Date: 20020321
Docket: 2001-2037-IT-I
BETWEEN:
ANIS MIKHAIL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Hershfield, J.T.C.C.
[1]
This is an appeal under the Informal Procedure to reassessments
of the Appellant's 1997 and 1998 taxation years. The subject
reassessments deny the deduction of certain expenses consisting
of property taxes, condominium fees, utility costs and motor
vehicle and travel expense claims in relation to a rental
property owned by the Appellant.
[2]
The subject rental property was a condominium unit located in
northwestern Florida that had suffered hurricane damage in 1995
and was taken off the rental market in 1996. Repairs of the
damage caused by the hurricane in 1995 were ongoing in the
subject years and for some time after. During such repair period
the subject property was not suitable for renting out. Given that
the property generated no revenues in the subject years, the full
amount of the expense claims in each year resulted in a
corresponding loss.
[3]
The basis for the reassessments is somewhat confusing and
difficult to deal with. The Respondent relies on different
provisions of the Act any one of which might result in the
dismissal of the appeal. However the principal basis for the
reassessments, added by interlocutory motion at the outset of the
trial, was to deny the deductions claimed pursuant to subsection
18(3.1) of the Act which would disallow the deductions
claimed but, unlike other provisions pleaded, would permit their
capitalization (addition to cost ) so as to reduce tax in a
future year which is not under appeal.
[4]
In very general terms, paragraph 18(3.1), read together with
subsection 18(3.3), applies during a period of construction,
alteration or renovation of a property and disallows certain
expense claims, such as those claimed in the subject years, until
the use of the property for which the construction, renovation or
alteration was undertaken can commence. Such disallowed expenses
cannot shelter income even after such use commences but are, as
stated, capitalized. While this provision might apply in this
case, some might argue that there is no issue estoppel on the
question of whether that provision decreases a tax in a future
year in the event the application of that provision is put at
issue again in the year of sale of the subject property.
Ordinarily, it is the year in which a particular tax liability
arises that this court has jurisdiction to rule - even in respect
of occurrences in prior years that impact the liability in that
later year. While this may seem to be a red herring, the
application of this subsection in the factual circumstances of
this case has proven to be somewhat challenging and has resulted
in a finding, without the desired conviction, that denying the
appeal on the basis reassessed is what is required. To do
otherwise would mean that the Appellant may have been better off
not to have brought this appeal at all.
[5] I
should also note that I allowed the motion to amend the Reply
since ultimately it seemed likely to assist the Appellant in this
case and since evidence was brought that it was the provision
actually relied on by the appeals officer who confirmed the
reassessment. Such decision was made however with appreciation
that it's late introduction may have made it more difficult
for the Appellant to respond to. The Reply should not confound
the Appellant as to the issues to be addressed and the evidence
to be brought and the arguments to be made. Last minute
amendments to pleadings can have this affect. For these reasons I
afforded the Appellant the opportunity to adjourn and consider or
seek help to consider the amendment. I believe he understood the
choice he was invited to make but he declined that
invitation.
[6]
Having expressed such initial reservations, I will briefly
describe the basis for the assessment as explained by the appeals
officer who gave evidence at the trial. The expenses were
initially denied on the basis that there was no reasonable
expectation of profit from the activity being undertaken. The
appeals officer abandoned this approach but, initially at least,
wanted to confirm the assessment on the basis that paragraph
18(1)(a) of the Act denied the expenses claimed
since the rental activity had ceased in the subject years. There
was no income producing activity in respect of which any expenses
could be claimed. However, given that the rental activity ceased
during a time when the rental property was undergoing substantial
reconstruction she thought it was harsh to deny the expenses.
Accordingly, she testified that she finally confirmed the
assessment on the basis that subsection 18(3.1) applied. Unlike
applying paragraph 18(1)(a), this approach at least
recognized the subject expenses as additions to cost. As my
analysis will indicate however, subsection 18(3.1) cannot be
addressed without first considering paragraph 18(1)(a)
which denies expense claims where their incurrence was not for
the purpose of earning income. The analysis requires a detailed
review of the facts.
