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Citation: 2003TCC312
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Date: 20030502
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Docket: 2002-3736(IT)I
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BETWEEN:
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SUZANNE LAVICTOIRE,
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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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AND BETWEEN:
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Docket: 2002-3737(IT)I
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SERGE LAVICTOIRE,
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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
Lamarre, J.T.C.C.
[1] These appeals, heard on common
evidence under the informal procedure, are from assessments made
by the Minister of National Revenue ("Minister") under
the Income Tax Act ("Act") for the 1995,
1996, 1997 and 1998 taxation years.
[2] In computing their income for
those years, the appellants calculated net rental losses on a
residential building they owned, which was located at
1503 Landry Road, Clarence Creek, Ontario
("Property"). The net rental losses claimed amounted to
$13,974.93 in 1995, $12,799.96 in 1996, $6,811.76 in 1997 and
$2,926.85 in 1998.
[3] Although, during the years at
issue, each appellant owned 50 per cent of the Property, they
claimed unequal shares of the losses reported for 1995, 1996 and
1997 (for 1995, they shared the rental loss in a proportion of
1 per cent to 99 per cent; for 1996, the
proportion was 15 per cent to 85 per cent, and for 1997,
28 per cent to 72 per cent). The agent for the
appellants recognized in his submissions that those allocations
were incorrect and that the losses should be shared on a
fifty-fifty basis by the two appellants.
[4] In reassessing the appellants, the
Minister disallowed the rental losses in their entirety. In so
doing, the Minister relied upon the facts stated in paragraph 6
of the Amended Replies to the Notice of Appeal, of which the
relevant parts read as follows:
(b) in December 1994, the
Appellant and his Spouse purchased a residential building located
at 1503 Landry, Clarence Creek, Ontario (the
"Property") for $50,000.00 from the Appellant's
Father on the condition that the upstairs unit would be rented to
the Appellant's Father at reduced rent; (admitted)
(c) at all material times,
the Appellant and his Spouse owned the Property; (admitted)
(d) the Property was
financed by a loan in the amount of $37,500.00; (admitted)
(e) a loan in the amount
of $44,490.12 was used to finance the renovations made to the
basement unit; (admitted)
(f) the Appellant
and his Spouse purchased the Property with the intention to rent
the units to family members with limited incomes (the
"Activity");
(g) at all material times,
the Appellant received pension income unrelated to the Activity;
(admitted)
(h) in reporting the
rental income (loss) from the Activity in his income tax returns,
the Appellant allocated rental income (loss) for the 1995, 1996,
1997 and 1998 taxation years as follows:
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Appellant
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Spouse
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1995
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1%
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99%
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1996
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15%
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85%
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1997
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28%
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72%
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1998
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50%
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50%
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(admitted)
(i) the Property
consisted of an upstairs unit (the "Unit # 1") and a
basement unit (the "Unit # 2"); (admitted)
(j) at all material
times, Unit # 1 is occupied by the Appellant's Father for the
sum of $50.00 per month;
(k) during [the] 1996,
1997 and 1998 taxation years, the Appellant rented Unit # 2 to
France Lavictoire (the "Appellant's Cousin") for
the sum of $500.00 per month;
(l) the Appellant
and his Spouse reported net rental losses from the Activity, for
the 1995 to 1998 taxation years inclusively, as follows:
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Year
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Gross Rental
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Net Rental
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_______
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Income
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Loss
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1995
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$ 1,200.00
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$(13,974.93)
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1996
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$ 2,600.00
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$(12,799.96)
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1997
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$ 6,600.00
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$( 6,811.76)
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1998
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$ 6,600.00
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$( 2,926.85)
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(admitted)
(m) at all material times, the
Appellant did not charge fair market rent for
Unit # 1;
(n) the Activity, as
operated during the 1995, 1996, 1997 and 1998 taxation years, was
incapable of yielding a profit;
(o) the Appellant did not
have a reasonable expectation of profit from the Activity during
the 1995, 1996, 1997 and 1998 taxation years; and
(p) the expenses claimed
in relation to the Activity during the 1995, 1996, 1997 and 1998
taxation years were not expenses from a business or property but
were personal or living expenses of the Appellant.
(q) The Minister
further states that the Activity was undertaken as a personal
endeavor, that the expenses claimed by him were not made or
incurred for the purpose of gaining or producing income from a
business or property but were personal of [sic] living
expenses and were not reasonable.
