Date: 20010621
Docket: 2001-487-IT-I
BETWEEN:
RAMIRO MORALES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1]
These appeals are from assessments for the 1997 and 1998 taxation
years. By those assessments the Minister of National Revenue
disallowed rental losses claimed by the appellant from the rental
of 28 Barrington Avenue in Toronto. The respondent's
position is that the appellant did not have a reasonable
expectation of profit from the rental operation.
[2]
The concept of reasonable expectation of profit is an appropriate
one to consider in this case because it is the Minister's
position that the expenses associated with the rental operation
are personal or living expenses within the meaning of
paragraph 18(1)(h). The statutory definition of
personal and living expenses in section 248 reads in part as
follows.
"personal or living expenses" includes
(a)
the expenses of properties maintained by any person for the use
or benefit of the taxpayer or any person connected with the
taxpayer by blood relationship, marriage or adoption, and not
maintained in connection with a business carried on for profit or
with a reasonable expectation of profit.
[3]
The assumptions upon which the Minister assessed the appellant
are the following.
(a)
in December 1988, the Appellant, his spouse, Nanette, and the
spouse's sister, Jewel Revil purchased 28 Barrington Avenue,
Toronto, Ontario (the "Property"), a detached single
family home, for $220,000.00;
(b)
Nanette Morales commenced renting the Property in 1989* and reported rental
income and claimed rental losses in the 1989 and 1990 taxation
years with respect to the Property as follows:
Year
Gross
Income
Loss
1989
$10,200.00
($45,197.00)
1990
$10,800.00
($35,395.00);
(c)
the Appellant commenced claiming the rental losses in 1991 and
reported rental income and claimed rental losses in the 1991 to
1999 taxation years with respect to the Property as follows:
Year
Gross
Income
Loss
1991
$10,200.00
($31,065.00)
1992
$12,000.00
($23,074.00)
1993
$12,000.00
($32,656.00)
1994
$12,360.00
($32,915.00)
1995
$12,840.00
($33,381.00)
1996
$7,800.00
($21,793.00)
1997
$7,800.00
($28,901.00)
1998
$7,800.00
($24,287.00)
1999
$12,000.00
($10,340.00)**
(d)
in the 1997 and 1998 taxation years, the Appellant reported
rental income, expenses and losses as per Schedule "A",
attached;
(e)
the Appellant moved into the Property in 1996;
(f)
during the 1997 and 1998 taxation years, the Property was the
principal residence of the appellant;
(g)
in the 1997 and 1998 taxation years, the only tenants occupying
the Property were the Appellant's mother and his niece;
(h)
the rent charged was not sufficient to offset the mortgage
interest for the Property;
(i)
amounts claimed as maintenance and repairs in the 1997 and 1998
taxation years, were capital in nature;
(j)
the Appellant has not reported a profit from the purported rental
operation since it's acquisition;
(k)
in the 1997 and 1998 taxation years, the rental expenses were not
made or incurred, or if made or incurred, were not made or
incurred for the purpose of gaining or producing income;
(l)
the Appellant had no reasonable expectation of profit from
renting the Property during the 1997 and 1998 taxation years;
(m) in
the 1997 and 1998 taxation years, the rental expenses were
personal or living expenses of the Appellant.
[4]
The factual parts of the assumptions are substantially correct,
and the figures are not challenged, except for the price of the
house which was $230,000 not $220,000. Also Mr. Morales
testified that his spouse's sister was not one of the
purchasers. The property was financed by a $190,000 mortgage from
the owner and a $50,000 loan from the appellant's wife's
parents.
[5]
The first thing that strikes one is that since 1989 the property
has never yielded a profit. Indeed the interest expense alone is
multiples of the rent received. The mortgage has not been reduced
in any significant degree. By the end of 1998 it was about
$158,000.
[6]
The second point is that since 1996 the appellant has lived in
the property and shared it with his mother and his niece. Prior
to that time it was his brother who lived there. He charged his
brother about $1,200 per month. Then, when he moved in in 1996,
he charged his mother and niece $750 per month. It is not
entirely clear whether his niece paid anything or whether he
actually received the amounts reported. In 1999 he seems to have
raised the rent his mother paid to about $12,000 per year.
Indeed, there is no evidence that the rents paid were fair market
value.
[7]
Considering the size of the mortgage interest payments in
relation to the rents received it is impossible to see how the
appellant could ever expect to make a profit.
[8]
The appellant is in the same situation as many people who in the
late 1980s bought real estate in what appeared to be a booming
market, expecting that the boom would never end. The appellant
with a refreshing degree of candour that I have not seen too
often in these cases testified that he bought the house with the
intention of "flipping" it (his word). The bottom fell
out of the market in the late 1980s and he was obliged to keep
the property and try to recover some of the costs by renting it.
It was not at the outset a rental property. More likely it was
held in the course of an adventure in the nature of trade. It
became a rental property only because of the exigencies of the
market place.
[9]
He has tried from time to time to sell the property but without
success.
[10] In 1997
and 1998 he put on a new roof and replaced the wooden windows
with aluminium ones. The expense of this work was treated as
maintenance and repairs for 1997 and 1998 in the amounts of
$17,178 and $14,700 respectively.
[11] The
appellant is critical of Revenue Canada (or CCRA) for failing to
tell him sooner that the losses should be disallowed. The agency
is put in a difficult situation. If it pounces too quickly
wielding the reasonable expectation of profit club it is
criticized for being too quick on the draw in not giving the
taxpayer enough time to get the business going. In Keeping v.
The Queen, 2001 F.C.A. 182, the Federal Court of
Appeal reversed a decision of this court which had dismissed an
appeal by a school teacher who sold Amway products on the basis
that the court should not have applied the no reasonable
expectation of profit principle where the appellant had been in
operation for less than five years. Here just the opposite
criticism is made. On one view of the matter the appellant was
fortunate that the agency allowed the deduction of losses for
eight years. In any event whether the agency should have
pounced on Mr. Morales sooner does not affect the way this
case should be decided.
[12] I think
this is a clear case of personal or living expenses. The
appellant has been living in a house with relatives and incurring
losses that are vastly disproportionate to the income that is
earned or could reasonably be expected.
[13] In light
of this conclusion I need not deal with the questions raised by
the respondent whether the new roof and windows are on capital or
revenue account or whether the losses should be shared with the
appellant's estranged wife.
[14] The
appeals are dismissed.
Signed at Montréal, Canada, this 21st day of June
2001.
"D.G.H. Bowman"
A.C.J.
COURT FILE
NO.:
2001-487(IT)I
STYLE OF
CAUSE:
Between Ramiro Morales and
Her Majesty The Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
June 5, 2001
REASONS FOR JUDGMENT BY: The
Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF
JUDGMENT:
June 21, 2001
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Brianna Caryll
COUNSEL OF RECORD:
For the
Appellant:
Name:
--
Firm:
--
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-487(IT)I
BETWEEN:
RAMIRO MORALES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on June 5, 2001 at Toronto,
Ontario, by
The Honourable D.G.H. Bowman
Associate Chief Judge
Appearances
For the
Appellant:
The Appellant himself
Counsel for the Respondent: Brianna
Caryll
JUDGMENT
It is
ordered that the appeals from assessments made under the
Income Tax Act for the 1997 and 1998 taxation years be
dismissed.
Signed at Montréal, Canada, this 21st day of June
2001.
A.C.J.
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