FACTS
[7]
The subject property was acquired by the Appellant in April 1994.
I accept the Appellant's testimony that the subject property
was acquired as a rental property which he felt could generate
net rental income. The Appellant testified that prior to coming
to Canada he had managed rental properties owned by his family in
Egypt and therefore was not inexperienced in relation to such
activities. More recently, in 1993, he had converted a
personal-use condominium in Winnipeg to a rental property and had
operated such rental property at a profit. Such profitable rental
activity is confirmed in the Reply in that it recognizes income
from the Winnipeg condominium as $7,260.00 in 1997 and $6,293.00
in 1998 with expenses having been claimed in the amounts of
$5,278.00 in respect of 1997 and $5,414.00 in respect of 1998. A
more complete history of the net income in respect of the
Winnipeg rental property is shown on schedule 8 of the Reply.
That schedule shows net income in 1996 of $1,312.00. There were
net losses in 1994 and 1995 in the amounts of $4,147.00 and
$1,185.00 respectively.
[8]
The Appellant testified that his decision in 1994 to acquire a
further rental property in Florida was based on his desire to
diversify his portfolio of bond holdings to include an additional
rental property. While the Florida location presented
difficulties and expenses in relation to his attending to
operations on a personal basis he determined, nonetheless, that
he could achieve a positive income from the rental of the
condominium in addition to having some expectation of capital
appreciation. I accept that testimony and accordingly accept that
current expenses incurred in the operation of the Florida
property would be deductible in the normal course of holding it
as a rental property.
[9]
The Appellant testified that unlike southern Florida locations,
the location of his condominium in northwestern Florida had a
seasonal peak in terms of tourism in the summer. That is, his
condominium was located at a summer beach resort that reached its
peak rental period of some three and one-half months during the
summer. While the Appellant testified that there was reduced
rental activity for the remainder of the year, there was evidence
that the winter months still enjoyed some so-called "snow
bird" traffic. Regardless, the highest seasonal rental
rates were summer rates and it was acknowledged that that was the
prime rental season.
[10] The
Appellant acknowledged that he used the Florida condominium for
his own use for approximately one month each year. He testified
that this use was over December and January in each year being a
period of lower marketability of the rental unit. He testified
that his presence at the site of the rental property was
necessary and that he chose that slower period in December and
January each year to go there to attend to matters that required
his personal attention. He had to visit the property and had to
stay somewhere. As expenses go, staying at the unit was the least
expensive option. On the other hand, the Appellant continued to
use the unit in the subject years for the same period and in the
four years after the subject years when the unit was not being
rented. While one shouldn't be penalized for the location
of an investment and while attending at its location is
consistent with business requirements, the regularity and
duration of these visits, with or without rental activity,
suggest a personal element.
[11] In 1994,
the Florida condominium generated gross revenues of
$7,676.00.
In 1995 and 1996 it generated $11,591.00 and $5,200.00
respectively. In 1997 and 1998 it generated no rental
revenues.
[12] There was
no dispute as to the reason for the failure of the property to
generate any rental income in 1997 and 1998. Similarly, it seems
that there can be little dispute as to why the revenues dropped
off in 1996 compared to 1995 and even why revenues in 1995 were
lower than the Appellant might have expected. The whole community
in which the Florida condominium was located had been hit by
three consecutive hurricanes since the acquisition of the
property in 1994.
[13] To help
understand the impact of the hurricanes, the Appellant provided a
helpful description of the Florida property including pictures.
