Goldstein v. R., [1997] 2 CTC 2940

Taylor T.CJ.:

This is an appeal heard in Toronto, Ontario, on February 21, 1997, against assessments dated July 31, 1992, May 27, 1993 and May 27, 1994, in which the Respondent disallowed rental losses in the amount of $8,556.69, $6,140.10, and $2,124.50 in the years 1991, 1992 and 1993 respectively under the Income Tax Act (the “Act"

The Notice of Appeal read:

Statement of Relevant Facts

(1) In 1987, the Appellant acquired a residential property municipally known as 34 Balsam Avenue in the City of Toronto (the “Property”), to be used in part as a living residence and in part as a rental property generating income.

(2) Shortly after the time of purchase, the Appellant constructed a basement apartment unit, having its own separate entrance, its own kitchen, bathroom, storage, and bedroom.

(3) During the Appellant’s 1991 and 1992 taxation years, the area of the basement apartment unit represented approximately 50 percent of the total floor area of the Property, and the Appellant accordingly deducted 50 percent of expenses relating to the Property in computing his rental property loss.

(4) During the 1993 taxation year, a second storey addition was constructed to the Property, such that the basement apartment unit represented approximately 33 percent of the total floor area of the Property. The Appellant therefore de- ducted 33 percent of expenses relating to the Property in computing his rental property loss.

(5) At all times since the construction of the basement apartment unit, the Appellant’s sole expectation has been that the unit would develop into a profitable rental property.

(6) Owing in part to a substantial decline in the market rental rates for basement apartment units, and in part to the continued high cost of financing, the Appellant incurred net rental losses in respect of the apartment unit, in the amounts set out in Part B, for his 1991, 1992 and 1993 taxation years.

(7) For the Appellant’s 1995 taxation year, the basement apartment generated a positive net rental income.

(8) The Appellant states that the rental losses were incurred for the purpose of gaining or producing income within the meaning of paragraph 18(l)(a) of the Income Tax Act, and were not personal or living expenses within the meaning of paragraph 18(1)(h) of the Acct.

The Reply to Notice of Appeal contained the following information: (b) at the time of purchase, the first mortgage on the Property was $144,000.00 and the second mortgage thereon was $23,000.00. These mortgages were refinanced; the second mortgage was increased to $32,000.00 in October 1989, and the first mortgage was increased to $161,000.00, in December 1991;

(d) in the 1991, 1992 and 1993 taxation years, the Appellant reported rental income, expenses and losses as per Schedules “A”, “B” and “C”, attached;

Schedule “A” to Michael G. Goldstein Reply to Notice of Appeal

Rental Income and Expenses

For 1991 Taxation Year

Gross Income				$	7,140.00
		Partly		Fully
	Deducti-		Deducti
		ble		ble
Expenses
Property Taxes	$	1,545.00
Maintenance and Repairs		1,360.69	$	2,240.91
Interest		19,293.02
Insurance		587.00
Heating		726.29
Electricity		959.47

Water		174.18
Parking Permit					67.70
Tenants Cable					167.04
Advertising					897.56
Total Expenses		$ 24,645.65		$	3,373.21
Deduct: Personal Portion		12,322.82
50%
Portion Applicable to Rent					12,322.83
al
Total Expenses						15,696.04
Net Income From Real Es					($	8,556.04 )
tate Rentals
* as reported by the Appellant.
Schedule “B” to Michael G. Goldstein Reply to Notice of Appeal
Rental Income and Expenses
For 1992 Taxation Year
Gross Income						6,760.00
	Total Ex-		Personal		Deductible
	penses		Portion		Amount
Expenses
Property Taxes	$ 1,710.00		855.00		855.00
Maintenance and	5,546.00		4,037.41		1,508.59
Repairs
Interest	17,766.80		8,883.40		8,883.40
Insurance	590.00		295.00		295.00
Light, Heat, Water	1,800.72		900.36		900.36
Parking Permit
Tenants Cable
Advertising
Total Deductible Expenses
Net Income From Real Estate Rentals
* as reported by the Appellant.
Schedule “C” to Michael G. Goldstein Reply to Notice of Appeal
Rental Income and Expenses
For 1993 Taxation Year
Gross Income						6,720.00

	Total Ex	Personal	Deductible
	penses	Portion	Amount
Expenses
Property Taxes	$ 1,534.89	1,023.26	511.63
Maintenance and	5,556.68	4,552.89	1,003.79
Repairs
Interest	16,321.70	10,881.14	5,440.56
Insurance	530.00	353.34	176.66
Light, Heat, Water	2,184.65	1,456.43	728.22
Parking Permit			-0-
Tenants Cable			500.49
Advertising			490.00
Total Deductible Expenses
Net Income From Real Estate Rentals			($2,131.35)
* as reported by the Appellant.

