Jose Alves v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2500

O’Connor, J.T.C.C.:— These appeals were heard in Toronto, Ontario on February 11, 1994 pursuant to the informal procedure of this Court. The only issue in this case is whether the appellant is entitled to deduct rental losses in the taxation years 1989 and 1990 which losses the Minister of National Revenue disallowed.

The facts are simple. In 1988, the appellant purchased a property at 74 Bonham Boulevard in Mississauga, Ontario. In the years 1989 and 1990, the appellant leased approximately 50 per cent of the area of the home to three of his sons.

In 1989, 1990, 1991 and 1992, the appellant reported rental income, expenses and losses as follows:

The appellant annexed to his notice of appeal a Schedule A which the respondent has filed as Exhibit R-1 which Schedule is annexed to these reasons for judgment to form part hereof.

The respondent argues inter alia that the rental losses for 1989 and 1990 should not be allowed principally because the rental expenses were personal or living expenses of the appellant, and that the appellant had no reasonable expectation of profit during the 1989 and 1990 taxation years. The appellant argues that his long term projections demonstrate that there would be positive rental income commencing in the year 1994. The appellant further submits that he consulted certain people experienced in real estate matters prior to purchasing the property and that he charged his sons a fair market rental.

The respondent argues there was no reasonable expectation of profit in 1989 and 1990 in that the appellant’s own Schedule confirms this. respondent also argues that even though the Schedule indicates that revenues and expenses up to and including 1992 have been updated to reflect actual results, this is in fact false because the actual rental losses in 1991 and 1992 were $14,079 and $9,975 respectively rather than the figures indicated in the Schedule of $8,460 and $4,932 respectively. The respondent also submits that even if it had been possible to commence a positive rental income in 1994 and continuing thereafter, it would take until some time after the year 2000 for the appellant to make up all the losses incurred from the years 1989 through 1993.

The respondent relies principally on section 67 and subsections 9(2) and 248(1) and paragraphs 18(1 )(a) and 18(1)(h) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") which for the 1989 and 1990 taxation years read as follows:

67. General limitation re expenses — In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.

9(2) Loss from business or property — Subject to section 31, a taxpayer's loss for a taxation year from a business or property is the amount of his loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source mutatis mutandis.

Subsection 248(1)

“Personal or living expenses"—"personal or living expenses” includes:

(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. . . .

18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) general limitation.— an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

(h) personal and living expenses.— personal or living expenses of the taxpayer, other than travelling expenses incurred by the taxpayer while away from home in the course of carrying on his business. . . .

The appellant refers the Court to the case of Paikin v. M.N.R., [1987] 1 C.T.C. 2041, 87 D.T.C. 6, where the Tax Court held in the circumstances of that case that rental losses were allowed notwithstanding that there was a projection which indicated positive rental income only in later years. This is, in the Court's view an isolated case which is distinguishable on the facts from this case. Moreover the general principle enunciated in that case runs counter to the the findings of the courts in many other cases on rental losses. Counsel for the respondent has referred the Court to the case of Dallos v. M.N.R., [1985] 2 C.T.C. 2021, 85 D.T.C. 417, where the Tax Court concluded at page 2022 (D.T.C. 419) as follows:

When a taxpayer enters into a transaction which is designed not to gain or produce income (in the sense of profit) for the immediate future then the lack of a complete and supportable program which will ultimately produce profits in significant time and of sufficient quantity for the taxpayer to take advantage of section 111 of the Act, is a considerable impediment to a claim such as the instant appeal. In certain circumstances the taxpayer might be entitled later to use the provisions of section 45 of the Act concerning “change of use” for property. In the instant case the use of the property at issue during the years under appeal was personal not investment, and there is no basis for the taxpayer reducing otherwise taxable income by the alleged “rental losses" sustained on the operation.

After reviewing all of the evidence, the Court concludes that even if the rent charged to the three sons was a fair market rent (a fact which was not clearly established), in the taxation years 1989 and 1990 there was clearly no reasonable expectation of profit and accordingly the appeals are dismissed.

Appeals dismissed.