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Citation: 2004TCC470
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Date: 20040716
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Docket: 2003-2596(IT)I
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BETWEEN:
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CHRISTINE LAROCHE,
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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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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This is an appeal from an
assessment made under the Income Tax Act
("Act") for the 2001 taxation year.
[2] The assessment was made following
the Respondent's refusal to accept various expenses totalling
$4,744 and an interest payment of $1,795.40. In other words,
did the Respondent correctly disallow the expenses claimed by the
Appellant on the ground that she had ended her business, which
consisted of renting commercial premises to her spouse? The
claimed expenses were disallowed on the basis that the Appellant
had ceased operating her business.
[3] In the Reply to the Notice of
Appeal, the Respondent listed the assumptions of fact relied on
to make and confirm the assessment. These assumptions are listed
in paragraph 5 of the Reply to the Notice of
Appeal.
[translation]
(a) During the
taxation year at issue, the Appellant was employed by the
Centre Hospitalier Baie-des-Chaleurs;
(b) In her income
tax returns for the 1990 to 2001 taxation years, the
Appellant reported the following amounts as gross income and
rental expenses, with respect to a building located at
208 Narcisse, New Richmond:
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Year
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Gross Income
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Expenses
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Net Income
(Net Losses)
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1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
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$548
$12,000
$7,000
$6,000
$6,000
$5,750
$5,100
$4,500
$0
$0
$0
$0
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$548
$5,844
$4,383
$4,799
$4,413
$3,515
$3,306
$2,915
$3,758
$5,275
$4,980
$4,744
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$0
$6,156
$2,617
$1,201
$1,587
$2,235
$1,794
$1,585
($3,758)
($5,275)
($4,980)
($4,744)
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(c) The nature of
the rental expenses the Appellant claimed for the
2001 taxation year consisted of the following:
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Description
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Amount
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Interest
Maintenance and Repairs
Management and Administration Costs
Property Taxes
Electricity, Heating, etc.
Total
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$1,795.40
$1,115.23
$259.61
$636.39
$938.05
$4,744.68
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(d) For the purposes
of his audit, the Minister had some telephone conversations with
the Appellant's spouse, who acted as the Appellant's
agent;
(e) During these
telephone conversations, the spouse stated that:
(i) the Appellant purchased the building for
$28,000;
(ii) the building used to be a post office;
(iii) the spouse occupied the entire premises for his
engineering business;
(iv) the Appellant rented the building to her spouse for
a cost of $500 per month;
(f) In a
letter sent to the Minister on December 3, 2002, the
Appellant stated that:
(i) the building was purchased for one reason
only: to provide her spouse, then self-employed, with an
appropriate workplace;
(ii) in 1997, the Appellant's spouse ceased
practising his profession due to health problems;
(iii) since then, she has wanted to sell the building to
a third party, rather than renting it out;
(iv) the building was offered for sale through a real
estate agent and by the Appellant and her spouse;
(g) At all relevant
times, the Appellant demonstrated her intention to sell the
building.
(h) No rental income
has been collected since 1998;
(i) No effort
was made to rent the building; the Appellant did not post a
"FOR RENT" sign in front of the building until the end
of 2001;
(j)
Furthermore, the Minister audited the expenses the Appellant
claimed relative to the building;
(k) During his audit
of the claimed expenses, the Minister found that interest
expenses totalling $1,795.40 were not associated with the
building.
[4] Although she was present at the
hearing, the Appellant did not testify; her spouse,
Léonel Tremblay, represented her.
[5] After informing the Appellant of
the Court's practice of reviewing the assumed facts when
making an assessment, her agent indicated that most of the
assumed facts were true and accurate.
[6] However, he identified some slight
differences, including, among others,
paragraph (e) (iii), indicating that the cost of
renting the premises was generally $500 per month; however,
it could vary based on his own income. It is important to
remember that the tenant of the commercial premises, which the
Appellant owned, was her spouse.
[7] With regard to
paragraph (f)(iv), he indicated that the building had been
offered for sale through two real estate agents
successively.
[8] Finally, he expressed his complete
disagreement with the decision relative to the interest. In his
testimony, he essentially reiterated all of the assumed facts
without adding anything new, with the exception of the interest
expenses, which he justified with well-prepared, very
clear, written explanations.
[9] Thus, he dismissed the aspect,
which remains somewhat unclear, of a claim for interest paid on a
line of credit, since a line of credit is generally used for
multiple purposes. It is rarely possible to determine with great
precision the purpose for which the interest paid on a line of
credit was used. The Appellant, with the collaboration of her
spouse, carried out this exercise, establishing in a plausible
and reasonable manner the validity of her claims concerning the
amount of interest paid and claimed.
[10] The representations were very
consistent with the content of the Notice of Appeal; it is
appropriate to reproduce the content:
(Exhibit I-1)
[translation]
. . .
