Date: 19991007
Docket: 1999-1460-IT-I
BETWEEN:
JACKLYN MEGGITT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman J.T.C.C.
[1] These appeals are from assessments for the appellant's 1995 and 1996 taxation years. They involve the deductibility of interest on two mortgages that the appellant had on rental property that she owned at 3690 Milman Road, Merville, British Columbia.
[2] In those years she deducted $19,537.13 and $9,424.44 against her income from renting the property at Milman Road.
[3] In 1994, the appellant and her husband lived at her home on Milman Road, which included five acres of land.
[4] In the spring of 1994, she also acquired a mobile home, which she intended to rent out along with the house. In the fall of 1994, they moved out to another house at 2395 Valley View Drive, Courtenay, British Columbia.
[5] The property on Milman Road was rented to tenants commencing in October 1994. In 1995, the mortgage on the Milman Road property to the Canadian Imperial Bank of Commerce was $121,014.69 and in 1996, $117,568.56.
[6] The house on Valley View Drive cost $195,000. The appellant borrowed $195,000 from Giroday Sawmills Ltd. and placed a mortgage of $136,500 on the Valley View Drive and a second mortgage of $58,500 on the property on Milman Road for a total of $195,000. The result was that the total of the mortgages on Milman Road was $176,068.56 and on Valley View Drive was $136,500.
[7] In June of 1996, the property on Milman Road was sold. Originally the appellant claimed to deduct only the interest on the mortgage of $195,000 from Giroday Sawmills Ltd. The Minister disallowed the claim.
[8] Both parties have modified their positions.
[9] The respondent now concedes that the appellant is entitled to deduct the interest on the CIBC mortgage on Milman Road in the amount of $8,935.91 in 1995 and $4,450.19 in 1996, the amount of interest paid up until the date Milman Road was sold.
[10] The appellant asserts that, in addition to the interest on the CIBC mortgage that the respondent concedes is deductible, she is also entitled to deduct the interest on the second mortgage of $58,500 on Milman Road to Giroday Sawmills Ltd.
[11] In analyzing this question one must look to the decision of the Supreme Court of Canada in Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32. Paragraph 20(1)(c) of the Income Tax Act uses the words "used for the purpose of". Here the appellant stated the purpose of the mortgage of $58,500 on Milman Road was to enable her to retain that property rather than sell it to finance the purchase of Valley View Drive.
[12] On one view of the matter this was the immediate economic purpose of the borrowing. The true purpose must of course be determined. In Les Entreprises Ludco Ltée et al. v. The Queen, 99 DTC 5154 Marceau J.A., speaking for the majority, said at page 5157:
[20] I said earlier that I had no difficulty aligning myself among the traditionalists in the interpretation and application of the Income Tax Act, in the sense that I dispute the thesis that it is the role of the courts to react against attempts at tax planning on the ground that the purpose being pursued appears antisocial. The only relevant considerations are the legal effect of the transaction that was carried out and the strict application of the statutory provision in question, not the intention. But there is an "unless" attached to this proposition, and it is this: unless the Act in question makes intention a dominant consideration. And that is clearly the case with subparagraph 20(1)(c)(i) of the Act.
[21] The wording does not characterize the intention or the purpose referred to in either the French or English version. I, too, have some difficulty seeing how one can introduce characterizations and speak of primary or final or incidental intention, etc., but no one can be in any doubt that what Parliament has in mind is the actual or true, not feigned or merely claimed, intention. It is the factors peculiar to the search for this actual intention that most of the judgements cited earlier have sought to define. As I said, the idea that reliance could be place on the statements of the interested party was quickly rejected. The intention had to be concretely expressed in the use of the funds and confirmed by the circumstances, and accordingly one could speak of "objective intention", startling as the juxtaposition of these two words might be, in itself. And that, I submit with respect, is precisely the approach that the trial judge took in this case.
[22] I said earlier, and I repeat, that to my way of thinking the finding reached by the judge at the conclusion of his analysis was one of fact that this Court should not reject unless it can detect some egregious error in the assessment of the evidence.
