McArthur
T.C.J.:
This
appeal
concerns
assessments
for
the
1990,
1991
and
1992
taxation
years.
The
issue
is
the
deductibility
of
losses
incurred
by
the
Appellant
from
four
condominium
rental
properties
purchased
in
1986.
Two
of
the
properties
were
in
London,
Ontario
and
the
remaining
two
were
in
Surrey,
British
Columbia.
The
Appellant,
Brian
J.
Stewart,
is
recently
retired
from
senior
positions
with
the
Toronto
Transport
Commission
that
included
property
management.
His
annual
income
ranged
from
$65,000
in
1986
to
over
$90,000
during
the
years
in
question.
The
Appellant
is
a
highly
intelligent,
experienced
real
estate
investor.
His
first
rental
property
was
acquired
in
approximately
1963.
A
second
property
was
acquired
in
the
late
sixties.
These
properties
were
later
disposed
of.
At
the
time
the
subject
properties
were
purchased,
the
Appellant
owned,
either
alone
or
with
partners,
six
other
similar
rental
units
in
London:
he
acquired
a
rental
property
in
1982,
two
additional
properties
in
1986,
and
a
further
three
properties
in
1987.
He
presently
retains
three
of
the
four
subject
units.
The
subject
properties
were
purchased
after
thorough
research.
Although
living
in
Toronto,
the
Appellant
was
very
familiar
with
the
London
area
and
informed
himself
with
respect
to
the
Surrey
market.
He
had
a
daughter
living
near
Surrey
and
was
attracted
by
the
potential
of
the
area.
The
Appellant
carefully
studied
Reemark’s
pro
forma
memorandum
with
projections
of
income,
profits
and
losses
over
a
ten-year
period.
He
had
an
exceptional
understanding
of
the
complex
details.
While
his
history
in
real
estate
reflects
a
pattern
of
acquiring
properties
with
a
down
payment
of
approximately
25%
of
the
purchase
price,
he
chose
to
purchase
the
subject
units
through
almost
100%
financing
by
granting
on
each
unit
a
first
and
second
mortgage,
promissory
notes
and
only
$1,000
in
cash.
This
was
the
first
time
that
he
had
purchased
properties
on
such
a
highly
leveraged
basis.
He
acquired
two
rental
condominium
apartment
units
in
the
project
referred
to
as
Meadows
of
White
Oaks
Phase
II
(“White
Oaks”)
situated
in
London,
Ontario,
by
way
of
purchase
agreements
dated
December
11,
1986
and
similarly
acquired
two
rental
condominium
apartment
units
in
a
project
referred
to
as
Park
Woods
located
in
Surrey,
British
Columbia,
by
way
of
purchase
agreements
dated
December
18,
1986.
Each
of
these
projects
was
a
syndicated
real
estate
development
promoted
by
the
Reemark
Group.
Each
of
the
properties
was
sold
on
the
basis
that
the
purchaser
would
be
provided
with
a
turn-key
operation,
that
management
would
be
provided,
and
that
a
rental
pooling
agreement
would
be
entered
into.
The
developer
arranged
financing
for
the
projects.
Each
of
the
White
Oaks
units
is
a
two-bedroom
apartment
that
cost
$72,990.
The
Appellant
paid
$1,000
in
cash,
assumed
the
first
mortgage
representing
72%
of
the
purchase
price,
$52,553,
and
delivered
promissory
notes
aggregating
$19,437,
for
each
unit.
Unit
No.
102
in
Park
Woods
is
a
two-bedroom
apartment
that
cost
$74,990.
Unit
No.
318
Park
Woods
is
a
one-bedroom
apartment
that
cost
$58,990.
He
paid
$1,000
in
cash
for
each
apartment,
assumed
a
first
mortgage
equal
to
75%
of
the
purchase
price,
being
$44,243
for
the
one
bedroom
unit,
and
$56,243
for
the
two-bedroom
unit.
He
provided
a
promissory
note
to
the
vendor
of
$14,747
in
respect
of
the
one-bedroom
unit,
and
$18,747
in
respect
of
the
two-bedroom
unit.
The
Appellant
was
provided
with
projections
of
rental
income
and
expenses
in
respect
of
each
of
these
projects.
The
original
projections
contemplated
payout
of
the
promissory
notes
over
a
period
of
years
terminating
in
1994.
The
projections
reflected
interest
expense
associated
with
the
promissory
note
and
first
mortgage
financing,
and
an
increase
in
the
first
mortgage
debt
in
three
years
to
reflect
an
upward
financing.
