Michael Mastri v. Her Majesty the Queen and June Mastri, Michael Mastri v. Her Majesty the Queen, [1996] 3 CTC 2702 (Informal Procedure)

Taylor J.T.C.C.: — These are appeals heard in Toronto, Ontario on June 18, 1996, under the Informal Procedure, against assessments for the year 1991 in the amount of $7,677.98 each, in which the Respondent disallowed deductions claimed as “Rental Losses” against other income — in the case of both Michael Mastri (Michael) and June Mastri (June).

Identical Notices of Appeal were filed for both the Appellants, as follows:

The Revenue Department states that, "“no reasonable expectation of profit” was expected from rental of the property at 2051 Merchants Gate. The Revenue Department has not requested an explanation on the costs incurred. Costs on a longer term basis would have produced a small profit by the second year. Furthermore, many of the costs were one time expenses and start up costs which were unavoidable during the first year of operation.

Relevant Facts

1. Interest costs upon purchase of the property in August of 1990 were high ranging between 12 1/4% to 14 1/4%. However, interest rates were on a decline through the year of 1991. Total interest costs for the 1991 taxation year were $14,934.00. Of that amount, $4,441.95 was paid to the developer of the property, as a builders MORTGAGE, for the interim of December 27, 1990 to April 17, 1991 when the final registration of the property occurred. The balance of interest payments of $10,492.95 included a conventional mortgage as well as interest costs for money which was borrowed to initiate the purchase. This money was paid off by the end of the 1991 Taxation year. The reduction of interest rates, termination of the “builders mortgage” and repayment of start up money borrowed, would certainly be reduced by the 1992 Taxation year. Actual interest costs for 1992 were $9,779.72.

2. Initial start up costs for any new venture are always high in the 1st year

of operation. Here is an outline of the unavoidable costs of start up:

Lawyers Fees	$2,870.98
Land Transfer Tax	$1,374.90
Real Estate Rental Fee	$1,125.00
Water Service Hook Up	$ 250.00
Hydro Hook Up	$ 150.00
Hudac Warranty	$ 159.99
Total	$5,930.87

The total of $5,930.87 inflated 1st year expenses was not expected in subsequent years.

3. Since the re-assessment, a second accountant has reviewed the 1991 return filed. It is admitted and recognized that on the Tax return filed that $2,953.50 of expenses, should not have been accounted as an expense, but rather, as a Capital Expenditure and upgrade.

4, An additional $500.00 to $700.00 was incurred in the 1st year for items such as clean-up and painting that were not expected in subsequent years.

TABLE OF 1991 EXPENSES VERSUS 1992 EXPENSES.

1991 EXPENSES		1992 EXPENSES
property taxes	$ 3,355.83	$ 1,803.07
Maintenance	$ 3,964.94	$ 300.00
Interest	$15,675.73	$ 9,779.72
Insurance	$ 210.00	$ 210.00
Utilities	$ 400.00	$ 0.00
Legal/Accounting	$ 1,870.98	$	0.00
Condo Fees	$ 1,060.99	$ 1,176.12
Real Estate Fees	$ 1,125.00	$	0.00
Total expenses	$27,730.97	$13,258.86
Total Income	$12,375.00	$14,175.00
Net deficit/surplus	«$15,355.97»	$ 916.14

* Based on $1,125.00 per month x 5% increase equals $1,181.25 per month in 1992.

Revenue Canada is excessive in their assessment to overturn all losses for the taxation year of 1991. I would ask for the courts to overturn the re-assessment and make adjustments with respect to my mistake made as outlined in section 3 of the statement of relevant facts.

The Reply to Notice of Appeal was also identical, and read in part:

1. Except as expressly admitted hereinafter, he denies all allegations of fact in the Notice of Appeal.

2. With respect to paragraph number 3 under the heading “Relevant Facts” of the Notice of Appeal, he admits only that not less than $2,953.50 of the claimed expenses were on account of capital expenditures.

3. He admits the authenticity of the copies of the Revenue Canada letters dated August 30, 1995 and September 18, 1995, attached to the Notice of Appeal.

4. He admits the authenticity of the copy of the Notification of Confirmation dated September 18, 1995, attached to the Notice of Appeal.

5. In computing income for the 1991 taxation year, the Appellant claimed rental losses from a property located at 2051 Merchants Gate, Unit #30, Oakville, Ontario (the “Property”) in the amount of $7,677.98.

