Howard v. R, [1997] 2 CTC 2458, 97 DTC 1340

Rowe DJ.T.C.:

Counsel agreed the appeals of both appellants would be heard on common evidence. Each of the appellants appeal from assessments of income tax with respect to their 1991, 1992 and 1993 taxation years. The appellants are husband and wife and in each of the taxation years under appeal claimed rental losses as a result of renting a portion of their principal residence. They claimed a deduction from other income on the basis that 75% of the overall costs of operating said property were attributable to their rental business. In assessing the appellants for the years under appeal, the Minister of National Revenue (the “Minister”) took the position that there was no reasonable expectation of profit from the rental activity and totally disallowed the losses.

The appellant, lan Howard, testified that he is a resident of Toronto and Owns a computer rental business. He and Dale Davis were married on July 28, 1990. In April, 1988, he and Davis purchased, jointly, a residential property at 165 Brookside Drive in Toronto for the sum of $227,000. Howard stated that, in 1981, he had purchased a residence in the same area - Beaches - and had renovated it so that it had three separate living units He did not live in the house but rented out all of the space at a time of buoyant real estate and rental markets. However, those markets went into a decline within the next year and at one point he moved out of his own apartment and into the rental property. He was operating the rental property at a small loss when he sold it in 1986. In 1985, with a partner, he purchased a rental property with two units. He never lived in the property and stated it was at a break-even point immediately, producing rental revenue of $1,200 per month. Financing was done by borrowing from his partner’s father and placing mortgages on the property at substantial rates of interest. He and his partner sold the property, for a profit, in 1987. During this period he worked as a musician and also as a driver earning between $12,000 to $30,000 per annum. In November 1987, with a partner, he started to operate a computer retail store. In 1988, he and Dale Davis were searching to buy a residential property - in Beaches - with two or three living units. They located an ideal house at 165 Brookside Drive. The purchase price was $227,000. They borrowed $15,000 from his wife’s mother, used $10,000 from their savings for the down payment and then placed a first mortgage of $175,000 on the property. An additional $35,000 was needed to close the deal and his mother-in-law placed a mortgage for that amount on her own personal residence and loaned the money to him and Dale. The interest rate on the mortgage was 11 1/2% per annum which they paid to her so she, in turn, could pay the mortgage. Before buying the property, Howard stated, “we did the math”. They dealt with a realtor and reviewed the information sheet which provided relevant details including cost of taxes and utilities. As for the revenue side of the equation, Howard stated they estimated the basement rental unit would bring in $695 per month while the main floor area would produce an additional $375. Then, the upstairs portion occupied by him and Davis would be shared with a tenant in return for a rental of $325 per month. Prior to purchasing 165 Brookside, they had been tenants and were accustomed to sharing a house. By May 1988, all of the rental units and/or shareable areas were producing revenue. However, about three months later the basement portion became vacant and they advertised it for rent at $695 per month. They were not able to rent it for that amount and lowered the advertised rent to $595. A tenant moved in and remained there until the summer of 1993, with one interruption during which they advertised the unit for $595 and when no response was forthcoming lowered it to $495. The former tenant decided to move back in and now they were only able to obtain the sum of $495 where, previously, the tenant had been paying an additional $100 throughout the previous term of the tenancy. The basement living unit - with a separate entrance - had been completely renovated and there was no internal access to upstairs living quarters. The main floor of the house had a living room, dining room and common hallway. Upstairs, where he and Davis lived, a tenant had a bedroom and shared a bathroom and kitchen facilities. They advertised in various Toronto newspapers and also in a local Beaches publication. Between 1991 and 1993, the vacancy rate in Toronto was very high and he recalled reading, in one issue of a newspaper, more than 80 advertisements for rental units similar to what they were offering. Interest rates on their mortgage rose to 13% during this period. The original mortgage was for a one-year term and when it came due in 1989 they elected to lock in to a four-year term at the increased rate. Two of their tenants were out of work from time to time and had difficulty paying their rent. He and Davis found they had to borrow money from her mother in order to keep up various payments. By April 1993, they were starting to obtain some relief on the mortgage interest. In 1993, the total rental revenue fell to $5,835 from the sum of $11,426 in 1991 and then $10,920 in 1992. After factoring in 25% of overall expenses attributable to their personal use of the property, they each claimed a rental loss as follows:

1991 - $5,865

1992 - $6,389

1993 - $7,369

In 1994 - a taxation year not included in the present appeal - the loss for each appellant was $4,816. Howard explained that in May 1993 the tenant vacated the basement living unit and he and Davis had to undertake a costly renovation which was not finished until February 1994. In August 1993, the tenant occupying the main floor moved out and this space remained vacant until 1994 when he and his wife moved downstairs and occupied that area while they renovated the upstairs space and added a bedroom. Since the beginning of 1994 they occupy 50% of the total space in 165 Brookside. The current interest rate on the mortgage is 10 1/2 % per annum and they pay only 5 1/2 % on money borrowed - approximately $40,000 - from his wife’s mother. The first mortgage now has a reduced amortization period so that it will be paid off within the next 11.5 years. In 1996, Howard estimated that their rental losses will be approximately $400 each. At all times, their property was intended to serve as a long-term investment and he and his wife believed that rental rates would increase at an orderly pace in accordance with the maximum 4% per annum permitted by Ontario rent con- trol legislation. Currently, they obtain $495 per month rent for the basement space and $450 from another tenant who shares the main floor and upstairs area with them.

In cross-examination, Howard stated that his training at Ryerson was not related to business and he had no formal training in real estate or rentals. He talked to realtors and bankers before purchasing any rental properties. The property which he had purchased in 1981 was close to the break-even point at time of sale, revenue being within $1,000 - plus or minus - of expenses. In his experience, the major factor is always the cost of interest on borrowed money and the amortization schedules are such that losses within the first few years are inevitable. He agreed that losses at 165 Brookside were continuous for eight years and that he could not sustain that kind of ongoing deficit in his computer rental business. However, in his opinion, the house will produce a profit when the interest expense is reduced. Current rates are much less and during any renewal term of the mortgage will probably be even lower. He and Davis had an opportunity to sell the house in 1988 for $275,000 and could have taken a quick profit but they wanted to hold the property over the long term. Counsel referred him to a floor plan of the house - Exhibit R-1 - together with a questionnaire - Exhibit R-2 - which Revenue Canada had requested to be completed and returned. Howard stated that he provided information to their accountant who then responded to the questionnaire. Howard was referred to Question 4 which read:

What was the initial purpose of acquiring the property?

The response was as follows: “Inhabit as principal residence but, (sic) rent part to help with mortgage payments.”

Howard stated the handwriting on the questionnaire is that of his accountant who also signed the questionnaire in the space provided. He was also referred to paragraph 2 of his Notice of Appeal which states:

Although the property was purchased with a view in mind to provide accommodation for the couple it was considerably larger than was necessary for their immediate requirements and so they undertook to let out a substantial portion of the property until their own spatial needs increased.

Howard stated the Notice of Appeal had been drafted by Counsel. He agreed that the purchase of 165 Brookside was 90% financed. He and Davis worked the numbers in a meaningful way and presented their plan to the mortgage company in order to finance the purchase. In his best estimation, he and Davis occupied only 25% of the house during 1991-1993, inclusive. The problem was that the rental market was terrible during that period and even when part of the main floor was vacant it was still available for rental and had been advertised as such from time to time. In 1991, he was able to lease commercial space for his computer rental business at a rate which he estimated to be about one-half of the normal rate because of the failure of certain large rental corporations which led to availability of space. In 1993 the main floor was still available for rent. The basement area was not used by them at all for storage or otherwise. He stated that he and Davis did not enter into any formal legal obligation with her mother by way of mortgage or promissory note but they did borrow money from her and are repaying that amount. In making calculations of revenue he relied on rents increasing at a rate of about 4% per year within the limits permitted by rent control. The basement area began to produce rent of $695 per month in 1988 and then fell to $495 between 1991 to 1993 and there were times when tenants had to be granted an extension in order to pay the rent but he and Davis did not have to write off any uncollected rent during the years under appeal.

The appellant, Dale Davis, testified she is a teacher and in 1988 was working part time earning between $20,000 and $30,000 per year. In 1991 she returned to university and in 1992 obtained a contract to teach full time. At all times she participated in decisions concerning the house. She had been a tenant since 1975 and was familiar with the rental situation. She and her husband, Ian Howard, looked for a property that could produce rental income. They were used to sharing facilities and knew they could continue to live in that fashion, only now they would be the landlords.

In cross-examination, Davis stated she has lived in Beaches most of her life and the property at 165 Brookside is beautiful. Since 1994, they now occupy 50% of the space but cannot imagine ever taking over the basement area. At some point in the future, it is conceivable they may choose not to share space upstairs with a tenant. In her view, they had reasonably counted on orderly rental increases and stable interest rates to produce a profit in due course.

