Meech v. The Queen, 87 DTC 5251, [1987] 1 CTC 421 (FCTD)

Strayer J:—This is an appeal with respect to the disallowance by the Minister of National Revenue, for the tax years 1979 and 1980, of certain operating losses incurred by the plaintiff with respect to two condominium units in Florida. An appeal to the Tax Court of Canada was dismissed and the taxpayer then appealed to this Court. After the hearing of this appeal I found some ambiguities in the materials filed by agreement. I asked counsel for further clarification which has now been provided.

The plaintiff has abandoned his claim to deduct certain expenses but, given the disposition which I am making of this matter I need not go into detail with respect to any of these items.

The condominium units in question are numbers 1209 and 1210, Baywood Isles, St. Petersburg, Florida. They are in one of six large buildings in a condominium complex.

•The plaintiff bought unit 1210 in July 1978 for approximately $42,000, paying for it by cash to a mortgage of about $33,000. This unit was rented out for four months in each of 1979 and 1980. In each of those years he used it personally for about three weeks and made no use of it otherwise. Since that time, and since his retirement he has been spending more time there, on the average about three months per year in periods when the unit can not be rented out.

In August 1979 he bought unit 1209 for about $52,000, paying partly in cash and by assuming a mortgage of about $28,000. It was rented out for three months at the beginning of 1980 but was never otherwise rented. He sold it in November 1980 for $61,500. He never used unit 1209 personally.

The plaintiff sought to deduct his losses from the rental of unit 1210 during 1979 and 1980, and of unit 1209 during 1980, subtracting an appropriate amount from total expenses for that portion of the time in which he personally occupied unit 1210. The Minister has disallowed these deductions rely ing on paragraphs 18(1)(a) and 18(1)(h), and section 248 of the Income Tax Act.

The essential question appears to be whether these losses can be attributed to expenses within the meaning of paragraph 18(1)(a) of the Income Tax Act. That paragraph provides, to the general rule against deductions from the income of a taxpayer from a property, an exception with respect to

an outlay or expense . . to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the . . . property;

This has been taken to mean that for an expense to be considered to have been made for the purpose of gaining income from a property there must be some reasonable expectation of profit from that property. See, e.g., Cecato v. M.N.R., [1984] C.T.C. 2125; 84 D.T.C. 1110 (T.C.C.). With respect to the meaning of reasonable expectation of profit, it was said by Dickson, J. in Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 (S.C.C.) at 313-14 (D.T.C. 485-86):

. . . In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive.

The objective nature of this test has been illustrated in many cases such as Lorentz v. M.N.R., [1985] 1 C.T.C. 2144; 85 D.T.C. 131 (T.C.C.); Arbus v. M.N.R., [1980] C.T.C. 2872; 80 D.T.C. 1744 (T.R.B.); Paikin v. M.N.R., [1987] 1 C.T.C. 2041; 87 D.T.C. 6 (T.C.C.); and Saleem v. M.N.R., [1984] C.T.C. 2660; 84 D.T.C. 1579 (T.C.C.).

The onus is on the plaintiff to show that there was a reasonable expectation of profit when he purchased these units. In my view he has failed to do so. To the extent that the evidence goes, it suggests instead that he could not normally expect to rent either of these units for more than about four months a year. With respect to unit 1209, his experience after a year confirmed to him that there was no reasonable expectation of profit and he sold that unit. With respect to unit 1210 his experience since buying it has also indicated that it was not a profitable investment. As noted by Dickson, J. in the Moldowan case quoted above, one criterion for reasonable expectation of profit is the probability of "the venture as capitalized to show a profit after charging capital cost allowance”. This unit has never shown a profit as so defined, and so far in only two years, 1982 and 1985, has there even been sufficient return for capital cost allowance to be deducted. Further, while the taxpayer in testifying expressed his opinion that there had been an unexpected weakness in the rental market due to recession, the weakening of the Canadian dollar, and gasoline shortages during the early years of this decade, there was no direct evidence as to sudden changes in the Florida rental market.

While I do not believe a taxpayer has to prove that he took all prudent steps to satisfy himself that a profit could reasonably be expected when making the original investment, if by an objective test such an expectation would have been reasonable, such evidence would strengthen his contention that he had good reason to expect a profit within a reasonable time. The taxpayer here has not satisfied me that he took such steps.

The expenses in question therefore do not qualify as having been made for gaining or producing income from property. This is true in respect of expenses incurred in relation to both units. It appears to me that nothing turns on the fact that the plaintiff made no personal use of unit 1209, although the fact that he so used unit 1210 provides additional reasons for my conclusion based on paragraph 18(1)(h) and the definition of “personal or living expenses" in subsection 248(1) of the Income Tax Act.

The appeal is therefore dismissed, with costs.

Appeal dismissed.