[5] At the hearing, counsel for the
respondent advised the Court that the respondent accepted the
fact that from September 1996 the basement unit was rented at
fair market value, and conceded that 40 per cent of the total
expenses claimed by the appellants was deductible. The proportion
of 40 per cent was determined based on the square footage of the
basement as compared to the total square footage of the
Property.
[6] However, in the respondent's
view, the upstairs unit occupied by Mr. Alcide Lavictoire,
the appellant Serge Lavictoire's father, during the years at
issue was not rented at fair market value.
[7] It is the position of the
respondent that the rental of that unit to a member of the family
for a very low rent was a personal endeavour that was not carried
on in a sufficiently commercial manner for it to constitute a
source of income within the meaning of the Act and thus
give rise to deductible losses. The respondent argues that the
expenses claimed in relation to that unit were personal or living
expenses that were not incurred for the purpose of producing
income from a business or property and that, pursuant to
paragraphs 18(1)(a) and 18(1)(h) of the Act,
were not deductible. The respondent also submits that the
deduction of these expenses is prohibited by section 67 of the
Act as they are not reasonable in the circumstances.
[8] The appellants' position is
that they did not pay the full market value of the Property when
they purchased it in 1994 and this is why a reduced rent was
charged to Alcide Lavictoire. I will reproduce the facts as
stated by the appellants in their Notice of Appeal. They read as
follows:
1. We are
appealing the assessments due to the reasons stated for the
refusals of the rental losses for the given years. The assessment
states that the rental activity did not constitute a source of
income as per the Income Tax Act - Part 1, articles 3 and 4,
since the activity did not have a reasonable expectation of
profit.
2. The
relevant facts in support of the appeal are as follows:
·
Serge Lavictoire had a stroke in 1992, and has since been unable
to work, and has been receiving a Canada Pension since May
1994.
·
Medical expenses for Serge Lavictoire amounted to $6,398 for the
1995 to 1998 tax years.
·
In December 1994, Serge Lavictoire's father, sold the
property he owned to Serge and his wife Suzanne Lavictoire for
$50,000.
·
For the exchange of having paid a fair price for the home at time
of purchase, a reduced rent was offered to Serge's father for
the upstairs portion of the property.
·
Serge and Suzanne hoped to eventually turn this property into a
full rental property, to be able to build their retirement
"nest egg".
·
In early 1996, Serge and Suzanne hired a contractor to renovate
and completely finish the basement, to be able to receive
additional rent from the property (total cost of $40,676 in
renovations); from September 1996, monthly income increased by
$500 per month for the basement apartment.
·
In early 1999, Serge Lavictoire's father passed away. From
mid May 1999, the upstairs portion of the property has been
receiving $665 a month.
·
In 2000 and 2001, the property has made a profit requiring the
application of CCA to reduce the revenues to zero.
·
In 2001, the property was assessed at $106,000 for property tax
valuation, and the market value of the property was estimated at
$130,000.
[9] In their written submissions, the
appellants stated that the market value of the Property was
$91,200 when they purchased it. Their lawyer at the time recorded
the transfer of the Property at the stated value of $50,000, as
discussed between Alcide Lavictoire and the appellants. The
Property was therefore transferred with the purchase having been
financed through a mortgage of $37,500 and Alcide Lavictoire
having made a gift of the balance of the selling price, that is,
$12,500.
[10] In 1995, the appellants started
renovations to the Property and made an application to the
Township of Clarence/Rockland for a change in zoning so as to be
able to convert the Property into a duplex. The zoning change was
approved in February 1996. During 1995, Alcide Lavictoire
paid $100 per month in rent.
[11] In 1996, the appellants spent an
additional $40,676 on renovations in order to completely finish
the conversion of the basement into a second rental unit.
Apparently, Alcide Lavictoire was there to supervise the
renovations, ensure the security of the premises and provide
access to the contractors. The appellants obtained additional
financing of $44,490 to perform the work. In September 1996, the
basement unit was rented at its market value of $500 per month.
During the renovations in 1996, Alcide Lavictoire's rent
was reduced to $50 per month. Apparently, this was due to his
role as administrator and as supervisor of the work being done.
During 1997 and 1998, his rent remained unchanged (at $50 per
month), and the basement unit rental was maintained at $500 per
month. The appellants pointed out that revenues exceeded the
interest paid on the mortgage by $637 in 1997 and by $1,068 in
1998. However, the other fixed costs (property taxes and
insurance) amounted to $2,424 in 1997 and to $2,354 in 1998.
