[2] The Minister of National Revenue reassessed them
for these years:
(a) to disallow a
portion of the losses claimed pursuant to subsection 18(12) of the Income
Tax Act;
(b) to reallocate the losses equally to
Mr. and Mrs. Denis.
[3] There is no issue between the parties that the
proper allocation of losses between the spouses is 50/50. Moreover, there is no
dispute that the revenues, expenses and losses of the partnership were properly
calculated, subject only to the application of subsection 18(12).
[4] Subsection 18(12) reads as follows:
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(12) Work space in home — Notwithstanding any other provision of this Act, in computing an
individual’s income from a business for a taxation year,
(a) no amount shall be
deducted in respect of an otherwise deductible amount for any part (in this
subsection referred to as the “work space”) of a self-contained domestic
establishment in which the individual resides, except to the extent that the
work space is either
(i) the individual’s principal
place of business, or
(ii) used exclusively for the
purpose of earning income from business and used on a regular and continuous
basis for meeting clients, customers or patients of the individual in respect
of the business;
(b) where the conditions set
out in subparagraph (a)(i) or (ii) are met, the amount for the work
space that is deductible in computing the individual’s income for the year
from the business shall not exceed the individual’s income for the year from
the business, computed without reference to the amount and sections 34.1 and
34.2; and
(c) any amount not deductible
by reason only of paragraph (b) in computing the individual’s income from the
business for the immediately preceding taxation year shall be deemed to be an
amount otherwise deductible that, subject to paragraphs (a) and (b), may be
deducted for the year for the work space in respect of the business.
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(12) Travail à domicile. Malgré les autres
dispositions de la présente loi, dans le calcul du revenu d’un particulier
tiré d’une entreprise pour une année d’imposition :
a)
un montant n’est déductible pour la partie d’un établissement domestique
autonome où le particulier réside que si cette partie d’établissement :
(i) soit est son principal lieu d’affaires,
(ii) soit lui sert exclusivement à
tirer un revenu d’une entreprise et à rencontrer des clients ou des patients
sur une base régulière et continue dans le cadre de l’entreprise;
b)
si une partie de l’établissement domestique autonome où le particulier réside
est son principal lieu d’affaires ou lui sert exclusivement à tirer un revenu
d’une entreprise et à rencontrer des clients ou des patients sur une base
régulière et continue dans le cadre de l’entreprise, le montant déductible
pour cette partie d’établissement ne peut dépasser le revenu du particulier
tiré de cette entreprise pour l’année, calculé compte non tenu de ce montant
et des articles 34.1 et 34.2;
c) tout montant qui, par le seul effet de
l’alinéa b), n’est pas déductible pour une partie d’établissement
domestique autonome dans le calcul du revenu d’entreprise du particulier pour
l’année d’imposition précédente est déductible dans le calcul du revenu
d’entreprise du particulier pour l’année, sous réserve des alinéas a)
et b).
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[5] “Self-contained domestic establishment” (« établissement domestique autonome ») is defined as follows in section 248:
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"self-contained domestic establishment" means a
dwelling-house, apartment or other similar place of residence in which place
a person as a general rule sleeps and eats;
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« établissement domestique autonome » Habitation,
appartement ou autre logement de ce genre dans lequel, en règle générale, une
personne prend ses repas et couche.
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[6] The sole issue is whether the Minister was
justified in applying subsection 18(12) and restricting the losses claimed
under that provision.
[7] The parties entered into an Agreed Statement of Facts
(“ASF”). It is attached as Schedule A to these reasons. It was supplemented by
oral evidence of Mr. Denis.
[8] There have been a number of cases of this type decided
in this Court. I see no inconsistency between them but the judges have reached
different conclusions depending on the facts of each case.
[9] One thing is quite clear and that is that subsection 18(12)
of the Act can on its plain wording apply to a B&B operation.
