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Citation: 2004TCC625
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Date: 20041102
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Docket: 2001-3616(IT)G
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BETWEEN:
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THOMAS LEE,
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Appellant,
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And
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HER MAJESTY THE QUEEN,
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Respondent.
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____________________________________________________________________
For the Appellant: The Appellant himself
Counsel for the Respondent: Andrea Jackett
____________________________________________________________________
REASONS FOR JUDGMENT
(Delivered orally from the Bench on
June 14, 2004, at Toronto,
Ontario)
Mogan J.
[1] This is an appeal with respect to
the 1997 taxation year of Thomas Lee. The only witness in this
appeal was Mr. Lee himself and he identified himself as a
software engineer. He was employed in Canada in 1997 receiving an
above average income as an employee. Mr. Lee now resides in the
state of Texas, in the U.S.A. and he explained that he moved to
Texas in 1999 for employment purposes.
[2] In filing his income tax return
for 1997, Mr. Lee reported his employment income in Canada and he
also included a Revenue Canada form T776, Statement of Real
Estate Rentals, for a rental property identified as Windjammer,
Units 314 and 316, 1400 Gandy Blvd. in St. Petersburg,
Florida. For those properties, he showed the number of units as
two, the gross rents as $520, and the only expense he claimed was
for interest in the amount of $1,562.84 resulting in a net loss
of $1,042.84. Also, he claimed a terminal loss of $54,800 on the
disposition of these properties.
[3] The Appellant stated that around
1991, he purchased two condominium units in St. Petersburg,
Florida without having seen them. He listened to a real estate
salesman about the possibility of earning rental income and,
therefore, he raised $15,000 in cash; arranged an American
mortgage on the properties through a company identified as
Intellivest Group; and he borrowed $31,400 from the Laurentian
Bank. With the two mortgages from Intellivest and the loan from
the Laurentian Bank plus his cash down payment of $15,000, he
purchased these two units in 1991 without seeing them. He then
reported gross rents and a loss for each of the years from 1991
up to and including 1996.
[4] In 1997, he decided that he would
not keep the properties any longer. They had shown nothing but
losses every year and so he stopped making any payments on the US
mortgage knowing that it would be foreclosed. He was content to
get out of the properties on that basis. The mortgage was
foreclosed and there was entered as Exhibit R-3 a Warranty Deed
dated September 4, 1998 between Bankers Trust Company, as trustee
for Mortgage Pass Through Certificates, and there is a series of
them, and another group called Residential Solutions Inc., a
Florida corporation. It recites a number of properties including
both Units 314 and 316 in Building 3 which are the two units
which Mr. Lee claims that he purchased, and the Warranty Deed
seems to transfer property to someone I assume is either the
mortgagee or some other third party.
[5] I now return to the
Appellant's 1997 income tax return which is Exhibit R-4 and
his claim for a terminal loss of $54,800. When he was asked by
counsel for the Respondent how he determined the terminal loss of
$54,800, he said he started with the Laurentian Bank loan for
$31,400 in support of which he produced a copy of a Floating Rate
Demand Note with General Trust dated January 17, 1992
(Exhibit R-1), which stated on page 4:
The undersigned hereby acknowledges having applied to General
Trust Corporation of Canada for an equity loan in the principal
amount of ...
And then the Appellant has ticked $15,700 for a property
identified as Renoir Unit B, a style of the condominium he
purchased, and since he bought two of them he had a $15,700 loan
with respect to each, for a total of $31,400. Again on
page 4, the following statement appears:
The Equity Loan, in part, finance the purchase by the
undersigned from Intellivest Realty Corporation (the Vendor) of a
beneficial interest in and to a unit in the real estate
syndication ... of Windjammer Condominium Units.
..."
Therefore, Exhibit R-1 from General Trust confirms the amount
borrowed with respect to Windjammer Condominium Units; and
Exhibit R-3, which is the Warranty Deed, refers to certain units
including Units 314 and 316 in Building 3, a condominium
according to the Declaration of Condominium, recorded in the
Official Records for Pinellas County, Florida.
[6] So there is outside third party
documentation linking the Appellant with those units at
Windjammer. Exhibit A-1 is a document he downloaded from the
Pinellas County records also showing his name in connection with
Units 314 and 316, Windjammer. Exhibit R-1 is the floating rate
demand note; Exhibit R-2 being the Laurentian Bank statement for
August 1998 showing a balance of $31,400; Exhibit R-3 being the
Warranty Deed referring to those units being foreclosed in
Windjammer; and Exhibit R-4 which is the Appellant's tax
return identifying Windjammer as the rental properties.