Canada Customs and Revenue Agency
Audit Division
Rimouski Tax Services Office
180 Cathédrale Street
Rimouski, QC G5L 5H9
Attn.: Diane Tremblay
Ref.: SIN xxx xxx xxx -
2001 income tax return
Building 208, Narcisse, New Richmond
Dear Madam:
I am writing in response to your letter dated
November 13, in which you indicate that you have decided to
disallow the rental expenses for the 2001 taxation year. I
disagree with this decision for the following reasons:
1. Use of the building
The building in question was purchased in December 1990
for the sole purpose of providing my spouse, who was
self-employed at the time, with an appropriate workplace.
From 1991 to 1997, the building, as well as my spouse's
business, generated a profit and created jobs on which
Revenue Canada collected its share of taxes. In 1997, he had
to cease operating his business due to health problems. Wishing
to sell the building rather than rent it to a third party, the
building was offered for sale through a real estate agent. In
fact, since initially being offered for sale, we, in addition to
two real estate agents, attempted to sell the building. In the
fall of 2001, after repainting the exterior, the building had
still not been sold and it represented a significant financial
burden; thus, we decided to try to rent it in addition to trying
to sell it.
2. Taxes
Since the building would have been deemed commercial if sold,
we had to charge GST and QST, which makes it much more difficult
to sell, as this adds 15% to the price. This does not represent a
problem for commercial buyers, because they recover the taxes.
However, for residential buyers, the taxes are added to the
purchase price. To date, most parties showing an interest have
been private persons who wish to convert the building into a
residence.
Thus, among other factors, the federal government is hindering
the sale by increasing the price; on disposition, it will take a
share of the profits, if applicable. In spite of this, it in no
way wishes to share the costs of maintaining the building! This
is your idea of justice!
3. Size of the market
It is difficult to sell the real property at issue due to a
limited market coupled with low demand. Businesses are leaving
the City to relocate. The real estate market, which was poor in
1997 when the building was offered for sale, does not seem to
have improved since: many houses are for sale; a number of
commercial premises are either for rent or for sale. By limiting
the period for deducting selling expenses, as suggested by the
interpretation of section 18(1)(a), a copy of which
you sent to us, and on which you based your decision, you are
penalizing investors in the area for their limited market. In
fact, you are discouraging investment. Investment involves a
higher degree of risk because the market is particularly limited
in the area. In this context, it is much more difficult to
dispose of property that is acquired for the purpose of operating
a business. Is this the message that the federal government
wishes to send to the regions?
We trust that these points will lead you to reconsider your
decision. There is no obvious solution to our problem. Drop the
price and take a loss? Allow the City to seize the building for
non-payment of taxes?
. . .
Christine Laroche
. . .
[11] Mr. Tremblay indicated that he
ceased operating his business as a consulting engineer for health
reasons; since then, his wife has also wished to cease any
commercial activities associated with the building she owned,
which was rented to him for the purpose of practising his
profession as an engineer.
[12] Essentially, he indicated that the
building ceased to be rented on the unanimous advice of
stakeholders with expertise in real estate to the effect that it
would be much more difficult to sell a building that was being
rented, given the fact that a potential purchaser would be
limited in terms of the various options for use of the building
at issue.
[13] This is a very plausible and completely
reasonable explanation. This concern was even more significant
because it seemed as though the real estate market was quite
passive. There were not many potential buyers; hence the
Appellant had an interest in doing everything possible to
maximize the number of possible prospects.
[14] The evidence revealed that the
Appellant did in fact make a considerable effort to sell her
building, which was sold in 2003. After maximizing her efforts
for an outright sale, she changed her plans and was willing to
rent the building if it could not be sold.
[15] Ms. Tremblay, who was responsible
for auditing the Appellant's file, testified that she
disallowed the expenses simply because the Appellant had ceased
her business, according to the Appellant's own
statements.
[16] After making this determination, she
acknowledged that the issue of the interest was not analyzed in
depth; however, the fact that this interest, largely from an
interest payment on a line of credit, was not of a nature that
would lead one to question this aspect of the file.
[17] Her initial decision was that the
Appellant no longer operated a business; thus, it was not
necessary to conduct a meticulous assessment of the interest
expenses because the business no longer existed. Under the
circumstances, it was reasonable to determine that the business
no longer existed, especially since such a determination was
consistent with the Appellant's own statements, which she
repeated in her Notice of Appeal.
[18] Taxation is not a simple matter, and
unfortunately, citizens' interpretations, notions and
perceptions are not necessarily consistent with the
Act.
[19] When does a business cease its
operations? For the average person, this moment may correspond to
the date the telephone service ceases, the date the office
closes, the date there are no longer any employees, etc.
