Joan O Paterson v. Minister of National Revenue, [1983] CTC 2318, 83 DTC 250

Guy Tremblay:—This case was heard on September 27,1982, at the City of Ottawa, Ontario.

1. The Point at Issue

The point at issue is whether the appellant is correct in claiming as an investment loss, the loss suffered in disposing of a property located in Winnipeg, Manitoba. The respondent contends that the said loss was of a personal nature.

2. The Burden of Proof

2.01 The burden 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 MNR, [1948] CTC 195; 3 DTC 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:

2. In assessing the Appellant for his 1977 and 1978 taxation years, the Minister of National Revenue relied on the following facts, inter alia:

(a) The Appellant and her spouse James E Paterson were never legally separated nor did they enter into a formal separation agreement.

(b) The Appellant purchased a residence for the use of her husband in Winnipeg, Manitoba, for which he was supporting the current expenses and the mortgage charges.

(c) When the Appellant’s spouse moved out of that residence the Appellant put the property up for sale.

(d) The Appellant and her spouse never entered into a formal lease agreement between themselves.

(e) The carrying expenses of that residence exceeded fair market rent for that type of property.

3. The Facts

3.01 In April 1976, the appellant purchased for $46,500 a bungalow located at 1096 Betournay Ave, Winnipeg, Manitoba. Concerning this property, the circumstances of the purchase and sale and the testimony of the appellant are well summarized by the facts described in the notice of objection dated June 2, 1980, and the Board quotes therefrom. First the chronological calendar of events:

June, 1967 to November, 1975, I resided in Barrie, Ontario.

October, 1975, my husband left Barrie and moved to Winnipeg, Manitoba.

November 20, 1975, I left Barrie and moved to Ottawa.

May 17, 1976, having flown to Winnipeg from Ottawa for 1 day, I purchased the property known as 1096 Betournay Ave, Winnipeg.

May 17, 1976 to September, 1976, my husband rented the property.

September 15, 1976, my husband vacated the property and moved back to Barrie, Ontario.

August 15, 1977, sold property to The Director, Veterans Land Act.

3.02 The appellant contends that the property was purchased as an investment.

The property in question being that known as 1096 Betournay Avenue, Winnipeg, Manitoba, was purchased as an investment and rented to my estranged husband, James Earlston Paterson, who was at that time transferred to and working in Winnipeg, at the request of his Company, Schlumberger Heathkit, Mississauga, Ontario. My husband had been living in a motel in Winnipeg all winter and was asked to vacate the premises for the summer season. As he had a dog and cat, he was unable to obtain rental premises and was not in a position to purchase a home as he already owned and still owns a VLA property in Barrie, Ontario in which my son and his wife were living during my husband’s absence from Barrie. I had been left some money by my late mother and was looking for a safe place to invest it. As my relationship with my husband was on a friendly plane, I decided that it would be a good investment to buy a house in Winnipeg, rent it to him and would know that the property would be taken care of. When applying for a mortgage, however, the laws being as they were, and a single or separated woman not being considered a good or reliable risk, Royal Trust would not accept my signature alone and my husband agreed to co-sign the mortgage merely as a GUARANTOR, and not as co-owner. He did not, nor does he have any other interest in the property, other than as a past renter. The Deed and Mortgage were in my name alone.

I have never lived in the property, and in fact only saw it for the space of about an hour while viewing it as a proposed purchase. I signed the Agreement of Purchase and Sale at Winnipeg airport, prior to flying back to Ottawa.

3.03 In September 1976, the appellant’s husband was transferred by his employer to Toronto and had to vacate the property.

When my husband had to vacate the property in Winnipeg in September 1976, I was forced to make the mortgage payments, which he had been making as rent, directly to Royal Trust, Winnipeg, on my behalf.

I received no further payments of rents from my husband other than the 3 months he occupied the premises, being June, July and August of 1976, and he gave me no notice that he was being forced to vacate due to his company’s moving him back to Mississauga. I did not and do not receive any Maintenance from him, by mutual agreement. At no time was I a tenant of the property known as 1096 Betournay Avenue, Winnipeg. At the time of the purchase, as stated, I was and am still residing, in Ottawa, now known as Nepean.

3.04 In September 1976, the appellant’s husband wrote (Exhibit A-2) to the appellant concerning the possibility of renting the house.

Another thing I have to tell you is that I have been talking to Kae Hartle about re-renting your house, and she says that she will list it right away and also she thinks that there should be no problem in getting a suitable tenant as it is a quality house in a desirable area. She asked about price — so I told her that my agreement with you for $525.00 per month would be the asking price. I hope that this is agreeable with you. I told her that I would check with you, as after all, you are the “Landlady”, so you should either let her or me know, as soon as possible, if this is agreeable to you.

Regarding the difference between our agreed rent and the mortgage payment, which I am paying direct — rather than sending it to you and then you sending it back to Royal — I will settle that up in the future hopefully. I am keeping a record of the amounts spent on paint, parts, glass and so on, and will give you a full accounting later. I hope that this will be OK with you. I don’t have all of the receipts but will keep all future ones — that’s for sure.

Oh — Kae asked me if you would consider selling the house, if she doesn't get a new tenant soon. I told her that I thought that you wouldn’t want to rent to just anybody — after all, you bought the place as an investment, and if the tenant (new

— that is) wasn’t a good one — you might lose money in future repairs and so on. I don’t know how the present market for Home Sales here stands at the present time

— so can’t offer an opinion or advice. It is most unfortunate that my present situation has occurred — as I was prepared to stay here until I retired in 1985.

