's spouse, Carmelle Mainguy, for the 1994 taxation year;
(p) the appellant reported the following rental losses:
Year Gross Income Net Loss
1995 $6,580 ($5,916)
1996 $0 ($8,518)
1997 $0 ($8,897)
1998 $0 ($8,656);
(r) for the 1998 taxation year, the appellant claimed $725 in carrying charges on a loan taken out on September 28, 1998, a portion of which, namely $10,000, was purportedly used to help his spouse start up a new business called "Service à domicile pour vous".
[4] All the facts assumed were admitted by the appellant. These facts are highly relevant facts and, above all, sufficient to dispose of the appeal.
[5] In addition, the appellant explained the context and circumstances of his case. I understood from the appellant's testimony that the plan had originally been conceived in order to enable his spouse to earn income, which in itself was quite legitimate.
[6] To achieve that objective, the appellant had foregone taking part in the potentially income-producing activity, even though he was one of its principal guarantors. The appellant clearly did not want to have to be assessed on that potential income; and that was lawful and legitimate.
[7] The plan never achieved its goal. On the contrary, things deteriorated to the point where not only did his spouse not realize any profits, she incurred losses.
[8] Relying on the attribution provisions of section 74.1 of the Income Tax Act (the "Act"), the appellant argued that he could deduct those losses against his own income. Section 74.1 reads in part as follows:
74.1(1) Where an individual has transferred or lent property [...] either directly or indirectly, by means of a trust or by any other means whatever, to or for the benefit of a person who is the individual's spouse or common-law partner or who has since become the individual's spouse or common-law partner, any income or loss, as the case may be, of that person for a taxation year from the property or from property substituted therefor, that relates to the period in the year throughout which the individual is resident in Canada and that person is the individual's spouse or common-law partner, shall be deemed to be income or a loss, as the case may be, of the individual for the year and not of that person.
. . .
(3) For the purposes of subsections (1) and (2), where, at any time, an individual has lent or transferred property (in this subsection referred to as the "lent or transferred property") either directly or indirectly, by means of a trust or by any other means whatever, to or for the benefit of a person, and the lent or transferred property or property substituted therefor is used
(a) to repay, in whole or in part, borrowed money with which other property was acquired, or
(b) to reduce an amount payable for other property,
there shall be included in computing the income from the lent or transferred property, or from property substituted therefor, that is so used, that proportion of the income or loss, as the case may be, derived after that time from the other property or from property substituted therefor that the fair market value at that time of the lent or transferred property, or property substituted therefor, that is so used is of the cost to that person of the other property at the time of its acquisition, but for greater certainty nothing in this subsection shall affect the application of subsections (1) and (2) to any income or loss derived from the other property or from property substituted therefor.
[Emphasis added.]
[9] At the hearing, I said to the appellant that things would probably have been quite different if there had been profits.
[10] He acknowledged and admitted that a taxpayer may use every lawful means to prepare a financial plan that is likely to have the greatest possible beneficial impact on his tax burden.
[11] Once chosen, however, the plan must be consistent and be complied with in all respects. In other words, the income was to go to his spouse so as to create favourable tax consequences. Thus, under the same plan, he could not benefit from the losses, because those same losses had no effect in his spouse's hands. The appellant wanted to win regardless of the outcome of the venture.
[12] The appellant's method was all the more unacceptable as the strategy had been the subject of no written agreement, the obvious purpose of this being to keep all options open.
[13] In support of his appeal, the appellant referred to the attribution rules in subsection 74.1(1) of the Act.
[14] On the one hand, the appellant argued that his spouse had acted as a nominee, but there was no valid evidence on that point, the only evidence being the appellant's highly self-serving oral explanation.
[15] On the other hand, the title of the appellant's spouse to the property always remained intact; at no time did the appellant hold any undivided share of his spouse's title to the property.
[16] The respondent nevertheless admitted that the mortgage payments and the operating costs with respect to the property had been paid by the appellant taxpayer and that he was repaying a debt contracted by his spouse, a situation within the contemplation of subsection 74.1(3) of the Act; the respondent thus agreed to a partial consent to judgment.
[17] The respondent's partial consent to judgment concerns only a portion of the rental losses claimed, namely the portion equal to the product of the loss from the property multiplied by the ratio between the fair market value at that time of the property transferred by the appellant (the mortgage payments and the operating expenses for the property) and the cost of the property at the time it was acquired. The appellant will thus be entitled to the following amounts:
· For 1996: $8,518 x $9,218 ÷ $60,000 = $1,308.65
· For 1997: $8,897 x $8,897 ÷ $60,000 = $1,319.28
· For 1998: $8,656.32 x $8,656.32 ÷ $60,000 = $1,248.86
[18] The second issue is whether the appellant could deduct from his income the carrying charges on a loan a significant portion of which-$10,000-was lent to his spouse without interest to enable her to start up a business.
[19] The appellant admitted that the loan granted to his spouse was interest-free. The appellant, though, paid interest on money that he had lent without interest. He contended that he could deduct the carrying charges and yet admitted that the interest-free loan was an absolutely non-income producing debt.
[20] Paragraph 18(1)(a) of the Act reads as follows:
18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
(a) General limitation - 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.
[Emphasis added.]
[21] The provisions of the Act are very clear and absolutely do not allow of the appellant's interpretation. The carrying charges claimed were not allowable at all. On this point, I think it useful to reproduce a passage from the judgment by Thorson P. in Royal Trust Company v. M.N.R., 57 DTC 1055, at page 1060:
. . . Thus, it may be stated categorically that in a case under The Income Tax Act the first matter to be determined in deciding whether an outlay or expense is outside the prohibition of section [18(1)(a)] of the Act is whether it was made or incurred by the taxpayer in accordance with the ordinary principles of commercial trading or well accepted principles of business practice. If it was not, that is the end of the matter. But if it was, then the outlay or expense is properly deductible unless it falls outside the expressed exception of section [18(1)(a)] and, therefore, within its prohibition.
[Emphasis added.]
[22] The appellant could not personally claim the carrying charges paid to enable his spouse to invest in a business, particularly since the loan charges produced absolutely no income in his hands.
[23] The appeal is accordingly allowed and the matter is to be referred back for reconsideration and reassessment on the basis that the appellant is entitled solely to the expenses indicated hereunder for the taxation years in question:
· For 1996: $8,518 x $9,218 ÷ $60,000 = $1,308.65
· For 1997: $8,897 x $8,897 ÷ $60,000 = $1,319.28
· For 1998: $8,656.32 x $8,656.32 ÷ $60,000 = $1,248.86
Signed at Ottawa, Canada, this 19th day of March 2002.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 22nd day of May 2003.
Erich Klein, Revisor