Citation: 2010 TCC 530
Date: October 22, 2010
Docket: 2008-3624(IT)G
BETWEEN:
BRADY WHITE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Campbell J.
[1]
On October 29, 2007,
the Minister reassessed the Appellant in respect to his 2004 and 2005 taxation years
by including income from his business in each of these taxation years. The
amounts of additional income were reduced by a further Notice of Reassessment
on June 19, 2008. Although no Notice of Reassessment has been issued for the
Appellant’s 2006 taxation year, that year has been included in the Notice of
Appeal as one of the years being appealed to this Court. During the hearing,
the Appellant acknowledged that he received no reassessment and that no
adjustments to his reported income had been made for this taxation year.
Consequently, since there are no grounds for appeal in respect to the 2006
taxation year, the appeal is dismissed with respect to this year. The taxation
years, 2004 and 2005, are validly before me.
[2]
The Appellant is the
sole proprietor of a dental practice located in Eastern Passage, Nova Scotia. His practice is conducted from rented premises
described by Bill Chappell, the real estate appraiser for the Canada Revenue
Agency (the “CRA”), as a single family dwelling. The Appellant also has his
primary and only residence located at this premises. During 2004 and 2005, the
Appellant, who is divorced, had his two sons reside with him periodically on
weekends and holidays.
[3]
Subsequent to his
divorce and unable to borrow money, he had a friend purchase this property and,
in April 2003, they entered into a written lease agreement whereby the
Appellant would lease the property and pay rent of $1,800 monthly,
commencing July 1, 2003, for a five year period. The second floor of the
one-and-a-half wood frame structure was used solely for his personal use in
2004 and 2005, and contained two bedrooms, one of which was accessed
through the other bedroom. Two rooms on the lower floor, referred to as the “operatory”
and “lab”, were used exclusively for the dental practice. The remaining
portions of the house consisted of a kitchen, bathroom, reception/living room
and basement. These areas were used for both personal and business, although
the Appellant’s evidence was that he was always working and they were primarily
used for business. The Appellant estimated his business use of the premises at
80 per cent.
[4]
The initial audit
allowed 31 per cent of the property as business use relating to the dental
practice. The appeals officer increased the portion dedicated to business use
from 31 per cent to 69 per cent, although this was the Appellant’s only place
of residence.
[5]
Although there were a
number of expenses referenced in the pleadings, during the hearing the
Appellant acknowledged that the primary issue was how the CRA treated the rental
amounts he paid pursuant to the lease agreement. The parties agreed that the
only other issue before me was the salaries paid to his two sons during periods
when they visited him.
[6]
The rental issue arose
largely as a result of the decision of the CRA to apply the 69 per cent
business use to the fair market rental value (the “FMV”) of the property in
2004 and 2005, as determined by a market rental report completed by Bill
Chappell, rather than applying the 69 per cent to the monthly amount of $1,800
paid by the Appellant. It was estimated that the retrospective FMV of the
property in 2004 and 2005 would be $900 monthly, and not the $1,800 that the
Appellant paid monthly according to his lease.
[7]
Mr. Chappell relied on
the Fourth Edition of Real Estate Appraisal (The Appraisal Institute,
Chicago, 2002), which defined “market rent” as follows:
The most probable rent that a property should bring in a competitive
and open market reflecting all conditions and restrictions of the specified
lease agreement including term, rental adjustment and revaluation, permitted
uses, use restrictions, and expense obligations; the lessee and lessor each
acting prudently and knowledgeably and assuming consummation of a lease
contract as of a specified date and the passing of a leasehold from lessor to
lessee under conditions whereby:
·
lessee and lessor are typically motivated.
·
both parties are well informed or well advised
and acting in what they consider their best interests.
·
a reasonable time is allowed for exposure in the
open market.
·
the rent payment is made in terms of cash in
dollars and is expressed as an amount per time period consistent with the
payment schedule of the lease contract.
·
the rental amount represents the normal
consideration for the property leased unaffected by special fees or concessions
granted by anyone associated with the transaction.
Mr. Chappell completed the market rental report in
2007. Since the CRA maintains no database for residential rental rates, he
compared, among other things, rents of duplexes and single family dwellings by
using local newspaper rental advertisements in 2007. Most of those properties
used in the analysis contained three bedrooms, while the Appellant’s leased
premises contained only two bedrooms. Mr. Chappell’s report tabulated the
results of the rental data and indicated a monthly rental range of $750 to
$1,300. However, because of the smaller size of the subject premises, he
estimated market rent to be in the range of $750 to $975 monthly in 2004 and
2005 and settled on an amount of $900 monthly.
[8]
In addition, Mr.
Chappell looked at commercial rental rates in the area. He did so because the
Appellant’s position is that this property is a commercial property where he
happens to reside and not, as the CRA had concluded, a residence with a portion
used for his business. According to Mr. Chappell’s evidence, while residential
rates typically reflect the rental amount for an entire dwelling, commercial
rates generally differentiate between ground floor space and basement areas as
well as upper floors. The commercial rate is also usually expressed as a rental
rate per square foot of leaseable area per year. From a commercial perspective,
Mr. Chappell prorated the rent for this property, and in considering the
main, second and basement floors of the Appellant’s premises, applied a 100 per
cent rate to the square footage of the ground floor, a 50 per cent rate to the
square footage of the second floor and a 25 per cent rate to the square footage
of the basement. The following table, reproduced from page 16 of the report,
illustrates this breakdown:
|
Area Allocation
|
|
|
|
Floor
|
Area
|
|
Ratio
|
|
Equivalent
Area
|
|
Ground
Floor
|
732.21
ft.2
|
x
|
100%
|
=
|
732.21
ft.2
|
|
Second
Floor
|
212.16
ft.2
|
x
|
50%
|
=
|
106.08
ft.2
|
|
Basement
|
424.00
ft.2
|
x
|
25%
|
=
|
106.00
ft.2
|
|
Total
|
1,368.37
ft.2
|
|
|
|
944.29
ft.2
|
[9]
Using the total
equivalent area of 944.29 square feet, Mr. Chappell stated that the 100 per
cent rental rate would equate to a yearly rent of $11.44 per square foot
($10,800 ÷ 944.29 ft.2), which he rounded to $11.50 per square foot.