The Appellant's unit is part of a condominium complex (the
Shoreline Towers), located in or near Destin, Florida on an
'L' shaped peninsula accessible by one highway and a
bridge. The Appellant testified that that location and the
surrounding community had historically not been affected by
hurricane problems in 20 years. The Appellant introduced as
evidence of hurricane activity, a listing of the 30 most costly
hurricanes in the United States from 1900 to 1996. Such listing
was taken from a web site, which the Appellant testified was a
Government site. The Respondent did not object to the listing
tendered as an exhibit and did not question its authenticity or
accuracy. The list shows hurricane Eloise as having struck
northwest Florida in 1975. The next hurricane (large enough to
make the list) was reported as hurricane Alberto which hit
northwest Florida in 1994. The Appellant testified that this
hurricane hit after he bought the subject unit. The next
hurricane hitting the area was in August 1995. It was known as
hurricane Erin and is ranked as the fifteenth most costly
hurricane to hit the United States in 96 years causing $700
million in damage to the area, which included central Florida and
southwest Alabama in addition to northwest Florida. The last and
the worst of the hurricanes was hurricane Opal which hit
northwest Florida in October 1995. Hurricane Opal is ranked as
the fourth most costly hurricane to hit the United States in 96
years costing $3 billion in damage to the area, which included
northwest Alabama as well as northwest Florida. It is not in
dispute that hurricane Opal devastated the Destin area.
[14] In the
Respondent's Reply, the Respondent stated that hurricane
Andrew had affected the subject location in 1992. However,
according to the list brought forward by the Appellant, that
hurricane hit the southeast coast of Florida and Louisiana and
did not affect northwestern Florida where the Appellant's
unit was located. That is, the Appellant's evidence supports
his testimony that he had reason to believe that Destin,
historically at least, was free from the hurricane risks
associated with parts of southern Florida. In any event, the
Respondent's Reply acknowledges that hurricane Erin hit
Destin in August 1995 and that hurricane Opal hit Destin in
October 1995. The Respondent admits that hurricane Erin caused
the subject unit not to be available for rent for part of August
1995 and further admits that hurricane Opal caused severe and
extensive damage not only to the whole of the Shoreline Towers
complex where the subject unit was located but to the entire
Destin Florida region.
[15] The
extent of the damage to the Appellant's unit caused by these
hurricanes was not such that prevented him from occupying it by
December 1995 or earning some rental income in 1996. However,
there was damage to the Appellant's unit and to the Tower in
which his unit was located which were not repaired until 2001.
While there was no evidence as to what the repairs to the Tower
as a whole were, the Appellant testified, in respect of his unit,
that leaking windows and concrete and railing damage to his
balcony remained unrepaired until 2001. That damage and other
factors all resulting from the hurrricane activity contributed to
the unit being removed from the rental market in 1996.
[16] While the
extent of damage caused by hurricane Opal is not in dispute, it
seems necessary to elaborate on it somewhat in fairness to
describing the circumstances in which the Appellant found himself
and to which he had to react.
[17] The
Appellant tendered as an exhibit a picture postcard of the single
highway giving access to the Shoreline Towers. Suffice to say
that the highway was not recognizable as such but rather simply
looked like a ragged portion of the coastline. The Appellant
further testified that the single access bridge was severely
damaged and that repairs to it and the highway took over a year
to complete.
[18] The
Shoreline Towers, indeed all of the Destin area, that had been
favoured as a summer tourist attraction, was now a hurricane
threatened destination having suffered three hurricanes between
the summer of 1994 and the fall of 1995. This obviously affected
the area as a tourist attraction and would for some time.
[19] The
attachments to the Respondent's exhibit R-1 provide evidence
as to the conditions that prevailed at Shoreline Towers during
the subject and later years. The complex consisted of at least
three towers, a number of town houses and common areas that
included a swimming pool. That the Appellant's unit in
Tower III was occupiable by late 1995 and, given rental
receipts, apparently rentable in 1996 does not fully describe the
general condition of the complex or the rentability of the
unit.
