[OFFICIAL ENGLISH TRANSLATION]
Date: 20020705
Docket: 1999-1403(IT)I
BETWEEN:
CARMELLE VACHON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
1999-1404(IT)I
NELSON VACHON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip, J.T.C.C.
[1] During the 1993, 1994 and 1995
taxation years, Nelson Vachon and his spouse
Carmelle Vachon (the "appellants") owned three
condominiums at the same location in Englewood, Florida
("Florida properties" or "Palm Manor
Resort"). They had jointly acquired two of those
condominiums in 1985 and the third in 1990. In March 1990, the
appellants acquired a detached house in Mississauga, Ontario
("Mississauga property"), which they sold in November
1994. Since May 1995, the appellants have owned a house in Hull,
Quebec ("Hull property"). The appellants say they
purchased the properties as investments.
[2] By the
notices of reassessment dated December 15, 1997, the
Minister of National Revenue ("Minister") disallowed
the appellants' deduction of the rental expenses, which they
had reported during the period in appeal with respect to the
Florida properties and the Mississauga property. The Minister
further disallowed the deduction of the rental expenses, which
the appellants had reported during the 1995 taxation year with
respect to the Hull property. The Minister also disallowed the
deduction of the miscellaneous expenses (office, automobile,
meetings, travel, accounting, telephone, CCA for computer,
printer, facsimile, etc.), which the appellants had deducted for
the 1995 taxation year.
[3] At the start of the trial, counsel
for the respondent informed the Court that the Minister had
admitted that the appellants were entitled to deduct rental
expenses for the Hull property. The appellants accepted the
Minister's refusal to allow the deduction of $3,474.94 (or
$1,737.47 for each appellant) claimed in respect of current
expenses for the Hull property for 1995. Those amounts represent
capital costs, notary's fees, [TRANSLATION]
"two months' rent paid to
Étienne Lyotte for construction of the basement
..." and property transfer fees.
[4] The appeals were heard on common
evidence. The appellant Carmelle Vachon filed a
20-page written explanation, which I have considered
carefully; the transcript has also been reviewed. The judgments
were suspended pending the Supreme Court's Reasons for
Judgment in Stewart v. Canada.[1] Following that decision, I invited
the parties to submit their comments. Counsel for the respondent
wrote that, in view of the fact the Florida properties entailed
no personal element, the rental activity was of a commercial
nature and therefore a source of income from property. By virtue
of the decision in Stewart, the respondent now admits that
each of the appellants is entitled to deduct the rental losses
claimed for the 1993, 1994 and 1995 taxation years for the
Florida properties. Counsel for the respondent wrote that, in his
view, the Mississauga property was of a personal nature, and it
had not been operated in a sufficiently commercial manner to
constitute a source of income. We agree with counsel for the
respondent that the Florida condominiums were a good source of
income from property and that the Mississauga property was not
commercial and, consequently, the appellants are not entitled to
deduct the rental losses claimed for that property.
[5] Although I agree that the expenses
for the Florida condominiums are deductible by the appellants, I
do not agree that all expenses claimed are deductible. The
expenses claimed for the Florida properties include the amounts
of $7,861.92 and $8,798.22 for the 1993 and 1994 taxation years
respectively, reported by the appellants under the heading
"Other", that is to say, "office, meeting,
consultants and travel". I do not understand these
"Other" claims. The Palm Manor Resort project was
managed by a manager, not by the appellants. The expenses of the
condominium units were pooled. The appellants explained neither
the nature of those expenses nor the extent to which they had
been incurred or made for the purpose of earning income from
those condominiums. The "Other" expenses should not be
considered in computing the deductible losses for the Florida
condominiums. Consequently, the expenses that are deductible for
the 1993 taxation year total $23,512.67 (the share of each
appellant is 50 percent), not $31,374.59. The deductible
expenses for the 1994 taxation year total $23,032.34 (the share
of each appellant is 50 percent), not $31,830.56
[6] Among the expenses the appellants
claimed in 1993 for the Florida condominiums was the sum of
CDN $1,271.05 under the heading "insurance".
