Citation: 2009 TCC 488
Date: 20091001
Docket: 2009-13(IT)I
BETWEEN:
SUSAN PREISS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D'Arcy J.
[1]
The Appellant, Susan
Preiss, has appealed her income tax reassessments in respect of the 2004 and
2005 taxation years. The appeal concerns rental losses in respect of a building
located at 37 Ben Machree Drive, Mississauga, Ontario (referred to during the
hearing as the “triplex”) that were deducted by her in computing income.
[2]
When filing her tax
returns for the 2004 and 2005 taxation years, the Appellant claimed rental
losses of $21,265 and $21,085 respectively. The reassessments reduced the
rental losses to $1,385 and $1,280 respectively.
[3]
The parties agreed at
the commencement of the hearing that there were two issues to be considered by
the Court:
(i) Whether the Appellant
was entitled to deduct one-third or two-thirds of the eligible expenses
incurred in respect of the triplex; and
(ii) Whether legal fees
of $6,256 incurred by the Appellant in the 2004 and 2005 taxation years were
deductible by the Appellant for the taxation year in which they were incurred.
[4]
Ms. Preiss testified at
the hearing. She was a credible witness and I accept her testimony as reliable.
I. Background
[5]
The Appellant purchased
the triplex in November 2003. The triplex consisted of three units: a basement
unit, a unit on the middle floor and a unit on the upper floor.
[6]
The Appellant testified
that at the time she purchased the triplex she intended to occupy one unit as
her principal residence and rent the other two units. Further, the Appellant
acknowledged that, when purchasing the triplex, she considered the
possibility of her mother renting one of the units. She felt that her mother
would consider renting a unit if she became ill and wished to live close to her.
[7]
The basement unit
(referred to during the hearing as Unit #1) was rented to a third party during
the 2004 and 2005 taxation years.
[8]
The middle floor unit
(referred to during the hearing as Unit #2) was not, except for a two-month
period, occupied during the 2004 and 2005 taxation years. It appears from the
evidence that Unit #2 was rentable; however, the Appellant elected not to rent
the unit while it was undergoing the repairs discussed in subsequent
paragraphs.
[9]
The Appellant received
rental payments of $8,724 in the 2004 taxation year and $8,324 in the 2005
taxation year.
[10]
The Appellant’s mother
moved into Unit #2 in December 2004 for what was referred to as the “trial
period”. The Appellant noted that her mother wanted to determine if she was
comfortable living in Mississauga. As a result, it was agreed that she would
not pay rent during the trial period. However, if at the end of the trial
period she felt that she was comfortable living in Unit #2, then she would
begin to pay rent at $1,100 per month. The trial period lasted two months.
In February 2005, the Appellant’s mother decided that she did not like
living in Mississauga and returned to her home in Windsor.
[11]
At the time the
Appellant purchased the triplex she concluded that the units required repairs,
particularly Unit #2. The Appellant carried out most of the repairs herself. The
repairs were delayed in 2004 as a result of a zoning dispute over Unit #1
(which will be discussed shortly) and in 2005 and 2006 as a result of the poor
health of the Appellant’s mother, who passed away in February 2006. The repairs
were completed in the first quarter of 2007, at which time Unit #2 was
immediately rented to a third party.
[12]
In April of 2004, a
neighbour of the Appellant filed a zoning complaint with the City of Mississauga. The neighbour alleged that Unit #1 did not conform
to the City’s zoning by-laws. The Appellant retained counsel; however, she
spent a considerable amount of her own time fighting the complaint. It appears
from the evidence that the matter was resolved in favour of the Appellant in
August or September of 2004. Invoices filed by the Appellant evidence payments
to her counsel of $5,543 in 2004 and $713 in 2005.
[13]
During the
cross-examination of the Appellant, it was disclosed that a Mr. James Krystolovich
held a 50% legal and beneficial ownership interest in the triplex during the
2004 and 2005 taxation years.
II. Analysis
[14]
The first issue before
the Court is whether, when calculating her loss under section 9 of the Income
Tax Act (the “Act”), the Appellant was entitled to deduct
one-third or two-thirds of eligible expenses incurred in respect of the
triplex. In particular, I must determine, in the first instance, whether
Unit #2 constituted a source of income. The approach to be taken in making such
a determination is mandated by the 2002 decision of the Supreme Court of Canada
in Stewart v. Canada, 2002 SCC
46, [2002] 2 S.C.R. 645.