The
offering
documents
also
projected
negative
cash
flow
and
income
tax
deductions
for
approximately
a
ten-year
period
in
all
cases.
The
marginal
tax
rate
reflected
in
the
projections
was
for
a
person
resident
in
Ontario
having
a
marginal
tax
rate
of
55.47%
in
1986
and
52.53%
for
1987
and
thereafter.
In
1986,
Mr.
Stewart
did
not
have
significant
income
levels
for
income
tax
purposes
and
little
if
any
of
his
income
for
tax
purposes
was
subject
to
tax
at
the
top
marginal
rates.
The
actual
rental
experience
of
the
apartment
units
was
worse
than
projected.
The
real
estate
recession
of
the
early
1990’s
adversely
affected
rental
rates
and
vacancies.
Rental
revenues
were
generally
lower
and
expenses
were
greater
than
forecasted.
The
property
management
company
was
changed
in
about
1991,
and
the
protection
of
the
rental
pool
was
lost
as
individual
owners
gradually
withdrew
their
units
from
the
pool.
The
Appellant
suffered
rental
losses
in
every
year.
Mr.
Stewart
and
his
spouse
of
many
years
separated
in
March
1987.
He
stated
that
the
separation
was
not
anticipated
at
the
time
of
purchase
of
the
four
units.
He
became
burdened
by
significant
financial
obligations
pursuant
to
an
interim
support
order
obtained
by
his
spouse
in
May
of
1987.
Pursuant
to
a
final
property
settlement
agreement
executed
in
1990,
he
became
obligated
to
pay
the
principal
interest
and
taxes
on
the
matrimonial
home
which
he
transferred
to
his
wife.
The
indebtedness
was
in
excess
of
$100,000.
Position
of
the
Appellant
The
Appellant
contended
that
at
the
time
that
he
purchased
the
four
properties
he
had
the
expectation
of
profit
of
a
reasonable
person
in
his
circumstances.
Due,
however,
to
the
unforeseen
circumstances
of
a
divorce
from
his
wife
and
an
economic
recession
affecting
rental
vacancies
and
underlying
property
values,
the
expected
profit
was
never
realized.
Had
the
rental
properties
been
fully
occupied
and
had
he
not
been
faced
with
divorce
obligations
totalling
over
$100,000,
a
profit
would
have
been
realised.
He
stated
that
his
original
intention
was
to
fully
pay
down
the
secondary
financing
by
1990
and
that
his
efforts
to
pay
down
the
secondary
financing,
despite
the
unforeseen
problems,
evidenced
his
intention
to
achieve
a
positive
cash
flow
as
soon
as
possible.
He
further
contended
that
the
fact
that
the
purchase
of
the
properties
was
almost
100%
financed
is
not
alone
determinative
of
whether
he
had
a
reasonable
expectation
of
profit.
He
also
submitted
that
he
is
entitled
to
deduct
the
carrying
charges
for
monies
borrowed
to
finance
the
rental
losses.
Position
of
the
Respondent
The
Respondent
argued
that
the
Appellant
purchased
the
properties
as
a
tax
shelter,
attracted
by
the
promises
of
(1)
income
tax
deductions
and
(2)
projected
capital
gains
after
ten
years.
Counsel
emphasized
that
the
Appellant
for
the
most
part
simply
followed
the
plan
recommended
by
Reemark.
For
example,
he
purchased
income
guarantees,
participated
in
a
rental
pool
and
allowed
the
interest
on
the
promissory
notes
to
accrue.
He
argued
that
the
Appellant
rejected
his
own
investment
rules
of
thumb
for
producing
positive
cash
flow
from
rental
properties
and
instead
adopted
the
Reemark
plan
that
projected
ten
years
of
losses.
He
noted
these
losses
were
projected
in
1986,
at
a
time
when
the
real
estate
market
was
“booming”.
Counsel
noted
the
one
expense
over
which
the
Appellant
had
control
was
the
interest
expense
and
if
he
intended
to
pay
down
loans
he
would
not
have
postponed
the
interest
on
the
notes,
which
accrued
on
a
compound
basis.
He
conceded
the
Appellant
sold
one
of
the
Parkwood
units
in
1990
and
with
the
proceeds
paid
down
indebtedness
on
the
second
Parkwood
property,
but
noted
the
Appellant’s
decisions
to
purchase
a
personal
use
condominium
in
1988
with
$40,000
down
and
to
purchase
$66,000
in
RRSPs
in
1990
contradicted
the
Appellant’s
evidence
that
he
did
not
have
the
money
during
the
years
in
question
to
follow
his
stated
intention
to
reduce
the
debt
owing
on
the
properties.
