Date: 20010125
Docket: 2000-1044-IT-I
BETWEEN:
FRANK D'ANGELO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
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For the Appellant: The Appellant himself
Agent for the Respondent: Geoffrey Roy (Student-at-law)
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Reasons for Judgment
(Delivered orally from the Bench at Toronto, Ontario, on January 15, 2001)
Bowie J.
[1] This appeal is brought from income tax reassessments for the taxation years 1995 and 1996. The facts of the case are not in dispute. In early 1993, Mr. D'Angelo was living with his family in a house at 163 Palmer Street, in Guelph, Ontario. That house had originally been purchased with mortgage financing, but by February 1993, the mortgage on it had been retired and the house was owned free and clear of any indebtedness. At that time he had a prospect of selling the house to a contractor who wished to make some severances and required consent from the Committee of Adjustments for the severances and for zoning variances in order to use the property. Mr. D'Angelo, with such a sale in anticipation, bought, on an unconditional offer to purchase, a house at 6 Burton Street in Guelph. The purchase price of that house was $212,000, and because of the situation of the vendors, it was necessary to purchase the house with a March 1, 1993 closing date. That closing date was prior to the time when it was possible to get a decision as to the severances and variances required by the prospective purchaser of the Palmer Street residence. Consequently, in order to close the purchase on March 1, 1993, Mr. D'Angelo supplemented his $32,000 down payment on the property with a first mortgage for $136,000 on the Burton Street property, and with a loan from the bank on a line of credit which was secured by a collateral mortgage on the Palmer Street property in the amount of $44,000.
[2] Using these funds, the transaction was closed. Later in the month of March, the Committee of Adjustments considered the applications for severances and variances and turned them down, with the result that the prospective sale of 163 Palmer Street fell through. At that point, Mr. D'Angelo attempted to sell the Palmer Street property, but he was unable to do so, or at least was unable to do so, at a price that he would find satisfactory. He then turned the Palmer Street property into a rental property, and he received rental income in 1995 of $9,200 and in 1996 of $10,800, from which he sought to deduct various expenses, including the interest being paid on the money borrowed to complete the purchase of the Burton Street property.
[3] As a result, the expenses, including that interest, exceeded the income from the property, and he claimed the right to deduct rental losses from his other income under section 3 of the Income Tax Act. He was reassessed by the Minister of National Revenue to reduce those rental losses by the amounts of $14,471 for 1995, and $12,154 for 1996, thereby transforming the losses into profits, upon which the Minister levied income tax.
[4] The sole question in dispute is whether or not Mr. D'Angelo is entitled to include the interest on borrowed money in the expenses charged against the rental income from the Palmer Street property.
[5] The authority for deducting interest from income is to be found in paragraph 20(1)(c) of the Act. But for that provision, there would be no entitlement at all to deduct interest in the computation of income. So far as it is relevant, it provides that there may be deducted, in computing one's income, an amount paid in the year, or payable in respect of the year, by a taxpayer pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business or property.
[6] The question, then, is whether the amounts of $136,000 and $44,000 were borrowed by Mr. D'Angelo for the purpose of earning income from a business or property. His position is that it is through the borrowing of that money that he is able to maintain the Palmer Street property as a rental property, because if he had not borrowed that money he could not have purchased and moved to the Burton Road property, and the Palmer Street property would not have been available to rent. That, I think, sums up accurately his position.
[7] Unfortunately, it is necessary to apply unambiguous provisions of the Act as they are written by Parliament, and I am bound in this matter by the decision of the Supreme Court of Canada in Bronfman Trust v. Canada, [1987] 1 S.C.R. 32, a case which, although not on identical facts, was decided on facts which cannot on principle be distinguished from those before me. In that case the Trust borrowed money to make a certain capital distribution, and having done so then claimed to deduct interest paid on the borrowed money on the theory that if the money had not been borrowed then it would have been necessary to sell assets for the purpose of making the distribution, and that it was to preserve those income-producing assets that the money was borrowed.
[8] Essentially the same argument was advanced to Judge Bowman, as he then was, in Meggitt v. Canada, [1999] T.C.J. No. 667, in which the facts are virtually identical to the facts in this case. There, the taxpayer resided in a property which had a first mortgage on it, moved to another property, and in order to pay for the second property increased the financing on the first property. Judge Bowman held that when the first property became a rental property, the taxpayer was entitled to deduct the interest on the financing which existed on the property prior to its being converted from a residence to a rental property, but was not entitled to deduct the interest on the incremental financing, the purpose of which was to assist with the purchase of the second property, which became the taxpayer's residence.
[9] Judge Bowman referred to the well-known passage in Bronfman Trust,supra, in which Mr. Justice Dickson, as he then was, rejected the same argument when it was advanced there before the Supreme Court of Canada, and made this observation:
... It would be a sufficient answer to this submission to point to the principle that the courts must deal with what the taxpayer actually did, and not with what he might have done ...
I note that the same principle was applied by my colleague Judge Mogan in Michael v. M.N.R., 91 DTC 1076.
[10] These are unfortunate cases, in that it would make little sense for the taxpayer to sell the first property, use the proceeds to buy another property to use as a residence, and then either re-purchase the first property or purchase a property similar to the first property, using financing for that purpose which would then be deductible. Nevertheless, as I said at the outset, I am bound by the decision of the Supreme Court of Canada, and I am bound to apply the clear provisions of paragraph 20(1)(c), which make it clear that it is the direct purpose to which the funds are put that will determine whether or not they are deductible. It is clear in the present case that the borrowed money was used not for the purpose of earning income from a property, but for the purpose of buying a residential property. Indeed, the inequities in this case are somewhat ameliorated by the fact that at the time the Appellant actually entered into the purchase transaction of the Burton Street residence and borrowed the funds to close it on March 1, he had no intention at all of turning the Palmer Street property into a rental property. It was his intention to sell it, and he thought when he borrowed the funds that he was borrowing what would be in effect bridge financing to cover the period between his purchase of his new residence on March 1 and the date at which he would sell the Palmer Street property to the developer. When that sale fell through, he continued with his intention to sell the Palmer Street property, and it was only when it could not be sold at a satisfactory price that he decided to turn it into a rental property.
[11] In any event, the provisions of the Act are clear. They have been interpreted numerous times, including, as I have said, by the Supreme Court of Canada, and by other judges of this Court. I have no alternative but to dismiss the appeals.
Signed at Ottawa, Canada, this 25th day of January, 2001.
"E.A. Bowie"
J.T.C.C.