Rudolph L Dallos v. Minister of National Revenue, [1985] 2 CTC 2021, 85 DTC 417

Taylor, TCJ: —This is an appeal heard in Toronto, Ontario on May 16, 1985 against income tax assessments for the years 1979 and 1980 in which the Minister of National Revenue disallowed “rental losses” in the amounts of $1,820 and $1,892 respectively. The respondent’s summary of the situation as provided in the reply to notice of appeal was as follows:

— in 1968 the Appellant purchased property comprising 8 acres;

— the property was severed into two parcels of 4 acres each;

— one parcel with a farm house was sold;

— in 1977 the Appellant built a house on the remaining parcel which was a 2 bedroom brick bungalow at a cost of $40,000.00 financed by a $35,000.00 mortgage;

— the Appellant began renting this house in 1978 and has incurred losses in every year up to 1981;

— during those years, the Appellant was renting the house at less than fair market value;

— for the years 1979 and 1980, the rent charged by the Appellant was less than the fixed costs of mortgage, interest and taxes;

— at no time during those years did the Appellant rent the property with a reasonable expectation of profit;

— at all times during the years in question the Appellant was intending to sell the property;

— the expenses incurred by the Appellant during the years in question were not incurred for the purpose of earning income from the rental of the property but rather, were the carrying costs of the property.

The respondent relied, inter alia, upon subsections 9(2) and 18(1) of the Income Tax Act, R.S.C. 1952, c 148 as amended.

In essence the testimony of the appellant was that he had built the house on Big Chief Road, in Orillia Township, Ontario, with the intention of retiring there some day and in the meantime rented it for what was considered to be the going rental rate for the area. While he had not actively pursued a rental program which might have produced a greater return it was his position that if he could have rented the house for more he would have done so. There was no indication during the hearing that the taxpayer had intended “‘to sell the property" (see above), and the Minister did not actively pursue the position that the disallowed amounts "were the carrying costs of the property". The issue then was simply whether in renting the property he had done so with a "reasonable expectation of profit”.

There is a considerable body of jurisprudence dealing with the "reasonable expectation of profit" question when related to rental losses (see — Lorentz v MNR, [1985] 1 CTC 2144; 85 DTC 131; Mason v MNR, [1984] CTC 2003; 84 DTC 1001; Cecato v MNR, [1984] CTC 2125; 84 DTC 1110). Most of that case law reflects the opinion of the Court, when an investment is made allegedly "for the purpose of gaining or producing income", and the taxpayer claims an operating loss. The results have not been generally favourable to the taxpayers. However, in this instance we have a situation in which Mr Dallos built the house involved with the admitted long-range purpose of using it as his retirement home, and apparently rented it in the meantime at the best rent he could obtain. I am not at all sure that anything significant hangs on his "retirement home" intention, since there is no evidence at all that he was aware of or even would have taken into account, the pure possible rental profits from the property before constructing the house, in his decision to construct and rent. Simply put, Mr Dallos decided to build the house he wanted on the property, without regard to its revenue producing potential — or he never would have built it if his sole objective had been to improve his financial condition. When faced with this clear conclusion to be drawn from the testimony, the agent for the appellant contended that at some time in the future, particularly when and if the principal of the mortgage was paid down, a profit could be realized. It would appear to me that this is analogous to admitting quite candidly that at least during the years under appeal there was no expectation of profit, let alone a reasonable expectation of profit — directly opposite to the taxpayer's basis for this appeal, and consistent with the rationale for the assessment at issue.

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.

The appeal is dismissed.

Appeal dismissed.