Date: 20010822
Docket: 2000-4791-IT-I
BETWEEN:
FRED MAYSKY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
Docket: 2000-4945-IT-I
BETWEEN:
SYLVIA MAYSKY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Miller, J.T.C.C.
[1]
These are appeals by way of Informal Procedure by Mr. Fred Maysky
and Mrs. Sylvia Maysky heard on common evidence for the 1996 and
1997 taxation years. Fred Maysky appeals the Minister of National
Revenue's ("Minister") assessments disallowing
rental losses of $10,129.95 and $7,924.96 for 1996 and 1997
respectively. Sylvia Maysky appeals the Minister's
assessments disallowing rental losses of $5,454.59 and $4,267.29
for the 1996 and 1997 taxation years respectively.
[2]
The rental losses claimed by the Appellants in 1996 and 1997
pertain to a property at 12039 63rd Street, Edmonton, Alberta.
This home was built in 1958 by Mr. Maysky and his parents as
their family home. Mr. Maysky's father died in 1969 and Mr.
Maysky's mother developed the downstairs of the property as a
rental area. Throughout the 1970's Mr. Maysky assisted his
mother with the rental arrangements. For health reasons Mr.
Maysky's mother moved out in the 1980's and the main
floor was then also turned into rental accommodation.
Mr. Maysky looked after the rental arrangements from then
on. Upon his mother's death he became the sole owner of the
property. He also owned and rented out the property next door
until he sold that property in 1991. He sold the property at that
time as the market in Edmonton was good and the property demanded
a higher maintenance than 12039 63rd Street. He believed the sale
of the property would reduce his overall debt load. In 1992 he
rented part of 12039 63rd Street to an acquaintance of a
relative of his. He did not charge fair market value rent as the
tenant could not afford it. In 1993 that tenant committed
suicide. Other tenants moved out and by 1994 the property was
vacant, which it remains to this day. The last tenant left some
considerable damage in 1994 which Mr. Maysky maintains took a
couple of months to tidy up.
[3]
Around 1992 Mr. Maysky changed careers and started as a realtor.
His evidence was that throughout the 1990's he concentrated
on selling real estate, hoping this income would not only
subsidize the rental property but ultimately allow him to reduce
the debt load, which in 1996 was approximately $120,000. Mr.
Maysky was not able to specifically allocate to what the $120,000
debt pertained, though it was clear that a significant portion
represented a line of credit in support of Mr. Maysky's
realtor activities.
[4]
Mr. Maysky provided few details on what steps he has taken since
1994 to generate revenue. His plan was simply to reduce the debt
load to ultimately result in greater profit from the property. He
indicated that profit could arise whether from rental income, of
which there was none after 1994, or capital appreciation. He
believed the property values had gone up since the
mid-1990's. He claimed he maintained the property throughout
the 1990's for two reasons; so that it would retain its value
and it would be more readily rentable. Mr. Maysky showed the
property to less than ten prospective tenants in 1996 and 1997.
His main effort at advertising appears to have been a sign in the
window. Mr. Maysky claims to have been suffering from depression
at this time. I conclude that due to health and to commitment to
his realtor activities he spent little or no time in attempting
to rent the property in the years in question. He maintained his
former home with a sense of pride in it, and also as it provided
solid valuable security to the banks. He indicated it was not how
much money he could squeeze out of the property but that he
wanted the property to be an asset to the neighbourhood. He was
not prepared to rent it out to anyone who might possibly damage
it. He has yet to find a responsible tenant.
[5]
Mr. and Mrs. Maysky allocated the losses on a 65-35% basis,
although Mr. Maysky owned 100% of the property. Mr. Maysky was
vague as to the split of responsibilities, but indicated the
allocation was the recommendation of his accountant.
[6]
With respect to the expenses claimed in 1996 and 1997 Mr. Maysky
could not itemize the maintenance and repairs, nor could he
allocate the interest expense between the rental property and his
realtor business.
[7]
Respondent's counsel presented four arguments in the
alternative:
1)
There was no reasonable expectation of profit in the 1996 and
1997 taxation years and therefore the property in question did
not constitute a source of income for the Appellants against
which any losses could be deducted.
2)
As the Appellants were not actively engaged in renting property
in 1996 and 1997 the expenses were not therefore incurred for the
purpose of gaining or producing income within the meaning of
section 18(1)(a) of the Income Tax Act
("Act").
3)
The maintenance and repair expenses were capital in nature, and
the interest expenses were personal and therefore neither of
these were deductible.
4)
The expenses claimed were unreasonable.
[8]
The Respondent relies on the well-known trilogy of Moldowan v.
