Gravel v. The Queen, docket 1999-4269-IT-I (Informal Procedure)

Date: 20010410

Docket: 1999-4269-IT-I,

1999-4272-IT-I

BETWEEN:

MONIQUE GRAVEL,

MARCEL GRAVEL,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Tardif, J.T.C.C.

[1]            These are appeals for the 1995, 1996 and 1997 taxation years. The parties agreed to proceed on common evidence.

[2]            The issue, which is the same in both cases, is whether the expenses claimed annually in respect of the property in Saint-Donat were incurred by the appellants-to the extent of their respective shares in that property-during the taxation years in issue for the purpose of gaining or producing income from a property or business.

[3]            The appellant Marcel Gravel began by admitting a number of paragraphs of the Reply to the Notice of Appeal (the "Reply"), including the following facts:

[TRANSLATION]

(a)            the property in issue is a condominium located at 40 chemin des Cimes in Saint-Donat, near the mountain at the Mont-Garceau ski resort;

(b)            the appellant and his wife are co-owners of the immovable in issue;

(c)            the appellant and his wife claimed equal shares of the losses in respect of the property in issue;

(d)            the property in issue was purchased on September 15, 1989, for $112,000 with the aid of loans totalling $104,000;

(e)            the approximate total area of the condominium is 1,290 square feet divided into seven rooms;

(f)             since it was purchased, the condo has only rarely been leased during the period from early March until September of each year;

(g)            the operation of the rental property has constantly generated rental losses:

                                (i)             1989                         $2,206 x 2                =               $ 4,412

                                (ii)            1990                         $6,233 x 2                =               $12,466

                                (iii)           1991                         $5,844 x 2                =               $11,688

                                (iv)           1992                         $3,866 x 2                =               $ 7,732

                                (v)            1993                         $3,636 x 2                =               $ 7,272

                                (vi)           1994                         $3,972 x 2                =               $ 7,944

                                (vii)          1995                         $4,326 x 2                =               $ 8,652

                                (viii)         1996                         $3,573 x 2                =               $ 7,146

                                (ix)            1997                         $2,738 x 2                =               $ 5,476

(h)            during the years in issue, the appellant used the condominium for personal purposes.

[4]            The evidence consisted of a written text which the appellants had prepared. The document in question was completed and supported by voluminous documentary evidence (Exhibits A-1 to A-14).

[5]            Since the evidence adduced by the appellants was presented in the form of a document and that document summarizes very well the essential and fundamental aspects of that evidence, it is appropriate to reproduce its content:

                [TRANSLATION]

CONDO No. 40 - ST-DONAT

REASONABLE EXPECTATION OF PROFIT

1- Factors in favour of the purchase of Condo 40 in 1989:

·          See investment plan; our purpose was primarily to rent the property; limited personal use would be made of it during periods when it was not rented

·          Vitality of the economy in general

·          Growing real estate sector

·          Numerous local tourist attractions:

                            - Des Cimes condos built on the slopes of Mont-Garceau

                            - Mont-Tremblant Provincial Park less than 10 km away

                                - La Réserve ski resort less than 5 km away without any accommodation facilities built near the slopes

                            - St-Donat Golf Club less than 5 km away

                            - Archambault, Ouareau and Blanc Lakes located around the village

                            - numerous restaurants and inns

                            - famous Manoir des Laurentides in the heart of the village

·          The enthusiasm and dynamism of the Gestion CondosCimes Inc. sales team of Nicole Ouellet and her spouse Yves Boileau

·          The charisma and people skills of Gestion CondosCimes manager Nicole Ouellet

·          Gestion CondosCimes Inc.'s marketing plan:

                            - promotional flyers

                            - model of a condo and of the project as a whole

                            - presence at specialized leisure activity shows having to do with such things as skiing, snowmobiling, hunting and fishing, and golf

                            - involvement in the local chamber of commerce

·          The vitality of the municipality of St-Donat:

                            - the Parc des pionniers development, including a dock, boat-launching ramp, beach and playground

                            - development of cross-country ski trails, hiking trails and bicycle paths

                            - recent construction of a municipal library

·          The dynamism of the St-Donat Chamber of Commerce:

                            - organization of a number of recreational and tourist activities such as the Festival of Colours, a fishing tournament, a sailboat regatta, and a snowmobile acceleration race

                            - operation of a tourist information bureau open year-round

·          The vitality of the builder of the condos, Les Habitations Con-Bois-Cier Ltée:

                            - construction of approximately 35 condo units out of a total of approximately 100 projected units already completed

                            - financial involvement in the ski resort to speed up its development

                            - plans to build an indoor pool and a tennis court right beside our condo for 1990

