Amato v. The Queen, docket 97-2251-IT-I (Informal Procedure)

Date: 19980603

Dockets: 97-2251-IT-I; 97-2252-IT-I

BETWEEN:

ELIZABETH M. AMATO, EUGENIO AMATO,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent,

Reasons for Judgment

Rip, J.T.C.C.

[1] The appellants, Elizabeth M. Amato and Eugenio Amato, wife and husband, have appealed their assessments for 1992, 1993 and 1994 on the basis that when they acquired a condominium unit in May 1987, they had a reasonable expectation of profit from this property and that the expenses incurred by them during the years in appeal, which were disallowed by the Minister of National Revenue ("Minister"), were incurred by them for the purpose of gaining or producing income from a business or property.[1]

[2] In May 1987 the appellants purchased a condominium unit located at Sandhurst Circle in the City of Scarborough, Ontario. The purchase price for the property was $138,000. The appellants borrowed $57,000 with security being a mortgage on their home in Markham, Ontario and their bank advanced $88,000 with security being a first mortgage on the Scarborough property.

[3] The appeals were heard on common evidence. Mrs. Amato testified on behalf of herself and her husband. The Amatos and their two children emigrated to Canada from Uraguay in 1977. Since they could not speak English, the Amatos were unable to secure employment in the field they were trained in, Mrs. Amato as a teacher of physical education and Mr. Amato as an electrician. They obtained positions as building superintendents. Soon their skills were recognized and it was suggested to them that they start a building maintenance business. This they did, and they were successful. Mrs. Amato testified that the business now employs approximately 60 people, some of whom are part-time.

[4] Throughout the time they operated the business, the Amatos relied upon advice from their bank manager. Sometime in about 1987, the bank manager suggested that they purchase investment property, in particular, real estate. Mrs. Amato recalled that the bank manager calculated how much money they could afford to put down and how much the bank was willing to lend them on security of their assets and what price he thought they could afford. He also told them how much interest they could afford to pay to finance the property and how much cash-flow would be necessary to support the payments of interest. The bank manager also referred them to a real estate agency next door to the bank. It was on the basis of the advice from their bank manager that the Amatos acquired the Scarborough property.

[5] On acquiring the property the appellants incurred additional expenses to make the property more attractive.

[6] Unfortunately, from the time they bought the property until 1994 the appellants failed to show a profit from renting the property and claimed the following losses:

YEAR	TOTAL RENTAL LOSS	EACH APPELLANT'S SHARE - 50%
1987	$ 1,478	$ 739
1988	$ 5,378	$2,689
1989	$ 2,934	$1,467
1990	$ 2,382	$1,191
1991	$ 2,196	$1,098
1992	$17,438	$8,719
1993	$18,190	$9,095
1994	$17,848	$8,924

[7] One of the assumptions of fact that the Minister considered when he made the assessments was that the Scarborough property was vacant throughout 1993 and 1994. Mrs. Amato recalled that it was very difficult to rent the property during those years. She said people were loosing jobs and that the people applying to rent the unit were not reliable. She said they either had poor credit ratings or their references from previous landlords were not favourable. She and Mr. Amato decided to renovate the unit so as to get a better grade of tenant.

[8] The appellants advertized the unit for rent in newspapers throughout the years in appeal. Although the appellants did not claim the costs of advertising as an expenses, Mrs. Amato stated she gave receipts to an official of Revenue Canada. The asking price for the unit was $1,100 per month. She stated that at time of trial the unit is being rented for $1,000 per month. She also indicated that they are now making a profit of about $10 per month on the unit.

[9] According to Mrs. Amato, the intent in acquiring the Scarborough property in 1987 was so that she and her husband would have some income on their retirement. They did not intend to sell the property and, indeed, have not attempted to sell the property. She stated that they are making efforts to reduce the mortgage on the property.

[10] Mrs. Amato stated that at least on one occasion a tenant left the unit in a "mess" and the Amatos incurred unexpected costs to repair the unit.

[11] Mrs. Amato's credibility was not challenged in cross-examination.

[12] The respondent's position is that there was no reasonable expectation of profit on the acquisition of the property and since there was no reasonable expectation of profit, the Amatos had no source of income from the property. Respondent's counsel acknowledges that there was no personal element in the acquisition of the property.

[13] In Moldowan v. The Queen, 77 DTC 5213, a decision of the Supreme Court of Canada, Dickson, J. (as he then was) held that in order to have a "source of income" the taxpayer must have a profit or a reasonable expectation of profit. On page 5215 he explained that:

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. 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 factors will differ with the nature and extent of the undertaking: The Queen v. Matthews (1974), 28 DTC 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

[14] Respondent's counsel submitted that the appellants had at least eight years of losses on the property, no experience or training in holding real estate, no intended course of action to demonstrate that the property could be successful and they failed to show that the property, as capitalized, can show a profit. He added that the property has not proven to be capable of producing a profit over the long term. Thus, he submitted, the property could not be said to be a source of income to the Amatos in the years in appeal.

[15] In Tonn et al. v. The Queen, 96 DTC 6001, the Federal Court of Appeal confirmed that it is not the place of a court to second-guess the business acumen of a taxpayer whose commercial venture turns out to be less profitable than anticipated. See also A. G. of Canada v. Mastri, 97 DTC 5420 at 5423 (F.C.A.). In the appeal at bar there are circumstances, not usually present in cases such as this, that are favourable to the appellants' claims.

[16] The question before me is whether or not the appellants had a reasonable expectation of profit and the determination of that question is an objective determination to be made from all of the facts. This is what was stated by the Supreme Court in Moldowan, supra. The appellants at bar were immigrants to Canada. They carry on a successful business. In making various investment and business decisions they rely upon the advice of their bank manager. They, themselves, do not believe they had the expertise to make such decisions. It was the bank manager who suggested to them that they acquire a rental property. He sat down with them and advised them, among other things, how much they could afford to pay for the property and how much rent they would have to receive from the property to meet their mortgage obligations. They acquired the property for a price which the bank manager said would be appropriate. They had confidence in their bank manager.

[17] At the time of the acquisition of the property, it is clear to me the appellants had a reasonable expectation of profit from the property. In considering whether there is a reasonable expectation of profit in the minds of taxpayers, as opposed to their hope of profit, one ought to consider, in addition to the criteria set down in Moldowan, their background and their source of counsel in deciding to invest. To the appellants, a bank manager is a competent and knowledgeable individual who could advise them how to make an affordable, secure and profitable investment. That they incurred losses since 1987, including the years in appeal, and, for example, that they had no investment background or training, do not, on the specific and peculiar facts of this appeal, negate the appellants' reasonable expectation of profit from the property over the long term.

[18] Accordingly, their appeals will be allowed with one set of costs, if any.

Signed at Ottawa, Canada, this 3rd day of June 1998.

"Gerald J. Rip"

J.T.C.C.

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