[OFFICIAL ENGLISH TRANSLATION]
Date: 20010925
Docket: 2000-2291(IT)I
BETWEEN:
STÉPHANE MALTAIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the Bench
on June 26, 2001, at Québec,
Quebec,
and edited for clarity and
completeness)
Archambault, J.T.C.C.
[1] Stéphane
Maltais is challenging the income tax assessments made by the
Minister of National Revenue (the Minister) for the 1996,
1997 and 1998 taxation years (years at issue). In respect
of each of these taxation years, he claimed a deduction for
rental losses relating to a property located at 115-117 St-Louis
Street in Beaupré (the property or the
duplex). The Minister disallowed these deductions on the
grounds that Mr. Maltais did not have a reasonable expectation of
gaining or producing an income from the property.
Facts
[2] At the outset of
the hearing, Mr. Maltais admitted all the facts stated by
the respondent in the Reply to the Notice of Appeal, with the
exception of subparagraphs (d), (l), (m) and (n) of the relevant
paragraph. The following are the facts that were admitted:
[TRANSLATION]
(a)
the appellant owns a two-unit house located at 115-117
St-Louis Street in Beaupré;
(b)
the appellant lives in the lower unit, and the upper unit is
intended to be rented;
(c)
since 1991, the appellant has earned the following income from
the upper unit:
|
YEAR
|
GROSS RENTAL INCOME
|
RENTAL LOSSES
|
|
1991
|
$3,000
|
($2,358)
|
|
1992
|
$3,000
|
($2,239)
|
|
1993
|
$3,000
|
($2,571)
|
|
1994
|
$1,500
|
($2,054)
|
|
1995
|
$0
|
($6,220)
|
|
1996
|
$0
|
($4,668)
|
|
1997
|
$0
|
($5,087)
|
|
1998
|
$2,000
|
($3,418)
|
(e)
at all material times, the appellant worked as a papermaker for
Abitibi-Price;
(f) the unit
stood vacant from July 1994 to December 1997 inclusive;
(g)
beginning in January 1998, the appellant rented the unit to a
friend for a monthly rental of $200;
(h)
the appellant claimed 50% of the following expenses as rental
expenses:
|
DESCRIPTION
|
1996
|
1997
|
1998
|
|
Insurance
|
$490.00
|
$490.00
|
$462.00
|
|
Interest
|
$5,898.67
|
$6,471.77
|
$7,343.05
|
|
Property taxes
|
$552.53
|
$1,519.22
|
$1,336.29
|
|
Public utilities
|
$1,695.00
|
$1,695.00
|
$1,695.00
|
(i) the gross
annual rental income for the property was always in deficit as
against the corresponding fixed charges:
|
Gross income
|
$0.00
|
$0.00
|
$2,000.00
|
|
Fixed charges
|
$8,986.23
|
$10,175.99
|
$10,836.34
|
|
Deficit
|
$8,986.23
|
$10,175.99
|
$8,836.34
|
(Note that the appellant claimed 50% of these
fixed charges as rental expenses)
(j) the balance
on the mortgage for the property located at
115-117 St-Louis Street was
$67,809.71 at January 1, 1996;
(k)
the municipal assessment in effect for 1995, 1996 and 1997 was
$60,020.
[3] In his testimony,
Mr. Maltais described the circumstances surrounding the
acquisition of the property. It was purchased in 1990 for
$52,500, an amount that was entirely borrowed by Mr.
Maltais, his mother having guaranteed 10% of the purchase price.
Monthly payments (capital and interest) amounted to approximately
$400.
[4] At the time the
property was purchased, the unit on the upper floor (upper
unit) was occupied by a tenant who had lived there for 23
years. The rent was $200 a month. Once he became the new owner,
Mr. Maltais persuaded the tenant to agree to a $50 monthly
increase in the rent. Mr. Maltais occupied the unit on the
ground floor (lower unit) with his spouse. A few years
later, in 1995, they had a child.
[5] Unfortunately for
Mr. Maltais, the tenant left his apartment in June 1994, and
it remained vacant until the end of 1997. Various attempts were
made to find another tenant: a big sign was put up on the
property and advertisements were placed in newspapers, including
the Journal de Québec and the Beaupré
Express. In addition, a notice was put up at Mr. Maltais'
workplace and at the credit union.
[6] Mr. Maltais
explained the problems he had in renting the upper unit. First of
all, the supply of rental units exceeded demand. A substantial
number of condominiums and other properties located in Mont
Sainte-Anne, at one kilometre from Beaupré, meant that
landlords in the area faced stiff competition.
[7] Moreover, the
unit badly needed to be fixed up. After his tenant left,
Mr. Maltais undertook renovation work not just on the upper
unit but also for the property as a whole. Among other things, he
replaced the windows and insulated the façade and the
attic of the house. Mr. Maltais described the work done in
the upper unit. In particular, he renovated the bathroom in
1995-1996, at a total cost of approximately $2,000. In late 1996
or early 1997, he installed a new wood floor to replace the
carpeting, except in two bedrooms where he laid new carpeting
instead. The cupboards were replaced in 1998-1999. Most of
the renovation work was done by Mr. Maltais himself, with
the help of a friend with whom he traded services.
