[OFFICIAL ENGLISH TRANSLATION]
Date: 20020307
Docket: 2001-1813(IT)I
BETWEEN:
MICHEL SAUCIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers, J.T.C.C.
[1] These are appeals by the appellant
under the informal procedure from assessments made for 1997 and
1998. The appeals were heard at Montréal on
January 28, 2002.
[2] The appellant appealed after the
Minister of National Revenue ("the Minister")
disallowed his rental losses from his property at 3714 Des
Aulnes in Notre-Dame-de-la-Merci. Those
losses amount to $12,045 for 1997 and $15,371 for 1998. The
Minister argued that the losses were not incurred by the
appellant for the purpose of gaining or producing income from a
business or property within the meaning of
paragraph 18(1)(a) of the Income Tax Act
("the Act") but were personal expenses of the
appellant within the meaning of paragraph 18(1)(h) of
the Act.
[3] The appellant is currently a
foreman. At the time he purchased the property in question, he
was running his own canopy sales and installation business in the
municipality of Lachenaie. It all began in March 1991, when
he purchased the property in question in
Notre-Dame-de-la-Merci in the Laurentians
for $70,000. It was an old house that had been abandoned for five
years. The appellant thought it would be possible to transform it
into an income property for his retirement. It had a habitable
floor area of 2,891 square feet and a basement that was just as
spacious.
[4] According to the appellant, many
repairs were needed. The roof and the ceilings had to be redone,
and there was a problem with water leaking into the walls. Before
doing all of that work, the appellant put in a kind of bachelor
apartment for himself in the basement. There were two mortgages
on the property: one granted in April 1991 that secured a
loan of $52,500 and another granted in October 1991 that
secured a $20,000 loan.
[5] The appellant did renovation work
in 1991, 1992 and 1993. Photographs were taken in 1992, and they
show that he did most of the renovations to his property that
year. It can be seen from the photographs that the roof was
completely redone and that the upper floor was divided into two
dwelling units. The first, measuring 40 feet by
30 feet, is identified as unit 1, while the other,
measuring 50 feet by 32 feet, is identified as
unit 2. The same photographs show that part of the interior
finishing of unit 1 was done in 1992. However, unit 1
was not completed for rental purposes until 1994. The appellant
in fact rented it in the summer of 1994.
[6] The appellant said that his
primary intention was to convert his property into a seniors'
residence. He filed in evidence two letters confirming that in
1993 he had taken steps to implement his project. His application
was apparently denied because his property was too far from the
hospital centre and because the centre could not refer seniors to
his property as the property was outside the territory served by
the centre.
[7] The work was done largely by the
appellant. While occupying his bachelor apartment, he worked
weekends to complete his renovations. After completing
unit 1 so that it could be rented in the summer of 1994, the
appellant suffered a heart attack in the spring of 1994 and was
inactive for nine months.
[8] During the two years that
followed, he continued to occupy his bachelor apartment and
performed work on an irregular basis on weekends. He did all he
could under the circumstances. In November 1996, he suffered
a second heart attack followed by a second period of inactivity,
of about seven months this time. In 1997, his canopy company
ceased operating and he fell into a depression.
[9] He tried to sell the property in
1997. Even with the help of a real estate broker, he was unable
to find a buyer. His financial problems increased, and in 1997
and 1998 he had to withdraw the money he had put in a registered
retirement savings plan (RRSP). In all, he withdrew nearly
$70,000. He allegedly used about $7,000 of the after-tax
amount for personal purposes. Although there are no details on
this in the evidence, the appellant allegedly used the balance to
meet his financial obligations with regard to the property.
[10] All of those steps notwithstanding, he
was unable to rent unit 2. In 1997 and 1998, the appellant did
not rent the basement, which he was no longer occupying. It was
not in a rentable state. In September 1998, the bank
repossessed the property. In return for the payment of $5,700, it
also forgave a debt owed to it by the appellant, arising from a
loan on a line of credit and the unpaid balance on his credit
card. The appellant had put $19,000 on his line of credit, and
the unpaid balance on his credit card was $2,300. The appellant
testified that he had incurred those two debts for the purpose of
investing the money obtained-aside from about $500-in the
property.
[11] The appellant called René
Faucher as a witness. Mr. Faucher confirmed that the
appellant had done the renovations to the property and that his
intention had been to rent it to seniors. He said that the
appellant had put up a sign in 1992 or 1993 for that purpose. The
witness did not recall seeing any advertisement for the rental of
the units.
