Rashid v. The Queen, docket 1999-2185-IT-I (Informal Procedure)

Date: 20000502

Docket: 1999-2185-IT-I

BETWEEN:

RITA RASHID,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Margeson, J.T.C.C.

[1]            In computing income for the 1994, 1995 and 1996 taxation years, the Appellant deducted rental losses with respect to a property located at 184 Crocus Drive and a property located at 623 Daintry Crescent in Cobourg, Ontario. The Minister reassessed the Appellant for the years 1994, 1995 and 1996 on the grounds that the Appellant had no reasonable expectation of profit from the rental of the properties during the years in question, that the expenses incurred were not for the purpose of gaining or producing income from a business or property but were personal or living expenses.

[2]            The Minister also argued that the Appellant rented part of the Crocus property to help defray the cost of maintaining their principal residence.

[3]            During the course of the trial counsel for the Appellant withdrew the appeal with respect to the property at 184 Crocus Drive. Consequently, the appeal in that regard is dismissed and the Minister's assessment is confirmed.

Evidence

[4]            Rita Rashid testified that in the year 1988 she lived at 184 Crocus Drive. In June of 1989 they bought the Cobourg property at 623 Daintry Crescent. The Agreement of Purchase and Sale was introduced by consent, as Exhibit A-1. The property was purchased by herself and her husband. Exhibit A-2 was a Tenancy Agreement for the same property. This was apparently in effect for the years 1992 to 1996.

[5]            A statement of adjustments for the property was introduced as Exhibit A-3 which showed a purchase price of $199,990.00. However, the witness indicated that there were extras of $30,765.00 and legal fees of $2,509.90 for a total of $233,264.00.

[6]            A mortgage was placed against the property according to this witness in the amount of $114,111.52 and the Appellants paid the balance of $119,152.00 themselves. It was her position that they had over 51% equity in the property. She said that she bought it because she was going to be transferred to that area. Then the government changed its mind and they did not move. If they had moved, she would have had to go to work at Bowmanville which was 20 minutes away from Cobourg. However, she remained at the head office and was living at Cobourg while working in Toronto.

[7]            She travelled for three and a half years but by September of 1993 "it got too much for her" and they decided to move back to 184 Crocus Drive and to rent out 623 Daintry Crescent. They believed that they could make a profit after three to four years. They had never rented the Daintry Crescent property before that time. She lived there with her husband and children. She denied the allegation in paragraph 6(c) of the Reply that she and her husband rented out part of the Daintry property while they were occupying the other as a principal residence. Further, she said that she never lived in the Cobourg property after August or September 1993 when they moved back to 184 Crocus Drive.

[8]            Her husband did a lot of looking in an attempt to obtain tenants. He made telephone calls. She did not tell the auditor that she rented part of the Cobourg property. They met with the auditor but he did not believe what she was showing him.

[9]            She identified Exhibit A-4, admitted by consent, which was a Statement of Real Estate Income for the property at 623 Daintry Crescent, Cobourg, for the period of January 1 to December 31, 1997; January 1 to December 31, 1998 and January 1 to December 31, 1999. In the year 1997 there was a loss of $3,468.11; in the year 1998 the statement showed a small profit of $126.39 and in the year 1999 the statement showed a small profit of $31.99. She also identified Exhibits A-5, A-6 and A-7 which were income tax returns for the years 1997, 1998 and 1999.

[10]          She pointed out that in Exhibit A-3 the interest rate on the mortgage was 11.75% for the year 1990 and Exhibit A-8 showed the mortgage rate being reduced to 6.750% for the year 1999. The rental for the property is now $1,100.00 per month whereas it was originally $900.00 a month. Further, they have more reliable tenants now than they had in the past.

[11]          In cross-examination she admitted that in the years 1994, 1995 and 1996 her employment income was over $70,000.00. She did not know that she changed tax brackets after earning income in excess of $60,000.00. Between 1990 and 1993 she lived in Cobourg. Unemployment was high in that area but they concluded that it was better to lease the Cobourg property because of the cost. They also had bad tenants in the Crocus Drive property. She denied that they moved for personal reasons.

