Date: 20020607
Docket:
2001-3489-IT-I
BETWEEN:
MYRON
RUDIAK,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
For the Appellant: The Appellant
himself
Counsel for the Respondent: George Boyd
Aitken
Reasonsfor
Judgment
(Delivered orally
from the Bench, on April 25, 2002, at Kitchener,
Ontario)
McArthur J.
[1]
The issue in these appeals is whether in the
1997, 1998 and 1999 taxation years the Appellant's losses
from the operation of a bed and breakfast business were
restricted by subsection 18(12) of the Income Tax Act
which reads as follows:
18(12) 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 for the year from the
business shall not exceed the individual's income for the
year from the business computed without reference to the amount
and sections 34.1 and 34.2; and
(c)
any amount not deductible by reason only of paragraph (b)
in computing the individuals's income from the business for
the immediately preceding taxation year shall be deemed to be an
amount otherwise deductible that, subject to paragraphs
(a) and (b) may be deducted for the year for the
work space in respect of the business.
[2]
In 1996, the Appellant and his wife Carol sold
their large Toronto home to purchase and renovate a stately old
residence in Stratford, Ontario. The purchase price was $285,000
and the renovations amounted to $205,000. Their adult children
had moved on and the Appellant had retired from a career in
marketing. His pension income was approximately $70,000 annually.
The Notice of Appeal contains the following:
In August 1996, we purchased a large
residential building in Stratford for the singular purpose of
establishing and operating our partnership business, The White
House Bed & Breakfast. This was to be a small private
prestige Inn offering Inn-style comfort in our bedrooms and
private guest rooms as well as gourmet breakfasts. The property
was of historic interest and was zoned R-2 allowing 4 guest
rooms. In the past the building had been owned and operated by
the Stratford Festival as a staff residence and guest
house.
The building itself and location was
well-suited for the new business, but needed major renovations
and repairs to meet our business requirements.
With planned renovations, there would be
sufficient driveway space for off-street parking for 10
automobiles. There was the capability to create four guest
bedrooms with private baths and the front of the house with a
large foyer, a principal front parlour room and large dining hall
would be designated for guest-use only.
A separate apartment would be constructed to
provide living quarters for the owners. A large renovated kitchen
would be used to service guests and provide a personal TV lounge
and eating area for ourselves. A new laundry room facility would
be added to service the business and personal use.
In the following eight months, the building
was extensively repaired, renovated and redecorated. A 4 room
separate owner's apartment with private entrance was
constructed. New electrical, plumbing and gas services were
installed. Three guest bedrooms were fitted with private
bathrooms. A 4th guest bedroom was set up to be used for guest
overflow accommodation. Fire detection and emergency lighting
systems were installed; plaster and flooring throughout the
building was repaired, and all the guest rooms were individually
decorated and furnished.
The White House Bed & Breakfast Inn opened
for business in July 1997. At that time there were over 200 other
establishments offering 'bed & breakfast' services in
the town of Stratford in addition to several hotels and about 12
motels in the immediate area. Our competitive advantage was to be
built on the elegance and privacy of our guest house, a superb
cuisine and excellent service. Our business plan which was
provided to the Canada Trust company as the basis for a major
business loan, forecasted that our business would grow steadily
each year and would be profitable in 5 years.
We expected CCRA to treat us as a small
business with normal expectation of profit guidelines and filed
our tax returns accordingly. In our notice of objection we
recommended that CCRA follow this approach with profit to be
expected in 2002.
...
... The costs for the construction of the
owner's apartment were not charged to the business, nor was
any depreciation on the building claimed as business
expense.
[3]
After an audit by Revenue Canada, a revised
business and personal use ratio of 50% was agreed upon and the
Minister of National Revenue applied the restrictions in
subsection 18(12) on the basis that the Appellant and his
wife were using their home for business purposes. In Lott v.