3.05 In October 1976, a listing agreement was made to try to sell the property. The bungalow was advertised for sale at $52,500 in the Winnipeg Free Press (Exhibit A-3). During the winter the real estate company put a “for sale” sign on the property (Exhibit A-6).

In spite of Multiple Listing and efforts by three real estate companies and my insurance agency in Winnipeg, I was unable to find a tenant who could pay the amount necessary to make the mortgage payments, or to sell the property. Not one cent was received by me on closing the deal, as can be seen by the Statement of Adjustments and the document from Mrs Kae Hartle of Royal Trust, who was my Agent. In fact, the Agent released me from my obligation to pay the balance of her fee, as she was sorry for me, as can be seen from these documents.

3.06 In April 1977, the (asking) price was altered from $52,500 to $49,000 pursuant to a letter of the then real estate agent “Campbell Lane Realty Ltd” (Exhibit A-7).

3.07 The property was sold on August 15, 1977 for $49,200 (in fact $48,178.78 after adjustments). A first account of $14,450 was then paid and another one of $20,000 was paid on September 6th and the balance was paid on October 12, 1977, as outlined in a letter to the appellant from her counsel (Exhibit A-8).

3.08 In filing her 1976 income tax return, the appellant did not report as income the said rent paid by her husband and she did not claim rental expenses, interest, current repairs and capital cost allowance.

3.09 In filing her 1977 income tax return, the appellant calculated a loss on disposal of $8,672.84 as follows:

On Form T1-A she claimed a capital cost disposal computed as follows:

3.10 Concerning the appeal for the 1978 taxation year, it is in respect of the general income averaging formula provided in subsection 118(1) of the Act. It is available to every Canadian taxpayer whose income in a particular year is at least 10% greater than that in the immediately preceding year and 20% greater than the average of that in the four immediately preceding years. No evidence was given concerning this point.

4. Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in the present case are sections 4(4), 18(1 )(a), 18(1 )(h), 40(2)(g)(iii), 54(e), 54(f)(1), 248(1) (definition of “personal or living expenses”) and 251(2). They read as follows:

4. (4) Unless a contrary intention is evident, no provision of this Part shall be read or construed to required the inclusion or to permit the deduction, in computing the income of a taxpayer for a taxation year or his income or loss for a taxation year from a particular souce or from sources in a particular place, of any amount to the extent that that amount has been included or deducted, as the case may be, in computing such income or loss under, in accordance with or by virtue of any other provision of this Part.

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.

40. (2) Notwithstanding subsection (1)

(g) a taxpayer’s loss, if any, from the disposition of a property, to the extent that it is

(iii) a loss from the disposition of any personal-use property of the taxpayer other than listed personal property,

is nil.

54. (e) “listed personal property” of a taxpayer means his personal-use property that is all or any portion of, or any interest in or right to, any

(i) print, etching, drawing, painting, sculpture, or other similar work of art,

(ii) jewellery,

(iii) rare folio, rare manuscript, or rare book,

(iv) stamp, or

(v) coin;

(f) “personal-use property” of a taxpayer includes

(i) property owned by him that is used primarily for the personal use or enjoyment of the taxpayer or the personal use or enjoyment of one or more individuals each of whom is

(A) the taxpayer,

(B) a person related to the taxpayer, or

(C) where the taxpayer is a trust, a beneficiary under the trust or any person related to the beneficiary,

248. (1) In this Act,

“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.

251. (2) For the purpose of this Act “related persons”, or persons related to each other, are

(a) individuals connected by blood relationship, marriage or adoption.

4.02 Analysis

4.02.1 In November 1975, the appellant’s husband left Barrie, Ontario, and moved to Winnipeg, Manitoba. The delicate situation in which her husband found himself in the spring of 1976 and her good relationship with him made her decide to purchase the property: “I decided it would be a good investment to buy a house in Winnipeg, rent it to him and would know that the property would be taken care of”. Her husband even co-signed the mortgage as guarantor. (para 3.02)

In September 1976, the appellant’s husband had to leave Winnipeg for Toronto (para 3.03). He wrote to the appellant, stating among other things: “It is most unfortunate that my present situation has occured as I was prepared to stay here until I retired in 1985”. (para 3.04)

In October 1976 the property was listed for sale and it was sold in April 1977. (paras 3.05 and 3.08)

4.02.2 The crux of the matter is whether the purchased property should be considered as a personal-use property. If not so considered, the loss can be allowed as a deduction. If it is so considered, the loss cannot be allowed as a deduction.

Considering the evidence adduced and the provisions of the Income Tax Act quoted above, the Board must dismiss the appeal.

Indeed the said property must be considered as a personal-use property (paragraph 54(f) quoted above) because it was for the use of the appellant’s husband — the latter co-signed as guarantor and his intention was to stay there until his retirement in 1985.

The expenses incurred with respect to the property must even be considered as personal and living expenses pursuant to the definition of this expression quoted above. Indeed the tenant of the property was her husband and, therefore, any loss must be considered as nil (subparagraph 40(2)(g)(iii) quoted above).

4.02.3 Concerning the year 1978, the reassessment must also be maintained because no evidence was adduced on this point. The appellant has the burden of proof.

5. Conclusion

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

Appeal dismissed.