[12]          Exhibit R-2 was introduced by consent. This was a Rental Questionnaire which this witness signed but she said that it was completed by her husband. In question 2, there was an indication that the Cobourg property cost $250,000.00. She said that this was a mistake. Likewise, she said that the answer to question 6 was wrong. Her husband did not put the correct figure in. They did not have the papers at the time when they completed the questionnaire. Question 6 indicated that they assumed the first mortgage of $125,000.00 and had a second mortgage of $56,000.00.

[13]          Her husband became unemployed in 1992 or 1993. He started working again in 1994 or 1995. The employment of her husband was not the main reason that they decided to move back to 184 Crocus Drive. There were a number of reasons.

[14]          When they bought the two properties it was not speculation. They had planned to rent the property and make a profit from it. She did not buy the Cobourg property because it was bigger or because there was a boom in the market. She did not move back to the Crocus property because the bigger property was too expensive.

[15]          Again with respect to the alleged mortgage of $56,000.00 as referred to in the questionnaire, there was no second mortgage on it. She again agreed that she had signed the questionnaire but she did not know why that figure was on the questionnaire. Her husband filled it out. If there was a $56,000.00 second mortgage on the property they would only have 29% equity in it.

[16]          She did not know whether the property was rented for the whole year of 1995. She agreed that in the year 1996 the statement only showed rental of $9,450.00 for nine months. She was asked what had happened that it was not rented for the whole year and she said that they had tenants coming and going. The tenants did not pay the rent. However, she insisted that when the property was purchased she intended to rent it. During the years 1994, 1995 and 1996 only one tenant lived there at any one time.

[17]          They never made the Cobourg property into two separate apartments even though it contained 3000 sq. ft. She was asked why they rented this big place for such a low rent and she said that it was hard to get tenants in Cobourg. They never had any complaints about the size of the house. It was never an option to sell the Cobourg property. They are making a profit now. She admitted that no capital cost allowance was taken for the years in issue.

[18]          It was suggested to her that if one used capital cost allowance in the future there would be no profit for a long period of time. She said that she did not know.

[19]          She was asked why she claimed 90% of the losses when the property was used 50/50 by herself and her husband. She said that she has a paper for the property but she gave no explanation as to the basis for her claim of 90%.

[20]          In re-direct she said that the figures in Exhibit R-3 were the same as in the income tax return. Again the said that they did not have tenants for the full year at the beginning. Now they have a long-term tenant there and who has been there for 3 ½ years.

[21]          In response to a question from the Court she said that there were disallowed losses before 1994.

[22]          She admitted that in order to make a profit there would have to be a substantial change in the operation. This took place when they obtained a substantial reduction in the interest rate according to her.

[23]          Dean Rashid was the husband of the Appellant. He had completed Exhibit R-2 with respect to the two properties and his wife signed it. In question No. 8 he agreed that the letter (a) referred to the Cobourg property and that the rent is now higher than what was shown there. With respect to the answers given to question No. 2, he did not have all of his documents available when he completed the questionnaire. He put down the figures as he believed that they were correct. These were estimates only. The more detailed figures would be from the Purchase and Sale Agreement. The price of $233,264.00 is the correct price.

[24]          With respect to question No. 6 he admitted that it referred to a first mortgage of $125,000.00 and a second mortgage of $56,000.00 and that it referred to the Cobourg property. The figures set out in Exhibit R-3 were taken from his wife's income tax return for the years 1994, 1995 and 1996.

[25]          He accepted the figures set out in Exhibit R-3 except for the maintenance and repairs items for the years 1995 and 1996.

[26]          He identified Exhibit A-9, which was admitted by consent. These were the expenses relative to the Cobourg property for the year 1996. He prepared it and the work referred to therein was work done on the Cobourg property. There was nothing unusual about the expenses and the amount of $2,760.00 was expended for painting. He also replaced a stove and fridge for $632.50.

