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Citation: 2005TCC288
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Date: 20050426
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Docket: 2003-1802(IT)G
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BETWEEN:
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ALISTAIR N. MOLLISON,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Beaubier, J.
[1] This appeal pursuant to the
Informal Procedure was heard at Toronto, Ontario on April 13,
2005. The Appellant was the only witness.
[2] Paragraphs 9 to 14 inclusive of
the Reply to the Notice of Appeal outline the matters in
dispute. They read:
9. In
computing income for the 1998, 1999 and 2000 taxation years (the
"period in question"), the Appellant deducted the following
rental losses from his income:
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Taxation Year
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1998
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1999
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2000
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Rental Loss
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$18,103
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$14,497
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$15,754
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10. In reassessing the
Appellant for the period in question, the Minister of National
Revenue (the "Minister") by Notices dated November 5, 2001,
advised the Appellant that his income tax liability for the
period in question had been increased by disallowing rental
losses in the amounts of $18,103, $14,497 and $15,754
respectively as they were not made or incurred to gain or produce
income from a business or property in accordance with the
provisions of paragraphs 18(1)(a) and 18(1)(h) of the Income
Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended
(the "Act").
11. The Appellant filed a
valid Notice of Objection for the period in question on February
1, 2002. The Minister issued a Notice of Confirmation dated
February 13, 2002 confirming the reassessments.
12. In so confirming the
reassessments for the Appellant for the period in question, the
Minister relied on, inter alia, the following
assumptions:
a) facts
admitted and stated above;
b) in January,
1993, the Appellant purchased a cottage property located in
Collingwood, ON for $223,000 (the "Property");
c) in 1993,
the Appellant obtained a first mortgage on the Property in the
amount of $215,000;
d) the
Property was purchased with the intention of using it as a family
vacation property and as a commercial rental property;
e) the
Appellant's predominant intention was not to make a profit from
the Property but rather to use the Property as a family vacation
property;
f) the
Property was only available for rent when not being used
personally by the Appellant or the Appellant's family;
g) the
Property was used personally by the Appellant during Christmas,
New Year's, Thanksgiving and the majority of the summer
months;
h) in June,
1995, the Appellant retained the services of Sae and Ski Property
Management ("Sea and Ski") to manage the Property;
i) the
agreement between the Appellant and Sea and Ski stated that the
Property was to be rented for $750 per week during the peak
season;
j) the
Appellant provided Sea and Ski with a calendar designating
available periods for rent and personal use, with the personal
use being approximately two weekends in May, six weeks in July
and August, Thanksgiving weekend and two weeks over Christmas and
New Year's;
k) in 1996 the
rental revenue increased and then dropped again in subsequent
years;
l) in
1998 the Property was rented out for 21 days;
m) in 1999 the
Property was rented out for 16 days;
n) in 1998 and
1999, Sea and Ski did not obtain any tenants in those two years
other than the Sea and Ski manager renting it for his personal
use;
o) the
Appellant did not actively seek tenants for year round
occupancy;
p) the
Appellant did not change his personal use of the Property during
the periods in question, but acquired Sea and Ski to market the
Property during times when it was not being used by the
Appellant;
q) the
Appellant did not change his personal use of the Property during
the periods in question given the past history of losses;
r) the
Property incurred losses in each year in operation. From 1993 to
2000 the Appellant experienced losses from the Property as
follows:
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Taxation Year
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Income
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Rental Loss Claimed
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1993
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$2,500
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($5,481)
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1994
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NIL
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NIL
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1995
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NIL
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($5,143)
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1996
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$4,300
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($11,985)
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1997
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$1,845
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($11,874)
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1998
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$1,750
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($18,103)
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1999
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$1,650
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($14,497)
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2000
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$1,200
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($15,754)
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TOTAL
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$13,245
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($82,837)
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s) in 2001 the
Property was rented out for the most of the ski season and the
Property still had a projected loss;
t) the
rental losses of the Appellant in respect of the Property were
not made nor incurred for the purpose of gaining or producing
income from a business or property;
u) the rental
losses claimed in relation to the Property were personal or
living expenses of the Appellant;
v) the
Property was not being carried on in a sufficiently commercial
manner to constitute a source of income;
w) the Appellant did
not have a business plan for the Property;
x) the
marketing efforts used by the Appellant did not change when they
were proven to be unsuccessful;
y) there is no
indication that the Property may be profitable;
z) the
Appellant did not have a reasonable expectation of profit from
the Property during the period in question;
aa) the Appellant did not
have a reasonable expectation of income at the time he purchased
the Property;
B.
ISSUES TO BE DECIDED
13. The issues are:
a) whether the
Appellant is entitled to deduct rental losses in the amounts of
$18,103, $14,497 and $15,754 for the period in question;
b) whether the
interest paid by the Appellant under the mortgage is
deductible;
C.
STATUTORY PROVISIONS RELIED ON
14. He relies on sections
3, 9; subsection 248(1); and paragraphs 18(1)(a), 18(1)(h) and
20(1)(c) of the Act.
[3] Assumptions 12 a), b), c), d), g),
h), i), j), k), l), m), n), o), q), r), s), x) and aa) were not
refuted by the evidence.