[8] The upper unit
was rented to a friend in 1998 for a rent below the market rent.
This person lived there only on a temporary basis and had refused
a long-term lease. They agreed instead on a month-to-month lease.
The upper unit became vacant once more beginning in March 1999
and was rented again in July 2000 for $275 a month. The rent was
increased to $300 beginning on July 1, 2001.
[9] In addition to
the problems he had experienced in finding a new tenant,
Mr. Maltais talked about the difficulties that had prevented
him from carrying out
his initial plan. He had planned to repay the
loan sooner than the 20-year amortization period provided for in
the contract. Among other things, there was a strike in 1998 that
apparently lasted about six months. During this time, the monthly
payments were funded by the credit union. In addition,
Mr. Maltais separated from his spouse in 2000 and thus had a
difficult time.
[10] In her audit report,
the auditor acknowledged that Mr. Maltais had received no
personal benefit from renting the upper unit. Mr. Maltais
also confirmed in his testimony that he had not planned on
renting the upper unit to family members and that family members
had not occupied that unit at any time.
[11] Mr. Maltais said
that, when he purchased the property, he had no knowledge of the
tax benefits that could be procured from the rental of a duplex.
His objective was to make the rental of the upper unit profitable
and, eventually, even to rent out the lower unit.
Analysis
[12] The fundamental issue
raised by this appeal is whether Mr. Maltais had a
reasonable expectation of profit. Obviously, this is basically a
question of fact. However, in order to answer it, the principles
laid down by the courts must be applied. To begin with, there is
the decision of the Supreme Court of Canada in Moldowan v. The
Queen, [1978] 1 S.C.R. 480. The clarifications made
by the Federal Court of Appeal in, inter alia, Tonn v.
Canada, [1996] 2 F.C. 73, should also be taken into account.
In that case, the Court of Appeal indicated that, unless there
were personal elements, the courts should apply the reasonable
expectation of profit test more sparingly. Furthermore, the
courts must act with caution in assessing taxpayers' conduct. I
also believe that, in the case at bar, it is important to go back
to the time the property was purchased to determine whether the
rental of the upper unit could give rise to a reasonable
expectation of profit. Obviously, this is a question that must be
asked again for each year in respect of which a deduction for
losses is claimed.
[13] No personal benefit
resulting from the acquisition of the property can be found in
the instant case, as there was in one of my earlier decisions,
Lussier v. The Queen, 2000 CarswellNat 3661. In
Lussier, the taxpayer had purchased a property with the
intention of renting it to members of his family. The case at bar
concerns a mixed-use project, involving the use of the lower unit
for personal purposes and the upper unit for rental purposes.
[14] In argument, counsel
for the respondent submitted that purchasing the duplex could
provide a personal benefit to Mr. Maltais in that he could
also benefit from a form of indirect subsidy given to taxpayers
by the Canadian tax system in allowing them to purchase a duplex
when it would have been hard for them to purchase a single-family
home. Since the purchase price for a single-family home in the
Beaupré area had not been established when the evidence
was taken, I have allowed the evidence to be reopened, at the
request of counsel for the respondent and with the consent of
Mr. Maltais. In his testimony, Mr. Maltais indicated that,
at the time that he purchased the duplex, he had looked at some
single-family homes in Beaupré. According to him, it would
have been possible to purchase a single-family home for a cost of
between $25,000 and $30,000. In view of this evidence, I think it
is difficult to affirm that the tax system directly or indirectly
subsidized Mr. Maltais in the purchase of a unit for
personal purposes since he could have purchased a single-family
home for approximately half of the purchase price for the
duplex.
[15] In these
circumstances, I believe it is important to follow the approach
taken by the Federal Court of Appeal and to apply the reasonable
expectation of profit test more sparingly. While Mr. Maltais
may possibly have made a bad decision in purchasing the property
in 1990, the Court, no more than the Minister, can question his
judgment after the fact. It is not unreasonable to think that
Mr. Maltais might have had a reasonable expectation of
profit in 1990. Furthermore, that expectation did not disappear
during the years at issue.
[16] It is clear that a
taxpayer cannot go on incurring losses alone, year after year.
There comes a time when one must take stock and make the
decisions that are in order. Consequently, if the losses were to
continue, the question of whether half of the duplex was a source
of income could be raised again in future years. However, with
regard to the years at issue, I am prepared to give
Mr. Maltais the benefit of the doubt and to allow the
appeal.
[17] For all these reasons,
the appeals of Mr. Maltais are allowed and the assessments
for the 1996, 1997 and 1998 taxation years are referred back to
the Minister for reconsideration and reassessment on the basis
that Mr. Maltais had a reasonable expectation of earning a profit
from the rental of half of his property located at 115-117
St-Louis Street in Beaupré.
Signed at Montréal, Quebec, this 25th
day of September 2001.
J.T.C.C.
Translation certified true
on this 30th day of January 2003.
Sophie Debbané, Revisor
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