James Cran and Coco Cran v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2342

Bell, T.C.C.J.:— The appellant appealed a reassessment of income tax pursuant to a notice of reassessment issued by the Minister of National Revenue ("Minister") on December 31, 1991 for the 1988 taxation year. The appeal was heard under the informal procedure. A similar appeal from the appellant's wife, Coco Cran, co-owner of the house located at 625 Sifton Boulevard South West, Calgary ("property"), was heard on joint evidence. Any reference to the appellant respecting use of amounts relative to the property refers, depending upon the context, to him and to Coco Cran or to himself alone.

Facts

In 1987 the appellant and his spouse were approached by a company to rent the property for the Calgary Winter Olympics. EXA Holding Limited ("company") was renting homes in the Calgary area to provide accommodation for its clients who were planning to attend the Winter Olympics. The company would only consider the property for renting if certain renovations and improvements were made. The following renovations ("renovations") were made to the property:

The renovations were made between November 1987 and February 1988 to the satisfaction of the company. The total cost of the renovations was $21,999.78 with further expenses of $1,020 relating to mortgage interest, municipal taxes and insurance.

A formal lease was executed for the period of February 9, 1988 to March 3, 1988, pursuant to which $30,000 was paid. The first instalment of $5,000 was paid on November 21, 1987, the second instalment of $10,000 was paid on November 30, 1987 and the final instalment of $15,000 was paid at the end of the occupancy period, March 3, 1988.

In filing returns of income for the 1988 taxation year the appellant and his wife deducted the aforesaid expenses from the $30,000 received from the company and each included one half of the resulting profit in income. The Minister reassessed and allowed the deduction of $1,020 but disallowed $21,999.78. In reassessing, the Minister made an assumption of fact that, inter alia, the value of the property remained unchanged during the rental period.

The appellant's position

The appellant advanced one argument in the notice of appeal, namely that there was a change of use on February 9, 1988, and another change of use on March 3, 1988 with a deemed sale at fair market value on each date. The appellant contended that the fair market value on February 9, 1988 was $325,000, $75,000 of which was allocated to the building and $250,000 to the land. The appellant used $75,000 as the cost of depreciable property. Appellant added the cost of renovations (rounding the sum of $21,999.78 to $22,000) incurred prior to the change of use to the deemed acquisition value of the property, yielding an aggregate of $97,000. This was used as the capital cost for the purpose of computing capital cost allowance. Upon changing use of the property back to a principal residence from income producing, the appellant used a fair market value of $325,000, allocating the deemed price in the same manner as on acquisition. As a result of these calculation the appellant was able to produce a terminal loss of $21,694 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”). Applying the terminal loss against rental income of $30,000, a profit of $7,026 resulted, of which the appellant included one half in income.

An alternative argument made by the appellant was that the income was business income earned from the operation of a rental business that commenced in November 1987. For the purpose of earning business income, certain expenses were incurred, namely on renovations, the cost of which was currently deductible. This is how the appellant's income tax return was filed.

The respondent's position

Counsel for the respondent submitted that the calculation of income proposed by the appellant was not in accordance with the Act, two arguments in support of same being made.

1. The Minister contended that these expenses were not incurred for the purpose of gaining or producing income but were personal in nature and not deductible under paragraph 18(1)(h).

2. The Minister contended that the expenses were not incurred on account of income but on account of capital and are not deductible under paragraph 18(1)(b).

Analysis and Conclusion

The appellant and the respondent agree that the property underwent a change of use on February 9,1988, pursuant to subsection 13(7), from a nonincome producing principal residence to income producing property. The reverse occurred on March 3, 1988.

The appellant in his notice of appeal states at unnumbered paragraph 7 that:

Pursuant to [sub]section 45(1) paragraph 13(7)(d) of the Income Tax Act there was a change of use at each date [9 February 1988 and 3 March 1988] with a deemed sale at fair market value at each date.

[Dates in brackets added.]

The respondent in reply to the notice of appeal indicates at paragraph 7, assumption (g) and (h) that:

(g) commencing February, 1988 the property was converted from a principal residence to a rental property;

(h) after February, 1988 the property was converted back to a principal residence of the appellant and his spouse;

Assumption (i) made by the Minister at paragraph 7 of the reply to the notice of appeal states;

(i) the fair market value of the property between January 31,1988 and March 1, 1988 remained unchanged;

The appellant confirmed his aforesaid contention respecting fair market value by introducing as an exhibit a letter dated September 23,1992 written by Mr. Brian Mahoney, Re/Max agent, at the request of the appellant. In this letter Mr. Mahoney stated in part:

SIB would estimate the fair market value in February 1988 to have been about $325,000.

He continued:

In summary the renovations you did were not such as to add significantly to the value of the house, and make it too valuable to tear down. The market value of the property is therefore set by the lot value which will be, of course, unchanged by the renovations.

The appellant sought a terminal loss deduction as a result of adding the renovation cost to the fair market value of the property. In so doing, he increased the acquisition cost by $220,000 from $75,000 to $97,000 thereby enabling him to claim a terminal loss of $22,000. This cannot be done because the value of the house on both February 9, 1988 and March 3, 1988 was the same, namely $75,000.

The appellant advances an alternative argument, namely that these expenses were currently deductible from income earned from a rental business that commenced in November 1987 when the renovations began. I do not accept this proposition. I find that the rental sum of $30,000 was income from property and not from a business, one of the significant indicia of which is the provision of services as outlined in Wertman v. M.N.R., [1964] C.T.C. 252, 64 D.T.C. 5158 (Exch. Ct.) and in Walsh v. M.N.R., [1965] C.T.C 478, 65 D.T.C. 5293 (Exch. Ct.).

I also find that the sums were not currently deductible from the rental income from property but were, rather, capital in nature.

For the foregoing reasons I dismiss the appellant's appeal for his 1988 taxation year.

Appeal dismissed.