Whether it does so in a particular case depends on a determination of fact. In
this case the question is whether the appellants “resided” in the entire two‑storey
building or, put differently, whether the entire house was the “self-contained
domestic establishment” or only the 540 square feet which the appellants
say was a private area for their own use. (Area 1 on the plan of Level 1
attached to the ASF). The appellants constructed the building with the
intention of running a B&B.
[10] Paragraph 38 of the ASF reads:
38. The building was built with the intention of
running an efficient bed and breakfast business. The 540 square feet private
area was designed and built to serve the personal needs of the Denises and was
built without its own living room, dining room, in suite laundry, kitchen and
storage room because by duplicating these areas inside the 540 square foot
private area, the Denises would have wasted a lot of space that would be been
[sic] required to build what they thought would be a profitable bed and
breakfast business.
[11] The building was not constructed as a private
residence with the intention that the Denises would live in the 4,448 square
feet making up the two levels. It was built to house a commercial operation
which contained an area in which they would live. This fact distinguishes it
from a B&B operation in which some rooms in an existing home are used to
run a B&B after the children have left home.
[12] The essential question is not whether the 540
square feet which the appellants called their private living space is a self‑contained
domestic establishment; rather it is whether the rest of the 4,448 square feet
that was intended to be used and was in fact used for the B&B operation
forms part of the “self-contained domestic establishment”. For
subsection 18(12) to apply the “work space” must be part of a
self-contained domestic establishment. I have concluded that the appellants did
not reside in that portion of the building that was devoted to and used for the
accommodation of guests in the B&B operation.
[13] Counsel for the Respondent contends that the
entire building is a self‑contained domestic establishment because
occasionally friends or family would be allowed to sleep in the guest rooms
free of charge and sometimes at family gatherings they would eat in the sitting
area (10.4). I do not think that the occasional use for such purposes amounts
to residing. I do not think that the occasional use of the B&B facilities
made it a place in which the appellants “as a general rule sleep[s] and
eat[s]”. Moreover, it is quite unreasonable to suggest that the appellants
would construct a two-storey building of 4,448 square feet for use as a private
residence where that structure has separate entrances from outside for each of
the five private guest rooms. Of the five guest rooms, one has a private
ensuite bathroom and two on level one have a bathroom between them and two on
level two share a bathroom.
[14] So far as the use of the guest facilities by
family and friends is concerned, this is minimal. (ASF para. 51) Family and
friends in 2001, 2002 and 2003, stayed overnight in guest rooms, less than
seven nights per year.
[15] As stated, the cases fall on both sides of the
line depending on the facts. They depend essentially on the extent to which the
B&B operation impinges upon or is integrated with the ordinary living
arrangements of the family that is carrying on the business. For example in Maitland
and Konduc v. The Queen, 2000 DTC 3622, Porter D.J. appears to have
focused primarily on the question whether the B&B operation was a hotel.
However, the finding of fact that was crucial to Porter D.J.’s dismissal
of the appeal was found in paragraph 26.
Upon
considering all of the evidence, I find that this was not a “hotel” operation,
but indeed was a “bed and breakfast” operation within the normal meaning of
that word; that is to say that guests came and stayed in the home of the
Appellants. It is true that there was more of a commercial nature to the
operation than is often the case. Nonetheless, the Appellants occupied
exclusively, with family members, a major part of the premises and shared with
their guests other common areas. It is clear that it was originally a dwelling
house. It had been used for intervening purposes, but during the time in
question, it was occupied as a residence by the Appellants. When no one else
was there, they still occupied it as their residence. Although they had other
places available to them to stay from time to time, as a general rule, they
slept and ate on these premises. It was a dwelling house or a similar place of
residence. It was not a commercial office building or regularly constructed
hotel or motel. In my view, it clearly falls within the definition of a
“self-contained domestic establishment”, set out in the ITA. In my
opinion, it is not realistic to draw an analogy between this situation and a
manager living in a suite in a regular motel or hotel. In that situation, the
operation is clearly a hotel or motel in which the manager lives in a small
part. Here, this was clearly their home into which they received paid guests
and that remained so despite the high quality of their operation, the hard work
they put in, and their original plans to operate it as a bed and breakfast
operation.