[4] At all times from the date of
purchase, the Property was owned jointly by the Appellant and his
wife. The Appellant claimed all of the losses incurred by the
Property. He only owned half of the Property. Moreover, at least
once, as exhibited (Exhibit A-1, tab 28), a tenant paid her
rental cheque to Mrs. Mollison. Therefore if the Appellant is
found to be entitled to any of the losses claimed, he is only
entitled to half of that amount.
[5] Furthermore, the Appellant claimed
an expense of $2,600 in 1998 for building a deck on the Property;
that was a capital expenditure and is not a deductible expense in
any event. He also claimed an expense of $980 in 1999 for
flagstone and material installed to build a path; that is also a
capital expenditure and is not a deductible expense in any
event.
[6] Finally, the Appellant was an
employee of Dupont. There is no evidence that he ever personally
rented any other property for profit. He alleged that he had done
some calculations when he purchased the Property, but there was
no evidence of a plan at that time to make a profit from renting
the Property. He testified that when he decided to rent the
property in 1995 he approached Sea and Ski to act as the agent.
He and his wife did rent the Property very occasionally at a
discount from the Sea and Ski rate to acquaintances at their
respective work places. But they themselves did not advertise the
Property for rent. The result is that the Court finds that the
indicia of carrying on a business do not exist in this case.
Therefore, if it should be found that this is an "income"
Property, it will be as income from property and not income (or a
loss) from a business.
[7] With respect to the remaining
assumptions in paragraph 12, the Court finds:
e) From the evidence, the
Appellant's intention at the time of purchase was to have a
personal use vacation property. He pointed out that his offer to
purchase (Exhibit A-2) contained a rental agreement to the vendor
at $500 per month from January 4 to May 14, 1993. He did not rent
it at all in 1994 or 1995. The first objective occurrence of a
true intention by the Appellant to rent the Property was when he
entered the first agency agreement with Sea and Ski. He testified
that he decided to retain Sea and Ski in 1995 when he discovered
the rental market and knew the costs of operation of the
Property. The date of the first contract with Sea and Ski is
assumed in h) to be June, 1995.
f) This assumption was not
denied by the Appellant and is not refuted.
p) The Appellant did not deny
that he did not change his personal use of the Property during
the years in question. In cross-examination, he stated that he
had rented the Property in blocked-out periods, but he did not
say that this had interfered with his personal use of it.
t) In calculating his
expenses for the Property in 1998, 1999 and 2000, the Appellant
estimated his use of the Property at 70 days per year or 19.18%
of 365 days (approximately 20%). Then he deducted 80.72% of the
expenses. According to the assumptions, it was rented for 21 days
in 1998 and 16 days in 1999; these were not refuted. The number
of days rented in 2000 is not in evidence, but the Appellant and
his wife rented to acquaintances at $500 per week and he declared
$1,200 in rent to indicate an estimated 17 days rented in 2000,
at a maximum. When the Appellant rented personally, he did not
pay a commission to Sea and Ski.
t), u), v) The remaining
comments respecting these will be dealt with in the narration to
follow.
w) Is true. Based on his
testimony, the Appellant never drew or created a plan to earn a
profit, or a business plan for the Property.
y) The Appellant paid down
the mortgage dramatically to a balance of about $68,000 in 2004
when he showed a loss of $4,000, including interest paid on the
mortgage. This assumption remains true today.
z), aa) Will be dealt with in what follows.
[8] There was, at the very least, a
strong personal element in the ownership and operation of the
Property by Mr. and Mrs. Mollison. Using the criteria set out by
Dickson, J. in Moldowan v. R, [1978] 1 S.C.R. 480,
the Appellant had no plan to arrive at a profitable level; had no
training or experience in operating a rental property; has an
experience to date of substantial losses without considering
depreciation; and he did not testify as to a course of action
that he had at any time to make it profitable. The Property is in
the Collingwood, Ontario, area which is a recreation and skiing
area, and is near ski runs, so the periods that the Mollisons
blocked out in their exhibited calendars are all of the prime
rental times for the Property. The result of all of this and for
their conduct is that at no time in the years in question was the
Property capable of showing a profit. Even today, it does not
appear to be capable of showing a profit.
[9] In these circumstances, with the
finding of a very strong personal element in the acquisition and
operation of the Property, and given the findings in paragraph
[8], the Appellant fails the test set out in paragraph [60] by
the Supreme Court of Canada in Stewart v. R., 2002
Carswell Nat., 1070. That is, renting the Property was not
capable of being carried out in a sufficiently commercial manner
to constitute a source of income in the years appealed. That
remains true today.
[10] From the Appellant's own testimony, the
Court finds, contrary to assumption 12 d), that the Appellant's
original purpose when the Mollisons purchased the Property was
entirely personal. The 1993 rent to the vendor was obviously
happenstance due to the date of purchase and the vendor's own
convenience. It was only in 1995 that the Mollisons embarked on
the renting scheme, when they instructed Sea and Ski and began
their programme of tax deductions by Mr. Mollison.
[11] For these reasons, the appeal is
dismissed.
[12] No costs are awarded in this
matter.
Signed at Calgary, Alberta, this 26th day of April
2004.
Beaubier, J.
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