Date: 20011123
Docket: 2000-3155-IT-I
BETWEEN:
EVANGELOS KOUROS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
___________________________________________________________
Agent for the Appellant: George Kouros
Counsel for the Respondent: Rosemary
Fincham
___________________________________________________________
Reasonsfor
Judgment
(Delivered orally from the Bench on October 15,
2001, at St. Catharines, Ontario)
Bowie J.
[1]
These appeals are from assessments of tax for the 1996 and 1997
taxation years. In filing his income tax returns for those two
years, the Appellant claimed to be entitled under section 3 of
the Income Tax Act (the Act) to deduct from his
other income, losses incurred in connection with certain real
estate which I shall refer to as "the property."
[2]
The losses deducted in 1996 were in the amount of $10,291.20 and
in 1997 they were $3,970.39. The losses for 1996 consist of
interest of $214.26, and $10,076.94 for property taxes. The
Appellant's brother, who acted as his agent and also gave
evidence, said he believed that the $10,076 consisted of both
property taxes and other expenses in the nature of utility costs.
It is unclear exactly how that $10,076 is made up, but I do not
think anything turns on it. The question is whether the property
was or was not a source of income, as that expression is used in
section 3 of the Act, in the two years in question, and
that, in turn, depends upon whether it can be considered to be a
property that had a reasonable prospect of producing rental
income. In 1997 the Appellant claimed a loss of $3,976.39 being
the property taxes. In both years the Appellant reported no
revenue from the property.
[3]
The Appellant is a physician with a busy practice in Welland,
Ontario. In 1981 he purchased the property, which is located in
Ridgeway near Welland. It is apparently now within the
municipality of Fort Erie. The property consists of a gasoline
retail outlet with one island, a garage, a convenience store, a
take-out restaurant and ice cream bar and a used car lot.
When the Appellant purchased the property in 1981 he bought it as
an investment, and certainly at that time it was a source of
income. The property was rented to various people who ran the
garage, the store, the restaurant and the car lot,
separately.
[4]
By 1983, or thereabouts, those tenants had left, and the property
was unrented. The Appellant and his brother operated a gas
station business in the City of Welland. The property in Ridgeway
being without tenants, they then began to operate a gasoline
retail business at that property, and sold gasoline and diesel
fuel until about 1991. It was not clear to me from that evidence
whether they operated any other business there in addition to the
gasoline and diesel retail. By 1991, however, it had become
apparent to them that the Ridgeway operation was not profitable
and, in fact, had become a drain upon the profits being made from
the gasoline station in Welland.
[5]
The Appellant's brother testified that this resulted from a
number of factors beyond their control, and I am sure that is
true. The local economy, for one thing, had taken a significant
downturn. There was a general business malaise around the
Ridgeway property, with the closure of other businesses, and
this, combined with the fact that the property is very near the
United States border and that gasoline prices there were
significantly lower than on the Canadian side of the border,
meant that sales of gasoline declined drastically. Many people
crossed the border to fill their gasoline tanks in the state of
New York rather than purchasing their gasoline in Ontario.
As a result, they ceased operating the gasoline retail business
in Ridgeway in 1991 or thereabouts.
[6]
From that point forward until the present day, the Appellant has
been attempting in one way or another to find a tenant who will
rent the Ridgeway property. At issue between the parties at the
hearing of the appeal was just how much and how effectively the
Appellant was attempting to find a tenant. Ms. Fincham says
that the Appellant was not making any very organized efforts to
find a tenant. No realtor was retained to do so, and whatever
signs were on the property were not very prominent and not likely
to attract tenants, in her view of the matter.
[7]
The Appellant's view is that no realtor was willing to expend
any efforts on trying to find a tenant without being paid a
significant amount of money up-front, which he was
unwilling to do. The signs, in his view, were adequate as they
were placed near the roadway where they were easily visible to
passing traffic. The evidence shows that there have been a number
of inquiries made over the years between 1991 and the present
from people who might have had an interest in renting the
property. It appears that the majority of those inquiries have
come since the years under appeal. In fact, it may be that all of
them have. Again, the evidence is less than totally clear. On two
or three occasions -- one of them as recently as
this month -- there has been sufficient interest
to lead to some negotiations, and even the preparation of a draft
agreement, but no lease has been entered into. The
Appellant's brother, it appears, represented him in all of
these negotiations that took place, and has generally carried out
the role of agent for the purpose of trying to find a tenant, so
far as I can make out from the evidence, throughout from 1991 to
the present.
