Maysky v. The Queen, 2003 DTC 991, 2003 TCC 387 (Informal Procedure)

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AMENDED JUDGMENT

Whereas the Federal Court of Appeal, by Judgment dated May 26, 2003, stated:

            The application for judicial review is allowed, with costs fixed at $200 payable to the Applicant, the decision of the Tax Court is set aside and the matter is referred back to the Tax Court for determination in accordance with these reasons.

          The appeals from reassessments made under the Income Tax Act for the 1996 and 1997 taxation years are dismissed in accordance with the attached Amended Reasons for Judgment.

Signed at Ottawa, Canada, this 5th day of June, 2003.

J.T.C.C.

____________________________________________________________________

____________________________________________________________________

AMENDED JUDGMENT

Whereas the Federal Court of Appeal, by Judgment dated May 26, 2003, stated:

            The application for judicial review is allowed, with costs fixed at $200 payable to the Applicant, the decision of the Tax Court is set aside and the matter is referred back to the Tax Court for determination in accordance with these reasons.

          The appeals from reassessments made under the Income Tax Act for the 1996 and 1997 taxation years are dismissed in accordance with the attached Amended Reasons for Judgment.

Signed at Ottawa, Canada, this 5th day of June, 2003.

J.T.C.C.

AMENDED REASONS FOR JUDGMENT

Miller J.

[1]      This matter has been referred back to me by the Federal Court of Appeal on the basis that the Appellants' rental of the property in question constituted a source of income in 1996 and 1997. I had initially found that the Appellants' holding of the property did not constitute a source of income as there was no reasonable expectation of profit, and I consequently dismissed their appeals. Although this initial decision was rendered prior to the case of Stewart v. Canada,[1] in the Supreme Court of Canada, I found that there existed a personal element sufficient to justify applying the reasonable expectation of profit test, which test the Mayskys could not meet. The Federal Court of Appeal found there were insufficient personal elements to make the Mayskys' "dealings in respect of that property something other than a commercial activity".

[2]      The Supreme Court of Canada was clear in the Stewart case that the determination of source of income is distinct from the determination of available deductions. One overcomes the former hurdle before tackling the latter. If there exists no personal or hobby element the first hurdle is cleared. The Federal Court of Appeal so found in this case, indicating that motive is not a relevant factor in the determination of whether there is a personal element versus a commercial activity. Presumably however, once a personal element is identified, the motive becomes critical in answering the source of income question posed by Justice Iacobucci in Stewart - is the activity undertaken in pursuant of profit?

[3]      Unlike a law practice or restaurant, to borrow Justice Iacobucci's examples, the holding of properties is neither inherently commercial nor personal. Some investigation is necessary - an investigation which cannot consider the motive, or why the property is being held as relevant. The distinction between personal and commercial must therefore clearly rest solely on the activity itself. As Justice Iacobucci indicated in Stewart: "Where the nature of an activity is clearly commercial, there is no need to analyze the taxpayer's business decisions".

[4]      This approach may readily deal with law practices and restaurants, but in cases such as the Mayskys, is the activity itself so clearly identifiable as commercial as to provide a full answer? The Federal Court of Appeal believed it did, finding that the Mayskys' holding of property, which had been rented in the past, continued clearly to be a commercial activity. No need to consider the pursuit of profit question, but on to the second hurdle.

[5]      In remitting the matter to me for reconsideration on the basis there was a source of income, the Federal Court of Appeal has directed me specifically to address the following two issues:

1.        Were the expenses claimed reasonable?

2.        Were the maintenance and repairs expenses capital in nature and were the interest expenses personal, resulting in neither of those expenses being deductible?

[6]      Before addressing these issues, I wish to emphasize some key findings of fact. First, the Mayskys earned not one penny of rental income in 1996 and 1997. Indeed, no rental revenue was earned from the property after 1994. In 1996 and 1997, the minimal efforts of the Mayskys to rent the property were neither serious nor diligent. I question the veracity of their claim that any efforts at all were made to rent the property. I find there was no credible expectation of actually earning any rental revenue, let alone any profit. The Mayskys acknowledged that the property was maintained for the following purposes: (i) for personal reasons, being retaining the stature of the family home; (ii) for the purpose of the property holding its value so it could be used as security for loans and also so it could catch the upswing in real property values for resale purposes; and (iii) so it could be more readily rentable. The Mayskys' actions belie an acceptance of their position on this latter point. They simply did not seriously try to rent the property.

[7]      So, addressing the first issue, the question becomes, what are reasonable expenses to incur on a "rental property" where there is no rental revenue, no expectation of rental revenue and no serious efforts to obtain any rental revenue? I have no hesitation in finding that no expenses are reasonable under these circumstances. The property earned revenue in some earlier period of time, and the Federal Court of Appeal found that it had not lost the status of a rental revenue property. But, if a taxpayer wishes to deduct expenses from a revenue property, especially one which produces no revenue, those expenses must at least relate to the revenue-producing nature of the property. What expenses are we talking about here? Not marketing expenses, but maintenance and repairs and interest. Maintenance and repairs and interest for a tenantless, vacant property suggests to me they were incurred for the very reasons acknowledged by Mr. Maysky; that is, so the property could be used as collateral and so the property would retain its value for resale purposes. To suggest that they were also incurred to make the property more rentable simply is not credible in the circumstances. These are not reasonable expenses related to the property as a source of income as a rental property. I would dismiss the appeals on the basis the expenses do not pass the reasonableness test set out in section 67 of the Income Tax Act which reads:

In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.

[8]      If the Federal Court of Appeal determines these expenses are reasonable, I find the Mayskys have not proven the maintenance and repairs are on income account, but find that they are on capital account. Further, those expenses and the interest expense are not deductible as they are personal or living expenses within the definition of that term as found in section 248 of the Act, which reads in part:

"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,

[9]      Was this property expense incurred for the benefit of the Mayskys? There was no one else who could possibly have benefitted - no tenant, no potential tenant. The expense was incurred so the property could retain its stature as the family home Mr. Maysky knew, and so that it might retain its value for mortgage or resale purposes - possible benefits to the Mayskys.

[10]     Were the expenses incurred in connection with a business? The Federal Court of Appeal says the Mayskys had a rental property since 1980 and, therefore, on the face of it, have a commercial activity in 1996 and 1997. Yet, I find their activities in 1996 and 1997 fall well short of a "business carried on for profit or with a reasonable expectation of profit" as required to avoid the definition of personal and living expenses. The test for determining a source of income appears to have been given a lower threshold, and the Federal Court of Appeal found the Mayskys met that threshold. This appears to be the very situation the Supreme Court of Canada alluded to in Stewart, where Justice Iacobucci stated: "a commercial activity which falls short of being a business may nevertheless be a source of property income".

[11]     The Mayskys have not however met the threshold for escaping the grasp of "personal or living expenses". They were not in 1996 or 1997 carrying on the rental property business for profit, nor even with a reasonable expectation of profit. They are therefore not entitled to any deductions for those expenses, which are personal or living expenses, caught by paragraph 18(1)(h) of the Act.

[12]     I dismiss the appeals.

Signed at Ottawa, Canada, this 5th day of June, 2003.

J.T.C.C.