Counsel for the appellants submitted that the evidence established they made a long-term investment which could produce a profit and that between them they had experience as tenants and as landlords and made certain business decisions based on information available to them at the time. The personal component in each of the years was accounted for and the losses attributable to the rental business should be allowed.

Ms. Quinn, student-at-law, appearing for the respondent stated that there was a strong personal component to the appellants’ decision to purchase the property. Therefore, ordinary rules of jurisprudence apply and it was clear the 90% financing was excessive and the cost thereof was prohibitive so that a profit could not reasonably have been produced during the years under appeal.

In Tonn v. R., (1995), 96 D.T.C. 6001 (Fed. C.A.), the Federal Court of Appeal examined the concept of reasonable expectation of profit as it has evolved over the years since the judgment of the Supreme Court of Canada in Moldowan v. R., (1977), [1978] 1 S.C.R. 480 (S.C.C.). Linden, J.A. writing for the Court, undertook the analysis and, reproduced below, is a review of the case law commencing at page 6009 of the reasons of His Lordship:

A closer look at this jurisprudence will illustrate that this is the approach now taken in most of the cases. The cases in which the “reasonable expectation of profit” test is employed can be placed into two groups. One group is comprised of the cases where the impugned activity has a strong personal element. These are the personal benefit and hobby type cases where a taxpayer has invested money into an activity from which that taxpayer derives personal satisfaction or psychological benefit. Such activities have included horse farms, Hawaii and Florida condominium rentals, ski chalet rentals, yacht operations, dog kennel operations, and so forth. Though these activities may in some ways be operated as businesses, the cases have generally found the main goal to be personal. Any desire for profit in such contexts is no more than a ‘pious wish or ‘fanciful dream . It is only a secondary motive for having set out on the venture. What is really going on here is that the taxpayer is seeking a tax subsidy by deducting the cost of what, in reality, is a personal expenditure.

One such hobby case is McKay v. M.N.R. where Brulé T.C.C.J., in deciding that an underwater diving instruction and photography operation did not comprise a business, stated:

Although the Appellant’s course of action demonstrated a dedication to the scuba diving field, this is not sufficient to take it beyond the character of a mere hobby. In my view, on the basis of all the evidence, the Appellant has failed to establish that he did possess a reasonable expectation of making a profit from an underwater diving instruction and photography business for the years under review.

It is not that the impugned activities in these cases are in themselves any more or less prone to being run like a business. Rather, it is the simple fact of how they are run which is decisive: though the taxpayer might well desire to profit from the activity, the profit motivation is not the main reason for the activity. Rather, the element of personal enjoyment is the dominant, motivating force.

In another hobby case, Escudero v. M.N.R., the applicant deducted losses arising from a dog-breeding operation. Though the operation was run ostensibly as a business, the taxpayer had an obvious personal interest in dogs, which was evidenced, among other things, by the fact that the appellant had purchased a mobile home for attending dog shows. In deciding that the deductions were correctly disallowed, Chairperson Cardin stated:

Although the appellant’s breeding kennel may be operated in a business-like manner, it lacks, in my opinion, the one essential ingredient to make it a business and that is a reasonable expectation of profit. On the basis of the evidence and particularly the financial statements for the years 1975 to 1980 inclusive, I do not believe the appellant can, in the foreseeable future, reasonably expect to realize the profit from the operation of his breeding kennel. For whatever reason the appellant may have engaged in the breeding of pure stock St. Bernard dogs, it was not, in my opinion, for the purpose of realizing a profit from the breeding operations.

A further case illustrating the personal benefit element in Huot v. M.N.R. In this case, the taxpayer acquired certain properties from his parents and in turn rented one of them to his parents for a rental value far below the market rate. The applicant then attempted to deduct losses arising from this arrangement. The Tax Court Judge properly found that the applicant did not entertain a reasonable expectation of profit and dismissed the appeal.

Lastly, in Maloney v. M.N.R., a taxpayer rented a house she had purchased from her mother back to her for a low rent and attempted to deduct the losses incurred. In deciding that a motive of personal benefit predominated in these circumstances, the Tax Court Judge stated:

I do not doubt in any way the good faith of the Appellant. She presented her own appeal with sincerity and conviction. I find, however, that the plan for the mother to be self-supporting and thereby pay a reasonable rent which would permit the Appellant to derive income from the property is a plan that was not well thought out. The subjective, good faith, commercial hopes and dreams of an individual taxpayer do not confer upon his or her enterprise a reasonable expectation of profit if that enterprise does not meet the objective criteria of a prudent business in similar circumstances.

