Horn v. R., [1996] 1 CTC 2583 (Informal Procedure)

McArthur J.T.C.C. - These appeals were heard in Edmonton under the informal procedures of this Court. The issue is whether the appellant is entitled to deduct expenses of $3,205.66 and $3,204.17 for the years 1991 and 1992 respectively.

The facts include the following: The appellant owned a residential bungalow during the relevant years, where she and her husband lived on the main floor and rented the basement to a student. There is no dispute with respect to the facts contained in paragraphs 6(b), (c), (d), (e), (f), (g) and (i) of the Respondent’s Reply to the Notice of Appeal, although the appellant added this to 6(i); although the rent was reduced by $100.00 monthly during the relevant years, 1991, 1992, the same tenant has paid in 1994 and 1995 in excess of $1,000.00 to reimburse the appellant for the reduction in rent he enjoyed. The same tenant paid $300.00 per month for the unit in 1994, together with the make-up amounts. The tenant occupied the basement area. He had exclusive use to a part of the basement as an apartment, and he shared laundry room and furnace room facilities also contained in the basement with the appellant. The property had a mortgage of approximately $40,000.00 during the relevant years, which was approximately 50 per cent of the market value of the house.

The deductions sought by the appellant were calculated as set out in paragraph 3 of the Reply to the Notice of Appeal.

The Respondent’s position is that the appellant did not have a reasonable expectation of profit from the activity of renting during the 1991 and 1992 taxation years, that the expenses incurred were personal or living expenses of the appellant, and that the appellant was properly reassessed in accordance with paragraphs 18( l)(a) and 18(1 )(h) of the Act.

The appellant testified that the interest rate was high, perhaps 10 and 3/4 per cent in 1991-1992, and the rent too low. She stated she fully anticipated the interest rates to go down and the rent to increase in the years to follow. She added that she has been correct on both accounts, with the rent currently now in excess of $300.00 per month and a much lower interest rate.

Paragraph 18(l)(a) of the Act states that no expense is deductible in computing income of the taxpayer from a property unless it was incurred for the purpose of gaining income. I’m satisfied that the appellant incurred the true or realistic loss of the appellant if any.

Counsel for the Respondent referred the Court to Trojanowski v. Minister of National Revenue, [1984] 2841, 84 D.T.C. 1705, wherein at page 2844 (D.T.C. 1708), the Court stated, in part,

he has chosen for reasons of his own, which are unrelated to the purpose of earning income, to heavily subsidize the Jaworskis in their living accommodations. He is perfectly entitled to do this, but what he cannot do is have other taxpayers indirectly share the cost of these subsidies through the deductions sought.

In the case of Saleem v. Minister of National Revenue, [1984] C.T.C. 2660, 84 D.T.C. 1579, a taxpayer who rented one-half of his personal residence for less than tax proportionate shares of the operating expenses was unable to deduct these losses as there was no reasonable expectation of profit.

Further, in the case referred to earlier of Trojanowski, the taxpayer rented a condominium to a couple whom he knew socially, reduced the

rent because of his wife’s illness and agreed to defer the rent in three years. He was not permitted, in the finding of the Court, to deduct rental losses for 1980 having chosen to subsidize his tenants for purely personal reasons.

tributable to her property to the rental unit. It would appear, although it is not relevant to this decision, that a fairer allocation of the expenses would have been two-thirds personal and one-third rental expense, although this was not in issue.

While I conclude that the appellant had no reasonable expectation of profit in 1991-92, the years at issue, she may well have had a reasonable expectation of profit in the later years after the rental subsidy was lifted and fair market rent was charged and only one-third of the expenses claimed. This was not the situation before the Court and the appeal is dismissed.

Appeal dismissed.