Kempo,
T.C.C.J.
(orally):—These
appeals
brought
under
the
informal
procedure
concerned
the
1986,
1987
and
1988
taxation
years
of
the
appellants,
the
Drs.
Prakash
Shah,
Azra
Shah,
Rashmi
Clerk
and
Shirish
Clerk,
appeal
numbers
92-693,
92-692,
92-694
and
92-691
respectively.
By
consent
application,
the
appeals
were
joined
for
hearing
on
common
evidence
to
be
given
by
one
of
the
appellants,
Dr.
Prakash
Shah
and
by
the
partnership's
accounting
adviser,
Mr.
Tom
Gaskell.
The
four
appellants
are
all
medical
doctors.
Each
were
disallowed
operational
losses
tor
each
year
under
appeal
arising
out
of
two
real
estate
rental
properties
in
Florida,
U.S.A.,
acquired
by
"Shah
&
Clerk
Partners"
being
a
partnership
entered
into
on
September
30,
1980
between
these
four
appellants.
The
stated
purpose
of
the
partnership
was
"to
seek
out
for
profit,
investment
opportunities
in
real
estate
and/or
other
investment
projects".
All
partners
agreed
thereunder
to
enthusiastically
seek
out
such
projects
in
Canada
or
U.S.A.
It
is
appropriate
at
this
time
to
set
out
the
relevant
extracts
from
the
pleadings
filed
by
each
party,
each
being
essentially
identical
with
respect
to
the
underlying
issue
as
to
each
appellant.
The
pleadings
from
Dr.
Prakash
Shah's
appeal
file
is
representative
of
the
matter
and
therefore
will
be
the
one
referred
to.
Paragraphs
1
to
13
inclusive
of
his
notice
of
appeal
asserted:
1.
The
appellant
is
a
partner
in
the
Shah
&
Clerk
partnership
(the"partnership").
The
partnership
has
a
December
31
fiscal
year
end
and,
incurred
operating
losses
in
the
amounts
of
$25,450,
$18,238
and
$14,701
for
its
1986,
1987
and
1988
taxation
years.
In
each
such
taxation
year,
the
partnership
allocated
to
the
appellant
his
proportionate
share
of
the
partnership
losses,
being
$8,908
in
1986,
$6,383
in
1987
and
$5,146
in
1988
and
the
appellant
deducted
such
losses
in
calculating
his
taxable
income
in
1986,
1987
and
1988.
2.
The
partnership
carried
on
business
of
earning
income
from
rental
property
and
the
appellant
invested
in
the
partnership
to
earn
income
therefrom.
Pursuant
to
subsection
96(1)
and
subsection
9(2)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the"Act"),
the
appellant
is
entitled,
in
calculating
his
taxable
income
in
each
of
1986,
1987
and
1988,
to
deduct
his
proportionate
share
of
the
partnership's
loss
for
such
fiscal
years.
3.
The
appellant
is
a
resident
of
Canada,
residing
at
77
Westmount
Road,
Suite
103,
Guelph,
Ontario,
N1H
5J1.
4.
On
September
30,
1980,
four
individuals
including
the
appellant
formed
the
partnership
pursuant
to
a
partnership
agreement
bearing
the
same
date.
5.
The
purpose
of
the
partnership
was
to
seek
out,
for
profit,
real
estate
investment
opportunities
whether
in
Canada
or
the
United
States.
The
appellant
had
a
35
per
cent
interest
in
the
partnership.
6.
In
November
of
1980,
the
partnership
purchased
two
rental
properties
in
the
State
of
Florida,
referred
to
as
Gulf
&
Bay,
unit
No.
204C
for
$181,000
(U.S.)
and
Siesta
Breakers
unit
No.
606
for
$172,000.
In
each
instance,
the
partnership
paid
25
per
cent
of
the
purchase
price
in
cash
and
secured
a
mortgage
for
the
remaining
75
per
cent
of
the
purchase
price.
The
appellant
contributed
to
the
partnership
his
proportionate
share
of
the
capital
required
to
complete
the
purchases.
7.
On
their
acquisition,
both
properties
were
put
on
a
permanent
rental
program
through
each
property's
Condominium
Association
agent.
