Citation: 2011 TCC 382
Date: August 15, 2011
Docket: 2010-3182(IT)I
BETWEEN:
NASR HANNA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2010-2919(IT)I
AND BETWEEN:
SARWAT MANSOUR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Edited
from the transcript of Reasons for Judgment delivered orally from the Bench on
June 2, 2011 in Hamilton, Ontario)
Campbell J.
[1]
Good morning again to
both of you. Let the record show that I am going to deliver oral reasons in the
appeals, which I heard yesterday, respecting Sarwat Mansour and Nasr Hanna. These
appeals were heard together on common evidence and are in respect to the 2005,
2006, and 2007 taxation years of both Appellants.
[2]
In computing income for
these taxation years, the Appellants claimed expenses in respect to a property
located at Lawrence Avenue
East in Toronto (the “property”). By Notices of Reassessment, the
Minister of National Revenue (the “Minister”) disallowed the claimed rental
expenses.
[3]
The Appellants purchased
the commercially zoned property in 2004 for $235,000. Each owned a 50 per cent
interest in the property. It was purchased to act as a centre for the purpose
of facilitating refugees coming to Canada from the
Middle East, particularly Egypt, as well as their adjustment to Canada.
[4]
The Appellants
incorporated an association called Canadian Coptic Association, which
Mr. Mansour testified was incorporated at the insistence of the bank as a
means of borrowing money. The Appellants spent approximately $60,000 on
renovations, as the property had previously been used as an animal hospital. A
mortgage of $130,000 was obtained in the names of both Appellants.
[5]
According to
Mr. Mansour, they made attempts at renting the property after the
renovations were completed but were largely unsuccessful. They advertised in
newspapers that provided free advertising and gave it to a realtor at one point
with the hope of renting it. The property was rented briefly to a tenant in
2005, but after 2005, the property was never rented. Any potential rentals
would be short-term in the event refugees arrived on short notice from the Middle East.
[6]
The Canadian Coptic
Association paid the monthly mortgage payments on the property, together with
the utility, telephone, and security services accounts. According to the evidence
of Mr. Mansour, he maintained a line of credit from which he filtered
funds through the Association's bank account to pay the expenses relating to
the property. In addition to the one short rental in 2005, Mr. Mansour
indicated that, on occasion, the property was rented for an occasional night
for meetings, for example. Mr. Mansour indicated that there was no
physical presence of the Association at the property except for signage on the
front yard and a phone and small desk inside the property.
[7]
The issue in these
appeals is whether the Appellants can deduct various expenses related to
maintenance of this property in the 2005, 2006, and 2007 taxation years.
[8]
The Minister denied these
expenses on two bases:
(1) that it was not the Appellants that
incurred the expenses relating to this property; and, alternatively,
(2) that, if they were incurred by the
Appellants, the expenses are still not deductible because they were not incurred
to gain or produce income in respect to this property.
[9]
The evidence respecting
many of the expenses, who paid them and how they were paid was simply not put
before me, either in the documentary or oral evidence. I have documentary
evidence that the utilities, telephone, and security expenses were incurred in
the name of the Association. Even though the interest expenses on the mortgage
were paid through an account set up in the name of the Association, the
mortgage was taken out in the names of the Appellants, and they were legally
liable, consequently, for the interest expenses.
[10]
I have no evidence
before me respecting the payment of any remaining claimed expenses such as
insurance, taxes, and professional fees. There is simply no evidence for me to
draw any conclusions respecting who incurred them or who paid them. Consequently,
except for the principal and interest on the mortgage payments, which were
incurred by the Appellants personally, a few of the expenses were incurred in
the name of the Association (the utilities, the phone, and security) and not
the Appellants. However, there was no evidence before me respecting the
remaining expenses from which I could draw any conclusions.
[11]
Since there are the
interest expenses associated with the mortgage, which were incurred by the
Appellants, I will address the Minister's alternative argument, that is, that
there is no source of income. This second argument applies to all of the
claimed expenses and not only the interest expenses related to the mortgage. The
pursuit-of-profit-source test is stated at paragraph 54 of the decision in Stewart
v The Queen, 2002 SCC 46, [2002] S.C.R. 645: “Does the taxpayer intend to
carry on an activity for profit and is there evidence to support the
intention?” The Supreme Court of Canada in Stewart went on to state: “This
requires the taxpayer to establish that his or her predominant intention is to
make a profit from the activity and that the activity has been carried out in
accordance with objective standards of businesslike behaviour.”
[12]
This
pursuit-of-profit-source test is to be applied in instances where there is some
personal element involved in the activity undertaken by a taxpayer. Clearly,
the activity in these appeals involved the stated personal goals of the Appellants,
which was to use the property as a focal point in assisting refugees to come to
Canada and eventually assist them to locate work here. In
fact, according to the evidence of Mr. Mansour, this was his predominant
objective or intention in acquiring this property. He stated that, in the
interim, he and his partner were hoping to rent the property on a short-term
basis to commercial tenants.
[13]
The decision in Stewart
referenced Justice Dickson's conclusions in Moldowan v The Queen,
[1978] 1 S.C.R. 480, in setting
out a number of objective factors which should be considered in determining
whether or not a taxpayer is carrying on an activity in a business-like or
commercial manner. These objective factors, which are not intended to be an
exhaustive list, include the following:
(1) the profit-and-loss experience in past
years;
(2) the taxpayer's training;
(3) the taxpayer's intended course of
action; and,
(4) the capability of the venture to show a
profit.
[14]
In reviewing the
evidence as it relates to these factors, the Court should not second-guess the business
judgment of the taxpayer. However, because there is a personal element to this
activity, a review of the factors must be undertaken in order to determine
whether the predominant intention of the Appellants was to make a profit from
the commercial rental of the property and, if so, whether the rental activity
was carried out according to business-like behaviour and standards. According
to the evidence, there was very little rental activity occurring in these years.
At best, the rentals were sporadic, consisting of one tenant for several months
in 2005 and, other than that, short rental periods for meetings or barbecues. The
rental activity, such as it was, was never profitable and the picture is one of
minimal revenue with comparably significant losses.
[15]
In fact, the Appellants
stated that they did not conduct an investigation prior to the purchase of the
property as to whether it would even produce rental income. Mr. Mansour
also testified in cross-examination that they intended to look after the property
expenses personally if there was no rental income. The evidence was also that
the tenants would have to vacate quickly if refugees suddenly arrived from the
Middle East. This may have undermined their ability to attract long-term
tenants or tenants at all to this property.
[16]
All of this leads to
the conclusion that the Appellants never really turned their attention to the
rental of the property, at least not in a serious manner. None of this is in
accordance with the standards of business-like behaviour. The Appellants were
not previously involved to any great extent in the rental of properties. Nasr
Hanna is a doctor and Mr. Mansour is retired from the automotive industry.
Although Mr. Mansour did have some experience with the purchase and rental
of residential units, this did not appear to be an extensive involvement.
[17]
The evidence supports
my conclusion that the Appellants’ predominant and primary intention was to use
this property with respect to their refugee endeavours and not to make a profit
from its rental activities. The rentals seemed to be, if anything, an
afterthought, with little effort put into making the commercial rental
activities a reality. For these reasons the appeals are dismissed without costs.
And that concludes my reasons in the two appeals.
Signed at Summerside, Prince Edward Island, this 15th day of August
2011.
“Diane Campbell”
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