Date: 20000726
Docket: 1999-3657-IT-I
BETWEEN:
KATHLEEN DOLORES FITZGERALD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] This is an appeal with respect to the 1996 taxation year.
[2] On January 14, 1991 the Appellant received an advance of $6,874.42 from her employer, the Nova Scotia Liquor Licence Board (the "Employer"), against her retiring allowance. The Appellant used the money to assist her husband in an application to the Nova Scotia Barristers Society for reinstatement to the practice of law. The application was not successful, and the Appellant did not repay the advance prior to her retirement in 1996. The Appellant did not work at any time in her husband's law practice. Consequently, the Employer recovered the advance from the Appellant's retiring allowance plus accrued interest to June 30, 1996 in the amount of $5,260.36. The balance of the allowance was remitted to Revenue Canada for income tax, directly by the Employer.
[3] The Appellant was initially assessed for the 1996 taxation year by Notice dated June 26, 1997. There were three Notices of Reassessment dated August 18, 1997, December 15, 1997 and May 26, 1998, which are not subject to appeal. One of these Notices, dated December 15, 1997, was made to include the retiring allowance, which was not included in the Appellant's 1996 return. The Appellant maintains that she could not include the allowance because she received no money or a T4 from the Employer. Consequently, she objects to penalties and interest assessed on the portion of her return, arguing that the tax had been paid on time, even if the income had not been reported in her return. A request for relief on penalties and interest has already been refused, and the Minister of National Revenue (the "Minister") denied that the Appellant could not include the allowance in her return.
[4] A fourth Notice of Reassessment, dated July 20, 1998, disallowed interest expenses in the amount of $5,260, which is the interest relative to the advance taken by the Appellant against her retiring allowance. Before this reassessment, the Appellant made a $5,000 payment as partial settlement of her income taxes owing, which resulted in a balance owing of $3,873.46 after the reassessment. The Appellant seeks to support the deduction of the amount advanced as being a business loan, which she maintains should be deductible as it is a loan by way of investment in her husband's future employment.
[5] Further, the Appellant submits that she was part of her husband's law practice, in that Revenue Canada, in 1979, proceeded under section 160 and under subsection 158(2) of the Income Tax Act to assess, enforce and collect tax liability in relation to her husband.
[6] The Minister denies the Appellant's allegation. The Minister assumes that the Appellant was not a partner in her spouse's law practice. According to the Minister, the earnings from the law practice were reported by the Appellant's spouse. Consequently, he states that the funds were not borrowed for the purpose of producing income from business or property owned by the Appellant.
[7] The Appellant in her evidence stated the advance was sought to pay a lawyer to represent her husband in his application to be reinstated as a barrister. The Appellant's husband in his evidence said that the purpose of the advance money was to help a member of the Appellant's family trying to get back on his feet.
ISSUE
[8] Is the Appellant entitled to deduct interest expenses in the amount of $5,260.36 in the 1996 taxation year?
STATUTORY FRAMEWORK
[9] Paragraph 20(1)(c) of the Income Tax Act (the "Act") reads as follows:
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:
...
(c) interest – an amount paid in the year or payable in respect of the year (depending upon 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 (other than borrowed money used to acquire property the income from which would be exempt or to acquire a life insurance policy). [emphasis added]
ANALYSIS
[10] Interest is deductible under paragraph 20(1)(c) with respect of money borrowed for the purpose of earning income from a business. If the money was borrowed for a non business purpose, such as for domestic purposes or to assist a relative, the taxpayer is not permitted to deduct the interest.
[11] The Appellant was not a member in any way of her husband's law practice. Prior to her work engagement in 1979 – she was supported by her husband as a spousal dependant. She did not receive income from her husband's law practice in the sense of being part of the law practice. The advanced funds were not advanced in any sense of an investment. Moreover, no evidence was presented in relation to the terms, conditions and enforceability of the monies from the husband to the wife. The judgment against her in 1979 under section 160 (tax liability with respect to property transferred not at arm's length) does not lead to a conclusion that she was part of her husband's law practice. From the evidence, I conclude the advanced borrowed funds given by her to her husband was for the purpose of helping and assisting her husband to return to the practice of law, and not to produce income for her from business or property. The Appellant is not entitled to deduct the interest expense relating to the advance.
[12] The Appellant also asks this court to review the Canada Customs and Revenue Agency's decision under the "Fairness Package". This court is not legislatively able to review and adjudicate on that decision.
DECISION
[13] The appeal is dismissed.
Signed at Ottawa, Canada, this 26th day of July 2000.
"D. Hamlyn"
J.T.C.C.