In
addition,
the
partnership
supported
the
rental
activities
of
the
agent
through
local
advertising.
8.
In
1982,
the
partners
of
the
partnership,
including
the
appellant,
as
to
his
proportionate
share,
injected
$117,375
in
the
partnership
to
pay
and
discharge
the
Siesta
Breakers
unit
606
mortgage.
The
purpose
of
the
capital
injection
was
to
try
to
ensure
that
the
partnership
was
operating
on
a
financially
self-sufficient
basis.
9.
In
1984,
the
partnership
sold
the
Gulf
&
Bay
unit
No.
204C
and
used
all
of
the
net
proceeds
from
the
sale
as
a
down
payment
on
the
partnership's
acquisition
of
Gulf
&
Bay
unit
507E.
The
Gulf
&
Bay
unit
507E
was
purchased
for
$281,000
(U.S.),
which
purchase
was
financed
with
a
$211,500
(U.S.)
open
first
mortgage.
10.
In
the
taxation
years
under
appeal
the
partnership's
assets
consisted
of
Siesta
Breakers
unit
606
("606")
and
Gulf
&
Bay
unit
507E
("507E").
From
its
acquisition
in
1984
and
for
each
year
throughout
the
assessment
period
(i.e.
1986,
1987
and
1988)
unit
507E
was
leased
by
the
partnership
to
residents
to
the
State
of
Florida
pursuant
to
an
annual
lease.
The
tenant
of
507E
was
not
related
to
and
dealt
at
arm's
length
with
the
appellant
and
with
the
partnership.
11.
Annual
leases
could
not
be
obtained
for
unit
606.
The
apartment
rental
or
lease
business
in
the
State
of
Florida
is
seasonal
with
a
significantly
increased
demand
in
the
winter.
12.
At
no
time
during
the
period
of
assessments
did
the
appellant
or
any
partner
in
the
partnership
ever
use
unit
507E
for
their
personal
use.
13.
The
aggregate
personal
use
made
by
all
of
the
partners
in
the
partnership
for
unit
606
was:
(a)
three
and
one-half
weeks
in
June
and
July
of
1986;
(b)
two
weeks
in
May
and
two
weeks
in
July
of
1987;
and
(c)
three
weeks
in
July
of
1988.
In
each
year,
the
partners
made
personal
use
of
unit
606
only
in
the
low
season
being
the
summer
months
when
the
unit
was
otherwise
vacant
and,
in
each
instance
the
partners,
including
the
appellant,
reimbursed
the
partnership
for
all
expenses
incurred
during
their
personal
use
of
unit
606.
The
respondent's
reply
to
this
notice
of
appeal
admitted
the
appellant's
facts
as
stated
in
paragraphs
1,
3,
4
and
6
of
the
notice
of
appeal.
Paragraphs
2
to
8
inclusive
of
the
reply
stated:
2.
He
denies
all
other
allegations
of
fact
in
the
notice
of
appeal.
3.
In
computing
income
for
the
1986,
1987
and
1988
taxation
years,
the
appellant
claimed
rental
losses,
arising
from
his
share
(35
per
cent)
of
a
partnership
interest
in
the
rental
operation
of
Florida
condominiums,
in
the
following
amounts:
|
Year
|
Rental
Losses
|
|
1986
|
$8,908
|
|
1987
|
$6,383
|
|
1988
|
$5,146
|
4.
In
reassessing
the
appellant
for
the
1986,
1987
and
1988
taxation
years,
the
Minister
of
National
Revenue
(the
"Minister")
disallowed
the
deduction
of
the
rental
losses.
5.
