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Citation: 2003TCC423
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Date: 20030911
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Docket: 2002-3322(IT)I
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BETWEEN:
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F.R. QUINN,
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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
Woods J.
[1] Mr. F.R. Quinn appeals income tax
assessments for the 1998, 1999 and 2000 taxation years that
disallowed rental losses on a property located at Hilton Head
Island in South Carolina.
[2] The appeal was heard under the
Court's Informal Procedure.
Facts
[3] Mr. Quinn was an executive with
Texaco Canada ("Texaco") and has been retired for
several years. At Texaco, Mr. Quinn was involved in the
purchase and lease of real estate in Canada and had dealings with
many of Canada's top developers. Through one of these
contacts, he purchased a residential property on Hilton Head, an
island resort off the coast of South Carolina.
[4] The Hilton Head property was
divided among four groups of owners each of whom had use of the
property for 13 weeks. However, it was not technically what is
called a "time share property." The Quinn family
acquired a one-quarter share in 1992 or 1993. Title was taken in
the names of Mr. Quinn and three other family members in
order to facilitate the family's use of the adjoining golf
course. The other family members did not contribute to any of the
costs associated with the property.
[5] Mr. Quinn stated that the property
was purchased to earn rental income and he estimated that, if the
property was rented for eight or nine weeks out of the 13 that he
had available, he would make a profit of approximately 15
percent. He realized that the operation would not make a profit
for the first several years but thought that profits would be
generated after about five years.
[6] The property was also used by the
family for personal purposes. Mr. Quinn stated that when the
property was not able to be rented, the family would use it or it
would remain vacant. Based on the personal use reported in the
tax returns for the 1999 and 2000 taxation years, the property
was used by the family over 40 percent of the 13 weeks that were
available. There was no evidence of personal use in the 1998
taxation year.
[7] Mr. Quinn engaged three agents to
find tenants for the property but preferred to rent by word of
mouth. The property was also advertised on the internet.
Mr. Quinn tried to rent the property in the summer, the high
season, since the family did not use the property during those
months.
[8] The property has not yet earned a
profit but Mr. Quinn still believes that it has
income-earning potential. Several of the factors that produced
the continuing rental losses were unforeseen: a poor rate of
exchange, a dispute with the original owner which caused the
owners to take over management of the property, high maintenance
fees, excessive refurbishing of the premises, and the lack of
tourism after the World Trade Centre incident on
September 11, 2001.[1]
[9] In his tax returns for the
relevant taxation years, Mr. Quinn reported the following losses:
[2]
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1998
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1999
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2000
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Cdn. $
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US $
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US $
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Gross Rental Income
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$
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3,620.00
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$
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2,368.00
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$
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4,700.00
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Expenses
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Advertising
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$
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110.00
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$
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-
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Interest
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2,846.22
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2,730.05
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Management & admin.
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4,032.46
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4,319.48
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Maintenance & repairs
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325.71
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Commission & no show
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2,905.00
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Telephone, stamps
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40.00
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50.00
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Total Expenses
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$
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7,354.39
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$
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10,004.53
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- Less Personal Use
Portion of Expenses
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2,161.32
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3,323.04
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- Net Expenses
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$
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5,193.0
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$
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6,681.48
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Net Rental Loss
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$
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2,825.07
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$
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1,981.49
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Capital Cost Allowance
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1,390.06
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1,397.00
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Net Rental Loss Claimed in US $
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$
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4,215.13
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$
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3,378.49
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Net Rental Loss Claimed in Canadian $
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$
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6,751.00
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$
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6,262.65
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[10] The personal use portion of expenses
that were reported in the tax returns was based on weeks that the
Quinn family used the property. Mr. Quinn stated that he did not
take excessive or misleading deductions in respect of the
property. For example he did not claim a deduction for travel
costs in maintaining the property.
[11] Mr. Quinn's belief in the
income-earning potential of the property was based on a gut feel
about the property and its location through his many years of
experience in real estate. He bought the property when prices
were low and he thought Florida would lose some of its appeal as
a tourist destination in favour of areas that were not so far to
travel.
[12] During the audit, Mr. Quinn was
requested to fill out a rental questionnaire that asked for
information about the rental operation. The answers he provided
to these questions in the form were not detailed. For example,
the part of the form pertaining to income projections reads:
Q. Provide a
detailed projection of how you intend to develop your rental
operation into a profitable enterprise. This projection should
include time frames, capital expenditures required, marketing
plans, estimated rental income, reductions in overhead, etc.
Current financial data should be provided where possible.
A.
RENTAL INCREASES, IE. NO OF WEEKS, HOPEFULLY RISE IN CANADIAN
DOLLAR. RENTAL REVENUE HAS RISEN FROM 1998 $2441 TO 2000 $4700 -
2001 LOOKS GOOD.
Mr. Quinn stated that he thought he had provided some income
projections to the auditor but he was not able to locate these
for purposes of the hearing. He stated, however, that they would
have been rough projections.
[13] The Minister of National Revenue (the
"Minister") disallowed the rental losses claimed in
respect of the property for the 1998, 1999 and 2000 taxation
years.