6. The Minister of National Revenue (the “Minister”) assessed the Appellant for the 1991 taxation year by Notice of Assessment mailed on May 19, 1992.

7. In reassessing the Appellant for the 1991 taxation year, by Notice of Reassessment mailed on March 23, 1995, the Minister disallowed the deduction of the rental losses claimed for the Property.

8. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) the Appellant and her spouse purchased the Property (a three bedroom condominium townhouse) in August, 1990 as their principal residence for $159,990.00 and financed more than 100% of the purchase price with a mortgage on the Property of $117,000.00 at an interest rate of 10.5% per annum and a mortgage on the Appellant’s spouse’s parent’s home of $45,000.00 at an interest rate of 10% per annum;

(b) for the 1991 taxation year, the Appellant reported rental income, ex- penses (before capital cost allowance) and a loss from the Property as follows:

	GROSS
YEAR	INCOME	EXPENSES	(LOSS)
1991	$12.375.00	$27,730.97	$(15,355.97)
- Amount of loss claimed by:
	- Appellant's spouse		$( 7,677.98)
	- Appellant		$( 7,677.98)

(c) interest expense included in total Property expenses for the 1991 taxation year amounted to $15,675.73;

(d) the Appellant’s and her spouse’s share of condominium common expenses included in total Property expenses for the 1991 taxation year amounted to $1,060.99;

(e) the Appellant and her spouse have resided at the Property since December, 1991;

(f) the disallowed rental expenses were not incurred for the purpose of gaining or producing income from a business or property;

(g) the Appellant had no reasonable expectation of profit from renting the Property during the 1991 taxation year.

B. ISSUES TO BE DECIDED

9. The issues are:

(i) whether the expenses disallowed by the Minister in respect of the rental operation were incurred by the Appellant for the purpose of gaining or producing income from a business or property;

(ii) whether the Appellant had a reasonable expectation of profit from the rental of the Property in the 1991 taxation year; and

(iii) in the alternative, whether the disallowed expenses were reasonable in the circumstances.

C. STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT

10. He relies on sections 3, 9 and 67, subsection 248(1) and paragraphs 18(1 )(a) and 18(l)(h) of the Income Tax Act (the “Act”) as amended for the 1991 taxation year.

11. He submits that the disallowed rental expenses were not incurred for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(l)(a) of the Act.

12. He further submits that the Appellant did not have a reasonable expectation of profit from renting the Property in the 1991 taxation year, and that the Appellant was properly reassessed in accordance with paragraph 18( l)(a) of the Act.

13. In the alternative, he submits that the disallowed rental expenses were unreasonable in the circumstances and were not deductible pursuant to section 67 of the Act.

Michael spoke for both the Appellants, although June was in Court. In general his testimony confirmed certain information supplied earlier to the Respondent, in connection with filing a Notice of Objection:

The basis of your reassessment is that my intent was solely to move in after the purchase of the property. Although, initially that was a goal, circumstances changed resulting in the rental of the unit to arm’s length parties and there was no element of personal use.

The townhouse was purchased on August of 1990 with a closing date of December 27, 1990. I was hired at my current position on August 1, 1990. At the time I was hired, I was to have been placed at the office in Burlington. The purchase of the home was precipitated with that in mind.

I was secured into a new territory in October of 1990. That placed me in the Toronto downtown head office rather than the Burlington Office. With that in mind, a decision was made that to rent the townhouse for business purposes with every expectation to earn a profit.

Because the largest expenses during the 1991 taxation year were mortgage payments/loan costs, and closing costs, a loss was incurred in the taxation year 1991. Projection of costs for the 1992 taxation year would have resulted in a profit. There were two main reasons for this; mortgage costs were rapidly declining, and, there were no more initial costs for the purchase of the unit. There was a realistic expectation of profit for the 1992 taxation year as well as subsequent years. Following is a projecting of the earnings and costs

1992 projected income	=$14,175.00	($1,181.25 x 12 months)
1992 projected costs	$10,728.00	principal & loan costs
	$ 1,801.93	taxes
	$ 1,176.12	condominium fees
		($98.01 x 12)
Total costs	$13,706.05

Future growth in profit was expected and anticipated.

In October of 1991, notice to vacate the premises at 2051 Merchants Gate was given by the tenants. They had realized an opportunity to buy their own home and would be vacating the premises by the end of November 1991.