[27]          Exhibit A-10 was introduced through this witness and placed into evidence subject to weight and proof. He referred to the repair cost for the Cobourg property in 1995. He indicated that the rental income was indicated as $9,400.00 although Exhibit R-3 showed $8,500.00. The mortgage with Housefold Finance Corporation showed an interest rate of 8.950% in 1995. The initial mortgage was over 11%. Now the mortgage rate is 6.5%. In the years 1995 to 1996 they paid down 5% on the principle.

[28]          Exhibit A-11 was also introduced through this witness. It showed an expense for an advertisement for rental of this property for the years 1992 and 1993.

[29]          In 1991 he was laid off. He was living in Cobourg. His next job started in the year 1996. He could not get a job in Cobourg. When he moved to Cobourg he was still employed.

[30]          He was asked why they would rent Cobourg? He said that they had two properties. They looked at both and projected that they would make a profit by renting Cobourg. They started making a profit in 1998 and will do so from now on.

[31]          In cross-examination he was referred to Exhibit R-2 question No. 2 which referred to the figure of $250,000.00. That was just a rounded figure according to him. He admitted that question No. 6, shown as small (a) does not pertain to Cobourg. It was pointed out to him that he had referred to (a) as being the Cobourg property throughout the questionnaire. Now he said that it did not refer to the Cobourg property. When he was dealing with Revenue Canada he was in a rush, he was under stress. Question No. 6 referred to the Crocus property. There was no second mortgage on the Cobourg property but only a first mortgage of $114,000.00.

[32]          Exhibit A-10, for the year 1995 referable to the Crocus property, was prepared before he filed his income tax return. He could not say what the figure of $833.75 represented on page 3. He had no receipts.

[33]          He referred to Exhibit A-9, the statement of expenses for the year 1996 regarding the Cobourg property and he said that the sum of $632.50 represented the cost of a second hand refrigerator. He was referred to the figure of $2,760.00, allegedly paid for the cost of painting, dated March 3, 1996, and he said that the person who gave him the receipt did not have a business name but the receipts were not fake.

[34]          There was a loss of $3,468.11 in 1997, a profit of $126.39 in 1998, and a profit of $31.99 in 1999. He admitted that no capital cost allowance was taken in any year. He reported rental losses for the years 1989 to 1993.

[35]          They moved back to the property in 1993 due to many factors. They did a calculation and concluded that the rental of the Cobourg property would be profitable. Between 1991 and 1996 his wife was earning $70,000.00 per year. It would be hard to stay in the Cobourg property.

[36]          In re-direct, Exhibit A-12 was admitted for identification purposes, subject to weight and proof. This was a receipt for the $833.25 for painting claimed in Exhibit A-10.

[37]          In 1993 their thought process, when they decided to move back to the Crocus property, was that they should rent the Cobourg property having concluded that they would make a profit in two to three years from it. In Toronto he was able to get a job. The tenants at the Crocus property were not good tenants.

Argument on behalf of the Appellant

[38]          Counsel for the Appellant submitted that the sole question in this appeal was whether or not there was a reasonable expectation of profit in the years in question. He referred to the case of Moldowan v. The Queen, [1978] 1 S.C.R. 480 indicating that the test was an objective one according to that case and that of Tonn et al. v. Minister of National Revenue, (1995) 191 N.R. 182. With respect to whether or not there was a personal element as set out in Tonn, supra, he argued that the Appellants had a 51% equity in the property. They did not rent part of it while living there and later on rented the whole property. It was rented to arm's length parties and the rental increase after 1996 was reasonable.

[39]          This was not a 100% financed property but it was only financed to the extent of 49%. It was not under-capitalized. The taxpayer kept up the property and soon was able to attract good tenants. She acted as a reasonable landlord. She kept control of the costs, has paid down the mortgage and has reduced the interest rate twice.

