Graca v. R., [1997] 3 C.T.C. 2772

Taylor T.C.J.:

1 These are appeals heard in Toronto, Ontario on April 8, 1997 against assessments in which the Respondent had disallowed claims for rental losses arising from the operation conducted at 195 St. Clarens Avenue in Toronto as follows:

RENTAL INCOME AND EXPENSES
INCOME	1991	1992	1993
195 St. Clarens Ave	$15,450.00	$10,850.00	$18,000.00
EXPENSES
Property taxes	$ 2,014.74	$ 2,120.78	$ 2,176.99
Maintenance and repairs	985.80	912.85	2,743.04
Mortgage interest	22,661.54	22,892.68	23,636.44
Insurance	554.00	675.00	500.00
Utilities	3,703.91	4,645.17	4,213.10
Advertising	217.46	313.47	128.38
Total Expenses	$30,137.45	$31,559.95	$33,397.95
Net Rental Loss	($14,687.45)	($20,709.95)	($15,397.95)
Appellant's share of Loss	$ 7,343.73	$10,354.98	$ 7,698.98

2 For Mr. Graca, the situation was that he had not filed a valid Notice of Objection for the years 1992 and 1993, and accordingly his appeal will only relate to the year 1991.

3 The property in question had been purchased in 1989, for about $280,000.00 and at various times, including the relevant three years was covered by two, sometimes three heavy mortgages, and perhaps even subject to some obligation because of a personal loan made to Mrs. Rosado to pay expenses associated with the property. According to Mrs. Rosado, who gave testimony on behalf of both parties, the property had been acquired for the purpose of providing some security after the Appellants were 65 years of age - and their primary hope was that it could be sold at a profit about that time, but possibly retained for the rental income, if the mortgages had been totally paid off. The basic income of Mrs. Rosado during the period 1989 through 1993 had been about $36,000.00 per year - from her employment at a local bank. The income of Mr. Graca during the same period had been about $30,000.00 per year but he is now ill and unemployed. Also in about 1989 the Appellants had purchased a separate house - on Bond Street in Toronto, for about $215,000.00 as their principal residence which was also mortgaged, but which they were forced to sell in 1993 because they could not maintain both properties, as I understand it, after settling with Central Mortgage and Housing Corporation for an amount of $3,000.00 to extinguish an obligation of some $50,000.00 to that Corporation. In 1994 - after difficulties to evict a tenant at the St. Clarens property, they moved into that place to live. Before 1994, it does not appear they occupied the subject property themselves. Mrs. Rosado detailed a sad list of the difficulties they encountered including the fact that the local municipal building inspector refused after 1991 to permit them to have tenants in either the basement or the third floor. They even resorted to having one tenant - who did not pay rent, but proceeded to do on his own time, some of the upgrading that was required to bring the building up to municipal code. Mrs. Rosado indicated that they are now (1995-1996) receiving some rent for these apartments, since the Inspector had approved the rental spaces. A great deal of further detail might be supplied in these reasons, about this troubled project and the disconcerting results experienced by the Appellants, but I doubt it would add greatly to the basic facts required for a determination of the issue before the Court.

4 Counsel for the Respondent summarized the points which should be emphasized, and noted in the Appellant's favour that there had been no specific “personal” element involved during the years under appeal. In his view, that indicated that the question of “reasonable expectation of profit” might be beyond the bounds of Court consideration because of the judgment in Tonn v. R. (1995), 96 D.T.C. 6001 (Fed. C.A.)with particular reference to the comment on p. 6013 thereof:

Though I do not support the use in the Nichol case of the word “patently”, I otherwise agree that the Moldowan test should be applied sparingly where a taxpayer's “business judgment” is involved, where no personal element is in evidence, and where the extent of the deductions claimed are not on their face questionable. However, where circumstances suggest that a personal or other-than-business motivation existed, or where the expectation of profit was so unreasonable as to raise a suspicion, the taxpayer will be called upon to justify objectively that the operation was in fact a business. Suspicious circumstances, therefore, will more often lead to closer scrutiny than those that are in no way suspect.

5 Counsel reviewed the aspects of this appeal which might fit more properly into the terms of Section 67 of the Income Tax Act.

Analysis

6 I do not see the direct requirement of using Section 67 above since I do not read the quotation from Tonn (supra) in the same way as Counsel, and I do not see that there should be any such rigid restriction on this Court to examine the fundamentals of an undertaking allegedly operated for business purposes, even when there is no direct reference to a“ personal” element. If there needs to be one point of distinction between this appeal and that of Tonn (supra) as decided at the Federal Court of Appeal level, it would be that in Tonn (supra) the loss period claimed and challenged by Revenue Canada started right from acquisition, allowing no time for the so-called “start-up period”. I have reviewed the comforting terms “start-up costs” on other occasions, and contrasted it with the lack of demonstration of a “reasonable expectation of profit” (a “business”). If it is not a viable business being commenced - what valid application can be found in the term “start-up costs” when loss results and are claimed? That is not true here, by 1991 according to the evidence, it was clear that there was no potential for profit in the near future - if ever - as a rental venture. The decision by the Appellants not to dispose of it - albeit at a substantial loss - was motivated by the determination to keep it at all costs. As Mrs. Rosado put it “I did as much as I could not to sell the property”. While a noble objective for them personally- perhaps - that does not warrant the benefit they seek in a reduction of their taxable income by virtue of the losses claimed.

7 I readily admit that this is a situation for these Appellants which evokes concern and consideration. But I do rely on a recent comment from Brill v. R. (1996), 96 D.T.C. 6572 (Fed. C.A.)by the learned Justice Linden of the Federal Court of Appeal, to be found at p. 6577:

There was nothing in Tonn, however, to indicate that the Moldowan principle was not to be applied in cases where interest expenses were deducted in situations where there was no reasonable expectation of profit. The Moldowan test, however, should not be used in paragraph 21(c)(i) cases unless it is clear that no profit is likely to be earned in the taxation year. In cases such as this, therefore, where it is clear that no profit could be earned in the year or forever after because of the judicial sale proceedings, Moldowan is applicable. Indeed, the parties in this case agreed that there was no reasonable expectation of profit in the taxation year 1987. This is not a case of second-guessing poor business decisions that do not yield profit, which was the case in Tonn. In cases where it is not clear whether that profit will be earned eventually, Tonn teaches that taxpayers should be allowed the deductions, when profit is not in fact earned. But where, as here, no profit is possible in the taxation year and thereafter, the deduction cannot be permitted.

8 As I read the relevant circumstances, that view from Justice Linden should be applied here.

9 The appeals are dismissed.