The Queen, [1998] 1 CTC 2869, in referring to subsection
18(12), my colleague, Bowie J. stated:
... It is quite
clear in the words of subsection (12) that it is intended to
restrict the extent to which individuals who use their homes for
business purposes may deduct a portion of the cost of maintaining
the home from their business income. The rule which this
subsection establishes is that costs arising out of the
maintenance of the home in which a business operates may be
deducted only if subparagraph (i) or (ii) is satisfied, and then
only to the extent that it does not have the effect of putting
the business into or contributing to a loss
position."
[4]
The Appellant
contends that their living quarters are entirely separate from
the area dedicated to the bed and breakfast which is a
self-contained domestic establishment. He adds that Revenue
Canada never physically inspected the property despite repeated
invitations to do so. To illustrate his position, the Appellant
provided pictures of the interior and exterior of both the
business area and the personal living area. He added:
... Subsection 18(12) does not apply to
our business as we are not running a business out of our home. We
live in an apartment or 'self-contained domestic
establishment' located within the building which is used to
operate the business, similar to a hotelier or a motel operator
who resides in a suite in the same building. Our Inn-style bed
& breakfast is operated like an Inn. We provide quality and
luxurious accommodation to our guests in an area which is private
and completely separate from our own living quarters. We do not
share part of our home with our guests and we do not live in the
guest areas.
I accept that statement of the Appellant as part of the
facts. The bed and breakfast was open during the theatre season
from approximately the beginning of May to the end of November.
The Appellant and his wife rarely used the bed and breakfast area
during the off-season. It is a regulatory and practical
obligation that the operators live on or adjacent to the bed and
breakfast business premises. While the Appellant and his wife had
their private residence, their private kitchen was used for the
preparation of an elegant guest breakfast. Laundry and office
facilities contained in the personal area were also used for
business purposes. Guests did not have access to these
facilities.
[5]
The private residence was off-limits to the
guests and, for the most part, remained locked. It had its own
private garage and entrance, eating area, family room, washroom
and bedroom. The guest area was self-contained with three private
ensuite bathrooms, a dining room for the breakfast, a sitting
area and verandah.
[6]
The Appellant relies on the decision of Judge
Bowman in Sudbrack v. The Queen, 2000 DTC 2521. The
Respondent distinguishes the facts in Sudbrack from the
present and refers to cases that are contained in his book of
authorities which include Broderick v. The Queen, [2001] 3
C.T.C. 2033, Ellis v. The Queen, 94 DTC 1731, Lott
v. The Queen, [1998] 1 C.T.C. 2869,Maitland v. The
Queen,
[2000] 3 C.T.C. 2840 and Sudbrack referred to
earlier.
[7]
The Appellant testified on his own behalf and
Mr. Hansen, a municipal assessment officer, gave evidence for the
Crown. The Respondent argued that the whole of the property
constitutes the workspace of self-contained domestic
establishment as defined by subsection 18(12). The focus of the
Appellant's argument is that he and his wife were not running
a business out of their home, that their home was self-contained
although attached to the bed and breakfast building. The
Respondent countered this with the argument that their living
area was not separate and was commingled with the bed and
breakfast business area and the line between the two areas was
not clear. The Respondent referred to the following areas of the
entire structure that had mixed use (my observations are included
after each reference):
(a)
the garage was used in part for the bed and breakfast storage;
(this was obviously a limited business use);
(b)
the kitchen was used to make the breakfast for guests of the bed
and breakfast; (the guest did not use or occupy the kitchen. The
prepared breakfast was served in the guest's dining
room);
(c)
the laundry room served both the bed and breakfast and personal
use; (this is accurate but again the guests did not use the
Appellant's laundry room);
(d)
the office in the Appellant's apartment was used for the
needs of both; (it was the Appellant's private office and
used exclusively by him);
(e)
two weeks annually the bed and breakfast area was used to
accommodate friends and family; (while this is accurate, it is
insignificant in the overall scheme);
(f)
four months of the year, the off-season, the Appellant and his
wife had access to the bed and breakfast area; (same comments as
in item (e));
(g)
heating and electrical services were common to both areas; (I do
not believe this is significant);
(h)
the City of Stratford did not recognize a separate apartment in
their municipal tax bill; (What does that prove?);
(i)
the Appellant was obligated to live on the bed and breakfast
premises to comply with municipal zoning requirements; (not
relevant);
(j)
the Appellant's bed and breakfast brochure advertised
"Welcome to our home". (advertising puffing and
privilege).
