Docket: 2007-3191(IT)I
BETWEEN:
CÉLINE ST-ANDRÉ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
____________________________________________________________________
Appeal heard on common evidence with the appeal of Symon
Migneault (2007-3197(IT)I) on April 28, 2008, at Montréal, Quebec
Before:
The Honourable Justice François Angers
Appearances:
|
For the Appellant:
|
The Appellant herself
|
|
|
|
|
Counsel for the Respondent:
|
Chantal Roberge
|
____________________________________________________________________
JUDGMENT
The appeal from the
assessment made under the Income Tax Act with respect to the 2001, 2002
and 2003 taxation years is allowed in part and the assessment is referred back
to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at
Edmundston, New Brunswick, this 14th day of July 2008.
"François Angers"
Translation
certified true
on this 2nd
day of September 2008.
Susan Deichert, Reviser
Docket: 2007-3197(IT)I
BETWEEN:
SYMON MIGNEAULT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
____________________________________________________________________
Appeal heard on common evidence with the appeal of Céline
St‑André (2007-3191(IT)I) on April 28, 2008, at Montréal, Quebec
Before:
The Honourable Justice François Angers
Appearances:
|
For the
Appellant:
|
The Appellant himself
|
|
|
|
|
Counsel for the Respondent:
|
Chantal Roberge
|
____________________________________________________________________
JUDGMENT
The appeal from the
assessment made under the Income Tax Act with respect to the 2001, 2002
and 2003 taxation years is allowed in part and the assessment is referred back
to the Minister of National Revenue for reconsideration and reassessment in
accordance with the attached Reasons for Judgment.
Signed at Edmundston, New
Brunswick, this 14th day of July 2008.
"François Angers"
Translation certified true
on this 2nd day of September
2008
Susan Deichert, Reviser
Citation: 2008TCC391
Date: 20080714
Dockets: 2007-3191(IT)I
2007-3197(IT)I
BETWEEN:
CÉLINE ST-ANDRÉ,
SYMON MIGNEAULT,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Angers
J.
[1]
In filing their income tax returns
for the 2001, 2002 and 2003 taxation years, the Appellants respectively reported
rental losses of $3,435.39 for the 2001 taxation year, $21,551.80 for the 2002
taxation year and $2,642 for the 2003 taxation year. The Minister of National Revenue ("the
Minister") cancelled their rental losses for the 2001 and 2002 taxation
years and added a net rental income of $2,642 for their 2003 taxation year. In
reply to the Appellants' objection, the Minister cancelled the net income of
$2,642 so that the 2003 assessment is now void and no longer being contested. With
respect to the 2001 taxation year, the Minister indicated at the hearing that
he was consenting to judgment so that only the 2002 taxation year is at issue
in this appeal. It should be noted that the assessment for the year 2001 was
made after the normal assessment period.
[2]
The Appellants are spouses and the
parents of five children. At the end of the summer of 2001, they purchased in
equal shares a parcel of land upon which are situated two cottages with the
civic addresses of 451 and 453 Des Geais Bleus, in the municipality of Nomininque, Quebec. The
female Appellant was familiar with this area because she had lived there during
her childhood. They started out by looking for a single cottage. When this
opportunity arose, the two cottages could not be sold separately, so they made
this purchase with the intention of earning rental income but they had not
prepared a business plan.
[3]
The cottage at 451 des Geais Bleus
is located near Lac Lesage. It has several bedrooms which can accommodate up to
16 people. The cottage at 453 Des Geais Bleus is located behind it and can
accommodate up to 8 people.
[4]
In 2001, the year of the purchase,
No. 451 was not rented. No. 453 had been rented to the female Appellant's
brother for two or three weeks and had earned $600 in rental income.
[5]
In 2002, the male Appellant
prepared a business plan primarily targeting the rental of 451 Des Geais Bleus to
set up a summer camp for diving, taekwondo and karate. There was also the
possibility of renting the pontoon and other accessories such as pedal boats,
canoes, windsurf boards and other things. However, there was little rental
activity in 2002 and the plan for the camp never materialized. The male
Appellant admitted that he had not done any research or detailed market studies
and that he had relied on rumours that cottages were easy to rent in this
region.
[6]
The Appellants posted several
advertisements in local convenience stores with their telephone number and
relied on word of mouth. The
advertisements were for 453 Des Geais Bleus, and the Appellants succeeded in
renting it and earned rental income of $900 in 2002. Several reservations were
made but they were often cancelled at the last minute and since the Appellants
had not asked for a deposit, they came away empty-handed in these cases. No. 453
Des Geais Bleus was rented for four weeks and two weekends in 2002. Each of the
Appellants deducted half of the expenses totalling $12,783.88, which can be broken
down as follows:
|
Mortgage interest
Municipal taxes
School taxes
Electricity
Telephone
Cable television
Improvements
Furniture and accessories
Recreation and equipment
Insurance
Total
|
$1,624.65
$357.81
$117.60
$330.00
$410.49
$341.82
$4,386.78
$568.41
$4,118.32
$528.00
$12,783.88
|
|
|
|
The Appellants never occupied 453
Des Geais Bleus in 2002.
[7]
No. 451 proved more difficult to
rent. The Appellants encountered several problems with it in 2002. It must
first be emphasized that only the basement of the cottage could be rented and
it was rented only for four nights, thereby earning a rental income of $300 for
the year 2002. The Appellants used 451 des Geais Bleus for personal purposes during
the summer of 2002.