[20] There was
damage to all the buildings and common areas. The complex went
from affording the condominium association a profitable on-site
rental program for owners, which commenced in February 1995, to
not having a rental program at all after hurricane Opal. It was
not until the end of 1999 that the association proposed to
restart the on-site rental program. By March 2000 the
association's rental program was underway and a notice
(attachment 4 of exhibit R-1) indicated that there was a
waiting list of renters who had requested reservations and that
there were not enough rental units available to accommodate that
waiting list. Members of the association (which included the
Appellant) were being urged to sign up to the association's
rental program. The Appellant made inquiries of the association
and was advised on September 20, 2000 as per attachment 1 to
exhibit R-1 that the association was not attempting to rent
units in Tower III until repairs were completed. This is
consistent with the Appellant's testimony that the damage to
the complex indeed to his own unit had not been finally repaired
until some five years after the damage was inflicted by hurricane
Opal. The repair schedule was not within the control of the
Appellant.
[21] The
September 20 correspondence goes on to indicate that the
association had snowbird reservations for all of the units in
their program (with one exception) and that assuming construction
on the Appellant's Tower would be completed on time, they
were taking reservations for that Tower starting
January 1, 2001. The Appellant was invited to sign-on
to the rental program on that basis. The Appellant did not put
his unit in the rental program but, regardless, it seems that his
unit would not have been rented in January, 2001 since, as
stated, the repairs to the Appellant's Tower were not
completed until sometime in 2001.
[22] In spite
of conditions following hurricane Opal and the collapse of the
on-site rental program, the Appellant was able to retain an
independent rental agent in the area to continue rental
activities in 1996. This accounts for the 1996 revenues. However,
the Appellant testified that the agent was dishonest and that to
continue operating the property as a rental unit in the
circumstances was proving impossible. Repair work, or the lack of
it, made the complex noisy, dusty and likely unsafe and further
the amenities of the complex and area were not conducive for
renting. It was the Appellant's view that the unit was
unrentable. That an unscrupulous agent might find a tenant is not
sufficient in my view in these circumstances to support a finding
that the property was rentable in 1996 or the subject years. If
the on-site rental agency, being a reliable and principled rental
agency looking for rental premises in 2000, would not regard the
Appellant's unit as rentable, what better corroboration
could the Appellant hope for in terms of his determination that
his unit was unrentable? Further, the economics of the area had
changed in the Appellant's view. Prospects for the property
as a viable rental property had changed. Accordingly, the
Appellant testified he did what he thought his only option was to
do. He listed his unit for sale. Although this tends to support
the view that rental activity was at an absolute end, I note that
the Appellant did not say that he would not have commenced
renting the unit again if it had been repaired earlier. That
option was simply not available in the subject years and listing
the property for sale did not preclude recommencement of the
rental activity. I believe, in the circumstances, it is fair to
say that the possibility of future income still existed although
the Appellant admitted that his purpose for holding the property
in the subject years was to sell it.
[23] The unit
was initially listed for a six-month period at the end of which
the listing was renewed for a further six-month period and so on
until the property was finally sold in 2001. He continued to pay
expenses relating to the unit and to stay there for some 30 days
in December and January each year until the unit sold. The
amenities of the area and the complex throughout this period were
such that the Appellant continued to believe that renting the
unit was not a viable option. I agree, it was not.
[24] To
briefly recap, it is clear that hurricane Opal had a long-term
disruptive effect on the rentability of the unit. It contributed
not only to depressed economic conditions in the area for a
considerable period of time but in particular made the complex in
which the unit was located less desirable as a tourist rental
location. Repairs to the complex took years to be fully complete
and throughout this period the amenities of the area and the
complex were not conducive to the quiet enjoyment of a resort
destination. Even by September 2000 the Appellant's Tower was
not felt to be sufficiently restored to be included in the
successful resurrection of the on-site rental program.
