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Appeals heard on April 28, 2004, at Kitchener, Ontario,

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JUDGMENT

          The appeals from reassessments of tax made under the Income Tax Act for the 1998, 1999 and 2000 taxation years are allowed and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in computing income, the Appellant is entitled to deduct rental losses as follows:

1998 -         $1,807

1999             $1,650

2000             $1,399

Signed at Ottawa, Canada, this 26th day of July, 2004.

Bowie J.

REASONS FOR JUDGMENT

Bowie J.

[1]      Mr. Nixon appeals from reassessments for income tax for the 1998, 1999, and 2000 taxation years, whereby the Minister of National Revenue disallowed the deduction of rental losses that he had claimed. The issue is the deductibility of losses incurred by Mr. Nixon in connection with the rental of the basement in his principal residence. Mr. and Mrs. Nixon own this property jointly.

[2]      Before May 2002, these appeals would have had little chance of success. Every year from 1990 to 2000, Mr. Nixon has reported losses incurred in the rental of an apartment in the basement of the family home that he, his wife and their four children shared with students attending university. The smallest loss claimed was $803 in 1994; the largest $3,972 in 1997; the median was $3,114. The aggregate loss for the three years under appeal was $10,104. Typically, the mortgage interest and taxes attributed to the rental apartment exceeded the gross rental income for the year, guaranteeing losses for the foreseeable future.

[3]      The house is a bungalow, centrally situated in relation to the two universities in the Kitchener-Waterloo area. The ground floor is 1,193 square feet and has three bedrooms, a kitchen, a living room and a bathroom. Mr. Nixon divided the lower level to make two bedrooms, a living room, a kitchen and a bathroom for tenants. The downstairs has 1,132 square feet.

[4]      Mr. Nixon has been renting rooms to students since 1978, when he lived in Sarnia. When he moved to Waterloo, he bought a house that could be divided for that specific purpose. He made the necessary renovations to provide comfortable quarters for two students. With the exception of the laundry room, the students have exclusive use of the basement of the house.

[5]      There was a great deal of evidence about the Appellant's efforts to obtain tenants. Mr. Nixon did not advertise in any commercial medium, but he did put advertising posters on notice boards, and he also advertised through the housing offices of the two universities and through an informal network of landlords that operates in the region. He set his monthly rent after consultation with the student housing offices. Because University of Waterloo operates on a co-op system, there is constant movement of students into and out of the city, making it difficult for landlords to maintain full occupancy.

[6]      During each of the three years under appeal, the occupancy rate of the Appellant's basement was 67%. If the occupancy had been 100% there would still have been a net loss each year. I am satisfied that Mr. Nixon did all that he could to achieve a 100% occupancy, and that the rents he charged were all that the market would bear.

[7]      From all of Mr. Nixon's evidence, I find that he chose his residence for the specific purpose of being able to rent one-half of it to students. He made the renovations and alterations for the specific purpose of renting the basement to students. He went about this in a businesslike way, and the people to whom he rented were arm's length tenants who paid a market rent. The maximum potential income from the basement was 2 x 12 x $285 = $6,840. The costs[1] each year were:

[8]      It is obvious that until the mortgage interest is reduced, either by renewing it at a lower rate or paying some principal or both, the expenses will continue to exceed revenue as they have done for at least eleven years.

[9]      Prior to the decision in Stewart v. R.,[2] I would have been bound to dismiss this appeal, as there is no reasonable expectation that Mr. Nixon's rental operation would produce a profit in the foreseeable future.[3] However the Supreme Court of Canada has determined that reasonable expectation of profit alone is no longer an acceptable basis for denying business losses.

[10]     In Stewart, the Court set out a two-stage test in determining whether activities of this sort can qualify as a source of income for the purposes of section 3 of the Act, even though they produce losses on a recurring basis. The first stage is whether the activity of the taxpayer is undertaken in pursuit of profit or whether it is a personal endeavor. There is no doubt that Mr. Nixon's rental operation was undertaken with a view only to profit, and that he carried it out in a businesslike way. The Respondent argues that there is a personal element to the rental activity, in that it was simply an attempt to defray part of the Appellant's personal living expenses. Although the Appellant by renting the basement did defray some of his personal living expenses each year, he also gave up possession of and thereby lost the use of one-half his residence. The reduction of his living expenses is only commensurate with the reduction of his living space and so there is no personal element to the rental activity. The rental losses are deductible.

[11]     A small part of the Appellant's claimed expenses related to the use of his automobile to drive his tenants to various destinations, or to purchase supplies. The Appellant did not meet his burden of proof to establish the business nature of the automobile expenses. The Appellant did not establish that the automobile expenses were proper expenses of the rental activity. The Appellant gave evidence that he drove tenants to various destinations; however, he was not contractually obliged to do so. He also failed to keep a mileage log, and so did not prove the mileage driven or the costs related thereto. The expenses, amounting to $391.03 in the year 2000, were personal, and so are not deductible by reason of paragraph 18(1)(h) of the Income Tax Act.

[12]     The appeals are allowed, and the reassessments referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to deduct one-half of his claimed rental losses[4] each year exclusive of the automobile expense of $391 claimed in the year 2000.

Signed at Ottawa, Canada, this 26th day of July, 2004.

Bowie J.