The other group of cases consists of situations where the taxpayer’s motive for the activity lacks any element of personal benefit, and where the activity cannot be classified as a hobby. The activity, in these cases, seems to be operated in a commercial fashion and not as a veiled form of personal recreation. Usually these deductions are not challenged by the Department, and, therefore, they do not get appealed and are not reported very often in the law reports. The Courts still have a role, however, in deciding whether there exist less apparent factors which might suggest a different conclusion in cases such as these. The Courts are less likely to disallow these expenses, but they do so in appropriate circumstances.

Thus, in Baker v. M.N.R., Couture C.J.T.C. found that the taxpayer conducted himself in a business-like manner and that it would not be appropriate to disallow the deductions he claimed:

In the present appeal, it appears to me that the Appellant conducted himself like a normal average investor, an investor who was not sophisticated because of lack of professional training, but who nonetheless had a working knowledge of the basic rules of the investment process. He knew the area where the property was located. He had received assurances from the real estate agent that there would not be any problem renting the property throughout the year and furthermore the agent had indicated the rent that could be obtained. ...The fact that the rental projections did not materialize, which was the main and only cause of the failure of the venture certainly cannot be imputed to the Appellant. It was simply part of the risk related to the venture.

In a contrasting case, the taxpayer attempted to deduct rental losses on a property. While recognizing that it is inappropriate for the Minister or the Court to substitute its business judgment for that of taxpayer, Bowman, T.C.C.J. found that the operation did not meet the Moldowan criteria:

Nonetheless, there must be sufficient of the indicia of commercial- ity to justify the conclusion that there is a real commercial enterprise being conducted. I do not find that the arrangements made by the appellant contain those indicia. The 100% financing, the payment of a 25% commission to Port Charlotte Homebuilders and the substantial expenses and consequent loss in comparison to the gross revenues and the overall cost of the property are among the factors that I find inconsistent with a genuine commercial operation.

This conclusion does not of course justify the automatic disallowance of losses in the early years of a genuine viable rental operation. There should be a reasonable period in which to permit the enterprise to become self-supporting. In the years under appeal, I do not think it had reached the stage where it can be called either a business or a viable rental operation.

Other cases utilize the Moldowan case in what appears to be regular commercial type situations exist. The facts, of course, are always of importance in sorting out which cases will be placed on the other side of the line. Hence, where a commercial enterprise is operated at a loss in order to generate tax refunds or other such tax consequences, the Court will likely find that the enterprise is not a business under the Moldowan test. In other situations, the Court may decide that, though the taxpayer genuinely intended the pursuit of profit through a purely commercial activity, the intention was unrealistic, the expectation of profit unreasonable, and hence, the activity was not a business. This was the situation before this Court in Landry v. Q. In deciding that a lawyer’s expecta tion to earn a profit from a rejuvenated legal practice, recommenced in his seventies, was not objectively reasonable, Décary, J. stated:

It is possible for someone, with the best will in the world, to practise an activity that takes all his or her time and that activity may still not be a business for the purposes of the Income Tax Act. ... There comes a time in the life of any business operating at a deficit when the Minister must be able to determine objectively, after giving someone a head start for a number of years, as the case may be, that a reasonable expectation of profit has turned into an impossible dream.

I might note for the record that the factual circumstances in Landry were not entirely free from suspicion. One significant source for the losses claimed in the case was part of the cost of the personal residence of the taxpayer from which the practice was run at least part of the time.

In another case, Engler v. Q. a taxpayer attempted to deduct losses from a small business he formed to buy and sell various gift items such as brassware, watches, rings and household gadgets. The profits intended from this business were to supplement the taxpayer’s employment income. Though no personal element was apparent in how the taxpayer ran the business, and though the type of business suggested a bona fide commercial operation, the losses arising from it were held to be non-deductible because the venture lacked a reasonable expectation of profit. Even though the operation could not otherwise be impugned, the rather large losses claimed were too suspicious to be overlooked, thus suggesting that a non-commercial intention lay at their source. In deciding the matter, Joyal, J. stated:

On the evidence, it might be said that the plaintiff originally brought the whole controversy upon himself by claiming expenses which could not by any stretch of the imagination be justified. In the face of this obvious disproportion between the resulting losses and the volume of business generated, or the capital committed, or the time and energy devoted to it, it was an easy slide from a determination of the unreasonableness of the expenses to an assumption that the venture, in any event, did not have a reasonable expectation of profit.

