Barry J. Reiter and Karen Malatest v. Her Majesty the Queen, [1994] 1 CTC 2460

Christie, A.C.J.T.C.C. (orally):— These appeals were heard together on common evidence. The appellants are husband and wife. The year under appeal is 1990. Paragraphs one to 14 of the notice of appeal read:

APPELLANTS’ ADDRESS

1. The address of the appellants is:

Barry J. Reiter and Karen Malatest

36 Bennington Heights Drive

Toronto, Ontario

M4G 1A6

ASSESSMENTS UNDER APPEAL

2. The particulars of the assessments under appeal are as follows:

Name of taxpayer:	Barry J. Reiter	Karen Malatest
Taxation Year:	1990	1990
Date of assessment:	December 6, 1991	August 16, 1991
Date of confirmation:	October 15, 1992	October 15, 1992

3. The issues raised and the facts and reasons relied upon are the same for both taxpayers. Accordingly, the notice of appeal is the same for both.

FACTS

4, These tax appeals are brought jointly by Barry J. Reiter and his wife, Karen Malatest (hereinafter collectively the "taxpayers") in respect of the disposition of their former principal residence and apartment at 65 Harbour Square, Toronto (the "apartment") which they owned jointly.

1989 Change of Use of Apartment

5. In February of 1989 the taxpayers were residing in the apartment, as their principal residence, when they decided to purchase a house on Bennington Heights Drive as their new principal residence. They entered into an agreement of purchase in February 1989. The agreement called for a closing of the house purchase on July 31, 1989 and the purchase was duly completed atthat time.

6. It was the intention of the taxpayers at the time they entered into the house purchase agreement in February of 1989 that they would sell their apartment and move into their new house in July. The apartment was listed for sale with a real estate broker. They had a moving company booked for their move in July.

7. On July 31, 1989, the closing date of the house purchase, the taxpayers had been unable to successfully sell the apartment. (An offer which had been accepted in early June in the amount of $735,000 was withdrawn by the purchaser on the basis of a condition in the offer that it was conditional upon financing.)

8. In or about August, 1989 the taxpayers decided to try to lease the apartment while continuing to list it for sale.

9. In order to enhance their ability to either lease or sell the apartment the taxpayers decided to continue to occupy it. Several real estate agents had strongly advised them that the apartment should remain occupied both because it enhanced the appearance of the apartment and because a vacant apartment would indicate desperation on the part of the taxpayers.

10. From August, 1989 onwards the apartment was listed for lease and for sale with a real estate agent specializing in the sale and lease of condominium units in the Harbour Square complex. During September, October and November, 1989 the taxpayers also placed advertisements in newspapers attempting to lease the apartment.

11. On November 15, 1989, the taxpayers moved into their new house. The apartment was left vacant but they continued to try to lease or sell it.

12. On November 25, 1989 the taxpayers accepted an offer to purchase the apartment for $650,000 with closing to be on April 15,1990. The purchaser, who owned 13 other units in the Harbour Square complex which he rented, intended to rent the apartment after he acquired possession. The taxpayers wanted to rent the apartment for the period up to the closing and they therefore agreed with the purchaser that they would attempt to rent the apartment immediately for a term of at least a one year which year would stretch through the taxpayers’ ownership until April 15, 1990 and thereafter into the purchaser’s ownership. The parties agreed on all terms of a lease that would be acceptable to them as lessor. The taxpayers continued their efforts to rent the apartment but they were unsuccessful.

13. The purchaser failed to close the purchase on April 15, 1990. The taxpayers therefore continued to try to lease or sell the apartment.

1990 Disposition of the apartment

14, Ultimately, in June, 1990, the apartment was sold for $525,000. The taxpayers realized $493,500 net after six per cent commission.

There are 11 additional paragraphs in the notice of appeal (paragraphs 15 to 25) relating to a number of matters required by the Tax Court of Canada Rules (General Procedures). They need not be reproduced here.

Paragraphs one to ten inclusive of the reply to the notice of appeal filed by Barry Reiter read:

A. STATEMENT OF FACTS:

1. He admits the facts stated in paragraphs 4, 5, and 14 of the notice of appeal.

2. With respect to paragraph 6 of the notice of appeal, he has no knowledge of whether the appellant and his spouse had a moving company booked for a move in July, but otherwise admits said paragraph.

3. He admits paragraph 7 of the notice of appeal except insofar as he says he has no knowledge of and puts in issue the amount of the offer.

4, With respect to paragraph 8 of the notice of appeal he admits that the appellant and his spouse ("the appellants"), being unable to sell a condominium unit at 65 Harbour Square, Toronto (“the condominium"), tried to lease it in November, 1989 while continuing to list the condominium for sale.

5. With respect to paragraph 9 of the notice of appeal, he admits that the appellants continued to occupy the condominium in order to enhance their ability to sell it, but otherwise has no knowledge of and puts in issue the facts stated in paragraph 9 of the notice of appeal.