Respondent's Assessment Position
[25] As stated
above, initially, Revenue Canada assessed the subject years and
denied losses on the basis of there being no reasonable
expectation of profit from the operation of the rental business.
At the objection stage, the appeal division abandoned the
reasonable expectation of profit position in favour of relying on
paragraph 18(1)(a). The reason for the change in the
Respondent's reassessment position was that the subject
years were still, as viewed by the appeals officer, part of the
start-up years and as such the reasonable expectation of profit
doctrine did not seem to apply. Further, that doctrine would be
less likely to apply where the losses arose by virtue of
circumstances beyond the control of the Appellant. Abandoning the
reasonable expectation of profit doctrine as the basis for the
reassessments in favour of applying paragraph 18(1)(a)
does not likely change the analysis in my view at least in
respect of permitting expense deductions after a source of income
has been shut down.
[26] In
applying subparagraph 18(1)(a) the appeals officer relied
on the fact that there was no income producing activity by 1997.
By then the Appellant ceased making any effort at all to rent the
property. After 1996 he simply held it for sale. The expenses in
1997 and 1998 were not incurred to earn rental income and
paragraph 18(1)(a) would deny their deduction in her view.
That is, regardless of the reason that the property was not being
rented, there was no intention to derive income during the
subject years from the expenses incurred in those years. However,
applying paragraph 18(1)(a) seemed harsh in the
circumstances, so the appeals officer applied subsection 18(3.1)
which on its express terms also seemed to fit the Appellant's
case. As stated above this provision allowed for the expenses to
be capitalized.
Appellant's Position
[27] The
Appellant asserts that the subject property was a rental property
in respect of which current expenses were properly deducted. He
relies on McGovern et al. v The Queen 94 DTC 6527 (FCTD)
in support of the deductibility of expenses incurred during a
sell-off phase of a rental activity. It might have helped if the
Appellant had testified that failing a timely sale, he had hoped
to rent the property, but he did not. As stated he simply did not
see that as an available option at the time.
[28] Although
no argument was advanced by the Appellant as to the application
of subsection 18(3.1), he relied on the Court to consider whether
it properly applied to his circumstances where the absence of
rental activity in the subject years was the direct result of a
series of natural disasters. The repairs of course were also a
direct result of such disasters and as such the repairs were not
the underlying or causal reason for the unit not being used for
its intended purpose.
ANALYSIS
[29] As to the
application of paragraph 18(1)(a), I am inclined to say
that it should not be so readily applied simply because the
income producing asset is up for sale during an extended period
of income deprivation particularly in cases such of this where
the extended period of income deprivation is caused by
extraordinary conditions beyond the control and expectation of
the taxpayer. The asset was acquired and held as a rental
property. It continued to be a rental property even when the
income streamed ended. One should not so readily dismiss an
income earning purpose in respect of an expenditure when the
characterization of the property has not changed. That is,
provided the property has not been put to another use to which
such expenditure might more appropriately attach, it remains a
rental property and current expenses incurred, including expenses
incurred while the property is not earning income, should not be
so readily denied as not having been incurred for the purpose of
earning income. While contrary to current thinking, I might go so
far as to suggest that even if the income stream of an enterprise
was at an absolute end, a reasonable sell-off period should
be recognized during which holding expenses should be allowed.
They are costs attaching to the income earning process which
includes start-up costs as well as wind-up costs.
That expenses during the last days of the life of an enterprise
might relate to income earned in a prior year should not
necessarily be fatal to their deductibility where they are costs
that are a necessary part of the income producing activity albeit
not incurred during the income producing years. Recognizing such
expenses gives a truer picture of the profit or loss from a
particular activity. Considering the purpose test in paragraph
18(1)(a) then, it should not be required that a purpose be
only forward looking although that is how paragraph
18(1)(a) has always been applied. That paragraph does not,
after all, say "for the purpose of gaining or producing
income in the future".
[30] While the
Appellant did not pursue the rental market at all, in the subject
years, I have not found that the rental activity was at an end.
