Barry S Arbus v. Minister of National Revenue, [1980] CTC 2872

M J Bonner:—The appellant appeals from assessments for the 1974 and 1975 taxation years. On assessment the Minister disallowed an offset against income from other sources of losses sustained by the appellant as a member of a joint venture known as Silverthatch Investors (hereinafter called “Silverthatch”). Silverthatch was organized to acquire and rent out two condominium apartment units at Pompano Beach, Florida. It acquired the apartments in January of 1974. They operated at a loss.

The respondent’s position is that the appellant’s interest was not acquired for the purpose of gaining or producing income.

The appellant is a lawyer practising in Toronto. He specializes in the commercial and real estate fields and might be expected to have expertise in appraising the commercial potential of ventures of the type in question here. Late in 1973 one of his clients, Wayne Currie, suggested to the appellant that he acquire an interest in Silverthatch. Mr Currie was a “partner” in an organization known as The Pythagoras Group. Its business was said to involve acting as a financial consultant for lawyers, doctors and accountants. It apparently put together investment packages for sale to such professionals.

Silverthatch was a joint venture of eight investors, each holding an equal share in the two apartments. The two apartments cost about $94,000, furnishings included. Of that acquisition cost $66,000 was financed by mortgages. Other funds were obtained by bank loans. The arrangements made called for Mr Currie to look after rentals and all management details in return for a fee.

The appellant’s evidence was that in promoting the deal Mr Currie suggested that the apartments would yield total gross rentals of $20,000, that is to say, $1,000 per month per apartment, less a vacancy allowance of two months per year per apartment. He stated further that the total expenses predicted were $10,000 per annum. When Mr Currie approached the appellant he produced no written material supporting the predicted revenue and expense figures. Mr Arbus said that the only written material that Mr Currie had was some promotional material prepared by the condominium developers. After a discussion lasting about one hour, the appellant committed himself to take a share in the venture.

The appellant stated that he could see no way that the venture could fail to yield a profit. The losses in question here arise as follows:

SILVERTHATCH INVESTORS STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1974

In my view the appellant’s memory as to his purpose at the time of entry into the venture has become clouded. It may very well be that the losses in fact experienced were worse than anticipated, but I have concluded that from the outset, losses, and not profits, were both predictable and predicted and the expenses were therefore not incurred for the purpose of gaining or producing income. Several factors in the evidence lead to this conclusion. The appellant admitted that operating expense levels were in the range anticipated. The operation which was contemplated involved, as I understand it, short term rentals. It was not suggested that tenants could be found who were willing to enter into long term leases at the level of rents suggested, namely $1,000 per unit per month. It is difficult to see how a Small scale enterprise such as this, which is rather similar to a two-room hotel, can be run successfully from a distance.

The appellant attributed the difficulties in the first year in achieving what he said were the anticipated revenue levels to delays on the part of the painters in completing the apartment. Those difficulties, of course, could not account for the even lower rents recorded for the second year. The appellant testified that legal action has been brought against Mr Currie for an accounting. However, no particulars were given as to the quantum of the claim made, or when or in what year it was made. It was not suggested that the 1974 and 1975 losses resulted from defalcations of Mr Currie.

Copies of documents produced at the hearing point to a conclusion that, from the beginning, losses and not profits were predicted. Exhibit R-2 is a photocopy of a memorandum dated June 5, 1974, from Mr Currie to the Silverthatch investors. It states in part:

As indicated at the commencement of the exercise, if we could get the two apartments to earn $5,000 for the year, we could each expect to write off about $1,000 against our carrying advances for a net after-tax loss of between $500 and $600 each. We are right on target.

Exhibit R-5 is a photocopy of a memorandum dated February 13, 1974, only about two months after the appellant entered into the joint venture. It was sent by Mr Currie to the Silverthatch investors, and produced by the appellant from his files. It states in part:

We have listed both units for the 1974-75 season with Ivan J Smith Realty asking $1,500/mo. The broker gets a 10% commission. We have also listed for sale Unit #807, now through September at $79,500 complete. Our sunk cost on this unit is $47,000.

We anticipate rental revenue of $5,000 for the year 1973-74.

There was no evidence that this memorandum provoked surprise among the investors, or dismay, or suggestions as to measures for raising gross rentals to the level said to have been predicted only a short time before.

Evidence was given at the hearing by Demeter Gyozo, an employee of the Department of National Revenue who had made an audit of the appellant’s affairs. He produced Exhibit R-6 which, he said, was a photocopy of the February 13 memorandum which he found in the appellant’s files. The quality of the photocopy is very poor, but it does appear to be a copy of Exhibit R-5, except that on Exhibit R-6 there appears, in a space which on Exhibit R-5 is blank, the following:

(illegible) will earn us a loss of about $5,000 (illegible). Each partner will have a deduction of $625.

I accept the evidence of this witness that Exhibit R-6, poor reproduction though it may be, is a photostat of a document which he found on the appellant’s files at the time he made the audit, despite the fact that the appellant testified he had never seen it. The assessor had no reason to distort the facts. Nothing in the cross-examination of the assessor suggested the document could have come from any other source. It is conceivable that Exhibit R-5 could have been issued in more than one version and that the appellant simply does not remember seeing the R-6 version. It is not necessary to speculate on the discrepancy.

When the evidence is considered as a whole I cannot, on balance, find that the appellant has established that he entered into the transaction for the purpose of gaining or producing income. The appeals will therefore be dismissed.

Appeal dismissed.