[16] The finding of fact
made by Porter D.J. is simply not open to me on the evidence and agreed
facts in this case. Obviously the B&B operation in that case was carried on
in the portion of the dwelling house used by the appellants Maitland and
Konduc. That is simply not the case here. The Denises did not use the guest
areas as their residence.
[17] Similarly in Broderick
v. The Queen, 2001 DTC 3722, Justice Campbell, in dismissing the
appeal made the following findings of fact:
. . . In
respect to the present case before me the primary function of this property was
a residence for the Appellant and his family and for a portion of each of the
years in question it was used as a bed and breakfast. Three bedrooms were
rented out but for whatever reasons, it ended up being a part time seasonal
operation despite the intention and hard work of the Appellant. When guests
were present, they confined themselves to the basement apartment for the
majority of the time but except for keeping the three bedrooms clean and available,
there was little need to restrict the balance of the upstairs portions
particularly when months would pass with no guests or the potential for any.
When guests were there, common areas of the house saw business and family life
converge.
[18] In three other cases different factual conclusions
led to different results. In Sudbrack v. The Queen, 2000 DTC 2521, the
following was said at page 5:
[19] I think
the better view, on the facts of this case, is that the separate living
quarters of the family, which are essentially a separate apartment within the
inn, constitute the self-contained domestic establishment. This appears to be
the more reasonable approach and is, I believe, more consonant with what
subsection 18(12) is seeking to achieve. Counsel for the Appellant
referred to a decision of the Supreme Court of Canada in Bell v. Ontario
(Human Rights Commission), [1971] S.C.R. 756. That case dealt with the
meaning of "self-contained dwelling". It is not of much assistance in
this case because here we are dealing with a statutory definition.
[20] The
Crown's position is that the inn as a whole is the self-contained domestic
establishment. Tab 17 of Exhibit R-1 contains a detailed summary of the
adjustments made under subsection 18(12). It allocates between expenses not
related to the work area and the expenses related to the work area. No
challenge is made to the arithmetical calculation if the fundamental assumption
that the self-contained domestic establishment is the inn as a whole and the
"work space" in that self-contained domestic establishment is the inn
as a whole as well is correct.
[21] In my
view that basic assumption is wrong. The self-contained domestic establishment
is the family apartment. Moreover, if the inn as a whole is the "work
space" that work space is "the individual's principal place of
business". Accordingly there is, in effect, excised from the area to which
the limitation in paragraph (a) applies the 85% of the inn in which the
family does not live.
[22] The work
space within the "self-contained domestic establishment" (the family
apartment) would consist of the kitchen which served the dual function as the
family cooking space and the restaurant cooking space and the small room where
Mr. Sudbrack kept his computer, records and other equipment for the purposes of
the business.
I
think the same conclusion is justified here, subject to what I propose to say
below with respect to the kitchen and laundry.
[19] In Moczulski v.
The Queen, 2003 DTC 3982, Justice Bell in allowing the appeal said
this at page 4:
[15] The
Appellants' apartment is, in my judgment, a self-contained domestic
establishment. The fact that the Appellants used the kitchen which produced
food for guests and the laundry facilities which they used for guest linens
does not prevent the apartment from being a "self-contained domestic
establishment". That definition includes an apartment or other
similar place of residence. The Appellants, as a general rule, sleep in
this apartment. There was no evidence that they eat in the apartment. However,
the definition does not exclude an apartment or similar place of residence
where the occupant or occupants do not eat. The definition uses the qualifying
term "as a general rule".
[16] One
should keep in mind the purpose of this provision. The Department of Finance in
Explanatory Notes relating to the legislative guidelines for deduction of
expenses in respect of space used as an office or other workplace in taxpayers'
residences reads as follows:
New subsection 18(12) of the Act restricts the
deduction of expenses incurred by an individual in respect of a home office. No
amount may be deducted in respect of a "work space" in a
self-contained domestic establishment in which the individual resides unless
certain conditions are met. The work place must be either the principal place
of business of the individual or used by him exclusively for the purpose of
earning income from business and be used on a regular and continuous basis for
meeting his clients, customers or patients in respect of the business. Where
these conditions are met, the individual may deduct otherwise allowable
amounts, but only to the extent of his income from the business for the year.
