Dockets: 2008-3080(IT)I
2008-3081(IT)I
BETWEEN:
RHÉAL LANDRIAULT
and
CAROLE L. BERCIER,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
___________________________________________________________________
Appeals
heard on common evidence on June 22, 2009, at Ottawa, Canada.
Before: The Honourable Justice Réal Favreau
Appearances:
|
For the appellants
|
The appellant herself
|
|
Counsel for the respondent:
|
Marie-Ève Aubry
|
____________________________________________________________________
JUDGMENT
The appeals from assessments
dated March 1, 2007, made under the Income Tax Act for the 2003 and 2004 taxation years are
dismissed without costs in accordance with the
attached Reasons for Judgment.
Signed at Montréal, Quebec,
this 28th day of July
2009.
"Réal Favreau"
on this 25th day
of September 2009
Margarita
Gorbounova, Translator
Citation: 2009 TCC 378
Date: 20090728
Dockets: 2008-3080(IT)I
2008-3081(IT)I
BETWEEN:
RHÉAL LANDRIAULT
and
CAROLE L. BERCIER,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
These
appeals were heard on common evidence.
[2]
The
appellants are appealing from assessments dated March 1, 2007, made under the Income
Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the Act), whereby the
Minister of National Revenue (the Minister) disallowed net rental losses of
$7,523 and $4,836 for the 2003 and 2004 taxation years.
[3]
In 2001,
the appellants purchased a two-unit residential property located at 299 Olmstead Street in Ottawa. The appellants are equal co-owners of
that property. The appellants occupy the lower unit, while the upper unit
is rented out to Carole Bercier's son, Nicholas Bercier (Nicholas).
The upper unit is comprised of two bedrooms, a kitchen, a bathroom and a living
room.
[4]
When the
appellants purchased the property, the two upper-unit bedrooms were rented out
to two tenants for $325 per month each. The tenants moved out in
May 2002, and Nicholas moved into the upper unit. Nicholas was living
alone in the unit until his brother joined him at an unspecified date
(presumably sometime after 2004).
[5]
Nicholas
paid $300 per month to rent out the unit in 2003 and $450 per month in 2004. His rent
payments covered the cost of electricity, water, heating, telephone and
satellite television. The gross rental income for 2003 was $3,600, while the
expenses claimed by the appellants were $11,124 or $927 per month. The gross
rental income for 2004 was $5,400, while the expenses claimed were $10,236 or
$853 per month.
[6]
Since
buying the property, the appellants reported the following rental losses:
|
2001
|
$3,022
|
|
2002
|
$2,754
|
|
2003
|
$7,524
|
|
2004
|
$4,836
|
[7]
The
appellants are claiming that their primary intention for this income property
has always been to make it into a profitable business. They stated that they
had tried to rent out the second bedroom of the upper unit to a friend, but
failed. The appellants acknowledged that, until September 2003,
they had been renting out the unit to Nicholas at a rate below market value.
However, they are claiming that it was a temporary arrangement just until
Nicholas could take advantage of a support program offered by the Province of Ontario, namely, the
Ontario Disability Support Program. They raised the rent to $450 per month once
Nicholas became eligible for that program in October 2003. After the appellants
had consulted with Social Services in 2002, the rent was set at $450 per month. A second-floor
rental unit, such as the one owned by the appellants, entitled the beneficiary
to monthly rent payments of $450. Ms. Bercier
also explained at the hearing that without that unit she would have lost her
son.
[8]
The
appellants have experience in business: Ms. Bercier has been working in
administration at the Royal Canadian Mounted Police for nine years, and
Mr. Landriault had his own construction business specializing in
foundations for 17 years.
[9]
The issue
is whether the rental expenses claimed by the appellants were incurred for the
purpose of earning income from a business or property or whether they are
personal or living expenses for the purposes of the Act.
[10]
The
relevant statutory provisions are paragraphs 18(1)(a) and (h)
and paragraph (a) of the definition of "personal or living
expenses" in subsection 248(1) of the Act. Those provisions read as follows:
|
General limitations
18(1) In computing the income of a taxpayer from a business or
property no deduction shall be made in respect of
General limitation
(a)
an outlay or expense
except to the extent that it was made or incurred by the taxpayer for the
purpose of gaining or producing income from the business or property;
Personal and living expenses
(h) personal or living
expenses of the taxpayer, other than travel expenses incurred by the taxpayer
while away from home in the course of carrying on the taxpayer’s business;
Definitions
248. (1) In this Act,
personal or living expenses
“personal or living expenses” includes
(a)
the expenses of
properties maintained by any person for the use or benefit of the taxpayer or
any person connected with the taxpayer by blood relationship, marriage or
common-law partnership or adoption, and not maintained in connection with a
business carried on for profit or with a reasonable expectation of profit,
|
[11]
The
appellants greatly emphasized that they had intended to make a profit from
renting out the upper unit. The only evidence supporting that intention was the
increase in rent once Nicholas became eligible for the support program.
[12]
The Supreme
Court of Canada clearly indicated in Stewart v. The Queen, 2002 D.T.C. 6983, that the
subjective intention to profit must be accompanied by objective factors of
businesslike behaviour. In that regard, the Court stated the following at
paragraphs 54 and 55:
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.
55. The objective factors listed
by Dickson J. in Moldowan, at p. 486, were: (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. . . .
[13]
In this
case, it was clearly established on the balance of probabilities that the
appellants had no real intention of making a profit from renting out the unit
to Nicholas. As in Rapuano v. The Queen, 2009 TCC 150, the
agreement with Nicholas was essentially a family arrangement under which a
minimal rent was paid to help defray the operating costs of the property.
[14]
The rental
activities were not carried out on a commercial basis and hence cannot be a
source of income for the purposes of the Act. As admitted by the
appellants themselves, the rent paid by Nicholas in 2003 was below the fair
market value of rent payable for a similar unit in the area. Even after it had been increased in 2004, the rent paid by
Nicholas was utterly insufficient for the property to be capable of showing a
profit.
[15]
In light of
the foregoing, the rental expenses claimed by the appellants are personal or
living expenses for the purposes of the Act.
[16]
The appeals
are dismissed without costs.
Signed at Montréal, Quebec, this 28th day of July
2009.
"Réal Favreau"
on this 25th day
of September 2009
Margarita
Gorbounova, Translator
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