Date: 19981127
Docket: 97-3397(IT)I
BETWEEN:
STANLEY GODZISZ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Somers, D.J.T.C.C.
[1] This appeal was heard at Toronto,
Ontario, on October 20, 1998.
[2] The Appellant appeals from the
assessments of income tax for the 1993, 1994 and 1995 taxation
years. In each taxation year the Minister of National Revenue
(the "Minister") disallowed the deduction of rental
losses based on the facts that the expenses were personal or
living expenses and, in the alternative, the expenses were not
reasonable in the circumstances.
[3] The Minister relied on sections 3,
9, 54 and 67, subsection 248(1) and
paragraphs 18(1)(a), 18(1)(h), 38(b),
39(1)(b), 40(2)(g) and 111(1)(b) of the
Income Tax Act (the "Act").
[4] In reassessing the Appellant, the
Minister made the following assumptions of fact which were
admitted or denied by the Appellant:
"(a) the facts
hereinbefore admitted;
(b) in December
1985, the Appellant and his spouse purchased a vacant lot at
18701 Countryman Avenue, Port Charlotte, Florida (the
"Lot") and by December 1986 a two-bedroom home of
approximately 1,900 square feet with garage, swimming pool and
lanai had been constructed on the Lot at a cost of $100,000.00;
(admitted)
(c) the purchase and
furnishing of the Property was financed by a mortgage of
$109,000.00 from Canada Trust; (admitted)
(d) at all material
times, the management of the Property was undertaken by Port
Charlotte Home Builders R.D. Ltd.
("Port Charlotte") who set the rental rates, and
in all other respects controlled the rental of the Property;
(admitted)
(e) in addition to a
management fee, Port Charlotte charged the Appellant 25% of the
gross rental fees received when rented to third parties, and 15%
of the gross rental fee when the property was occupied by the
Appellant; (admitted)
(f) from 1987
to 1995, the Appellant reported rental income and losses on the
Property as follows: (admitted)
Gross
Income
Net Loss
1987
$11,369.00
($ 6,075.00)
1988
$
8,396.00
($ 8, 769.00)
1989
$11,200.00
($ 8,005.00)
1990
$
9,350.00
($11,018.00)
1991
$
9,065.00
($ 9,107.00)
1992
$
6,925.00
($ 8,522.00)
1993
$
4,715.00
($ 9,708.00)
1994
$
7,512.00
($10,352.00)
1992
[sic]
$
6,195.00
($12,112.00);
(g) the Appellant
reported rental income, expenses and losses as per Schedule
"A", attached; (admitted)
(h) during the 1993,
1994 and 1995 taxation years, the Appellant included in the
rental expenses personal and capital expenditures in the amounts
of $2,500.00, $2,165.00 and $3,343.00, respectively; (denied)
(i) during the
1993, 1994 and 1995 taxation years, the property was rented for
78 days, 71 days and 82 days, respectively, of which the
Appellant occupied the Property for 24 days, 8 days and
30 days, respectively; (denied)
(j) the
Appellant had no reasonable expectation of profit from renting
the Property during the 1993, 1994 and 1995 taxation years;
(denied)
(k) the rental
expenses were personal or living expenses of the Appellant;
(denied)
(l) at all
material times, the Property was used primarily for the personal
use or enjoyment of the Appellant. (denied)"
[5] The Appellant testified that he
bought a property in Florida for investment purposes coupled with
the intention of spending several months a year when he retired.
Since the purchase of the property in 1985, he visited and
vacationed on his property every year. The total cost of the
construction amounted to $100,000.00. The property was financed
for $109,000.00, covering the cost of the construction and the
amount of $8,000.00 for the purchase of furniture.
[6] The property was purchased as a
result of a promotional sale by Port Charlotte Home Builders
R.D. Ltd. The literature given to the Appellant stated that he
could use the cost of the construction as a tax shelter. The
Appellant was influenced by the section of the booklet referring
to investment and not by the section "vacation".
However, he recognized that the purchase plan was suitable for
people of retirement age where he could spend leisurely
months.
