[OFFICIAL ENGLISH TRANSLATION]
Date: 19980807
Docket: 98-225(IT)I
BETWEEN:
DENIS BLOUIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] These are appeals for the 1993 to
1995 taxation years. There is only one issue for those three
years, namely whether the appellant was carrying on a rental
business with regard to a certain property.
[2] The facts on which the Minister of
National Revenue ("the Minister") relied in making his
reassessments are set out in paragraphs 8, 9 and 10 of the
Reply to the Notice of Appeal ("the Reply"):
[TRANSLATION]
8. When the
appellant filed his tax returns for the 1993, 1994 and 1995
taxation years, he claimed in computing his income $5,169 for
1993, $6,355 for 1994 and $5,910 for 1995 as net rental
losses with respect to the property.
9. By notices
of reassessment dated October 7, 1996, for the 1993,
1994 and 1995 taxation years, the Minister denied the appellant
the net rental losses referred to in paragraph 8.
10. In making the
reassessments of October 7, 1996, the Minister assumed
the following facts, inter alia:
a. a loss has
always been incurred on the property since it was acquired in
1992;
b. the
property is a single-family home;
c. the
appellant's intent in building was to use the property as a
personal residence;
d. the
appellant had no reasonable expectation of earning a profit from
the activity of renting his property during any of the 1993, 1994
and 1995 taxation years;
e. the
appellant has not shown that he incurred expenses with respect to
the property for the purpose of gaining or producing income from
a property or business for the 1993, 1994 and 1995 taxation
years.
[3] The Notice of Appeal reads as
follows:
[TRANSLATION]
SCHEDULE A
. . .
2. These
losses are directly related to a loss of rental income, since the
rented house did not generate enough income to cover all the
expenses associated therewith.
3. That loss
occurred because of a shortage of income, since the house was not
always rented 100 percent of the time on a yearly basis, and
because of non-recurrent expenditures that necessitated
further loans, thus increasing interest charges, and also because
of repairs (property maintenance) that were out of the
ordinary.
4. Moreover, I
never lived in that house. I lived in another house that I also
own.
SCHEDULE B
1. The auditor
working for Revenue Canada did not understand that the house was
built for the purpose of selling it.
2. However,
because of several problems during and at the end of
construction, the cost price was a little too high for a quick
sale. I was obliged to rent the house until such time as it was
sold.
3.
Subsequently, the many expenses occasioned by bad tenants further
increased the cost price of the house.
4. I cannot
rent the house at a higher price because of the current market
conditions. It is better to have a little less than nothing at
all.
5. The house
is still for sale, but given the decrease in the price of houses
since 1994, it may be necessary to be patient to get a fair price
for it.
6. I can
provide receipts for the many expenses incurred with a view to
selling the house.
7. The office
where the objection was dealt with is:
Revenue Canada
165 Rue de la Pointe-aux-Lièvres sud
Québec, Quebec G1K 7L3
[4] The notice of objection, which was
filed as Exhibit I-5, states the following:
[TRANSLATION]
I challenge the assessments in question because it is my view
that the rental losses incurred on my Ste-Foy property in
the above-mentioned years are deductible since I built the
house for the purpose of selling it. However, since I could not
sell it, I put it up for rent intending to sell it when there was
demand.
I did not intend to use it for personal purposes since, after
it was built, I held open houses, and a sales office was set up
to meet clients. The fact that I did not receive any valid offers
was what prompted me to rent it until a buyer could be found.
[5] Michel Martel, an accountant,
acted as the appellant's agent at the hearing.
[6] The appellant admitted
subparagraphs 10(a) and (b) of the Reply. He denied
subparagraph 10(c).
[7] He explained to the Court the
specific circumstances in which he acquired the property located
at 1741 Rue Ste-Famille in Ste-Foy.
Initially, there was an agreement between a real estate agent, a
builder and the appellant. The appellant had purchased a lot, on
which the builder built a house and sold it to the appellant. The
house was to serve as a model home for the purposes of three
parties: the builder could have built other houses; the
appellant, who had a small flooring installation business at the
time, could have benefited through an increase in his clientele;
and the real estate agent could have earned commissions. It would
seem that the agreement did not get beyond the stage of building
the house. In any event, the appellant ended up owning a house
that he immediately put up for sale. He apparently could not find
any buyers and therefore decided to rent it.
