Broderick v. The Queen, docket 2000-3935-IT-I (Informal Procedure)

Date: 20010504

Docket: 2000-3935-IT-I

BETWEEN:

RONALD BRODERICK,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

For the Appellant:                      The Appellant himself

Counsel for the Respondent:      Diane Hawco

Reasons for Judgment

(delivered orally from the Bench on March 16, 2001 at St. John's Newfoundland)

Campbell, J.

[1]      This appeal is from reassessments in respect to the Appellant's 1996, 1997 and 1998 taxation years.

[2]      Although at the outset there appeared to be no consensus in respect to the issues to be decided, it was agreed that the issues before the Court were as follows:

1.        Whether the bed and breakfast operation was a self-contained domestic establishment within the meaning of subsection 18(12) of the Income Tax Act (the "Act").

2.        Whether the Minister was justified in concluding that 50% of the residence was used as personal use and the remaining 50% was used to earn income from the bed and breakfast.

3.        Consequently, whether subsection 18(12) of the Act has been properly applied to restrict the losses claimed by the Appellant through the operation of his bed and breakfast.

[3]      No evidence was introduced in respect to vehicle expenses claimed by the Appellant and the Respondent agreed this issue was resolved in the Appellant's favour and was not before this Court. Although the Appellant alluded to an issue of payment of wages to his daughter, the Respondent objected to this matter being before the Court as it was not presented by the Appellant as an issue in his pleadings. With only the vague references of the Appellant in respect to this payment and the Appellant's acknowledgement that $1,000.00 was suggested by Revenue Canada as an adjustment, I cannot permit this claim for an adjustment of $2,000.00.

[4]      In addition, the Appellant asked that I rule on the installation of a hardwood floor in the upstairs portion of the residence and the costs associated with the flooring. This item was referenced in assumptions (l) and (m) of the Respondent's Reply. In 1998, the Appellant stated he replaced carpet worn by guests in the upstairs portion of the bed and breakfast and decided to put in hardwood flooring instead of carpet, as some guests had allergies. He claimed the cost as a current repair and maintenance expense. I find that the installation of the flooring was an improvement to the home and the related costs were in the nature of capital expenditures rather than current expenses as claimed.

[5]      The Appellant purchased a property in Marystown, Newfoundland sometime in 1993. He stated that it was his intention when he bought the property to eventually complete renovations and open a bed and breakfast. In late 1996 the property was refinanced and the additional $15,000.00 borrowed was used to build a basement apartment in which the Appellant, his wife and their two children resided. The basement consisted of three bedrooms, a bathroom, a kitchen and a living room. There was a separate entrance to this basement area. The upper portion consisted of three levels. One level being split into two. This area upstairs contained three bedrooms that were rented to guests.

[6]      Until the renovations were complete, the Appellant and his family resided in the entire residence from the date of purchase in 1993 until late 1996, when they moved to the basement area.

[7]      The bed and breakfast was opened in November 1996 and stayed open on a full-time basis until September 1998. The Appellant also operated a craft store in the upper level. After September 1998, the bed and breakfast was operated seasonally only. Although the bed and breakfast was, in fact, available for guests on a full-time basis, between 1996 and 1998, there were, in fact, two guests only during November and December of 1996, 10 guests between January and May 1997, and in the same time period, January to May 1998, there were no guests, with the last guest in 1998 being in October. Therefore, in 1998, guests were at the bed and breakfast for only four and a one-half months of the total 12-month period. During this time, the Appellant claimed 75% of all expenses for the entire year as business expenses.

[8]      The Appellant gave evidence of how he totalled the entire square footage of the house compared to the square footage of the basement which contained approximately 611 - 612 square feet of the total overall area. The Appellant's evidence was that 60% of his guests were walk-ins and therefore, the premises had to be available to receive guests at all times.

[9]      The Appellant's evidence, as well as that of his wife, was to the effect that the bedrooms when made up, had to also be kept clean during the months when the operation had no guests. There were inconsistencies in the Appellant's evidence as to how much the family used the upstairs portion of the house from which the bed and breakfast was operated. The Appellant's wife admitted that there were occasions when she would do personal laundry with the guests laundry using the upstairs laundry facilities. The Appellant agreed that the laundry facilities upstairs were used occasionally even though the family had a portable washer and dryer in the basement apartment. As well, the Appellant's evidence was that when there would be no guests, the family used the kitchen and the family room facilities upstairs. The estimated percentage of use of the upstairs facilities however varied in his evidence from 5% to 20%. The Appellant went on to state that some of the use of the kitchen occurred when they took breakfast and snacks with guests.

[10]     There was conflicting evidence given by the Appellant and the departmental the auditor as to why the auditor saw only the bed and breakfast portion of the residence and was not shown the living quarters in the basement. However that came to be, I accept the Appellant's evidence that the basement facilities do exist in the approximate size of 612 square feet.

[11]     It is the Minister's contention that during the relevant years, the bed and breakfast was a self contained domestic establishment within the meaning of subsection 18(12) of the Act with 50% of the residence being used to generate income from the bed and breakfast and the remaining 50% used by the Appellant and his family for personal use. During this period the Appellant had other income from his employment as a teacher and commission income from his position with the Canadian Scholarship Fund.

