[OFFICIAL ENGLISH TRANSLATION]
Date: 20020913
Docket: 2001-3056(IT)I
BETWEEN:
GILLES MONTMINY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal concerning the
1993, 1994, 1995 and 1996 taxation years.
[2] The points at issue are as
follows:
first, whether the expenses claimed
annually in respect of the condominium located in the town of
Beaupré were incurred by the appellant during the 1993,
1994, 1995 and 1996 taxation years for the purpose of gaining or
producing income from a business or property;
second, to determine whether for the
1993, 1994, 1995 and 1996 taxation years the respective amounts
of $20,562, $12,823, $13,478 and $10,697, which the appellant
claimed as rental losses, were correctly computed.
[3] In making and confirming the
reassessments, the Minister of National Revenue (the
"Minister") assumed the following facts:
[TRANSLATION]
(a) on
February 26, 1990, the appellant purchased a condominium
located at 203 Rue Val des Neiges,
apartment 4012, in the town of Beaupré;
(b) among other
things, the condominium comprises one closed bedroom and a
mezzanine, and the total area is approximately 928 square
feet;
(c) the condominium
is part of a condominium village known as "Domaine
Val des Neiges";
(d) the appellant
acquired the condominium at a cost of $130,500;
(e) the appellant
acquired this hotel-apartment by means of 100 percent
financing from a caisse populaire;
(f) the
building unit is part of a pool of condominiums the management of
which was assigned to a corporation called
"Hébergement Mont Sainte-Anne
B.B.F. Inc.";
(g) the appellant
signed an "Option A" management contract with
Hébergement Mont Sainte-Anne B.B.F. Inc.;
(h)
Hébergement Mont Sainte-Anne B.B.F. Inc.
could rent the appellant's condominium when all the
hotel-apartments of Phases 1, 2, 3 and 4 provided with an
"Option B" management contract had been
rented;
(i) the rental
income, that is to say, the gross rental income less commission
expenses, credit card expenses and the sports centre share was
divided on a 50/50 basis between the mandatary,
"Hébergement Mont Sainte-Anne
B.B.F. Inc.," and the mandator, the appellant;
(j) before
confirming or denying that there was a reasonable expectation of
profit, the Minister audited the rental statements for each of
the 1993, 1994, 1995 and 1996 taxation years;
(k) the Minister
determined for the 1994 taxation year that an amount of $556 was
not deductible as interest expense, as a result of which the
rental loss was revised to $12,267;
(l) the
management of the appellant's condominium always generated
losses:
(i)
1990
$16,149
(ii)
1991
$12,382
(iii)
1992
$16,262
(iv)
1993
$20,562
(v)
1994
$12,267
(vi)
1995
$13,478
(vii)
1996
$10,697
$101,797
(m) the appellant always
claimed rental losses and never claimed depreciation expense;
(n) gross rental
income from the condominium read as follows:
(i)
1990
$114
(ii)
1991
$5,268
(iii)
1992
nil
(iv)
1993
$5,149
(v)
1994
$1,097
(vi)
1995
$1,478
(vii)
1996
$6,150
(o) the appellant
used the condominium for personal purposes, mainly in winter, in
addition to occasionally allowing members of his family to stay
there during the year;
(p) the appellant
did not show the Minister that he had relevant experience in the
rental field;
(q) the appellant
did not show the Minister that he had taken action to reduce the
amount of loans during the years in issue;
(r) the appellant
had no reasonable expectation of profit from the condominium
located in the town of Beaupré during the 1993, 1994, 1995
and 1996 taxation years;
(s) the rental
expenses claimed annually in respect of the condominium located
in the town of Beaupré constituted personal or living
expenses of the appellant and were not incurred by the said
appellant for the purpose of earning income.
[4] The appellant first explained and
described the circumstances of his decision to acquire a
condominium in a region focusing on recreational and tourist
activities. He made on-site visits, asked questions, thought the
matter over and lastly had the various projects analyzed by a
well-known accounting firm. Following the evaluation, he decided
on the project at the origin of the facts of this appeal.
[5] The appellant and his spouse
testified in support of the appeal. The Notice of Appeal (the
"Notice") summarizes the testimony quite well. The
appellant and his spouse essentially repeated the content of a
portion of the notice, that is to say, two of the three
parts.
