Green v. R., [1998] 2 C.T.C. 2119

Rip T.C.J.:

1 George Green (“appellant”) appeals from income tax assessments for the 1990, 1991 and 1992 taxation years on the basis that since incurred expenses for the purpose of gaining or producing income from a rental property he is not prohibited from deducting the expenses in computing income: paragraph 18(1)(a) of the Income Tax. Act (“Act”).

2 The Minister of National Revenue (“Minister”) does not dispute that Mr. Green expended the amounts he says he did in 1990, 1991 and 1992. The Minister states that the appellant did not have a reasonable expectation of profit from renting the property during the years in appeal and that the expenses were personal or living expenses of the appellant and, as such, are not deductible in computing income: paragraph 18(1)(h) of the Act.

3 Mr. Green was raised near Calgary, Alberta, and was educated at the University of Alberta. At one time, he stated, his family owned one of the more prestigious apartment buildings in Calgary and he helped the family rent the apartments. He had also owned “about five rental units” before getting married in 1983 and then moving to Edmonton.

4 Mr. Green previously worked across Alberta in the pipeline industry and wanted a place to “hang my hat”. He wanted to purchase some land and build a home for his wife and himself and, at the same time, supplement his pension by renting property. He wanted a “viable rental situation”. Mr. Green purchased a lot in West Edmonton, about 2 kilometres from the West Edmonton Mall. The appellant obtained a mortgage to finance the acquisition of the land. The property was atop a hill which, Mr. Green believed, added to the attractiveness of the property. He made plans for the house and told the contractor to build as high on the top of the hill as possible to ensure a view.

5 Mr. Green caused an attractive home to be built; pictures of the property were produced as exhibits. The landscaping is also attractive. The districting, or zoning, of the land was for single family units, not apartments. However, the house was designed for four separate units, one of which was for the appellant's use. At no time did the districting change. The property was at the mouth of a “cul de sac” amid, according to the appellant, “an expensive row of show houses”.

6 Only the area of the house for use of the appellant's family was finished on completion of the building. The areas for the other three units, which were to be rented, were “roughed in” and eventually finished by Mr. Green himself. Mr. Green used his own funds to build the house.

7 Two rental units were completed on the lower floor of the building, behind the Green family unit. The lower floor had nine feet high ceilings and “big bay windows”. Each rental unit was separately heated, had a separate entrance and had on site parking. Each unit had a four piece washroom. The first unit contained one bedroom and a large living room beside a kitchen and bathroom. The second unit was a bachelor apartment, with a bedroom and a separate kitchen as well as a bathroom. The lower floor was only one foot below grade and was surrounded by bushes on the outside. These two units were available for rent in 1990.

8 A third separate unit, situated above the garage, was completed and available for rent in 1992. This unit consisted of a divided room with a fireplace, separate kitchen, bedroom and living room as well as a full bathroom.

9 Mr. Green testified he lived in not more, and probably less than, 50 per cent of the area of the house, but allocated 50 per cent of the relevant expenses to personal expenses when he completed his statement of rental income and expenses.

10 Mr. Green anticipated rents based on his experience of renting property in Calgary. He believed he could compete in the Edmonton market by charging a rent of $100 less than the going rate for a similar apartment suite in apartment blocks. He placed advertisements in the Edmonton Journal, the Edmonton Sun as well as on notice boards and word of mouth. He had no takers. He did not experience the success he had in Calgary and was forced to reduce his asking price.

11 Mr. Green insisted he researched the Edmonton rental market and in his view he “knew the market place”. He believed that the work he undertook in landscaping and working on the property would increase the value of the property but values in Edmonton were “sluggish” when compared to Calgary.

12 Mr. Green testified that he imposed rigid rules on his tenants. The tenants could not park cars on the street but had to use the facilities available to them on the property. He did not countenance noisy tenants. He wanted to ensure that since the rental units were contrary to zoning regulations, he would not alienate any of his neighbours.

13 From 1987 to 1994 the appellant reported rental income (losses) as follows:

14 In 1990 and 1991 two units were rented; the area above the garage was unoccupied. In 1992, at first two and then three units were rented.

15 During 1990, to get better tenants, Mr. Green made modifications to the property: new rugs were installed, new refrigerators were purchased and a coin laundry was offered to the tenants. He also convinced “undesirable” tenants to move. He anticipated rental increases. He stated that during the past four years conditions were “stable”.[FN1: <p>Mr. and Mrs. Green recently divorced and the ownership of the subject property was transferred to Mrs. Green. Mr. Green understands Mrs. Green gains a profit from renting the three units.</p>] Mr. Green blamed his rental losses on high interest rates, the standard of tenants he wanted as well as lower than expected rentals.

16 Mr. Shaun A. Helmers, an appraiser with Revenue Canada, gave expert evidence for the Crown. He testified that the rental value of 50 per cent of the house occupied by Mr. Green and his wife during the years in appeal was $975 per month. He estimated the area of the house was 1765 square feet; Mr. Green said the area was 2300 square feet. Mr. Helmers did not determine whether four units would yield more or less rent than one unit. Mr. Helmers did not see the interior of the house.

17 I am inclined to allow the appeal. The appellant had some experience renting property before he commenced his venture. The building in issue was built for rent as well as for Mr. Green and his wife to reside in. This is not a situation where people try to renovate the interior of an existing residence by dividing it into units, usually extremely small and not overly private, or, they rent a room in their home and share some facilities with the boarders. In those examples accommodations are parted simply to assist the owner of the residence with the financing and upkeep of the property and other expenses incurred are the owner's personal expenses. The situation at bar is quite different. The residential property was designed and built with the provision of accommodating separate and private units, not unlike duplexes or triplexes that are commonly rented. These rental units also offered some privacy and security. The personal element present in the appeal is only minimal and, on the weight of the evidence, is not an overriding factor: Tonn v. R. (1995), 96 D.T.C. 6001 (Fed. C.A.). The units the appellant had available for rent were separate and distinct from the appellant's personal accommodations and were marketable entities. The expenses incurred on these units were not personal or living expenses within the meaning of subsection 248(1) and paragraph 18(1)(h) of the Act.

18 The appeals are therefore allowed with costs.