Girard v. The Queen, docket 98-2287-IT-I (Informal Procedure)

Date: 19991020

Docket: 98-2287-IT-I

BETWEEN :

SYLVIE GIRARD,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Lamarre Proulx, J.T.C.C.

[1]The appellant is appealing from assessments by the Minister of National Revenue (the "Minister") for the 1994 and 1995 taxation years.

[2]The point at issue is whether the appellant carried on a rental business during the years in question.

[3]The facts on which the Minister relied in making his reassessments are set out in paragraph 10 of the Reply to the Notice of Appeal (the "Reply") as follows:

[TRANSLATION]

(a) the property known as 170 Rue de Bernières, Apt. 101, located in Québec, was purchased by the appellant in 1990;

(b) the property is a condominium;

(c) the condominium was purchased to be used as a family residence;

(d) in October 1991, the appellant was appointed cultural attaché in Paris for the Government of Quebec's Ministère des Affaires internationales, de l'Immigration et des Communautés culturelles;

(e) the condominium was rented for the period from January 1992 to August 1994;

(f) the appellant returned to Quebec in February 1995 and has lived in the condominium since March 1995;

(g) in 1992, the appellant allegedly undertook major repairs to her condominium and borrowed a large amount of money on a line of credit in order to do so;

(h) in 1994, the appellant made a double claim for interest paid, once in the statement of real estate rentals and again on line 222 of her return of income;

(i) in 1995, the appellant claimed interest paid on line 221 of her return of income;

(j) in 1991, 1992, 1993 and 1994, the appellant's property incurred the following annual losses:

Taxation year 1991 1992 1993 1994

Losses claimed $2,406 $8,030 $1,754 $6,636

(k) the appellant had no reasonable hope of earning a profit from the property known as 170 Rue de Bernières, Apt. 101, located in Québec, during the 1994 taxation year;

(l) the rental expenses claimed for the 1994 taxation year in respect of the property known as 170 Rue de Bernières, Apt. 101, located in Québec, constituted personal or living expenses of the appellant and were not incurred by the appellant for the purpose of earning income from a property or business;

(m) the interest paid by the appellant and claimed as carrying charges in computing her income for the 1994 and 1995 taxation years constituted personal or living expenses of the appellant and were not incurred for the purpose of earning income from a property or business.

[4]The appellant testified, and admitted subparagraphs 10(a) to (j) of the Reply.

[5]As to subparagraph 10(h) of the Reply, she stated that her double claim for the amount of $7,593.81 was made by mistake.

[6]As regards subparagraph 10(i) of the Reply, the appellant explained that she had claimed the total amount of interest paid that year, even though she had occupied the condominium starting in March 1995, because she had misinterpreted an answer that a Revenue Canada official had given her concerning the modalities respecting possible rental deductions for 1991.

[7]The appellant purchased the property in 1990 for $92,000, obtaining a $63,000 mortgage loan. The balance of the purchase price was financed by means of a line of credit. The following year, she consolidated these loans in a mortgage loan of approximately $82,000. She undertook a major renovation project to change the half-below-grade property to a ground-level property. She changed the windows and did other work. She invested $25,000 in repairs. This amount was also financed by means of a mortgage loan. She explained that she had made this purchase and done this work in order to resell the property at a profit. She had previously purchased a property on Rue Cartier which she had resold for twice the purchase price.

[8]When she obtained the position in Paris in October 1991, she asked her father, who had previously worked in the real estate business, to rent out her property. She also asked a real estate agent to do the same. The appellant herself put up posters at various locations which she thought to be good. She testified that her intent at the outset had been to rent her property furnished for $1,400 a month. However, it was leased unfurnished for $900 a month from January 1992 until June 1994. Although August 1994 is referred to in subparagraph 10(e) of the Reply, it was in fact June 1994.

[9]While subparagraph 10(g) of the Reply was admitted, except as regards the adverb "allegedly", it is doubtful that it is correct as regards the year because, by 1992, the appellant had been in Paris since October 1991. Logically, therefore, the work must have been done in 1990 and 1991.

[10]In July 1994, she put the property up for sale or rent. Exhibit A-1 is the counter-offer of $145,000 which the appellant made on July 20, 1994. The appellant left Paris in early March 1995.