[TRANSLATION]
(1)
Information relevant to Gilles Montminy's
case
-
On August 26, 1988, the taxpayer purchased a condominium in
Phase 3 of the Domaine Val des Neiges project for
the purpose of earning rental income.
-
The taxpayer purchased the condo since Phases 1 and 2 of
that same project had made a profit, as shown in the financial
statements signed by the accounting firm of Malette,
Benoît, Boulanger, Rondeau et associés, c.a.
-
Owners of units in Phases 1 and 2 purchased units in
Phase 3, which influenced the taxpayer to buy a condo.
-
In 1988, Domaine Val des Neiges joined Best Western, a
highly prosperous hotel chain very well known in the North
American tourist market.
-
Management of the condo unit rental system was assigned to
Hébergement Mont Sainte-Anne Inc. That
corporation was run by three career hotel operators known for
their competence.
-
The taxpayer signed a mandate granting Hébergement
Mont Sainte-Anne Inc. rental exclusivity in order to
maximize his chances of profitability.
-
At the time of the acquisition, the taxpayer was sure he could
easily resell his condo and realize a capital gain. The real
estate market was booming at the time of the purchase.
(2)
Relevant facts and unforeseeable profitability factors
-
The tourism and, more particularly, the ski industries were very
hard hit by the major recession in the early 1990s.
-
That recession resulted in a significant decline in rentals,
particularly in tourism infrastructures, that is, condominiums
near ski resorts (Mont Ste-Anne), thus delaying
profitability of condo rentals.
-
During those years, the Mont Tremblant ski resort was in
full expansion, whereas there was no further investment in the
Mont Ste-Anne centre.
-
In 1990, an interlocutory injunction obtained by
Société de Gestion Cap-aux-Pierres,
which owned the neighbouring hotel, prevented Domaine
Val des Neiges from operating as a hotel and even
forced it to waive its contract with the Best Western hotel
chain. This situation continued until 1993, when a highly costly
settlement considerably reduced the return to owners. The
shortfall for owners was nearly $200,000, the equivalent of the
annual returns for 1994 and 1995.
-
Certain significant construction defects resulted in major
lawsuits. Legal and other expenses were incurred by the owners,
thus resulting in losses and reduced profitability.
-
In 1993, the manager of Domaine Val des Neiges was no
longer able to assume the management and had to file a proposal
with its creditors.
-
That same year, Société de Développement
Industriel du Québec, an agency whose mission is to invest
in businesses with profitability potential, agreed to invest and
became a creditor holding 25 percent of the shares of
Hébergement Mont Ste-Anne.
-
At the same time, a new management team was put in place with a
new board of directors, which included an observer from
Société de Développement Industriel du
Québec. The result was a significant increase in revenue
and better expenditure control. The owners remained optimistic
about the profitability of their investment.
-
However, Mont Ste-Anne did not develop and the owners
had to bear all the development and marketing expenses alone.
-
During that period, the Government of Quebec announced all kinds
of major investment projects for the Mont Ste-Anne ski
resort but nothing materialized.
-
The manager carried the employment of nearly 40 persons,
with annual tax contributions of approximately $150,000 and
significant local economic benefits.
-
In 2001, a new management agreement was signed with
Château Mont Ste-Anne. Management of condo
rentals was assigned to
Château Mont Ste-Anne, which brought much
more prestige and ensured profitability in the relatively short
term.
[6] The evidence shows that the
appellant had three objectives at the time he acquired a
condominium:
- to own a
condominium to enable him and his family to go skiing;
- to collect
maximum income during periods when they did not occupy the
condo;
- to realize a
significant capital gain in an eventual sale.
[7] In the case of mixed (personal and
commercial) use of a condominium, it is more difficult to
understand the owner's predominant intention, as a result of
which the owner must show on a balance of probabilities that his
main intention was the pursuit of profit.
[8] The true pursuit of profit implies
the exclusion of any personal activity or use on conditions not
comparable to market conditions, except in specific
circumstances. That does not prevent the owner of an income
property from enabling his family to enjoy it. However, he will
have to show that personal occupancy was managed or subject to
conditions comparable or similar to those that would have
prevailed for third parties; in other words, personal use must
not adversely affect potential income.
