Zabchuk v. The Queen, 2003 TCC 260 (Informal Procedure)

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Appeals heard on March 25, 2003, at Ottawa, Ontario.

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JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1998 and 1999 taxation years are dismissed.

Signed at Ottawa, Canada, this 11th day of April 2003.

J.T.C.C.

REASONS FOR JUDGMENT

Lamarre, J.T.C.C.

[1]      The appeals from the assessments made by the Minister of National Revenue ("Minister") under the Income Tax Act ("Act") for the appellant's 1998 and 1999 taxation years are dismissed.

[2]      In computing his income for those years, the appellant claimed net rental losses of $11,875 for 1998 and $24,571 for 1999. Those losses were disallowed by the Minister.

[3]      It is admitted that in November 1989 the appellant purchased a residential building consisting of two self-contained units and a basement for $190,000. The purchase was financed by a first mortgage in the amount of $142,500 and a second mortgage of $27,500. The appellant purchased the property with the intention of making it his principal residence and of renting the units not occupied by him in order to recover part of his costs.

[4]      He at first moved into the basement and rented the two self-contained units. It is not clear how much he charged for rental at the beginning. In his testimony, he said that the rental was initially $400 a month per unit, although the main-floor unit was a two-bedroom apartment having access to the laundry room in the basement, while the top-floor unit was only a one-bedroom apartment with no access to the laundry room. Logically, this would have given a total gross rental income of $9,600 per year. The appellant however declared from $10,100 to $10,960 in gross rental income in the years 1990 to 1996. He mentioned that he had also rented out the garage during those years.

[5]      In 1997 and thereafter, the appellant rented the main-floor unit to his son's girlfriend ("girlfriend"), who had just given birth to a baby, the appellant's grandson. Apparently the appellant's son, who had drug problems, did not move in with his girlfriend. In the same years, the top-floor unit was rented to relatives or friends of the girlfriend. Again, it is not clear how much rent was charged to those new tenants. The appellant testified that he charged $450 a month for each unit and that, in addition, the tenants had to pay for their hydro. The gross rental income should thus normally have been $10,800, yet the appellant declared only $7,600 for 1998 and declared no rental income for 1999.

[6]      The appellant testified that he could not raise the rent because the hydro bills were too high for the tenants. He also said that he could not have found tenants who would have paid more as construction work was being done on the street in front of the property, and it went on for at least two years.

[7]      The appellant also testified that he subsidized his son's girlfriend by paying her hydro bills, buying groceries for his grandson and her and buying clothes for his grandson. The girlfriend gave the appellant access to the laundry room and the appellant visited his grandson and her on a regular basis.

[8]      In 1999, the appellant converted from electrical heating to gas heating. He thus installed a new furnace and ducts. He did not raise the rent when the work was completed in 1999. It is not clear at what point after 1999 the appellant told the girlfriend that he was going to increase her rent. Apparently she left after being so informed and ceased all relations with him. At that time, the appellant moved into the main-floor unit and started renting the basement at $600 per month. He refurbished the main-floor unit and began renting it at $1,000 per month in July 2002. At the same time, he began charging $650 per month for the top floor. The girlfriend's relatives or friends accepted the higher rent of $650 but only paid it for three months, after which they moved. The appellant, who had lived somewhere else during those three months, then moved into the top-floor unit.

[9]      The appellant admits that the gross rental income fell after 1996, when the girlfriend moved in. It did not increase thereafter until 2002 when the main-floor unit was refurbished and rented to non-family members. It is also clear from the statement of real estate rentals filed with the Reply to the Notice of Appeal that property taxes and the interest expenses on the mortgages amounted to twice the gross rental income in 1998 and 1999 (assuming that the annual rental income was $7,600 in those years).

[10]     In my view, the rental activity was not undertaken with a view to profit but was a personal endeavour.

[11]     Indeed, I do not find that in the years at issue the appellant's predominant intention was to make a profit from his rental activities. His principal motive was more to accommodate his son's girlfriend, her friends or relatives and his grandson than to seek a profit. This view is reinforced by the fact that as soon as the girlfriend and her son moved in, and her relatives or friends also moved in, the rental income decreased significantly. As soon as she moved out, the rental income rose. In the years at issue, the appellant's expenses consistently exceeded the rental income. In my view, the venture was not undertaken in a sufficiently commercial manner to be considered a source of income in those years. Such being the case, the appellant is not entitled to claim his rental losses. (See Stewart v. Canada, [2002] SCC 46, paragraphs 50 et seq.)

[12]     The appeals are dismissed.

Signed at Ottawa, Canada, this 11th day of April 2003.

J.T.C.C.