However, among the expenses pooled in 1993 for the entire Palm
Manor Resort project, the sum of US $4,804.26 appears under
the heading "insurance". No explanation was given for
this result. However, this was not questioned by the respondent,
and I will therefore allow that the expenses claimed in respect
of insurance be deducted.
[7] The appellants wrote that it
appears from Stewart that all their rental activities
constituted a source of income and that all the losses claimed
are deductible. In the appellants' view, all their properties
have always been operated in a sufficiently commercial manner in
accordance with objective standards of businesslike behaviour.
With respect to the Mississauga property, they argue that their
intention was to make net business profits and that the personal
aspect was secondary and of no significance.
[8] The appellants suggested in their
correspondence, just as they did at the hearing, that, with
respect to the Mississauga property, my findings were based on
the fact that the Minister had agreed that the expenses for the
Hull property were deductible. The taxpayers must be aware of the
fact that the Court is not bound by a settlement between the
parties to a case or by a concession given by one of the parties.
A judge may always dismiss a settlement between parties or a
concession, as I did with the concession made by counsel for the
respondent respecting the expenses of the Florida
condominiums.
[9] As to the Hull property, I
accepted the concession the Minister made at the start of the
hearing. Consequently, I did not consider any evidence on the
question as to whether the expenses for the Hull property were in
fact deductible. If I had to consider such evidence, including
the examinations of witnesses, I would either have accepted or
refused to accept the Minister's consent to the deductibility
of the expenses for the Hull property. However, in considering
the expenses for the Mississauga property as well as the nature
of that property, I am not bound by what the Minister did or did
not accept as a reasonable rent or deductible expenses for the
Hull property.
[10] As a result of the decision of the
Supreme Court of Canada in Stewart, the point for
determination is not whether the appellants had a reasonable
expectation of profit but rather whether the property was used in
pursuit of profit and therefore whether it was a source of income
from a business or property.
[11] There are thus two points for
determination:
(a) whether the appellants
were entitled to deduct rental expenses for the Mississauga
property; and
(b) whether the appellants were
entitled to deduct additional miscellaneous expenses claimed for
the 1995 taxation year.
A. Mississauga
Property
[12] According to the appellants, the
Mississauga property was a "rooming house", as that
term is defined in Interpretation Bulletin 434R of the
Canada Customs and Revenue Agency ("CCRA"). They claim
that their operational plan for the Mississauga property was to
rent the four bedrooms for $600 a month each, with an annual
increase of six percent. The appellants claim that the
market rent was $1,075 a month for a similar property, and,
consequently, the property was rented at more than market
value.
[13] The appellants stated that, in 1990 and
1991, two of the four rooms had been permanently rented and
a third was rented occasionally; as a result, they received an
average income of $1,225 a month. One of the two tenants in
1990 and 1991, and the only tenant in 1992, was their son. In
1993, only one of the rooms was rented permanently to their son.
According to the appellants, there was another tenant for part of
1993, but they were unable to collect the rent from him. In the
first three months of 1994, the only tenant was the
appellants' son. The appellant Carmelle Vachon said that
her son's rent was fixed at $600 a month since he was on
unemployment insurance and it was therefore impossible to ask him
for a greater amount. She further stated that, in 1994, when her
son's financial situation had improved, his rent was
increased to $1,100 a month. The appellants contend that, in
1992, after losing one of the two permanent tenants, they put the
house up for sale, but without success. In the meantime, they had
placed a number of ads to rent the rooms and ultimately put the
house back up for sale in 1994 and this time succeeding in
selling it.
[14] According to the appellants, their
operational plan included paying down substantial amounts of
mortgage principal just as it was for their Florida properties.
