M S Trojanowski v. Minister of National Revenue, [1984] CTC 2841, 84 DTC 1705

Christie, CJTC:—The issue is whether the appellant is entitled to deduct expenses in the amount of $6,424.79 from his total income in 1980.

The appellant is an engineer by profession and is employed by the British Columbia Telephone Company. There is no dispute about the facts contained in paragraphs 2 to 7 inclusive of the respondent’s reply to notice of appeal except that it is agreed that they should be read as amended to this extent: first, in paragraph 4 the figures listed under 1980 are altered by deletion of the claimed capital cost allowance in the sum of $5,140; second, rental income of $2,400 should be shown in 1980. These changes were included in the amended return of income filed with the respondent by the appellant in respect of the latter’s 1980 taxation year on March 26, 1982 which is the same date on the notice of appeal to this Court. It is the evidence of the appellant that the $2,400 in rent was not paid when due, but was paid subsequently and in this regard reference was made to an agreement dated October 26, 1981, (Exhibit A-1) which reads:

This is the confirmation of a verbal agreement, existing between the owner of the suite 327 at 9101 Horne St Burnaby V3N 4M3, Mr MS S Trojanowski P Eng and the tenant Mr L M Jaworski, occupier of the above suite. It is confirmed that because of the dire financial situation of the tenant, he did not pay the rent for the above premises in the period 1980-81, nevertheless it had been additionally agreed by both parties that Mr L M Jaworski will begin the back-payment of the rent starting in January 1982. Signed, in Burnaby BC, this 26th day of October, nineteen hundred and eighty one.

Paragraphs 2 to 7 of the reply to notice of appeal read:

2. In the 1977 taxation year, the Appellant purchased two condominiums (suite numbers 328 and 327) in the same building in Burnaby, British Columbia.

3. The Appellant resided in Suite #328, and Suite #327 (a 2-bedroom suite) was rented to friends from Poland, Mr and Mrs Jaworski, for $200 per month which was the rental charged from 1977 through 1980.

4. In respect to Suite 327, the Appellant reported the following rental income and expenses in the various years:

	1977	1978 1978	1979 1979	1980 1980
Gross rents	$2,000.00	$2,400.00	—	—
Less:
Property taxes	(938.01)	(774.35)	(940.00)	(755.73)
Maintenance fees	(486.32)	(729.48)	(905.76)	(958.20)
Mortgage interest	(2,293.02)	(4,575.26)	(4,459.64)	(4,542.31)
Other	(173.83)	(54.58)	(74.00)	(170.55)
CCA	(5,043.43)	—	—	(5,140.00)
Net rental loss:	$(6,934,61)	$(3,733.67)	$(6,379.40)	$(11,564.79)

5. The Respondent allowed a rental loss of $2,234.61 for the 1977 taxation year after disallowing the capital cost allowance claimed. The 1978 rental loss was accepted as filed. The 1979 initial assessment was adjusted to allow the rental loss of $5,439.40 after the disallowance of property taxes.

6. By Notice of Reassessment dated November 5, 1981 the Minister of National Revenue reassessed the 1980 taxation year so as to disallow the loss claimed of $11,564.79.

7. The Appellant objected to the said Reassessment on December 15, 1981 and the Minister confirmed the said Reassessment by notification dated March 4, 1982.

The appellant said that he purchased the condominiums with a view to living in one and renting the other. In the long term, suite 327 was intended to supplement his pension which, when it becomes payable in a relatively short period of time, will be modest. The appellant’s country of origin is also Poland. He met the Jaworskis socially prior to the purchase of the condominiums. At that time the latter were interested in finding suitable living accommodation. The evidence is that Mr Jaworski is in his early or mid-forties. The appellant is divorced and 63 years of age, having been born on May 11, 1921.

Suites 327 and 328 are contiguous. Their total purchase price was $98,500 which included stoves, fridges and washers. The amount of $18,500 was paid in cash. Suite 327 was mortgaged in the sum of $44,000 and suite 328 in the sum of $36,000. As indicated in paragraph 4 of the reply to notice of appeal, the interest on the mortgage regarding suite 327 was $2,293.02 for part of 1977. The interest on that mortgage for 1978, 1979 and 1980 was $4,575.26, $4,459.64 and $4,542.31 respectively. Payments on the mortgage commenced at the beginning of July 1977. Occupancy of suite 327 by the Jaworskis commenced around the beginning of March in that year. It was initially agreed that Jaworski would pay $250 per month, but this was soon dropped to $200 when Mrs Jaworski became ill and ceased working. As evidenced by the agreement of October 26, 1981, even this modest sum was not paid when it came due. The appellant says that the amount payable was raised from $200 to $300 commencing in 1984. It was alleged that, when the arrangement was entered into regarding suite 327, it was expected that Jaworski would soon be doing well financially and that the amount payable to the appellant would be increased. No evidence was forthcoming that, during the intervening years, this expectation was realized.