Contrary to the assumptions made by the assessment officer, Mrs. Smith, attempts were made to rent out the unit again. Mrs. Smith would have seen receipts enclosed because Real Estate Agencies do not charge for services unless a tenant is found and secured.

Due to difficult market conditions, closing date in and around Christmas, made renting of the unit difficult. Coupled with major problems and landlord neglect at one premises, a decision was then made to cut our losses at 2051 Merchants Gate pretty simple. Property values were continuing to decline making the sale of the property a significant loss.

In addition, under questioning he agreed that the Appellants had considered the situation in December 1990 (noted above) and recognized that for the year 1991 there would be a rental loss (excess of paid out expenses, less rents received) estimated to be at least $10,000.00. By their tax claims for 1991, that loss turned out to be the amount in dispute of $15,355.97. He agreed that the amount categorized as “capital” by the Respondent (see above) of $2,953.50 should be so treated - and that the loss then would be reduced to $12,402.47. He further agreed that they had also considered the prospect of selling the property in December 1990, but that would also have occasioned approximately the same amount of estimated loss -about $10,000.00 - and that route they rejected. He explained the dramatic reduction in interest charges from 1991 to 1992 $10,728.00 (estimated, see attached to Notice of Objection above -filed on March 23, 1995) and also the final interest charge apparently of $9,779.72 (see Notice of Appeal) as “anticipated” since the Appellants hoped for some reduction in the $45,000.00 mortgage (see Reply to Notice of Appeal) either by paying part of it all shortly after they were married, or by some “gift” from the parents.* Something like that did happen, although details were not provided, and

* The difference between the $10,728.00 (Notice of Objection) and the $9,779.72 (Notice of Appeal) might be that some part of principal was included in the first amount — but I do not consider that crucial to a determination of this issue.

there was some substantial reduction in the payments required on the $45,000.00 mortgage in 1992. The real prospect of definite reduction in mortgage interest costs would come from a drop in the mortgage rates - to about 8 % from 10 1/2% originally on the $117,000.00 mortgage, which mortgage was only on a short term basis. This was not a situation in his mind where the Appellants could only expect a decrease in mortgage interest charges as a result of the slow reduction in mortgage principal itself. In late 1991, they re-listed the property for rent for about three months but being unsuccessful, they decided to return to Oakville about the end of 1991. He still continued to work in downtown Toronto, and commuted. There were no explanations provided for additional residence address shown for Michael on some documents filed with his 1991 income tax return - 35 Ceremonial Drive, Mississauga (the same “other” address from which rental losses were deducted by Michael); 95 Redpath Drive, Toronto; and 40 Wyndcliff Crescent, Toronto. The income tax returns of June showed she worked for British Airways, and there was no indication that situation had changed before, or after her marriage. Other details were not provided by Michael regarding her domicile over these years.

In the cross-examination of Michael, Counsel for the Respondent established to my satisfaction, and there was little dispute from the witness that more expenses than just the $2,935.50 already noted included in the original list of expenses for 1991 ($27,730.97 above) should be classed as capital. These reduced the expenses which might be claimed on current account to $21,333.00 rather than $27,731.00. The net result was that the most that could be claimed by the Appellants as a loss would be $8,958.00, not $15,356.00 as originally stated. The balance of these reasons will deal with whether that $8,958.00 for 1991 should be deductible, and the matter of changing the required items to appropriate “capital accounts” will be left with the Respondent.

Argument

For the Appellants, Michael maintained that all factors above had been carefully considered, it appeared the second year would show a profit, and that the plan to remain in Toronto living while renting their home in Oakville for several years, had just been frustrated because they could not find a tenant at the end of 1991, and the place would have remained vacant for some time. Michael contended a factor in his mind, had not been that there would be a prospect of writing off the rental loss of even $10,000.00 for 1991, against other income, even when it was brought to his attention that he was already (for a few years) a partner in another rental property - 35 Ceremonial Drive, also in Mississauga, Ontario, deducting tax losses therefrom. In the end analysis Michael’s major contention in support of the deductibility of the loss for 1991, was that while the estimates for that year showed a loss of $10,000, the Appellants could look forward to profits as early as 1992, and continuing profits from then on, while living in downtown Toronto where they worked. He recognized the possible relevance of some of the provisions of the judgment of Tonn v. R., [1996] 1 C.T.C. 205, 96 D.T.C. 6001 (F.C.A.), made available quite properly by the Respondent, at the trial.