[20] What happens in cases where it takes
months to close the books, years to collect accounts receivable,
or where months remain on a lease, or where it takes months to
dispose of inventory, or to sell assets, etc.? These scenarios
effectively illustrate that the end of a business or operation of
a property can become a question that is not necessarily easy to
answer.
[21] To answer the questions at issue, is it
necessary to consider as fatal the explanations included in the
Appellant's letter to the effect that she had ceased rental
activities? Indeed, she acknowledged that she ceased her rental
activities. However, the evidence revealed that this was a forced
choice, in light of the intention to sell the building.
Furthermore, this interpretation is specifically expressed at the
end of paragraph 1 of the Notice of Appeal, which reads as
follows:
[translation]
Wishing to sell the building rather than rent it to a third
party, the building was offered for sale through a real estate
agent. In fact, since initially being offered for sale, we, in
addition to two real estate agents, attempted to sell the
building. In the fall of 2001, after repainting the exterior, the
building had still not been sold and it represented a significant
financial burden; thus, we decided to try to rent it in
addition to trying to sell it.
[Emphasis added]
RELEVANT LEGISLATION
Relevant portions of the Act read as follows:
18(1) In computing the income of a
taxpayer from a business or property no deduction shall be made
in respect of
(a) an outlay or expense except to the extent that it
was made or incurred by the taxpayer for the purpose of gaining
or producing income from the business or property;
20(1) Notwithstanding
paragraphs 18(1)(a), 18(1)(b) and
18(1)(h), in computing a taxpayer's income for a
taxation year from a business or property, there may be deducted
such of the following amounts as are wholly applicable to that
source or such part of the following amounts as may reasonably be
regarded as applicable thereto
. . .
c) an amount paid in the year or payable in respect of
the year (depending on the method regularly followed by the
taxpayer in computing the taxpayer's income), pursuant to a
legal obligation to pay interest on
(i) borrowed money used for the purpose of earning income from
a business or property (other than borrowed money used to acquire
property the income from which would be exempt or to acquire a
life insurance policy),
[22] The outcome of the Appellant's
appeal depends on whether or not the business or operation of her
property ceased. Determining whether or not a business has ceased
its activities or whether property has ceased operations is
essentially a question of fact.
[23] In this case, was the income-generating
activity not essentially the operation of property, that is, a
building.
[24] In this regard, I shall reproduce a
passage written by J. Durnford, The Distinction
Between Income from Business and Income from Property,
and the Concept of Carrying on Business
(1991) 39 Can. T. Found. 1131 at
pp. 1161-62.
There are many judgments to the effect that rentals from real
estate held by individuals constitute income from property.
An occasional significant exception to the foregoing exists
where there are commercial tenants. In
M. Ginsberg v. MNR, [(1953),
9 Tax ABC 321 (Mr. Fordham)] an individual
taxpayer's income by way of rentals was held to constitute
income from a business. No special services were supplied to the
tenants, but the latter included a restaurant on the ground
floor, and all the other tenants rented their premises for
business purposes. Ginsberg accordingly did not apply the
criteria laid down in the leading case of Walsh
and Micay, where it was held that the deciding
factor was the range of the services supplied to the tenants.
This does not mean that Ginsberg was wrongly decided. That
judgment does not stand alone. What the courts have done is to
introduce, but with little discussion, another criterion. The
additional factor seems to be that where a high degree of
commerciality is to be found in connection with the premises
(such as there being stores and offices), the rentals received
will be treated as income from a business without regard to
the level of services offered and without regard to the fact that
the landlord is an individual rather than a corporation.
[Emphasis added]
[25] In determining whether the
Appellant's income was earned from a business or from
property, the degree of commerciality must be assessed. In this
case, the Appellant's spouse did in fact rent the building
for the purpose of operating a business. However, the Appellant
essentially rented the building to her spouse. Consequently, the
degree of commerciality was very marginal. Therefore, it is
reasonable to determine that the Appellant earned her income from
property.
Expenses incurred for the purpose of earning income
from property
[26] In this case, the Appellant ceased
renting the building for a very specific reason, that is, to sell
the building as quickly as possible. Circumstances led her to
reconsider her decision, after a reasonable amount of time; she
placed the building back on the rental market. Thus, the
Appellant did not definitively abandon her intention of earning
income from the building. In addition, it is clear that the
expenses are associated with the Appellant's building. As
such, we can determine that the Appellant incurred expenses for
the purpose of earning income from property.
[27] The appeal is allowed and the
assessment is referred back to the Minister of
National Revenue for reconsideration and reassessment on the
basis that expenses totalling $4,744 were incurred for the
purpose of earning income from property and on the basis that a
total of $1,795.40 is also a qualified interest expense paid for
the purpose of earning income from property.
Signed at Ottawa, Canada, this 16th day of July 2004.
Tardif J.
Translation certified true
on this 30th day of July 2004.
Sharlene Cooper, Translator
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