One need not go beyond comparing what was payable by Jaworski and the interest arising out of the mortgage on suite 327 and to have regard to the history of payment by Jaworski to the appellant to conclude that what transpired between them was not based on reasonable or creditable commercial landlord and tenant considerations and conduct. In his notice of appeal the appellant said, inter alia: “In addition, since I live alone, my tenant and his wife offered, and provided me, with my evening meals, as I do not cook”. At the hearing he retreated somewhat from this statement, but not persuasively. The appellant also stated that he was not in the business of renting property, but that his primary concern was to protect his interest in suite 327 as best he could until it was required to supplement his pension. According to him, after the Jaworskis moved in, fellow condominium owners became very sticky about condominiums in the building being rented. This is not to suggest that the advent of the Jaworskis precipitated this attitude. They were regarded as good tenants and occupancy by them was considered as protected but if they vacated suite 327, the appellant was most concerned that he might be unable to secure approval of the other condominium owners to new tenants. When he was asked what reason he had to believe that the situation would be different when he needed an economic rent to supplement his pension, he replied with something to the effect that he was optimistic about the future and that events would unfold in a way favourable to him.

The heading “Income or loss from a business or property” in the Income Tax Act, RSC 1952, c 148 (“the Act”) is immediately followed by the subheading “Basic Rules” and the first basic rule is subsection 9(1) which provides that a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year. This rule is subject to any other provisions of the Act which apply to it. In Dominion Taxicab Association v MNR, [1954] CTC 34; 54 DTC 1020, Cartwright J (as he then was) in delivering the judgment of the majority of the Supreme Court of Canada said at 37 [1021]:

The expression “profit” is not defined in the Act. It has not a technical meaning and whether or not the sum in question constitutes profit must be determined on ordinary commercial principles unless the provisions of the Income Tax Act require a departure from such principles.

See also Canadian General Electric Co Ltd v MNR, [1961] CTC 512; 61 DTC 1300 per Maitland, J delivering the majority judgment of the Supreme Court of Canada at 513 [1304]. In Odeon Associated Theatres Ltd v Jones (Inspector of Taxes), [1971] 2 All ER 407, Pennycuick, V-C said with respect to the expression “ordinary principles of commercial accountancy”* [1] at 414:

The concern of the court in this connection is to ascertain the true profit of the taxpayer. That and nothing else, apart from express statutory adjustments, is the subject of taxation in respect of a trade. In so ascertaining the true profit of a trade the court applies the correct principles of the prevailing system of commercial accountancy. I use the word “correct” deliberately. In order to ascertain what are the correct principles it has recourse to the evidence of accountants. That evidence is conclusive on the practice of accountants in the sense of the principles on which accountants act in practice. That is a question of pure fact, but the court itself has to make a final decision as to whether that practice corresponds to the correct principles of commercial accountancy. No doubt in the vast proportion of cases the court will agree with the accountants but it will not necessarily do so. Again there may be a divergency of view between the accountants, or there may be alternative principles, none of which can be said to be incorrect, or, of course, there may be no accountancy evidence at all. The cases illustrate these various points. At the end of the day the court must determine what is the correct principle of commercial accountancy to be applied. Having done so, it will ascertain the true profit of the trade according to that principle, and the profit so ascertained is the subject of taxation. The expression “ordinary principles of commercial accountancy” is, as I understand it, employed to denote what is involved in this composite process. Properly understood it presents no difficulty, and I would not be at all disposed to attempt any alternative label.

A number of definitions of what constitutes “accounting principles” are to be found in works devoted to accounting. This is said in J Langhout’s Analysis and Interpretation of Canadian Financial Statements at page 4:

Essentially these principles are rules or guides to accounting procedures which were developed over the years to meet the needs arising in practice and which, when found useful, received general acceptance. Initially accounting concepts were derived from experience or reason; after they had proved useful they became accepted as principles of accounting. When acceptance became sufficiently widespread they became part of the generally accepted accounting principles which constitute for accountants the canons of their art.

The next subheading in the Act after the one previously mentioned is entitled “Inclusions” and the first subsection thereunder is subsection 12(1) which states that there shall be included in computing the income of a taxpayer for a taxation year his income from a business or property such of the following amounts as are applicable. Then ensues a considerable category of specific matters in section 12 and in subsequent provisions to be included in computing income.

The next subheading is “Deductions” which is immediately followed by subsection 18(1). It provides that, in computing the income of a taxpayer from a business or property, no deduction shall be made in respect of a sizeable class of designated things. This class, however, contains within it numerous exceptions which are in substance positive statements of things which may be deducted. Included in the class of things which cannot be deducted are “personal or living expenses of the taxpayer” (paragraph 18(l)(h)). There is an exception in this respect, but it has no application to this case.

I am satisfied that the expenditures made by the appellant were personal or living expenses. He has chosen, for reasons of his own which are unrelated to the purpose of earning income, to heavily subsidize the Jaworskis in their living accommodations. He is perfectly entitled to do this, but what he cannot do is to have other taxpayers indirectly share the cost of these subsidies through the deductions sought.

Finally I do not draw any inference adverse to the respondent from the fact that deductions of the kind claimed in 1980 passed unchallenged in prior years: Day v MNR, [1984] CTC 2200; 84 DTC 1184 at 1185. The same applies in relation to deductions claimed in respect of post-1980 taxation years. Counsel for the respondent, Mr Mah, observed during the course of his argument that the limitation period for taking action regarding these last-mentioned years has not expired.

The appeal is dismissed.

Appeal dismissed.