Those expenses, added to the other expenses claimed by the
appellants, contributed to creating losses in those years.
[12] In early 1999, Alcide Lavictoire passed
away and the unit he occupied was rented for $665 per month
starting in mid-May 1999. In that year, the appellants said, they
earned total revenues of $9,340 and claimed a rental loss of
nearly $2,200. They said that for 2000 and 2001 they declared
rental profits of $2,934 and $1,406 respectively before the
application of capital cost allowance, which brought the rental
income down to nil.
[13] It is the position of the appellants
that the 1994 agreement of purchase and sale of the Property did
not record the Property at fair market value. The appellants'
agent argues that in fact the appellants acquired a portion of
the Property by way of gift and that through the application of
paragraph 69(1)(c) of the Act, they are deemed to
have acquired the Property at its fair market value at the time
of acquisition. The low rental amount charged to Alcide
Lavictoire was to compensate for the transfer of the Property for
a very low price. Had the appellants paid the full price for the
Property, they would have taken out a higher mortgage and would
have paid more interest. With a low mortgage, they were able to
rent the Property at a lower rent. Furthermore, lower rent was
also charged to Alcide Lavictoire because he had played a
significant role in the management of the Property. In the
appellants' view, the expenses claimed were in fact
reasonable under the circumstances, and they took reasonable
steps with a view to gaining or producing income from the
Property.
[14] The facts as summarized by the
appellants do not convince me that the rental of the Property,
except for the rental of the basement as of September 1996 for
$500 per month, constituted a source of income for the
appellants. Indeed, my understanding is that the low rent charged
to Alcide Lavictoire was the consideration given by the
appellants for the transfer of the Property at a price below fair
market value. If that is the case, the appellants cannot say that
a portion of the Property was "gifted" to them, as they
gave up rental income at the market rate, income which would have
helped them absorb the expenses and eventually make a profit. I
do not exactly see the relevance of paragraph 69(1)(c) in
this case and it is in any event inapplicable in the
circumstances.
[15] Furthermore, if low rent was charged to
the vendor as compensation for a purchase price below fair market
value, the loss of rental profit is not something that can be
added to the low rent so as to constitute a source of income but
is rather part of the appellants' cost of acquisition of the
Property. The appellants cannot recharacterize the purchase price
of the Property as rental income for the sole purpose of
deducting expenses that would not otherwise be deductible.
[16] As I have said, the appellants do not
dispute the fact that the rent charged to Alcide Lavictoire was
clearly below market value. It was a personal arrangement that
benefited each party: the appellants acquired a property at a
price below fair market value and the vendor could stay in the
house as long as he lived for no or very low consideration. In
1999, when Alcide Lavictoire passed away, the appellants
almost immediately rented the Property for an amount well over
what was paid by Alcide Lavictoire.
[17] It is therefore quite evident that the
arrangement constituted a personal endeavour. It is also quite
clear that in the years at issue and until
Alcide Lavictoire's death, the predominant intention in
renting him a portion of the Property was not to make a profit.
It was an arrangement intended to accommodate all parties. They
did not act in accordance with objective standards of
businesslike behaviour. (See Stewart v. Canada, [2002]
S.C.J. No. 46 (Q.L.).)
[18] Finally, the fact that Alcide
Lavictoire supervised the renovations and was there to look after
security on the Property is not an element that I would take into
account for the purpose of recharacterizing the personal
endeavour as a commercial activity. Indeed, there is no evidence
that Alcide Lavictoire declared any income from that alleged
work, although his doing so might have justified charging a lower
rent.
[19] For all these reasons, I am of the view
that the appellants were not justified in claiming expenses
beyond those conceded to be valid by the respondent at the
beginning of the hearing. The proportion of 40 per cent
attributed to the basement was not disputed by the appellants.
Consequently, the appeals are allowed and the assessments are
referred back to the Minister for reconsideration and
reassessment on the basis that the appellants may deduct 40 per
cent of the total expenses incurred and claimed with respect to
the Property from the month of September 1996 until the end of
the 1998 taxation year, with 50 per cent of the deduction to be
allotted to each of the appellants.
Signed at Ottawa, Canada, this 2nd day of May 2003.
J.T.C.C.
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