Date: 19971126
Dockets: 96-2865-IT-I; 96-2866-IT-I
BETWEEN:
RANDALL LOTT, TRISH LOTT,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowie, J.T.C.C.
[1] The Appellants, who are husband and wife, bring these
appeals from their assessments for income tax for the 1992, 1993
and 1994 taxation years. The issues are identical, and their
appeals were heard together on common evidence. The issue between
the parties is whether or not subsection 18(12) of the Income
Tax Act (the Act) applies to limit the extent to which
the Appellants may deduct certain losses incurred by them in the
operation of a day-care business in computing their incomes for
the years in issue.
[2] Shortly before the birth of their second child, the
Appellants decided that they would go into business operating a
day-care centre for pre-school children in their home. To this
end, Mrs. Lott attended a course in the operation of day-care
establishments at Kwantlen College. At the same time they sold
the house in which they were living, which was not large enough
to be used for a day-care centre, and bought a larger house,
better suited to the purpose, to which they and their two
children moved. This house had two levels. The lower one
consisted of a family room, a washroom, a laundry room with an
office area in it, and the garage. The upper level had a
combination living room and dining room, a kitchen, a bathroom,
and three bedrooms, one of which had an en suite bathroom
attached. Upon taking possession Mr. Lott built a covered deck of
about 10 feet by 25 feet, and a retaining wall at the back of the
lot, and repaired the fence on two sides.
[3] The purchase price of the house was $181,000, $161,950 of
which was obtained by way of a mortgage at 10.135% per annum. The
cost of the covered deck, the retaining wall, and the fence
repairs was not established at the trial. However, the evidence
did include the amounts paid in each of the years under appeal as
mortgage interest, and for municipal taxes. The day-care business
was operated by the Appellants for the last four months of 1992,
all of 1993, and the first seven months of 1994. Statements of
the losses incurred in each of these three years were prepared by
an accountant, and were introduced in evidence. In preparing the
Statements of Loss, the accountant made a charge against the
income for the use of the residence, which in each year was
computed as 40% of an amount which is said to be the cost
associated with the residence for that year. The accountant did
not give evidence, and neither the proportion of 40% attributed
to the day-care business, nor the base numbers to which it was
applied in the three years, were satisfactorily established by
the evidence of the Appellants. The losses of the business, as
shown in the statements prepared by the accountant, the portions
of them arising from costs associated with the residence, and the
portions arising from operations,[1] are as follows:
YEAR LOSS RESIDENCE OPERATIONS
1992 $7,299 $3,462 $3,837
1993 $6,910 $7,387 $ 477 profit
1994 $4,670 $4,292 $ 378
It is not disputed by the Crown that the business was operated
on the basis of an equal partnership.
[4] In 1992 Mrs. Lott ran the day-care centre for most of the
day, beginning at 5:45 a.m. with the arrival of the first child,
and ending at about 6:00 p.m. with the departure of the last
child. In 1993 and 1994 she took evening employment elsewhere,
which she usually went to at about 4:45 or 5:00 p.m., and on
those occasions Mr. Lott, who worked full time elsewhere,
would tend the children after work until they were picked up.
Mrs. Lott tended them for most of the day, fed them, led them in
activities, and generally took care of their needs. In addition
to looking after the children for a short time after work, Mr.
Lott did general maintenance associated with the house and the
business.
[5] Mrs Lott’s evidence was to the effect that every
part of the house and its grounds was utilized in some way for
the day-care business. In 1992 there were three to five
children, in 1993, two or three children, and in 1994, one child
whom she looked after, in addition to her own two. Each room in
the house, including each of the three bedrooms, she said was
used for playing, watching television or videos, reading, eating
or sleeping. In addition, the front yard, the back yard, the
covered deck, the driveway and the garage were all used at one
time or another as play areas for the children. This claim was
not seriously challenged on cross-examination, but it must
be obvious that, for example, in 1994 when there was only one
child other than the Lott’s own children to care for, if
every room in the house had been used by that child, it could
only have been for quite a short period per day in most of them.
Even at the peak of activity in 1992, when there were five
children attending, it is difficult to see how they could have
used all of the house and grounds for 40% of the time. I accept,
however, that all parts of the house were used by the day-care
operation for some period of time, however small, in each
year.
[6] In reassessing the Appellants for the years in question,
the Minister of National Revenue disallowed the losses claimed to
the extent that they arose out of the charge against income for
the use of the residence, relying upon subsection 18(12) of the
Act as the authority for doing so. That section reads as
follows.
18(12) Notwithstanding any other provision of this Act,
in computing an individual’s income from a business for a
taxation year,
(a) no amount shall be deducted in respect of an
otherwise deductible amount for any part (in this subsection
referred to as the “work space”) of a self-contained
domestic establishment in which the individual resides, except to
the extent that the workspace is either
(i) the individual’s principal place of business, or
(ii) used exclusively for the purpose of earning income from
business and used on a regular and continuous basis for meeting
clients, customers or patients of the individual in respect of
the business;
(b) where the conditions set out in subparagraph
(a)(i) or (ii) are met, the amount for the workspace that
is deductible in computing the individual’s income from the
business for a taxation year shall not exceed the
individual’s income from the business for the year,
computed without reference to the amount; and
(c) any amount not deductible by reason only of
paragraph (b) in computing the individual’s income
from the business for the immediately preceding taxation year
shall be deemed to be an amount otherwise deductible that,
subject to paragraphs (a) and (b), may be deducted
for the year for the work space in respect of the business.
