Rino Volpe v. Minister of National Revenue, [1990] 2 CTC 2321, 90 DTC 1707

Lamarre Proulx, T.C.J.:—This is an appeal against reassessments by the respondent, the Minister of National Revenue, for the year 1984 and 1985.

The points at issue are:

(1) whether amounts received by the appellant to compensate for a loss incurred with respect to his family home, because his new job required him to move, are amounts that should be included in the computation of the taxpayer's income under subsection 6(3) of the Income Tax Act (the "Act");

(2) whether the rental of the appellant's family home constituted a business and thus allowed the deduction of rental losses;

(3) whether interest and property taxes can, upon the disposition of land, be added to the adjusted cost base of this land pursuant to paragraph 53(1)(h) of the Act.

The respondent relied on the following facts in determining his assessment with respect to the first issue:

[Translation]

(b) in 1983, the appellant owned a home in Edmunston, New Brunswick, in which he lived;

(c) on July 15, 1983, the appellant entered into an agreement with l'Assomption, Compagnie Mutuelle d'Assurance-Vie (the "employer");

(d) this agreement provided, inter alia, for acceptance by the appellant of the position of vice-president, marketing with the employer as well as the employer's commitment to a monetary obligation expressed as follows:

With respect to the sale of your home in Edmunston, I wish to confirm the following agreement:

You place a market value on your home of $137,000. In the event that it is sold for $110,000 or less, we shall partially reimburse your loss in 1983, 1984 and 1985 as follows:

1983— Upon hiring—allowance	$ 8,500
1984— Allowance in January	15,000
1985— Allowance in January	3,500

(g) in September 1983 the appellant moved to Moncton, New Brunswick, to be closer to his new job;

(h) at the time of his move, the appellant intended to return to work in Edmunston and therefore decided not to sell his home;

(i) notwithstanding the appellant's intention not to sell his home in 1983, the employer paid the appellant the amounts mentioned in para. (d) above at the dates agreed upon in the agreement;

The evidence shows that the appellant had always intended to sell his home, despite the respondent's allegations in paragraph (h). The real estate market in Edmunston was weaker than in Moncton. When negotiations began with his future employer, the appellant had his home appraised on a replace- ment value basis. The appraisal showed a value of $137,000. The appellant's wife immediately contacted potential buyers, e.g. professionals and business executives living in the area, in the hope of obtaining the full price for their home. They realized, however, that they would not be able to obtain the replacement value of their home. This explains the agreement with the future employer, set out in paragraph (d) of the respondent's reply.

Counsel for the appellant brought the following authorities to my attention: Jennings v. Kinder (Inspector of Taxes), [1958] 1 All E.R. 369; 38 T.C. 673; affd [1958] 3 All E.R. 285; Hochstrasser (Inspector of Taxes) v. Mayes, [1959] 1 Ch. 22; ; [1959] 3 All E.R. 817; Cyril John Ransom v. M.N.R., [1968] 1 Ex. C.R. 293; [1967] C.T.C. 346; 67 D.T.C. 5235; Richard D. McNeill v. The Queen, [1986] 2 C.T.C. 352; 86 D.T.C. 6477 and William R. Phillips v. M.N.R., [1990] 1 C.T.C. 2372; 90 D.T.C. 1274.

Counsel for the respondent argued that, in each of those cases, the employer paid for the capital loss sustained by the employee because of a move in the course of employment or at the end of employment, and not as in the present case at the beginning of employment. It is true that this distinction was made in each of those cases, as illustrated by the following words of Noël, J. in Ransom, at page 357 (D.T.C. 5241):

It indeed appears clearly that the indemnity paid to the appellant in respect of the capital loss sustained upon the sale of his house when transferred, cannot reasonably be regarded as falling within any of the following categories: (i) "as consideration or partial consideration for accepting the office or entering into the contract of employment" as the evidence discloses that it had nothing to do with his engagement as an employee. . .

In the instant case, the employer's obligation to pay an amount in compensation for a capital loss sustained by the employee is part of the appellant's contract of employment. It is one of the very terms of that contract.

Counsel for the appellant submitted that the purpose of subsection 6(3) of the Act is to prevent remuneration being paid under the guise of capital payments, while in the instant case, there is no question of disguised remuneration. This reasoning may be true for paragraph 6(3)(d), but it is debatable whether it also applies to paragraph 6(3)(e), which seems to cover payments made on account of capital. I conclude that subsection 6(3) of the Act not only aims at circumventing disguised remuneration schemes but may also include capital payments.

I fail to see how I could say that such a payment was not received on account of an obligation resulting from an agreement between the payer and the payee immediately before a period in which this payee became an officer of the payer, and that this amount cannot reasonably be regarded as having been received as consideration or partial consideration for accepting the office, Within the meaning of paragraphs 6(3)(b) and (c) of the Act.

Accordingly, I find that the respondent's assessment with respect to the first issue Is correct.

The second issue concerns the rental losses on the house in Edmunston, amounting to $9,676.

The respondent relied, inter alia, on the following facts in disallowing this deduction:

[Translation]

(l) from September to December 1983, the appellant rented his house for $400 a month;

(m) from January 1 to October 30, 1984, the appellant rented his house for $200 a month;

(n) during the periods mentioned in paragraphs (I) and (m) above, the tenant was Mr. Raymond Levesque, the appellant's brother-in-law;

(o) from January 1 to October 30, 1984, house-related expenses amounted to $11,616.90, as follows:

— Property taxes	$	920.55
— Insurance		328
— Interest on loan	11,809.85
—Water and sewerage		400
— Electricity		481.87
	$13,940.27
Less 2/12	$2,323.37
	$11,616.90

In 1984, rental income was $2,000 and losses $9,616.90. According to the testimony of the appellant and his wife, the purpose of the rental was to keep the house in good repair. I agree this was the primary purpose, especially as in 1983 the mortgage was not renegotiated and the appellant substituted a high- interest bank loan, which leads me to believe that the profitability of the rental was not an issue.

Counsel for the respondent referred me to the following cases: Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213; 77 D.T.C. 5213; Coupland v. The Queen, [1988] 1 C.T.C. 414; 88 D.T.C. 6252; Gregory E. Cecato v. M.N.R., [1984] C.T.C. 2125; 84 D.T.C. 1110; Taillefer v. M.N.R., [1987] 2 C.T.C. 2137; 87 D.T.C. 418 and Gerald T. Mason v. M.N.R., [1984] C.T.C. 2003; 84 D.T.C. 1001. Counsel particularly made reference to the decision of Rip, J. of this Court in Taillefer, supra, at pages 2140-41 (D.T.C. 420-21):

Where the farming activities have never shown a profit the Court must decide whether the undertaking is susceptible of profit, if the losses were reasonable in view of the income produced and whether the taxpayer did what would be necessary to show a profit. A profit in a future year from activities identical to those undertaken in the years under appeal is relevant in determining its profitability.

The expectation of profit, therefore, is not a mere hopeful or wishful expectation; it is what a person having a basic knowledge of the undertaking would normally expect having regard to the various factors involved in the undertaking. If the undertaking is susceptible to the vagaries of weather (e.g. drought), disease, economics (e.g. fluctuating prices and costs) or other adversities beyond the taxpayer's control, that potential adversity must be taken into account in appreciating the meaning of "reasonable". Many of the adversities, beyond the control of the taxpayer, may be expected and are normal risks of farming but others are unusual and exceptional occurrences; the taxpayer ought to allow for the former in determining his expectation of profit. The term “reasonable expectation” is not analogous to “expectation under ideal conditions”.

The appellant did not prove a reasonable expectation of profit and the respondent's assessment on this point is therefore correct.

The third issue is whether interest and property taxes paid on a lot should be added to the cost of the lot. There is no question as to the amounts of interest and property taxes. The respondent relied on the following facts:

[Translation]

(q) in 1980, the appellant acquired approximately 70 acres of land for $42,000 and then sold this land for $62,000 in 1985;

(r) the interest on borrowed money used to acquire the land and the property taxes paid on this parcel of land from 1980 to 1985 did not constitute an outlay or expense made or incurred by the appellant for the purpose of gaining income from this land;

(s) the appellant obtained no income from this land;

(t) at no material time can it be said that the land was used in that year for the operation or held for the purpose of a business operated during the year by the appellant or held by the appellant mainly for the purpose of gaining income from that land during that year;

(u) the parcel of land was at all material times undeveloped.

At the hearing, the appellant testified that the acquisition of the land in 1980 was an adventure in the nature of trade. Following the appellant's testimony, counsel for the respondent decided not to object to that view.

Paragraph 53(1)(h) states:

Sec. 53. Adjustments to cost base.

(1) In computing the adjusted cost base to a taxpayer of property at any time, there shall be added to the cost to him of the property such of the following amounts in respect of the property as are applicable:

(h) where the property is land of the taxpayer, any amount paid by him after 1971 and before that time pursuant to a legal obligation to pay

(i) interest on debt relating to the acquisition of land, or an amount payable by him for the land, or

(ii) property taxes (not including income or profits taxes or taxes imposed by reference to the transfer of property) paid by him in respect of the property to a province or to a Canadian municipality

to the extent that the amount was, by virtue of subsection 18(2), not deductible in computing his income from the land or from a business for any taxation year commencing before that time. . .

We must therefore decide if this is a case where the restrictive provisions of subsection 18(2) of the Act prevent the deduction of interest and property taxes. This may occur in a case of business income or in a case of property income. The appellant took the view that the purchase of land was an adventure in the nature of trade.

Accordingly, the appellant is entitled to the benefit of paragraph 53(1)(h) of the Act.

The appellant's appeal is dismissed for the 1984 taxation year.

For the 1985 taxation year, the appeal is allowed without costs and the matter is referred back to the respondent for reconsideration and reassessment on the basis of the aforementioned findings.

Appeal allowed in part.