[11]Exhibit A-2 is the statement of real estate rentals for 1992. The gross rental income indicated is $10,800. Total expenses shown are $18,830 incurred in particular for maintenance and repairs ($5,746) and interest ($9,463). The net loss is $8,030.

[12]Exhibit A-3 is the statement of real estate rentals for 1993 showing gross rental income of $10,800 and total expenses of $12,554.35, incurred in particular for interest ($5,835.21). The net loss is $1,754.35.

[13]Exhibit I-1 is the appellant's return of income for 1994. As may be seen from the statement of real estate rentals appended thereto, gross rental income was $5,400 and total expenses $12,036.80. Interest expenses alone amounted to $7,593.

[14]Exhibit I-2 is the appellant's return of income for 1995, which includes the moving expenses claim form. The new address indicated is 170 Rue de Bernières, Apt. 101, which is the address of the property in question. The date of the move was March 1, 1995. No statement of real estate rentals is included with this return.

[15]Counsel for the appellant would have liked to have a real estate agent testify as an expert regarding the rent that the property could have brought in. Counsel for the respondent objected on the ground that the expert's report had not been filed at the Registry and served on the other party not less than 10 days before the commencement of the hearing as required by section 7 of the Tax Court of Canada Rules (Informal Procedure) and on the ground that the report was immaterial. What is material is not what hypothetically might have been done (higher rent, lower interest), but what was in fact done. I therefore sustained the objection on these two grounds.

Analysis and Conclusion

[16] I refer to Dickson J.'s remarks in the Supreme Court of Canada's decision in Moldowan v. The Queen, [1978] 1 S.C.R. 480, at pages 485 and 486:

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking . . . .

(My emphasis.)

[17]I refer also to Linden J.A.'s comments in the Federal Court of Appeal's decision in Tonn, supra, at pages 102 and 103-4:

The primary use of Moldowan as an objective test, therefore, is the prevention of inappropriate reductions in tax; it is not intended as a vehicle for the wholesale judicial second-guessing of business judgments. A note of caution must be sounded for instances where the test is applied to commercial operations. Errors in business judgment, unless the Act stipulates otherwise, do not prohibit one from claiming deductions for losses arising from those errors. . . .

. . . I otherwise agree that the Moldowan test should be applied sparingly where a taxpayer's "business judgment" is involved, where no personal element is in evidence, and where the extent of the deductions claimed are not on their face questionable. However, where circumstances suggest that a personal or other-than-business motivation existed, or where the expectation of profit was so unreasonable as to raise a suspicion, the taxpayer will be called upon to justify objectively that the operation was in fact a business. Suspicious circumstances, therefore, will more often lead to closer scrutiny than those that are in no way suspect.

[18]Based on the evidence in this case, I am of the opinion that what is involved is not the appellant's business judgment, but rather circumstances suggesting that a personal or other-than-business motivation existed. This is not necessarily fatal, but the Court must be sure that the normal characteristics of a business exist in order to allow the appeal.

[19]Evidence was adduced by the appellant that the property in question was not purchased for rental purposes but to be lived in by the appellant and eventually resold at a profit. The repairs were made with that in mind. Reselling at a profit is a separate undertaking from a rental operation and the fact that a person purchases a property for the purpose of reselling it at a profit does not mean that that person is operating a rental business at a profit pending the sale.

[20]It should be noted that the Minister allowed the appellant a period of three years with respect to her rental activities. In 1991, 1992 and 1993, the Minister allowed losses of $2,406, $8,030 and $1,754 respectively.

[21]The financial structure of the property allowed for no profit. As capitalized, the property was incapable of showing a profit in the years in issue, as may be seen from the facts stated in paragraphs 11, 12 and 13 of these reasons. It is moreover surprising to observe that interest expenses increased by nearly $2,000 from 1993 to 1994, as indicated in paragraphs 12 and 13 of these reasons. In addition, the rental operation itself was virtually non-existent during the years in issue. The property was rented for only six months in 1994 and not at all in 1995.

[22]Analysis of the facts can lead to only one conclusion: in 1994, the appellant's limited rental operation did not constitute a rental business having a reasonable expectation of profit, and there was no rental business in 1995.

[23]The appeal is accordingly dismissed.

Signed at Ottawa, Canada, this 20th day of October 1999.

"Louise Lamarre Proulx"

J.T.C.C.

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