In
so
reassessing
the
appellant,
the
Minister
made
the
following
assumptions
of
fact:
(a)
the
facts
herein
before
admitted;
(b)
since
1980,
the
appellant
has
held
a
35
per
cent
partnership
interest
in
a
rental
operation
of
two
condominium
units,
located
in
the
State
of
Florida,
U.S.A.,
(the"properties");
(c)
from
1986
to
1988
the
partnership
reported
income,
expenses
and
losses
from
the
rental
of
the
properties
as
follows:
|
Year
|
Income
|
Expenses
|
Loss
|
|
1986
|
$27,305
|
$52,755
|
($25,450)
|
|
1987
|
$29,267
|
$47,505
|
($18,238)
|
|
1988
|
$29,095
|
$43,796
|
($14,701)
|
(d)
fixed
costs
for
the
partnership
such
as
interest,
taxes
and
condominium
fees
for
the
properties,
exceeded
the
income
reported
in
each
of
the
year
1986,
1987
and
1988
taxation
years,
and
were
as
follows.
|
Year
|
Interest
|
Taxes
|
Condo
Fees
|
Total
|
|
1986
|
$35,883
|
$5,523
|
$7,454
|
$48,860
|
|
1987
|
$33,641
|
$5,293
|
$6,006
|
$44,940
|
|
1988
|
$23,983
|
$5,502
|
$5,563
|
$35,048
|
(e)
even
though
the
mortgage
on
one
of
the
properties
(Siesta
Breakers
Unit
606)
was
paid
off
in
1982,
the
partnership's
rental
operation
has
been
unable
to
show
a
profit;
(f)
from
1980
to
1989
the
partnership
incurred
rental
losses
from
the
properties.
The
losses
incurred
for
the
1982
to
1989
taxation
years,
inclusive,
are
as
follows:
|
Year
|
Losses
|
|
1982
|
($16,525)
|
|
1983
|
($
7,150)
|
|
1984
|
($11,168)
|
|
1985
|
($10,208)
|
|
1986
|
($25,450)
|
|
1987
|
($18,238)
|
|
1988
|
($14,701)
|
|
1989
|
($18,773)
|
(g)
no
financial
plan
was
developed
showing
how
the
partnership's
rental
operation
could
become
profitable;
(h)
the
appellant
had
no
reasonable
expectation
of
profit
from
his
partnership
interest
in
the
rental
operation
of
the
properties
during
the
1986,
1987
and
1988
taxation
years;
(i)
the
rental
expenses
were
personal
or
living
expenses
of
the
appellant.
6.
The
issue
is
whether
the
appellant
had
a
reasonable
expectation
of
profit
from
his
partnership
interest
in
the
rental
of
the
properties
in
the
1986,
1987
and
1988
taxation
years.
7.
He
relies
on
section
9,
subsection
248(1)
and
paragraphs
18(1)(a)
and
18(1)(h)
of
the
Income
Tax
Act
(the
"Act")
as
amended
for
the
1986,
1987
and
1988
taxation
years.
8.
He
submits
that
the
appellant
did
not
have
a
reasonable
expectation
of
profit
from
his
partnership
interest
in
the
rental
of
the
properties
in
the
1986,1987
and
1988
taxation
years,
that
the
losses
were
personal
or
living
expenses
of
the
appellant,
and
that
the
appellant
was
properly
reassessed
in
accordance
with
paragraphs
18(1)(a)
and
18(1)(h)
of
the
Act.
The
evidence
advanced
for
the
appellants
supports
the
factual
allegations
found
in
paragraphs
5,
8,
9,
12
and
13
of
the
notice
of
appeal
and
those
in
paragraphs
3,
5(b),
(c),
(d),
(e)
and
(f)
of
the
reply
to
notice
of
appeal.
Dealing
with
the
other
factual
allegations
in
the
notice
of
appeal,
paragraph
7
is
not
correct
in
that
during
1982
the
partnership,
to
avoid
incurring
substantial
rental
management
fees,
decided
to
advertise
and
seek
out
prospective
tenants
in
the
Guelph
and
Toronto
area
on
their
own.
When
this
failed
to
produce
the
anticipated
results,
commencing
in
1983
and
thereafter
rental
agent
services
were
used
in
the
area
of
Sarasota,
Florida.
No
oral
evidence
was
actually
led
respecting
the
annual
leases
as
alleged
in
paragraph
10
or
11.
Through
a
misunderstanding,
a
written
one
that
was
executed
by
the
partnership
that
was
available
for
production,
was
inadvertently
removed
from
the
Book
of
Documents,
Exhibit
A-1.
As
to
any
financial
plan
of
the
partnership
formulated
at
the
outset,
Dr.
