Date: 19980428
Docket: 97-1820(IT)I
BETWEEN:
SUSAN KIMBERLY DWINNELL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
O'Connor, J.T.C.C.
[1] These appeals were heard at
Toronto, Ontario on April 9, 1998 pursuant to the Informal
Procedure of this Court. The Appellant was the only person to
give evidence.
Issue
[2] The issue is whether the Appellant
was entitled in the years 1991 through 1994 to deduct certain
rental losses with respect to her home in Oshawa, Ontario.
Facts
[3] I find the basic facts to be as
follows.
1. On February 25, 1989
the Appellant, a school teacher, purchased a two storey home at
150 Sagebrush Street in Oshawa, Ontario (the
"Property") for a price of $164,500 as her principal
residence.
2. Subsequent to the
purchase the Appellant prepared the basement area for rental. She
was prepared to rent it out in early 1991. The tenant for the
basement area was to share the kitchen, a bathroom, a laundry
room and use the same entrance as the Appellant. Further, the
tenant was to share the phone bill and the T.V. Cable was
available to the television in the basement area and the
Appellant's television on the first floor.
3. The bathroom in the
basement was unfinished and could not be used. Also, there was no
kitchen in the basement. The Appellant explained that as it was
impossible for her to afford those improvements she was only able
to rent the non-self-contained basement at $300 as opposed to
$400 to $450 per month had the basement area been
self-contained.
4. The Appellant
advertised in neighbourhood facilities such as her church and
local store as well as by word of mouth. She did not want just
any tenant because of the considerable shared areas and
facilities described above.
5. The Appellant intended
to improve the basement with the expectation of increased rents
but she was not able to afford this for the main reason that her
expected salary increases on her teaching income were frozen
under the Social Contract for a period commencing September 1992
and terminating only in June 1995.
6. The expenses were
higher than normal for the following principal reasons:
(a) the electric furnace and
water heater bills were very high. The Appellant wanted to
replace these but could not afford to do so until 1994 at which
time she did so; and
(b) the Appellant encountered an
unforeseen large expense resulting from a heated contest with her
ex-husband over the custody and child support of her four
children. To pay her lawyer's fees she had to increase her
mortgage from $76,000 to $110,000, thus increasing the interest
expense.
7. The rent and expenses
claimed are set out in the Reply to the Notice of Appeal as
follows:
|
YEAR
|
INCOME
|
INTEREST EXPENSE
|
MAINT. & REPAIR
|
TOTAL EXPENSES
|
RENTAL PORTION
|
LOSS CLAIMED
|
|
|
|
|
|
|
|
|
|
1991
|
$ 600
|
$7,490
|
$1,650
|
$15,406
|
33%-$5,083
|
$4,483
|
|
|
|
|
|
|
|
|
|
1992
|
$3,600
|
$6,660
|
$ 100
|
$12,597
+ Prop.
|
50%-$6,290
Tax _2,600
|
$5,298
|
|
|
|
|
|
|
|
|
|
1993
|
$3,600
|
$6,580
|
$ 300
|
$11,954
+ Prop.
|
50%-$5,977
Tax 2,640
|
$5,017
|
|
|
|
|
|
|
|
|
|
1994
|
$3,600
|
$7,973
|
$3,615
|
$19,645
|
33%-$6,541
|
$2,941
|
|
|
|
|
|
|
|
|
8. The Appellant explained
that her accountant had done her returns for 1991 and 1994 and
allocated the rental portion at 33%. The Appellant herself did
her returns in 1992 and 1993 and claimed 50%. She admitted that
the 50% was erroneous and that it should have been 33% for the
rental portion throughout the four years. The Appellant also
acknowledged that her method of calculating real estate taxes in
1992 and 1993 was incorrect.
9. The Appellant projected
a profit in 1995 as shown on Exhibit A-1 which projections were
made on the basis that the mortgage amount used was the original
mortgage amount as reduced by any payments on account of capital
thereon.
Analysis and Decision
[4] The issue is whether the Appellant
had a reasonable expectation of profit given the foregoing
circumstances. I found the Appellant to be forthright, direct and
credible. She admitted her mistakes adding that this rental
operation was her first experience at same. In my opinion, for
the following reason, the Appellant had a reasonable expectation
of profit, especially considering the adjustments which will be
detailed later. My reasons for this finding are:
(a) The amounts claimed are
modest and do not appear to be exaggerated. This is more so when
the adjusted figures below are considered.
(b) The mortgage had to be increased
for the unforeseen reasons discussed above.
(c) The freezing of the
Appellant's salary resulted in her inability to finish the
bathroom and install a kitchen in the basement and thus not be in
a position to charge higher rents.
(d) There was a projected profit for
1995 although this is tempered by the fact that the original
amount of the mortgage as reduced is used in that projection.
[5] Notwithstanding this general
finding in favour of the Appellant, in my opinion the replacement
of the furnace and water heater expenses in 1994 were capital in
nature and not deductible.
[6] Consequently the appeals are
allowed and the matters are referred back to the Minister for
reconsideration and reassessment on the following bases:
1991 - the allowable loss should be $4,060. This results from
only allowing 11/12th's (i.e. $14,122) of the total expenses
claimed because the contemplated rental operation only commenced
in February of 1991 as opposed to January 1, 1991. 33% of $14,122
is $4,660. The rental income was $600, consequently the allowable
loss is $4,060.
1992 - the allowable rental loss should be $1,415. This
results from adding the property tax ($2,600) to the total
expenses claimed to produce an amount of $15,197. The 33% rental
portion becomes $5,015. The rental income was $3,600 for a loss
of $1,415.
1993 - the allowable rental loss should be $1,216. This
results from adding the property taxes ($2,640) to the total
expenses claimed to produce an amount of $14,594 and the 33%
rental portion becomes $4,816. The rental income was
$3,600, for a loss of $1,216.
1994 - the allowable rental loss should be $1,924. This
results from reducing the total expenses claimed by the combined
cost of the furnace and hot water tank thus $19,645 - $2,905
producing $16,740. 33% of $16,740 is $5,524. The rental income
was $3,600 to produce a loss of $1,924.
Signed at Ottawa, Canada this 28th day of April 1998.
J.T.C.C.
COURT FILE
NO.:
97-1820(IT)I
STYLE OF
CAUSE:
Susan Kimberly Dwinnell and The Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
April 9, 1998
REASONS FOR JUDGMENT BY: The Honourable
Judge T.P. O'Connor
DATE OF
JUDGMENT:
April 28, 1998
APPEARANCES:
For the
Appellant:
The Appellant herself
Counsel for the Respondent: Madeleine
Schwarz
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the
Respondent:
George Thomson
Deputy Attorney General of Canada
Ottawa, Canada
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