[12] He also confirmed that in 1997 the
appellant had intended to sell his property. He said that the
appellant was unable to rent his units because they were not
completely finished. On cross-examination, he said that he
had seen the appellant swimming occasionally but that most of the
time he worked on the property.
[13] The appellant was asked on
cross-examination about the contradictions between his
testimony at trial and the answers he gave in a questionnaire
sent to him by one of the respondent's representatives on
December 14, 1999, which was filed as
Exhibit I-1. The appellant answered question 5 in the
questionnaire by stating that he had initially purchased the
property in order to make a second home or cottage of it. He
explained his answer by adding that he had spent the first three
years doing renovations and had not deducted his expenses. In
answering question 12, he reiterated that the property was
initially a second home and that the loss of his business was
what had obliged him to convert it into an income property. His
answer to question 6 was that he had begun renting the units
around 1996. During his testimony, the appellant admitted the
contradictions and explained that he had given false information
in the questionnaire. He had just received a call from the bank,
and he feared that the bank would come after him again. He
claimed that the tax authorities knew he had been renting since
1994, as in his tax return for that year he had reported rental
income.
[14] The appellant explained that he had
planned on being able to rent unit 1 for the entire year and
unit 2 during the summer in 1998. In actual fact, the rental
of the property constantly generated rental losses, as shown by
the following table:
|
1994
|
($5,600)
|
|
1995
|
($4,798)
|
|
1996
|
($10,954)
|
|
1997
|
($12,045)
|
|
1998
|
($15,371)
|
[15] The gross yearly income from the rental
of the property for the same years was as follows:
|
1994
|
$6,000
|
|
1995
|
$6,000
|
|
1996
|
$6,000
|
|
1997
|
$4,000
|
|
1998
|
$1,000
|
[16] As well, until 1996, the appellant
subtracted 25 percent from his total expenses to reflect his
personal-use portion thereof. He did not do so in 1997 and
1998 because he did not occupy the basement apartment in those
two years.
[17] The appellant told the Court that he
purchased the property with the intention of making it an income
property and not a second home. In his testimony, he referred to
all the efforts he made to renovate the property and convert it
into dwelling units. He said he had proved that two or even three
units could be built in the property. He expended all his energy
and spent all his time working on it. The profitability of his
project was delayed by his illness. In spite of everything, he
did all he could in the circumstances.
[18] Counsel for the respondent argued that
the appellant's initial intention was to make the property a
second home. It was not until 1993 that he took steps to convert
it into a seniors' residence. He very quickly realized that
this was impossible, and his intention changed in 1994. It was
necessary to make the property profitable while retaining a
personal portion, namely the basement. Although he did not go to
the property often, he occupied it when he went there with his
wife.
[19] Counsel for the respondent admitted
that the appellant had spent time and money renovating the
property. His personal financial problems, the financial problems
of his canopy business and his health caused difficulties for
him. Counsel submitted to the Court that, leaving all of that
aside, the appellant did not have a reasonable expectation of
profit from the property. The rental problems, the degree of
completion of the units, and the potential income are all
significant indications that there were serious obstacles to the
implementation of the project. No other conclusion is possible if
one looks at the income and expenses for 1998.
[20] According to counsel for the
respondent, the appellant's intention when he purchased the
property, the fact that he occupied it during the years following
the purchase and the fact that it was in a resort area show that
there was a personal element.
[21] In the alternative, counsel submitted
that the personal-use portion should be in proportion to
the occupation. The square footage of the basement was equal to
that of the two units, meaning that half of the property was used
for personal purposes.
[22] What must therefore be determined is
whether the expenses deducted by the appellant for each of the
1997 and 1998 taxation years were incurred for the purpose of
gaining or producing income from a business or property within
the meaning of paragraph 18(1)(a) of the Act
or whether they were personal expenses of the appellant within
the meaning of paragraph 18(1)(h) of the
Act.
[23] Those legislative provisions read as
follows:
18(1) In computing the income of a taxpayer
from a business or property no deduction shall be made in respect
of
(a) General limitation - an outlay or
expense except to the extent that it was made or incurred by the
taxpayer for the purpose of gaining or producing income from the
business or property;
(h) Personal and living expenses -
personal or living expenses of the taxpayer, other than travel
expenses incurred by the taxpayer while away from home in the
course of carrying on the taxpayer's business.
Subsection 248(1) defines "personal or living
expenses" as follows:
248(1) . . .
"personal or living expenses" -
"personal or living expenses" includes
(a) the expenses of properties maintained by any person
for the use or benefit of the taxpayer or any person connected
with the taxpayer by blood relationship, marriage or adoption,
and not maintained in connection with a business carried on for
profit or with a reasonable expectation of profit.
