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Citation: 2005TCC91
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Date: 20050128
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Docket: 2004-2643(IT)I
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BETWEEN:
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PIERRE ALLARD,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Dussault J.
[1] The Appellant is contesting the assessments made for the 1999 and 2000 taxation years through which the Minister of National Revenue (the "Minister") denied him rental losses of $9,168 and $16,093 for each of those years respectively.
[2] The Appellant owns three rental properties, namely two duplexes located in Montréal, Quebec and a single-family home located at 400 chemin Lac des Piles in Grand-Mère, Quebec.
[3] The Appellant himself lives in an apartment in one of the duplexes in Montréal. He has been renting the single-family home to his parents since 1997. Only the losses in relation to that home are at issue.
[4] For the purposes of the assessments, the Minister made the assumptions of fact set out in subparagraphs (a) to (h) of paragraph 6 of the Reply to Notice of Appeal (the "Reply"). Those subparagraphs read as follows:
(a) The Appellant owns three rental properties which are located at 2077, rue Marchand in Montréal, at 2257 rue Chapleau in Montréal and at 400 chemin Lac des Piles in Grand-Mère;
(b) In filing his income tax returns for the taxation years at issue, the Appellant declared a gross rental income of $21,336 for each of the respective taxation years and deducted rental losses of $13,985 for the 1999 taxation year and $13,616 for the 2000 taxation year;
(c) Upon preliminary review of the file, the auditor noted that the Appellant had been claiming rental losses since the 1993 taxation year;
(d) The auditor limited his audit to the property located at 400 chemin Lac des Piles in Grand-Mère;
(e) The alleged gross annual rental income as declared by the Appellant, attributable to that property, was $4,800 for each of the respective taxation years;
(f) According to the income statement provided by the Appellant, the rental expenses, attributable to that property, were $13,960 for the 1999 taxation year and $20,883 for the 2000 taxation year;
(g) The interest, property taxes and insurance costs alone totalled $7,255 for the 1999 taxation year and $7,000 for the 2000 taxation year;
(h) Given that the Appellant did not submit vouchers in support of the expenses claimed and given that he did not respond to the auditor's questionnaire, the rental loss was adjusted to $0 for each of the two years in relation to that property;
[5] In confirming the assessments, the Minister relied on the additional assumptions of fact set out in subparagraphs (a) to (d) of paragraph 7 of the Reply. Those subparagraphs read as follows:
(a) On July 7, 1997, the Appellant acquired the property from his father at a cost of $80,000;
(b) The property was financed through a mortgage the current balance of which is approximately $65,000;
(c) The Appellant's parents are the tenants of the property;
(d) The ratio of all the rental expenses attributable to the property is three to four times higher than the income it generates;
[6] The Respondent's reason for denying the Appellant the rental losses mentioned is that there was no reasonable expectation of profit and that the property was not a source of income.
[7] The Appellant and Julie Grant, auditor with the Canada Customs and Revenue Agency (the "CCRA") testified.
[8] The Appellant explained that he had acquired the house from his parents in 1997 in order to turn it into an income property and that it was under that express condition that he was able to obtain a mortgage loan of approximately $69,000, because he had a low income that had never exceeded $30,000 per year. Paragraph 2.2 of the mortgage contract with the Caisse Desjardins des fonctionnaires du Québec (the "Caisse"), submitted on consent after the hearing, specifically set out an additional mortgage involving rents. The Appellant added that he did not have the means to own a property that was not an income property outside of Montréal because he did not have a car to get around in and that he had to go to Grand-Mère by bus.
[9] The price paid for the home was $80,000. The municipal assessment at the time was $57,000. Under the one-year loan and mortgage contract signed on July 7, 1997, with the Caisse, the loan of $69,187.50 bore interest at the rate of 5.05%. The mortgage loan and interest payments were initially $404.37 per month.
[10] After the acquisition, the Appellant's parents went to live with a relative in Bromont for a few months. The exact period was not specified but by all accounts it was only a few months in all. The Appellant stated that he then put the house up for rent without however having taken specific steps in that regard. His parents, who were not very happy in Bromont, indicated that they wanted to return to Grand-Mère and the Appellant, who had not found a tenant, decided to rent them the house. The rent was set at $400 per month. The Appellant explained that he had consulted his accountant who assured him that renting to his parents did not present any problems provided that the rent corresponded to the market value.
[11] The Appellant stated that he researched rental prices in the regional newspaper. He furthermore submitted into evidence an excerpt from the newspaper Le Nouvelliste dated April 18, 1997, highlighting in particular an advertisement for a 5½-room apartment for $295 per month and another 4½-room apartment for $250 per month in the neighbouring municipality of Shawinigan. As there are very few single-family homes for rent in Grand-Mère, the Appellant was not able to make a direct comparison. However, he explained that the house in question is a modest home with two bedrooms, a kitchen and a living room which is equivalent to a 4½-room apartment (Exhibit A-1). The Appellant therefore stated that the $400 rent corresponded to the market value and even a little more.
[12] The Appellant also explained that he had hoped the 5.05% interest rate he had obtained for his mortgage loan with a term of one year in July 1997 could be reduced even more upon renewal and that he would also be able to increase the rent. However, according to him, the rates on the mortgage loans then increased and he was not able to increase the rent.
