Jocic v. R., [1999] 4 CTC 2191 (Informal Procedure)

O’Connor T . C.J.:

This appeal was heard at Edmonton, Alberta on July 26, 1999 pursuant to the Informal Procedure of this Court.

The only witness to give evidence was the Appellant himself.

Although numerous issues are addressed in the Notice of Appeal and in the Reply, at the hearing counsel for both parties submitted that there were in essence only two outstanding issues.

The first was whether an amount of $1,200 paid in 1995 for labour in respect of a rental property of the Appellant was deductible. The second issue was whether the Appellant was entitled to deduct certain expenses incurred in relation to an alleged rental operation of part of his principal residence.

With respect to the $1,200 issue, the testimony of the Appellant was to the effect that he paid this amount to his son to carry out certain maintenance and repair works with respect to the rental property consisting principally in snow removal and lawn maintenance. The Appellant further testified that he paid his son the amount in question in cash. On this issue I am prepared to accept the uncontradicted testimony of the Appellant and consequently would allow that expense of $1,200 against the rental property in the 1995 year.

With respect to the second issue I produce below an abbreviated version of Schedule C to the Reply to the Notice of Appeal amended to reflect only the principal residence and to add the gross amount of the expenses:

Claimed Allowed Disallowed Gross amount

1993

Gross Revenue:

1994

Claimed Allowed Disallowed Gross

amount

Gross Revenue:

The Appellant testified that in 1992 and 1993, he constructed a very substantial home with considerable upgrades. The total area was 5,500 square feet and the Appellant claims that 1,200 feet consisting of space in the basement and on an upper floor were rented out to a company of which he and his wife were the sole shareholders and directors. The name of that company is Radovan Structural Engineering Ltd. 1,200 square feet represents 21.8 percent of 5,500 square feet but counsel for the Appellant submits that 25 percent of expenses should be allowed because of ongoing plans for other space in the home to be used by the company.

The principal residence expenses claimed don’t always work out to 25 percent of the gross expenses however this is immaterial considering the decision I have arrived at.

The Appellant’s testimony confirms that no rent was paid in any of the years in question but that the Appellant had established an annual rent of $1,000 for the company. However, none was paid and little if any business activity was carried on in the company’s portions of the principal residence. On the other hand, he confirms that certain equipment consisting of com- puters, shelves, desks and books were placed in the premises. He does however admit that very few, if any, clients were actually ever in the company’s premises.

Submissions of the Appellant:

Counsel for the Appellant submits that the amounts claimed as principal residence expenses should be allowed. He points to the extensive resume submitted by the Appellant (See Exhibit A-1) which outlines the Appellant’s qualifications, education and projects he had worked on and certain achievements. He also refers to Exhibit A-2 which indicates the efforts the Appellant was taking to improve his computer knowledge and to the Appellant’s efforts to obtain employment and or jobs for the company. He referred to certain decisions discussed below and concluded that what the Appellant was attempting to do was to set up and increase the business opportunities of the company and that the elaborate construction and design of the principal residence was in effect a showcase for the type of work the Appellant and the company were capable of performing. Further the Appellant invested considerable personal monies in the construction of the residence in the expectation that the company would grow. He concludes that for these reasons principally, the principal residence expenses claimed should be allowed notwithstanding that in the years in question, 1993, 1994 and 1995 no rent was paid.

Submissions of the Respondent:

Counsel for the Respondent submits that there can be no rental operation where there are absolutely no rents paid. She points to the fact that even if the alleged $1,000 per year rent had been real there would still have been losses, in other words, the alleged notional $1,000 rent could never have been sufficient to allow the Appellant to claim that he had a reasonable expectation of profit. She further points out the fact that there is absolutely nothing in writing between the Appellant and his company, no written lease, no writings of any sort, no resolutions of the company authorizing the entering into a lease or the payment of rent.

She concludes that there was no rental operation and therefore no principal residence expenses can be allowed arid thus any losses claimed with respect to the principal residence are not to be allowed.

Analysis and Decision:

In my opinion the position of the Respondent is sound. There was no rent paid during the years in question so how can there possibly be a rental operation being carried on. Further, little if any business was ever transacted in the premises. Moreover, as counsel for the Respondent states there is nothing in writing to lead one to conclude that indeed there was a lease in place. Also, even if there was a lease the Appellant’s testimony is that the annual rent was $1,000 for the years in question and with that amount there was clearly no reasonable expectation of profit.

The principal decisions referred to by counsel for the Appellant were Business Art Inc. v. Minister of National Revenue (1986), [1987] 1 C.T.C. 2001 (T.C.C.) and Byram v. R., a decision of the Federal Court of Appeal dated January 25, 1999 [reported (1999), 99 D.T.C. 5117 (Fed. C.A.)]. In both cases the findings in favour of the taxpayers related to loans made by them to companies and the ability, when the loans went bad, for the taxpayers to have a capital loss deduction under s. 40(2)(g)(ii) of the Income Tax Act because the loans were made for the purpose of earning income from a business or property. The concept of earning income from a property is related to the concept of reasonable expectation of profit but is not the same. In my opinion, these cases are not applicable to these appeals.

In conclusion, the labour expense of $1,200 with respect to the rental property in 1995 is to be allowed. Consequently, the appeal is allowed on this issue. Further, no principal residence expenses are to be allowed for any of the years in question. The matter is referred back to the Minister of National Revenue for reconsideration and reassessment on these bases.

Appeal allowed in part.