The Queen, 77 DTC 5213, Attorney General of Canada v.
Mastri et al., 97 DTC 5420 and Tonn et al. v. The
Queen, 96 DTC 1806 as establishing the principle that to have
a source of income a taxpayer must have a reasonable expectation
of profit from that source, objectively determined, and that
without a source of income there is no basis upon which to claim
a rental loss. As I have stated on previous occasions, the test
is one which looks to section 3 of the Act as a
gate-keeping section. If the situation does not justify getting
past section 3, there is no need to apply any further provision
of the Act. The application of the reasonable expectation
of profit test can differ depending on whether the alleged source
is property or business and further whether there is a personal
element involved. In this case I am faced with a situation of the
alleged source being property and also with the existence of a
"personal element". The personal element stems from the
property having formerly being the Appellant's home, from the
Appellant using the property as collateral for a line of credit
pertaining to his realty business and from the Appellant's
acknowledgement of retaining pride in maintaining the home as an
asset to the neighbourhood. I have no hesitation in seeking an
objective determination of whether or not there was a reasonable
expectation of profit. This is an appropriate case for doing so:
this is not a matter of second guessing the Appellant's
business judgment.
[9]
Factors to examine in coming to an objective determination of the
reasonable expectation of profit from this property, suggested by
Respondent's counsel, are those cited in Landry v. The
Queen, 94 DTC 6624 case as follows:
the time required to make an activity of this nature
profitable
the presence of the necessary ingredients for profits
ultimately to be earned
the profit and loss situation for the year subsequent to the
years in issue
the number of consecutive years during which losses were
incurred
the increase in expenses and decrease in income in the course
of the relevant periods
the persistence of the factors causing the losses
the absence of planning
the failure to adjust
I would add to this list the motivation of the taxpayer in
making the expenditures. Mr. Maysky's evidence was clear that
for health reasons and due to concentrating on the realtor
business he spent little time on his rental property. Indeed,
there are no ingredients for profits to be earned as there was
simply no revenue. Even by reducing his debt load to zero, which
was the extent of his plan, Mr. Maysky would not have earned a
profit. The property had a history of losses while generating
revenue prior to the years in question, and a history thereafter
of simply no revenue. There may well have been a reasonable
expectation of profit in the late 1980's and early
1990's, though I am not ruling on that point, however by 1994
there is no basis to find any expectation of profit. Expenses
remained constant and revenues dropped to nothing. Mr. Maysky did
nothing to obtain revenues and his sole plan was to reduce debt.
So why did he continue incurring expenses on this vacant
property? Three reasons: first, he retained a pride of ownership
in his family home. He wanted it to be considered as an asset to
the neighbourhood and not simply something to squeeze money from.
Second, he wanted to ensure it retained its value for future sale
purposes. Mr. Maysky knew exactly what it was worth in 1998 and
also today. He is in the realtor business and knows when he can
maximize a gain on sale. Third, he needed to ensure the property
was an attractive security to the bankers so they would continue
to accept it as collateral for his personal line of credit. These
are not the motivations of one determined to earn rental income
from property. None of these motivations reflect any expectation
of profit from rental income.
[10] On an
objective basis there is no reasonable expectation of profit and
therefore no source of income. The expenses do not require
further scrutiny under other provisions of the Act as they
have not made it past the section 3 gate. The appeals are
dismissed.
Signed at Ottawa, Canada this 22nd day of August 2001.
"C.J. Miller"
J.T.C.C.
COURT FILE
NO.:
2000-4791(IT)I and 2000-4945(IT)I
STYLE OF
CAUSE:
Fred Maysky and The Queen
Sylvia Maysky and The Queen
PLACE OF
HEARING:
Edmonton, Alberta
DATE OF
HEARING:
August 15, 2001
REASONS FOR JUDGMENT
BY:
The Honourable C.J. Miller
DATE OF
JUDGMENT:
August 22, 2001
APPEARANCES:
For the
Appellants:
Fred Maysky
Counsel for the
Respondent:
Michael Taylor
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-4791(IT)I
BETWEEN:
FRED MAYSKY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the
appeals of
Sylvia Maysky (2000-4945(IT)I) on August
15, 2001 at Edmonton, Alberta, by
the Honourable Judge Campbell J. Miller
Appearances
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Michael Taylor
JUDGMENT
The
appeals from the reassessments made under the Income Tax
Act for the 1996 and 1997 taxation years are dismissed in
accordance with the attached reasons for judgment.
Signed at Ottawa, Canada this 22nd day of August 2001.
J.T.C.C.
Email this Content