·          The vitality of the Mont-Garceau ski resort:

                            - installation of a quad chair lift under way

                            - purchase of new artificial-snow-making equipment

                            - plan to rebuild the ski chalet for the spring of 1990

                            - plan to install lighting for night skiing for the winter of 1991-1992

                            - Mont-Garceau is accessible by chair lift

·          Knowledge of Les Habitations Con-Bois-Cier Ltée's development projects because Marcel Gravel was at the time a partner in the consulting firm (Enviro-Tech) working for the developer

               

2- Evolution of business over the years:

                1989         -                income: $1,528                                      - losses: $4,412

                -                condo purchased on September 16

1990         -                income: $8,080                                      - losses: $12,466

-               April: letter from Nicole Ouellet reporting on all rentals for the winter of 1989-1990: average occupancy rate of 34.9% for the first winter of operation

-               summer rentals: 18 days including 4 weekends

-               rentals for the Festival of Colours: 7 days

1991         -                income: $9,245                                      - losses: $11,688

-               winter rentals comparable to previous year

-               summer rentals: 26 days including 5 weekends

-               rentals for the Festival of Colours: 7 days

1992         -                income: $9,047                                      - losses: $7,732

-               winter rentals better than previous year

-               April: departure of Nicole Ouellet and her spouse and arrival of Denise Delorme

-               summer rentals down: 9 days including 2 weekends

-               rentals for the Festival of Colours: 4 days

1993         -                income: $5,625                                      - losses: $7,272

-               significant decline in winter and summer rentals

-               September: departure of Denise Delorme and arrival of Rolande Delorme of Gestion CondosCimes and Claudette Gauthier from the Mont-Garceau ski resort

-               rentals for the Festival of Colours: 4 days

1994         -                income: $5,000                                      - losses: $7,944

-               winter rentals stagnant

-               no summer rentals

-               rentals for the Festival of Colours: 4 days

-               meeting with Rolande Delorme in October to look at the possibilities of improving rentals and agreement was revised to reduce management fees from 38% to 30%

1995         -                income: $3,505                                      - losses: $8,652

-               winter rentals down

-               no summer rentals

-               rentals for the Festival of Colours: 4 days

-               October: meeting with Gestion CondosCimes representative Claudette Gauthier with a view to imposing an obligation to achieve results

1996         -                income: $3,879                                      - losses: $6,934

-               slight increase in winter rentals

-               April: Gestion CondosCimes abandons rental service

-               no summer or fall rentals

-               September: meeting with Francine Richard of the Sutton Group in St-Donat to look at the possibilities of selling the condo: she was not interested unless we were prepared to sell for nearly half the purchase price, that is, approximately $60,000; she had no interest in rentals

-               September: meeting with Claudette Gauthier of the Mont-Garceau ski resort to determine her interest in taking over the rental service; since she often received calls for accommodation near the ski slopes, she agreed to take on our condo and we reached an agreement on management fees of 20%

-               October: we put "Condo for sale or rent" signs on the condo

1997         -                income: $3,025                                      - losses: $5,490

-               winter rentals down

-               no summer rentals: 1 weekend through personal efforts

-               no fall rentals

-               September-October: we spent more time at the condo to meet potential tenants or buyers and put up another "Condo for sale or rent" sign near the access road to the condo

-               October: another meeting with Claudette Gauthier at which we agreed that we would continue with her but that we would also make efforts on our own to increase rentals

1998         -                income: $2,700                                      - losses: $6,817

-               a single tenant for the period from January 9 to April 12

-               rental loss of $2,000 as a result of the cancellation of a reservation for the 1997-1998 Christmas vacation due to poor weather

-               March: visit by two real estate brokers from St-Donat to see whether a rental service was available and/or to look at selling the condo: neither was interested in selling the condo because they already had similar units in hand and they were very hard to sell unless owners were prepared to sell for half the purchase price; only one showed a little interest in rentals, but his operating method was complex and rentals were not a priority for him

-               no summer or fall rentals

-               September: signed an exclusive six-month contract for the sale of the condo with La Capitale River-Nord Inc., Joliette office; no visits to the condo and no offers to purchase resulted from this

-               September-October: as we did the previous year, we spent more time at the condo to meet potential tenants or buyers

-               October: another meeting with Claudette Gauthier and agreement to continue with her for rental purposes

1999         -                income: $10,535                                   - profits : $267

-               significant increase in winter and fall rentals

2000         -                income: $8,110                                      - losses: $1,116

-               long-term rental starting January 10

PROJECTIONS

2001         -                income: $9,650                                      - profits : $450

-               continued long-term rental from January to October

2002         -                income: $10,750                                   - profits : $1,350

3- Events affecting financial results:

Period from 1990 to 1999: (negative factors)

·          High interest rates in the early 1990s

·          Departure of Nicole Ouellet and Yves Boileau in April 1992

·          Arrival of the new, less dynamic sales team, decline in quality of services and less attention to customer needs

·          Economic recession which started in the early 1990s

·          Decline in the real estate market, more particularly the secondary residence market

·          General decline in tourist traffic in the St-Donat region (e.g., Manoir des Laurentides)

·          Closing of La Réserve ski resort around 1994

·          Pool and tennis court construction projects not carried out

·          Halt in condo construction around 1993; 100 condo units were initially planned, but the project was finally stopped at 45 units

·          Final withdrawal of developer Les Habitations Con-Bois-Cier Ltée from the condo project and from involvement in the ski resort around 1995

·          Failure to make planned improvements to the ski resort: the chalet was renovated in stages and not rebuilt, as planned in 1990, and the trails are still not lit

·          Lack of interest of real estate brokers and potential buyers in Des Cimes condos (too many condos for sale and few transactions)

·          Drying up of rentals to snowmobilers as a result of a lack of promotion and stricter condo regulations concerning snowmobile traffic on the site

·          Impossibility of obtaining a list of rental customers from Gestion CondosCimes following their withdrawal from the provision of a rental service

Period from 1999 to 2001: (positive factors)

·          Stable and low interest rates

·          Gradual reduction of principal repayable on the mortgage

·          General economic growth and drop in unemployment

·          Recovery of real estate market

·          Reopening of La Réserve ski resort in the fall of 2001

·          Constant development of our network of contacts and tenants

·          Construction of a road linking St-Donat directly with Mont-Tremblant in 2001, which will result in economic development and the expansion of tourism on an unprecedented scale in the municipality of St-Donat

                4- Conclusion:

                As one can see, a number of factors beyond our control have had a negative effect on our operating results. However, the situation is undergoing a significant turnaround for the reasons set out above. Lastly, if, over the next few years, we make profits, as anticipated, what will this do to our tax picture?

                By: Monique Gravel and Marcel Gravel      Date: February 26, 2001

[6]            Although the above document is a good summary of the evidence adduced, a number of points should be added since the appellants also filed voluminous documentary evidence.

[7]            At the time of the purchase, the condominium unit was the last in one of the phases of the project. The condo had been the subject of a transaction which was never completed. As the prospective purchaser was unable to find the required financing, the unit was put back on the market and attracted the appellants' attention.

[8]            Following negotiations, the appellants purchased the condo with a minimal cash payment of several thousand dollars, $8,000 to be exact. The developer had held out prospects of very good income, and the entire scheme was to be supported by a dynamic major development and the addition of facilities such as tennis courts and a swimming pool.

[9]            The reality of the situation was quite different. A number of projects, including construction of the pool and tennis courts and of the other planned phases of the development, never saw the light of day. The appellants thus contended that their plan had never been profitable and had incurred significant consecutive losses mainly as a result of these factors.

[10]          The appellants also gave a whole series of other reasons to explain the repeated losses. As is curiously frequent in this type of case, in the wake of the assessment, there was a significant turnaround, to the point that the appellants indicated that profitability had been attained and was assured for the future. They said the turnaround was the result of new projects and initiatives in the region, in particular a new road that was to link St-Donat with Mont-Tremblant.

[11]          It came out in cross-examination that, during the years in issue, the appellants had received interest income from various investments, had purchased RRSPs and had failed to report certain income in 1999. The appellant Marcel Gravel admitted that he had not reported some income, saying that if he was not entitled to benefit from the losses, he did not see why he should have to report surpluses.

[12]          The Court pointed out to him that, given the many losses from which he and his spouse had benefited over the years, they could have made profits for a number of years and paid the resulting taxes before ever being out of pocket, from a tax standpoint, in respect of the condo.

[13]          The evidence also brought to light the fact that the appellants had used their condo for personal purposes 15 percent of the time.

Analysis

[14]          The appellants purchased a condo with a quite insignificant down payment and, although they had a real opportunity over the years to reduce substantially the debt and, consequently, the interest payable, they did not do so.

[15]          Despite the numerous changes and disappointments described, all of which had negative effects on the project, they never reacted in the way such a situation would have dictated. The tax losses were clearly an offset, with personal use being a further benefit.

[16]          They could and should have reduced the amount of the mortgage debt so as to decrease their losses. Why did they not do so? They did not provide an answer to this basic question.

[17]          At the outset, as a result of the promises made and the planned subsequent stages in the completion of the project as a whole, it was perhaps possible and reasonable to expect profitability but, with the abandonment of the various phases, a general decline in interest in the region and the economic slowdown, it became quite obvious that the project, in its original form, would never be viable.