[40]          He admitted that there was an issue as to why the property was purchased. The Appellant said that she had a personal residence which she moved out of because of her job. At the end of the day, it was a predominantly business reason to move out of the Cobourg property and to move back to the Crocus property. The Court should look at other factors not mentioned in Moldowan, supra. The Appellant's own idea was that it would be better for her travel situation if she moved back to the Crocus property. This is not a strictly personal reason.

[41]          Counsel presented a thorough review of some of the appropriate cases on this subject and some particularly referenced portions of those judgments.

[42]          Counsel indicated that in Mastri v. Canada, [1998] 1 F.C. 66 and [1997] F.C.J. No. 880, Court File Nos. A-650-96 and A-651-96 the Court indicated that Tonn, supra, simply affirms the common sense understanding that it is not the place of the Courts to second guess the business acumen of a taxpayer whose commercial venture turns out to be less profitable than anticipated. In the case at bar, counsel said that there was evidence that the Appellant had taken into consideration whether or not the property could be rented profitably.

[43]          In Patricia Watt v. The Queen, A-332-95, September 24, 1997, the Federal Court of Appeal indicated that a profit motive can co-exist with a personal element and that there should be a start-up period allowed for the Appellant's business. As in Zahid Mohammad v. The Queen, (F.C.A.), A-652-96, July 28, 1997, the reasonableness of the expense in the circumstances is not to be assessed by reference to whether any one expense, or collective expenses, are considered to be disproportionate to revenues. The doctrine of reasonable expectation of profit and the concept of reasonable expenses under section 67 of the Act must be applied independently of one another.

[44]          In Tarantino v. Canada, [1999] T.C.J. No. 928, Court File Nos. 98-1215(IT)I, 98-1216(IT)I, dated November 25, 1999, Beaubier T.C.J. found that the problem that existed in that case was:

...an unpredictable force beyond their control and that the rents they achieved, when they finally could complete their plans, constitute reasonable rents which could have occurred earlier, but for the Eaton's catastrophe which adversely affected them.

Counsel did not point out what equivalent unpredictable force beyond the control of the Appellants occurred in the case at bar.

[45]          Counsel also relied upon Costello v. Canada, [1998] T.C.J. No. 16, Court File No. 97-407(IT)I, dated January 8, 1998, where the Court found that in spite of the Minister's disallowance of the expenses on the basis that there was no reasonable expectation of profit and where the Minister conducted no analysis of the losses in question, even though some of them may have been of a capital nature, the Court allowed the deductions to be made.

[46]          Counsel also referred to Aziz v. Canada, [2000] T.C.J. No. 57, Court File No. 98-2428(IT)G which concluded that, "generally speaking, no single factor is determinative. All must be taken into account and assigned a proper importance in the context of the case as a whole. In some cases one factor may outweigh all others and in others, that factor may be of relatively smaller importance." The Court in that case referred to David Kaye v. The Queen, 98 DTC 1659 where the Court preferred to put the matter on the basis "whether there is or is not truly a business?"

[47]          In the Aziz case, supra, the Court found that the disallowance was reasonable and the Appellant had not shown otherwise.

[48]          Counsel did not believe that the facts in the case at bar were similar to those in Goldstein v. Canada, [1997] T.C.J. No. 275, DRS 97-09336, Court File No. 96-1676(IT)I, dated April 4, 1997 where Taylor T.C.J. found that the expenses were those of the taxpayer's personal residence. The case at bar is different from that of Bell v. Canada, [2000] T.C.J. No. 36, Court File No. 98-2804(IT)I, dated January 24, 2000 where the Court found that there was no financial plan in place, where the expenses had exceeded the profits on sales continually and where the taxpayer should have been alerted that there was a fatal flaw in his operation. Similarly, the case of Sherry v. Canada, [1999] T.C.J. No. 257, Court File No. 97-2820(IT)G, dated May 10, 1999 is inapplicable to the facts in the present case as disclosed by the evidence.

