Citation: 2011 TCC 472
Date: 20111006
Docket: 2009-2919(IT)I
BETWEEN:
GEORGE LEISSER,
appellant,
and
HER MAJESTY THE QUEEN,
respondent.
REASONS FOR JUDGMENT
Jorré J.
Introduction
[1]
The appellant appeals
from assessments for the 2004 and 2005 taxation years. The appellant is in his
late 80s. He has elected the informal procedure.
[2]
In assessing, the Minister
of National Revenue (Minister) substantially reduced net rental losses claimed
by the appellant. I shall return to these changes in a moment.
[3]
The appellant raised a
number of other issues in his appeal.
Pensions
[4]
The first relates to
the taxability of foreign pensions.
[5]
In 2005 the appellant
claimed and received a deduction of $1,621.69 with respect to a German pension
pursuant to the Canada-Germany tax treaty.
[6]
In appealing, the
appellant claimed a deduction with respect to the same pension in 2004. After
the hearing, the respondent wrote to the Court and the appellant and conceded
that an amount of $2,555.30 was deductible pursuant to the treaty.
[7]
Accordingly, the appeal
will be allowed to the extent of this concession.
Issues Relating to Years Prior to 2004
[8]
The appellant also
raised a number of other issues relating to earlier taxation years.
[9]
While I cannot make
changes to the assessment of taxation years not before me, I can of course
consider whether something occurring in the prior year may have an effect that
would have an incidence on the amount of tax that should be assessed in the two
years before me.
[10]
First, there was an
issue relating to an RRSP amount of $18,000 from his wife’s estate which he
wished to roll over. This issue related to the 2003 taxation year.
[11]
I was unable to
understand how it would affect either 2004 or 2005; in any event, from the
evidence before me, it appears that the amount was rolled over and that
rollover was not challenged by the Canada Revenue Agency.
[12]
Similarly there were issues
relating to capital gains deductions prior to 2004, an allowable business
investment loss calculation relating to 2003, the amount of unused net capital
loss available in 2007 and a duplicate T5 issued to the appellant’s wife
relating to 2001 that was added to her income.
[13]
Among other things
relating to these events, there was the bankruptcy of what I understand to have
previously been the appellant’s company.
[14]
Much of what happened
was very unfortunate and I commend the appellant’s efforts to help his son.
[15]
However, I was not,
based on the evidence before me, able to discern what errors in assessing might
have occurred relating to these matters, nor was I able to discern that they
would have any effect on the two taxation years before me.
Rental Income and Losses
[16]
The main issue in the
appeal relates to rental income reported and rental losses claimed by the
appellant. The property in question is located in the City of Westmount, Québec.
[17]
In 2004, the appellant
claimed a rental loss of $40,567.94; the Minister assessed on the basis that
the 2004 rental loss was only $8,924.
[18]
In 2005, the appellant
reported rental income of $1,396.98; the Minister assessed on the basis that
the rental income was $7,223.
[19]
Excluding the basement,
the property in question has three floors. The appellant lives on the second
floor which measures 1,708 sq. ft.
[20]
The third floor is
rented to the appellant’s daughter and measures 1,316 sq. ft.
[21]
The first floor has
three units and totals 1,708 sq. ft.
[22]
In the two years under
appeal, two of the first floor units were rented and one was vacant.
[23]
The appellant
attributed one third of the expenses related to the building to his personal
apartment. For the purposes of computing his rental income or loss, he deducted
two thirds of the expenses related to the building.
[24]
In reassessing, the
Minister:
(a) disallowed
a small amount of expenses on the basis that they were not incurred at all; this
amount was small: a net refusal of $1,864 out of $88,215 in the 2004 taxation
year, and of $5,909 out of $26,102 in the 2005 taxation year;
(b) accepted the rental of
the two occupied units on the first floor as being of a commercial nature with
the consequence that the appellant could claim all the expenses related to
those units; and
(c) treated the third floor
occupied by the daughter and the vacant unit on the first floor as not being of
a commercial nature with the consequence that the Minister excluded from the
property revenues the rent paid by the daughter and denied the deduction of the
portion of the expenses related to the daughter’s unit and the vacant unit.
[25]
The Minister was of the
view that, because no reasonable efforts were made to rent the vacant unit on
the first floor, the empty first floor unit was no longer a source of income.
[26]
With respect to the
unit occupied by the daughter, the daughter moved into the unit in
approximately 1998.
[27]
The Minister proceeded
on the assumption that the daughter paid $570 a month for a five‑room
apartment while on the first floor arm’s length tenants were paying $530 and
$500 a month, respectively, for one‑and‑a‑half‑room
apartments.
