Williams v. The Queen, docket 1999-2456-IT-I (Informal Procedure)

Date: 20000524

Dockets: 1999-2456-IT-I; 1999-2918-IT-I

BETWEEN:

EVAN WILLIAMS, JILLIAN WILLIAMS,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent,

Reasons for Judgment

Teskey, J.T.C.C.

[1] Both Appellants, in their Notices of Appeal wherein they appealed their reassessment of income tax for the years 1993, 1994 and 1995, elected the informal procedure.

[2] Both appeals were heard on common evidence.

Issue

[3] The issue is whether the Appellants had a reasonable expectation of profit for the rental of a two bedroom condominium unit in Hawaii.

[4] Facts not in dispute:

(a) The Appellant, Evan Williams ("Evan") and his spouse, Jillian Williams ("Jillian"), purchased a condominium unit located at 77-6469 Alii Drive, # 307 White Sands Village, Kailua-Kona, Hawaii, USA 96740, which closed on April 2^nd 1990 and commenced to rent the unit then ("Unit");

(b) the purchase price of the Unit was $159,000US which was 100% financed;

(c) the purchase price was financed by way of a first mortgage of $90,000US at an interest rate of 10.5% and this mortgage was held by the vendors of the Unit and by a second mortgage of $69,000US at 12.75% interest rate on their principal residence;

(d) the unit is approximately 1,050 square feet and consists of two bedrooms, two bathrooms, a lounge, a kitchen and a lanai;

(e) the rental rate of the Unit was $100US per day with a 10% discount during low season and for stays of 8 days, and a 15% discount for stays of 15 days or longer;

(f) the Unit was rented approximately 9 days per month during 1993, 2 days per month during 1994 and 5 days per month during 1995;

Evan claimed he did not know if this fact was true. Although he had all the records, none of which were produced and no evidence was adduced to the contrary.

(g) the fixed costs averaged over a three year period were $22,228 per year plus Capital Cost Allowance ("CCA") of $2,960;

Evan also agreed with this assumed fact, yet he never broke down the purchase price between land, building and chattels and guessed at a possible breakdown.

(h) the Appellant replaced the carpets, hot water tank, furnishings, TV, VCR and the washer and dryer during the period up to 1996 for an accumulated capital outlay of $4,500;

(i) at all material times, Evan an engineer, was operating an administrative and consulting business in British Columbia and his spouse Jillian, a bookkeeper, was providing bookkeeping services to clients;

(j) from 1990 to 1995, Evan reported the following income and deducted 50% of the losses from the Unit rental:

Taxation Year Gross Expenses Net Rental Appellant's

Rental Income (Loss)

1990 $ 7,741.19 $22,187.79 ($14,446.60) ($ 7,223.30)

1991 18,678,41 27,502.75 ( 8,824.34) ( 4,412,17)

1992 6,330.72 24,572.73 ( 18,242.01) ( 9,121.00)

1993 11,150.25 27,888.73 ( 16,738.48) ( 8,369.24)

1994 2,400.00 24,254.14 ( 21,854.14) ( 10,927.07)

1995 5,400.00 23,487.71 ( 18,087.71) ( 9,043.85)

Total $51,700.57 $149,893.85 ($98.193.28) ($49,096.64)

[5] Facts not proven or in dispute:

(a) Neither the original agreement of purchase sale or a copy of the first mortgage was produced. Evan alleged that in his agreement with the vendors on the first mortgage, he was only obligated to pay $700 a month. He claims that he voluntarily paid $1,000 a month principle and interest and produced an amortization schedule. A single calculation of interest at 10.5% on $90,000, the annual interest would be $9,450, while 12 payments of $700 a month would be $8,400. Thus, no payment on principle would be made and at the end of one year, $1,050 of interest would be outstanding as $700 a month does not cover the accrued interest.

I reject the Appellant's testimony on this allegation.

(b) neither a copy of the second mortgage nor an amortization schedule was produced.

(c) only two financial statements were produced, one for the 1997 year (Exhibit A-5) and one for the 1998 year (Exhibit A-6);

(d) the 1996 statement was not produced and none of the back-up documents for any of the years 1993 to 1998 were produced. I draw the conclusion that since Jillian did not give evidence, and no reasonable explanation was offered, her evidence and the actual records would have been detrimental to these appeals. I also conclude that since the books and records were not produced for the period of 1993 to 1998, they would not have to stood up to scrutiny and that the expenses were probably overstated and the revenu may have been understated.

[6] The financial statement (Exhibit A-6) purports to be for the whole of the calendar year 1998, yet, the Unit was sold and the deal was closed on October 30, 1998.

[7] None of the discrepancies between the two financial statements were explained. From this, I conclude that I cannot accept any of the uncorroborated statements of the Appellant. He claims that Exhibit A-3 consists of three spreadsheets prepared by him at the time of purchase. Page two thereof is supposedly based on the fact that the vendors of the Unit had rented the Unit in 1989 for 231 days and they personally used the same for 60 days.

[8] The alleged 231 days is most suspect. Perhaps he was being lied to by the vendors or the rental agents. In any event, there was no acceptable reason that rental should fall off in 1990. The Appellants owned the Unit for nine full months and claimed gross rental of $7,741.19. Even assuming full rental for the month of January, February and March, the total income for the Unit would have been $16,741. The gross income for 1991 was $18,678. It appears to me that the rental for these two years was right in line. Thereafter, the rental may have dropped because of events beyond the Appellants' control.

[9] Thus, the spreadsheets are of no help as they were based on the wrong rental assumption. Even page one of the exhibit, the break even spreadsheet, was not accurate. It shows $19,375 as expenses for a year. Yet, the Appellants claimed for nine months in 1990 expenses of $22,187.79 and for the year 1991, $27,502.75. It also shows interest on the first mortgage, it is understated by some $1,200 and on the second mortgage by $2,500. Thus, on mortgage interest alone the expense figures are understated by some $3,700.

[10] Therefore, I reject all the figures the Appellant has produced as none of them were backed-up by original documents.

[11] The Appellants have not satisfied me that pursuant to the dicta of Dickson J., as he then was in Moldowan v. The Queen, 77 DTC 5213, that they did have a reasonable expectation of profit after CCA at the time they purchased the Unit and during all the years they owned the unit.

[12] Although Evan states there is a profit in 1998, the figures are so suspect that I have no idea whether there was a profit or the figures were made up to look like a profit was obtained because by that time, Evan knew he was going to be reassessed and his losses refused.

[13] I am satisfied that their was a strong personal element in this case and the thought of a capital gain was also in the minds of the Appellants and these two considerations were the motivating factors in their decision to purchase the property.

[14] For these reasons, the appeals are dismissed.

Signed at Ottawa, Canada on the 24th day of May 2000.

"Gordon Teskey"

J.T.C.C.