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Docket: 2002-3770(IT)I 2002-3773(IT)I |
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BETWEEN: |
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SOLOMON ISAAC and ALINA ISAAC, |
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Appellants, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeals heard on common evidence, on March 26, 2003, at Toronto, Ontario,
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By: The Honourable Judge A.A. Sarchuk |
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Appearances: |
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Agent for the Appellants: |
Cary N. Selby |
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Counsel for the Respondent: |
Meghan Castle |
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JUDGMENT
The appeals from assessments of tax made under the Income Tax Act for the 1998, 1999 and 2000 taxation years are dismissed.
Signed at Ottawa, Canada, this 30th day of April, 2003.
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"A.A. Sarchuk" |
J.T.C.C.
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Citation: 2003TCC303 |
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Date: 20030430 |
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Docket: 2002-3770(IT)I 2002-3773(IT)I |
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BETWEEN: |
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SOLOMON ISAAC and ALINA ISAAC, |
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Appellants, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Sarchuk J.
[1] These are appeals by Solomon Isaac and his wife, Alina Isaac, from assessments of tax with respect to their 1998, 1999 and 2000 taxation years. In computing income for those years, the Appellants claimed mortgage interest expenses in the amounts of $6,409.51, $6,409.51 and $6,409.51, respectively.[1] In reassessing the taxation years in issue, the Minister of National Revenue disallowed mortgage interest expenses in the amounts of $1,598, $1,816 and $2,630, respectively.
[2] The basic facts are not in dispute. In 1991, the Appellants took out a mortgage with the Royal Bank of Canada in the amount of $200,000 on their personal residence located at 7 Esther Crescent ("Esther") to enable them to finance the purchase of shares in Connectric Systems Inc. From 1991 to 1996, the principal was paid down to a balance of $162,487.66. In that year, the Appellants sold Esther and purchased a new residence at 63 Flamingo Road. The outstanding principal balance of the Esther mortgage was $162,488 when the mortgage was discharged on May 29, 1996. To finance the acquisition of the new residence on May 28, 1996, the Appellants took out a new mortgage with the Royal Bank in the amount of $300,000. It is not disputed that this mortgage represented the amount of $137,512.34 required to complete the acquisition of the new home and $162,487.66 being the remaining balance due and owing to the Royal Bank with respect to the Esther mortgage.
[3] The Appellant Solomon Isaac testified that notwithstanding the existence of one mortgage, there were in fact two loans in existence, the first in the amount of $162,487.66 which represented funds borrowed for the purpose of earning income and the second in the amount of $137,512.34 to acquire the new home at 63 Flamingo Road. On this basis, subsequent to May 28, 1996, the Appellants say they made principal payments only against what they refer to as the "personal loan" of $137,512 and that no amounts were paid against the "loan" of $162,488, being the balance due and owing on what they referred to as the "share purchase loan". Furthermore, Isaac said it was intended that no payments would be made on the "share purchase loan" until such time as the "personal debt" was paid in full. On this basis, the Appellants calculated the amount of interest deductible on the "share purchase loan" as being 7.3% of $162,488 i.e. $11,861.62, 50% of which was deducted by each Appellant. Isaac also noted that since this interest charge did not change from 1998 to 2000 as no principal reduction of the "share purchase loan" had taken place, the same amount was deducted in all years in issue.
Appellants' Position
[4] The Appellants contend that two entirely distinct and separate loans exist, the share purchase loan and the home purchase loan. They argue that the only common factor between these two "loans" is that they were both secured under one mortgage held by the Royal Bank. It is the Appellants' position that the fact that both "loans" were secured under one mortgage does not negate the fact that these are two entirely distinct loans advanced at different times and for different purposes. Accordingly, the Appellants contend that the allocation of the payments made to the Royal Bank in respect of the principal balances can be structured by them as they choose. Accordingly, they chose to pay down the "personal" portion of the principal first, thus reducing the interest relating to the "personal" portion only. Once their "personal" debt was paid off, all subsequent principal payments would be deducted from their "investment loan balance". They further contend that because the interest is paid every month, no compounding of interest upon the "share purchase loan" occurs. Therefore, the business portion of the mortgage has a constant interest expense of 7.3% annually until such time as the personal portion was paid off at which time the business principal would start to decrease. On this basis, the annual deduction of $5,930.80 for the taxation years in issue was correct and ought not to have been subject of a reassessment by the Minister.
Conclusion
[5] I am satisfied that there is no rational basis for the Appellants' proposition that because the "mortgage loan" was obtained for two different purposes, it may be considered by the borrowers for tax purposes as two separate loans. There is in this case but one "loan" agreement between the Bank and the Appellants and both the payments made by the Appellants and the interest incurred in each taxation year were in respect of this single loan.
[6] Subparagraph 20(1)(c)(i) of the Act reads:
20(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:
(a) ...
(c) an amount paid in the year or payable in respect of the year (depending on the method regularly followed by the taxpayer in computing the taxpayer's 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 ...
or a reasonable amount in respect thereof, whichever is the lesser.
[7] It is an accepted fact, as was noted in Tonn v. The Queen:[2]
Subparagraph 20(1)(c)(i), it can be seen, sets out yet another business purpose test, albeit of a rather narrow application, but in other respects much like the tests contemplated by subsection 9(1) and paragraph 18(1)(a). In certain circumstances, and in view of the requirements set out in the Bronfman decision, any given interest expense may have to be allocated ratably between eligible and non-eligible uses to the extent reasonably practical. Such allocation is contemplated by the statutory provision and is not unusual in the case law.
[8] Since there is but one loan, I have concluded that an allocation of interest expenses must be made in each taxation year if the taxpayers are to comply with the provisions of paragraph 20(1)(c) of the Act. In Friedberg v. The Queen,[3] Linden J. made the following comments:
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.
[9] The appeals are dismissed.
Signed at Ottawa, Canada, this 30th day of April, 2003.
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"A.A. Sarchuk" |
J.T.C.C.
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CITATION: |
2003TCC303 |
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COURT FILE NO.: |
2002-3770(IT)I and 2002-3773(IT)I |
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STYLE OF CAUSE: |
Solomon Isaac and Alina Isaac and Her Majesty the Queen |
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PLACE OF HEARING: |
Toronto, Ontario |
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DATE OF HEARING: |
March 26, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge A.A. Sarchuk |
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DATE OF JUDGMENT: |
April 30, 2003 |
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APPEARANCES: |
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Agent for the Appellants: |
Cary N. Selby |
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Counsel for the Respondent: |
Meghan Castle |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
N/A |
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Firm: |
N/A |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |