Ivan Glavanovic v. Minister of National Revenue, [1986] 1 CTC 2150, 86 DTC 1082

Tremblay, T.C.J.:—This appeal was heard on March 20, 1985 at the City of Toronto, Ontario.

1. The Point at Issue

The problem is whether the appellant, a design draftsman, and the owner of a property on Humbercrest Blvd., Toronto, until 1981, is correct in the computation of his income for the 1979 and 1980 taxation years, to deduct rental losses in the amounts of $4,870.83 and $4,643.39 respectively. These losses are related to the aforesaid property which the appellant had been trying to sell since 1975.

The respondent disallowed the losses on the basis that the rental activity had no reasonable expectation of profit.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent's assessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessment or reassessment are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

5. In so reassessing tax to the Appellant for the 1979 and 1980 taxation years, the Respondent [sic] upon the following assumptions or findings of fact:

(a) the Appellant built the property at 170 Humbercrest Blvd. and since at least 1975 had been trying to sell it;

(b) the Appellant failed to sell the property because he anticipated a higher price than the market was currently prepared to pay;

(c) the Appellant listed the property for sale as follows:

1975 listed to sell for $149,000

1976 listed to sell for $145,000

1978 listed to sell for $137,000

1981 listed to sell for $140,000

(d) the Appellant sold the property in 1981 for $140,000;

(e) the Appellant claimed rental losses on said property since 1977 as follows:

	Rental	Mortgage	Total Total
Year	Income	Interest	Expenses	Net Loss
1977	8,105	10,036.59	11,666.96	3,561.96
1978	10,800	11,718.20	12,289.35	1,489.35
1979	11,010	9,339.24	15,880.83	4,870.83
1980	9,930	8,422.31	14,573.39	4,643.39

(f) at no material time did the Appellant rent the property with a reasonable expectation of profit;

(g) the expenses claimed by the Appellant in respect of the property were not incurred for the purpose of income therefrom.

3. The Facts

3.01 The appellant testified that

(a) in 1975, in building the subject property located at 170-172 Humber- crest Boulevard in the City of Toronto, his intention was “to get into the building trade and build the houses” (T.S. p. 5);

(b) he started to sell the subject property before the building was finished. It was listed with a company based in Mississauga (TS p 6). An agreement of purchase and sale for $140,000 in August 1975 was signed by the two Pitcairn sisters (Exhibit A-1). However the mortgagee did not approve the purchasers;

(c) from 1975 to 1980, eight real estate agents tried to sell the property (Exhibit A-2 relating to listings for 1975, 1976, 1978, 1979 and 1980). There were about 12 prospective purchasers per year (TS p. 17);

(d) the problem was that the house was of a higher real estate value than the houses of the neighbourhood. Also, there was a problem with parking;

(e) in 1980, the appellant sold his home located in the east end of Toronto and then moved to the subject property. The latter was sold on June 30, 1981 for $140,000 (Exhibit A-3).

3.02 In 1979 and 1980, mortgage interest and municipal taxes paid were:

3.03 In cross-examination, the appellant admitted that

(a) his original intention in building the house was to sell it to make money;

(b) the property was always listed for sale from the time it was built until the time it was sold (TS p. 17);

(c) he hoped to sell it a few months after it was built (TS p. 22);

(d) it was not his concern to know whether he would have a profit or a loss from renting the property (TS p. 22);

(e) in the computation of the rental income for 1980, the appellant included 12 months for both apartments rented, despite the fact that he lived five months in one apartment without paying rent.

3.04 In re-examination by his agent, the appellant testified that

(a) he did not want to get into renting business because “‘we [he and his wife] are not made to rent something"' (TS p. 23);

(b) in renting the property, he attempted to minimize all necessary costs.

4. Law — Cases at law — Analysis

4.01 Law

The main provisions of the Income tax Act involved in the instant case are paragraphs 18(1 )(a), (h) and the definition of “personal or living expenses" in section 248. They read as follows:

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

(a) 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 or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business;

248. (1) . ..

“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,

4.02. Cases at Law

The only case referred to the Court is M.N.R. v. Gordon, [1966] C.T.C. 722; 66 D.T.C. 5445.

4.03. Analysis

4.03.1 The point is whether the losses from the rental of the property were deductible. To be deductible, the expenses must be incurred “for the purpose of gaining or producing income from the business or property” within the wording of provision 18(1)(a) of the Act.

4.03.2 It is obvious that the property was not acquired to be rented to earn income from it but to be sold, i.e., to earn income by selling it (paragraphs 3.01(a), (b), (c), 3.03(a), (b), (c), 3.04(a)).

The property must then be considered as part of the appellant’s inventory, and then the expenses must be considered as part of the cost in the computation of the profit after the sale, but not as current expenses. They were not incurred for the purpose of earning income from the property during the years’ retention of ownership (par. 3.04(a)).

4.03.3 Moreover, even if the expenses were incurred with the intention of earning income (which was not the case), another point to be considered would be whether the property was maintained with a reasonable expectation of profit. In the negative, the expenses must be considered as personal expenses pursuant to the above definition.

As the retention of the property was only on a temporary basis, and as during most of the years only one item of expenses (interest) was greater than the gross income, then it is obvious to me that there was no reasonable expectation of profit.

4.03.4 The fact that, in renting the property, the appellant attempted to minimize all necessary costs does not change the real nature of the business; that is “the building trade” (paragraphs 3.01(a)), and does not give a reasonable expectation of profit to the renting activities.

The problems arising from the location of the property, the parking and the fact that the property was continuously advertised for sale may explain the difficulty of selling and renting, but they do not justify, pursuant to the Act, the deduction of the expenses.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.