[OFFICIAL ENGLISH TRANSLATION]
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Reference: 2004TCC424
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Date: 20040812
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Docket: 1999-1762(IT)G
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BETWEEN:
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ORIGÈNE TREMBLAY,
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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.T.C.C.
[1] The issue at bar in this case is
whether the Appellant is entitled to claim rental losses in the
amounts of $33,106, $27,602, and $231,993, incurred in taxation
years 1994, 1995, and 1996, and whether he is entitled to carry
back losses incurred in 1996 to taxation years 1993 and
1994. The losses at issue are the result of a disastrous
real estate investment the Appellant made with respect to a
rental property located in Longueuil, Quebec.
[2] The Minister of National Revenue
(the "Minister") disallowed the rental losses (including a
substantial terminal loss incurred in 1996), because the
Appellant did not have a reasonable expectation of profit from
the rental of the rental property and, therefore, this property
did not constitute a source of income for him. The Minister
maintains that the activities of the rental property contained a
personal aspect and that the rental activity carried on was not
commercial in nature. Because these losses were disallowed,
there were no losses to carry back to taxation year 1993.
[3] The Appellant denied that the
rental activity contained a personal aspect, and he claimed that,
while he was the owner of this property, he intended to make a
profit, and he carried on the activities in a commercial
manner.
Evidence
[4] The Appellant was the only witness
called at the hearing.
[5] This is a 72-year-old man who has
retired from a long career as a manager with IOC Ltd. (formerly
known as the Iron Ore Company of Canada) in Sept-Îles,
Quebec. The Appellant and his spouse are residents of
Sept-Îles, where his spouse operates her own small retail
business.
[6] The Appellant testified that,
throughout the years, he had purchased a number of rental
properties, including condominiums near Magog and Saint-Sauveur,
and in Montréal. Although some of these properties
were located near ski resorts and tourist areas, they were never
used for personal enjoyment. He always intended to keep
them as investments and sources of rental income.
[7] In approximately 1987, the
Appellant decided to invest in another rental property in the
Montréal area. He learned that the municipality of
Longueuil was developing lots in a residential area, and he felt
that this area offered a number of rental opportunities for a
luxury single family residence. Longueuil was expanding
rapidly and a number of industrial manufacturing businesses,
namely Canadair and Pratt and Whitney, were located nearby.
Also, the airport that was formerly a part of the Saint-Hubert
military base was to reopen as a civilian
establishment.
[8] The Appellant purchased a vacant
lot located at 806 des Roselins, in Longueuil, for $36,000 for
the purpose of building a house which he anticipated renting out
to supplement his pension income. He claims that he thought
he could attract better tenants by offering higher quality
housing. He calculated that, at the outset, he would meet
the break-even point, and that, in time, he would make a profit
owing to increases in rent and reductions in the mortgage.
His calculations were based on a $100,000 investment from his own
capital and a $200,000 loan.
[9] He had a two-storey,
five-thousand-square-foot house built with four bedrooms, three
bathrooms, a family room, a games room, a swimming pool, and
premium quality finishing. The house was located in the new
sector of Longueuil, in a luxury homes neighbourhood.
[10] Shortly after the work began, the
Appellant experienced construction problems. The first
contractor he hired to do the framing invoiced the Appellant for
materials he was using in the construction of another
house. The cost of labour and materials was higher than
projected, and extra options were added to the house. The
Appellant claimed that he had been misled by the contractor who
gave him the first estimate for the project; he offered
excessively low prices for a number of articles, for example, the
brick facing for the house. At one point, the Appellant
exhausted his funds and was forced to suspend the work. The
house was nearly completed, but it was not ready to be rented
out. The Appellant had to perform some of the finishing
work himself. The house was finally completed in 1992, at a
cost of $430,000, rather than the initially estimated
$300,000.
[11] The Appellant spent a considerable
amount of time in his house in Longueuil to do the finishing
work. He was already retired from the IOC, but his spouse
remained in Sept-Îles. He also worked on the North
Shore of Quebec on a part-time basis. It would have been
more profitable for him to remain in Sept-Îles and work at
his part-time employment, but he wanted to finish the house so
that he could rent it out.
[12] The Appellant's daughter also lived in
the house beginning in 1992. The house was not furnished,
except for one bedroom. The kitchen was also usable, as it
contained cupboards and built-in appliances. The Appellant
testified that his daughter had moved into the house as a favour
to him, to discourage vandalism and break-ins; during the
construction of the house, one break-in occurred, as did one
incident of vandalism. Moreover, the insurer of the house
required that the house be occupied for it to be insurable.
The Appellant's daughter paid him a nominal amount of rent, which
he reported in his income tax returns.
[13] In 1993, the Appellant decided to sell
the property. He claimed that he was pressured into
doing so, owing to his financial situation. He was
seriously indebted to the bank because of all the additional
expenses, and he paid considerable amounts of interest each
month. He listed the house for sale for $549,000.
[14] Even while the house was up for sale,
the Appellant tried to rent out the property, but his efforts
were mostly in vain: the house was rented for only two months
during the summer of 1995, at a monthly rent of $4,000.