[13] The trial judge relied upon the decision in this court in Mark Resources Inc. v. The Queen, 93 DTC 1004 that "the real purpose of the use of the borrowed funds" must be determined. The proposition is axiomatic. Mark Resources is supported by the decision of the Federal Court of Appeal in Ludco. In addition to the numerous cases referred to by Linden J.A. in his dissenting judgment in Singleton v. The Queen, 99 DTC 5362, Mark Resources has been referred to with approval by the Supreme Court of Canada in Hickman Motors Limited v. The Queen, 97 DTC 5363 at page 5372 and by McDonald J.A., speaking for the unanimous Federal Court of Appeal; in The Queen v. Byram, 99 DTC 5117 at page 5120.
[14] The appellant's position here is somewhat reminiscent of an argument advanced in Bronfman. At pages 54-55, Dickson J. said:
Before concluding, I wish to address one final argument raised by counsel for the Trust. It was submitted — and the Crown generously conceded — that the Trust would have obtained an interest deduction if it had sold assets to make the capital allocation and borrowed to replace them. Accordingly, it is argued, the Trust ought not to be precluded from an interest deduction merely because it achieved the same effect without the formalities of a sale and repurchase of assets. 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 what he might have done: Matheson v. The Queen, 74 D.T.C. 6176 (F.C.T.D.), per Mahoney J., at p. 6179. In any event, I admit to some doubt about the premise conceded by the Crown. If, for example, the Trust had sold a particular income-producing asset, made the capital allocation to the beneficiary and repurchased the same asset, all within a brief interval of time, the courts might well consider the sale and repurchase to constitute a formality or a sham designed to conceal the essence of the transaction, namely that money was borrowed and used to fund a capital allocation to the beneficiary. In this regard, see Zwaig v. Minister of National Revenue, [1974] C.T.C. 2172 (T.R.B.), in which the taxpayer sold securities and used the proceeds to buy a life insurance policy. He then borrowed on the policy to repurchase the securities. Under s.20(1)(c)(i) the use of borrowed money to purchase a life insurance policy is not a use entitling the taxpayer to an interest deduction. The Tax Review Board rightly disallowed the deduction sought for interest payments, notwithstanding that the form of the taxpayer's transactions created an aura of compliance with the requirements of the interest deduction provision. The characterization of taxpayers' transactions according to their true commercial and practical nature does not always favour the taxpayer. The taxpayer Trust in this appeal asks the Court for the benefit of a characterization based on the alleged commercial and practical nature of its transactions. At the same time, however, it seeks to have the commercial and practical nature of its transactions determined by reference to a hypothetical characterization which reflects the epitome of formalism. I cannot accept that it should be allowed to succeed.
[15] The appellant contends that by borrowing $195,000 she did not need to sell her house on Milman Road, but could continue to use it as a rental property.
[16] This, I think, is precisely the type of argument that was rejected in the passage quoted above from Bronfman.
[17] The real purpose of the use of the borrowed funds here, in accordance with Bronfman, was the purchase of her house on Valley View Drive. The purpose of the use of borrowed funds is not determined by the property against which the borrowing is secured.
[18] It is useful to compare the ratio in Bronfman with that of that decision of the Federal Court of Appeal in Singleton.
[19] Bronfman stands for the proposition that if a trust borrows money to make a distribution of capital to a beneficiary the interest is not deductible. Singleton stands for the proposition that if a partner in a law firm borrows money to give to his law firm so that it has the funds to make an immediate distribution to him so that he can buy a house, the interest is deductible, even though none of the money is used in the law firm's business.
[20] I need not comment further on the Singleton decision. I do not think that it supports the appellant's position. Even if it supported the appellant's position I would be obliged to follow Bronfman with which Singleton is impossible to reconcile. I conclude therefore that the interest on the $58,500 mortgage on Milman Road is not deductible.
[21] The appeals are allowed and the assessments are referred back to the Minister of National Revenue to permit the deduction of $8,935.91 in 1995 and $4,450.19 in 1996, the interest on the mortgage on Milman Road to the Canadian Imperial Bank of Commerce as conceded by the respondent.
[22] The appellant having achieved more than 50% success, albeit as the result of the Crown's concession, is entitled to her costs, if any.
Signed at Toronto, Canada, this 7th day of October 1999.
"D.G.H. Bowman"
J.T.C.C.