[15]
The Court noted at
paragraphs 52 to 55 of its discussion that where there is some personal or
hobby element to the activity in question, one must apply a “pursuit of profit”
source test. At paragraph 54, the Court stated the test as follows: “Does the
taxpayer intend to carry on an activity for profit and is there evidence to
support that intention?”
[16]
The following comments
of the Supreme Court of Canada in the Stewart case are particularly
relevant for the purposes of this appeal:
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.
[17]
The evidence before the
Court in the present case was that the predominant intention of the Appellant
was to make a profit from the rental of Unit #1 and Unit #2. During the
2004 and 2005 taxation years, Unit #1 was rented to a third party for a fair
market value rent. During this period, the Appellant intended to rent Unit #2
for a fair market value rent. The evidence provided by the Appellant was that
the fair market value rent would be provided by either a third person or by her
mother (after her two-month trial period ended).
[18]
The fact that the
repairs took a long time to complete did not change the taxpayer’s intention
during 2004 and 2005. The fact that she was not inclined to rent Unit #2 until
the repairs were completed is further evidence of the businesslike behaviour of
the Appellant. She was conscious of the importance of maintaining a reputation
as a “good landlord” and maximizing any rents she received from the two units.
[19]
As a result, I find
that the Appellant’s activities with respect to Unit #1 and Unit #2 constituted
a source of income.
[20]
The next question that
must be addressed is the deductibility of expenses. As noted in paragraph 57
of the Supreme Court of Canada decision in the Stewart case, whether
or not a business exists is a separate question from the deductibility of
expenses.
[21]
The parties agreed at
the commencement of the hearing that the Appellant had incurred eligible
expenses in respect of the triplex of $30,635 in the 2004 taxation year and
$29,104 in the 2005 taxation year plus any amount that this Court might allow
in respect of the legal fees. The details of these expenses are set out in
Schedule A of the Respondent’s Reply.
[22]
While the parties
agreed on the quantum of the eligible expenses incurred, they disagreed on the
extent to which such expenses were deductible. The Appellant’s agent
argued that the Appellant was entitled to deduct two-thirds of such expenses
when calculating the income or loss from the rental of the units in the
triplex. Counsel for the Respondent argued that the Appellant was only entitled
to deduct one-third of such expenses. Counsel argued that the deduction of the
expenses relating to Unit #2 was prohibited under either paragraph 18(1)(a)
or 18(1)(h) or, alternatively, by subsection 18(3.1).
[23]
It is my view that the
deduction of eligible expenses relating to Unit #2 during the two-month period
the unit was occupied by the Appellant’s mother was prohibited by paragraph
18(1)(h).
[24]
Paragraph 18(1)(h)
reads as follows:
18(1) In computing the income of a taxpayer from a
business or property no deduction shall be made in respect of
…
(h) 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.
[25]
The term personal and
living expenses is defined in subsection 248(1) to include 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
common-law partnership or adoption and not maintained in connection with a
business carried on for profit or with a reasonable expectation of profit.
[26]
It is clear from the
evidence that for the two-month period commencing in December 2004, Unit #2 was
maintained for the benefit of the Appellant’s mother. Further, the evidence
before the Court was that the Appellant’s mother did not pay any rent during
this period. This period was referred to as a trial period; its purpose was to
allow the Appellant’s mother to determine if she was comfortable living in the
apartment. If she had decided to stay, she would then have started paying fair
market value rent.
[27]
However, during the
two-month period that the Appellant’s mother occupied Unit #2, there was no expectation
of profit. As a result, pursuant to paragraph 18(1)(h), the Appellant
is not entitled to claim a deduction for expenses incurred during this period
in respect of Unit #2.
[28]
Counsel for the
Respondent argued that subsection 18(3.1) prohibited the Appellant from
deducting expenses relating to Unit #2 during the 2004 and 2005 taxation years.
I cannot agree with this argument.
[29]
One of the conditions
for the application of subsection 18(3.1) is that the outlay or expense at
issue “can reasonably be regarded as a cost attributable to the period of the construction,
renovation or alteration of a building.”
[30]
Based upon the evidence
before the Court, it does not appear that the work carried out by the Appellant
during 2004 and 2005 constituted the “construction, renovation or alteration”
of a building. The work carried out was more in the nature of repairs to the
units than the construction, renovation or alteration of a building. Subsection
18(3.1) is not intended to apply to periods during which general repairs are
being undertaken. Rather, subsection 18(3.1) requires more extensive work that
constitutes construction, renovation or alteration.
