Lennox Moonan v. Her Majesty the Queen, [1997] 1 CTC 2712 (Informal Procedure)

Taylor J.T.C.C.: — This is an appeal heard in Toronto, Ontario on October 7, 1996, against assessments for the years 1989, 1990 and 1991 in which the Respondent disallowed claims for rental losses in the amounts of $5,044.68, $10,635.44 and $9,427.93 respectively.

For purposes of this decision, I note that the details provided in the Notice of Appeal and in the Reply to Notice of Appeal are to be considered an integral part thereof. I will however quote one specific paragraph from the Notice of Appeal:

We had an emotional tie to the property as my wife was born there and it was the family home for 30 years so rather than sell it, we felt it would make a good rental property.Unfortunately, circumstances beyond my control such as losing my job, the market crash and destructive tenants forced us to sell before this profit was realised.

Counsel for the Respondent relied heavily in his argument - based on the testimony and evidence - that the real purpose for which the Appellant (and his wife) retained the subject property, after the acquisition of another principal residence was because of this “personal element” — the attachment to the property.

Faced with the clarifications outlined in the Federal Court of Appeal judgment in Tonn v. R. (1995), [1996] 1 C.T.C. 205, 96 D.T.C. 6001 of Moldowan v. R., (sub nom. Moldowan v. The Queen), [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, a judgment of the Supreme Court of Canada, the grounds for supporting the assessments on the basis of “no reasonable expectation of profit” required establishing at least a precondition (personal element) noted in Tonn (supra) according to Counsel, and he relied on the following quotation, from page 225 (D.T.C. 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.

As I understood Counsel’s point, that “personal element” led to the view that the “deductions claimed (were) on their face questionable”. Much has been said and written about Tonn (supra) since that judgment, and it appeared to me Counsel now took the position firmly that if a “personal element” could be identified the effect of the guidelines in Tonn (supra) would be negated, thereby permitting the case to be viewed by the Court from the long-standing perspective of “no reasonable expectation of profit”. Counsel might well be required to objectively support such an over-arching proposition when the assertion of “personal element” is a subjective determination, or when the indication of “personal element” is so small as to be almost negligible — e.g. a taxpayer spending a few days in a Florida condominium, which would normally be rented to an outside party.

This subjective as well as objective appreciation was noted in another judgment of the Federal Court — at the Trial Division level, in Timmins v. R., [1996] 3 C.T.C. 175, 96 D.T.C. 6378, as follows, at page 188:

Justice Linden [1] noted that the common law reasonable expectation of profit test, described in Moldowan, resembles the business intention tests in subsection 9(1) and paragraph 18(l)(a) of the Act, in that the taxpayer must be subjectively motivated by profit when carrying out the activities in question. The common law test goes further than the statutory tests, however, in that it also requires that the taxpayer’s profit motive be objectively reasonable.

[Emphasis added. I

[...]

As indicated previously, the reasonable expectation of profit test consists of both subjective and objective elements.

[Emphasis added. I

I would refer to a note of caution to be found in Zonn (supra), at page 212 (D.T.C. 6005):

In other words, the expense must have been incurred within a business framework, bearing some relation to the income earning process. I might mention in this context that such intention, strictly speaking, is subjective; no requirement of objective reasonability is expressly imposed by the section.

[Emphasis added. I

In this case the “personal element” identified by the Respondent appears to me to be “subjective” rather than “objective”. I accept that proposition for purposes of this case, since the basis for the “personal element” was an admission by the Appellant (see Notice of Appeal) that there were emotional ties to the property.

I am satisfied this “personal element” was a major reason, perhaps even a “preponderant purpose”, based on the following:

1. Due to a high mortgage both in amount and rate of interest, which was left in place on the subject property during the years in question, there was never any prospect of earning a profit from rentals.

2. The resale market for such homes in 1988 was quite low.

3. The house would be in need of substantial repairs in the near future - it was simply an old house.

4. When finally sold in 1992 - the sale price ($205,000.00) almost exclusively represented the value of the land - the house was torn down.

5. The evidence does not substantiate the Appellant’s claim that profits could have reasonably been expected, but unforeseen and preventable events produced the losses.

Based on the acceptance of that proposition from the Respondent — the evidence does not support this Appellant’s claim of “reasonable expectation of profits”. This operation was not a “commercial enterprise” as I understand that term for income tax purposes. It was a convenience by which to hold the property for a period of time for personal reasons, but to ultimately sell it when the market was more favourable. Apparently, it still comes down to the discharge of the “onus of responsibility”, by the Appellant in supporting the ultimate position he espouses — e.g. “reasonable expectation of profit”, although that may require highlighting by the Respondent of preliminary requirements, according to Counsel.

The appeal is dismissed.

Appeal dismissed.