[8]
The question is whether the bed and breakfast
area used exclusively for business purposes was "any part
of" a self-contained domestic establishment in which the
Appellant resided. "Self-contained domestic
establishment" is defined in section 248 as
follows:
248(1) In this
Act,
"self-contained domestic
establishment" means a dwelling-house, apartment of other
similar place of residence in which place a person as a general
rule sleeps and eats;
The bed and breakfast guest premises and the
Appellant's living area were physically separate. The
business was carried on in the renovated confines of the original
house. The Appellant and his wife's place of residence was
wholly-contained within the newly-constructed addition to
the rear of the business premises. The guests did not use this
separate residence. The Appellant did use his private kitchen and
laundry facilities and a small garage area for the business, but
I find that this does not detract from the Appellant's
position that it was minor in comparison to the overall picture.
The fact remains that the guests did not use the kitchen, laundry
area or office.
[9]
I have read the several cases cited and I find
that the one closest to the present situation is Sudbrack,
supra. The Respondent's position in the present case is
that the bed and breakfast business is the entire structure.
Following the reasoning of Judge Bowman of this Court, I
find on the facts that the living quarters of the Appellant and
his wife were a separate apartment built at the back of the bed
and breakfast area and constitute a self-contained domestic
establishment. Obviously, there was some overlapping, and the
Rudiaks used the bed and breakfast area occasionally as a
personal living area. This was limited to less than 10% of a
calendar year.
[10]
The facts in this case are distinguishable
from those in Broderick, which also dealt with a bed and
breakfast and the application of subsection 18(12). In
Broderick, as in the other cases cited apart from
Sudbrack, the Appellant operated a business in his home.
In the present case, I find the Appellant did not operate a
business in his home. His home was the separate addition
constructed at the rear as is clearly shown on the sketches
marked "C" and "D" to Exhibit A-1.
[11]
It is unfortunate that the Respondent did not
make a physical inspection of the premises. I find that the
guests did not occupy the Appellant's self-contained domestic
establishment. It was a separate structure, locked and reserved
exclusively for the Appellant's dwelling or apartment. This
is not the usual living arrangements commonly found in bed and
breakfast operations. I believe most bed and breakfast businesses
are assimilated in the operator's home and the operators and
guests use common facilities such as the same entrance, living
room, TV room, dining room, etc. The Appellant's bed and
breakfast was somewhat unique. The result is that subsection
18(12) does not apply. I believe that the parties have agreed
upon a 50-50 allocation of specific expenses. If there
remains a dispute with respect to the figures, the parties may
request a telephone conference with me to deal with the
matter.
[12]
The appeal is allowed, with costs, and the
assessment is referred back to the Minister for reconsideration
and reassessment on the basis that subsection 18(12) does not
apply.
Signed at Ottawa, Canada, this 7th day of
June, 2002.
"C.H. McArthur"
J.T.C.C.
COURT FILE
NO.:
2001-3489(IT)I
STYLE OF
CAUSE:
Myron Rudiak and Her Majesty the Queen
PLACE OF
HEARING:
Kitchener, Ontario
DATE OF
HEARING:
April 23, 2002
REASONS FOR JUDGMENT
BY: The Honourable Judge C.H.
McArthur
DATE OF
JUDGMENT:
April 30, 2002
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
George Boyd Aitken
COUNSEL OF RECORD:
For the
Appellant:
Name:
N/A
Firm:
N/A
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
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