Citation: 2010 TCC 330
Date: 20100427
Docket: 2009-2868(IT)I
BETWEEN:
MIKE DAOUST,
Appellant,
and
HER MAJESTY THE QUEEN
Respondent.
____________________________________________________________________
EDITED VERSION OF TRANSCRIPT
OF ORAL REASONS FOR JUDGMENT
(Delivered orally from
the Bench
on April 9, 2010 at Winnipeg, Manitoba)
D’Arcy J.
[1]
The Appellant, Mike Daoust, has appealed income
tax reassessments in respect of his 2005 and 2006 taxation years. These are my
oral reasons for judgment.
[2]
The appeal concerns rental losses in respect of
a cottage located at Moth Lake
in Manitoba (which I will refer
to as the “cottage”) that were deducted by the Appellant when computing his
income for the relevant years.
[3]
When filing his tax returns for the 2005 and
2006 taxation years, the Appellant claimed rental losses of $9,173.77 and
$6,506.38 respectively. The reassessments denied the rental losses claimed.
[4]
I will first summarize the facts.
[5]
The Appellant purchased the cottage in 2004. He
testified that he purchased the property both to generate income and as a
capital investment. He believed that he could generate income from the
cottage by renting it to family, friends and colleagues. He felt that the
cottage was attractive due to its very private location and proximity to Winnipeg. The cottage was winterized and
could be rented year round.
[6]
He believed that he could rent the cottage for
$1,600 per week, even though he accepted that the rental rates for comparable
properties were substantially less. Apparently, the rent for a “high-end”
property was $1,500 per week. The cottage was not a “high-end” property.
[7]
He spent two months in 2004 preparing the
cottage for rent. Beginning in 2005, the cottage was available for rent. The Appellant
testified that, in addition to offering the property to family, friends and
colleagues, he advertised the property in an attempt to rent the property to
people he did not know. He advertised the property in a Winnipeg daily newspaper, in an online
rental website, posters placed in various places close to the cottage and in
the Kenora local paper.
[8]
The Appellant was not successful in renting the
cottage. The cottage was not rented in 2005. In 2006 it was rented for two
weeks, one week to a long‑time friend and a second week to his brother.
In 2007 the property was rented for one week to a third party who the Appellant
did not know. These rentals resulted in total rental revenue of $4,400.
[9]
The Appellant reported substantial losses from
the rental of the cottage. He calculated the losses on the assumption that his
personal use of the cottage during these years was 50 percent. Based upon 50
percent use as a rental property, the Appellant calculated losses of $9,193.77
in 2005, $6,506.38 in 2006 and $8,025 in 2007, for total losses in the
three years of $23,725.15.
[10]
In 2009 the cottage was sold for $315,000,
resulting in an $80,000 capital gain.
[11]
The issue I must decide is whether the cottage
constituted a source of income. The approach to be taken in making such a
determination is mandated by the 2002 decision of the Supreme Court of Canada
in Stewart v. Canada, [2002] 2 S.C.R. 645.
[12]
The Court noted at paragraphs 52 to 55 of its
decision that where there is some personal or hobby element to the activity in
question, one must apply a pursuit of profit source test.
[13]
At paragraph 54 the Court stated the test as
follows,
'Does the taxpayer intend to carry on an activity for
profit and is there evidence to support that intention?' 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.
[14]
The Court provided the following non-exhaustive
list of objective factors that should be considered:
-
the profit and loss experience in past years;
-
the taxpayer's training;
-
the taxpayer's intended course of action; and
-
the capability of the venture to show a profit.
[15]
The Court emphasized that although the reasonable
expectation of profit is a factor to be considered, it is not the only factor,
nor is it conclusive. The key is to determine whether or not the taxpayer
is carrying on the activity in a commercial manner without second-guessing the
business judgment of the taxpayer.
[16]
Since there was a personal element in the
activity in question, I must apply the “pursuit of profit” source test. In
short, I must determine whether the Appellant's predominant intention was to
make a profit from the rental of the cottage and whether the rental of the
cottage was carried on in accordance with objective standards of business-like
behaviour.
[17]
This determination can be made in the current
case by considering the four factors noted in Stewart.
[18]
The profit and loss experience would indicate
that the Appellant's primary intention was not to make a profit from the rental
of the cottage. The rental of the cottage was never profitable and, as noted
previously, the rental incurred substantial losses on minimal revenue.
[19]
If I accept the Appellant's testimony, then it
would appear that his intended course of action was to make a profit. However,
he provided very little evidence to support his verbal testimony. He did not
produce copies of any of the advertisements, nor did he provide a copy of even
a simple business plan.
[20]
Further, he did not explain why the rent was set
at a weekly rental rate that did not appear to be realistic, a rate that
resulted in few rentals for a property that appears to be an excellent rental
property.
[21]
This brings into question whether the Appellant
really intended to rent the cottage on a regular basis.
[22]
It appears to me that the combination of a very
high rental rate and a limited target market of friends and relatives resulted
in the rental of the cottage not having the capacity to show a profit.
[23]
I agree with counsel for the Respondent that the
primary intention of the Appellant was to use the cottage for personal
purposes, with occasional rentals to reduce the cost of maintaining the
property.
[24]
In short, it was not the Appellant's predominant
intention to make a profit from the rental of the cottage. The cottage was not
a source of income.
[25]
For these reasons, the appeal is dismissed
without costs.
D’Arcy J.
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