[8]
No. 451 had a
serious erosion problem which made its foundation unstable. The Appellants had
to perform some major work in 2002 for which they deducted the related
expenses. The expenses can be broken down as follows:
|
Mortgage interest
|
$1,115.74
|
|
Foundation
|
$9,185.45
|
|
Electrician
|
$3,680.80
|
|
Plumbing
|
$1,643.60
|
|
Insulation
|
$2,726.09
|
|
Materials
|
$5,046.23
|
|
Septic tank
|
$1,414.81
|
|
Labour
|
$5,193.38
|
|
Notary
|
$750.00
|
|
Assessor
|
$575.13
|
|
Insurance
|
$188.50
|
|
Total
|
$31,519.73
|
[9]
The expense for
the foundation represents 35% of the amount actually paid under this heading,
namely, $26,244.00. Each of the Appellants deducted half of it, as they had done
for the expenses relating to 453 Des Geais Bleus. The work in question involved
the construction of a new foundation, which necessitated raising the cottage. They
also finished the basement and the two bathrooms, constructed a staircase, and replaced
the electrical system, the plumbing, the insulation, the patio in treated wood
and the porch. They did excavation work and repaired the septic tank.
[10]
No. 451 was not
more successful in 2003. In fact, except for the income of $300 collected in 2002,
no rental income was obtained from it in 2001, 2003 and 2004 and it is in fact
no longer for rent because the intention is to do something else with it. No. 453
generated rental income of $600 in 2001 and $500 in 2003. It was not rented in
2004.
[11]
The Respondent
justified disallowing the rental losses reported for the two cottages on the
grounds that these were personal expenses and that the Appellants never
intended to engage in that activity with a view to profit nor to make that activity
a source of income within the meaning of the Income Tax Act.
[12]
According to
the evidence, there is no doubt that the Appellants were looking for a cottage
for personal use. The area in which they were looking was meaningful for the
female Appellant because she was familiar with it from her childhood. When the
opportunity arose to buy two cottages on the same parcel of land, the idea of
renting came to mind because this purchase exceeded their budget. It took until
2002 for a business plan, including the rental of 451 Des Geais Bleus, to be developed by the male
Appellant. He admitted that he had no training in the field, did not conduct
any market studies and relied only on rumours that cottages were easy to rent.
The business plan did not include a plan to rent 451 Des Geais Bleus for 2002 but only future
projects. It was partly occupied by the Appellants and their children and was the
subject of major work beginning in August 2002 and for the remainder of the
year.
[13]
It is also
obvious that the rental rates were not established based on the profitability
of the project but on the basis of average rental prices for cottages in this
area.
[14]
That being said,
the Supreme Court of Canada in Stewart v. R., [2002] 2 S.C.R. 645, restated
the way in which a reasonable expectation of profit is to be analyzed, and also
decided that this test applies only in certain circumstances. I am reproducing
below paragraph 60 of this judgment:
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. …
[15]
Furthermore, at
paragraph 54, the Supreme Court of Canada indicated how the analysis must be
carried out:
It should also be noted that the source
of income assessment is not a purely subjective inquiry. Although in order for
an activity to be classified as commercial in nature, the taxpayer must have
the subjective intention to profit, in addition, as stated in Moldowan,
this determination should be made by looking at a variety of objective factors.
Thus, in expanded form, the first stage of the above test can be restated as
follows: “Does the taxpayer intend to carry on an activity for profit and is
there evidence to support that intention?” This requires the taxpayer
to establish that his or her predominant intention is to make a profit from the
activity and that the activity has been carried out in accordance with
objective standards of businesslike behaviour.
[Emphasis added.]
[16]
I therefore
find, for the reasons indicated in the preceding paragraphs, that 451 Des Geais
Bleus was purchased mainly for personal purposes and used as such in 2002. It
is also obvious, in view of the condition of this cottage, that major repairs
were necessary. This
work began in August 2002 and affected the structure of the cottage. The
business plan developed by the Appellant Symon Migneault forecast activities
over the following years which never materialized. In my opinion, in 2002, 451 Des Geais Bleus did not have a
commercial nature. The fact that it was rented for four nights is clearly
insufficient to lead me to find that this activity was carried out in a
sufficiently commercial manner to constitute a source of income. I must also
add that the expenses deducted by the Appellants for 451 Des Geais Bleus were primarily
for major and necessary work of a capital nature, and not expenses for normal maintenance
and repairs.
[17]
However, I come
to a different conclusion with respect to 453 Des Geais Bleus. Although
this cottage was purchased with the intention eventually of selling it to the
female Appellant's brother, this does not preclude the fact that it was intended
to be rented, at least in 2002, and this rental was carried on in a
sufficiently commercial manner. The Appellants' lack of experience certainly
cost them some rentals and therefore some income, but the activity was purely
commercial. The Appellants are therefore entitled to deduct their respective
portions of the rental expenses for 453 Des Geais Bleus for the year 2002.
[18]
The appeals are
allowed in part and the assessments are referred back to the Minister of
National Revenue for reconsideration and reassessment.
Signed
at Edmundston, New Brunswick this 14th day of July 2008.
"François Angers"
Translation
certified true
on
this 2nd day of September 2008.
Susan
Deichert, Reviser
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