Jandrisits v. R., [1998] 2 C.T.C. 2680, 98 D.T.C. 3389

Bowman T.C.J.:

1 These appeals were heard together on common evidence. They are from assessments for the 1991, 1992 and 1993 taxation years and involve the disallowance of losses claimed from various commercial enterprises in which the appellants engaged in those years.

2 Mr. Oldland and Ms. Jandrisits purchased 3 Cassels Avenue in Toronto in September 1991. They lived in a portion of the property and rented out a portion in each of the years. Losses were reported in 1991, 1992 and 1993 of $8,137, $6,319 and $6,133 respectively and each appellant claimed 50% thereof in computing his or her income.

3 Mr. Oldland also claimed business losses of $8,455, $7,215 and $8,381 for the years 1991, 1992 and 1993 respectively from a business “Oldland Music Productions”.

4 Ms. Jandrisits also claimed business losses from a business known as Nancy's Beauty Consultants in the amounts of $4,158, $4,137, $3,799 for 1991, 1992 and 1993 respectively.

5 Mr. Oldland drives a beer truck and is a musician. Ms. Jandrisits is a legal assistant employed by the law firm Blake, Cassels & Graydon.

The rental loss

6 The property on Cassels Avenue was purchased by the appellants jointly in September 1991. Mr. Oldland testified that he looked for a property that would yield a rental income. He looked at numerous properties and the price of the Cassels property, $182,500, was attractive. The house is a substantial three storey brick structure. It was however in a terrible state inside. It had been lived in by young men who used it for wild parties. Mr. Oldland described the previous tenants as “pigs” and “slobs”. The description seems accurate. When the noise from the stereo system upstairs became too unbearable the basement tenant simply pulled the master switch and turned off all the electricity in the house. Undeterred, the upstairs tenants brought in car batteries and the cacaphonic din resumed. The police frequently came to the house. Just before the tenants left when the house was sold they held a grand farewell party in the course of which they blew out the speakers and threw them through the window. Some of the carpets were destroyed by food and other substances being thrown on them and by leakage from a water bed.

7 Much of the damage occurred shortly before the appellants took possession. Mr. Oldland had retained a house inspection company to examine the house and he put in evidence the report made by Majestic Home Inspection Service. It sets out in detail the substantial repairs that were required.

8 An estimated cost was assigned to a number of the repairs listed and the total of these is $4,340. However, the situation was substantially exacerbated by the damage done by the tenants just before they left.

9 In 1991 a complete renovation of a bedroom was done, including new walls, closet, doors, lighting and carpet. The cost was $6,200. Also in 1991 a complete renovation of a bathroom was done at a cost of $3,104. Renovations of this magnitude were not anticipated in the house inspection report.

10 The appellants' intention in acquiring the house was to rent part of it to tenants and live in part of it. They expected to rent the basement, a self contained one bedroom apartment for about $500 per month. A sewer main broke and flooded the basement, necessitating extensive repairs. Moreover, renovations were being carried on in all three years under appeal, making the basement virtually unrentable. Therefore they rented the basement to Mr. Oldland's sister at a reduced rent of $300 per month. After the renovations were completed in 1993 they rented it for $595 per month.

11 The following figures were set out in the reply to the notice of appeal. They were not challenged and in fact are consistent with the returns of income filed:

Schedule “A1”

1991
Gross Rental Income	$1,600
Expenses:
Interest	$11,109.19
Utilities	1,846.18
Insurance	314.00
Repairs	9,403.79
Taxes	1,669.39
Total expenses	$24,342.55
Business portion - 40%	9,737.02
Net Income (Loss)	($8,137.02)
Appellant's share of Loss - 50%

Schedule “A2”

1992
Gross Rental Income	$3,600
Expenses:
Interest	$13,240.95
Utilities	2,101.22
Insurance	314.00
Repairs	7,422.77
Taxes	1,719.39
Total expenses	$24,798.33
Business portion - 40%	9,919.33
Net Income (Loss)	($6,319.33)
Appellant's share of Loss - 50%

Schedule “A3”