They claim that starting in 1993, there was a greater expectation
of earning a profit from the Mississauga property since the
operating profits were generated at the same time expenses and
mortgage rates declined significantly.
[15] The appellants contend that they had no
personal link to the Mississauga property, despite the fact that
their son was one of the tenants and, in fact, the only tenant
for certain parts of the year. They contend that, in addition to
paying the same rent as any other tenant, their son also saw to
the maintenance of the entire building (the common areas as well
as the private areas occupied by the other tenants) and also
supplied all the furniture and services a rooming house offers.
They claim that the nature of the activity was strictly
commercial and provided them with no personal benefit.
[16] According to the appellants, there was
a reasonable expectation of profit, but it was the rentals that
did not materialize according to their operational plan. They
claim that the Mississauga property was operated in the same way
as the Hull property and that, consequently, since the Minister
agreed that the expenses claimed for the Hull property were
deductible, the same conclusion should apply to the Mississauga
property. We do not agree that the situation of the Mississauga
property is equivalent to that of the Hull property.
[17] At the trial, the appellants argued
that the Act is discriminatory and, more specifically,
that subsection 248(1) is unconstitutional [TRANSLATION]
"to the extent that it affects the interpretation of the
other provisions relating to business expense deductions".
The appellants' argument on this point in particular was not
very clear. They seemed to claim that the definition of the term
"personal or living expenses" stated in
subsection 248(1) of the Act, applied in relation to
paragraph 18(1)(h), establishes a distinction based
on the personal characteristic of parental or family status,
which, in their view, is discriminatory. They argued that
[TRANSLATION] "the effect of the provision created by this
section is that taxpayers who rent an immovable at the market
price to persons who are related to them by blood are disallowed
the deduction of legitimate expenses incurred in the operation of
their business, which would otherwise be deductible for
them."
B. Additional
Expenses
[18] As to the additional expenses claimed
by the appellants in their tax returns for the 1995 taxation
year, the appellants argue that those expenses are deductible
since they were incurred to generate net business income. In the
appellants' view, they are entitled to deduct the expenses
incurred in 1994 in their 1995 return. They submit that the
Minister should have amended their tax return for 1994 to include
the expenses in question as they had requested since he did not
reply to them and deny them that request.
Analysis
Mississauga Property
[19] With respect to the Mississauga
property, the respondent considers some of the expenses
non-deductible, notwithstanding the fact that there is a
determination that the appellants had a reasonable expectation of
profit. However, other expenses incurred in respect of the
Mississauga property are accepted as deductible if they were
incurred for the purpose of gaining income.
[20] The Minister assessed the appellants on
the basis that they had no reasonable expectation of profit. The
assessment of the appellants is incorrect in view of the decision
of the Supreme Court of Canada in Stewart, in
paragraph 4, which states that the reasonable expectation of
profit test is not a determining factor as to whether there is a
source of income:
4 In our view,
the reasonable expectation of profit analysis cannot be
maintained as an independent source test. To do so would run
contrary to the principle that courts should avoid judicial
innovation and rule-making in tax law.
[21] At paragraph 50 in Stewart,
the Supreme Court of Canada stated the test that should be
applied in determining whether a source of income exists:
... 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.
[22] The appellants did not show that there
was no personal element associated with the Mississauga property.
Despite their plan to operate the Mississauga property as a
rooming house, it was not disputed that, in 1993 and in the first
three months of 1994, the only rent the appellants collected
came from their son. No evidence was adduced that there was
another tenant in 1993 from whom the appellants were unable to
collect rent. Thus, notwithstanding the appellants' claims,
their son appears to have had the benefit of using the entire
house. Consequently, the furniture he purportedly provided and
the housekeeping services he performed merely served his own
needs. This shows that there was a personal element, in view of
the fact that the son paid a rent of only $600.