[8] Exhibits I-1, I-2
and I-3 are the financial statements for the property in
question for the three years at issue. They describe the income
and expenses as follows:
[TRANSLATION]
STATEMENT OF INCOME AND EXPENSES
FOR THE 12 MONTHS ENDING ON DECEMBER 31,
1993
INCOME
Rent
$7,650.00
$7,650.00
EXPENSES
Municipal and school
taxes
$1,634.25
Fire and liability
insurance
241.00
Interest on
loan
9,971.23
Electricity
93.36
Maintenance &
repairs
879.45
$12,819.29
Net loss for the
year
$ 5,169.29
STATEMENT OF REAL ESTATE RENTALS
For the period 01/01/94 to 31/12/94
. . .
GROSS RENTAL
INCOME
4,350.00
EXPENSES
Total - Personal
= Deductible
expenses
portion
amount
Property
taxes
1,645.00
1,645.00
Maintenance and
repairs
1,267.00
1,267.00
Insurance
357.00
357.00
Electricity
51.00
51.00
Interest on
loan
7,315.00
7,315.00
Advertising and
stationery
70.00
70.00
Total deductible
expenses
10,705.00
10,705.00
NET RENTAL INCOME before capital cost
allowance
( 6,355.00)
STATEMENT OF REAL ESTATE RENTALS
For the period from:
01-01-1995 to: 31-12-95
Gross income . .
.
6,870.00
EXPENSES
Total
Personal
expense
portion
Advertising
208.00
Insurance
340.00
Interest
8,658.00
Maintenance and
repairs
1,166.00
. . .
Property
taxes
1,634.00
. . .
Utilities
774.00
Total
expenses
12,780.00
. . .
Deductible
expenses
12,780.00
Net income (loss) before adjustments . .
.
( 5,910.00)
[9] In 1992, the appellant obtained
permission from the municipality of Ste-Foy to put a
secondary suite in the basement, which would have added to the
rental income. The suite was never put in because it would have
cost too much. According to an estimate by Mr. Martel, it
would have cost between $15,000 and $20,000.
[10] Mr. Martel, who was the agent for the
appellant at the hearing, has also been renting the property in
question for the past three years. His rent is $660 a month. He
stressed that this is a normal rent for such a house.
[11] Counsel for the respondent argued that
the fixed costs greatly exceeded the rental income and that, in
such circumstances, there cannot have been a business carried on
with a reasonable expectation of profit.
[12] The agent for the appellant tried to
argue that, by obtaining the permit to build a second dwelling
unit in the property, the appellant had done what was necessary
to make the rental operation profitable.
[13] According to the case law, as given
concrete expression by the Supreme Court of Canada's decision
in Moldowan v. The Queen, [1978] 1 S.C.R. 480, the
expression "income from a business or property" means
income from a source that is a profitable business or that at
least has a reasonable expectation of profit. That is the income
referred to, inter alia, in sections 3 and 9 and
paragraph 18(1)(a) of the Act. In the
Act, the term "business" therefore refers to a
business established so as to generate profits. The same meaning
is given to income from property.
[14] That the property was purchased for
resale is really of no significance in determining the commercial
nature of the activity of renting it. Nor do I have to take into
account the possibility of a second dwelling unit, since it was
never built.
[15] It must be determined whether the
rental operation was a business enterprise, that is, an
enterprise likely to make profits. To make this determination, it
is necessary to look at the fixed costs, namely the mortgage
interest, the property taxes and the insurance. In the
appellant's case, the cost of electricity must also be added,
since, according to Exhibit I-4, electricity, heat and
hot water costs were to be borne by the landlord. Some allowance
must also be made for current expenses and other expenses that
might be incurred. Such expenses must be considered in relation
to the potential income so that the likelihood of profits may be
determined.
[16] It is my view that on the balance of
evidence one can only conclude that the rental activity was not
in the nature of a business enterprise. As set up, that activity
could not generate profits. The only thing that was certain when
the rental activity was undertaken was that substantial rental
losses would be incurred given the significant fixed costs
associated therewith, which were much higher than the potential
rental income.
[17] I must therefore conclude that the
Minister assessed correctly in fact and in law when he disallowed
the rental expenses, since, given that the rental activity was
not a business within the meaning of the Act, the expenses
in question were not incurred for the purpose of gaining income
from a business or property.
[18] The appeals are dismissed.
Signed at Ottawa, Canada, this 7th day of August 1998.
J.T.C.C.
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