1993
Gross Rental Income	$2,100
Expenses:
Interest	$12,629.08
Utilities	2,254.52
Insurance	314.00
Repairs	3,714.65
Taxes	1,670.00
Total expenses	$20,582.25
Business portion - 40%	8,232.90
Net Income (Loss)	($6,132.90)
Appellant's share of Loss - 50%

12 These figures are in marked contrast with those disclosed in Exhibit A-10 which discloses a profit of $105.56, divided equally between the two appellants. Exhibit A-10 is as follows:

RENTAL INCOME STATEMENT FOR THE PERIOD ENDED DEC. 31, 1994
INCOME	$6,600.00
EXPENSES	TOTAL	PERSONAL
INSURANCE	$574.00	$344.40
INTEREST	$11,688.63	$7,013.18
ADVERTISING & PROMOTIONS	$159.96
REPAIRS	$89.77	$53.86
TAXES	$1,251.84	$751.10
UTILITIES	$2,231.96	$1,339.18
TOTAL EXPENSES	$15,996.16	$9,501.72
($9,501.72)
TOTAL DEDUCTIBLE /	$6,494.44
NET INCOME / LOSS	$105.56
N. JANDRISITS 50%	$52.78
T. OLDLAND 50%	$52.78

13 The difference lies in the increased rentals following the renovations that were done and the dramatic decrease in the items claimed for repairs.

14 Mr. Oldland and Ms. Jandrisits stated that they had not filed returns for 1995 and 1996 because of the dispute with the Department of National Revenue. This is no reason for failing to file returns. It leaves me with very little substantiation of their unsupported oral testimony that the enterprises were making a profit in 1995 and 1996.

15 So far as Mr. Oldland's music business is concerned, the following statements included with his return of income indicate the manner in which the losses claimed by him were computed:

OLDLAND MUSIC PRODUCTIONS INCOME STATEMENT FOR THE PERIOD ENDED DEC. 31, 1991
GROSS INCOME	$2,850.00
EXPENSES
OFFICE EXPENSES	$2,434.26
AUTOMOBILE EXPENSES	$2,877.76
ADVERTISING & PROMOTIONS	$350.00
EQUIPMENT C.C.A.	$3,693.96
PROFESSIONAL FEES	$1,000.00
TELEPHONE	$150.00
CASUAL WAGES	$800.00
TOTAL EXPENSES	$11,305.98
NET INCOME/LOSS	($8,455.98)

OLDLAND MUSIC PRODUCTIONS INCOME STATEMENT FOR THE PERIOD ENDED DEC. 31, 1992
GROSS INCOME	$4,200.00
EXPENSES
OFFICE EXPENSES	$2,479.83
AUTOMOBILE EXPENSES	$2,361.71
ADVERTISING & PROMOTIONS	$278.40
EQUIPMENT C.C.A.	$2,955.17
PROFESSIONAL FEES	$1,500.00
TELEPHONE	$240.00
CASUAL WAGES	$1,600.00
TOTAL EXPENSES	$11,415.11
NET INCOME/LOSS	($7,215.11)

OLDLAND MUSIC PRODUCTIONS INCOME STATEMENT FOR THE PERIOD ENDED DEC. 31, 1993
GROSS INCOME	$1,457.50
EXPENSES
OFFICE EXPENSES	$2,058.23
AUTOMOBILE EXPENSES	$2,791.76
ADVERTISING & PROMOTIONS	$425.00
EQUIPMENT C.C.A.	$2,364.13
PROFESSIONAL FEES	$1,500.00
TELEPHONE	$100.00
CASUAL WAGES	$600.00
TOTAL EXPENSES	$9,839.12
NET INCOME/LOSS	($8,381.62)

16 Mr. Oldland runs a band called the Tabasco Cats. I do not accept counsel's assertion that there is no business here or that there is no reasonable expectation of profit. There is a substantial capital investment and a great deal of hard work and long hours are involved. This enterprise is not merely a hobby or a labour of love, although I daresay Mr. Oldland derives much personal satisfaction from being a musician. I accept that operating a band in Toronto is a risky enterprise and that the music business in Canada is cyclical and vicissitudinous.

17 I find as a fact that Mr. Oldland's music business was a genuine commercial enterprise and that it did have a reasonable expectation of profit. Mr. Oldland testified that in 1995 and 1996 he made a profit. I have no reason to question his credibility, but since he has not filed returns for those years there is no concrete substantiation of this assertion.