[23] The fact that the appellants increased
their son's rent to $1,100 a month in 1994 from the moment
his financial situation had improved shows, in my view, that the
house was not being operated as a rooming house. The appellant
Carmelle Vachon admitted in her testimony that the rent
increase had taken place in 1994 since the son had at the time
more available resources to pay a higher rent. The Mississauga
property appears to have been rented in accordance with the
resources of the appellants' son. It appears undeniable that,
from the moment their son paid $1,100, he was the only person to
use the house and the appellants were not renting out individual
rooms. This shows that there was no intention to operate the
property as a rooming house. According to the appellants'
projections, by renting the property for $1,100 a month, it was
impossible to make a profit. Furthermore, the fact that the
property was sold in 1994 when the son moved from the Mississauga
area also reveals a personal element.
[24] At paragraphs 60 and 63 of the
decision in Stewart, the Supreme Court of Canada then
stated the following:
60 In summary, the issue of
whether or not a taxpayer has a source of income is to be
determined by looking at the commerciality of the activity in
question. Where the activity contains no personal
element and is clearly commercial, no further inquiry is
necessary. Where the activity could be classified as a
personal pursuit, then it must be determined whether or not the
activity is being carried on in a sufficiently commercial manner
to constitute a source of income.
...
63 Even if the appellant had made
use of one or more of the properties for his personal benefit,
the Minister would not be entitled to conclude that no business
existed without further analysis. A taxpayer in such
circumstances would have the opportunity to establish that his or
her predominant intention was to make a profit from the activity
and that the activity was carried out in accordance with
objective standards of businesslike behaviour. Whether
a reasonable expectation of profit existed may be a factor that
is taken into consideration in that analysis.
[25] In view of the personal elements
described above, the appellants did not have a bona fide
commercial purpose for the Mississauga property. Furthermore, the
Mississauga property was not operated on a commercial basis. This
is clear from the fact that the decisions concerning the
Mississauga property were made on the basis of the needs of the
appellants' son, not for the purpose of making a profit. A
serious businessman does not set rent in accordance with the
tenant's ability to pay, as the appellants did. Consequently,
the Mississauga property cannot be considered as a source of
income from a business or property, and the appellants may not
deduct expenses relating to that property.
Additional Miscellaneous Expenses
[26] The additional expenses deducted in
1995 are enumerated as follows in Schedule C of
Exhibit A-5[2] filed by the appellants:
Office, car supplies, meetings, travel, accounting and
telephone
$11,067.56
CCA - computer
1990
$ 329.76
Computer upgrade -
1991
$ 787.66
Printer -
1991
$ 824.24
Facsimile -
1994
$ 659.38
CCA for 1994 computer, printer,
fax
$ 572.34
CCA for 1995 computer, printer,
fax
$ 447.88
$14,688.82
[27] The appellant Carmelle Vachon
testified in cross-examination that approximately 97 percent
of the $11,067.56 claimed in expenses appeared to represent
expenses relating to the Mississauga property, such as travel
costs incurred in 1995 for travel to Mississauga to attend to the
maintenance of the house following its sale but prior to its
delivery. The expenses connected to the Mississauga property are
not deductible in view of the fact that that property was not a
source of income from a business or property. Furthermore, in
1995, the appellants had already sold the Mississauga property
and thus, in any case, could not deduct expenses incurred in 1995
in respect thereof. There is no evidence that those expenses were
incurred for the property. Some of the expenses claimed in 1995
were generated in 1994 and, as a result, are not deductible.
[28] The rest of the amount of $11,067.56
represents expenses for travel to Hull to purchase the Hull
property. The parties agreed that rental losses from the Hull
property could be deducted. However, it must be made clear that
the Hull property was a source of income from property, not a
source of income from a business. A distinction must be drawn
between expenses that may be deducted from business income and
those that may be deducted from income from property. On the
facts before me, the travelling expenses are not deductible from
income from property.