If
his
intention
was
to
pay
down
the
principal,
argued
the
Respondent,
the
Appellant
had
the
opportunity
and
chose
not
to
take
it.
Counsel
for
the
Respondent
also
proposed
that
being
able
to
reduce
your
personal
income
tax
through
such
mechanisms
is
a
“personal
element”
in
considering
the
reasonable
expectation
of
profit
test.
Analysis
The
issue
in
this
matter
is
whether
the
Appellant
had
a
source
of
income
from
which
he
could
deduct
rental
losses
incurred
in
the
years
under
appeal.
In
particular,
whether
there
existed
a
reasonable
expectation
to
profit
from
the
subject
rental
properties.
During
the
course
of
argument
counsel
for
both
parties
referred
to
a
number
of
authorities
in
support
of
their
respective
positions,
including
the
Federal
Court
of
Appeal
decisions
in
Tonn
v.
R.,
(1995),
96
D.T.C.
6001
(Fed.
C.A.),
Mohammad
v.
R.,
(1997),
97
D.T.C.
5503
(Fed.
C.A.),
and
Mastri
v.
R.,
(1997),
97
D.T.C.
5420
(Fed.
C.A.).
In
Mastri,
at
5423,
Robertson,
J.A.
(MacGuigan
and
McDonald,
JJ.A.
concurring),
said
the
following
with
regard
to
the
articulation
of
the
reasonable
expectation
of
profit
test
in
Moldowan
v.
R.,
(1977),
[1978]
1
S.C.R.
480
(S.C.C.):
First,
it
was
decided
in
Moldowan
that
in
order
to
have
a
source
of
income
a
taxpayer
must
have
a
reasonable
expectation
of
profit.
Second,
“whether
a
taxpayer
has
a
reasonable
expectation
of
profit
is
an
objective
determination
to
be
made
from
all
of
the
facts”
(supra
at
485-86).
If
as
a
matter
of
fact
a
taxpayer
is
found
not
to
have
a
reasonable
expectation
of
profit
then
there
is
no
source
of
income
and,
therefore,
no
basis
upon
which
the
taxpayer
is
able
to
calculate
a
rental
loss.
Having
considered
whether
the
Tonn
decision
purported
to
alter
the
law
as
stated
in
Moldowan,
Robertson,
J.A.
continued
at
5423:
Tonn
simply
affirms
the
common-sense
understanding
that
it
is
not
the
place
of
the
courts
to
second-guess
the
business
acumen
of
a
taxpayer
whose
commercial
venture
turns
out
to
be
less
profitable
than
anticipated.
In
Mohammad,
the
issue
before
the
Court
of
Appeal
was
whether
the
Tax
Court
Judge
erred
in
applying
section
67
of
the
Income
Tax
Act
(the
“Act”).
In
order
to
provide
a
background
to
the
Court’s
analysis
of
the
section
67
issue,
Robertson,
J.A.
(MacGuigan
and
McDonald,
JJ.A.
concurring),
said
the
following
at
5505-06
with
respect
to
the
proper
parameters
of
the
reasonable
expectation
of
profit
doctrine:
Frequently,
taxpayers
acquire
a
residential
property
for
rental
purposes
by
financing
the
entire
purchase
price.
Typically,
the
taxpayer
is
engaged
in
unrelated
full-time
employment.
Too
frequently,
the
amount
of
yearly
interest
payable
on
the
loan
greatly
exceeds
the
rental
income
that
might
reasonably
have
been
earned.
This
is
true
irrespective
of
any
unanticipated
downturn
in
the
rental
market
or
the
occurrence
of
other
events
impacting
negatively
on
the
profitability
of
the
rental
venture,
e.g.,
maintenance
and
non-capital
repairs.
In
many
cases,
the
interest
component
is
so
large
that
a
rental
loss
arises
even
before
other
permissible
rental
expenses
are
factored
into
the
profit
and
loss
statement.
The
facts
are
such
that
one
does
not
have
to
possess
the
experience
of
a
real
estate
market
analyst
to
grasp
the
reality
that
a
profit
cannot
be
realized
until
such
time
as
the
interest
expense
is
reduced
by
paying
down
the
principal
amount
of
the
indebtedness.
Bluntly
stated,
these
are
cases
where
the
taxpayer
is
unable,
prima
facie,
to
satisfy
the
reasonable
expectation
doctrine.
These
are
not
cases
where
the
Tax
Court
is
being
asked
to
second-guess
the
business
acumen
of
a
taxpayer
whose
commercial
or
investment
venture
turns
out
to
be
less
profitable
than
anticipated.
