Date: 19971103
Docket: 97-122(IT)I
BETWEEN:
ROBERT C. QUINN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Somers, D.J.T.C.C.
[1] This appeal was heard in Toronto,
Ontario, on October 10, 1997, pursuant to the Informal procedure
of this Court.
[2] In reassessing the Appellant for
the 1991, 1992 and 1993 taxation years, the Minister of National
Revenue (the "Minister") disallowed the deduction of
the rental losses. In the reassessment, the Minister
decided that the Appellant did not have a reasonable expectation
of profit from renting the property in the 1991, 1992 and 1993
taxation years, that the losses were personal or living expenses
and that the Appellant was properly reassessed in accordance with
paragraphs 18(1)(a) and 18(1)(h) of the Income
Tax Act.
[3] In so reassessing the Appellant,
the Minister made the following assumptions of fact which were
admitted or denied by the Appellant:
"(a) in July 1990,
the Appellant purchased 82 Waterford Crescent in Stoney Creek,
Ontario (the "Property") at a cost of
$238,353.66; (admitted)
(b) the Property
purchased was financed with a down payment of $38,353.66, a first
mortgage on the Property in the amount of $88,000 and a first
mortgage on the Appellant's principal residence in
Mississauga in the amount of $112,000; (admitted)
(c) in July 1991,
the Appellant began renting out the Property;
(admitted)
(d) in the 1991,
1992 and 1993 taxation years, the Appellant reported gross rental
income, expenses and losses as per Schedules "A",
"B" and "C", attached; (admitted)
(e) the receipts,
invoices or other records provided by the Appellant to the
Minister did not fully support the expenses claimed;
(denied)
(f) the
Appellant reported a rental loss from renting the Property in
another year as follows: (denied)
Year
Losses
1990
$14,132.00
(g) the rent charged
was not sufficient to offset the fixed operating expenses
(mortgage interest and property taxes) of the Property;
(denied)
(h) the Appellant
did not have a reasonable expectation of profit from renting the
Property during the 1991, 1992 and 1993 taxation years;
(denied)
(i) the rental
expenses were personal or living expenses of the
Appellant." (denied)
[4] The Appellant, operating his own
business since 1978, decided as an investment venture to purchase
a property for rental purposes in Stoney Creek, Ontario.
The property is situated on the shore of Lake Ontario and was
purchased in July 1990 for the price of $238,353.66. The
property was financed with a down payment of $38,353.66, a first
mortgage on the property in the amount of $88,000. and a first
mortgage on the Appellant's principal residence in
Mississauga in the amount of $112,000.
[5] The property is part of a
community close to Toronto where exists a yacht club
designed for the active outdoor lifestyle. The Appellant,
as a result of inquiries, thought that he could get sufficient
returns, eventually creating a profit.
[6] He approached his retired
parents-in-law, to rent the property in question. He
obtained a verbal agreement that they would rent the property at
$2,000 per month. Unfortunately, his mother-in-law became
ill in September 1990 and died in February 1991. His
father-in-law died in May 1991. They were unwilling to rent
the property as of September 1990.
[7] The projected rental expectation
was a monthly rent of $2,000 to $3,000. However, his
projected revenue income was not based on the opinion of a real
estate agent; he was influenced by the promotional aspect of the
community project. With the help of his accountant of 15
years, they decided that it would be a good investment.
[8] There was, however, a decline in
the real estate market and the property was not leased out until
July 1991 at a much lesser rate than anticipated. From
September 1990 he listed the property for sale. He realized
that he could not rent the property at the projected rate.
He finally rented the property in July 1991 at $1,200 per month
based on a written two-year lease.
[9] When this two-year lease expired,
the Appellant listed the property for sale. In the meantime
he rented the house with a verbal monthly lease at a rate of
$1,000 per month. The lessee's post-dated cheques of
$1,000 each were not honoured. The lessee did not leave the
premises freely. The Appellant finally obtained a judgment
of $3,000 and costs against the lessee.
[10] Due to the decline in the real estate
market, lower rental expectations and losses in 1994 and 1995, he
sold the property in February 1996 at a selling price of
$144,000. Between the time of the purchase and the sale, he
reduced the mortgage in order to reduce the interest charges.
[11] Before the purchase of the property,
the Appellant and his chartered accountant reviewed the various
factors and concluded that the purchase would be a worthwhile
investment. The chartered accountant testified on the
Appellant's behalf and admitted he did not possess any
expertise in the real estate market in 1990. However, he
said the real estate was booming in 1990 but prices went down
considerably in 1991.