[15] In 1996, the Appellant felt that he no
longer had the means to keep the house, and he surrendered it to
the bank of his own volition, in exchange for discharging the
mortgage. At that time, he owed the bank $366,000.
This amount was deemed to be the proceeds from the disposition of
the house, which resulted in a loss of $217,172 for the
Appellant. He claimed this amount as a terminal loss
comprising a part of the rental loss claimed for 1996.
[16] The Appellant denied having built the
house for his own personal use. He claimed that the house
was not adapted to his and his spouse's retirement needs, because
it was too large and too costly. The size of their house in
Sept-Îles was only 2,000 square feet, and it exceeded their
needs. Moreover, his spouse is relatively younger than he
is, and at the time the house was built, she had not yet made
plans for her retirement. The Appellant also denied the
allegation that he had the house built for his daughter.
The house simply was not suitable for a single young woman, owing
to its size and cost, and the circumstances.
Analysis
[17] In Stewart
v. Canada[1], the Supreme Court of Canada stated that the
first step in determining whether a taxpayer's activities
constitute a source of business or property income is to make a
distinction between commercial activities and recreational or
personal activities. Where the nature of an activity is clearly
commercial, the taxpayer's pursuit of profit is established.
There is no need to take the inquiry any further by analyzing the
taxpayer's business decisions. However, where the activity
contains aspects of a personal nature, a court must be persuaded
that the primary intention of the taxpayer was to derive a
profit, and there must be evidence of businesslike behaviour
which supports that intention, in order to conclude that it was a
source of income within the meaning of the Income Tax Act
(the "Act"). One of the factors to be considered by the
Court is the taxpayer's reasonable expectation of profit from
this activity.
[18] Counsel for the Minister maintains that
the fact that the Appellant's daughter occupied the property
constitutes a personal aspect, which makes it necessary to decide
whether the taxpayer had a reasonable expectation of profit
during the years at issue. He admitted that there was no
evidence to show that the Appellant intended to use the house for
his own personal use when he purchased the lot and had the house
built. However, in his opinion, the mere fact that the
Appellant's daughter occupied the house constitutes the necessary
personal aspect.
[19] I feel that, in situations like this
one, the concept of "personal aspect" extends to situations in
which personal reasons, rather than profit, lead the taxpayer to
engage in commercial or rental activities. A personal
aspect exists where the taxpayer enjoys or intends to enjoy a
benefit or personal profit from the activity at issue.
[20] All of the evidence in this case shows
that neither the Appellant nor any member of his family
personally enjoyed a benefit from the operation of the rental
property. I am allowing the Appellant's testimony whereby
he did not build the house for his personal use or for the
personal use of any member of his family. The Appellant
appeared to me to be straightforward and credible, and his
testimony on this point is corroborated by the clearly excessive
nature of the house with respect to the needs of a retired couple
or a single person. Counsel for the Respondent did not
challenge the fact that the purpose of building the house was to
rent it out, but he insisted that, because the Appellant and his
daughter occupied the house, a personal aspect had been
introduced into the rental activity. However, the need to
have the house occupied for security and insurance reasons shows
that the occupation of the house by the Appellant's daughter was
justified by commercial motives rather than personal
ones. Again, this evidence was not challenged during
cross-examination, nor was the Appellant's claim that the amount
of rent charged was reasonable, given the small area of the house
his daughter occupied. I am also allowing the fact that the
Appellant's occupation of the house was justified, owing to the
finishing work he was required to perform and the fact that he
gained no personal benefit.
[21] Overall, I consider that the Appellant
did not have a non-commercial reason for having this house built
and for operating this rental property. It appears that his
failure to earn rental income is justified by unfavourable market
conditions and by listing the property for sale, not by the fact
that his daughter lived there. The Appellant did not choose
to waive an opportunity to earn higher rental income in order to
allow his daughter to live in the house. She lived in the
house while it was not possible to find other tenants, as
demonstrated by the rental of the house to unrelated third
parties in 1995.
[22] Even if I had concluded that there was
a personal aspect in the rental activity in this case, I would
have, nonetheless, concluded that the Appellant fulfils the
criteria of a reasonable expectation of profit, because he acted
in a businesslike manner. Prior to purchasing the lot in
Longueuil, he researched the rental market and assessed the
development opportunities and economic growth in the area.
He prepared cost projections for the construction and rental
income projections, and he concluded that there was an
opportunity to earn profits. After the house was completed,
he took all the measures necessary to rent it, then he decided to
list the house for sale to minimize his losses. It was
suggested that he should have turned the house over to the bank
in 1994 when he was unable to find a tenant, and the fact that he
did not do so demonstrated that he was not managing this activity
in a commercial manner. However, this is a criticism of the
Appellant's business acumen rather than the commercial nature of
the activity; it is not, therefore, relevant in the application
of the criteria of a reasonable expectation of profit.
[23] I conclude that the Appellant's rental
activity was a source of income for him within the meaning of the
Act and that he is entitled to the deductions for losses that he
has claimed.
[24] The appeal is allowed, with costs.
Signed at Ottawa, Canada, this
12th day of June 2004.
Paris J.
Certified true translation
Colette Dupuis-Beaulne
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