Shandala v. The Queen, docket 98-2065-IT-G

Date: 20000606

Docket: 98-2065-IT-G

BETWEEN:

FREDA SHANDALA,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Teskey, J.T.C.C.

[1] The Appellant appeals her reassessment of income tax for the years 1991, 1992, 1993, 1994 and 1995.

Issues

[2] The issues are whether the Appellant is entitled to deduct rental losses, a terminal loss and a capital loss as claimed. The Appellant's position is that her principal residence was converted to a rental business on July 1, 1993.

Facts

[3] At the commencement of the hearing, the parties submitted a Partial Agreed Statement of Facts containing 12 paragraphs, which read:

1. The Appellant is an individual resident in Canada.

2. The Appellant was an owner of a property located at 4080 Hall Road, Binbrook, Ontario. The property consisted of a 94.75 acre parcel of land and was purchased by the Appellant as vacant land on July 14, 1989. Title to the property was held in the names of the Appellant and her husband jointly.

3. The property was purchased by the Appellant with the intent of using the farm to grow mushrooms for resale and other farming purpose, the Appellant applied to severe the property into two parcels and a portion of the land was being leased to a farmer (the original Vendor to the Appellant).

4. The severance applications were denied.

5. A house had been built on the property in the fall, winter and spring of 1989 and 1990 respectively. The Appellant and her husband resided in the home from the spring of 1990 until July of 1992.

6. A portion of the property was continuously rented out throughout the ownership of the Appellant and maintained for agricultural purposes.

7. When the Appellant and her husband realized the mushroom business was not going to occur, they attempted to sell the property and, in fact, did sell the property in July of 1992 pursuant to a Long Form Agreement of Purchase and Sale.

8. The property was purchased in 1989 for $175,000 and was sold in July 1992 for $600,000.

9. The Purchaser, pursuant to the Long Form Agreement of Purchase and Sale defaulted and the Appellant and her husband repossessed the farm (sometime between May and July of 1993).

10. The Appellant and her husband sold the property in May of 1994 for $316,000.

11. The Appellant has claimed the following losses in respect of the 1994 taxation year:

Rental Loss $ 3,131.00

Terminal Loss $ 85,206.00 (home)

Capital Loss $ 42,015.00 (land)

12. The Appellant has carried forward and back those claimed losses for the taxation years 1991, 1992, 1993 and 1995.

[4] Only the Appellant and her husband, the co-owner of the property gave evidence.

[5] No explanation was given why John Baranyi, the proprietor of Homefinders was not called as a witness to help establish what the market value rental of the house would be in July of 1993 or to confirm the house was listed with him for rental. I therefore draw the conclusion that his testimony would have been detrimental to the Appellant's position

[6] The house was never rented during the period of July 1, 1993 to December 31, 1993. The Appellant and her husband both said that as of July 1, 1993, their intention was to rent the property as a business for $2,000 a month with the tenant paying all utilities.

[7] Without evidence from a qualified appraiser as to what a reasonable amount the house could have been rented for on the open market, I am left to speculate if $2,000 a month was the fair market value of the rental. However, since the house was never rented and no written offers to rent were produced, I conclude that the market rental value was considerably lower than $2,000 a month. I do not accept either the Appellant's or her husband's testimony on this point without acceptable appraisal evidence to substantiate their testimony.

[8] The Appellant used as her total adjusted cost base as of July 1, 1994 the sale price of $600,000 in the 1993 sale. However, the 1993 sale was not the normal deed and mortgage back but a Long Form Agreement of Purchase and Sale. Only $22,000 was paid on execution and monthly payments of $2,000 a month were to be paid for several years (a copy of this agreement was not produced). No interest was charged on the $578,000 owing under the agreement as of the date of occupancy. None of the monthly payments were ever made.

[9] I do not accept that $600,000 was the fair market value as in a normal arms' length transaction of this magnitude there would usually be a more substantial deposit and interest would accrue on the outstanding balance. The purchasers never made a payment under the agreement except the initial payment of $22,000. The Appellant accepted the $22,000 for one years use of the house. The Appellant and her husband obviously had the right to have the purchaser evicted long before the year was up. I conclude they waited the year because they knew $600,000 was way more than the market value of the property and that the $22,000 was way more than what the house would rent for on the open market.

[10] The Appellant on request from Revenue Canada submitted invoices for advertisements as evidence to back up her claim that the property was exclusively for rent as of July 1, 1993.