[7] The plan was prepared by the
vendor. The Appellant was more interested in an investment and
losses were not a factor that he considered. He did not have an
investment plan of his own because he relied on the vendor's.
It was the first time he went into such venture.
[8] As shown in subparagraph 11(f) of
the Reply to the Notice of Appeal, the Appellant suffered yearly
losses from 1987 to 1992, ranging frrom $6,075.00 to $12,112.00.
Schedule "A", attached to the Reply to the Notice of
Appeal, indicates the rental income and expenses for the years
1993, 1994 and 1995 as follows:
"Rental Income and Expenses
1993
1994
1995
Rental
Income
$ 4,715.00 $
7,513.30 $
6,195.00
Property
Taxes
$ 1,569.35 $ 1,
628.23 $ 1,154.23
Maintenance and
Repairs
536.09
3,930.69
6,281.52
Interest
5,466.79
4,976.36
4,360.85
Insurance
288.60
332.31
253.34
Light, Heat,
Water
2,374.34
1,795.66
1,913.72
Advertising
780.00
940.00
nil
Other
Expenses
3,407.91
4,262.03
4,343.85
Total Rental
Expenses
$14,423.08
$17,864.78 $18,307.51
Net Rental Income
(Loss) ($
9,708.08) ($10,352.48)
($12,112.51)"
[9] The interest alone was a major
yearly expenditure; the light, heat and water bills were other
major expenses. Other expenses were incurred such as paying Port
Charlotte Home Builders R.D. Ltd. a commission of 25% of the
gross rental fees received when the property was rented to third
parties for vacations for a few weeks at a time. A commission of
15% of the gross rental fees was charged to the Appellant when he
or members of his family were occupying the property.
[10] The expenses deducted included
travelling expenses, that is to and from Florida, which covered
gasoline, rented accommodation and meals. Some of the expenses
deducted include the cost of groceries and other luxury items
such as mascara, etc. The Appellant stated that the purposes of
his yearly trips to Florida were to deal with the administration
of the property and attending to repairs, if necessary.
[11] In the case of Tonn v. R., 96
DTC 6001, Justice Linden of the Federal Court of Appeal stated
the following:
"A closer look at this jurisprudence will illustrate that
this is the approach now taken in most of the cases. The cases in
which the "reasonable expectation of profit" test is
employed can be placed into two groups. One Group is comprised of
the cases where the impugned activity has a strong personal
element. These are the personal benefit and hobby type cases
where a taxpayer has invested money into an activity from which
that taxpayer derives personal satisfaction or psychological
benefit. Such activities have included horse farms, Hawaii and
Florida condominium rentals, ski chalet rentals, yacht
operations, dog kennel operations, and so forth. Though these
activities may in some ways be operated as businesses, the cases
have generally found the main goal to be personal. Any desire for
profit in such contexts is no more than a "pious wish"
or "fanciful dream". It is only a secondray motive for
having set out on the venture. What is really going on here is
that the taxpayer is seeking a tax subsidy by deducting the cost
of what, in reality, is a personal expenditure."
[12] In the case of Cheesmond v.
Canada [1995] T.C.J. No. 775, in which a similar set of facts
as those in the appeal at bar were considered whereby a property
was purchased in Florida and involved the same company, Port
Charlotte Home Builders R.D. Ltd., Judge Bowman of this Court
concluded:
"This conclusion does not of course justify the
automatic disallowance of all losses in the early years of a
genuine viable rental operation. There should be a reasonable
period in which to permit the enterprise to become
self-supporting. In the years under appeal, however, I do not
think it had reached the stage where it can be called either a
business or a viable rental operation."
[13] In the present appeal the Appellant had
a personal element involved in the purchase of the property: part
of the motivation was for retirement purposes. He and his family
made use of the property from 1987 to 1995. The Appellant had no
business plan, he relied only on the promotional information
obtained from the builder. He financed the full amount of the
cost of building and furnishing the house. Furthermore, part of
the expenses deducted were for living and travelling expenses to
and from Florida.
[14] I cannot conclude that rental of the
house in Florida was a viable commercial venture.
[15] The appeal is dismissed.
Signed at Ottawa, Canada, this 27th day of November 1998.
D.J.T.C.C.
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