Turning to the issue in Argument, Counsel for the Respondent agreed that there were certain aspects of the evidence which put the Appellants in a favourable light - they had rented the property through a Real Estate Agency, hoping thereby to get a longer term reliable tenant; they had looked at the longer term, and calculated - in their view, there would be a small profit in the second year; they had dramatically reduced the mortgage expense charges, with some premonition that this would occur - both with the 2% drop in rates and paying down the second mortgage; they had been able to negotiate their way out of the rented apartment in Toronto, and return to Oakville. From another viewpoint - this had been purchased as a Principal Residence, and after an eleven month hiatus it had now return to its original purpose; the Appellants had shown great skill and determination in retaining the property and now using it; Michael, at least was somewhat knowledgeable about the treatment available for rental losses; and the projected amounts of income, expenses and profit or (loss) for the year 1992 were open to serious question which Counsel detailed. Counsel reviewed the recent Federal Court of Appeal judgment in n (supra)and commented on the various aspects of that decision which might have some relevance to the known facts in this matter. As I understood Counsel’s opinion it was that the Appellants had not overturned the conclusion of the Respondent that there was “no reasonable expectation of profit”, and that in the end analysis little assistance for them could be found from Tonn (supra)

Analysis

I would start by repeating a quotation from a recent judgment of this Court Joseph v. R. (March 19, 1996), Doc. 95-755(IT)I (T.C.C.):

As Judge Hamlyn of this Court commented so ably in Watt Estate v. R., 95 D.T.C. 423 at page 425:

When there has been no actual profit it would appear that fact alone is a presumption against a finding of a reasonable expectation of profit. That presumption, however, may be rebutted by the evidence submitted on behalf of the taxpayer.

The crux of the position sustained by Michael even at the end of the trial, was that indeed there was “a reasonable expectation of profit”. At the time of his submission to the Respondent (The Notice of Objection) and to the Tax Court (Notice of Appeal) the Tonn (supra) judgment referenced above was not widely, if at all, reviewed outside the narrow confines of the Courts and those directly involved with tax law cases. Therefore it is understandable that his reliance would have been squarely on presenting a contrasting opinion to that expressed by the Respondent in the assessments

- “not made for the purpose of gaining or producing income from the business or property”. Michael at that time did not allow for any moderation to the principles enunciated in the highly revered Moldowan [1] judgment of the Supreme Court of Canada, upon which the Respondent’s assessment appeared to be based. Whatever lessons are to be learned from Tonn (supra) I do not read therein that the principles enunciated in Moldowan (supra) are to be completely discarded, and accordingly in my view it is appropriate in this set of circumstances to first examine the primary contention of the Appellants — “that there was a reasonable expectation of profit”, to see if that would suffice to uphold the Appellants’ contention.

In my opinion, the Appellants have not established that there was indeed a “reasonable expectation of profit” from the intended rental operation as at December 1990. That view is not one of the much reviled “hindsight” conclusions by the Respondent allegedly urged on this Court. It is based on the facts from the Appellants. The Appellants had managed to obtain only a short term lease with its 1991 tenants of which one months rent ($1,125.00) was to be retained by the Agent. There was no assurance whatsoever that there would be occupancy beyond that time, and indeed that turned out to be precisely the situation - no tenant at the end of the lease. Even with this amount of rental income, the loss anticipated by the Appellants was estimated to be $10,000.00. That would require a further infusion of funds from the Appellants, to retain the property. Acceptance of that rental loss, and the direct infusion of that amount of money, as contrasted with a recognized immediate personal capital loss — about $10,000.00 from a sale-was the route chosen. Perhaps the certainty of a loss in the first year of such a venture should not be fatal to the Appellant’s cause, but following the comments of Judge Hamlyn above, that situation should require some explanation and further supporting evidence. The support for that choice of direction — to rent rather than to sell — if I accept the logic of the Appellants is that there would be a profit in the second year — and the following summary of that “reasonable expectation” was provided in the Notice of Appeal (above) and I reprint it. I should point out that there was no evidence - in fact there was a total lack of evidence - which would support a view that even this brief summary was actually documented or tabulated in December of 1990. It appears to be more a response in December 1995 to the assessments at issue. Nevertheless it was put forward to serve the Appellant’s purpose at the trial:

TABLE OF 1991 EXPENSES VERSUS 1992 EXPENSES

1991 EXPENSES		1992 EXPENSES
property taxes	$ 3.355.83	$ 1,803.07
Maintenance	$ 3.964.94	$ 300.00
Interest	$15,675.73	$ 9,779.72
Insurance	$ 210.00	$ 210.00
Utilities	$ 400.00	$ 0.00
Legal/Accounting	$ 1,870.98	$	0.00
Condo Fees	$ 1,060.99	$ 1.176.12
Real Estate Fees	$ 1,125.00	$	0.00
Total expenses	$27,730.97	$13.258.86 (1)
Total Income	$12,375.00	$14.175.00
Net deficit/surplus	«$15,355.97»	$ 916.14

* Based on $1,125.00 per month x 5% increase equals $1,181.25 per month in 1992.

