Lott v. R., [1998] 1 CTC 2869

Bowie T.C.J.:

The Appellants, who are husband and wife, bring these appeals from their assessments for income tax for the 1992, 1993 and 1994 taxation years. The issues are identical, and their appeals were heard together on common evidence. The issue between the parties is whether or not subsection 18(12) of the Income Tax Act (the Act) applies to limit the extent to which the Appellants may deduct certain losses incurred by them in the operation of a day-care business in computing their incomes for the years in issue.

Shortly before the birth of their second child, the Appellants decided that they would go into business operating a day-care centre for pre-school children in their home. To this end, Mrs. Lott attended a course in the operation of day-care establishments at Kwantlen College. At the same time they sold the house in which they were living, which was not large enough to be used for a day-care centre, and bought a larger house, better suited to the purpose, to which they and their two children moved. This house had two levels. The lower one consisted of a family room, a washroom, a laundry room with an office area in it, and the garage. The upper level had a combination living room and dining room, a kitchen, a bathroom, and three bedrooms, one of which had an en suite bathroom attached. Upon taking possession Mr. Lott built a covered deck of about 10 feet by 25 feet, and a retaining wall at the back of the lot, and repaired the fence on two sides.

The purchase price of the house was $181,000, $161,950 of which was obtained by way of a mortgage at 10.135% per annum. The cost of the covered deck, the retaining wall, and the fence repairs was not established at the trial. However, the evidence did include the amounts paid in each of the years under appeal as mortgage interest, and for municipal taxes. The day-care business was operated by the Appellants for the last four months of 1992, all of 1993, and the first seven months of 1994. Statements of the losses incurred in each of these three years were prepared by an accountant, and were introduced in evidence. In preparing the Statements of Loss, the accountant made a charge against the income for the use of the residence, which in each year was computed as 40% of an amount which is said to be the cost associated with the residence for that year. The accountant did not give evidence, and neither the proportion of 40% attributed to the day-care business, nor the base numbers to which it was applied in the three years, were satisfactorily established by the evidence of the Appellants. The losses of the business, as shown in the statements prepared by the accountant, the portions of them arising from costs associated with the residence, and the portions arising from operations, [1] are as follows:

It is not disputed by the Crown that the business was operated on the basis of an equal partnership.

In 1992 Mrs. Lott ran the day-care centre for most of the day, beginning at 5:45 a.m. with the arrival of the first child, and ending at about 6:00 p.m. with the departure of the last child. In 1993 and 1994 she took evening employment elsewhere, which she usually went to at about 4:45 or 5:00 p.m., and on those occasions Mr. Lott, who worked full time elsewhere, would tend the children after work until they were picked up. Mrs. Lott tended them for most of the day, fed them, led them in activities, and generally took care of their needs. In addition to looking after the children for a short time after work, Mr. Lott did general maintenance associated with the house and the business.

Mrs Lott’s evidence was to the effect that every part of the house and its grounds was utilized in some way for the day-care business. In 1992 there were three to five children, in 1993, two or three children, and in 1994, one child whom she looked after, in addition to her own two. Each room in the house, including each of the three bedrooms, she said was used for playing, watching television or videos, reading, eating or sleeping. In addition, the front yard, the back yard, the covered deck, the driveway and the garage were all used at one time or another as play areas for the children. This claim was not seriously challenged on cross-examination, but it must be obvious that, for example, in 1994 when there was only one child other than the Lott’s own children to care for, if every room in the house had been used by that child, it could only have been for quite a short period per day in most of them. Even at the peak of activity in 1992, when there were five children attending, it is difficult to see how they could have used all of the house and grounds for 40% of the time. I accept, however, that all parts of the house were used by the day-care operation for some period of time, however small, in each year.

In reassessing the Appellants for the years in question, the Minister of National Revenue disallowed the losses claimed to the extent that they arose out of the charge against income for the use of the residence, relying upon subsection 18(12) of the Act as the authority for doing so. That section reads as follows.

18(12) Notwithstanding any other provision of this Act, in computing an individual’s income from a business for a taxation year,

(a) no amount shall be deducted in respect of an otherwise deductible amount for any part (in this subsection referred to as the “work space’’) of a self-contained domestic establishment in which the individual resides, except to the extent that the workspace is either

(i) the individual’s principal place of business, or

(ii) used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business;

(b) where the conditions set out in subparagraph (a)(i) or (ii) are met, the amount for the workspace that is deductible in computing the individual’s income from the business for a taxation year shall not exceed the individual’s income from the business for the year, computed without reference to the amount; and

(c) any amount not deductible by reason only of paragraph (b) in computing the individual’s income from the business for the immediately preceding taxation year shall be deemed to be an amount otherwise deductible that, subject to paragraphs (a) and (b), may be deducted for the year for the work space in respect of the business.

Against these reassessments, counsel for the Minister raised three arguments. First, that in the present case it was not “any part” of the house and grounds that was used for the business, but the whole of them, and so the subsection does not apply. Second, the Lott’s house did not, at the relevant time, meet the definition of a “self-contained domestic establishment”, so the subsection could not apply to it. Third, if the house did meet the definition of a “self-contained domestic establishment”, then it was only the house itself and not the land adjacent and subjacent that fell within the definition, so that the Appellants are entitled to take the mortgage interest and the municipal taxes attributable to the land into account in the computation of their losses for the year.

