Date: 19990823
Docket: 97-368-IT-G
BETWEEN:
MICHAEL W. TESLUK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
ISSUE
[1] After some discussion respecting the Notice of Appeal and after much evidence concerning the unfortunate experiences of the Appellant, the issue was stated to be whether the Appellant, for his 1989, 1990, 1991, 1992 and 1993 taxation years, was entitled to deduct certain legal costs, certain interest costs and a terminal loss in respect of a building purchased by the Appellant and his partner for their law practice.
[2] The Appellant and one J. Paul Fletcher ("Fletcher") under an Agreement of Purchase and Sale dated November 11, 1986 purchased a two-storey house for $10,000. Penalty amounts totalling $8,000 for non-removal of the building from its original site increased the property cost to $18,000.
[3] A document entitled GROUND LEASE is shown to have been made on May 13, 1987. Under this document one William George Trip ("Trip") leased land to the Appellant and Fletcher. They planned to move the house to this site. After moving the building to the leased site the Township refused to issue a building permit. Litigation resulted in an order of the Supreme Court of Ontario on December 20, 1989 ordering the Appellant, Fletcher and Trip to remove the building from the lot and restraining them from occupying the building so long as it was located on that lot. In addition, a number of writs of seizure and sale against the Appellant and Fletcher were issued both with respect to costs of and connected with the building, and a bank loan said to have been made for operating purposes.
[4] The Appellant and Fletcher occupied the building until Township supplied services were terminated. After their departure they continued to use a portion of the building for file storage until vandals broke in and set a fire which burned the entire back portion. The Appellant was unable to specify the date of the fire. The building was demolished on July 28, 1994.
[5] The Appellant filed returns of income for his 1989 to 1993 years inclusive, all dated January 25, 1995. In those returns he declared amounts of income and claimed deductions as follows:
1989
Income $35,299.05
Deducted "Allowable business investment loss" re office building $35,299.05
1990
Income - $69,019.45
Deducted "Allowable business investment loss" re office building $69,019.45
1991
Income - $38,953.23
Deducted "Allowable business investment loss" re office building $38,953.23
1992
Income $41,201.00
Deducted "Allowable business investment loss" re office building $41,201.00
1993
Income $31,958.87
Deducted "Non-capital losses of other years" re office $31,958.87
[6] Appellant entered as an exhibit a document prepared by Manik B. Datta CMA, entitled
"Re Your Personal Income Tax
1989-1993
Computation of Losses and
Revised Taxable Income"
He stated that he was seeking relief based upon it. That document, other than the computation sheets attached to it, reads as follows:
MANIK B. DATTA, CMA
Certified Management Accountant
_______________________________________________________
Mr. Michael W. Tesluk, LL.B.
Barrister and Solicitor
Pickering, Ontario
March 11, 1999
Re Your Personal Income Tax
1989-1993
Computation of Losses and
Revised Taxable Income
__________________________________
Further to my letter dated February 4, 1999 please note I have deducted interest costs from your income, based on the information provided by you. Your revised taxable incomes are as under:
1989 income as filed $ 35,299
Legal costs (2,215)
Interest costs – See Sch A (741)
32,343
Terminal Loss (32,343)
1989 taxable income Nil
Non-capital loss carried forward:
($92,124 * - $32,343)
*See my letter dated February 4, 1999 $ 59,781
1990 income as filed $ 69,019
Interest costs – See Sch B (5,523)
Non-capital loss brought forward (59,781)
Revised taxable income – 1990 $ 3,715
1991 income as filed $ 38,953
Legal costs (5,215)
Interest costs – See Sch C (14,866)
Revised taxable income – 1991 $ 18,872
1992 income as filed $ 41,201
Legal costs (4,046)
Interest costs – See Sch D (17,525)
Revised taxable income – 1992 $ 19,630
1993 income as filed $ 31,958
Legal costs (6,412)
Interest costs – See Sch E (21,386)
Revised taxable income – 1993 $ 4,160
I hope the above computations meet with your requirements. If you require any clarification in this regard, please give me a call.
Yours truly,
"signature"
M. B. Datta
When this document was entered as an exhibit the Appellant set forth his quest of this Court as outlined in the description of the issue above.
