George Girgis, Mona Girgis v. Minister of National Revenue, [1984] CTC 3005, 84 DTC 1794

Taylor, TCJ:—These are appeals called for hearing on common evidence on April 30, 1984 in Toronto, Ontario. The notices of appeal dated August 6, 1982 were identical, and read as follows:

The above taxpayers purchased a rental property in Daytona Beach, Florida on August 31, 1977. The rental losses have been disallowed on the basis that there was no reasonable expectation of profit. Furthermore, the expenses were deemed to be personal or living expenses within the meaning of paragraph 18(1)(h).

In order to substantiate my clients’ belief that there was an expectation of profit, we would ask the tax review board to consider the following facts:

1) The property was purchased with a mortgage interest rate of 7V4% with a 25 year term. Based on the expectations that US mortgages in the future would go to a 3 or 5 year term as they had in Canada, we would be expecting a profit profit (sic) within a 4-5 year time frame.

2) The property taxes went from a $550 range for 1977 to $1,070 by 1979. This is approximately a 100 per cent increase over a two year period. By 1981, the taxes were $1,405. This is approximately a 250 per cent increase over a 4 year period. If the realty taxes would have increased by their expected 8 or 10 per cent per year, the realty taxes by 1981 would have been in the vicinity of $800. This $600 difference would have put the taxpayers in a profitable position for 1981.

3) When the taxpayers purchased the rental property in 1977, they were not aware that they would have to pay the utilities for the tenants as well as the telephone. These expenses are frequently paid by the landlords in the United States but are not paid by Canadian landlords in Canada.

4) It was the management’s policy of Oceans One Condominium not to rent the apartments for less than a 2 month period. As such, the Girgis’s were not able to rent the condominium during the summer months.

5) During 1981, the condominium was rented for 7 months as opposed to 5 or 6 months in earlier years.

6) During 1981, the taxpayers purchased an additional property in Daytona Beach based on the future expectations of profits.

The taxpayers have used the property 3 out of the 5 years for a period of 3 weeks during the summer when the property was not rented. It would be understandable to allocate one-twelfth of the expenses towards personal use. However, to say that the property was used solely for personal or living expenses is incorrect.

It is quite common that rental properties will show a negative cash flow for a period of 3 to 5 years. Due to the unexpected increase in expenses as well as the inability to rent the property for the full year, this period for a return of profit has been extended by a couple of years. However, with our hindsight and knowing that mortgages are presently 16 to 20%, this property will be showing a profit shortly.

In response thereto, the respondent’s reply to notice of appeal stated in part:

In so reassessing tax to the Appellant for the 1980 taxation year, the Respondent made the following assumptions:

(a) the Appellant with his wife, Mona Girgis, purchased a condominium unit in Florida in August of 1977;

(b) in the period 1977 to 1980 Inclusive, the Appellant and his wife have rented out the condominium unit at a net loss;

(c) during the period 1977 to 1980 inclusive, the condominium unit was never rented for more than six months of the year;

(d) in so dealing with the said condominium unit, the Appellant and his wife had no reasonable expectation of profit;

(e) during the summer months of the period 1977 to 1980 inclusive, the condominium unit was available for occupancy by the Appellant and his wife, and was so occupied in at least three of the summers.

The Respondent submits that as the Appellant and his wife had no reasonable expectation of profit in renting out the condominium in the 1980 taxation year, no amount may be deducted in respect of the operation thereof as no amount can be considered an outlay for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(l)(a) of the Income Tax Act.

In the alternative, the Respondent submits that the expense of operating the condominium unit was a personal expense, with the consequence that no amount may be deducted in respect thereof by virtue of paragraph 18(l)(h) of the Income Tax Act.

The financial statements filed with the Court, showed the following results: The notice of objection filed earlier, which had commenced the process leading to this appeal read in part:

. . . It is stated that the reason the rental loss was disallowed was that there was no reasonable expectation of profit. This is not the criteria for rental income. The idea of reasonable expectation of profit is based on a business.

The respondent had relied, inter alia, on section 3, paragraphs 18(l)(a) and 18(l)(h), and subsection 248(1) of the Income Tax Act, RSC 1952, c 148, as amended. It was noted by the Court that reference would also be needed to subsection 9(2) of the Income Tax Act, and Moldowan v The Queen, [1977] CTC 310 at 313; 77 DTC 5213 at 5215:

9. (2) Subject to section 31, a taxpayer’s loss for a taxation year from a business or property is the amount of his loss, if any, for the taxation year from that source computed by applying the provision of the Act respecting computation of income from that source mutatis mutandis. [Emphasis added]

From Moldowan:

Although originally disputed, it is now accepted that in order to have a ‘*source of income" the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v Minister of National Revenue. [72 DTC 6131], [1972] CTC 151. See also s 139(1)(ae) of the Income Tax Act which includes as “personal and living expenses” and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred. [Emphasis added]

On the basis of the information available, counsel for the respondent requested an adjournment of the hearing, in anticipation of the settlement of the appeals. That request was granted. The hearing was not re-scheduled, no evidence was provided and no testimony adduced. A consent to judgment dated May 23, 1984 was filed with the Court on August 31, 1984.

The precise role or requirement for the Court in ordering a reassessment in this matter, is not clear to me. The Minister of National Revenue has the authority under subsection 152(4) of the Income Tax Act to reassess at any time, and I assume given adequate reason by the Minister, a taxpayer could always withdraw an appeal.

However, based solely on that consent to judgment filed and signed by both parties, it is ordered that the appeal in respect of the 1980 taxation year be allowed in part and the matter referred back to the respondent for reconsideration and reassessment on the basis that each appellant incurred an operating loss of $2,069 in respect of his one-half interest in a Florida condominium unit at 3051 South Atlantic Avenue in Daytona Beach Shores, Florida, USA.