In support of the first argument, counsel referred to the budget speech of the Minister of Finance of June 18, 1987, in which the amendment to the Act which introduced subsection 18(12) was announced, to the White Paper on Tax Reform of the same date, and to the Department of Finance technical notes which accompanied it. These, he says, indicate that the intention of Parliament was not that this new and restrictive provision would apply to day-care businesses which utilize all parts of the home, but that it would simply apply to home offices which occupy a part of the home. It is quite clear in the words of subsection (12) that it is intended to restrict the extent to which individuals who use their homes for business purposes may deduct a portion of the cost of maintaining the home from their business income. The rule which this subsection establishes is that costs arising out of the maintenance of the home in which a business operates may be deducted only if subparagraph (i) or (ii) is satisfied, and then only to the extent that it does not have the effect of putting the business into, or of contributing to, a loss position. By its terms it is applicable to “a business”, and nothing in the words of the subsection can reasonably be construed as limiting their operation to any particular type of business, or as excluding from them any particular type of business. In short, there is no ambiguity as to the scope of subsection 18(12), and therefore no need to resort to extraneous materials as aids to interpretation. [2]

Nor do I accept the argument that this subsection does not apply to this day-care facility because it was carried on in all, rather than part, of the Lott’s house. The expression “any part” clearly includes the whole. If an activity is carried on throughout all of a particular place, it cannot be said that it is not carried on “in any part” of it; quite the opposite, the activity is properly said to be carried on in every part of it. That this is so may be seen from the judgment of the Federal Court of Appeal in Aerlinte Eireann Te- oranta v. Canada (Minister of Transport)? [3] which held that a reference to part of an enactment included a reference to all of it.

I turn now to the two arguments which were made by counsel for the Appellant on the basis of the definition of the words “self-contained domestic establishment” found in the English version of subsection 248(1) of the

Act:

...a dwelling house, apartment or other similar place of residence in which place a person as a general rule sleeps and eats;

It is argued, first, that this does not apply to the Appellants’ house, because Mr. Lott ate most of his meals away from home, Mrs. Lott ate dinner at her place of alternate work in the latter two years, and when she ate breakfast and lunch in the house, it was not then a residence, but a day-care establishment, because the children were there. So, the argument goes, it cannot be said that, as a general rule, they slept and ate in their house. I find no merit in this argument. The evidence was that they slept in the house all the time, and that they ate their meals there, except when they took them at a restaurant, at work, or as guests somewhere else. Common sense has not yet been displaced as an aid to interpretation. [4] In this case it tells us that the Lotts’ house, even though they selected it for its suitability as a day-care centre, is their residence, and a self-contained domestic establishment.

The other argument based on this definition is that subsection 18(12), even if it applies to the house in this case, does not apply to the land adjacent and subjacent to it. The contention is that the words “any part ... of a self-contained domestic establishment” encompass any part of the house, but not of the land, with the result that the limiting effect of the subsection has no application to costs referable to the land. This is said to flow from the words “...dwelling-house, apartment or other similar place of residence...”, which counsel argues apply to the building only. In support of this he relies on the definition of “dwelling-house” which appears in section 231 of the Act, which reads as follows:

“dwelling-house” means the whole or any part of a building or structure that is kept or occupied as a permanent or temporary residence and includes

(a) a building within the curtilage of a dwelling-house that is connected to it by a doorway or by a covered and enclosed passageway, and

(b) a unit that is designed to be mobile and to be used as a permanent or temporary residence and that is being used as such a residence;

I do not find this definition to be helpful. It applies only in the context of section 231, which is concerned with the general subject of inspection, search and seizure in aid of enforcement of the Act, where far different considerations apply. I do find assistance, however, in an examination of the definition of the expression “établissement domestique autonome”, used in the French version of subsection 18(12) and defined in subsection 248(1) of the Act:

Habitation, appartement ou autre logement de ce genre dans lequel, en règle générale, une personne prend ses repas et couche.

The word “habitation” in French is of broader scope than the word “dwelling-house” in English, and is capable of taking in both building and land. [5]

If there is any residual ambiguity, it is resolved by an examination of the purpose of subsection 18( 12) [6] . The Budget Speech, the White Paper and the technical notes issued by the Department of Finance, which counsel for the Appellants put before the Court, show that the intended purpose of subsection 18(12) is to prevent taxpayers from using a portion of the expenses related to their residences to contribute to business losses which will have the effect of offsetting some of their income from other sources. If accepted, the Appellants’ argument would produce the remarkable result that they, and others who in operating a home business utilize the land surrounding their residences, would be entitled to take business losses into account, to the extent that they arise out of interest and taxes attributable to the residen- tial land, but not to the residential building. Indeed, even those using a part of the building alone might make some claim to deduct mortgage interest and taxes attributable to the land under that part of the building, free from the strictures of subsection 18(12). Such a result defies any logical explanation, and would certainly not accord with the clear intent of Parliament. It is therefore to be avoided. [7]

The appeals are dismissed.

Appeal dismissed.