Date: 19981014
Docket: 97-3080-IT-I
BETWEEN:
ANTHONY M. HAYES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Christie, A.C.J.T.C.
[1] These appeals are governed by the Informal Procedure
prescribed under section 18 and following sections of the Tax
Court of Canada Act. The years under review are 1992, 1993
and 1994.
[2] At the commencement of the hearing of these appeals on
October 2, 1998 the appellant raised two matters pertaining to
limitation periods provided for in the Tax Court of Canada
Act ("the Act"). The first was whether the
Reply to the Notice of Appeal had been filed within the
prescribed time.
[3] The Court file indicates that on October 17, 1997 Chief
Judge Couture made an order extending the time within which the
appellant could appeal from assessments pertaining to the years
under review. The Order is dated October 17, 1997. The third
paragraph reads:
"This Court orders that the time within which appeals may
be instituted is extended to the date of this Order and the
appeals, received with the application, are deemed to be valid
appeals."
[4] The Court file indicates that the appeals were forwarded
to Revenue Canada on October 24, 1997. The Reply to the Notice of
Appeal was filed with the Registry on December 23, 1997 and copy
was sent on that date to the appellant by registered mail.
Subsection 18.16(1) of the Act provides:
"18.16 (1) The Minister of National Revenue shall file a
reply to a notice of appeal within sixty days after the day on
which the Registry of the Court transmits to that Minister the
notice of appeal unless the appellant consents, before or after
the expiration of the sixty day period, to the filing of that
reply after the sixty day period or the Court allows the
Minister, on application made before or after the expiration of
the sixty day period, to file the reply after that
period."
The appellant did not consent to the filing of the Reply after
the 60-day period. Subsection 27(5) of the Interpretation
Act provides:
"27. (5) Where anything is to be done within a time
after, from, of or before a specified day, the time does not
include that day."
On the basis of what has been said so far, the Reply should
have been filed within 60 days after October 24, 1997, which is
December 23, 1997. That is the date on which the Reply was filed.
Further, it should be noted that paragraph 18.18(1)(a) of
the Act provides:
"18.18 (1) For the purposes of calculating a time limit
for the purpose of section 18.16, 18.17 or 18.22,
(a) the period beginning on December 21 in any year and
ending on January 7 of the next year shall be excluded;"
This means that the Reply did not have to be filed prior to
Monday, January 12, 1998. In this regard it is to be borne
in mind that Saturday and Sunday, January 10 and 11, 1998
are not to be counted in calculating the 60-day period. Section
15 of the Act provides:
"15. Where the time limited for the doing of a thing
under this Act expires or falls on a holiday or a Saturday, the
thing may be done on the day next following that is not a holiday
or Saturday."
Subsection 35(1) of the Interpretation Act declares
that Sunday is a holiday.
[5] The second preliminary point relates to fixing the date
for the hearing of the appeals. Subsections 18.17(1) and
18.17(1.1) of the Act provide:
"18.17 (1) Subject to subsection (1.1), the Court shall
fix a date for the hearing of an appeal referred to in section 18
that is not later than one hundred and eighty days or, where the
Court is of the opinion that it would be impracticable in the
circumstances to fix a date for the hearing of the appeal within
that period, three hundred and sixty-five days after the last day
on which the Minister of National Revenue must file a reply to
the notice of appeal pursuant to subsection 18.16(1) or (3).
18.17 (1.1) The Court may, in exceptional circumstances, fix a
date for the hearing of an appeal referred to in section 18 at
any time after the periods referred to in subsection
(1)."
The Notice of Hearing, which is dated July 24, 1998, states
that the appeals were scheduled to be heard at Ottawa on October
2, 1998. There is nothing on the Court file to show that the
question whether "it would be impracticable in the
circumstances" or whether "exceptional
circumstances" existed was considered. I think the
consequence is that subsection 18.17(1) was not complied with as
it should have been. But this administrative oversight, cannot,
of itself, determine the question whether the reassessments under
appeal are in error. That must be decided on the merits of the
relevant circumstances pertaining to the reassessments. But the
administrative oversight will be drawn to the attention of the
Registrar with a view to avoid repetition in other cases. In
Ginsberg v. The Queen, 96 DTC 6372 the Federal Court of
Appeal held that the failure of the Minister of National Revenue
to reassess tax "with all due dispatch" as stipulated
in subsection 152(1) of the Income Tax Act did not afford
a ground upon which to vacate the reassessment.
[6] There are two minor errors in the Reply in respect of
which counsel for the respondent was granted leave to amend the
Reply. In paragraph 3 "her" should be "his"
and in paragraph 7(a) "Federal" should be
"Provincial".
[7] The question to be decided is whether the appellant is
entitled to deduct certain claimed rental losses in computing his
income for 1992, 1993 and 1994.
