[OFFICIAL ENGLISH TRANSLATION]
Date: 20010123
Docket: 1999-1229(IT)I
BETWEEN:
ALBERT LAVALLÉE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Rendered orally on the bench
on January 25, 2000, at Québec, Quebec,
and subsequently amended for greater clarity)
Archambault, J.T.C.C.
[1] This is an appeal from an
assessment made by the Minister of National Revenue (the
Minister) for the 1990 taxation year. In computing Mr.
Lavallée's income, the Minister disallowed the deduction
of an amount of $10,860 as rental losses in respect of a
property located at 5865 Saint-Laurent Street, Apt. 404,
Lévis, Quebec (the Lévis property). The
losses are due to interest expenses and property taxes.
Facts
[2] At the beginning of the hearing,
Mr. Lavallée admitted subparagraphs 4(a), (b) and (c) of
the Reply to the Notice of Appeal, which are reproduced
below:
[TRANSLATION]
(a) the property was
never rented by the appellant;
(b) according to a
bank statement from the Royal Bank of Lévis, dated
November 14, 1989, the appellant's address is the address of the
property;
(c) according to the
representatives of the financial institutions with whom the
appellant dealt, the appellant's address is the address of the
property.
[3] The evidence revealed that Mr.
Lavallée was, at the time, an engineer with the Quebec
ministère des Transports. He was married and is the father
of eight children but during 1988 and 1989, he was involved in
divorce proceedings. Considering the legal costs incurred in
divorce proceedings, an amicable settlement (the
settlement) providing for the division of the family
assets was negotiated through the efforts of a notary. The
settlement was signed about October 25, 1989, and was retroactive
to October 1, 1989.
[4] During that time,
Mr. Lavallée owned three rental properties: a
sixteen-unit apartment building purchased in 1973 and sold in
January 1988, a five-unit apartment building purchased in 1966
and a parking lot. In addition, the Lavallée family owned
a convenience store that was primarily operated by Ms.
Lavallée with the assistance of her children.
Mr. Lavallée was also involved as the financial
backer.
[5] The Lévis property was
purchased by Mr. Lavallée in July or August 1988 with
the help of his daughter, Louise, who was or about to become a
realtor. Mr. Lavallée was more inclined to purchase a
smaller apartment but, on the recommendation of his daughter, who
thought it would be more advantageous, he purchased a more
spacious apartment. Although his words were somewhat vague,
Mr. Lavallée said he wanted this property to be part
of his daughter's assets one day.
[6] From the beginning, the
Lévis property was allegedly put on the market for sale or
rental. However, the evidence showed that, beginning in July or
August 1988 and up to the present, the property has never been
rented. After it was purchased, the property remained unoccupied
until October 1989. From then on, Mr. Lavallée
occupied it from time to time. The floors had not yet been
covered at the time. It was during this period that he negotiated
the settlement referred to above. For the 1989 taxation year, the
evidence shows that Mr. Lavallée incurred expenses of
$876.84. According to Exhibit A-1, Mr. Lavallée
occupied the Lévis property in 1990 during January,
February, April, May, July, August and September. Mr.
Lavallée said he had also lived in the home of a friend in
Lévis and in an apartment above the convenience store
belonging to his family.
[7] Beginning in 1991, the
Lévis property became Mr. Lavallée's principal
residence and he was still living there at the time of the
hearing. The evidence revealed that advertising expenses of
$112.23 were incurred in 1991 in respect of that property.
Analysis
[8] In order to be able to deduct his
rental expenses in respect of the Lévis property-which
amounted to $12,724.41 but $10,860 of which were disallowed
by the Minister[1]-the expenses must have been made
or incurred by the taxpayer for the purpose of gaining or
producing income from a business that must be an adventure or
concern in the nature of trade or made or incurred for the
purpose of gaining or producing income from the rental of the
property.
[9] In determining whether that is the
case, any capital gain that might be realized by Mr.
Lavallée on the disposition of that property must not,
according to subsection 9(3) of the Income Tax Act (the
Act), be taken into account. The expenses incurred in
relation to the Lévis property may be deducted if the
property was purchased in the context of an adventure or concern
in the nature of trade.
However, as I said in Stein v. The Queen,
96 DTC 1526, the expenses incurred in such
circumstances are deductible only in the year the property is
sold.
[10] It is important to remember that it is
Mr. Lavallée who had the burden of showing that he did not
use the Lévis property for his personal use and that he
was entitled to deduct the expenses he claimed.
[11] In my opinion, Mr. Lavallée did
not succeed in proving this in the case at bar. Some of the
evidence indicates that the property was held in the context of
an adventure or concern in the nature of trade. First of all,
there is the fact that his daughter was active in real estate and
seems to have played a fairly significant role in choosing the
property. There is also the fact that the property was put on the
market soon after it was purchased. As I said earlier, if this
property had been purchased in the context of an adventure or
concern in the nature of trade, some expenses would be
deductible, but only in the year of the sale.
[12] It is also possible that the
Lévis property was purchased for personal use. Although
Mr. Lavallée's daughter had her own residence, the
evidence showed that she might have been looking for another
residence because of some problems relating to the property she
already had. Moreover, there is, of course, the personal use of
the property at issue by Mr. Lavallée. According to his
bank statement from the Royal Bank of Lévis, dated
November 14, 1989, and according to the representatives of the
financial institutions with whom he dealt, the Lévis
property was his residence.
[13] However, regardless of whether it is
decided that the purchase of the property was made in the context
of an adventure or concern in the nature of trade or for personal
reasons instead, the evidence has not established that it was
purchased for the purpose of gaining or producing income
therefrom.
[14] The factors that support this
conclusion are the following. The Lévis property was never
rented. It remained unoccupied from the outset for a period of 14
or 15 months. The fact that the appellant went to France when he
still did not know whether the floors had been covered is an
important sign indicating his lack of interest in renting this
property. Subsequently, it was occupied intermittently by Mr.
Lavallée himself until his occupation became permanent in
1991.
[15] There is nothing in the actions of Mr.
Lavallée that reveals the conduct of a motivated landlord.
The only expenses that might relate to the rental of the
Lévis property are the advertising expenses, which, in my
opinion, relate more to the sale than to the rental. No
meaningful effort was made to find tenants. Furthermore, Mr.
Lavallée said that he did not have much interest in
finding such tenants in view of his intention to sell the
property.
[16] Therefore, for all these reasons, the
appeal of Mr. Lavallée is dismissed.
Signed at Ottawa, Canada, this 23d day of January 2000.
J.T.C.C.
Translation certified true
on this 26th day of September 2003.
Sophie Debbané, Revisor
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