[8]
In any event, since 1991 the property has produced no rental
income whatsoever for the Appellant, and has been virtually
unused, with the following two exceptions. First, the gasoline
and diesel tanks were filled in November 1995 at a cost of
approximately $4,800. The invoices for that fuel show the sale as
being to Kouros Ent. which I take to be Kouros Enterprises,
which, it appears, is the name attached to the business run by
the Appellant and his brother in Welland, Ontario, where their
retail gas station has operated, presumably profitably,
throughout the years with which we are concerned here. The
Appellant's brother testified that there was somebody in
attendance and selling gasoline from the time the tanks were
filled in 1995 through to the end of November 1996. It appears
that no rent was paid to Dr. Kouros for the use of the
property during that period of time as he declared gross income
of nil in both 1996 and 1997 in connection with the property.
Dr. Kouros testified that filling the gasoline tanks and
attempting to sell gasoline there was an attempt to demonstrate
to anybody who might be interested in renting the property that
it could be a viable location for a gasoline station, and thereby
assist in renting the property. So far as the documentary
evidence shows, no revenues were assigned from any sales that
took place there to the property itself, nor was any rent paid
for the property. But property taxes, the $214.26 of interest
that I referred to earlier, and perhaps some utility expenses
were charged against the property. I can only deduce from all of
this that Dr. Kouros in effect donated the use of the
property to Kouros Enterprises, the partnership through which he
and his brother sell gasoline in Welland.
[10] The
attempt to show that it is a viable location for a gasoline
station obviously failed because by the end of November, 1996,
the fuel that was put in the tanks a year earlier had not all
been sold, and what remained was removed from the tanks and taken
to Welland to be sold at the Kouros Enterprises station.
[11] The other
use that has been made of the property since 1991 is that twice a
year, in May and July, the Appellant, his brother and his
brother's son sell fireworks at the property, presumably for
a short period of time, because it is a very seasonable business.
The Appellant's nephew testified that they sold fireworks
there at retail each year, and that they divided the profits from
those sales three ways, with each of them receiving something
between $300 and $400 per year from that. There was no evidence
that any rent was charged by the Appellant to this casual
business, nor do I expect that that business could viably exist
and pay anything like a market rent for the use of the premises.
The evidence of the Appellant and his brother shows that the
Appellant has in recent years (since the two years under appeal)
shown some interest in developing the property in some way,
although the evidence, again, is extremely vague on that.
[12] I come to
the question, then, whether this property can be said in the two
years under appeal, 1996 and 1997, to have been a source of
income having some reasonable expectation of profit.
Mr. George Kouros, on behalf of his
brother, argues that it was a source of profit or a source of
income during that period, because it was the Appellant's
intention to rent it, and if he did rent it, it would be
profitable. That, however, is not the legal test that the
authorities have laid down for me to apply. In Moldowan
v. The Queen[1] the Supreme Court of Canada made it clear that, at
least in the context of a business, there must be some reasonable
expectation that a profit can be produced before there can be
said to be a source of income for the purposes of section 3 of
the Act. It is only if there is a source of income that
losses may be taken into account under section 3 and netted
against positive income from other sources.
[13] In my
view, this case is indistinguishable from Enstone v. R,[2] a decision of
Lamarre Proulx J. of this Court, which was later affirmed by the
Federal Court of Appeal.[3] In that case, the Appellant had a property at
132 Faraday Street, Ottawa, which remained unrented for a
significant period of time. During the years that it was
unrented, the property incurred costs which the Appellant sought
to offset against other income. At paragraph 22 Judge Lamarre
Proulx said:
In the years in question, the 132 Faraday property was not an
ongoing rental activity due to a stoppage of activity of a length
that was much outside normal commercial practice. Sometimes a
rental activity has to be stopped for the purpose of major
repairs. This may not change the nature of the activity if it is
done in accordance with commercial practice. In this particular
case, the length of the stoppage was not within the normal
commercial bounds. The evidence has shown that the property did
not have tenants for nine years and contrary to what was done on
the Hinton properties, no substantial repairs were made on the
Faraday property and there was no advertising for rental nor
listing with a leasing agent. As there was no ongoing rental
business regarding that property, the expenses incurred in those
years for the basic upkeep of the property, are not current
expenses for the purpose of earning income from a business or
from a property. ...
In the Federal Court of Appeal the reasons for dismissing the
appeal were given by Sharlow J.A. At paragraphs 31 and 32 she
stated:
It is significant that Mr. Enstone does not say what
plans he has for the 132 Faraday Street property. He does not say
that he has any intention of finding tenants for that property.