[8] Paragraph 7 of the Reply to the Notice of Appeal
reads:
"7. In confirming the reassessments of the
Appellant's income tax returns for the 1992, 1993 and 1994
taxation years, the Minister made the following assumptions of
fact:
(a) during the 1992, 1993 and 1994 taxation years, the
Appellant was employed by the Provincial Government;
(b) the Appellant's personal residence was located at 25
Rosegarden Crescent, Ottawa, Ont.;
(c) the Appellant rented a portion of his personal residence
to arm's length third parties for the 1992, 1993 and 1994
taxation years;
(d) the Appellant claimed 50% of the operating expenses for
the 1992 and 1993 taxation years, and 40% of operating expenses
for the 1994 taxation year;
(e) the rent charged was insufficient to cover the
proportionate share of operating expenses;
(f) the Appellant's calculation of rental losses for the
1992, 1993 and 1994 taxation years can be summarized as
follows:
Taxation Years
1992 1993 1994
Revenues $ 1,200 $ 2,275 $ 3,300
Expenses:
Property Taxes 1,412 1,361 1,080
Maintenance & Repairs 1,521 1,124
573
Interest 5,920 6,339 4,745
Insurance 374 351 351
Light, Heat, Water 952 1,012 897
Other 512 286
0
Total Expenses $10,691 $10,473 $ 7,646
Net Rental Losses $(9,490) $(8,198)
$(4,346)
(g) the Appellant had no reasonable expectation of profit from
the rental property in the 1992, 1993 and 1994 taxation
years;
(h) the expenses claimed by the Appellant for the 1992, 1993
and 1994 taxation years with respect to the rental of his
personal residence were not allowable for the purposes of
computing his rental losses for the 1992, 1993 and 1994 taxation
years as they were not made or incurred by the Appellant for the
purpose of gaining or producing income from a business or
property but were personal or living expenses of the Appellant;
and
(i) the Appellant ceased renting any portion of the personal
residence after the 1994 taxation year."
[9] In order for losses pertaining to the rental of property
to be deductible in computing a taxpayer's income they must
exist in relation to a source of income. Subsection 9(2) of the
Income Tax Act, which is one of the basic rules regarding
income or loss from a business or property, provides:
"9(2) Subject to section 31,[1] a taxpayer's loss for a taxation
year from a business or property is the amount of his loss, if
any, for the taxation year from that source computed by applying
the provisions of this Act respecting computation of income from
that source mutatis mutandis."
[10] In Moldowan v. The Queen, 77 DTC 5213 Dickson J.
(later Chief Justice), in delivering the judgment of the Supreme
Court of Canada, said at page 5215:
“Although originally disputed, it is now accepted that
in order to have a ‘source of income’ the taxpayer
must have a profit or a reasonable expectation of profit. Source
of income, thus, is an equivalent term to business: Dorfman v.
M.N.R., 72 DTC 6131.”[2]
and later on the same page:
“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.”
I emphasize the words "objective determination". In
Kerr and Forbes v. Minister of National Revenue, 84 DTC
1094 (T.C.C.) this is said at page 1095:
"The existence of a reasonable expectation of profit is
not to be determined by the presence of subjective hopes or
aspirations, no matter how genuine or deep-felt they may be. The
issue is to be decided by objective testing."
[11] In Tonn et al. v. The Queen, 96 DTC 6001 the
Federal Court of Appeal examined Moldowan in some detail,
and what was said in the Court's reasons for judgment raised
serious concern in some quarters about the ramifications of
Tonn in relation to Moldowan. Indeed, in
Attorney General of Canada v. Mastri, 97 DTC 5420, counsel
for the Attorney General submitted that Tonn was wrongly
decided and urged the differently constituted panel of the Court
of Appeal in Mastri to "overrule" Tonn or
at least "clarify" what was decided by that appeal.
Robertson J.A., speaking for the Court, said at page 5423:
"In summary, the decision of this Court in Tonn
does not purport to alter the law as stated in Moldowan.
Tonn simply affirms the common-sense understanding that it
is not the place of the courts to second-guess the business
acumen of a taxpayer whose commercial venture turns out to be
less profitable than anticipated."
[12] The appellant said that tenants left on short notice and
he had some difficulty in renting the property. The rental
periods were as follows: 1992 – March 1 to June 30;
1993 – January 1 to March 31 and September 1 to
December 31; 1994 – January 1 to November 30. The
appellant confirmed what is said in paragraph 7(i) of the Reply
to the Notice of Appeal about ceasing to rent the property.
[13] The amounts set out in paragraph 7(f), as being what was
sought to be deducted in computing income, are verified by the
statements of rental income that were filed with the
appellant's returns of income. Those documents are in
evidence as exhibits. The figures in that paragraph speak for
themselves, and they establish that when objectively regarded, a
reasonable expectation of profit did not exist in any of the
years under appeal. It will be noted that in 1992 income was 20%
of interest alone. The same percentages for 1993 and 1994 are 36
and 70. Even if interest being the major expense is disregarded,
the other expenses exceed income in 1992 and 1993. In 1994, again
disregarding interest, income exceeded expenses by $399.00.
[14] The appeals are dismissed.
Signed at Ottawa, Canada, this 14th day of October 1998.
"D.H. Christie"
A.C.J.T.C.C.
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