(1) Judge’s Note: the total apparently should be $13,268.91 rather than $13,258.86 making the calculated profit $906.09.

As I review the available comparable information for 1991, I would suggest that the “maintenance” item for $300.00 may be quite low, even for a second year house (rented), and could easily be increased to $700.00; the utilities amount of $400.00 for 1991, should continue to be included - there was no evidence to the contrary; the item for “accounting” alone was agreed at $60.00 which was included in 1991 in “legal and accounting” and should be continued even eliminating any possible “legal” fees, - a doubtful elimination; one months rent would go to the Real Estate Broker in the amount now of $1,181.25. These changes would bring the expense item total to $15,310.61. Even allowing for the calculated rental increase to total $14,175.00, the loss would continue in 1992 at approximately $1,135.61, not a profit of $906.09, and most importantly there would not be a reduction in interest charges for future years looming on the horizon. Finally, in connection with this calculation, events showed that there would be a vacancy period to take into account (some three months) on almost any short term lease - a large loss in calculated revenue, with little corresponding reduction in expenses . The anticipated rental increase of 5 % did not materialize since the property was listed (at the end of 1991) at the same rental $1,125.00 per month, and at that without success. It would not have been unreasonable to expect even a rental rate decrease, not increase of about 5 %, in view of the obvious availability of homes for sale in the area and the much vaunted mortgage interest rate decrease of some 2 %. All in all an anticipated 1992 rental loss of even more than $1,135.61, at least as much as $2,485.61 might easily have been anticipated, not a rental profit of $916.14, a difference of some $3,401.75. am well aware that the above are calculations at best - but they represent more accurately the information available to the Appellants and supplied by the Appellants at the trial. While the Appellants might have hoped for a rental profit in 1992 (and I have difficulty even seeing such a “hope”), they could hardly have held a “reasonable expectation” of profit for that year and beyond. The sole rationale for the Appellants’ claim of a loss in 1991 was that they had calculated that there would be profit in 1992. That calculation was inaccurate, and not because there were any unknown unfavourable factors, or even matters which would be based on “second-guessing” by the Respondent, of the business motivation of the Appellants.

While that might be regarded as sufficient to dismiss these appeals, the judgment in Tonn (supra), at page 208 (D.T.C. 6003), contained the following, including a quotation from the Tax Court judgment, which dismissed the original Tonn appeal:

There was never a point in time, when you take into account the mortgage interest alone and the taxes alone, that the expected rental revenue could produce a profit.

When you cannot show that there was a reasonable expectation of a profit, the operation is not a business for income tax purposes, and it is not entitled to deduct the losses incurred from other income, and that is what happened here. [2]

The Tax Court Judge, thus, essentially ruled that the taxpayers did not and could not demonstrate that they had a reasonable expectation of profit in the circumstances. Therefore, for the years in question they were precluded from the outset from claiming a deduction because the projected revenues were insufficient to offset expenses. Furthermore, even if the projected revenues had materialized, the taxpayers’ books would still have shown a loss, according to the Tax Court Judge.

There are two other quotations from the Tonn (supra) judgment at page 6009, which might shed some light on this situation, as highlighted by Counsel for the Respondent:

As a common law formulation respecting the purposes of the Act, the Moldowan test is ideally suited to situations where a taxpayer is attempting to avoid tax liability by an inappropriate structuring of his or her affairs. One such situation is the attempted deduction of an expense incurred to gain a tax refund. [3] Another is an attempt by a taxpayer to deduct personal housing expenses under the guise of a free-lance typing business operated by his wife. [4]

These cases are merely instances where an inappropriate use of the Act is attempted, and where the Moldowan test has rightly denied deductibility on the basis that the Act’s purposes would otherwise be violated.

