Gaouette v. The Queen, docket 97-2333(IT)I (Informal Procedure)

[OFFICIAL ENGLISH TRANSLATION]

97-2333(IT)I

BETWEEN:

JACQUES GAOUETTE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on March 10, 1998, at Sherbrooke, Quebec, by

the Honourable Judge Alain Tardif

Appearances

Counsel for the Appellant:                    Bertrand Lussier

Counsel for the Respondent:                Michel Lamarre

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1992 and 1993 taxation years are dismissed in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 20th day of March 1998.

"Alain Tardif"

J.T.C.C.

Translation certified true

on this 7^th day of June 2003.

Sophie Debbané, Revisor

[OFFICIAL ENGLISH TRANSLATION]

Date: 19980320

Docket: 97-2333(IT)I

BETWEEN:

JACQUES GAOUETTE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Tardif, J.T.C.C.

[1]      This is an appeal concerning the 1992 and 1993 taxation years. In respect of the years at issue, the appellant claimed that he had suffered rental losses and a major final loss on selling the building that was to have generated rental income.

[2]      The main facts at issue are the following:

- The appellant purchased a single-family house in 1987. The principal residence was occupied by the appellant and his two teenaged children of whom he had joint custody.

- In 1991, the appellant met a woman who soon became his spouse; since she owned a triplex, they agreed to live together as man and wife in the basement unit of her triplex.

- Subsequent to that decision, the appellant moved in with his companion and thus freed up the house on Auguste Dubuc Street in Sherbrooke, hitherto occupied as his family residence.

- A year before renewing his loan, for which the rate of interest was over 10%, he decided on a change in use for his family residence, making it a business affair. According to him, there was a possibility that he could rent out his residence for a monthly consideration that could vary between $600 and $700 per month, providing an income that would be amply sufficient to make the operation both viable and profitable.

[3]      He testified that he did not pay for advertising to rent his house but put up notices on several bulletin boards at the grocery store, the C.H.U. hospital and the Université de Sherbrooke. In his opinion, this was a better and more certain way of finding really good, serious tenants.

[4]      Encountering problems in renting and after receiving notice by the insurers on December 17, 1991, that his insurance coverage would be cancelled as of January 15, 1992, if the premises remained unoccupied, the appellant said that he became very nervous and worried. He was afraid that cancellation of the insurance coverage on his property would result in having the creditor call in the mortgage loan. His deep-seated concerns led him to turn to a real estate agent to facilitate the rental and speed things up.

[5]      After testifying that the mandate he had signed was a rental listing agreement, he admitted on cross-examination that the mandate he had given to a Ms. Trépannier was not for renting but was for selling. Furthermore, the evidence showed that the appellant's residence had been described in a specialized publication intended for the entire real estate network, the obvious purpose being to let all the real estate agents know that his residence was for sale. After the listing agreement was signed, a "for sale" sign was erected in front of the residence.

[6]      Between 1992 and 1993, the real estate market was just as bad as the rental market. This was clear from the appellant's testimony and from the contents of Exhibit I-2, which showed that three of the entries were for properties located on Auguste Dubuc Street.

[7]      It was understandable that the appellant, faced with such unpromising prospects, do everything he could to protect his capital, minimize his losses and preserve his financial assets.

[8]      Is this enough to justify the appellant's claim for financial loss? I do not think so. Indeed, the Court has found it hard to ascertain, understand and assess what really happened in terms of the origin of the plan to rent and how the plan was managed. While I agree that the process may be imperfect, the only tools I have at my disposal to assess the nature of those plans are the facts established by the evidence, the burden of which was on the appellant.

[9]      I noted from the evidence that the appellant gave a real estate agent a mandate to sell and that this was done after he saw how bad the market was. At the time he devised the plan, the appellant, banking on a good and reliable tenant, estimated that he could get between $600 and $700 if he rented out his residence. The reality was something else: the rentals were for very brief periods and the consideration far below what had been anticipated.

[10]     Residential rentals are highly regulated and tenants enjoy rights and powers that can have an impact on the sale of residential property. Consequently, the regulations often have the effect of dampening the owner-vendor's enthusiasm for renting a property that he wants to sell.

[11]     On the other hand, when a building is unoccupied and purchasers are hard to come by, the financial expense involved in holding on to the building becomes a burden and the thought that the insurers might cancel coverage for the unoccupied building is particularly unnerving.

[12]     Caught in an economic downturn, the appellant chose the route that was tempting and theoretically possible; to succeed, however, his project needed to be better structured and defined and, above all, more consistent.

[13]     It is not enough to hope or to mentally plan a project for it to become a reality that may be raised against the tax authorities. It is imperative that it be a genuine, concrete and realistic project.

[14]     In the case at bar, I believe that the market and its constraints were the principal elements that shaped the project devised by the appellant. The evidence did not demonstrate the consistency needed to implement the project that the appellant wanted the respondent to accept. I do not think there would have been a case if the appellant had been able to sell his property quickly and obtain a fair price for it.

[15]     Although it is a difficult process, the nature of a transaction must be assessed on the basis of the actual intentions at the time of the creation of the project, which must be followed by concrete, consistent and sustained action towards an objective that is equally well determined. In the case at bar, the project was obviously created to offset a disastrous financial situation. The evidence essentially showed that the facts were interpreted to support plans that were far more theoretical than practical. The theory relied on was not supported by objective and plausible facts.

[16]     The weight of the evidence essentially showed that the appellant's project was unrealistic; the appellant did everything possible to minimize his losses, but this is insufficient to find in his favour.

[17]     For these reasons, the appeal is dismissed.

Signed at Ottawa, Canada, this 20th day of March 1998.

"Alain Tardif"

J.T.C.C.

Translation certified true

on this 7^th day of June 2003.

Sophie Debbané, Revisor