Shah
testified
that
rental
income
properties
located
in
the
sunbelts
of
California
and
Florida
were
actively
considered
and
weighed.
Other
people
investing
in
this
type
of
activity
were
also
consulted.
The
subject
acquisitions
were
made
after
receiving
advice
from
a
locally
situated
professional
realtor
and
condo
management
personnel
as
to
the
historical
rental
capabilities
and
the
capital
appreciation
of
the
properties
themselves.
Advice
was
sought
and
taken
from
the
partnership's
accounting
adviser.
Dr.
Shah
readily
conceded
that
the
partnership
was
initially
and
remained
continuously
interested
in
both
capital
appreciation
of
its
investment
properties
as
well
as
enjoying
a
profitable
net
income
stream
to
be
derived
therefrom.
At
the
outset
the
partnership
operated
on
the
assumption,
arrived
at
through
its
consultations
with
knowledgeable
people
in
the
field,
that
the
two
units
acquired
in
1980
could
be
rented
at
$3,500
each
per
month
for
six
months
during
the
winter
months
and
for
two
months
during
the
summer.
As
the
expenses
were
fixed,
a
net
profit
was
projected
in
the
second
year
of
operation.
Dr.
Shah
was
totally
forthright
and
credible
in
the
delivery
of
all
of
his
evidence.
I
have
no
doubts
that
the
partnership
had
indeed
proceeded
on
this
expectation
and
that
it
was
based
on
a
reasonable
foundation
at
the
time.
During
1981-82,
(its
first
real
season)
with
a
25
per
cent
equity
in
the
venture,
the
partnership
soon
realized
that
with
the
original
financing
in
place
and
with
their
own
attempts
to
gain
tenants
being
unsuccessful,
there
would
be
operational
losses
without
at
least
five
to
six
months
of
full
occupancy
at
$7,000
gross
total
income
per
month.
Given
their
own
best
efforts,
and
in
a
market
declining
for
various
reasons,
the
actual
income
receipts
were
only
(rounded
out)
$18,600
for
1982.
Acting
on
this
knowledge,
the
partnership
retained
professional
on-site
rental
personnel
and
injected
a
further
$117,375
so
as
to
discharge
the
unit
606
mortgage
on
the
premise
that
thereafter
net
profits
would
be
received
if
not
at
least
at
a
break-even
point
at
the
outset.
Sadly,
this
was
not
the
case.
In
1983
$26,400
in
income
was
gained
and,
notwithstanding
the
lower
mortgage
interest
costs
(down
from
$31,400
to
$23,000),
a
loss
of
$7,150
occurred.
During
this
time
it
was
discovered
that
two
new
rental
towers
were
being
constructed
on
the
Gulf
&
Bay
site
which
effectively
made
unit
204C
itself
significantly
less
desirable
in
the
rental
market.
A
business
decision
was
then
made
to
upgrade
within
the
same
complex
as
they
considered
it
was
still
a
desirable
and
worthy
location.
Unit
204C
was
sold
and
another,
507E,
was
purchased
with
the
sale
proceeds
plus
new
mortgage
financing.
In
this
deal
the
vendor-developer
had
guaranteed
a
one-year
rental
income
of
$15,000.
Dr.
Shah
testified
that
these
new
towers
had
had
a
severe
impact
on
the
rentability
of
204C,
and
that
it
was
felt
unit
507E
was
a
considerable,
albeit
more
expensive,
improvement.
In
1985
$36,200
of
income
was
received
with
$46,430
in
expenses
being
incurred.
In
reaction,
the
partnership
listed
the
Siesta
Breakers
unit
606
property
for
sale
in
late
1985
or
early
1986
with
the
intention
of
applying
the
sale
proceeds
to
pay
down
the
mortgage
on
Unit
507E.
Dr.
Shah
said
a
few
tentative
fire-sale
types
of
bids
were
advanced
and
rejected.
In
1986
$27,300
in
rental
income
was
received
with
$52,755
in
expenses
incurred.
In
1987
the
income
was
$29,300
with
$47,505
in
expenses.
An
accepted
written
offer
to
purchase
unit
606
was
aborted
by
the
purchaser
in
December
1987.