[29] The rest of the expenses enumerated in
Schedule C of Exhibit A-5 total $3,621.26. Some
of those expenses are from years prior to 1995 and are therefore
not deductible, whereas, for others, there is no evidence that
they were incurred for the purpose of gaining income from the
Hull property or Florida properties and therefore they are not
deductible either.
Constitutional Argument
[30] The constitutional argument raised by
the appellants is not valid. The appellants seem to contend that
the deductions claimed in respect of the Mississauga property
were disallowed because their son was the tenant. They claim that
this constitutes discriminatory treatment, which is contrary to
the Canadian Charter of Rights and Freedoms.
[31] No ground has been found that would
make it possible to conclude that the provisions relevant to the
instant appeals are invalid under subsection 15(1) of the
Canadian Charter of Rights and Freedoms. In Law v.
Canada (Minister of Employment and Immigration),[3] the Supreme Court of
Canada outlined, at paragraph 39 of its judgment, the
approach to take in examining a discrimination claim under
subsection 15(1) of the Charter:
... Following upon the analysis in Andrews, supra, and
the two-step framework set out in Egan, supra, and
Miron, supra, among other cases, a court that is called
upon to determine a discrimination claim under s. 15(1) should
make the following three broad inquiries. First, does
the impugned law (a) draw a formal distinction between the
claimant and others on the basis of one or more personal
characteristics, or (b) fail to take into account the
claimant's already disadvantaged position within Canadian
society resulting in substantively differential treatment between
the claimant and others on the basis of one or more personal
characteristics? If so, there is differential
treatment for the purpose of s. 15(1). Second, was the claimant
subject to differential treatment on the basis of one or more of
the enumerated and analogous grounds? And third, does the
differential treatment discriminate in a substantive sense,
bringing into play the purpose of s. 15(1) of the
Charter in remedying such ills as prejudice, stereotyping,
and historical disadvantage? The second and third
inquiries are concerned with whether the differential treatment
constitutes discrimination in the substantive sense intended by
s. 15(1).
[32] At paragraph 41, the Supreme Court
of Canada then wrote as follows:
41 Since the beginning of
its s. 15(1) jurisprudence, this Court has recognized that the
existence of a conflict between an impugned law and the purpose
of s. 15(1) is essential in order to found a discrimination
claim. This principle holds true with respect to each
element of a discrimination claim. The determination of whether
legislation fails to take into account existing disadvantage, or
whether a claimant falls within one or more of the enumerated and
analogous grounds, or whether differential treatment may be said
to constitute discrimination within the meaning of s. 15(1), must
all be undertaken in a purposive and contextual manner.
[33] At paragraph 51 of its judgment,
the Court expressed the purpose of subsection 15(1) of the
Canadian Charter of Rights and Freedoms:
... It may be said that the purpose of s. 15(1) is to prevent
the violation of essential human dignity and freedom through the
imposition of disadvantage, stereotyping, or political or social
prejudice, and to promote a society in which all persons enjoy
equal recognition at law as human beings or as members of
Canadian society, equally capable and equally deserving of
concern, respect and consideration. Legislation which effects
differential treatment between individuals or groups will violate
this fundamental purpose where those who are subject to
differential treatment fall within one or more enumerated or
analogous grounds, and where the differential treatment reflects
the stereotypical application of presumed group or personal
characteristics, or otherwise has the effect of perpetuating or
promoting the view that the individual is less capable, or less
worthy of recognition or value as a human being or as a member of
Canadian society. Alternatively, differential treatment will not
likely constitute discrimination within the purpose of s. 15(1)
where it does not violate the human dignity or freedom of a
person or group in this way, and in particular where the
differential treatment also assists in ameliorating the position
of the disadvantaged within Canadian society.
[34] The provisions of the Act
respecting the deductibility of expenses do not, as the
appellants claim, create a differential treatment on the basis of
family status, which is discriminatory. The fact that the
appellants' son was a tenant of the Mississauga property is
considered in the context of determining whether the property was
used to make a profit and thus whether it was a source of income
earned from a business or property. It is not the fact that the
appellants rented the Mississauga property to their son that
makes the expenses relating to that property non-deductible but
rather the fact that the property was not operated
commercially.