Therefore, I am satisfied from the external documentation and the
credibility of the Appellant himself that he did own properties
in St. Petersburg, Florida from 1991 to 1996. Counsel for the
Respondent stated in argument that she did not suggest the
Appellant was not credible. In my opinion, that was a prudent
statement by counsel because it is the responsibility of every
barrister to make some kind of appraisal of a witness, and the
Respondent's counsel's appraisal of the Appellant as a
witness is consistent with my own. I found him to be
credible.
[7] Another area of corroboration for
the Appellant's evidence is the fact that in paragraph 15(c)
of the Reply to the Notice of Appeal, there is a statement of the
rental losses which he deducted from 1991 to 1996 and his
testimony is that they were allowed each year and never
disallowed as a loss deduction by Revenue Canada. Perhaps Revenue
Canada did not get around to auditing the Appellant, but there is
an acceptance on the part of the Respondent that the Appellant
was not only claiming the losses each year but Revenue Canada was
allowing them and must have been satisfied that there was some
justification for his claiming them. It would take a particularly
outrageous act of effrontery for a taxpayer to claim losses like
this without any justification whatsoever if he did not own the
properties.
[8] Also, the losses for a man earning
the Appellant's kind of income, were tolerably low in the
sense that they were well under $8,000, some of them being as low
as $2,800 and $3,500. They are not the kind of losses that would
have necessarily excited the interest of Revenue Canada given the
size of the Appellant's income. I therefore conclude that the
Appellant is a believable witness, that he made an investment in
real property in Florida, and that he suffered a significant loss
on the disposition of that property.
[9] There are two or three questions
which arise though in terms of measuring the kind of relief which
the Appellant might obtain. One question raised by counsel for
the Respondent was whether the Appellant claimed the loss in the
right year. If he suffered a loss, did it happen in 1997 or 1998?
Secondly, she raised the argument of whether the loss is all his
because some of the documents indicated that the property might
have been registered in the name of the Appellant and his wife.
And thirdly, she questioned whether he could document enough of
the loss to justify the amount claimed. The Appellant claimed
$54,800 as a total loss in his tax return but in his Notice of
Appeal he claimed only $31,400. He indicated "I only
claimed that because it is the only one I can really prove, even
though I did pay $15,000 in cash". There is a fourth
question and that is, assuming that he has this cost and if it
was for rental purposes, to what extent does it relate to
depreciable property which might give rise to a terminal loss,
and to what extent does it give rise to non-depreciable property
like land or the common elements of a condominium building?
[10] The Appellant did say that in all the
years he deducted the losses, he never claimed capital cost
allowance, probably because the actual expenses laid out each
year exceeded the revenues. He also said that he filed with his
tax return a statement from the management corporation in Florida
which managed the rental of his two units and he simply used that
statement as a vehicle for measuring his loss which probably, in
my speculation, would count only actual cash revenue and cash
outlays and not take into account the depreciation, or capital
cost allowance as it is known for income tax purposes.
[11] Therefore, I will allow part of the
Appellant's appeal on the basis that the properties were
actually purchased and that he had a business purpose in them
because he said he never saw them before he bought them and only
saw them once in 1995 when he and his wife took their children to
Florida. They saw the properties but did not stay in them because
they were rented and so he has never used them personally. In my
view, the Appellant has not offered sufficient evidence to
justify a terminal loss claim of $54,800. That amount is simply
not sustainable.
[12] Counsel for theRespondent brought to my
attention a well-known but brief decision of the Federal Court of
Appeal in Njenga v. The Queen, 96 DTC 6593,
which emphasized the need to prove amounts for losses claimed.
She also referred me to a particular decision which followed that
by Justice Miller of the Tax Court of Canada in Quaidoo
v. The Queen, [2004] 1 C.T.C. 2540. I am going to read a
passage from Justice Miller's judgment because it shows the
danger in a case like this and the exception, which I think the
Appellant has met here. Justice Miller says at paragraph 19,
referring to the taxpayer:
... his lack of record keeping, the oddity of invoices as
receipts, his vagueness as to exactly what goods were acquired
and how, his vagueness as to the nature of the business as a
proprietorship or partnership, and if the latter with whom,
leaves me unable to rely solely on his oral testimony as to his
expenditures. ...
And the appeal was dismissed.
[13] As I have already indicated, I do not
have to rely on the oral testimony alone of the Appellant because
there are so many documents in evidence which corroborate his
story; and I refer to Exhibit R-1, the floating rate demand note;
Exhibit R-2, the statement of the Laurentian Bank showing $31,400
owing; Exhibit R-3, the Warranty Deed foreclosing on those
units; Exhibit R-4 which is a tax return showing that the
Appellant at the time simultaneously claimed a loss with respect
to the Windjammer; and Exhibit A-1 which is a document he
downloaded from Pinellas County in Florida showing his name on
title for Units 314 and 316.