Mr. Chappell applied this figure to the Appellant’s property and the
results were reproduced in a second table at page 17 of the report:
|
Rental
Allocation
|
|
|
|
|
|
|
|
|
|
Floor
|
Area
|
100% Rate
|
|
Ratio
|
|
Rent/Floor
|
|
Ground Floor
|
732.21 ft.2 x
|
$ 11.50 /ft.2
|
x
|
100%
|
=
|
8,420.42
|
|
Second Floor
|
212.16 ft.2 x
|
$ 11.50 /ft.2
|
x
|
50%
|
=
|
1,219.92
|
|
Basement
|
424.00 ft.2 x
|
$ 11.50 /ft.2
|
x
|
25%
|
=
|
1,219.00
|
|
Total
|
1,368.37 ft.2
|
|
|
|
|
10,859.34
|
[10]
Mr. Chappell reviewed
commercial rents for five premises within the area of the subject property and
concluded that the commercial data indicated a range of rental rates from $9.00
per square foot per annum to $14.00 per square foot per annum. Mr. Chappell concluded,
at page 18 of his report that,
… when represented on a “per ft.2” basis, the estimated residential monthly rental of $900 at the
subject property indicates a ground floor rental of $11.50/ft.2 per annum which is within the range
of commercial rents noted …
[11]
Mr. Chappell testified
that reviewing and comparing the subject property to commercial premises, in
light of the fact that he believed it to be a residence, was done to provide
another perspective, particularly since the Appellant argued that it was not a
residential property. In any event, the results indicate that the residential
rate assigned by the appraiser would be similar to the commercial rate.
[12]
The only document that
legally identified the Appellant’s relationship to the subject property in 2004
and 2005 was the lease agreement (Exhibit A-1, Tab 1). This document refers to
the premises as a “1.5 storey single family dwelling”. The form itself is a
standard residential leasing document pursuant to the Residential Tenancies
Act for Nova Scotia. It contains no reference to the property
being a commercial premises. The tenant is identified as Dr. Brady C. White,
with other occupants being his sons. The rental is referred to as a global
monthly amount and is not identified as a square footage amount as the majority
of commercial leases would.
[13]
The Appellant testified
that, in addition to the financial benefits, one of the primary reasons he
relocated his dental practice to this premises was to take advantage of the
ocean view. Although he indicated that this view provided a beneficial
environment to his clientele, presumably in helping them relax while dental
work was being completed, he did not adduce any evidence to support his
position that the view added to his profit. He admitted he did not advertise
for patients and I have no evidence before me that either indicates that his
rental amount was higher because of the ocean view or that this view increased
his patient volume and, consequently, his profit. In fact, it appeared from the
Appellant’s evidence that, unrelated to his dental practice, one of the reasons
that drew him to the property was the serenity that the ocean view provided to
him personally. Although the water view may have some positive effect on the
eventual selling price of this property for the owner, there was no evidence to
suggest that it had any effect on either the market rental rate or on the
profit margin of the dental practice.
[14]
According to the
evidence and the appraiser’s report, the property is zoned C-2, which allows
for residential use interspersed with small-scale commercial uses. The
Appellant views the property as commercial because the dental practice
permeates his entire life. As he stated in his Notice of Appeal, “I do not work
at home, I live at the office”. However, in 2004 and 2005, it was where he
resided and where his sons spent visitation time with him. The diagrams of the
inside of the property, provided in Exhibit A-1, indicate a structural layout
and style that appears at first blush to be a residential building. The
location and zoning also support this conclusion. In much of the dwelling, the
personal and business uses are co‑mingled. Apart from the analysis
contained in the appraisal report and its conclusion, the Appellant did not
provide any evidence to dispute either the 69 per cent assigned to
business use by the CRA or the fair market rent of $900 monthly. I was not
provided dimensions for each room to enable me to alter the assigned 69 per
cent and the Appellant did not provide evidence to dispute the report’s
conclusion, except to state that the $1,800 monthly rent was based on rents he
had paid previously for premises from which he operated his dental practice.
Since the Appellant has not established evidence which would meet the burden of
proof, I must conclude that the fair market rent for the property is $900 per
month and that the business use of the property was correctly assessed at
69 per cent.
[15]
With respect to the
second issue, the salaries paid to his sons, the Appellant claimed business
expenses of $1,100 for the salaries in each of the 2004 and 2005 taxation
years. The Appellant was allowed $550 as a reasonable salary expense in each
taxation year. The Appellant testified that he paid his sons, aged 12 and
15 in those taxation years, for booking appointments, transferring business
information to the computer, yard work and snow removal. Other than this
general information, I was not provided with any specifics which would permit
me to alter the amount that the CRA concluded would be reasonable under the
circumstances.
[16]
The Respondent pointed
out that the within appeals were inadvertently filed as Class B when, in fact,
they should have been recorded as Class A appeals.
[17]
The appeals are
therefore dismissed, with costs.
Signed at Ottawa, Canada, this 22nd
day of October 2010.
"Diane Campbell"
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