6. With respect to paragraph 10 of the notice of appeal, he says as follows:

(a) he admits that from August 1989 onwards, the condominium was listed for sale with a real estate agent specializing in the sale of condominium units in the Harbour Square complex;

(b) at the beginning of November 1989, the appellants also placed advertisements in newspapers attempting to lease the condominium;

(c) he otherwise denies the allegations of fact contained therein.

7. With respect to paragraphs 11,12 and 13 of the notice of appeal, he says as follows:

(a) he admits that on November 15, 1989, the appellants moved into their new house

and that the condominium was left vacant while they continued to try to sell it;

(b) he admits that on November 25, 1989, the appellants accepted an offer to purchase the condominium with closing to be on April 15, 1990;

(c) he admits that the "purchaser" failed to close the purchase on April 15, 1990 and accordingly, the appellants continued trying to sell the condominium;

(d) he otherwise has no knowledge of the allegations of facts contained therein and puts them in issue.

8. He denies the facts stated in paragraphs 15, 16, 17, 18 and 19 of the notice of appeal.

9. In filing his income tax return for his 1990 taxation year, the appellant reported a “rental loss" of $71,076.48 in respect of the condominium, of which $68,250 was claimed as a capital cost allowance and determined as follows:

Cost of Additions during year	$650,000
Disposal Proceeds during year	$513,500
Capital Cost Allowance for year	$136,500
Appellant’s share (50 per cent)	$68,250

10. In assessing the appellants so as to disallow the portion of the loss related to the capital cost allowance deduction, the Minister made, inter alia, the following assumptions of fact:

(a) the appellants jointly owned the condominium which was their principal residence.

(b) in 1989, the appellants placed the condominium on the market and purchased a house at 65 Bennington Heights ("the house");

(c) in November 1989, the appellants moved into the house and also attempted, at

the beginning of November 1989, to lease the condominium pending its sale;

(d) the appellants’ primary intention was to sell the condominium as soon as ossible and to lease the condominium to defray expenses pending its sale and to facilitate that sale;

(e) the condominium sold in June 1990;

(f) the appellants did not rent out the condominium prior to its sale;

(g) the condominium was never used by the appellants for the purpose of gaining or producing income from a business or property.

The reply also contains additional paragraphs that need not be reproduced.

The reply to the notice of appeal filed by Karen Malatest is essentially the same as the reply filed regarding the appeal of Barry Reiter.

The appellants seek to deduct a terminal loss under subsection 20(16) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") in respect of the disposition of their former apartment at 65 Harbour Square, Toronto. The appellants say that the amount of the loss on the disposition depends on whether it is measured from July 1989 or November 1989 or some time in between. Counsel informed the Court that they are in agreement that for the purpose of calculating the loss $660,000 relates to July 1989 and $635,000 relates to November 1989.

Only the appellants gave oral evidence. Their testimony is essentially what is said in the paragraphs cited from the notice of appeal. The purchaser in the failed sale referred to in paragraphs 12 and 13 of the notice of appeal, Mr. George Kolentsi, was sued successfully by the appellants but he became a bankrupt and the judgment was not paid. The appellants did retain the $20,000 down-payment that was forfeited under the agreement of sale and purchase. Kolentsi’s offer was placed before the appellants by Mr. Ed Wery, a real estate agent with whom the apartment had been listed for sale. It was said that by this time Karen Malatest was very reluctant to sell. So was Barry Reiter, but less so. Both, however, changed their minds on the same day that they received the offer and agreed to sell. Copies of advertisements placed in the Globe and Mail on November 3, 6 and 7,1989 are in evidence. They all read:

Harbour Sq, (65) S.E. corner, two bdrm., two bath, in-suite laundry, balc., all rooms face lake. Designer decorated, Unfurn., rec. facil., Parking. Dec. 1, $2,450/mo. (The phone number is listed) 865-7381.

There is oral evidence that advertisements to rent were also placed in September and October 1989 with the tenancy to run from October 1 and November 1 respectively. The appellants were prepared to rent in the range of $2,000 to $2,400 per month. The apartment was never rented by them.

In order for a terminal loss to be deductible under subsection 20(16) of the Act the property to which it relates must be depreciable property. That is to say, it must be property held by a taxpayer for the purpose of producing income therefrom.

To succeed on these appeals the appellants must, therefore, establish on a balance of probability that at some relevant timethey held the apartment for the purpose of producing income.

To my mind that has not been established. The basic reason the apartment was held by the appellants from the end of July 1989 to June 1990 was that they could not dispose of it. Further, their overriding purpose throughout was to sell the apartment. It was never removed from the for sale market. Unfortunately for them the appellants were in: the position of simultaneously having two residences in a rapidly declining market. The notion of renting was, I think, really related to the hope of somehow cutting losses rather than for the purpose of producing income. The appellants had a heavy interest payment burden and the declining market is reflected in the fact that they accepted an offer of $735,000 in June 1989 that failed because of fimancing. They sold in June of 1990 for $525,000, a decline of some 28 per cent.

In light of what I have said these appeals must fail. Judgments shall issue accordingly. The respondent is entitled to party-and-party costs.

Appeals dismissed.