[49]          The case at bar can be distinguished from Alidor Bokuluta and Mary-Jeanne Bokuluta v. The Queen, Tax Court of Canada, April 15, 1997, (Court File Nos. 94-1371(IT)G and 94-1372(IT)G) where the Court found that from the outset all of the rental business endeavours were all under-capitalized. The Appellant's attempts to address rental losses were ineffectual because of the lack of flexibility of the Appellant to make adjustments and because of the fact that it involved a non-arm's length transaction.

[50]          However, in the case at bar the Appellant took the required steps to run it as a business. The personal element was slight, there was a reasonable expectation of profit. There is a profit now and there will be in the future. The appeal should be allowed with costs.

Argument on behalf of the Respondent

[51]          Counsel for the Respondent argued that there was a strong personal element involved in this case. The Crocus property was a smaller property. The price of properties in general was skyrocketing. The Cobourg property was much larger and they bought it for speculation purposes. They were not interested in making this a rental property. In 1992 the husband lost his job and the wife had the only income of about $70,000.00. They could not manage with the new larger property so they moved back to the smaller property which was 184 Crocus Drive.

[52]          When the Appellant moved to the bigger property it was for speculative purposes and the move back to the Crocus property was for personal reasons. They did not decide to rent the Cobourg property for business reasons.

[53]          In 1993 the real estate market was down. The Appellant and her husband did not want to sell the Cobourg property but wanted to keep it until such a time as the market value had increased. It was a large property, hard to rent, there were not many tenants available in that area and a reasonable business person would not have purchased it for business purposes.

[54]          The Appellant and her husband did not subdivide the larger property in order to increase the rental income available because they wanted to keep this larger house for investment purposes.

[55]          The evidence of the Appellant and her husband was not credible with respect to the second mortgage on the Cobourg property. If one looks at the questionnaire one can see that the letters (a) and (b) in reference to the different properties are not confusing. There was a second mortgage of $56,000.00 on the Cobourg property according to the questionnaire.

[56]          If the Appellant claimed the deduction that she is seeking here she would be taken out of the higher income tax bracket. This was a distinct advantage to her. There was a strong personal element relative to the property in question.

[57]          In any event the statement that they had a reasonable expectation of profit is suspicious because they did not even consider capital cost allowance when calculating the profit or loss for the years in question. In the year 1998 the net rental income was only $126.39. In the year 1999 the net rental income was only $31.99. However, in neither year did the Appellant claim capital cost allowance. Consequently, any profit that there was, even if the figures of the Appellant are accepted, was minuscule.

[58]          The facts in this case bring it squarely within the parameters of the facts in Moldowan, supra. Under Tonn, supra, there was a personal element and Moldowan has to be considered in that light. Capital cost allowance is a significant factor and any reasonable party could not have concluded that there was a reasonable expectation of profit on these facts.

[59]          Counsel referred to the case of Brian J. Stewart and The Queen, dated February 18, 2000, Docket: A-337-98, particularly at page 3 where the Federal Court of Appeal held that Moldowan should not be restricted to cases where the property has an element of personal use. That Court reiterated that:

The Moldowan principle is that in order to have a source of income, the taxpayer must have a profit or a reasonable expectation of profit. No subsequent Supreme Court authority has altered the Moldowan principle.

The Court went on to say:

Where a loss from a business or property is claimed, it is necessary to question whether there is a business or property that is a source of income. When someone owns real property that yields some rent but never a profit over an intended holding period, the question arises as to whether the property was acquired or is being held for some objective other than profit. The objective may be found to be personal use in some form or another, but it might be anything other than an intention to derive a profit. In such a case the losses cannot be deducted because the property is not a source of income.

That principle should be applied in this case and when it is applied, the Court should find that there was no reasonable expectation of profit.

[60]          Counsel argued that even today the Appellant is not trying to keep it as a business because of the fact that she has not considered capital cost allowance.