18 The major problem with Mr. Oldland's claim to deduct losses from his music business lies in the unreasonableness of his expenses claimed in comparison with the revenues produced, coupled with the fact that many of the expenses have not been proved.

19 In 1991, he had gross income of $2,850.00, and expenses of $11,305.98, to produce a loss of $8,455.98. In 1992, he had income of $4,200.00, expenses of $11,415.11 to produce a loss of $7,215.11. In 1993, his income was $1,457.50 and his expenses $9,839.12, resulting in a loss of $8,381.62.

20 For example, the office expenses are said to relate to part of a small room on the second floor where he stores his musical equipment and which he shares with Ms. Jandrisits who stores cosmetics in part of it.

21 I find this rather unreasonable and in any event the basis of allocation was not demonstrated. Also, it is not clear whether the amount claimed for office expenses was not already included in the rental loss claimed. Moreover, the conditions in subsection 18(12) of the Income Tax Act have not been met. Subsection 18(12) reads as follows:

Notwithstanding any other provision of this Act, in computing an individual's income from a business for a taxation year,

(a) no amount shall be deducted in respect of an otherwise deductible amount for any part (in this subsection referred to as the “work space”) of a self-contained domestic establishment in which the individual resides, except to the extent that the work space is either

(i) the individual's principal place of business, or

(ii) used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business;

(b) where the conditions set out in subparagraph (a)(i) or (ii) are met, the amount for the work space that is deductible in computing the individual's income from the business for a taxation year shall not exceed the individual's income from the business for the year, computed without reference to the amount.

22 The automobile expenses which range from about $2,300 to $2,800 have not been proved. I do not think that vouchers and receipts are strictly speaking necessary, but there must be some evidentiary foundation for a claim to deduct expenses. Possibly even a ledger would suffice.

23 The same is true of the casual wages which ranged from $600 to $1,600. These were evidently paid in cash but no receipts or records of the payments were put in evidence.

24 Both the casual labour expense and the telephone expense are round figures that I suspect were mere estimates.

25 I am prepared to accept the professional fees expense, simply because Mr. Persaud testified that he received the amounts of $1,000, $1,500 and $1,500. Also I accept the capital cost allowance on Mr. Oldland's equipment as well as the cost of advertising and promotion, which seems reasonable.

26 So far as Ms. Jandrisits' business of cosmetics (Nancy's Beauty Consultants) is concerned, there was a reasonable expectation of profit from such a business but the expenses claimed were wholly disproportionate to the revenues. Her income in 1991, 1992 and 1993 was $1,152, $1,703 and $1,630, but the expenses claimed were in each year over $5,000. The greatest part of the expenses claimed was for office expense $3,651, $3,719 and $3,087. This was for the 8′×12′ room where she stored her cosmetics along with Mr. Oldland's musical equipment.

27 This is patently unreasonable and excessive. To illustrate the absurdity of the claim for office expenses, let us look at 1991. The income produced by Mr. Oldland's music business was $2,850 and Ms. Jandrisits cosmetic business was $1,152, for a total of $4,002. The claim for office expense was $3,651 (cosmetics storage) and $2,434 (musical equipment storage) for a total of $6,085 or about $500 per month for an 8′×12′ room on the second floor of a house. The figures speak for themselves.

28 Moreover, the conditions of subsection 18(12) quoted above have not been met.

29 So far as the other expenses are concerned, they have simply not been proved, apart from the professional fees.

• (a) the losses claimed from Nancy's Beauty Consultants are not allowable;

• (b) The losses from Oldland's Music productions are allowable only to the extent set out earlier in these reasons;

• (c) The rental losses are allowable on the basis that there was a genuine and bona fide rental operation carried on with a reasonable expectation of profit but these losses must be computed in accordance with the Income Tax Act to exclude the deduction as current expenses of the capital expenditures made in the years in question. Since the matter will be referred back to the Minister of National Revenue for reconsideration and reassessment that determination must be made at that time. The matter was not raised in the reply and the evidence before me does not permit me to decide which expenditures are on capital account and which are on revenue account.

31 The appeals are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons. I make no order for costs.