[35] The deductions claimed by the
appellants in respect of the Mississauga property are not allowed
since the property was not a source of income from a business or
property. The expenses are not disallowed on the basis that they
were personal expenses contemplated by
paragraph 18(1)(h). The appellants claim, however,
that the definition of "personal expenses" in the
Act creates a differential treatment based on parental or
family status. Under paragraph 18(1)(h), every person
who earns business income is not entitled to deduct personal or
living expenses, other than travelling expenses incurred in the
course of carrying on his business while he is away from home.
The definition of "personal or living expenses" stated
in subsection 248(1) includes expenses relating to
properties maintained by any taxpayer for the use or benefit of
his children if those properties are not maintained with a
reasonable expectation of earning a profit from the operation of
a business. Paragraph 18(1)(h) does not create a
differential treatment that is discriminatory since the expenses
of property maintained by any taxpayer for the use or benefit of
the taxpayer's children shall not be considered as personal
expenses if those properties are maintained in the reasonable
expectation of earning a profit from the operation of a business.
The object and effect of the Act is to prevent the
deduction of expenses that are not connected to a business of the
taxpayer, not to penalize a taxpayer who does business with a
member of his family. Consequently, there is no conflict with
subsection 15(1) of the Charter.
[36] It is worth recalling the note of
caution by the Supreme Court of Canada in Blencoe v.
British Columbia (Human Rights Commission)[4] with respect to the Charter
arguments, at paragraph 188:
188 We must remember though that s. 7
expresses some of the basic values of the
Charter. It is certainly true that we must
avoid collapsing the contents of the Charter and perhaps
of Canadian law into a flexible and complex provision like s. 7.
But its importance is such for the definition of substantive and
procedural guarantees in Canadian law that it would be dangerous
to freeze the development of this part of the
law. The full impact of s. 7 will remain
difficult to foresee and assess for a long while
yet. Our Court should be alive to the need to
safeguard a degree of flexibility in the interpretation and
evolution of s. 7 of the Charter. At the
same time, the Court should remind litigants that not every case
can be reduced to a Charter case.
189 Assuming that the Charter
must solve every legal problem would be a recipe for freezing and
sterilizing the natural and necessary evolution of the common law
and of the civil law in this country. In the present
appeal, the absence of a Charter remedy does not mean that
administrative law remedies could not have been identified and
applied, as we have seen above.
[37] There is no valid ground in the
circumstances of this appeal for resorting to the
Charter.
[38] The Mississauga property was acquired
to meet the personal needs of the appellants' son rather than
to make a profit. That property was not commercial in nature.
Consequently, the appellants are not entitled to deduct expenses
relating to the Mississauga property.
[39] Furthermore, the appellants are not
entitled to deduct the additional miscellaneous expenses
enumerated in Schedule C of Exhibit A-5.
[40] The appeals for the years in issue are
allowed, with costs if any, and the assessments are referred back
to the Minister for reconsideration and reassessment on the basis
that:
(a) the amount of
$11,756.34 representing 50 percent of the expenses of
$23,512.67; the amount of $11,516.17 representing 50 percent
of the expenses of $23,032.34; and the amount of $10,515.81 (for
Mrs. Vachon and $10,515.80 for Mr. Vachon) representing
50 percent of the expenses of $21,031.61 for the Florida
condominiums are deductible for the 1993, 1994 and 1995 taxation
years respectively;
(b) the amount of $5,598.96
representing 50 percent of the expenses of $11,197.93 for
the Hull property is deductible for the 1995 taxation year.
The appellants are entitled to no other relief.
Signed at Ottawa, Canada, this 5th day of July 2002.
J.T.C.C.
Translation certified true
on this 6th day of October 2003.
Sophie Debbané, Revisor
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