To the extent that this latter requirement restricts the deduction of a portion
of work space expenses for a particular year, such expense are treated as work
space expenses incurred in the immediately following year, thus permitting an
indefinite carryforward of this type of expense. This amendment is applicable
to fiscal periods commencing after 1987.
It is noted
that the emphasis of the above explanatory note respects a "work
space" in an ordinary domestic establishment. This normally includes
reserving and equipping a room or other space for business purposes. The
circumstances in the instant appeal do not fall into that category.
[17] The
Appellants, in this case, bought a commercial building and commenced operating
it for the purposes described. The use of the main entry to the building and of
the main hall leading to the doorway to the Appellants' residential quarters
does not diminish the description of such quarters being a self-contained
domestic establishment. With respect to use of laundry facilities shared with
the business, ordinary apartment buildings routinely share such facilities.
There are many persons who live in apartments or houses and do not eat there as
they have no interest in shopping or preparing food or washing dishes or
cleaning the premises after such use. Surely they cannot be said not to be
living in a self-contained domestic establishment.
[20] A case that is
somewhat similar on the facts to this one is a decision by
Justice McArthur in Rudiak v. The Queen, 2002 DTC 3901. At page 4
he said:
. . .The
Respondent referred to the following areas of the entire structure that had
mixed use (my observations are included after each reference):
(a) the garage was used in part for the bed and
breakfast storage; (this was obviously a limited business use);
(b) the kitchen was used to
make the breakfast for guests of the bed and breakfast; (the guest did not use
or occupy the kitchen. The prepared breakfast was served in the guest's dining
room);
(c) the laundry room served
both the bed and breakfast and personal use; (this is accurate but again the
guests did not use the Appellant's laundry room);
(d) the office in the
Appellant's apartment was used for the needs of both; (it was the Appellant's
private office and used exclusively by him);
(e) two weeks annually the bed
and breakfast area was used to accommodate friends and family; (while this is
accurate, it is insignificant in the overall scheme);
(f) four months of the year,
the off-season, the Appellant and his wife had access to the bed and breakfast
area; (same comments as in item (e));
(g) heating and electrical
services were common to both areas; (I do not believe this is significant);
(h) the City of Stratford did
not recognize a separate apartment in their municipal tax bill; (What does that
prove?);
(i) the Appellant was obligated
to live on the bed and breakfast premises to comply with municipal zoning
requirements; (not relevant);
(j) the Appellant's bed and breakfast brochure
advertised "Welcome to our home". (advertising puffing and
privilege).
[21] Which side does this
case fall on? In my view clearly it falls on the Rudiak, Sudbrack, Moczulski
side. I emphasize several points that I think are important.
(a) The appellants did
not reside in the entire house. They resided in areas which they designed,
built and used as their personal living quarters and did not reside in the area
designed, built and used for the B&B operation.
(b) The self‑contained
domestic establishment was the living area, the 544 square feet, not the entire
house.
(c) The fact that they
occasionally let friends or family stay in the guest rooms does not turn the
entire house into a self-contained domestic establishment.
(d) With respect to the
fact that they used the kitchen and laundry for both business and personal use
does not turn the entire house into a self-contained domestic establishment, or
conversely prevent the living area (the 544 square feet Area 1 on the sketch of
Level 1) from being a self-contained domestic establishment. I respectfully
adopt the reasoning of Bell J. in Moczulski and McArthur J. in Rudiak.
[22] The appeals are
therefore allowed with costs and the assessments are referred back to the
Minister of National Revenue for reconsideration and reassessment in accordance
with these reasons.
[23] There should be one
set of counsel fee for both appellants.
Signed at Ottawa,
Canada, this 1st day of November 2007.
Bowman C.J.
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