The property was unrentable but rental prospects still existed in
spite of the Appellant's decision to list the property for
sale in the subject years. Even a subjective purpose test should
not preclude recognition of such prospects where there is no
change in use of the property.
[31] The
property has not become inventory of the Appellant. Neither party
argued that it had. Aside from that, the jurisprudence in this
area supports not regarding there to be a change of use to
inventory in these circumstances. The intention alone to sell a
capital property does not constitute the seller as a trader.
There must be an element of business-like trader activity which
is wanting where capital assets of an enterprise are simply being
listed for sale. The property being liquidated remains capital
property and arguably should also retain its character as
property held in the course of earning income even if, due to
disruptive events dictating the liquidation, it is unable to
produce income during that period.
[32] The next
question is whether the subject capital property has changed to a
personal use property. There are two elements to this question in
this case. Firstly, we have continued personal use of the
property for one month per year which might suggest that the
overall use has changed to personal use so that the subject
expenses would properly be denied under paragraphs
18(1)(a) or 18(1)(h); and, secondly, we have
property being held for investment recovery in order to minimize
loss or enhance gain on the property which, not being an income
producing use, might suggest that the use has changed so that the
subject expenses would be properly denied under
paragraph 18(1)(a). In the former case,
capitalization of the subject expenses is clearly inappropriate
and in the latter case, while arguably appropriate, no provision
of the Act would seem to permit capitalization of such
current expenses (unless paragraph 18(3.1) applies as asserted by
the Respondent).
[33] As to
whether the subject property has become a personal use property,
I find that it has not. In this case the Appellant is a prisoner
of circumstances beyond his control. He is locked into an
investment with incumbent carrying costs. The investment was made
to earn income. It is not for the court to dictate what actions
in these circumstances are necessary provided they are
reasonable. Putting the property up for sale while it was
unrentable was not only reasonable but likely prudent. It was not
reflective of a change of use.
[34] While
there does not appear to be any jurisprudence regarding the
application of paragraph 18(1)(a) during a sale-off period
there is a relevant comparison that might be drawn with
reasonable expectation of profit cases that have commented on
loss claims during wind-up periods. It is interesting to note
that the reasonable expectation of profit doctrine often comes
down to determining if there is a source of income. Where a
source or potential source is closed or is closing down there can
be no source of income unless recognition of it continues for
some reason. The question of permitting recognition of a source
in a reasonable expectation of profit case after that source has
been or is in the course of being shut down would be the same, or
so it would seem to me, as the question that arises when
considering the application of paragraph 18(1)(a) which
requires that the purpose of the expense be to earn income
- from a source. In any event, in a recent Informal
Procedure case, Heard vs Canada 2001 T.C.J. No. 554, Judge
Miller found that the reasonable expectation of profit doctrine
should not be applied during a reasonable wind-up period. I
endorse this view and suggest that it implicitly accepts the
deductibility of expenses during a reasonable wind-up period
where the income from a prior source has been cut off.
Paragraph 18(1)(a) would dictate a contrary view
unless it too allowed that the purpose of an expenditure can be
tied to the purpose of holding the property which includes
historical purpose where no new purpose overrides.
[35] The
McGovern case referred to by the Appellant supports this
view to some extent as well. As in the case at bar, the sell-off
in McGovern was due to changing economic conditions
resulting from events beyond the taxpayer's control. Unlike
the case at bar, in McGovern, the taxpayer did continue
some rental activity during the sell-off phase. Expenses (losses)
were allowed. While the factual difference of having some rental
receipts is not immaterial, I am inclined to apply the principle
of that case to the facts here. The Appellant in the case at bar
could not reasonably be expected to derive any rents because it
was unrentable in the course of holding it as a rental property.
The obligations attaching to this income source did not disappear
just because the revenue ceased. The analogy to McGovern
is valid, in my view, regardless that in the case at bar there
were no revenues in the subject years.
