Donald Arthur Porter v. Minister of National Revenue, [1981] CTC 2445, 81 DTC 385

D E Taylor:—This is an appeal heard in Vancouver, British Columbia, on May 4, 1981, against income tax assessments for the years 1971, 1972 and 1973 in which the Minister of National Revenue disallowed claims for rental losses made by the appellant and also disallowed capital losses including disposition costs claimed during the years 1972 and 1973.

The notice of appeal in its critical portions reads:

The appellant, Dr D A Porter, was employed as Assistant Superintendent — Personnel by the Edmonton Public School Board during the years 1967 to 1969. During this period the appellant built and occupied a residence at 26 Westbrook Drive, Edmonton.

In mid-November, 1969, the appellant accepted an appointment to the newly created Douglas College, headquartered in New Westminster, BC, as Dean of Curriculum.

On December 30, 1969, the appellant and his family left Edmonton and took up residence in Burnaby, BC. On November 28, 1971, the appellant completed the purchase and moved into his present residence in Delta, BC.

Upon accepting the appointment with Douglas College, the appellant took steps to dispose of his Edmonton residence by private means. Because Imperial Oil Ltd had just transferred virtually its entire Edmonton staff to Toronto and had underwritten their mortgage payments, hundreds of comparable homes in the Riverbend and Derrick areas were then on the market.

In early January, 1970, in recognition of the real estate market conditions, the appellant decided to convert his former residence to a revenue-producer and sought to derive rental revenue therefrom.

The appellant instructed several Edmonton realty firms and trust companies to seek a tenant for the subject property; personally advertised for a tenant in the daily newspaper, the Edmonton Journal; and arranged for notices to be posted in the University of Alberta’s Faculty Club as a likely source of quality tenants. These continuous efforts to locate a tenant met with no success. The appellant was unable to personally direct the search or to take additional steps because of a heavy commitment to the establishment and initial operation of a major educational institution, Douglas College, which opened three campuses in October, 1970.

The appellant made regular expenditures of some $400 each month in the expectation that initial rental would approximate $400 per month with the tenant taking over $70 in expenditures, and that the inflation becoming inceasingly apparent in 1970 and 1971 would quickly enhance the rents to make the property not only viable but attractive as a revenue producer.

In November 1971, the appellant received an offer to purchase the subject property through the Edmonton offices of the Canada Permanent Trust Company, which offer was subsequently accepted, the appellant not being financially able to continue his investment. The sale transaction was consummated in January, 1972.

The appellant relies, inter alia, upon the provisions of Sections 11 (1 )(a), 12(1 )(a), 20(6)(b) and 20(6)(g) of the Income Tax Act, Chapter 148, RSC 1952 and Section 1102 of the Income Tax Regulations with respect to taxation year 1971.

The appellant relies, inter alia upon the provisions of Section 13(7)(b), 20(1)(a), 38, 40(1 )(b), 45(2), 85B(1)(a) and 85(B)(3) of the Income Tax Act, Chapter 63, RSC 1971 as amended and Section 1102 of the Income Tax Regulations with respect to taxation years 1972 and 1973.

It is respectfully submitted that the appellant’s personal residence was converted from a personal use to a revenue producing use in January, 1970 in accordance with Section 20(6) (b) of the 1952 Act.

It is further respectfully submitted that from the date of such conversion, the subject property was employed for the purpose of gaining or producing income therefrom, and that once such use is established, the fact that income is not in fact derived therefrom is not relevant to the appellant’s claim.

Further, it is submitted that the appellant has satisfied the requisite constituent elements of the relevant provisions of the Income Tax Act (1952) governing the deductibility of various expenditures incurred by him in respect of the subject rental property and that, accordingly, such rental loss is properly allowable for taxation year 1971; and that the appellant has satisfied the requisite constituent elements of the relevant provisions of the Income Tax Act (1971) governing capital losses and disposition expenses incurred by him in respect of the subject rental property and that, accordingly, such losses and expenses are properly allowable for taxation years 1972 and 1973.

The position of the respondent was that:

— the appellant acquired in or before 1967, for personal use, a residential property at 26 Westbrook Drive, in the City of Edmonton in the Province of Alberta;

— the property at 26 Westbrook Drive was occupied as a personal residence by the appellant and his family during the years 1967, 1968 and 1969;

— following the appellant’s move to British Columbia in November 1969, the Edmonton residence remained vacant until it was sold;

— the rental expenses claimed as a deduction from income in respect of property known as 26 Westbrook Drive, Edmonton were not outlays or expenses incurred by the taxpayer for the purpose of gaining or producing income within the meaning of paragraph (a) of subsection (1) of section 12 of the Act but were personal or living expenses within the meaning of paragraph (h) of subsection (1) of section 12 and paragraph (ae) of subsection (1) of section 139 of the Act;

— the house situated on the said property was not acquired for the purpose of gaining or producing income within the meaning of paragraph (c) of subsection (1) of section 1102 of the Income Tax Regualtions and, therefore, no capital cost allowance is permitted under paragraph (a) of subsection (1) of section 11 of the Act:

— rental expenses claimed as a deduction from income in 1972 in respect of property known as 26 Westbrook Drive, Edmonton, Alberta, were not outlays or expenses incurred by the taxpayer for the purpose of gaining or producing income within the meaning of paragraph 18(1 ) (a) of the Act but were personal or living expenses within the meaning of paragraph 18(1 )(h) and subsection 248(1) of the Act;

— the said property was a personal use property within the meaning of paragraph 54(f) of the Act and therefore the allowable capital loss and net capital loss deductions claimed by the taxpayer under paragraphs 38(b) and 111(1)(b) of the Act in respect of the disposition of the property have been properly disallowed in accordance with the provisions of subparagraph 40(2)(g)(iii) of the Act.

Subsection 20(6) of the Income Tax Act provides a rule to arrive at a value on the transfer of property (or “conversion”) to apply the term used by this appellant) from one use to another. The implementation of subsection 20(6) also requires adherence to other standard income tax rules — and of specific relevance to this case it is necessary that the “conversion” be for the “purpose of gaining or producing income therefrom”. In this matter, the appellant did not have a “reasonable expectation of profit”, in fact he had no expectation of profit. Indeed, there is no evidence that he could expect to even bring in rent, let alone enough rent to cover carrying costs of the house. The taxpayer has failed to demonstrate that the rental operation in which he alleges he engaged can qualify as a “business”, a situation which is fundamental to his appeal. The term “business” is used in the general sense to include the alleged purpose of the expenses claimed, which must fit within the parameters of paragraph 18(1 )(a) . . for the purpose of gaining or producing income from the business or property”, and subsection 9(1) “. . . income from a . . . property is his profit therefrom. ..”.

The taxpayer’s problem in this matter is not his complaint that there does not appear to be any “formula” or “document” that he can complete which will attest to his alleged intention to rent the property — his problem is that the business investment he contends he made in rental property (by its alleged conversion) does not qualify as a business investment at all. It remained a personal investment and asset. Whether it was desirable or not at the relevant period of time does not matter to the determination of this issue.

The appeal is dismissed.

Appeal dismissed.