[61]          However, if the Court should find that there was a reasonable expectation of profit, then the Appellant should only be allowed to claim 50% of the loss since the properties were obviously owned by her and her husband.

[62]          Further, in the years 1995 and 1996 the maintenance and repairs items should not be allowed because of the lack of sufficient evidence about these expenses.

[63]          In reply, counsel for the Appellant said that there was no evidence of value of the real estate market introduced into Court. Further, only the expenses for 1996 were not fairly established and this related only to the amount of $614.40.

[64]          Counsel agreed that there should be a 50/50 split with respect to the expenses between the Appellant and her husband.

Analysis and Decision

[65]          If there ever was a question in anyone's mind that Moldowan, supra, and the principles set out therein are still alive and well, and there is no question in this Court's mind about that, then surely that question has been put to rest by the recent decision of the Federal Court of Appeal in Brian J. Stewart, supra.

[66]          As counsel for the Respondent rightly pointed out in reference to that case, the Court stated:

It is argued by the appellant that Moldowan has no application unless the particular activity or property has an element of personal use. We do not think Moldowan is necessarily so limited. The Moldowan principle is that in order to have a source of income, the taxpayer must have a profit or a reasonable expectation or profit. No subsequent Supreme Court authority has altered the Moldowan principle.

This Court has always considered that the main thrust of the decision in Tonn, supra, was to indicate that in cases where a personal element was involved in the enterprise then the Court must be cautious when considering the principles set out in Moldowan, supra, and must interpret the facts more strictly in relation to those principles. The finding of a personal element does not answer the question which arises in such cases but is only one of the factors which must be looked at objectively in determining whether or not there was a source of income, thus a business, which would permit the deduction of the expenses claimed.

[67]          It is true that some may find it more palatable to ask a different question, that is, instead of asking the question, was there a reasonable expectation of profit, one might ask the question "Was this or was this not truly a business?", as in Kaye, supra, and as referred to by Bowman T.C.J. in Aziz, supra.

One cannot view the reasonableness of the expectation of profit in isolation. One must ask "Would a reasonable person, looking at a particular activity and applying ordinary standards of commercial common sense, say ‘yes, this is a business'?" In answering this question the hypothetical reasonable person would look at such things as capitalization, knowledge of the participant and time spent. He or she would also consider whether the person claiming to be in business has gone about it in an orderly, businesslike way and in the way that a business person would normally be expected to do.

. . . . .

Generally speaking, no single factor is determinative. All must be taken into account and assigned their proper importance in the context of the case as a whole. In some cases one factor may outweigh all others and in others that factor may be of relatively smaller importance.

In the Aziz case, supra, Judge Bowman went on to find that the factual situation as displayed by the evidence militated against the assertion that there was a truly commercial activity. Some of the factors that were referred to are factors which are important in the case at bar such as the fact that the mortgage interest payments exceeded the gross rents. Other factors are also similar. As Bowman T.C.J. pointed out:

Any one of those factors by itself might not have justified the disallowance of the losses. Cumulatively they pose an insurmountable obstacle to the appellant's showing that the assessments are wrong.

[68]          Upon review of the relevant cases on this issue it can be seen that the question may be put in various ways but at the end of the day, in order for the expenses to be deductible, the Court must be satisfied that it would have been reasonable for the taxpayer to conclude that there was truly a business in place, that there was truly a reasonable possibility of making a profit after considering the factors as referred to in Moldowan and applying those factors to the evidence presented in any particular case.

[69]          In the case at bar the Court finds that there was a personal element involved with respect to the property in question. This property was originally purchased for the purposes of providing living quarters for the Appellant and her husband. The Court is not satisfied that the real purpose in purchasing this property was business related and indeed the Court is satisfied that any business purpose that might have been contemplated came about after the Appellant and her husband had decided to buy the property and the decision to rent the property only came about when they realized that the Appellant was not going to be transferred for work purposes from the Toronto area.