It was agreed that claims for similar losses had been made by the Appellant for several years previous to those under review. While not challenged in this appeal by the Respondent, the filed tax returns of the Appellant showed substantial losses from other ventures, both rental and business, claimed against employment income for the same years. The Appellant provided some information and comments on these, but it was clearly difficult for Mr. Goldstein, a capable and articulate businessman, familiar with real estate and property matters, to comprehend the concentration of the Respondent on the particular rental losses at issue, while other losses apparently similar but even greater seemed to be acceptable. But that is not a matter to be dealt with at this hearing.

The essence of Mr. Goldstein’s testimony was that he had hoped and expected — over these many years — that his rental operation would eventually show a profit — he regarded such expectation as reasonable, and put forward that in the year 1995 the basement apartment did generate a positive cash flow. For the Respondent’s counsel that was simply not adequate — the basic figures, showed that in none of the years under review could he have demonstrated a reasonable expectation of profit; that the more recent “positive” amounts were really the result of a restructuring of expenses — to charge more to himself, all of which might have been done years ago; that the period before the years under review had provided Mr. Goldstein with ample time to show a profit — even if one looked at “startup costs” as any moderation of the situation; and ultimately this was his principal residence, and he reduced the personal carrying costs by obtaining some rent. Counsel recognised the “benefit” obtained by the Appellant, in reduced income tax impact over several years, arising from the losses deducted from his separate employment income.

Counsel cited some comments from relevant case law particularly in Moldowan v. R. (1977), 77 D.T.C. 5213 (S.C.C.), Cecato v. Minister of National Revenue (1984), 84 D.T.C. 1110 (T.C.C.), Landry v. R. (1994), 94 D.T.C. 6624 (Fed. C.A.), Tonn v. R. (1995), 96 D.T.C. 6001 (Fed. C.A.)and Sardinha v. The Queen (unreported but dated (November 29, 1996), and listed as Tax Court - Doc. 96-860(IT)I).

From Sardinha (supra) I would note:

Occupying as a “principal residence” a single family home means that all the costs of maintaining the property are personal. Occupying one unit as a “principal residence” does not mean that the “market” basis (what the traffic would bear) can necessarily be applied to the occupant - owner - taxpayer and the balance of the costs incurred shifted to the general public. The decision — a conscious one — to rent the other units at a rate less than their proportionate share of the total expenses, is for the owner to make, and no one should question that decision. But that basic decision, which often automatically results in unrecovered costs does not just automatically permit the owner to regard these uncovered costs as “rental losses”. They are unrecovered costs attributable to the basic decision, and therefore her occupancy of part of the building, has a direct bearing on the result. Simply put, when the rental charge is not sufficient to cover the proper proportion of costs involved, the owner occupier may be required to shoulder the financial responsibility for that decision. The rationale (“what the traffic would bear”) which produces a loss from charging a shortfall non-compensatory rent is the owners proprietary decision. When the same calculation base (“what the traffic would bear”) is applied to the personal use portion of a building, as in this case, it can produce a benefit to the owner (see “use or benefit” in section 248(1) of the Act under “Personal or Living expenses”) as I see it

Conclusion

In my view this is a clear case where the conduct of the Appellant under the circumstances does not warrant the benefit one might read into Tonn (supra), and it should be noted that the recent comment of the learned Justice Linden in Coad v. The Queen Doc. A-90-95 (F.C.A.) is directly applicable.

... That is the lesson of the Tonn case, which only seeks to restate and clarify the application of the principle of Moldowan. Thus, where as here, if no profit is possible in the year or in the near future, no deduction can be allowed (at least as long as Mo Ido wan continues to govern cases such as these).

The appeal is dismissed.

Appeal dismissed.