I also find the following words from earlier in the judgment instructive:

It is only when the taxpayer has other sources of income against which any such losses are claimed that Revenue Canada’s antennae start sending out signals which might become a source of concern to the taxpayer. Depending on the circumstances in each case, Revenue Canada will assume that the taxpayer is engaged in a business which objectively has no reasonable expectation of profit. The inference will be drawn that the taxpayer is merely engaged in a sport, hobby or some other self-satisfying endeavour, and if his losses are charged to his other sources of income, he is effectively reducing his tax exposure.

The difficulty the taxpayer could not overcome was the inference, derived from the unreasonable nature of the expenses, that the business was in fact not operated for business reasons.

When the cases are categorized into two groups as above, one cannot help observing that the hobby and personal benefit cases are rarely decided in the taxpayer’s favour. In contrast, where the activity is purely commercial, they rarely are challenged. If they are the Courts have been reluctant to second-guess the taxpayers, with the benefit of the doubt being given to them. I also note that in terms of sheer numbers, the hobby/personal-benefit cases vastly outnumber those of the commercial activity and variety, which are quite rare, indicating that taxpayers are challenged less often in such situations.

The primary use of Moldowan as an objective test, therefore, is the prevention of inappropriate reductions in tax; it is not intended as a vehicle for the wholesale judicial second-guessing of business judgments. A note of caution must be sounded for instances where the test is applied to commercial operations. Errors in business judgment, unless the Act stipulates otherwise, do not prohibit one from claiming deductions for losses arising from those errors. This point was stated strongly by Sheldon Silver:

It is submitted that it should not be the role of Revenue Canada to determine what businesses taxpayers should attempt to pursue. In fact, governments in Canada have often stated that new businesses and risk-taking should be encouraged and have, from time to time, enacted legislation to encourage such activity. Canadian chartered banks have recently been seriously criticised by the press and government officials for not providing adequate lending facilities to small and new businesses. Clearly, Revenue Canada’s attempt to penalize taxpayers who are unsuccessful after taking these risks is inconsistent with the government’s promotion of private entrepreneurs.

This criticism was echoed by Bowman, T.C.C.J. in Bélec v. Q. where he stated:

It must be noted that these losses were incurred solely in a business context. There was no personal element, either in his purchase nor in his use of the building. The appellant is an experienced businessman. He took his decision in good faith on his best judgment and on the facts available to him at the time. It is not up to the Minister (or this Court) to substitute his business acumen for that of the taxpayer, with the benefit of hindsight. The question to be asked is not, “Knowing what I know now, would I have embarked upon this enterprise?” The answer is no doubt “No”, because the question only comes up when there are losses.

And finally, the same caution was reiterated in Nichol v. Q.:

[Mr. Nichol] made what might, in retrospect, be seen as an error in judgment but it was a matter of business judgment and it was not one so patently unreasonable as to entitle this Court or the Minister of National Revenue to substitute its or his judgment for it, or pe- nalize him for having made a judgment call that, with the benefit of 20-20 hindsight, that Monday morning quarterbacks always have, I or the Minister of National Revenue might not make today. We were, after all, not there in 1986.

Though I do not support the use in the Nichol case of the word “patently”, I otherwise agree that the Moldowan test should be applied sparingly where a taxpayer’s “business judgment” is involved, where no personal element is in evidence, and where the extent of the deductions claimed are not on their face questionable. 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 closer scrutiny than those that are in no way suspect.