But do the Act’s purposes suggest that deductions of losses from bona fide businesses be disallowed solely because the taxpayer made a bad judgment call? I do not think so. The tax system has every interest in investigating the bona fides of a taxpayer’s dealings in certain situations, but it should not discourage, or penalize, honest but erroneous business decisions.

[..J

The Moldowan test, therefore is a useful tool by which the tax- inappropriateness of an activity may be reasonably inferred when other, more direct forms of evidence are lacking. Consequently, when the circumstances do not admit of any suspicion that a business loss was made for a personal or non-business motive, the test should be applied sparingly and with a latitude favouring the taxpayer, whose business judgment may have been less than competent.

Predictable, even continuing losses, have never been the sole factor in deciding tax cases, but they have always represented a significant element to this Court. Hobby and personal benefit cases have been routinely dismissed, as I read the case law. In this instance there does not appear to be any basis for the conclusion that there was a “bad judgment call” or an “erroneous business decision” to whatever degree the pure economics of such a situation deserve to be taken into account. It appears they made a completely informed and conscious decision to rent rather than sell. But, provided by the Respondent with the references in Tonn (supra) which might be favourable to them, these Appellants now seek the same relief as that taxpayer received. They acquired the property as a principal residence, rented it temporarily, and returned it a year later to its original purpose; that Michael, at least, had some concurrent experience in the rental loss field with its possible tax benefits; and that he seemed to reside at different locations during the year 1991, in addition to the downtown apartment they used temporarily. The question then for the Court is whether, based on Tonn (supra), these factors should be sufficient to definitively deny the Appellants the tax benefits they seek, on either a “personal” or “inappropriate tax avoidance” basis, and thereby confirm the primary conclusion of the “reasonable expectation of profit” review above. Failing that to see if the Tonn (supra) judgment should serve to exonerate the Appellants from the dismissal arising out of that primary conclusion, and provide them the relief they seek.

Conclusion

In this matter, first it can be said that the pure economics compared favourably for these Appellants to those in Tonn (supra), and from that perspective alone, the lack of a demonstrated “reasonable expectation of profit” factor, should not be determinative against them, if I read Tonn (supra) correctly. Second, Counsel for the Respondent did not vigorously pursue the “personal elements”, or the “foreseeable tax advantages” for the Appellants in these circumstances. It has not been made clear to me in argument that the apparent absence of these two aspects - so crucial as considerations in Tonn (supra), should be accorded less weight in this matter. The latitude for such asserted business ventures, particularly losing rental operations as outlined in Tonn (supra) must prevail. There has not been a “reasonable expectation of profit” basis provided by the Appellants -but the Respondent has not shown clearly that there was a “personal element” or some “foreseeable tax advantage” during the year in question, assuming it is for the Respondent so to do. However, I repeat a caution from the recent judgment of this Court in My ria Joseph (supra):

It might also be argued that the provisions of Section 111 above were inserted in the Act for the express purpose of providing a reliable and useful route for recording, even possibly reporting, but not immediately deducting, early or “start-up” losses incurred, as opposed to the more contentious “frontend loading” avenue frequently pursued.

As a final thought, I would note that the Respondent in the Reply to Notice of Appeal did deal with the possible application of section 67 of the Act, as an “alternative”, which might arise out of the rejection by the Court of the main contention of the Respondent that there was “no reasonable expectation of profit”. That would accord with my own view, as expressed in Heenan v. R., 96 D.T.C. 1344, at page 1366:

I do not subscribe to the basic proposition of Counsel for the Appellants that the fundamental question is the “reasonableness” of the expenses claimed. That question of reasonableness of expenses arises as a result of a determination made that a business was being conducted.

The Court has not rejected the “no reasonable expectation of profit” assertion by the Respondent. The facts do show that a reasonable expectation of profit has not been demonstrated. However, that factor alone is inadequate to dismiss the appeals, when viewed against Tonn (supra) as I read that judgment. Nevertheless, the trial has shown that many of the expense items originally claimed on current account should have been treated as capital items, and to that extent the provisions of Section 67 of the Act may have some relevance although also the provisions of paragraph 18(1 )(b) of the Act would come into play. The total loss claim now remaining is only $8,958.00 divided between the two Appellants, as noted earlier in these reasons.

The appeals are allowed, without costs, in order that a total loss of $8,958.00 may be deducted by the Appellants for the year 1991. The entire matter is referred back to the Minister of National Revenue for reconsideration and reassessment.

Appeal allowed.