[13] As to the very high expenses in 1999 and 2000, the Appellant explained that they were the result of a septic tank problem, the collapse of the porch under the weight of the snow and a leaky roof. He stated that since those problems were resolved, the loss is now only $1,000 per year and that he hopes to make a return on his investment soon and is counting on the appreciation of the property which will provide him an eventual "profit."
[14] It should be noted that the rent remained unchanged between 1997 and 2002 when it went from $400 to $575 per month. It was apparently increased again in 2004 when it was set at $595 per month. Although the audit of the Appellant's file by the CCRA happened in 2002, the Appellant stated that it was a coincidence and that the 2002 rent increase reflected a significant increase in rental prices in Grand-Mère.
[15] During her testimony, Julie Grant submitted a document outlining the Appellant's expenses in relation to the Grand-Mère property in 1999 and 2000 (Exhibit I-1). That document indicates that the amounts of $5,166 and $5,059 were claimed for interest alone for the 1999 and 2000 taxation years respectively, that the property taxes were $1,674 and $1,521 for each of the years and that the insurance costs were $415 and $420 for each of the years. Furthermore, we know that from the outset in 1997, the $400 monthly rent was lower than the $404.37 monthly mortgage carrying costs.
[16] It is clear that from 1997, and until 1999 and 2000 at least, expenses including the interest on the mortgage loan, property taxes and insurance alone largely exceeded, by 40%, the rental income drawn from the property that the Appellant rented to his parents. Yet, the basic rent of $400 per month remained strictly the same during four consecutive years and was increased for the first time in 2002 when it was increased to $575, a very substantial increase of more than 40% all at once. Even with rent that had subsequently been increased to $595 per month in 2004, the Appellant stated that his loss was now about $1,000 per year. No details or calculations were submitted in that regard. Thus, more than seven years after acquiring the property, the Appellant has still not been able to make a return on his investment.
[17] In this case, I believe that we clearly cannot ignore the personal element that seems to underlie, on the one hand, the Appellant's acquisition of his parents property and, on the other hand, that he rented it to them a short time later for rent that from the outset did not even cover the mortgage payments themselves. The Appellant did not indicate any specific steps he may have taken before the acquisition to ensure that his investment would be profitable, if that was his true motivation for acquiring his parents property. Further, he does not seem to have made inquiries with anyone, nor designed a serious business plan in that regard, although I must acknowledge that the Caisse granted him financing of $69,000 and that the mortgage contract covers the rents that the Appellant could draw from the property. Moreover, the Appellant did not provide any specific information at all concerning his attempts to find a tenant. As to the evidence introduced concerning the rental prices in Grand-Mère in 1997, it is rather thin and not very persuasive. The price advertised for apartments in the regional newspaper is hardly comparable to that which can be charged for a single-family home. Also, it is impossible to determine the quality and state of the apartments advertised. I will add here that a photograph of the outside of the property, submitted in evidence, did not persuade me that it was as modest as the Appellant would have me believe and that it can be compared to a 4½-room apartment (Exhibit A-1). However, the more striking aspect, other than the rent that from the outset did not even make it possible to cover the mortgage and interest payments, is that the Appellant, while he had to deal with higher interest rates and very high expenses during the years at issue, did not at all increase the rent that remained the same from 1997 to 2002. Even a minimal increase or one within the permitted limits would have shown that the Appellant was indeed concerned with the profitability of his investment and not motivated by other considerations. This is especially true as, during the years at issue, he had to incur extremely high expenses that his relatively modest income made it difficult to bear.
[18] In Stewart v. Canada, [2002] 2 S.C.R. 645, 2002 DTC 6969, the Supreme Court of Canada decided that the test for reasonable expectation of profit is only applicable in certain circumstances. At paragraph 60 of the judgment, the Court stated the following:
60 In summary, the issue of whether or not a taxpayer has a source of income is to be determined by looking at the commerciality of the activity in question. Where the activity contains no personal element and is clearly commercial, no further inquiry is necessary. Where the activity could be classified as a personal pursuit, then it must be determined whether or not the activity is being carried on in a sufficiently commercial manner to constitute a source of income. ...
[19] Furthermore, at paragraph 54 of the same decision, the Supreme Court stated the following:
54 It should also be noted that the source of income assessment is not a purely subjective inquiry. Although in order for an activity to be classified as commercial in nature, the taxpayer must have the subjective intention to profit, in addition, as stated in Moldowan, this determination should be made by looking at a variety of objective factors. Thus, in expanded form, the first stage of the above test can be restated 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.
(Emphasis added.)
[20] Unfortunately, for the reasons indicated above, I feel that the Appellant did not persuade me that his predominant intention was to make a profit from renting his parents the property located in Grand-Mère and that he behaved in accordance with objective standards of businesslike behaviour in that regard. In fact, I am of the view that the price paid for that property and the financial commitments resulting from the mortgage loan obtained, not to mention the property taxes and insurances to only name a few elements, are difficult to reconcile with the modest rent of $400 per month that the Appellant charged his parents. The lack of a specific plan to make a return on the investment and the failure to increase the rent over numerous years despite the significant expenses during the years at issue were also pointed out.
[21] As a result of the preceding, the appeals are dismissed.
Signed at Ottawa, Canada this 28th day of January 2005.
Dussault J.
Translation certified true
on this 30th day of June 2005.
Aveta Graham, Translator
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