[9] In this case, depending on the
rental agreement in effect, the appellant and his family could
use the condo as they wished at a rate corresponding to a
fraction of the cost, that is half of what third parties had to
pay. In fact, the appellant had to pay the mandatary responsible
for rentals the same percentage as the third party rentals. In
other words, the rental officers lost nothing, whether the
condominium was rented to third parties or occupied by the owner.
It was entirely different for the appellant since he received no
income and had to pay expenses when he occupied his own
condominium.
[10] The appellant could and in fact did
benefit significantly from his condominium for essentially
personal purposes; the personal use had significant consequences
on income. In fact, the appellant deprived himself of substantial
income by occupying the premises himself with his family.
[11] It was shown that winter was the high
season because of skiing. However, in response to a question from
the Court, the appellant said that he had used the condominium
approximately 40 days, primarily during the high season. He
also said that it had been used for more or less
12 weekends.
[12] I find these figures sufficient to
conclude that the personal use was not occasional or limited,
with no effect on the condominium's viability or
profitability; on the contrary, the personal use had a decisive
impact on income and, as a direct consequence, on
profitability.
[13] Although the evidence, the burden of
which was on the appellant on this important issue, was not very
elaborate, I believe I can assume that certain instances of
personal use coincided with the Christmas holiday period, school
vacation, break periods, etc. However, those are strategically
important periods for this kind of operation.
[14] Any personal use or enjoyment of an
income property on conditions more advantageous than those set
for third parties considerably distorts the fundamental figures
that must be considered in order to determine the actual
intention to make the operation profitable.
[15] The personal use of a property does not
automatically exclude or rule out any possibility of making a
profit. However, it is important to establish an accounting
system that makes it possible to quantify the extent of the
income losses so as to be able to draw valid conclusions.
[16] Using a property or deriving personal
benefits from the operation of a business does not automatically
result in the conclusion that there is no source of income,
particularly if the personal benefit is something marginal with
little or no impact on income. However, any low-cost or free
personal use distorts profitability to an extent equivalent to
the benefit obtained.
[17] In this case, the appellant and his
family enjoyed the condominium during strategic periods. Apart
from the shortfall for the periods in question, it is likely that
the personal use also affected income from third parties since
the available periods were shortened by the weekends occupied by
the appellant, thus making availability unattractive for the
purpose of renting to third parties.
[18] Did the appellant invest for the sole
purpose of making profits? I do not believe that he invested for
the purpose of incurring losses. He explained that the project
had been the subject of a dispute, followed by legal proceedings,
all of which created unforeseen expenditures and had an impact on
income. Although the appellant also said he had invested for
speculative purposes, he never really tried to sell the
condominium.
[19] To win his case, the appellant had to
show on a balance of probabilities that the condominium
acquisition had been motivated and justified by the pursuit of
profit. It is important to recall that the condominium was not
located where the appellant and his family lived. To get there,
he had to travel nearly two hours, which in itself was
likely to complicate management to some degree.
[20] In itself, however, this factor was not
decisive and was one that could be offset by resorting to
competent persons, which the appellant moreover did; at all times
during the years when the operations ran at a loss, the appellant
had given a mandate to an organization with competence and
expertise in the field. The appellant of course had to pay high
expenses in order to do so, but this was a kind of
"turnkey" arrangement justified by the appellant's
lack of knowledge in the matter and by his distance from the
premises.
[21] In this respect, the appellant's
actions with regard to profit seeking were beyond reproach.
[22] Matters are quite different with regard
to personal use. The evidence showed that the appellant and his
family derived an appreciable benefit, to the point where it had
a considerable effect on the profitability of the operation.
[23] In support of his appeal, the appellant
referred to a decision by the Honourable Judge Yvan Mayrand
of the Court of Quebec, Civil Division,
No. 755-02-002532 997,
Paul Laforest c. Le Sous Ministre du Revenu du
Québec. In that case, which also involved a number of
other similar cases, the Honourable Judge Mayrand found in
favour of the appellants. I do not believe that decision is
relevant on the bases of a passage from the judgment, which I
think is worth quoting:
[TRANSLATION]
. . .