[31]
It would be
unreasonable to suggest that every time a repair is undertaken the deduction of
the related soft costs will be denied under subsection 18(3.1). The issue
is one of degree, with general repairs and cosmetic touch-ups at one end of the
spectrum and construction, renovation or alteration falling at the other end.
Based upon the evidence before the Court, the expenses incurred by the Appellant
constituted general repair and cosmetic touch-ups and thus were not subject to
the provisions of subsection 18(3.1).
[32]
In summary, the
Appellant was entitled to deduct two-thirds of the agreed eligible expenses
incurred during the 2004 and 2005 taxation years, with the exception of those
for the two-month period during which Unit #2 was occupied by the Appellant’s
mother. For this two-month period, the Appellant was only entitled to deduct
one-third of the agreed eligible expenses.
III. Deductibility of Legal Expenses
[33]
As noted previously,
the Appellant incurred legal fees to defend against a zoning complaint filed by
a neighbour with the City of Mississauga. The complaint related to Unit #1 of the
triplex.
[34]
The agent for the
Appellant argued that the legal fees were incurred on account of income, while
Counsel for the Respondent argued that they were incurred on account of
capital.
[35]
In M.N.R. v. The Dominion
Natural Gas Company Limited, [1941] S.C.R. 19, the Supreme Court of Canada
stated at page 31 that legal fees are on account of capital if they are
incurred with a view to “preserving an asset or advantage for the enduring
benefit of a trade.”
[36]
In the case of Kellogg
Company of Canada Limited v. M.N.R., [1942] C.T.C. 51, the Exchequer
Court held that legal fees incurred in
the successful defence of an infringement action with respect to a registered
trademark involving the use of the words “shredded wheat” were deductible. The Exchequer Court distinguished this from the situation dealt with in
the judgment of the Supreme Court of Canada in the Dominion Natural Gas Company
case by noting that the legal fees were incurred to maintain Kellogg’s
trading and profit-making position. In confirming the decision of the Exchequer
Court, the Supreme Court of Canada noted that the right upon which the Respondent relied was not a right of property
or an exclusive right of any description, but the company’s right (in common
with all other members of the public) to describe its goods in the manner in
which it was describing them.
[37]
In Evans v. M.N.R., [1960] S.C.R.
391, the Supreme Court of Canada allowed the taxpayer to deduct legal fees
which had been incurred to establish her right to an annual income from her
father-in-law’s estate. Cartwright
J., for the majority, said that the payment of the legal fees did not bring
this right or any asset or any advantage into existence.
[38]
The legal fees at issue
in the present case were incurred to allow the Appellant to continue to rent
Unit #1. The legal fees were incurred in the process of earning income from the
triplex and were not incurred to preserve the Appellant’s interests in her
capital asset - the triplex. As a result, those fees were incurred on account
of income and were fully deductible when determining the income or loss from
the rental of the units in the triplex. Further, there was no personal use of
the legal services, since the legal services related solely to Unit #1.
IV. Appellant’s Financial Interest in the Triplex
[39]
As noted previously,
during the cross-examination of the witness it was disclosed that a Mr. James Krystolovich
held a 50% legal and beneficial interest in the property during the 2004 and
2005 taxation years. As a result, only 50% of the rental loss suffered in
respect of the triplex should be deducted by the Appellant when computing her
taxable income.
V. Conclusion
[40]
The appeals in relation
to the reassessments of the Appellant’s 2004 and 2005 taxation years are allowed,
with costs, and the reassessments are referred back to the Minister of National
Revenue for reconsideration and reassessment on the basis that:
The appellant’s net rental losses for the
2004 and 2005 taxation years in respect of the building located at 37 Ben
Machree Drive, Mississauga, Ontario, were $8,196 and $5,492 respectively,
determined as follows:
|
|
2004 Taxation Year
|
2005 Taxation Year
|
|
Gross Rental Income
Eligible Expenses
Less Personal Portion
11/12 x 1/3
1/12 X 2/3
Total Personal Portion
Deductible Eligible Expenses
Deductible Legal Fees
Net rental loss related to property
Appellant’s 50% share of loss
|
8,724
30,635
9,361
1,702
11,063
19,572
5,543
-16,391
-8,196
|
8,324
29,104
8,893
1,617
10,510
18,594
713
-10,983
-5,492
|
Signed at Toronto,
Ontario, this 1st day of October 2009.
“S. D’Arcy”
Email this Content