[28]
Because of that, the
respondent argued that the daughter was not paying a fair market value rent and
that the unit was not a source of income.
[29]
The appellant brought
nothing forward in his evidence which would lead me to conclude that the daughter
was paying a fair market rent. Indeed, considering the size relative to the
other units and the absolute size, the rent is clearly well below market value.
[30]
The appellant also
testified that the daughter suffered from serious health problems.
[31]
As to the vacant unit,
the appellant described how he and his wife had had difficulties with a tenant
who left in, approximately, 2001. After the difficulties he and his wife
decided to take a break from renting the unit.
[32]
The appellant’s wife
died in 2002. After his wife died, because of the troubles that they had had,
the appellant was still scared to rent the unit to just anyone and was only
prepared to rent the unit by word of mouth. While the appellant did not explain
what he meant by that, I take it to mean that he only wanted a tenant
recommended to him by someone he knew.
[33]
There was no evidence
and no assumption by the Minister that the vacant unit had been reallocated to
the use of the appellant or of his daughter.
[34]
Apart from the $263.40
cost of the stove, at the hearing the appellant did not really contest the
amounts disallowed as not incurred. As for the cost of the stove, it was
disallowed on the basis that the appellant did not have leases showing that he
provided appliances.
[35]
Given that the appellant’s
testimony, as I understood it, is that there were no leases, and given his
testimony that over the years one tenant had damaged the unit’s stove, I am
satisfied that he did indeed provide stoves and that the $263.40 expense should
be allowed.
Analysis
[36]
I shall start with the
unit occupied by the daughter. Given the large difference in size between the
daughter’s unit and the two units rented on the first floor, I am satisfied
that the unit was rented to the daughter for less than a fair market rent.
[37]
I am satisfied that,
applying the tests set out by the Supreme Court of Canada in Stewart v.
Canada,
there is, applying the first test in Stewart, a personal element
involved in leasing the third floor apartment. This personal element is the
fact that the appellant, out of a very understandable wish to assist his
daughter, gave the daughter a much lower rent than if he were renting out the
unit to an unrelated person.
[38]
Further, applying the
second test in Stewart, there is nothing in the evidence to suggest that
this is being operated in a sufficiently commercial manner to constitute a
source of income.
[39]
Although the daughter
has her own dwelling unit, the situation is more akin to the daughter contributing
to household expenses than that of a commercial lease.
[40]
Accordingly, the Minister
was correct in excluding from the property income the rent payments by the
daughter and in excluding from the property expenses the pro rata share of the
expenses related to the daughter’s unit.
[41]
I now turn to the
vacant unit.
[42]
It is worth repeating
the particular facts relating to this unit: the appellant, while making little
effort to rent the unit (no advertising), was prepared, if he could find a
suitable tenant through word of mouth, to rent the unit; the unit was not
converted to personal use and, rather importantly, the unit is part of the
building the appellant owns and could not be sold separately from it.
[43]
Given these particular
circumstances, in the two years in issue, I do not see how one could consider
the unit to not form part of the first floor rental property. As such, for the
2004 and 2005 taxation years, I am satisfied that the unit is still part of the
first floor rental property and is still part of a source of income.
[44]
As a result, the
appellant is entitled to deduct the expenses related to the vacant unit on the
first floor.
[45]
The result of these
conclusions is that the total expenses incurred in 2004 should be revised
upwards to $86,614.40.
[46]
The first floor
represents 36.09% of the square footage of the three floors. Accordingly, in
the 2004 taxation year, 36.09% of the expenses incurred for the building, an
amount of $31,259.14,
are deductible from the $11,696 revenue relating to the first floor. This
produces a net loss of $19,563.14 in respect of the first floor.
[47]
The Minister was
correct in excluding the revenue from the daughter’s unit and in denying the
deduction of the unit’s pro rata share of the expenses. This is true for both
taxation years.
[48]
In 2005, the net income
must be recomputed on the basis that the revenues for the first floor are
$12,045 and the expenses related to the first floor are $7,287.65. This results in
a net rental income of $4,757.35.
Conclusion
[49]
For these reasons, the
appeal is allowed, without costs, and the matter is referred back to the Minister
for reconsideration and reassessment on the basis that:
(a) in
the 2004 taxation year,
(i) the appellant’s
income should be reduced by the $2,555.30 amount of the German pension,
(ii) the rental loss of $8,924
should be increased to $19,563.14;
(b) in the 2005 taxation
year, the appellant’s net rental income should be decreased from $7,223 to $4,757.35.
Signed at Ottawa, Ontario, this 6th day of October 2011.
“Gaston Jorré”
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