[70]          Further, the Court is satisfied that the decision to rent the property was not made solely as a business decision but it was made because it was more convenient for the Appellant and her husband to move back to the Crocus property. At the Crocus property the tenants that were there were not looking after the place, it was more difficult to obtain tenants in the Cobourg area and the Court is satisfied on the basis of the evidence that the Appellant and her husband had concluded that it would be much more advantageous to hold the Cobourg property as an investment rather than sell it at that time. When they decided to rent the property they did not do so because they had concluded that they could make a profit from renting it. Any intention to make a profit was, at best, secondary.

[71]          If the Appellant had reasonably considered all of the factors that would be necessary to make this rental property profitable, they would have concluded that a profit on an ongoing basis would not be possible unless something was done to obtain considerably more rent for the property such as changing it into a multiple residence property. This would have enabled them to obtain more rental for it. It might have been possible for the Appellant to show that even after the costs of the renovations were taken into account that over a reasonable period of time sufficient income might have been obtained from the property to make it profitable. However, the Appellant herself said that no consideration was given to changing this property into a multiple residence property.

[72]          The Court concludes that the Appellant obviously considered that it was more reasonable, from an investment point of view, to keep this property with a large residence upon it as a single family unit and to wait until the time would come when it might be sold at an increased value.

[73]          The only evidence given in support of the position of the Appellant that there was a reasonable expectation of profit from the rental of this property and that that was one of the factors that they had in mind when they purchased it, was the evidence of the Appellant and her husband. However, neither witness produced any evidence by way of a plan showing a reasonable projection of income and a reasonable projection of expenses that would enable the Court to conclude whether or not there was a reasonable expectation of profit.

[74]          The facts in the case at bar do not establish this as a case where the Appellant could reasonably be expected to have made a profit during the years in question but because of some intervening event, which was unexpected, the profit was not realized. This is not one of those "but for" cases in which the facts produced at trial give an explanation as to why a profit was not made in the years in question, and absent such unexpected events, one could reasonably expect that things would be different in the future.

[75]          Neither is this a case where the taxpayer could conclude that after a reasonable start-up period there would be a profit. This is not a case where the taxpayer was prevented from obtaining a profit in the years in question because he was preparing the property as a rental unit and that once the start-up expenses were accounted for there would be a clear path to a profit in the future.

[76]          In response to a question directed to the Appellant by the Court she admitted that she took no steps in the years in question which would have turned the financial picture around. Indeed, the only steps taken to improve the financial situation was to reduce the mortgage. But even when this was done, according to the Appellant's own figures there was not an excess of income over expenses until the year 1998 when total income exceeded expenses by only $126.39 and in the year 1999 the total income exceeded expenses by the amount of $31.99. In those years the Appellant did not take into account capital cost allowance, which is one of the factors referred to in Moldowan, supra.

[77] There are cases where it would appear obvious on the face of the matter that one could not reasonably expect to have a profit from this enterprise based upon the nature and the extent of the expenses and the extent of the income that could be realized from the property. The Court is satisfied that the facts in the case at bar place this property in this category. This can be seen from the figures set out in Exhibit R-3 which show that during the years in question the gross rent was substantially less than the interest on the mortgage alone and it was not until the year 1997 that the amount of interest was less than the amount of gross income. Again, even in the years 1997, 1998 and 1999 the Appellant did not take into account capital cost allowance.

[78]          Counsel for the Respondent argued that the evidence of the Appellant and her husband was contradictory and not credible. The Court is satisfied that some of the discrepancies raised as a result of the cross-examination have not been satisfactorily explained.

[79]          On the whole of the evidence the Court is not satisfied that the Appellant has established that there was a reasonable expectation of profit during the years in question from the rental of this property. In the event that the Court had found otherwise, it would have concluded that the Appellant would have only been entitled to 50% of the deductions but in light of the Court's finding this is a moot point.

[80]          The appeal is dismissed and the Minister's assessment is confirmed.

Signed at Ottawa, Canada, this 2^nd day of May 2000

"T.E. Margeson"

J.T.C.C.