It is in evidence that the appellant bought a condo in the Val
Des Neiges Complex in Mont Ste-Anne in 1990. The appellant,
who was a teacher at the time, was to retire in 1992. He
explained that he had bought the condo with the expectation of
making a profit in order to ensure additional income when he
retired by renting the condo. He never bought the condo for the
purpose of occupying it personally and, at the time of the
purchase, he had never skied. His condominium is managed
under a management mandate, which is in effect. The mandates are
comprised of two classes: Group A, which provides for condo
rentals for the purpose of making a profit, and Group B,
which provides for partial occupancy and partial rental of the
condo in question. The appellant is part of Group A,
which provides for rental only for the purpose of making a
profit.
Emphasis added
[24] In Stewart v. Canada,
[2002] S.C.J. No. 46 (Q.L.), the Supreme Court of Canada
recently shed new and extremely important light by setting out a
new approach for determining whether an activity constitutes a
source of income for the purposes of section 9 of the
Income Tax Act.
[25] The Supreme Court held that a two-stage
approach should be employed to determine whether a taxpayer's
activities constitute a source of business or property
income.
[26] A passage from the introduction of this
important judgment should be reproduced:
. . .
Is the taxpayer's activity undertaken in pursuit of
profit, or is it a personal endeavour? If it is not a personal
endeavour, is the source of the income a business or property?
The first stage of the test is only relevant when there is some
personal or hobby element to the activity. Where the nature of an
activity is clearly commercial, the taxpayer's pursuit of
profit is established. There is no need to take the inquiry any
further by analysing the taxpayer's business decisions.
However, where the nature of a taxpayer's venture contains
elements which suggest that it could be considered a hobby or
other personal pursuit, the venture will be considered a source
of income only if it is undertaken in a sufficiently commercial
manner. In order for an activity to be classified as commercial
in nature, the taxpayer must have the subjective intention to
profit and there must be evidence of businesslike behaviour which
supports that intention. Reasonable expectation of profit is no
more than a single factor, among others, to be considered at this
stage.
. . .
[27] At paragraph 5 of the judgment in
that same case, rendered by Iacobucci and Bastarache JJ.,
the Supreme Court of Canada held:
. . .
As such, in order to determine whether a particular activity
constitutes a source of income, the taxpayer must show that he or
she intends to carry on that activity in pursuit of profit and
support that intention with evidence. The purpose of this test is
to distinguish between commercial and personal activities, and
where there is no personal or hobby element to a venture
undertaken with a view to a profit, the activity is commercial,
and the taxpayer's pursuit of profit is established. However,
where there is a suspicion that the taxpayer's activity is a
hobby or personal endeavour rather than a business, the
taxpayer's so-called reasonable expectation of profit
is a factor, among others, which can be examined to ascertain
whether the taxpayer has a commercial intent.
At paragraphs 6, 50, 52 and 54, the Court said:
6. In the
present appeal, the taxpayer purchased four rental properties
which he rented to arm's length parties in order to obtain
rental income. There was no personal element to the
taxpayer's endeavour, and its commercial nature was never
questioned. As a result, the appellant's rental activities
constitute a source of income from which he is entitled to deduct
his rental losses. We would therefore allow the appeal.
50. It is clear that in
order to apply s. 9, the taxpayer must first determine
whether he or she has a source of either business or property
income. As has been pointed out, a commercial activity which
falls short of being a business, may nevertheless be a source of
property income. As well, it is clear that some taxpayer
endeavours are neither businesses, nor sources of property
income, but are mere personal activities. As such, the following
two-stage approach with respect to the source question can be
employed:
(i) Is the
activity of the taxpayer undertaken in pursuit of profit, or is
it a personal endeavour?
(ii) If it is not a
personal endeavour, is the source of the income a business or
property?
The first stage of the test assesses the general question of
whether or not a source of income exists; the second stage
categorizes the source as either business or property.
52. The purpose of this
first stage of the test is simply to distinguish between
commercial and personal activities, and, as discussed above, it
has been pointed out that this may well have been the original
intention of Dickson J.'s reference to "reasonable
expectation of profit" in Moldowan. Viewed in this light,
the criteria listed by Dickson J. are an attempt to provide
an objective list of factors for determining whether the activity
in question is of a commercial or personal nature. These factors
are what Bowman J.T.C.C. has referred to as "indicia of
commerciality" or "badges of trade": Nichol,
supra, at p. 1218. Thus, where the nature of a
taxpayer's venture contains elements which suggest that it
could be considered a hobby or other personal pursuit, but the
venture is undertaken in a sufficiently commercial manner, the
venture will be considered a source of income for the purposes of
the Act.