[11] Unfortunately for the Appellant, Revenue Canada took the invoices to the newspaper, namely The Hamilton Spectator and got copies of the actual advertisements, which are:

April 24, 1993 – under "Farms for Sale":

BINBROOK 95 acres & new home, 2 frontages, Paved, 15 min. to Stan.Crk. 662-5568.

May 1, 1993 – under "Farms for Sale":

BINBROOK 95 acres & new home, 2 frontages, Paved, 15 min. to Stan.Crk. 662-5568.

May 5, 1993 - under "Farms for Sale":

BINBROOK 95 acres & new home, 2 frontages, Paved, 15 min. to Stan.Crk. 662-5568.

May 12, 1993 - under "Farms for Sale":

PARTNER for farming, Ostrich & Emu or boarding horses. New house & 95 ac. 662-5568

May 15, 1993 - under "Farms for Sale":

BINBROOK Partners for farming, Ostrich & Emu or boarding horses. New house & 95 ac. 662-5568

May 19, 1993 - under "Farms for Sale":

BINBROOK Partners for farming, Ostrich & Emu or boarding horses. New house & 95 ac. 662-5568, 834-5904.

May 19, 1993 – under "Horses to Stable":

WANT to board your horse at ½ price? For info. 662-5568. leave msg. or (416) 834-5904.

May 22, 1993 - under "Farms for Sale":

BINBROOK. Partners for boarding horses. New house & 95 acres. 662-5568, 834-5904.

Again:

WANT to board your horse at ½ price? For info. 662-5568. leave msg. or (416) 834-5904.

May 26 - under "Farms for Sale":

BINBROOK. Partners for boarding horses. New house & 95 acres. 662-5568, 834-5904

May 29 – under heading "Horses/Stables":

WANT to board your horse at ½ price? For info. 662-5568. leave msg. or (416) 834-5904.

and under "Farms for Sale":

BINBROOK. Partners for boarding horses. New house & 95 acres. 662-5568, 834-5904

June 5th - under "Farms for Sale":

BINBROOK farm requires mgmt team & or horse owners to form a co-op Ex security & return on investment. Call collect 416-834-5904.

Nov. 20, 1993 - under "Glenbrook Area":

PRIVATE

4080 HALL RD.,

OPEN HOUSE,

SAT. & SUN. 1 – 5

Unique open concept, almost new 4,000 sq.ft. home with all the Bells and Whistles. Overlooking 95 scenic acres. Take 56 hwy. south to 1st road on right past Southbrook Golf Course, turn right on Hall Rd. For viewing at other times call 905-534-5904.

[12] The only evidence that the property was held exclusively for rental at market value from July 1, 1993 to November 1993 was the Appellant and her husband's testimony which I do not accept on this point.

[13] No rental losses were claimed for the 1993 taxation year. I conclude from this that the Appellant did not consider herself in the rental business for the last six months of 1993 when she filed her income tax return for that year.

[14] There is no doubt that the property was originally purchased for the dual purpose of building a substantial 4000 sq. feet home thereon and establishing a mushroom farm. The mushroom business never got started and was never established.

[15] I am satisfied that by July 1, 1993, when possession of the property came back, that the Appellant realized that the value of the property was way down and that her intention and that of her husband was to resell or rent as soon as possible because of financial constraints. They did not have enough resources to pay the accruing interest on their first mortgage, at that time and throughout the balance of 1993. In the last six months of 1993, they held "NO specific expectations". They were doing their best in a difficult situation.

[16] Even if I accepted the testimony of the Appellant and her husband that the property, from July 1, 1993, was held exclusively for rental (and I do not accept this allegation) they have not satisfied me as to what the fair market rental value was at that time nor the value of the land and building at that date.

[17] Thus, there is no way I can come to the conclusion that a rental business, if established, would have had a reasonable expectation of profit after taking into consideration capital cost allowance nor could I calculate what the terminal loss on the building would be or the capital loss on the property.

[18] The Appellant did claim a rental loss for part of the year 1994. It is an undisputed fact that the property was not "For Rent" in 1994 yet rental losses were claimed. I believe this was just an attempt to set up a date for a terminal loss on the house and a capital loss on the land, all being an afterthought.

[19] The Appellant not having established that she was in business, the appeals must be dismissed, with costs to the Respondent.

Signed at Ottawa, Canada, this 6th day of June, 2000.

"Gordon Teskey"

J.T.C.C.