Date: 20000502
Docket: 1999-3302(IT)I
BETWEEN:
MAURICE ARNOLD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
Docket: 1999-3296(IT)I
JUDILEE ARNOLD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
WATSON, D.J.T.C.C.
[1] These appeals were heard in
Toronto, Ontario on April 20, 2000, on common evidence under the
Informal Procedure.
[2] In computing income for the 1994,
1995 and 1996 taxation years, the Appellants claimed rental
losses in the amounts of $10,226.00, $12,142.00 and $2,731.00,
divided equally in the amounts of $5,113.00, $6,071.00 and
$1,365.00 respectively.
[3] By concurrent Notices of
Reassessment dated April 29, 1999, the Minister of National
Revenue (the "Minister") disallowed the Appellants'
rental losses for the three taxation years.
[4] In reassessing the Appellants, the
Minister made the following assumptions of fact in the file
concerning Mr. Arnold:
"(a) in 1989, the
Appellant and his spouse purchased a 35 foot, one bedroom
mobile home at a cost of $47,000.00 (the "Trailer")
which they kept at Lot 114, Key Largo Kampgrounds and Marina,
10155l Overseas Highway, Key Largo, Florida
("Kampgrounds");
(b) the purchase
Trailer was financed by a mortgage of $25,213.00;
(c) at all material
times, the Appellant paid a monthly fee to Kampgrounds for the
routine maintenance and care of the Trailer;
(d) the Appellant
undertook no organized method of advertising the rental of the
Trailer beyond "word of mouth" and advising the
management of Kampgrounds that the Trailer was available for
rent;
(e) Kampgrounds
charged the Appellant 35% of the gross rental fees received when
rented to third parties;
(f) the
Appellant began claiming rental losses in 1993, and from 1993 to
1996, the Appellant reported rental income and losses on the
Trailer as follows:
Gross
Income
Net Loss
1993
$3,463.00
($ 5,594.00)*
1994
$3,452.00
($10,226.00)*
1995
$1,778.00
($12,142.00)*
1996
$l,772.00
($ 2,731.00)*
* - the Appellant claimed 50% of the total loss;
(g) in the 1994,
1995 and 1996 taxation years, the Appellant reported rental
income, expenses and losses as per Schedule "A",
below;
(h) during the 1994,
1995, 1996 taxation years, the Trailer was rented for
approximately 35 weeks out of a possible 156 weeks, or 22% of the
time;
(i) the
Appellant had no reasonable expectation of profit from renting
the Trailer during the 1994, 1995 and 1996 taxation years;
(j) the rental
expenses were personal or living expenses of the Appellant;
(k) at all material
times, the Trailer was used primarily for the personal use or
enjoyment of the Appellant.
Schedule A to
Maurice Arnold
Reply to Notice of Appeal
Rental Income and Expenses
1994
1995
1996
Rental
Income
$ 6,094.62
$ 1,778.95
$ 3,545.36
Insurance
$ 256.79
$ 258.06
$ 256.36
Property
Taxes
1,459.34
1,487.95
1,314.71
Interest
2,807.43
2,642.16
2,539.15
Cable, Water, Park
Maintenance
3,741.58
l,693.43
1,804.07
Bank
Charges
196.69
230.60
Nil
Repairs and
Maintenance
1,837.04
377.48
136.36
Hydro
442.55
576.51
Nil
Housekeeping
327.82
377.48
Professional
Fees
Nil
Nil
80.25
Rental
Expense
Nil
822.03
145.91
Depreciation
6,062.00
5,455.80
Nil
Total Rental
Expenses
$17,131.24
$13,921.50 $6,276.81
Net Rental Income
(Loss)
($10,226.62) ($12,142.55) (
$2,731.45)
Appellant's Share
(50%)
($ 5,113.31) ($ 6,071,27)
($1,365.72)"
[5] At the hearing, Mr. Arnold
admitted paragraphs (a) to (c) and (e) to (h) and denied
paragraphs (d) and (i) to (k). Mrs. Judilee Arnold made the same
admissions and denials for the similar assumptions of fact in her
appeal.
[6] The burden of proof is on the
Appellants; they must establish on a balance of probabilities
that the Minister's reassessments were ill-founded in fact
and in law. The sole issue before the Court was whether the
Appellants had a reasonable expectation of profit from the
trailer rental business for the 1994, 1995 and 1996 taxation
years.
[7] The Appellants were the only
witnesses at the hearing. They lived and worked in the Pickering,
Ontario area; in 1989, they were married in Key Largo, Florida
and purchased the trailer which they occupied once per year in
1989, 1990 and 1991. In 1992, they started renting the trailer
when it was vacant, however, there were net losses every year
since. In 1994 and 1995, they did not occupy the trailer,
preferring to stay with friends in the Key Largo area; in 1996,
they visited Mexico instead of Florida. They advertized the
trailer for rent by word of mouth to friends and they relied on
the management of the trailer park to find tenants in return for
payment of 35% of the rents received. Over the 156-week
period in issue, the trailer was rented out for only 35
weeks.
[8] When the trailer was purchased, it
was as an investment that they could sell for a profit or live in
themselves when they eventually retired. In August 1995, they
listed the trailer for sale through a real estate company in
Florida and took it off the market when the agreement expired in
February 1997. They did not have previous experience in trailer
renting in the Key Largo area, but relied on the advice from
friends in Florida that it was a good investment. In 1992, 1997
and 1998 they did not report any income or net losses from the
trailer rental; depreciation was claimed in 1994 and 1995, but
not in 1996.
[9] I have reviewed the cases provided
to me by counsel for the Respondent and they include
Cheesemond (J.E.) v. Canada, [1995] 2 C.T.C. 2567D,
Fish v. Canada, [1995] 2 C.T.C. 2755D #1, Godzisz v.
R., 1998 CarswellNat 2401, Green v. R., [1997] 1
C.T.C. 2668, Landry (C.) v. Canada, [1995] 2 C.T.C. 3,
Mastri v. R., 97 DTC 5420, Moldowan v. R. 77 DTC
5213, Stewart v. H.M.Q., [2000] A-337-98, and Tonn v.
R., 191 N.R. 182.
[10] The case law on the subject of
reasonable expectation of profit is extensive; a reasonable
expectation of profit is an objective test and not just a
"fanciful dream". The objective test includes the
examination of profit and loss experienced in the past years; it
also examines the operational plan and background to the
implementation of this plan; other criteria include the time
spent on the activity, the background education and experience of
the taxpayer, the time required to establish the intended
business, the presence or absence of ingredients leading to
profits, the record of profits and losses, the cause of the
losses and the flexibility of the taxpayer to make adjustments in
the face of the losses.
[11] Taking into consideration all of the
circumstances of these appeals, including the testimony of the
Appellants, the admissions and the documentary evidence produced
at the hearing, in the light of the well-established case law, I
am satisfied that the Appellants have failed in their onus of
establishing on a balance of probabilities that during the 1994,
1995 and 1996 taxation years, they had a reasonable expectation
of profit in the trailer rental business in Key Largo,
Florida.
[12] Accordingly, the appeals are
dismissed.
Signed at Ottawa, Canada, this 2nd day of May 2000.
D.J.T.C.C.
Email this Content