Wallace v. R., [1998] 1 CTC 3010

Watson D.J.T.C.:

This appeal, heard in Toronto, Ontario, on August 7, 1997 concerns the 1991, 1992 and 1993 taxation years.

In computing income for the 1991, 1992 and 1993 taxation years, the Appellant claimed rental losses in the amounts of $6,145, $8,521 and $6,822 respectively and reported an allowable capital loss of $30,840 in the 1993 taxation year. In reassessing the Appellant for the 1991 taxation year, the Minister of National Revenue (the “Minister”) disallowed the rental loss of $6,145; in reassessing the Appellant for the 1992 taxation year, the Minister disallowed the rental loss of $8,521 and assessed a net rental income of $2,025; in reassessing the Appellant for the 1993 taxation year, the Minister allowed a terminal loss of $8,867 and revised the net rental loss to $7,670 and also allowed an allowable capital loss of $4,816.

In further reassessing the Appellant, pursuant to subsection 165(3) of the Income Tax Act (the “Act’) for 1992, the Minister revised the net rental income to nil; for 1993, the Minister disallowed the terminal loss and the rental loss and revised the allowable capital loss to $15,478. By Notice of Confirmation dated February 6, 1996, the Minister confirmed the reassessment for the Appellant’s 1991 taxation year.

In reassessing the Appellant, the Minister admitted that the Appellant and his partner purchased a property located at 176 Rushton Road, Toronto, Ontario for a price of $269,900 in September 1988; that the Appellant occupied the ground floor and basement of the property, a total of 1,200 square feet, during the entire period of his ownership of the property. The Minister made the following assumptions of fact:

Rental Losses

(b) in September 1988, the Appellant and his partner purchased the property for a price of $269,900.00;

(c) the property is a 3 storey semi-detached house with a total square footage of 2,000;

(d) at all material times, the Appellant occupied the ground floor and basement of the property with a total square footage of 1,000 square feet (50% of the total square footage of the property), as his principal residence;

(e) at all material times, the second and third floor of the property (the “Rental Unit”), 50% of the total footage of the property, was rented to tenant(s);

(f) in the 1988, 1989, 1990, 1991, 1992 and 1993 taxation years, the Appellant reported gross rental income and rental losses as follows:

(g) in the 1991, 1992 and 1993 taxation years, the Appellant imputed rent charged to himself, sought to deduct all expenses of the property as rental expenses and claimed rental losses, as detailed in Schedules A, B and C attached hereto;

Year	Gross Rental Income	Appellant’s Rental Loss
1988	$ 2,275.00	$7,718.00
1989	18,300.00	9,894.00
1990	16,980.00	7,520.00
199]	25,131.00	6,145.00
1992	25,131.00	8,521.00
1993	21,470.00	6,822.00

1991 & 1992			Gross
			Rent
Appellant	$950.00 x 12	$11,400.00
	Recovery for repairs		2,331.25
		$13,731.25
Tenant	$950.00 x 12		11,400.00
Total		$25,131.25
1993			Gross
			Rent
Appellant	$850.00 x 12	$10,200.00
Tenant	$950.00 x 12		11,400.00
	Less: Rebate	(	130.00)
Total		$21,470.00

(h) in the 1992 taxation year, the Appellant reported expenses in the amounts of $3,600.00 and $4,222.00 for the renovation and repairs of the bathroom and kitchen on the ground floor of the property as rental expenses;

(I) the expenses of $7,822.00 ($3,600.00 + $4,222.00), as mentioned in subparagraph (h) above, were personal expenses of the Appellant;

(j) in the 1993 taxation year, the Appellant reported a management fee in the amount of $600.00 paid to himself as rental expenses;

(k) in or around December 1993, the property was sold for $200,000.00;

(l) in the 1993 taxation year, the Appellant incurred mortgage interest penalty in the amount of $8,085.00 as a result of the disposition of the property;

(m) in the 1993 taxation year, the Appellant incurred legal fees in the amount of $1,408.00 on the disposition of the property;

(n) the Appellant had no reasonable expectation of profit from the rental of the property during the 1991, 1992 and 1993 taxation years;

(o) the rental expenses in excess of the amounts of $11,400.00, $11,400.00 and $11,270.00 allowed by the Minister in the 1991, 1992 and 1993 taxation years respectively, were not made or incurred for the purpose of gaining or producing income from a business or property;

(p) the claimed rental expenses were personal or living expenses of the Appellant;

Capital Loss

(q) in the 1993 taxation year, the Appellant and his partner incurred a capital loss on the disposition of the property, as follows:

Proceeds of Disposition		$200,000.00
Less:
Adjusted Cost Base	$269,400.00
Outlays & Expenses	12,840.00
Legal Fees	1,400.00
Mortgage Interest
Penalty	8,085.00	291,725.00
Capital Loss		$ 91,725.00

(r) the Appellant was entitled to share 50% of the profit or loss on the disposition of the rental portion of the property;

(s) the Appellant’s loss on the sale of the Rental Unit was $20,638.00 (the “Amount”), calculated as follows:

$91,733 x 45% x 50% = $20,638.00

(t) the Appellant’s loss on the sale of the Rental Unit was on capital account; and

(u) in the 1993 taxation year, the Appellant’s allowable capital loss on the sale of the Rental Unit was $15,478.00 ( A of capital loss of $20,638.00).

At the hearing, the Appellant, who was the only witness to give evidence, admitted subparagraphs (b) to (m), (q) and (r) and denied subparagraphs (n) to (p) and (s) to (u); he stated that the relief he now seeks is rental losses of $2,601, $1,660 and $880 for 1991, 1992 and 1993 respectively and a terminal loss of $15,365 for 1993.

The Appellant testified in an open and honest fashion clearly demonstrating that he had acted in good faith in his financial dealings with the property, relying on the advice and experience of relatives, friends and various professionals. He has the onus in this appeal of establishing on a balance of probabilities that the Minister was ill-founded in fact and in law in his reassessment relating to the three years in issue.

The main issue of this appeal is whether the Appellant had a reasonable expectation of profit from the rental of the property in the 1991, 1992 and 1993 taxation years. Were the expenses disallowed by the Minister in respect of the rental operation incurred by the Appellant for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18( 1 )(a) of the Act or were they personal and living expenses of the Appellant within the meaning of paragraph 18(1)(h) and subsection 248(1) of the Act; furthermore, was the Appellant entitled to deduct a terminal loss in the 1993 taxation year unser subsection 20(16) of the Act?

Taking into consideration all of the circumstances, including the testimony of the Appellant, the admissions, documentary evidence and submissions of the parties in the light of the criteria set out in the case law provided by the Appellant and counsel for the Minister, I am satisfied that the Appellant has not succeeded in establishing on a balance of probabilities that he had a reasonable expectation of profit from the rental of the property during the three taxation years in issue. The appeal is, accordingly, dismissed.

Appeal dismissed.