He expresses the view that it is 'already profitable'.
Why would he make this comment with respect to a property that is
not rented? Perhaps he meant that the value of the 132 Faraday
Street property is sufficient economic justification for the
maintenance costs he has incurred. It is far from clear from this
comment that he had any intention of using the 132 Faraday Street
property as a rental property. Nor is there any other evidence
that is capable of establishing as a matter of fact that the 132
Faraday Street property is part of any rental business.
Counsel for Mr. Enstone argues that the evidence
establishes that Mr. Enstone always regarded the three
rental properties as a single business, and that he had simply
made a business decision to delay the expenditures that would be
required to make 132 Faraday Street property attractive to
renters. However, the Tax Court Judge clearly did not interpret
Mr. Enstone's evidence that way.
There are, of course, some significant differences in the
facts between that case and the one before me, specifically with
respect to intent. There seems to have been some doubt, at least
on the Federal Court of Appeal's view of the evidence, as to
whether Mr. Enstone intended to rent his Faraday Street
property. I have no doubt that Dr. Kouros intended, and
still intends, to rent his Ridgeway property. What is
significantly similar about both cases is that for a very long
period of time they have not produced rental income. With respect
to the Ridgeway property of this Appellant, there is no evidence
that satisfies me that in 1996 or 1997 there was any reasonable
prospect that any revenue whatsoever would be produced by this
property in the foreseeable future, nor was the Appellant taking
any significant steps at that time to remedy the situation. The
one step that he took was to put gasoline in the tanks and, in
effect, permit the partnership business, Kouros Enterprises, to
use the property without paying rent, in the hope that this would
show that it was a viable property.
[14] He was
not, however, willing to put any money whatsoever into either the
hiring of a real estate agent to look for a tenant, or through
significant improvements making the property more attractive to
potential tenants or by developing it in some way, turning it
into a property that would produce revenues. I have no doubt that
this was a viable income-producing property and source of
income within the meaning of that expression in section 3 when it
was bought in 1981 and through 1983, when the tenants left. I
presume that it continued to be such from 1983 for some period of
time thereafter.
[15] I have no
evidence before me as to what financial arrangements there were
between the Appellant and the partnership, Kouros Enterprises,
consisting of the Appellant and his brother, with respect to the
payment of rent for the property between 1983 and 1991. Assuming
for the sake of argument that a market rent was being paid
throughout those years, nevertheless it had become apparent by
1991 that a gasoline station could not viably be operated on the
property. Certainly by 1992 or 1993, if not by 1991, this
property simply was not viable to be operated as a rental
property, at least under the conditions that Dr. Kouros was
attempting to operate it under and in the economic climate which
by that time prevailed.
[16] Nothing
happened between then and 1996, the first of the years under
appeal, that would make it a viable rental property. Indeed, they
demonstrated in 1996 that it was not a viable rental property by
filling the gas tanks, attempting to operate it as a gas station,
and being unable in the space of a year to empty those tanks even
once. In the end, they had to remove what gasoline remained and
truck it into Welland and sell it there.
[17] As
regrettable as it may be, I find myself bound by Enstone
and countless other decisions, which deal with the question of
what constitutes a source of income for the purposes of section 3
of the Act, and in my view this property cannot satisfy
the requirements in 1996 and 1997. Consequently, the amount paid
for interest, municipal taxes and, if any, for utilities, at that
point could not be said to be the losses incurred by a source of
income. They may or may not be costs that can be capitalized, and
I specifically make no finding as to that, as it is an issue that
might arise some other day. If it does, it should be dealt with
in the context of all of the other evidence going to that issue
if and when the time comes. I am bound to dismiss these two
appeals.
Signed at Ottawa, Canada, this 28th day of November, 2001.
"E.A. Bowie"
J.T.C.C.
COURT FILE
NO.:
2000-3155(IT)I
STYLE OF
CAUSE:
Evangelos Kouros and
Her Majesty the Queen
PLACE OF
HEARING:
St. Catharines, Ontario
DATE OF
HEARING:
October 15, 2001
REASONS FOR JUDGMENT
BY:
The Honourable Judge E.A. Bowie
DATE OF
JUDGMENT:
October 22, 2001
APPEARANCES:
Agent for the
Appellant:
George Kouros
Counsel for the
Respondent:
Rosemary Fincham
COUNSEL OF RECORD:
For the
Appellant:
Name:
--
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
Email this Content