[7] The Appellant cannot succeed in his argument respecting the deduction of a "terminal loss". The combination of subsection 20(16) and 13(21) of the Income Tax Act ("Act") provides that a terminal loss arises at the end of a taxation year when a taxpayer has an undepreciated capital cost of appropriate depreciable property and no longer owns any property of that class. The evidence indicated that the purchase price of the building by the Appellant and Fletcher, as aforesaid, $18,000.
[8] The Appellant explained that an additional sum of $74,124 should be added to the total capital cost of the building thereby totalling $92,124. The sum of $74,124 is made up as follows:
(a) $25,000 awarded to 376314 Ontario Limited by order of the Ontario Court (General Division) payable by the Appellant and Fletcher,
(b) $12,402.16 awarded to the Canadian Imperial Bank of Commerce by the Ontario Court of Justice (General Division) payable by the Appellant and Fletcher,
(c) $25,299.45 awarded to The Royal Bank of Canada pursuant to Court Order payable by the Appellant and Fletcher, and
(d) $11,422.35 awarded to The Royal Bank of Canada pursuant to Court Order payable by the Appellant and Fletcher.
[9] The Appellant alleges that the above sum of $25,000 related to a loan which he and Fletcher used primarily to move the building. The Appellant was not able to confirm the exact amount of the loan proceeds used for that purpose and no documentation in respect thereof was presented. He also acknowledged that any amounts in excess of payments for moving the building would be included in the general accounts for their law practice.
[10] The Appellant alleges that the execution in favour of the Canadian Imperial Bank of Commerce related to funds borrowed to pay a commission to a real estate broker in acquiring the building and negotiating the lease for the land to which the building was moved. The Appellant was unable to confirm the exact amount of the loan or the commission payments and provided no documentation with respect thereto.
[11] Both the Appellant and Fletcher confirmed that the two execution amounts in favour of The Royal Bank of Canada represented an operating loan and overdraft for their law practice, thus having nothing to do with the cost of the building.
[12] The Appellant alleges that the disposition of the building took place in 1989 and that the terminal loss arose at that time. No evidence was adduced as to the value of the building in that year and no evidence was adduced to indicate that the building was not used by them in that year.
[13] The aforesaid sums could not all be added to the cost of the building. In addition, the Appellant had a half interest only in the building and even if such terminal loss arose the Appellant would be entitled to only one-half thereof.
[14] The evidence indicated that even after the Appellants moved their law practice from this building they continued to use a portion of the second floor to store closed files from their law practices until a portion of the building was damaged by fire. The testimony of neither the Appellant nor Fletcher produced a date or year in which the fire occurred. It is, therefore, not clear that the building was disposed of before its demolition in 1994. Accordingly, it was not established that a terminal loss arose during any of the years under appeal and the deduction claim for same is disallowed.
[15] The Appellant also claimed as a deduction for legal costs and interest the following amounts:
|
Year |
Legal Costs |
Interest Costs |
|
1989 |
$2,215 |
nil |
|
1990 |
nil |
$ 5,523.00 |
|
1991 |
5,215 |
14,866.00 |
|
1992 |
4,047 |
17,525.00 |
|
1993 |
6,412 |
21,383.00 |
|
Total |
$17,888 |
$59,297.00 |
[16] The Appellant explained that such costs related to judgments against him and Fletcher. Both of them acknowledged that the interest amounts had not been paid. Paragraph 20(1)(c) of the Act provides that in computing income from a business or property, there may be deducted an amount paid in the year or payable in respect of the year (depending upon the method regularly followed in computing income) pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income of a business or property. The Appellant failed to establish that he followed a method of accounting which would permit the deduction of interest on an accrual basis. Further, the Appellant failed to establish what proportion of the interest expense above described was payable by him. Accordingly, no deduction is allowed with respect to the interest claimed.
[17] The Appellant testified that the legal costs had not been paid. Apart from the fact that the Appellant did not establish that such costs were made or incurred by the taxpayer for the purpose of gaining or producing income from a business or property he did not establish that he was employing a method of computing income which might permit deduction on an accrual basis. Further, it appears that his portion of such costs could not exceed 50% in any event.
[18] In result, the Appellant fails in respect of all three claims and his appeal is dismissed.
Signed at Ottawa, Canada this 23rd day of August, 1999.
"R.D. Bell"
J.T.C.C.