[36] My
preoccupation with paragraph 18(1)(a) this far stems from
a problem I have with the Respondent's approach in applying
subsection 18(3.1). On the one hand, the Respondent asserts that
the Appellant did not have the requisite purpose in incurring the
subject expenses since he had taken the property off the rental
market and held it only for sale. On the other hand, the
Respondent wants subsection 18(3.1) to apply. However that
subsection cannot apply in my view if
paragraph 18(1)(a) applies to deny the subject
expense claims. Subsection 18(3.1) denies deductions
notwithstanding any other provision of the Act. It cannot,
in my view, apply to expenses already denied by any other
provision of the Act. To read this provision otherwise
would permit capitalizing non deductible expenses. Personal
expenses for example could be capitalized under this provision if
it did not implicitly require that the expense be otherwise
deductible. In applying subsection 18(3.1) then it seems that the
Respondent's principal assessing position has to be that
paragraph 18(1)(a) does not apply.[1] I am it seems applying my best
efforts to agree with the Respondent lest I put the Appellant in
the position of being in a worse position for having come to
Court than he would have been in had he not appealed.
[37]
Subsection 18(3.1), and subsection 18(3.3) which the amended
Reply makes reference to as well, read as follows:
(3.1) Costs relating to construction of building or
ownership of land
Notwithstanding any other provision of this Act, in computing
a taxpayer's income for a taxation year,
(a) no deduction shall be made in respect of any outlay
or expense made or incurred by the taxpayer (other than an amount
deductible under paragraph 20(1)(a), (aa) or (qq) or subsection
20(29)) that can reasonably be regarded as a cost attributable to
the period of the construction, renovation or alteration of a
building by or on behalf of the taxpayer, a person with whom the
taxpayer does not deal at arm's length, a corporation of
which the taxpayer is a specified shareholder or a partnership of
which the taxpayer's share of any income or loss is 10% or
more and relating to the construction, renovation or alteration,
or a cost attributable to that period and relating to the
ownership during that period of land
(i) that is subjacent to the building, or
(ii) that
(A) is immediately contiguous to the land subjacent to the
building,
(B) is used, or is intended to be used, for a parking area,
driveway, yard, garden or any other similar use, and
(C) is necessary for the use or intended use of the building;
and
(b) the amount of such an outlay or expense shall, to
the extent that it would otherwise be deductible in computing the
taxpayer's income for the year, be included in computing the
cost or capital cost, as the case may be, of the building to the
taxpayer, to the person with whom the taxpayer does not deal at
arm's length, to the corporation of which the taxpayer is a
specified shareholder or to the partnership of which the
taxpayer's share of any income or loss is 10% or more, as the
case may be.
(3.3) Completion
For the purposes of subsection (3.1), the construction,
renovation or alteration of a building is completed at the
earlier of the day on which the construction, renovation or
alteration is actually completed and the day on which all or
substantially all of the building is used for the purpose for
which it was constructed, renovated or altered.
[38] These
provisions were enacted to prevent soft cost deductions during
construction[2]. As
noted, they were not intended to alleviate hardships and that
being the case there are some difficulties in applying these
provisions to the case at bar.
