Pacey v. R., [1997] 2 CTC 2157

Somers D.J.T.C.:

This appeal was heard in Toronto, Ontario, on November 25, 1996, pursuant to the Informal Procedure of this Court concerning the Appellant’s 1991, 1992 and 1993 taxation years.

The issues in this appeal are:

(i) whether the Appellant had a reasonable expectation of profit from the rental of the Property in the 1991, 1992 and 1993 taxation years;

(ii) whether the rental expenses in excess of the amounts allowed by the Minister were incurred by the Appellant for the purpose of gaining or producing income from a business or property; and

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

The Minister relies on sections 3, 9, and 67, subsection 248(1) and paragraphs 18(1)(a) and 18(l)(/z) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the “Act”) as amended for the 1991, 1992 and 1993 taxation years.

In reassessing the Appellant, the Minister of National Revenue (the “Minister”) made the following assumptions of facts which were admitted or denied by the Appellant:

(a) the facts hereinbefore admitted;

(b) in June 1989, the Appellant purchased a detached 3-storey house located at 20 Blantyre Avenue, Scarborough, Ontario (the “Property”) at a purchase price of $725,000.00; (admitted as amended);

(c) at all material times, the Property was the principal residence of the Appellant; (admitted)

(d) in the 1989, 1990, 1991, 1992 and 1993 taxation years, the Appellant rented the 3rd floor and part of the 2nd floor of the Property and claimed 40% of the total expenses of the Property as rental expenses; (admitted)

(e) in the 1989, 1990, 1991, 1992 and 1993 taxation years, the Appellant reported gross rental income, expenses (before capital cost allowance) and net rental losses from the rental of the Property, (as detailed in Schedule A attached herewith), in the following amounts: (admitted)

	Year	Gross Rental	Rental Expenses	Net Rental Loss
		Income
	1989	$ 6,300.00	$ 19,545.00	$ 13,245.00
	1990	$ 8,100.00	$22,481.00	$ 14,381.00
	1991	$8,100.00	$21,731.00	$ 13,631.00
	1992	$ 9,000.00	$ 18,396.00	$ 9,396.00
	1993	$ 6,750.00	$ 17,738.00	$ 10,988.00
(f)	interest payments in each of the 1991, 1992 and 1993 taxation years
	exceeded the rent received in respect of the rental unit in those years;
	(admitted)
(g)	the Appellant had no reasonable expectation of profit from the rental of
	the Property during the 1991, 1992 and 1993 taxation years; (denied)
(h)	the rental expenses in excess of the amounts of $8,100.00, $9,000.00
	and $6,750.00 allowed by the Minister in the 1991, 1992 and 1993 taxa
	tion years respectively, were not made or incurred for the purpose of
	gaining or producing income from business or property; and (denied)
(i)	the claimed rental expenses were personal or living expenses of the Ap
	pellant. (denied)

The pertinent sections of the Act, for the purposes of this appeal are:

Section 18: General limitations.

(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) General limitation - 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 and living expenses - personal or living expenses of the taxpayer, Other than travelling expenses incurred by the taxpayer while away from home in the course of carrying on his business;

The Appellant, an industrial designer, bought a three-storey house, in June, 1989, at a price of $725,000.00, financed with a mortgage in the amount of $300,110.00. The Appellant used the house partly as his residence and partly as a rental investment. The rental space was established at 34.7 per cent of the total space.

In 1991, the rental rate was $1,000 per month, but was reduced to $750 per month due to the rental market. The rental income from 1989 to 1993 is enumerated in subparagraph 6(e) of the Reply to the Notice of Appeal. The rental unit was adequate for rental purposes. The purpose of buying the house was to reside in it and the rental space was to provide revenues to offset the mortgage payments.

In cross-examination, the Appellant stated that he did not know if he would break even. Further to the expenses for repairs, the Appellant added bank charges and car expenses.

The issue in this appeal is to determine if there is a reasonable expectation of profit from the rental of part of the property in the 1991, 1992 and 1993 taxation years. In the Moldowan v. R., (sub nom. Moldowan v. Minister of National Revenue) [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, established the deductibility test applicable to the taxpayer’s situation requiring a reasonable expectation of profit.

The Federal Court of Appeal in the case of Tonn v. R., (sub nom. Tonn v. Canada) [1996] 1 C.T.C. 205, 96 D.T.C. 6001, expresses itself in the following terms, at page 225 (D.T.C. 6013):

However, where circumstances suggest that a personal or other-than-business motivation existed, or where the expectation of profit was so unreasonable as to raise a suspicion, the taxpayer will be called upon to justify objectively that the operation was in fact a business. Suspicious circumstances, therefore, will more often lead to closed scrutiny than those that are in no way suspect.

The Appellant has admitted that he does not know if the will break even. The interest at 12% per annum alone amounts to $11,760.95 deducted as an expense. The cost of the repairs to the house amounted to $2,623.77, which was deducted as an expense for the 1992 taxation year. Likewise for the 1993 taxation year, interest was deducted plus $1,682.94 for repairs and maintenance.

Test of time allows us to determine if there is a reasonable prospect of making any profit. The figures are evident for the years 1989 to 1993 that there is no prospect of making a profit. The Appellant has not demonstrated that he can reasonably make a profit in the near future. It seems that the purpose of renting was more to offset the mortgage payments on the house rather than an incentive to a business venture.

We can conclude that the Appellant did not have a reasonable expectation of profit from renting part of the property in the 1991, 1992 and 1993 taxation years, that the losses were personal or living expenses of the Appellant and that the Appellant was properly reassessed in accordance with paragraphs 18(l)(a) and 18(1)(h) of the Act.

The appeal for the 1991, 1992 and 1993 taxation years is dismissed.

Appeal dismissed.