Castagna v. R., [1997] 2 CTC 2001

Taylor T.C J .:

These are appeals heard on common evidence in Toronto, Ontario on December 4, 1996 against assessments for the years 1991, 1992 and 1993, in which the Respondent disallowed claims for “rental losses”.

I would also refer to the recent appeal of Rossi v. R. (December 11, 1996), Doc. 96-1057(IT)I (T.C.C.)and the footnote at the completion of the reasons:

Since hearing this appeal, but before giving any decision on it, I have heard the appeals of Renzo Castagna (96-1059(IT)I and 96-1061(IT)I respectively) on common evidence, but completely separate from this appeal. I do point this out since the three — Jerry Rossi, Renzo Castagna and Lori Castagna were the partners in the one parcel of property involved but Renzo Castagna and Lori Castagna required that their two appeals be heard separately from this appeal.

The same basic documentation was filed and obtained in these appeals which is referenced in Rossi (supra). Therefore only points which were stressed more strongly or differently by these Appellants in testimony will be noted. Renzo Castagna pointed out that he and his wife (Lori) were quite satisfied at the outset that they could look forward to a profitable operations — at least not a losing one — during the years they intended to hold the property before selling it. He agreed that the end objective had been a sale at a profit “a capital gain”, but that had not interfered with or impeded in any way their operation of the property for rental purpose and the efforts to minimize costs and make the operation viable in the meantime. In cross- examination, Counsel for the Respondent filed as Exhibits, the relevant income tax returns, and included those of 1990, and 1994, both showing losses.

Mr. Castagna in argument raised the contention that in the event the Respondent’s disallowance on “no reasonable expectation of profit” should prevail, then consideration should be given to allowing the claims as “startup costs”.

In argument, Counsel for the Respondent provided the Appellants and the Court with copies of the judgment in Tonn v. R., [1996] 1 C.T.C. 205, 96 D.T.C. 6001 (F.C.A.) and Sardinha v. R. (November 29, 1996), Doc. 96- 860(IT)I (T.C.C.). Counsel dealt with the aspects of the evidence and testimony (see Rossi (supra)) which led to the Respondent’s conclusion that there was no “reasonable expectation of profits” - the losses had commenced immediately, there was no real evidence of actual signed “leases”, as opposed to simply monthly rental programs, and the fixed costs above militated against profits. There was evidence that at least two, possibly three efforts had been made to sell the property even while renting it, - which efforts eventually succeeded. Counsel’s main point, however was that the real objective for these Appellants had been to “turn over” the property, and make a quick capital gain. In her view, that relegated any “rental” operation to a secondary role, and one which could not be used to support the Appellant’s claims, which if allowed would reduce the tax impact for the Appellants on other income.

Analysis

I believe I have dealt with the evidence and the “reasonable expectation of profits” point adequately in Rossi (supra), and the comments apply here - but I would add that these Appellants took an even more optimistic view of their prospects for profit at the outset, and according to the testimony did not anticipate any requirement for additional contributions to cover losses. On the “start-up costs” assertion made by Mr. Renzo Castagna, I would not regard that highly, in view of the fact that loss claims for the years 1989 and 1990 were allowed by the Respondent, before the issues raised in the appeals for 1991, 1992 and 1993. Further as I said in Sardinha (supra) to claim “start-up costs” required something more, in my view, than simply raising it as an alternative, after rejection of the basic “source of income” contention. I would not be inclined to agree with these Appellants claim based on the “start-up costs” contention either alone or as an alternative, and I repeat I covered my views on that subject in Sardinha (supra),

The main point to be addressed in these appeals, as distinct from Rossi (supra) is that raised by Counsel for the Respondent regarding the “capital gain” intention. It would not be difficult for me to visualize these appeals from the perspective of an “adventure in the nature of trade” - the purchase, holding and sale of a property and that prospect has been advanced obliquely in the Notice of Appeal. Indeed if brought forward that way by the Appellants with all the attendant possible calculations to determine a capital gain or loss, possibly including some of the claimed losses as “capital” might have made for an interesting excercise. But that was not done, and I fail to see how the Respondent’s Counsel can raise it now as the bulwark for the assessments at issue. It was not part of the pleading by the Respondent, and this is not a “capital or income” appeal in the traditional sense. Counsel has not said that the Respondent is prepared to reassess, allowing by some criteria (and I do not propose the basis which could be used) the amounts at issue as “capital amounts” - although I agree the thought that similar amounts should be so treated has often been expressed. By inference, therefore, Counsel is relegating the losses claimed to the “personal expenses” category which I rejected in Ross (supra). The Appellants effectively would receive no “credit” for the additional sums advanced, of which the claimed losses are composed. While perhaps, not vital in theses circumstances - a loss on sale ultimately resulted - that lack of consideration by the Respondent might become important in a situation where a gain - perhaps a substantial gain had been realized. Obviously it was open for the Respondent to assess the entire venture, from a different basis and let the chips fall where they might. I would also add that in T ann (supra) the learned Justices did not seem to bridle at the prospect of an investor considering the “capital gains” objective in conjunction with the assertion of “source of income”, and I quote from p. 6015 thereof:

A further matter worthy of mention is that real estate, like shares, may be purchased not only to create an income stream but with an eye to an eventual capital gain. Mr. Tonn testified that “real estate is a good long term investment”. One reason why real estate and securities alike present good investment possibilities is that they offer the possibility both of earning income and of obtaining capital gains in the future. Purchasers usually intend to profit from both the income and the longer-term capital aspects, and, if they do, they pay tax on both sources of profit.

I leave aside for purposes of these reasons, any reservations I might hold personally regarding the possible co-mingling of the two sources - income (or loss) from rental, and capital gain, but I have expressed these in other appeals.

lam not prepared to reach a conclusion in these appeals different than that provided in Rossi (supra) on the basis of Counsel’s “capital gain” assertion.

The appeals are allowed. One set only of costs, if applicable, is allowed to cover these two appeals as well as that of Rossi (supra).

Appeal allowed.