[12]     The statutory framework which governs this case is found in subsection 18(12) which reads as follows:

Work space in home. Notwithstanding any other provision of this Act, in computing an individual's income from a business for a taxation year,

(a)      no amount shall be deducted in respect of an otherwise deductible amount for any part (in this subsection referred to as the "work space") of a self-contained domestic establishment in which the individual resides, except to the extent that the work space is either

(i)       the individual's principal place of business, or

(ii)       used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business.

(b)      where the conditions set out in subparagraph (a)(i) or (ii) are met, the amount for the work space that is deductible in computing the individual's income for the year from the business shall not exceed the individual's income for the year from the business, computed without reference to the amount and sections 34.1 and 34.2; and

(c)       any amount not deductible by reason only of paragraph (b) in computing the individual's income from the business for the immediately preceding taxation year shall be deemed to be an amount otherwise deductible that, subject to paragraphs (a) and (b), may be deductible for the year for the work space in respect of the business.

[13]     The definition of self-contained domestic establishment is defined in subsection 248(1) of the Act as follows:

"self-contained domestic establishment" means a dwelling-house, apartment or other similar place of residence in which place a person as a general rule sleeps and eats;

[14]     Judge Bowie of this Court dealt with subsection 18(12) of the Act in the case of Lott v. R.. [1998] 1 C.T.C. 2869 at page 2873 when he stated:

. . . It is quite clear in the words of subsection 12 that it is intended to restrict the extent to which individuals who use their homes for business purposes may deduct a portion of the cost of maintaining the home from their business income. The rule which this subsection establishes is that costs arising out of the maintenance of the home in which a business operates may be deducted only if subparagraph (i) or (ii) is satisfied, and then only to the extent that it does not have the effect of putting the business into, or of contributing to, a loss position.

[15]     Subsection 18(12) limits losses that may be claimed to the amount of income reported and losses not claimed can be carried forward. The Minister has accepted that there was a business being carried on within the premises and that there were legitimate business expenses incurred but not to the extent claimed by the Appellant. The evidence quite clearly points to this operation being a bed and breakfast operation within the normal meaning of the words. It was not a hotel but the operation clearly had a commercial element. When guests were present, the Appellant and his family occupied the basement area for the majority of the time and shared some of the upstairs areas of kitchen, laundry and living area. However, when guests were not there during approximately seven months in any one-year period, they potentially had the use of the entire area upstairs except for three bedrooms. It was originally their dwelling house before renovations to the basement and now that the bed and breakfast has closed it has become so again. The facts clearly establish that this was their home into which they received paying guests in respect to the three bedrooms located upstairs.

[16]     Based on the facts, it was at best a part time seasonal operation. I have reviewed the months and the number of guests that came through this bed and breakfast during the years in question. In 1998 the operation saw guests in only four and one-half to five months of the 12 months and yet the Appellant claimed 75% of all the expenses for the year as business expenses. The Appellant stated that the upstairs bedrooms were kept clean and ready in the "off chance" that a guest might arrive but months went by without anyone using the facilities. Based on the facts, I therefore conclude that it would be unreasonable for the Appellant to claim 75% of the total expenses. The 50% allocation provided by the Minister is a reasonable percentage in these circumstances.

[17]     Both the Appellant and the Respondent relied on several cases but specifically the Sudbrack v. R. case, reported at 2000 DTC 2521, a decision of Associate Chief Judge Bowman of this Court. The Sudbrack case can be distinguished quite dramatically from the facts in the present case. In Sudbrack, approximately $100,000.00 was spent on extensive renovations for an elaborate country inn not a bed and breakfast. Fine dining with a gourmet menu was offered at this inn and it was a major focus of the inn. In respect to the present case before me the primary function of this property was a residence for the Appellant and his family and for a portion of each of the years in question it was used as a bed and breakfast. Three bedrooms were rented out but for whatever reasons, it ended up being a part time seasonal operation despite the intention and hard work of the Appellant. When guests were present, they confined themselves to the basement apartment for the majority of the time but except for keeping the three bedrooms clean and available, there was little need to restrict the balance of the upstairs portions particularly when months would pass with no guests or the potential for any. When guests were there, common areas of the house saw business and family life converge.

[18]     I agree with the Respondent counsel when she states that the Sudbrack case is not meant to apply to situations where rooms are rented out in homes. The overall picture that has emerged here is one of a family residence within which a bed and breakfast facility operated from a portion of the residence for part of each of the years in question. It was therefore reasonable for the Minister to attribute 50% of the residence to personal use and the remainder for business use and consequently, to have invoked subsection 18(12) of the Act to restrict the amount of losses claimed through the operation of the bed and breakfast. I see no reason based on the facts to interfere with these percentages.

[19]     The appeal is accordingly dismissed.

Signed at Ottawa, Canada, this 4th day of May 2001.

"D. Campbell"

J.T.C.C.