John D Walker v. Minister of National Revenue, [1984] CTC 2634

Brulé, TCJ [ORALLY]:—In this case there does not seem to be any argument of the facts. The appellant, a resident of Calgary, purchased a condominium unit in Hawaii late in 1979. He was the president and 99 per cent shareholder of a service company.

The court was told that the purchase was made for two reasons: first, in order to be able to rent the apartment to clients of the incorporated company and thus retain his clients in a competitive field, and secondly, to provide a possible place for his retirement.

In the course of operating the project, Mr Walker incurred large expenses and he sought to deduct these as being within the provisions of section 18( l)(a) of the Income Tax Act. That particular section is negative in its approach and prohibits deductions for, and I quote,

. 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.

The onus in such situations lies with the appellant, and here it is necessary to review the notice of objection which the appellant’s counsel has adopted as part of his evidence and as well the evidence provided by Mr Walker.

One of the first arguments provided was that the apartment rental project would help the appellant’s company by way of offering its clients the opportunity of renting accommodations in Hawaii at a reasonable cost. Dealing with this point first, objection was made by counsel for the Minister on the basis that the undertaking by Walker personally had nothing to do with the welfare of Walker’s company.

In support of this objection there were cited the recent decision in C J Oliver v MNR, [1984] CTC 2080; 84 DTC 1092. There the taxpayer paid out certain sums to benefit his companies. The court held that the business of the taxpayer was different from the business of the company and the amounts paid were not deductible by the taxpayer.

The Supreme Court of Canada in MNR v Freud, [1968] CTC 438; 68 DTC 5279, which was cited in the notice of objection herein can be readily distinguishable from the case here.

Looking at the practical aspects of this case it must be determined that before expenses can be deducted there must be a reasonable expectation of profit. No profit was obtained during the 1979 or 1980 years in question in this appeal and none was anticipated until at least 1985.

The appellant set his rental below the going rate to help the customers of his company and was very selective in choosing who could rent the premises, perhaps too much so if he really intended to have the operation as a profit making one.

On buying the condominium, Mr Walker was quite aware of the tax treatment of rental property which would allow him to write off losses against other income. In fact these losses were increased when two of the capital payments were not met and a second mortgage with its interest requirements was placed on the property. Mr Walker was led to believe that these units were “increasing at the rate of $20,000.00 per month” to quote him, and with his disclosed intention to have a possible retirement residence, this may have influenced his decision to buy.

As a person who has by his own admission had some experience with rental properties, it is surprising that no cash flow statement was prepared by the appellant until after the notice of objection to the reassessment was delivered.

In his testimony, Mr Walker said that he had hoped to show a profit in four years. The cash flow statement introduced as evidence at best didn’t suggest any profit before 1985, some seven tax periods after going into the venture.

I was surprised that the Minister’s representative allowed the exhibit when the maker was not present to be cross-examined as was disallowed recently in the case of Hanlon v MNR, [1984] CTC 2131; 84 DTC 1101.

The projection statement suggests income in 1981 of some $4,460, while in testimony Mr Walker stated that in 1981 the unit was rented for some nine months. Giving him credit, I believe he meant 1982. The projection is based on some rather large amounts of capital being paid into the project, with resulting reductions in interest payments as these were reduced drastically in the projection for each year.

Mr Walker didn’t make two of the original capital payments, and if he was allowed to deduct these expenses against other income why should he make further capital payments as suggested by the projection?

The Minister’s counsel offered a calculation that even if the apartment was rented 340 days a year (and this does not include the appellant’s use thereof) there would be no profit and I add that only if large amounts of capital were injected could this be turned around.

Apart from the business aspect, was Mr Walker acquiring the property to produce income within the meaning of the Act? I think not. I believe he was seizing on a possible investment opportunity as the units were gaining in value monthly, and he wanted a vacation retirement place in Hawaii for himself per- sonally. He may have had in mind helping the business but this must be kept separate and I do not believe was paramount.

As set out in DeMontigny v MNR, [1982] CTC 2012; 82 DTC 1034, and offered by the respondent, at 2014 [1036] the Honourable L J Cardin said, and I quote,

It is clear and well-settled law that no activity can be regarded as a business within the meaning of section 18(l)(a) of the Act if there is no reasonable expectation of realizing a profit from it. In my view this principle necessarily assumes that the primary intention of the businessman is to realize a monetary return from carrying on his business. It also goes without saying that there cannot be a business within the meaning of section 18(l)(a) of the Act if the maximum possible profit that can be expected from a business does not cover the necessary expenses of operating it.

This latter part of that judgment is our situation. I infer from the evidence that one of the more important considerations which Mr Walker had in mind when buying the property was that he might obtain a deduction from other income. If his prime intention was for the company I ask why it didn’t buy the property?

I do not intend to dwell further on the law advanced by the Minister as I do not believe it is necessary. Appellant’s counsel urged me to consider the principle set out in the F H Jones Tobacco Sales Limited, [1973] CTC 784; 73 DTC 5577; which concludes by saying,

It is a common sense appreciation of all guiding features which must provide the ultimate answer.

I have addressed my mind to all considerations and have arrived at the conclusion that the expenses claimed by the appellant do not fall within the exemption of paragraph 18(l)(a) and therefore this appeal must be dismissed.

Appeal dismissed.