[24] In Tonn v. Canada, [1996] 2 F.C.
73, Linden J.A. analysed the above legislative provisions, which
lay down some of the rules applicable to deductions, and the
tests set out in Moldowan v. The Queen, [1978] 1 S.C.R.
480. Although I will not reproduce that entire analysis, Linden
J.A. concluded in Tonn, inter alia at page 96
(paragraph 28):
The Moldowan test, therefore is a useful tool by which
the tax-inappropriateness of an activity may be reasonably
inferred when other, more direct forms of evidence are lacking.
Consequently, when the circumstances do not admit of any
suspicion that a business loss was made for a personal or
non-business motive, the test should be applied sparingly
and with a latitude favouring the taxpayer, whose business
judgment may have been less than competent.
[25] Linden J.A. continued by stating that
the cases in which the "reasonable expectation of
profit" test is employed can be placed into two groups:
cases where the activity has a strong personal element and cases
where the taxpayer's motive for the activity lacks any
element of personal benefit and where the activity cannot be
classified as a hobby. He added that Moldowan,
supra, has been utilized in regular commercial type
situations and that the facts of each case will determine whether
the activity is to be considered a business activity.
[26] The appeals in question relate to the
appellant's activities in 1997 and 1998 in connection with
his property. The history of the property before those two years
is obviously important in terms of the use that may have been
made of the property and the return it may have generated. For
example, it seems clear to me that the appellant made personal
use of the property, if only because he occupied the basement for
his personal purposes during the renovations and was able to take
advantage of the fact that the property was located near a lake
and in a resort area. Moreover, he subtracted a
personal-use percentage of 25 percent in his tax
returns until 1996.
[27] On November 30, 1996, the appellant
suffered a second heart attack. He testified that he did not go
to the property for a period of 11 months because he would have
been too far from the hospital centre in the event of an
emergency. After that period, he said, he went there just a few
times to make sure everything was in order. This was confirmed by
René Faucher, who testified that he did not see the
appellant often after his heart attack.
[28] I therefore conclude that, for the 1997
and 1998 taxation years, there was no personal element in the
appellant's business. In fact, given the appellant's
financial problems and the state of his health, I do not think
that the property could have given him any personal satisfaction
or benefit during those two taxation years.
[29] The question nonetheless arises as to
whether the appellant was operating a commercial enterprise in
relation to the property. Although he initially intended to
convert it into three dwelling units, he was able to rent only
one of them. The other two were never finished. Even the bachelor
apartment, which he did not occupy in 1997 and 1998, was not
suitable for rental purposes.
[30] In 1997, he did no advertising except
for distributing flyers. He advertised in 1998, but he did not
elaborate on the nature or extent of the advertising. The problem
he had renting the property was due to the fact that he had not
finished two of the three units.
[31] During all the rental years, that is,
from 1994 on, he made no profits. Between 1991 and 1998, the
appellant was able to complete only one unit. Although he had
health problems and had long periods of convalescence, he could
have completed the units after 1992, since most of the renovation
work had been done that year. To make profits, the necessary
sources of income must be put in place.
[32] The appellant is a businessman. He
cannot deny the fact that a lack of income merely increases
losses. Difficulty finding tenants was never a factor that
interfered with the profitability of the business. What did was
the fact that two of the three units were not ready to be rented
and that unit 1 could not be rented in the winter. It was
apparently not winterized until 1998.
[33] Even if I were to give the appellant
some latitude, as Judge Bowman did in Bélec (E.)
v. Canada, [1995] 1 C.T.C. 2809, and to give his business the
benefit of a start-up period, I do not think that I can stretch
that period to 1997 and 1998.
[34] I recognize that the appellant had
problems implementing his project. Given the time, energy and
money he invested in that project, he is deserving of admiration.
His health suffered. However, all of his efforts were unable to
transform his project into a business capable of making a
profit.
[35] His attempt to sell the property in
1997 was unsuccessful. The making of a capital gain could have
been a factor in the appellant's favour, but it must be
excluded because he purchased the property in question in 1991 in
order to generate income for his retirement. In 1997, the
appellant was not retired.
[36] For all these reasons, and taking into
account the factors set out in the case law, I conclude that the
appellant, in the time given to him, could not have expected his
project to become profitable. Accordingly, there was no
reasonable expectation of profit from the operation of that
business.
[37] The appeals are therefore
dismissed.
Signed at Ottawa, Canada, this 7th day of March 2002.
J.T.C.C.
Translation certified true
on this 15th day of May 2003.
Erich Klein, Revisor
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