54. . . . Thus, in
expanded form, the first stage of the above test can be restated
as follows: "Does the taxpayer intend to carry on an
activity for profit and is there evidence to support that
intention?" This requires the taxpayer to establish that his
or her predominant intention is to make a profit from the
activity and that the activity has been carried out in accordance
with objective standards of businesslike behaviour.
[28] The appellant and his family enjoyed
and benefited from the condominium at issue in this appeal. The
appellant and the members of his family, ski enthusiasts, enjoyed
their premises for recreational purposes. It was mentioned on
this point that the appellant might reside there nearly
40 days a year, that is, more or less 12 weekends.
[29] This was a significant use that had
considerable, indeed even decisive effects on the operation's
profitability. These facts cannot be excluded from the analysis;
they constitute a factor that considerably influenced the
project's viability.
[30] During the years in issue, the
appellant assigned two types of mandates to third parties, which
attended to administration and management.
[31] First, the appellant and members of his
family were able to live in their condo provided they paid the
fees usually required for every rental, approximately
50 percent of rental income. The appellant says that these
were substantial outlays, which he clearly found excessive.
[32] Second, the appellant was able to live
there at lower cost, but the periods of occupancy had to be
subject to advance notice; the letter of understanding is very
clear on that point. The relevant clauses should be
reproduced:
[TRANSLATION]
Management mandate - Option A (Exhibit
A-1)
. . .
4.
AVAILABILITY
4.1 The mandator may use
his hotel-apartment subject to the terms stated below in
paragraphs 4.2 and 4.3, for the periods therein
specified.
4.2 The mandator may
obtain use of his hotel-apartment for the following periods
subject to payment equal to 50 percent of the regular rental
price:
- from December 26 of each year to the first
Tuesday of the following January;
- from the second Sunday in February to the third
Sunday in March of each year;
- from July 15 to the first Monday in September
of each year.
4.3 The mandator may
occupy his hotel-apartment outside the periods stated in
paragraph 4.2 above. The sum of $40 shall then be paid upon
each departure for service charges.
Furthermore, if the mandator wishes to have daily maintenance
service at his hotel-apartment, he shall pay the additional
yearly cost stated in Schedule A hereto.
4.4 Where the mandator is
a corporation, the hotel-apartment may be occupied in accordance
with the terms and restrictions provided for in this article, by
any shareholder of the said corporation and any member of that
shareholder's immediate family. The total period of occupancy
by the shareholders or the members of their families may not at
any time exceed 12 weeks per fiscal year outside the periods
stated in paragraph 4.2.
. . .
October 2, 1990
Management and rental mandate - Option B(Exhibit
I-1)
. . .
4.0 AVAILABILITY OF
DWELLING
The MANDATOR shall notify us twice a year of the availability of
his dwelling, as described in article 4.1.
4.1 NOTIFICATION OF
AVAILABILITY
Before September 1 for the period between November 1
and April 30 of the following year;
4.1.1 Before March 1 for the period
between May 1 and November 30 of each year.
. . .
this 26th day of September 1993
[33] Despite that there were two letters of
understanding, the appellant might not have occupied his condo or
might have occupied it marginally during periods when there was
no third party rental demand.
[34] The burden of proof was on the
appellant. The evidence showed that the activity carried on was
not primarily commercial. One of the fundamental objectives was
for the appellant and the members of his family to take advantage
of and enjoy a facility enabling them to engage in their sport
while receiving supplementary income, which had the effect of
reducing the prohibitive cost of practising that sport. The
appellant's family thus determined its periods of personal
occupancy and offered the remaining availability on the third
party rental market.
[35] A genuine business gives priority to
and targets maximum income by employing every means to eliminate
or reduce everything that is or can have a contrary effect.
[36] In this case, the appellant and his
family enjoyed a condominium whose operating expenses were
reduced by renting it to third parties during periods of
inoccupancy. This was not an activity that could be characterized
as commercial by nature.
[37] The appellant having failed to show
that his predominant intention was to make a profit from the
activity or that the activity was carried on in accordance with
the objective standards of businesslike behaviour, I must dismiss
his appeal.
Signed at Ottawa, Canada, this 13th day of September 2002.
J.T.C.C.
Translation certified true
on this 22nd day of December 2003.
Sophie Debbané, Revisor
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