It is obvious that the subject matter of the within appeals contains a personal element of considerable proportion. Although not a holiday or resort property, the appellants purchased 165 Brookside-in an area they both loved-with a view, after renovations, to having the rental portion of the property subsidize the overall cost of operating the property, including payment on the extensive financing. The Income Tax Act does not, in this instance, specifically deal with the subject of a mixed-use property but it is always a question of reasonableness in that the costs and expenses of the business component of an asset must bear a direct and proper relationship to the revenue produced. On occasion, a mixed-use asset will appear not to have a reasonable expectation of profit because there has been an improper or incorrect allocation of expenses against the revenue. Once that error has been rectified, the picture changes substantially and a profit may be realized in one or more of the years under appeal or will probably occur in the foreseeable future. The allocating of expenses to mixed-use assets is undertaken on hundreds of thousands of occasions per year by taxpayers deriving income from real property, vehicles, vessels, equipment and so on and the Minister reviews these statements of income and expense with a view to determining, inter alia, whether the claimed expenses are reasonable. Therefore, while the appellants’ venture in the within appeals was not purely commercial as in Tonn, I do not read that decision in such a way as to be compelled to subject legitimate, good faith, purchases and operation of mixed-use assets to the same kind of scrutiny as is appropriate for matters farther along the continuum where it is plain the enterprise is borne of, and pursued for, purposes of personal interest or recreation.

In the within appeals, the appellants ran into some bad luck. It is true that they were heavily financed but Dale Davis’ mother was probably not going to sue them if they fell behind on payments to her from time to time and many large, super-sophisticated real estate rental and trading companies in Ontario went into receivership or otherwise suffered serious financial consequences during the period 1991 to 1993. The revenue projections of the appellants were not, in my view, unrealistic and they attempted to attract new tenants by placing advertisements and made compromises to keep the tenants they had. In 1994, they made a decision to take out a mortgage at 10 1/2 % interest for five years. As it turns out, they have been overtaken by events but that does not detract from the reasonableness of that action in light of their previous experience with substantially higher rates and with the understanding that the major expense had always been the cost of the financing. It should be kept in mind that in large metropolitan areas in Canada it is almost inevitable that a young couple will require a property which is capable of producing some revenue in order that the purchase can be made, initially, and sustained thereafter under difficult circumstances in an uncertain economy. It is a fact of life which is well recognized by banks, other financial institutions and all levels of government, especially municipalities which are directly affected by housing shortages. It is precisely that kind of rental accommodation flowing from thousands of mixed-use properties which helps to narrow the gap between increasing demand and the supply provided by public housing or residential rental space in the form of apartments, suites, townhouses and condominiums.

The basement area of the property was always used 100% for rental purposes. It had been occupied, for the most part, on a continuous basis since they purchased the house in 1988 but fell vacant in May 1993 and remained so until February of 1994. A renovation was required in order to make it ready for a new tenant. The main floor was rented until August 1993 and was the subject of attempts thereafter to rent it until the appellants decided, in 1994, to occupy it themselves while they renovated upstairs and added a bedroom. As a result, in that year they increased their allocation of the personal use component to 50%. The upstairs area featured a bedroom used exclusively by a tenant and a bedroom occupied by the appellants with the rest of the area being shared. It is difficult to calculate the appropriate percentage of personal use based on the floor plan - Exhibit R-1-but the sharing of all but the bedroom on the top floor leaves me to conclude that overall, a better allocation would be 65% commercial and 35% personal for the period between January 1, 1991 and September 30, 1993. Following September 30, 1993, the basement area was still vacant and it was not reasonable to expect that the main floor would be rented out as the response to advertisements had drawn no response even though the appellants did not occupy it themselves in a formal sense until early 1994. Therefore, a more reasonable apportionment for the remainder of 1993 is to fix the appellants’ use of the total property at 50% with 50% allocated to rental purposes - the same percentage used by them in filing their return of income for 1994 and thereafter. I am satisfied that the interest payable by the appellants to the mother of Dale Davis is properly included as an expense item - subject, of course, to the proper apportionment along with the other expenses - on the basis that there was a legal obligation by them to repay her (which they did and continue to do) and they put that borrowed money to use in purchasing the property which is the subject matter of these appeals. Lack of formal documentation by way of promissory note or other instrument does not render the debt unenforceable.

Therefore, the appeal of each of the appellants is allowed and the assessments for those years are referred back to the Minister for reconsideration and reassessment on the following basis:

1991 - to allow rental losses on the basis that 65% of the expenses are attributable to rental purposes.

1992 - to allow rental losses on the basis that 65% of the expenses are attributable to rental purposes.

1993 - to allow rental losses on the basis that 65% of the expenses are attributable to rental purposes for the period January 1, 1993 to September 30, 1993 and thereafter to December 31, 1993 on the basis that only 50% of the expenses for that period are attributable to rental purposes.

The success of the appellants, although mixed, is - according to my calculation - sufficient in accordance with the Rules to permit the award of costs which will be limited to one set as the appeals were heard on common evidence.

Appeal allowed.