[18]          Thus, the evidence shows that, in 1995, 1996 and 1997, it was unreasonable and unrealistic to expect the project to be profitable at all. Furthermore, the appellants themselves admitted this fact by taking a number of steps to sell their condo. They were prepared to take a loss, but not any size of loss.

[19]          In my view, this behaviour clearly confirms that the appellants themselves recognized at that time that the project was not profitable and never would be, at least based on the information then available and the various factors that came into play at the time.

[20]          Despite this fact, they refused to incur a large loss and injected no new money in order to reduce the interest amount, which was keeping the tax losses high.

[21]          The existence of many factors inconsistent with the project's eventually becoming profitable and the appellants' refusal to take a significant loss confirm unequivocally that there was no reasonable expectation of profit at the time. These two circumstances alone are an amply sufficient basis for concluding that the appellants simply had no reasonable expectation of profit during the years in issue.

[22]          Furthermore, the appellant Marcel Gravel expressed his concern at the idea of eventually making a profit, which would thus oblige him eventually to pay taxes if the Court took away his right to take advantage of the losses.

[23]          Such comments by the appellant Marcel Gravel are highly indicative of the appellants' motivation and reasons for purchasing the condo. They confirm that the "tax loss" aspect was clearly a factor considered when the condo was purchased. This particular attraction, supplemented and enhanced by the possibility of being able to enjoy the condo personally, were no doubt the main motivation for the purchase, since any objective considerations enabling the appellants to anticipate eventually making a profit were few in number and very weak even at the time of the purchase.

[24]          In my view, the evidence shows that there was no reasonable or realistic expectation of making a profit from the condo property in 1995, 1996 and 1997. Indeed, there was no objective basis for a realistic, objective and reasonable expectation of any profit whatever. This observation, moreover, is not based on facts unknown at the time. Both during the years in issue and in the preceding years, there was no accounting or factual information that could support any expectation of profit. In actual fact, all the circumstances of the purchase and the facts that became available in the following months pointed irresistibly to only one conclusion: that there would never be any reasonable expectation of profit unless new and at the time entirely unknown and highly unlikely facts emerged. Consequently, there were only three reasons to keep the condo: tax losses, personal use and the hope of finding a buyer.

[25]          At the hearing, the appellants argued that their condo would possibly produce income and be profitable in the very short term. The evidence showed that eventual profitability would be assured on the basis of the dreams and hopes of certain local developers who wanted to profit from the hundreds of millions of dollars invested in the Mont-Tremblant region.

[26]          A project's viability must be proceed from a vision founded on factors that are objective, logical and real. Luck and hope are of course factors which can contribute to the success of an enterprise, but they cannot form its main, or indeed its sole, basis.

[27]          In the instant case, in light of the facts and circumstances revealed by the evidence, there can be no doubt that there was no reasonable or realistic expectation of making any profit whatever during the years in issue.

[28]          For these reasons, the appeals are dismissed.

Signed at Ottawa, Canada, this 10th day of April 2001.

"Alain Tardif"

J.T.C.C.

Translation certified true on this 30th day of September 2002.

Erich Klein, Revisor

[OFFICIAL ENGLISH TRANSLATION]

1999-4269(IT)I

BETWEEN:

MONIQUE GRAVEL,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on common evidence with the appeals of Marcel Gravel (1999-4272(IT)I) on February 26, 2001, at Trois-Rivières, Quebec, by

the Honourable Judge Alain Tardif

Appearances

For the Appellant:                                                                 The Appellant herself

Counsel for the Respondent:                              Simon Petit

JUDGMENT

                The appeals from the assessments made under the Income Tax Act for the 1995, 1996 et 1997 taxation years are dismissed in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 10th day of April 2001.

"Alain Tardif"

J.T.C.C.

Translation certified true on this 30th day of September 2002.

Erich Klein, Revisor

[OFFICIAL ENGLISH TRANSLATION]

1999-4272(IT)I

BETWEEN:

MARCEL GRAVEL,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on common evidence with the appeals of Monique Gravel (1999-4269(IT)I) on February 26, 2001, at Trois-Rivières, Quebec, by

the Honourable Judge Alain Tardif

Appearances

For the Appellant:                                                                 The Appellant himself

Counsel for the Respondent:                              Simon Petit

JUDGMENT

                The appeals from the assessments made under the Income Tax Act for the 1995, 1996 et 1997 taxation years are dismissed in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 10th day of April 2001.

"Alain Tardif"

J.T.C.C.

Translation certified true on this 30th day of September 2002.

Erich Klein, Revisor

[OFFICIAL ENGLISH TRANSLATION]