Pirie v. R., [1999] 4 CTC 2650 (Informal Procedure)

Beaubier T.C.J.:

This appeal pursuant to the Informal Procedure was heard at Calgary, Alberta on September 17, 1999. The Appellant’s husband, Thomas, was the only witness. Paragraphs 3 to 6 inclusive of the Reply describe the issues. They read:

3. In computing income for the 1992, 1993 and 1994 Taxation Years, the Appellant claimed rental losses in the following amounts:

YEAR	RENTAL LOSSES
1992	(1,216.75)
1993	(3,734.00)
1994	(1,478.54)

4. In reassessing the Appellant for the 1992, 1993 and 1994 Taxation Years, the Minister of National Revenue (the “Minister”) disallowed the deduction of the rental losses.

5. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) the Appellant purchased 7424 Hunterburn Hill NW Calgary, Alberta (the “Property”) as her principal residence;

(b) from 1987 to 1994 the Appellant reported rental income, expenses and losses as follows:

(c) the expenses claimed by the Appellant in the 1992, 1993 and 1994 Tax (d) the Appellant was renting out the basement of her principal residence;

YEAR	INCOME	EXPENSES	LOSS
1987	4,200	5,249	(1,049)
1988	2,400	2,975	(575)
1989	nil	nil	nil
1990	4,200	8,604	(4,404)
1991	2,700	6,993	(4,293)
1992	2,700	6,916	(4,216)
1993	2,400	6,134	(3,734)
1994	3,000	4,478	(1,478)

ation Years were calculated as follows:
	1992	1993	1994
Property Taxes	1,385.00	1,452.00	1,632.39
Maintenance and	340.72	380.00	365.00
Repairs
Interest	9,670.40	7,614.00	6,318.95
Insurance	340.00	420.00	420.00
Light, heat and	1,997.50	2,346.00	2,460.00
water
Advertising	42.60	56.00	0.00
Total	13,833.5	12,268.0	11,196.34
	0	0	4

	1992	1993	1994
Portion Claimed	50%	50%	40%
	6,916.75	6,134.00	4,478.54

(e) the area rented was approximately 1200 square feet;

(f) the Property was rented for $225 per month in the 1992 Taxation Year;

(g) the Property was rented for $200 per month in the 1993 Taxation Year;

(h) the Property was rented for $250 per month in the 1994 Taxation Year:

(i) the Appellant ceased renting the Property in the 1995 Taxation Year in order to use the space personally;

(j) the Appellant was renting the basement of her personal residence in order to subsidize the cost of owning the Property;

(k) the Appellant did not advertise the Property as being for rent in order maximize rental income;

(l) the Appellant had no reasonable expectation of profit from the Property during the 1992, 1993 and 1994 Taxation Years;

(m) the rental expenses were personal or living expenses of the Appellant

B. Issues to be Decided

6. The issue is whether the Appellant had a reasonable expectation of profit from the Property in the 1992, 1993 and 1994 Taxation Years.

Assumptions 5(a), (b), (c), (d), (e), (f), (g), (h) and (k) were either proven or not refuted. In 1995 the Appellant rented the basement suite to her brother-in-law for three months and he has rented the suite since then at increasing monthly rental rates.

Originally the Appellant deducted 50% of the house expenses but in 1994 it was 40% and in 1995 fewer expenses were charged because it was only rented for three months.

Mr. Pirie testified, and the Court accepts it as true, that in 1990 the rental market for suites in Calgary was very bad and that it has improved since, until it is very good today. In addition, the Court accepts the testimony that the rent received during the years in question was for market rent and that it was reasonable to expect that rents would increase and the market would improve.

In essence, the Court must determine if there was a reasonable expectation of profit at the times in question on the basis of the rents and expenses reported and objective market conditions at the time. Any start-up period had ended by 1992.

In Zonn v. R. (1995), 96 D.T.C. 6001 (Fed. C.A.) at 6007 and 6008, Linden, J.A., speaking for the Federal Court of Appeal stated that where there is a strong personal element, as is assumed here, any desire for profit “1s no more than a ‘pious wish’” and that what is really going on “is that the taxpayer is seeking a tax subsidy by deducting the cost of ... a personal expenditure.

The evidence is that during the years in question and in the years since, the Appellant has reduced the percentage of total expenses she charged to the rental operation although, except in 1995, the total space rented and the period of rental did not change. Moreover, the space rented does not include a kitchen; a tenant must use the Appellant’s kitchen. Thus, while the rented area may equal half the house, it is a basement space with fewer facilities than the main floor. Thus it has much less commercial value than the main floor.

There is no evidence that the tenant was related to the Appellant during 1992-1994. There is evidence that she had rented for years at a loss and continued to do so in 1992-1994. Mr. Pirie did not testify that the rental market in the late 1980’s was depressed, nor did he testify why there was no rental in 1989. What is evident is that she had nothing but rental losses before 1992-1994. There is no evidence that she changed her method of operation or that she charged capital cost allowance as part of her expenses claimed.

Given the Appellant’s rental history of losses without charging capital cost allowance, the fact that the rental market was bad in 1992-1994, and her failure to change her rental procedures in any way in 1992-1994, the evidence is that she had no reasonable expectation of profit from rentals during the years in question. She was merely deducting household expenses.

The appeal is dismissed.

Appeal dismissed.