[ORIGINAL ENGLISH TRANSLATION]
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Reference: 2004TCC513
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Date: 20040922
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Docket: 2003-3080(IT)I
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BETWEEN:
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ROGER DELORME,
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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
Paris J.
[1] The Appellant is appealing from a
decision that refused the deduction of rental losses relating to
property that he rented first to his son and his daughter-in-law,
and then to his son, during 1999, 2000 and 2001. The losses in
respect of which the deduction was refused totalled $11,338 in
1999, $1,351 in 2000 and $4,984 in 2001. The question that the
Court must answer here is whether the expenses that the Appellant
deducted in connection with the property were made for the
purpose of deriving income from property, and whether these
expenses were personal or living expenses of the Appellant within
the meaning of the Income Tax Act (the "Act").
[2] The Appellant purchased the
property, located in North Hatley, Quebec, in May 1999 for the
sum of $58,000 and took possession of it in July of that year.
The property consisted of a small house built on land bordering
the Massawippi River. The house was in very bad condition and
required many repairs and extensive renovation.
[3] According to the Appellant, his
son expressed a desire to rent the property immediately after the
Appellant purchased it, and they agreed that he would rent it for
$375 a month. The Appellant stated that his son could not move in
immediately but that he still paid the rent because, in the
Appellant's words, "that was the agreement".
[4] After a few initial repairs were
made, the Appellant's son and daughter-in-law moved into the
house even though, according to the Appellant, it was still
uninhabitable at that point. The Appellant repeated that he could
not have found another tenant, given the state of the property.
Because the house was not well insulated and because the windows
and doors were not airtight, the Appellant's son and
daughter-in-law had to pay very high heating costs during the
winter months. The Appellant stated that this was another reason
why he could not charge rent higher than the rent that his son
and daughter-in-law were paying.
[5] During 2000, the Appellant's son
and daughter-in-law separated, and his son lived in the house
alone. After March 2001, he stopped paying the rent, even though
he continued to live in the house until April 2002. Mr. Delorme
stated that he took no action to recover the unpaid rent or to
evict his son because he knew that his son had no money and that
it would have been illegal to evict him during the winter. He
added that during the seventeen years that he rented two other
properties, only once did he have to take action to evict a
tenant for not paying the rent. Mr. Delorme also stated that his
son continued to pay the cost of heating the property, which the
Appellant considered to be to his advantage.
[6] Mr. Delorme apparently made
repairs and renovations to the house during the period in
question. He said that he did most of the work himself to save
money. He stated that the constant renovation that the house was
undergoing was another reason why he did not try to find another
tenant.
[7] Shortly after Mr. Delorme's son
vacated the property, it sold for $120,000.
[8] The Minister refused the deduction
of rental losses because the expenses that constituted these
losses had not been incurred in order to produce income, but were
personal or living expenses, and because paragraphs
18(1)(a) and 18(1)(h) of the Income Tax Act
prohibited the deduction of such amounts.
[9] I conclude that the appellant did
not establish, on a balance of probabilities, that he purchased
and held the property with the intention of deriving rental
income from it, and that he did not establish that the expenses
were not personal and living expenses within the meaning of
section 248 of the Act, which reads in part as
follows:
"personal or living expenses" includes
(a) 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,
[10] Although the Appellant stated that he
could earn $10,000 a year in rent from the property if he rented
it during holiday periods, it was clear that major work had to be
done on the house before this would be possible. This conclusion
is supported by the fact that, prior to 2002, the Appellant did
not try to rent the property during holiday periods; instead, he
allowed his son to live in the house either in return for a
modest rent or rent-free. The evidence therefore reveals that,
given the state of the property, the rental income that it could
have generated before work on the house was completed would not
have been sufficient to cover the expenses. In the meantime, the
Appellant was content to let his son, who was unemployed and
unable to pay any rent at all, live in the property.
[11] I also acknowledge that the reason why
the Appellant did not try to recover the rent that his son owed
him was because his son was a member of his family. The
Respondent's evidence revealed that the Appellant took legal
action to recover outstanding rent owed by two other tenants of
the other properties that he rented in 2000. Although the
Appellant argued that the circumstances of these legal
proceedings were very different from his son's situation, in my
opinion, only the fact that the tenants whom he prosecuted were
not related to him distinguishes the two cases.
[12] I light of this evidence, I am
satisfied that the Appellant rented the property to his son for a
purpose other than to derive profit from it and that the expenses
associated with the property were not incurred in order to earn
income.
[13] The appeal is therefore dismissed.
Signed at Ottawa, Canada, this 22nd day of September 2004.
Paris J.
Certified true translation
Manon Boucher
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