Another
purchase
was
completed
in
January
1990.
These
funds
were
not
directed,
however,
to
the
pay-down
of
the
mortgage
on
the
other
unit
but
rather
were
favourably
converted
to
Canadian
currency
and
invested
for
one
year
in
treasury
bills
at
a
higher
rate
of
interest
than
the
mortgage.
Dr.
Shah
denied
any
implication
that
in
1990
the
partnership
was
desirous
of
continuing
the
rental
loss
situation
for
its
personal
write-offs
to
each
of
the
partners.
He
said
the
one-year
Canadian
treasury
bill
investment
made
better
business
and
economic
sense.
The
1990
financial
statement
of
the
partnership
shows
that
rental
revenue
of
$16,570
and
interest
revenue
of
$18,565
was
receipted
for
a
total
of
$35,135;
that
expenses
were
$37,800
for
an
operational
loss
of
$2,663
but
that
$10,900
of
the
profit
from
the
sale
of
unit
606
was
applied
to
report
a
net
income
of
the
partnership
for
1990
of
$8,200.
Analysis
I
have
considered
the
authorities
advanced
by
each
party
in
their
cause.
Both
counsel
raised
Moldowan
v.
The
Queen,
[1978]
1
S.C.R.
480,
[1977]
C.T.C.
310,
77
D.T.C.
5213;
Aucoin
v.
M.N.R.,
[1991]
1
C.T.C.
2191,
91
D.T.C.
313
(T.C.C.);
and
Panz
v.
M.N.R.,
[1991]
1
C.T.C.
2459,
91
D.T.C.
125
(T.C.C.).
The
appellant's
counsel
also
relied
upon
Paikin
v.
M.N.R.,
[1987]
1
C.T.C.
2041,
87
D.T.C.
6
(T.C.C.);
McNeil!
v.
Canada,
[1989]
2
C.T.C.
310,
89
D.T.C.
5516
(F.C.T.D.);
Baker
v.
M.N.R.,
[1987]
2
C.T.C.
2271,
87
D.T.C.
566
(T.C.C.);
and
Laurence
v.
M.N.R.,
[1987]
1
C.T.C.2234,
87
D.T.C.
173
(T.C.C.).
The
respondent's
counsel
raised
in
its
favour
Scott
et
al.
v.
M.N.R.,
[1984]
C.T.C.
3040,
85
D.T.C.
1
(T.C.C.),
Lorentz
v.
M.N.R.,
[1985]
1
C.T.C.
2141,
85
D.T.C.
131
(T.C.C.)
and
Foldy
et
al.
v.
M.N.R.,
[1991]
1
C.T.C.
2175,
91
D.T.C.
361
(T.C.C.).
All
of
these
authorities
are
persuasive
and
helpful
providing
they
can
be
factually
synchronized
with
those
of
the
case
before
me.
However,
on
a
careful
reading,
their
factual
differences
abound
as
to,
inter
alia,
the
method
and
underlying
purpose
of
the
acquisition,
the
nature
of
the
venture,
the
time
period
held,
reaction
or
lack
thereof
to
meet
normal
risks
and
adversities
plus
the
very
capability
of
the
venture
at
its
outset
to
produce
profit.
All
of
these
factors,
plus
the
reasonableness
of
the
projections
made
at
inception,
together
as
to
what
was
actually
done,
are
all
matters
and
factors
usually
unique
to
each
taxpayer
in
their
particular
situation.
Here,
we
have
a
partnership
venture
pledged
to
earn
profit
through
its
investments.
It
had
made
reasonable
inquiries
of
knowledgeable
professionals
concerning
location,
price
and
rental
capabilities.
There
is
no
aspect
here
whatsoever
respecting
an
underlying
operative
purpose
to
serve
personal
needs.
Counsel
for
the
respondent
has
highlighted
the
negative
aspects
of
this
case.
He
questioned
the
extent
of
the
planning
stages
as
the
appellants
were
neophytes
in
this
kind
of
venture.
He
suggested
that
the
upgrading
in
1984
to
a
more
expensive
unit
had
simply
and
objectively
continued
an
old
underfinancing
problem
and
therefore
was
not
a
reasonable
response
by
the
partnership
to
the
historical
loss
position.