Issue
[14] The issue is whether the rental losses
claimed by Mr. Quinn for the 1998, 1999 and 2000 taxation
years are deductible for purposes of the Income Tax Act,
R.S.C. 1985 (5th Supp.), c. 1 (the "Act").
Submissions of Parties
[15] The Crown takes the position that the
losses should be disallowed, primarily on the basis that there is
no source of income, but also by virtue of paragraph
18(1)(a) and section 67. In the alternative, the Crown
submits that capital cost allowance should be reduced pursuant to
Regulation 1100(11) so as to not exceed rental income. It is also
suggested that, if Mr. Quinn's evidence that the family did
not contribute to the costs of the property is rejected, Mr.
Quinn should only be entitled to 25 percent of the rental losses
since there were three other family members on title.
[16] The Crown's main argument is that
there was no source of income and for this position relies on
Stewart v. R., [2002] 3 C.T.C. 439 (S.C.C.) and
Titus v. The Queen, 2003 DTC 5158
(F.C.A.).
[17] Mr. Quinn, on the other hand, submits
that with his 40 years of experience in sophisticated real estate
deals, he would not have purchased the property if he had thought
it would not earn a profit. He admitted that there was some
element of risk but thought that it was fairly small.
Analysis
[18] In order for the rental operation on
the Hilton Head property to constitute a source of income, Mr.
Quinn's predominant intention must be to carry on the rental
activity for profit and there must be objective evidence to
support that intention. The Supreme Court in Stewart
described the test as follows:
[54] It should also be noted
that the source of income assessment is not a purely subjective
inquiry. Although in order for an activity to be classified as
commercial in nature, the taxpayer must have the subjective
intention to profit, in addition, as stated in Moldowan,
this determination should be made by looking at a variety of
objective factors. Thus, in expanded form, the first stage of the
above test can be restated as follows: "Does the taxpayer
intend to carry on an activity for profit and is there evidence
to support that intention?" This requires the taxpayer to
establish that his or her predominant intention is to make a
profit from the activity and that the activity has been carried
out in accordance with objective standards of businesslike
behaviour.
[55] The objective factors
listed by Dickson J. in Moldowan, at p. 486, were: (1) the
profit and loss experience in past years; (2) the taxpayer's
training; (3) the taxpayer's intended course of action; and
(4) the capability of the venture to show a profit. As we
conclude below, it is not necessary for the purposes of this
appeal to expand on this list of factors. As such, we decline to
do so; however, we would reiterate Dickson J.'s caution that
this list is not intended to be exhaustive, and that the factors
will differ with the nature and extent of the undertaking. We
would also emphasize that although the reasonable expectation of
profit is a factor to be considered at this stage, it is not the
only factor, nor is it conclusive. The overall assessment to be
made is whether or not the taxpayer is carrying on the activity
in a commercial manner. However, this assessment should not be
used to second-guess the business judgment of the taxpayer. It is
the commercial nature of the taxpayer's activity which must
be evaluated, not his or her business acumen.
[19] Mr. Quinn testified that his intention
with respect to this recreational property was to earn a profit
and that factors unforeseen at the time of purchase caused the
extensive rental losses. In my view, this intention is not
supported by the objective evidence and I find that Mr.
Quinn's predominant intention was to use the property for
personal purposes.
[20] The personal use aspect of the Hilton
Head property was significant. From the outset, the property was
intended as a vacation property for the family. Title to the
property was taken in names of four family members to facilitate
use of the adjoining golf course. The family made extensive use
of the 13 weeks that were purchased. Although Mr. Quinn
testified that the family used the property when it could not be
rented, it is significant that the family's use occurred when
it was convenient for the family. Mr. Quinn tried to rent the
property in the summer months which he said was the high season.
However, he also stated that the family did not need to use the
property in the summer as they could golf in Canada then.
[21] Concerning the rental activity, the
property has been owned for about ten years and it has never been
profitable. It is significant that five of these loss years were
prior to the taxation years at issue. Further the rental losses
in the taxation years at issue were significant and the rental
revenues were small compared to the cost of maintaining the
property.
[22] Notwithstanding the poor profit
performance with respect to the property for the five years prior
to the taxation years at issue, there was little evidence to show
that Mr. Quinn made a serious attempt at earning a profit from
the rental operation. He testified that he had engaged
three agents to find tenants and that the property was listed for
rent on the internet. He also testified that he preferred to rent
the property by word of mouth as this was less expensive than
using the agents. In my view, there was not sufficient evidence
of a predominant intention to earn a profit from the property
when compared with the extensive personal use of the property by
Mr. Quinn and his family. If there had been a predominant
intention to earn a profit, further efforts should have been
taken to stem the flow of losses. The rental operation in effect
reduced the expenses on what was predominantly a recreational
property for the family. This finding is supported as well by the
lack of a detailed business plan and Mr. Quinn's brief
responses in the CCRA questionnaire.
[23] Looking at the evidence as a whole, Mr.
Quinn has not established that the rental operation on the Hilton
Head property was a source of income. Accordingly, the appeal is
dismissed.
Signed at Toronto, Canada, this 11th day of September,
2003.
J.M. Woods J.
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