[12] The chartered accountant prepared
projections of rental income for the years 1991 to 1998 as
follows (Exhibit A-5):
"Robert C. Quinn
Projected Rental Income
82 Waterford Crescent
|
|
1991
|
1992
|
1993
|
1994
|
1995
|
1996
|
1997
|
1998
|
|
Revenues
|
$14,400
|
$15,120
|
$15,876
|
$16,670
|
$17,504
|
$18,379
|
$19,298
|
$20,263
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Property Tax
|
3,700
|
3,885
|
4,079
|
4,283
|
4,497
|
4,722
|
4,958
|
5,206
|
|
Interest
|
22,038
|
16,153
|
14,109
|
13,602
|
12,687
|
11,699
|
10,632
|
9,480
|
|
Insurance
|
450
|
473
|
497
|
522
|
548
|
575
|
604
|
634
|
|
Repairs & other
|
500
|
525
|
551
|
579
|
608
|
638
|
670
|
704
|
|
|
26,688
|
21,036
|
19,236
|
18,986
|
18,340
|
17,634
|
16,864
|
16,024
|
|
Net income (loss)
|
-$12,288
|
-$ 5,916
|
-$ 3,360
|
-$ 2,316
|
-$ 836
|
$ 745
|
$ 2,434
|
$ 4,239
|
Robert C. Quinn
Revised Rental Projections
82 Waterhouse Crescent
|
|
1991
|
1992
|
1993
|
1994
|
1995
|
1996
|
1997
|
1998
|
|
Revenues
|
$13,200
|
$13,200
|
$13,860
|
$14,553
|
$15,281
|
$16,045
|
$16,847
|
$17,689
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Property Tax
|
3,700
|
3,885
|
4,079
|
4,283
|
4,497
|
4,722
|
4,958
|
5,206
|
|
Interest
|
22,038
|
16,153
|
14,109
|
13,602
|
12,687
|
11,699
|
10,632
|
9,480
|
|
Insurance
|
450
|
473
|
497
|
522
|
548
|
575
|
604
|
634
|
|
Repairs & other
|
500
|
525
|
551
|
579
|
608
|
638
|
670
|
704
|
|
|
26,688
|
21,036
|
19,236
|
18,986
|
18,340
|
17,634
|
16,864
|
16,024
|
|
Net income (loss)
|
-$13,488
|
-$ 7,836
|
-$ 5,376
|
-$ 4,433
|
-$ 3,059
|
-$ 1,589
|
-$ 17
|
$ 1,665"
|
[13] In fact the rental income for the years
1991, 1992 and 1993 were respectively $6,600, $13,200 and
$6,600. Besides the property taxes, maintenance, repairs
and insurance costs, the interest alone on the mortgage was
higher than the rental income. For the same years 1991,
1992 and 1993, the interest on the mortgage was respectively
$22,039, $16,153.60 and $14,609. 95. The rental losses
claimed for those years are in the sums of $18,911, $7,704.43 and
$13,284.73 respectively.
[14] In the unreported case of Zahid
Mohammad and H.M.Q., A-652-96, dated July 28, 1997, the
Federal Court of Appeal stated the following:
"In many cases, the interest component is so large that a
rental loss arises even before other permissible rental expenses
are factored into the profit and loss statement. The facts
are such that one does not have to possess the experience of a
real estate market analyst to grasp the reality that a profit
cannot be realized until such time as the interest expense is
reduced by paying down the principal amount of the
indebtedness."
[15] In the present case, the evidence has
shown that the interest expense exceeds the indebtedness.
With the figures presented to the Court, the Appellant had a
burden of proving that there was a reasonable expectation of
profit. No expert witness was called to enlighten the Court
as to the real estate market value before and after the purchase
of the property. While the location of a community project
on the shore of Lake Ontario seems quite attractive for personal
residential purposes with all its recreational activities, there
is no evidence that it would be attractive for rental purposes,
thereby generating income with a reasonable expectation of
profit.
[16] The Appellant did not demonstrate that
he had a reasonable expectation of profit in the
circumstances. The Appellant offered no evidence explaining
why he expected rental income of $14,400 to $20,263 from 1991 to
1993. The projected rental income, as suggested in the
chartered accountant's schedule, was only an accounting
calculation. Neither the Appellant nor the chartered
accountant could present a reasonable explanation as to the
accuracy of the projected rental income.
[17] Bearing in mind all of the
circumstances in this case, the Appellant did not have a
reasonable expectation of profit from renting the property in the
1991, 1992 and 1993 taxation years.
[18] The appeal is dismissed.
D.J.T.C.C.
Ottawa, Canada,
October 3, 1997.
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