Against these reassessments, counsel for the Minister raised
three arguments. First, that in the present case it was not
“any part” of the house and grounds that was used for
the business, but the whole of them, and so the subsection does
not apply. Second, the Lott’s house did not, at the
relevant time, meet the definition of a “self-contained
domestic establishment”, so the subsection could not apply
to it. Third, if the house did meet the definition of a
“self-contained domestic establishment”, then it was
only the house itself and not the land adjacent and subjacent
that fell within the definition, so that the Appellants are
entitled to take the mortgage interest and the municipal taxes
attributable to the land into account in the computation of their
losses for the year.
[7] In support of the first argument, counsel referred to the
budget speech of the Minister of Finance of June 18, 1987, in
which the amendment to the Act which introduced subsection
18(12) was announced, to the White Paper on Tax Reform of the
same date, and to the Department of Finance technical notes which
accompanied it. These, he says, indicate that the intention of
Parliament was not that this new and restrictive provision would
apply to day-care businesses which utilize all parts of the home,
but that it would simply apply to home offices which occupy a
part of the home. It is quite clear in the words of subsection
(12) that it is intended to restrict the extent to which
individuals who use their homes for business purposes may deduct
a portion of the cost of maintaining the home from their business
income. The rule which this subsection establishes is that costs
arising out of the maintenance of the home in which a business
operates may be deducted only if subparagraph (i) or (ii) is
satisfied, and then only to the extent that it does not have the
effect of putting the business into, or of contributing to, a
loss position. By its terms it is applicable to “a
business”, and nothing in the words of the subsection can
reasonably be construed as limiting their operation to any
particular type of business, or as excluding from them any
particular type of business. In short, there is no ambiguity as
to the scope of subsection 18(12), and therefore no need to
resort to extraneous materials as aids to interpretation.[2]
[8] Nor do I accept the argument that this subsection does not
apply to this day-care facility because it was carried on
in all, rather than part, of the Lott’s house. The
expression “any part” clearly includes the whole. If
an activity is carried on throughout all of a particular place,
it cannot be said that it is not carried on “in any
part” of it; quite the opposite, the activity is properly
said to be carried on in every part of it. That this is so may be
seen from the judgment of the Federal Court of Appeal in
Aerlinte Eirann Teoranta v. Canada,[3]which held that a reference to part of
an enactment included a reference to all of it.
[9] I turn now to the two arguments which were made by counsel
for the Appellant on the basis of the definition of the words
“self-contained domestic establishment” found in the
English version of subsection 248(1) of the Act:
... a dwelling house, apartment or other similar place of
residence in which place a person as a general rule sleeps and
eats;
It is argued, first, that this does not apply to the
Appellants’ house, because Mr. Lott ate most of his
meals away from home, Mrs. Lott ate dinner at her place of
alternate work in the latter two years, and when she ate
breakfast and lunch in the house, it was not then a residence,
but a day-care establishment, because the children were there.
So, the argument goes, it cannot be said that, as a general rule,
they slept and ate in their house. I find no merit in this
argument. The evidence was that they slept in the house all the
time, and that they ate their meals there, except when they took
them at a restaurant, at work, or as guests somewhere else.
Common sense has not yet been displaced as an aid to
interpretation.[4]
In this case it tells us that the Lotts’ house, even though
they selected it for its suitability as a day-care centre, is
their residence, and a self-contained domestic establishment.
[10] The other argument based on this definition is that
subsection 18(12), even if it applies to the house in this case,
does not apply to the land adjacent and subjacent to it. The
contention is that the words “any part ... of a
self-contained domestic establishment” encompass any part
of the house, but not of the land, with the result that the
limiting effect of the subsection has no application to costs
referable to the land. This is said to flow from the words
“... dwelling-house, apartment or other similar place of
residence ...”, which counsel argues apply to the building
only. In support of this he relies on the definition of
“dwelling-house” which appears in section 231 of the
Act, which reads as follows:
“dwelling-house” means the whole or any part of a
building or structure that is kept or occupied as a permanent or
temporary residence and includes
(a) a building within the curtilage of a dwelling-house
that is connected to it by a doorway or by a covered and enclosed
passageway, and
(b) a unit that is designed to be mobile and to be used
as a permanent or temporary residence and that is being used as
such a residence;
[11] I do not find this definition to be helpful. It applies
only in the context of section 231, which is concerned with the
general subject of inspection, search and seizure in aid of
enforcement of the Act, where far different considerations
apply. I do find assistance, however, in an examination of the
definition of the expression “établissement
domestique autonome”, used in the French version of
subsection 18(12) and defined in subsection 248(1) of
the Act:
Habitation, appartement ou autre logement de ce genre dans
lequel, en règle générale, une personne
prend ses repas et couche.
The word “habitation” in French is of broader
scope than the word “dwelling-house” in
English, and is capable of taking in both building and land.[5]
[12] If there is any residual ambiguity, it is resolved by an
examination of the purpose of subsection 18(12)[6]. The Budget Speech, the White
Paper and the technical notes issued by the Department of
Finance, which counsel for the Appellants put before the Court,
show that the intended purpose of subsection 18(12) is to
prevent taxpayers from using a portion of the expenses related to
their residences to contribute to business losses which will have
the effect of offsetting some of their income from other sources.
If accepted, the Appellants’ argument would produce the
remarkable result that they, and others who in operating a home
business utilize the land surrounding their residences, would be
entitled to take business losses into account, to the extent that
they arise out of interest and taxes attributable to the
residential land, but not to the residential building. Indeed,
even those using a part of the building alone might make some
claim to deduct mortgage interest and taxes attributable to the
land under that part of the building, free from the strictures of
subsection 18(12). Such a result defies any logical explanation,
and would certainly not accord with the clear intent of
Parliament. It is therefore to be avoided.[7]
[13] The appeals are dismissed.
Signed at Ottawa, Canada, this 27th day of November, 1997
"E.A Bowie"
J.T.C.C.
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