[39] The costs
or expenses being denied by the application of subsection 18(3.1)
must be related to the construction, renovation or alteration of
a building (which is not the case here) or be costs or
expenses that must, firstly, be attributable to the period of
construction, renovation or alteration ("construction
period expenses"), and, secondly, be construction
period expenses "relating to the ownership during that
period of land that is subjacent" to that building.[3]
[40] As to the
second requirement for applying subsection 18(3.1) to
construction period expenses, the property taxes and condominium
fees claimed by the Appellant in this case relate, in large
measure at least, to the ownership of land that is subjacent to
the building in which the Appellant owned his unit during the
repair period. Arguably all such expenses "relate" to
the ownership of such subjacent lands even though part of such
expenses might be attributable to common areas or even lands
subjacent to other buildings. [4]
[41] As to the
first requirement for applying subsection 18(3.1) to construction
period expenses, there is no doubt that the subject years fall
within a period when the Shoreline complex was undergoing
substantial repairs. Is that a period of "construction,
renovation or alteration"? That question might be more
easily answered except what work was actually done during the
subject years is not in evidence. Still, the probability is that
extensive repairs were being done at least to the complex that
included "buildings". In terms of the broader question,
as to whether the period that repairs were undertaken is a period
of "construction, renovation or alteration of a
building", the Canadian Oxford Dictionary includes in the
meaning of the word "renovate" an act to
"restore to good condition; repair". The extensive
nature of the repairs, necessitated by damage from external
forces, lend them to being described as a "restoration to
good condition" project. Such extensive repairs over such
extended period might even constitute a period of
"construction".
[42]
Subsection 18(3.3) suggests that the "construction,
renovation or alteration" being referred to in subsection
18(3.1) be such as to prepare it (a building) for a use after
completion of the work. This implies an inability to use the
property for that use during the construction period. That period
is over when the property being constructed, renovated or altered
"is used for the purpose for which it was constructed,
renovated or altered". What is that purpose where the work
is being undertaken for many owners each with a different use of
their respective unit? In this case, the use must, in my view, be
the quiet, safe enjoyment of the unit affording complete
utilisation including rental use which, in respect of the
Appellant, did not occur until 2001. It seems then that the
subject expenses are capable of being found to be construction
period expenses in the subject years.
[43] As I
stated at the outset, I have found the subject reassessment
difficult and challenging and has resulted in a finding, without
the desired conviction, that denying the appeal pursuant to
subsection 18(3.1) is what is required. This appeal might best
have been dismissed from the bench by simply adopting the views
of the appeals officer since, in the circumstances, I agree that
the best result is to apply subsection 18(3.1).
[44] There is
one remaining issue to deal with which is the application of
paragraph 18(1)(h) of the Act.
[45] Schedule
B to the Reply denies $99 and $100 of motor vehicle expenses
(while in Florida) for 1997 and 1998 respectively as personal
expenses as well as $45 and $801 respectively for travel expenses
(getting to and from Florida). Further, a portion of all other
rental expenses (condo fee, property taxes and utilities) are
denied as personal as well. The portion disallowed as personal is
one twelfth to reflect the one month each year that the Appellant
lived in the unit. This part of the reassessment shall stand as
well. Travel and motor vehicle expenses are properly denied as
they cannot likely relate to anything other than personal use
given that there was no rental activity in the subject years.
These expenses do not relate to the holding of the property even
in the prospect of having future income potential. As to the
Respondent's treatment of the other expenses noted above,
apportioning one twelfth as personal, I find that to be
reasonable.
[46]
Accordingly the appeals are dismissed.
Signed at Ottawa, Canada, this 21st day of March 2002.
"J.E. Hershfield"
J.T.C.C.
COURT FILE
NO.:
2001-2037(IT)I
STYLE OF
CAUSE:
Anis Mikhail and
Her Majesty the Queen
PLACE OF
HEARING:
Winnipeg, Manitoba
DATE OF
HEARING:
December 10, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge J.E. Hershfield
DATE OF
JUDGMENT:
March 21, 2002
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Angela Evans
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-2037(IT)I
BETWEEN:
ANIS MIKHAIL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on December 10, 2001 at Winnipeg,
Manitoba, by
the Honourable Judge J.E. Hershfield
Appearances
For the
Appellant:
The Appellant himself
Counsel for the Respondent: Angela
Evans
JUDGMENT
The
appeals from assessments made under the Income Tax Act for
the 1997 and 1998 taxation years are dismissed in accordance with
the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 21st day of March 2002.
J.T.C.C.
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