[14] I accept that the Appellant had a cost
of $31,400 with respect to the Laurentian Bank loan and that he
lost that money when he permitted the first mortgagee in the US
to foreclose on the mortgage. That amount is, in my view, a
proven loss. I also assume that no person could get mortgage
money in Canada without some kind of down payment or equity in
the property. That is to say, accepting the fact that he has
proven that he borrowed $31,400 for these properties, I cannot
imagine the Laurentian Bank or General Trust would have loaned
him the full amount of the remaining balance after the first
mortgage in the US. In other words, most banks that are going to
advance money will advance up to 70 or 80 or 90% but, they want
the buyer to put in some of his own money as a hedge against the
loan. I do not know what amount is reasonable but, given the fact
that the Laurentian Bank was lending $15,700 on each unit, for a
total of $31,400, I would assume that they would want him to
advance at least half of that for each unit which is $7,500 each,
or $15,000 altogether, and that is the amount he mentioned. He
stated, "I had to put up a $15,000 down payment" and
that kind of ties in, in my view, with the financing proven in
the documents because he would have to put up on each unit at
least half of the amount the Laurentian Bank put up. So for each
unit, the Appellant put up $7,500 and Laurentian Bank put up
$15,700 which is approximately double his amount.
[15] Therefore, I am going to accept his
oral evidence in all of the circumstances supported by the
documentary evidence that he had to put up a cash down payment
and I accept his evidence of $15,000. The Appellant therefore has
proven to my satisfaction an investment of $31,400 plus $15,000
or $46,400 in these Florida properties. I am satisfied that that
is the amount he lost when they were foreclosed by the US
mortgagee and that he has suffered that loss. But that is the
only amount of loss he has proven here in court today. Therefore,
I accept the loss at $46,400.
[16] In my view, I have to regard that
amount as a capital loss because I do not know how to take that
amount and allocate it between depreciable property and
non-depreciable property when there is no method of
determining how the accounting of the Windjammer condominium
corporation was set up at the time these properties were acquired
around 1991 and 1992. So I am going to call it a capital
loss.
[17] On the other two issues that have
troubled me, which were raised by counsel for the Respondent, I
am going to accept the loss of the Appellant alone and not share
it 50/50 with his wife because his name is the one that appears.
First of all, he claimed the loss himself in the years under
appeal as acknowledged in the Reply to the Notice of Appeal. In
the demand note, (Exhibit R-1), it shows the borrowers as Thomas
and Tracey Lee. In the Laurentian Bank statement it shows the
clients of the bank as Thomas and Tracey Lee. The Appellant's
name does not appear at all in Exhibit R-3 but his is the only
name which appears in the Pinellas records, (Exhibit A-1), and he
said he was the one who deducted the losses in each year, and he
spoke of the properties as his own. Therefore, I think that while
the banking people may have wanted his wife to sign on for bank
loans more or less to guarantee the amounts they were lending to
him and to protect the bank, I accept the fact that the property
belonged to the Appellant alone and therefore the losses are his
alone.
[18] Lastly, the question of whether the
loss was suffered in 1997 or 1998, I am going to give the
Appellant the benefit of the doubt because in 1997, in his mind,
he abandoned the properties when he stopped making payments on
the US mortgage. He said that he gave up that year and that is
why he claimed the loss in that year. He knew he would be
foreclosed by the mortgagee in the US and that he would have to
then make good from his own resources in paying back the
Laurentian Bank. But I gather it was a non-recourse loan in the
US so that he was not personally liable on the first mortgage
beyond the property itself. So that once it was foreclosed, he
probably had no further liability to the American mortgagee, but
of course he did have a personal liability to the Laurentian Bank
which he paid off. Therefore, because there is no way to allocate
this between depreciable property which might give rise to a
terminal loss, and other capital property which is not
depreciable property, I am going to regard the whole amount of
the $46,400 as a capital loss suffered in the 1997 taxation year,
and that is the extent of the relief that I can grant the
Appellant.
[19] The Appellant will be granted a capital
loss of $46,400 which would translate into an allowable capital
loss of some lesser amount. I believe it is about 75% for the
year that we are talking about. So I believe the Appellant will
get an allowable capital loss equal to 75% of $46,400 which will
be about $34,800. Therefore, the appeal is allowed in part with
no costs to either party. I will not grant costs to the Appellant
because he obtained only partial relief; and I will not grant
costs to the Respondent because the appeal was allowed
substantially to the extent of granting an allowable capital loss
of about $34,000.
Signed at Ottawa, Canada, this 2nd day of November,
2004.
Mogan J.
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