He
also
noted
that
the
unit
606
sale
proceeds
in
1990
were
diverted
to
something
other
than
the
pay-down
of
the
mortgage
on
unit
507E.
I
have
considered
these
factors
as
well
as
the
favourable
features
highlighted
by
counsel
for
the
appellants.
One
must
be
mindful
of
the
brilliance
that
20-20
hindsight
embodies
when
considering
and
applying
an
objective
test
to
the
matters
and
the
partnership's
responses
as
they
arose,
having
regard
to
all
of
the
overall
circumstances.
In
this
regard
the
facts
establish
timely,
reasonable
and
prudent
conduct
on
the
part
of
the
partnership
as
adverse
circumstances
became
known.
In
1982
the
problem
was
analyzed
as
faulty
marketing
on
their
part
and
underfinancing.
Both
were
promptly
corrected
by
the
retention
of
a
professional
on-site
rental
agent
together
with
an
infusion
of
funds
which
resulted
in
an
equity
position
of
50
per
cent.
This
course
of
conduct,
as
I
see
it,
was
essentially
sourced
in
response
to
a
recognition
of
the
undercapitalization.
The
following
season's
experience
(1983)
sourced
its
problems
to
the
competition
for
rental
income
caused
by
the
newly
built
rental
structures
on
the
site.
The
business
decision
and
response
was
to
upgrade
in
order
to
receive
the
expected
rentals.
In
1985,
1986
and
1987,
the
years
under
appeal
and
review,
this
did
not
happen.
In
reaction
to
the
1984/1985
season
experience
which,
objectively,
now
represented
both
problems
of
underfinancing
and
sluggishness
of
rental
income,
it
was
decided
in
late
1985
or
early
1986
to
sell
unit
606
in
order
to
fund
a
pay-down
of
the
mortgage
on
the
other.
As
to
respondent-counsel's
submission
that
the
decision
to
sell
the
debt-free
unit
should
raise
suspicions
reflecting
personal
reasons
to
continue
a
loss
position,
I
agree
with
appellants’
counsel's
position
that
in
this
case
it
did
not
really
matter
which
one
had
been
marketed
because
the
moneys
realized
would
still
remain
in
the
partnership
to
reduce
its
operational
losses.
Further,
and
factually,
I
accept
Dr.
Shah's
evidence
that
the
partnership
had
decided
there
was
a
real
and
greater
value
to
the
retention
of
unit
507E
and
that
the
other
reflected
lesser
investment
potential.
It
was
given
due
consideration
at
the
time
and
I
cannot
find
this
business-based
choice
was
unreasonable
under
all
of
the
circumstances.
In
an
overall
view,
the
facts
of
this
case
support
a
funding
of
reasonable
business
planning
with
timely
and
appropriate
business
reactions
being
taken
in
response
to
the
events
as
they
arose.
The
events
that
did
happen
are
not,
in
my
view,
beyond
normally
anticipated
business
risks
which,
like
in
Baker
v.
M.N.R.,
supra,
at
page
2274
(D.T.C.
568)
cannot
be
imputed
to
the
partnership.
To
use
Chief
Judge
Couture's
words,
[i]t
was
simply
part
of
the
risk
related
to
the
venture".
My
answer
to
the
question
posed
in
paragraph
6
of
the
Minister's
reply
to
notice
of
appeal,
supra,
is
yes.
For
the
reasons
given,
the
appeals
of
each
of
the
appellants
are
to
be
allowed,
and
the
matters
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
on
the
basis
that
each
appellant
is
entitled
to
his
or
her
claimed
deduction
from
income
for
the
1986,
1987
and
1988
taxation
years
respecting
his
or
her
rental
losses
arising
from
his
or
her
share
of
a
partnership
interest
in
a
rental
operation
of
condominiums
located
in
Florida,
U.S.A.,
described
as
Siesta
Breakers
unit
606
and
Gulf
&
Bay
unit
507E.
The
appeals
being
heard
on
common
evidence,
the
appellants
are
entitled
to
one
set
of
costs
on
a
party-to-party
basis.
Appeal
alllowed.
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