Rather
these
are
cases
where,
from
the
outset,
taxpayers
are
aware
that
they
are
going
to
realize
a
loss
and
that
they
will
have
to
rely
on
other
income
sources
to
meet
their
debt
obligations
relating
to
the
rental
property.
[...]
The
above
analysis
is
to
the
effect
that
there
can
be
no
reasonable
expectation
of
profit
so
long
as
no
significant
payments
are
made
against
the
principal
amount
of
the
indebtedness.
This
inevitably
leads
to
the
question
of
whether
a
rental
loss
can
be
claimed
even
though
no
such
payment(s)
were
made
in
the
taxation
years
under
review.
I
say
yes,
but
not
without
qualification.
The
taxpayer
must
establish
to
the
satisfaction
of
the
Tax
Court
that
he
or
she
had
a
realistic
plan
to
reduce
the
principal
amount
of
the
borrowed
monies.
As
every
homeowner
soon
learns,
virtually
all
of
the
monthly
mortgage
payment
goes
toward
the
payment
of
interest
during
the
first
five
years
of
a
twenty
to
twenty-five
year
amortized
mortgage
loan.
It
is
simply
unrealistic
to
expect
the
Canadian
tax
system
to
subsidize
the
acquisition
of
rental
properties
for
indefinite
periods.
Taxpayers
intent
on
financing
the
purchase
of
a
rental
property
to
the
extent
that
there
can
be
no
profit,
notwithstanding
full
realization
of
anticipated
rental
revenue,
should
not
expect
favourable
tax
treatment
in
the
absence
of
convincing
objective
evidence
of
their
intention
and
financial
ability
to
pay
down
a
meaningful
portion
of
the
purchase-money
indebtedness
within
a
few
years
of
the
property’s
acquisition.
If
because
of
the
level
of
financing
a
property
is
unable
to
generate
sufficient
profits
which
can
be
applied
against
the
outstanding
indebtedness
then
the
taxpayer
must
look
to
other
sources
of
income
in
order
to
do
so.
If
a
taxpayer’s
other
sources
of
income,
e.g.,
employment
income,
are
insufficient
to
permit
him
or
her
to
pay
down
purchase-money
obligations
then
the
taxpayer
may
well
have
to
bear
the
full
cost
of
the
rental
loss.
Certainly,
vague
expectations
that
an
infusion
of
cash
was
expected
from
Aunt
Beatrice
or
Uncle
Bernie
will
not
satisfy
the
taxpayer’s
burden
of
proof.
In
practice,
the
taxpayer
will
discharge
that
burden
by
showing
that
significant
payments
were
in
fact
made
against
the
principal
indebtedness
in
the
taxation
years
closely
following
the
year
of
purchase.
Both
parties
to
this
appeal
relied
upon
portions
of
this
analysis
in
support
of
their
respective
positions.
While
the
analysis
is
obiter
dicta
and
therefore
not
binding
upon
me,
I
find
it
instructive
and
of
assistance
in
determining
the
outcome
of
this
appeal.
The
crux
of
this
appeal
is
whether
the
Appellant
possessed
the
intention
to
pay
down
the
principal,
regardless
of
whether
this
in
fact
occurred.
Given
the
evidence,
without
the
intention
to
reduce
the
amount
of
the
principal
owing
on
each
unit
there
could
be
no
reasonable
expectation
of
profit.
The
Appellant’s
evidence
was
that
his
intention
was
to
reduce
the
amount
of
the
debt
at
a
rate
more
quickly
than
that
projected
in
the
Reemark
plan
in
order
to
produce
a
positive
cash
flow.
The
Respondent
challenged
the
credibility
of
the
Appellant’s
testimony
and
argued
that
it
was
his
intention
to
follow
the
Reemark
plan.
The
Reemark
plan,
which
was
provided
to
the
Appellant
before
he
purchased
the
four
units,
included
the
pro
forma
schedule
and
projections,
as
discussed
above.
The
effect
of
the
plan
was
to
use
rental
losses
to
offset
other
income
and
realize
a
gain
at
the
end
of
the
day
from
the
expected
appreciation
in
the
value
of
the
property.
The
Reemark
plan
held
out
no
expectation
of
profit
from
rental
income.
The
Appellant
was
a
very
experienced
real
estate
investor
who
in
the
past
applied
his
“rule
of
thumb”
—
25%
of
purchase
price
down
to
reduce
the
risk
that
the
amount
of
rental
income
would
be
exceeded
by
the
interest
and
other
operating
expenses,
and
monthly
rents
charged
on
the
basis
of
1%
of
the
value
of
the
property
—
to
assure
a
positive
cash
flow
from
properties.
