October 07, 2011

Thomas J. Allen and Edward R. Milewski (Appellants) v. Her Majesty the Queen (Respondent)

99 DTC 968
Tax Court of Canada
August 12, 1999

(Court File Nos. 97-3096(IT)G and 97-3106(IT)G.)

Deductions — Interest — Taxpayers investing in units of a limited partnership carrying on the business of renting apartments — Taxpayers financing almost all of the purchase price of their said units by arm’s length borrowings on the strength of their own promissory notes — Whether taxpayers entitled to deduct interest on the funds borrowed by them as aforesaid — Whether one taxpayer entitled to deduct his share of the partnership loss sustained by the said partnership — Income Tax Act, R.S.C. 1985 (5th Supp.), c.?1, as amended, ss.?20(1)(c) and 67.

The taxpayers invested in units of a limited partnership carrying on the business of renting apartments. All parties admitted that the partnership business was being carried on with a reasonable expectation of profit. The taxpayers financed almost all of the purchase price of their said units by arm’s length borrowings on the strength of their own promissory notes. In assessing the taxpayers for 1993 and 1994, the Minister disallowed the deductions of the interest that they had claimed in respect of the funds borrowed by them as aforesaid. The Minister’s position was that, because the interest paid by the taxpayers exceeded their income from the partnership, they were precluded from deducting such interest by virtue of the reasonable expectation of profit doctrine. In one taxpayer’s case, the Minister also disallowed his attempt to deduct his share of the partnership loss incurred by the said partnership during his 1993 taxation year. The taxpayers appealed to the Tax Court of Canada.

Held: The taxpayers’ appeals were allowed. The Minister had completely misapplied the reasonable expectation of profit doctrine in resorting thereto in support of his assessments. The taxpayers had invested in a perfectly viable business, with no personal element involved. On the other hand, the Minister was improperly seeking to limit the deductions of the interest involved by intoning the ritual incantation respecting the reasonable expectation of profit doctrine in the paragraph 20(1)(c) context. It was obvious, however (and it was also admitted), that the partnership was carrying on a profitable business. The Minister’s approach, moreover, was ignoring the plain meaning of paragraph 20(1)(c) of the Act. In light of all of the foregoing, the taxpayers were entitled to the deductions claimed. The Minister was ordered to reassess accordingly.