In
the
instance
of
the
four
subject
properties,
he
abandoned
his
tried
and
true
method.
When
asked
why
he
had
deviated
from
his
normal
plan
of
investment,
the
Appellant
was
unable
to
provide
a
plausible
explanation.
The
Appellant
had
an
impressive
knowledge
of
his
agreements
with
Reemark
and
obviously
spent
a
great
deal
of
time
analyzing
the
investment.
The
Appellant
was
not
an
unsophisticated
person
and
clearly
understood
the
projections.
it
is
true
that
the
Appellant
encountered
unexpected
problems
in
the
form
of
his
marriage
breakdown
and
the
economic
downturn
after
the
purchase
of
the
subject
properties.
These
factors
may
explain
the
inability
of
the
Appellant
to
pay
down
the
principal
outstanding
on
the
properties
at
a
quick
enough
rate
to
realize
positive
cash
flows
in
the
years
relevant
to
this
appeal.
It
is
also
true
that
the
Appellant
tried
to
adopt
to
the
changing
circumstances,
selling,
for
example,
one
of
the
four
subject
units
and
using
the
proceeds
to
pay
down
a
portion
of
the
debt
on
another
unit.
However,
I
note
that
in
1988
the
Appellant
chose
to
advance
$40,000
in
principal
toward
the
purchase
of
a
condominium
for
his
personal
use.
In
1990,
the
Appellant
received
more
than
$50,000
as
a
retirement
payment,
which
he
sheltered
in
an
RRSP
rather
than
paying
down
more
of
the
indebtedness.
After
he
finished
satisfying
his
obligations
to
his
ex-spouse
in
1992,
he
made
no
effort
to
significantly
reduce
the
amount
of
the
outstanding
principal
of
each
unit.
The
Appellant
had
several
opportunities
to
reduce
the
outstanding
indebtedness
and
chose
not
to.
Having
considered
all
of
the
evidence,
I
am
not
satisfied
that
the
plan
that
the
Appellant
followed
was
realistic
in
its
ability
to
produce
a
profit
on
the
subject
properties.
While
the
Appellant
testified
it
was
his
intention
to
pay
down
a
portion
of
the
outstanding
debt,
this
evidence
alone
is
not
enough.
As
Sarchuk,
J.T.C.C.
observed
in
Foldy
v.
Minister
of
National
Revenue,
(1990),
91
D.T.C.
361
(T.C.C.)
at
363:
...
he
proof
necessary
to
establish
the
existence
of
a
reasonable
expectation
of
profit
from
an
enterprise
goes
well
beyond
the
declared
intention
of
a
taxpayer,
even
given
under
oath.
Such
a
statement,
of
course,
cannot
be
ignored
but
all
the
facts
surrounding
the
acquisition
and
the
operation
of
the
property,
its
earning
potential
and
its
carrying
charges,
must
be
such
as
to
satisfy
an
objective
observer
that
a
profit
can
reasonably
be
expected
to
arise
from
its
rental
alone
(Scott
v.
M.N.R.,
85
D.T.C.
1).
Here
there
is
a
lack
of
convincing
objective
evidence
of
a
realistic
plan
to
pay
down
a
sufficient
portion
of
the
indebtedness
so
as
to
create
a
positive
cash
flow.
The
Appellant
has
not
discharged
his
burden
of
showing
that
the
reasonable
expectation
doctrine
was
satisfied.
Conclusion
Given
the
similarity
in
the
circumstances
involving
each
of
the
four
subject
properties,
I
do
not
think
it
necessary
to
analyze
each
property
individually
in
determining
whether
there
existed
a
reasonable
expectation
of
profit.
I
conclude
that
there
was
insufficient
evidence
to
find
a
reasonable
expectation
of
profit
with
respect
to
these
properties.
The
parties
argued
whether
the
capital
cost
allowance
(“CCA”)
should
be
included
in
determining
whether
a
reasonable
expectation
of
profit
existed.
Even
if
CCA
were
included
in
the
calculations
of
the
losses,
my
conclusion
that
there
was
no
reasonable
expectation
of
profit
remains
unchanged.
As
to
the
carrying
charges,
these
are
not
deductible
under
the
provisions
of
paragraph
20(1)(c)
as
there
is
no
source
of
income
for
which
the
expenses
were
incurred.
The
appeal
is
dismissed.
Appeal
dismissed.