Date: 20010803
Docket: 2001-795-IT-I
BETWEEN:
DOREEN LONDON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1]
These appeals are from assessments for the 1996, 1997 and 1998
taxation years. By those assessments the Minister of National
Revenue disallowed losses claimed by the appellant on the basis
that the losses incurred from the rental of a portion of her
principal residence were not losses from a business because she
had no reasonable expectation of profit ("REOP").
[2]
The appellant bought a house at 10 Giffen Place, Brampton,
Ontario, in 1989 for $292,000 with a down payment of $65,000 and
a five-year mortgage of $227,000 at an interest rate of 8.25%. In
1996 the opening balance was $260,026 and on December 31,
1998 it was $242,821. The increase in the amount of the mortgage
appears to have been the result of the bank's adding accrued
and unpaid interest to the principal.
[3]
The house was an ordinary two-storey residence. The basement had
two bedrooms, a living and dining room, a kitchen, and a
bathroom. The first floor had a kitchen, living room, family room
and sunroom which was to be used for rental purposes. The dining
room was used for personal purposes and the laundry room was used
for everyone in the house. The second floor had a bathroom, a
bedroom with an ensuite bathroom and three other bedrooms.
[4]
The appellant stated that she bought the property in 1989 with a
view to selling it at a profit. However with the downturn in the
real estate market she was unable to do so and therefore she
rented it. She treated it as her personal residence throughout
and finally sold it in 1999 at a loss.
[5]
In the years in which she owned the property she reported the
following income, expenses and losses:
YEAR GROSS
RENTS
EXPENSES
RENTAL LOSSES
1989 $
1,800.00
$
5,207.00
$ 3,407.00
1990 $
6,000.00
$24,095.00
$18,095.00
1991 $
3,850.00
$22,258.00
$18,408.00
1992 $
4,380.00
$27,492.00
$23,112.00
1993
$11,480.00
$22,802.00
$11,322.00
1994
$12,005.00
$22,737.00
$10,732.00
1995 $
8,845.00
$22,518.00
$13,673.00
1996 $
5,220.00
$22,458.00
$17,238.00
1997 $
1,500.00
$20,101.00
$18,601.00
1998 $
5,200.00
$17,255.00
$12,055.00
[6]
The appellant allocated 80% of all expenses to the rental
operation. The pleadings do not raise the question of
reasonableness but on the evidence that I heard I should have
thought that this percentage was high. At all events the Minister
did not question the returns until 1996.
[7] A
large part of the expenses was for mortgage interest. In 1996,
1997 and 1998 the interest was $21,725, $19,398 and $12,939
respectively.
[8]
The appellant said that in 1998 a tenant by the name of Croasdan
(or something of the sort - she was not too clear) occupied
two bedrooms and the ensuite on the second floor and that he
moved out without paying his rent but she said she was able to
collect $8,000 from him in 1999 after he left. She showed me a
T-1 adjustment for 1998 which she prepared but never submitted to
the tax authorities adjusting her receipts by $8,000, so that the
loss for 1998 would have been only about $4,000.
[9]
Counsel suggested that Mr. Croasdan was a figment of the
appellant's imagination, that he never really existed or
occupied the premises and the $8,000 that the appellant allegedly
collected in 1999 was simply dreamt up to make the financial
results of 1998 look better.
[10] I suppose
this hypothesis is not impossible, but I do not lightly make
adverse findings of credibility against a witness without cogent
evidence. I am prepared to accept the reality of the mysterious
Mr. Croasdan but as will become apparent later in these
reasons it does not make any difference to the final result
whether I do or not.
[11] In
September, October and November 1998 the appellant's son
Lucius lived in one room on the second floor and paid the
appellant $550 per month. From January to May, 1998 the
appellant's son Lucius' common-law wife, Lisa Bedley,
lived in the same room but she moved out without paying the
$2,500 rent for the five months. She also lived there from June
to December of 1997 but only paid $1,500 rent out of the $3,500
owing. The appellant kept Lucius' two children with her in
the basement.
[12] In 1998
she received rent from one Delon Griffith in the amount of
$3,550.
[13] Counsel
for the respondent called a Mr. Hall of CCRA and he
established that all three of the appellant's children,
Lucius, Deborah and Carlisle, used 10 Giffen Place,
Brampton, as their mailing address for their income tax returns
and that also some T-4 slips from their employers were sent to
that address. From this he asks me to infer that the children
were all living at 10 Giffen Place.
[14] Such an
inference is not justified. These days children move about
frequently. The only thing permanent is their parents' home.
Using that as a mailing address does not prove they live
there.
[15] Counsel
also argued that the appellant gave between $7,000 and $17,000 in
each year under appeal to her church or to other charitable
causes. He suggests that with a relatively small income she
should have used that money to pay down her mortgage.
[16]
Mrs. London struck me as a woman of extreme compassion and
generosity. She allowed Lisa and her children to live at her
house rent-free for extended periods. She testified - and I
believe her - that she often went hungry so that other
people could eat.
[17] Her gifts
to the church are one aspect of this predisposition. I am
certainly not, in an income tax appeal, going to draw and adverse
inference from the fact that where the appellant, in choosing
between God, Caesar, the money-lenders and mammon, followed the
admonition in Matthew 6:24 and chose God.
[18] However
admirable Mrs. London may be — and she certainly is
— and however persuasive Mr. Fitz-Andrews may have
been — and he certainly was — I do not think that it
can reasonably be said that the appellant was carrying on a
business that would entitle her to deduct the substantial losses
that she sustained in the years in question.
[19] I say
this for several reasons. In the first place, I do not think that
it meets the test of a business enunciated in Kaye v. The
Queen, 98 DTC 1659 at 1660:
[4] I
do not find the ritual repetition of the phrase particularly
helpful in cases of this type, and I prefer to put the matter on
the basis "Is there or is there not truly a business?"
This is a broader but, I believe, a more meaningful question and
one that, for me at least, leads to a more fruitful line of
enquiry. No doubt it subsumes the question of the objective
reasonableness of the taxpayer's expectation of profit, but
there is more to it than that. How can it be said that a driller
of wildcat oil wells has a reasonable expectation of profit and
is therefore conducting a business given the extremely low
success rate? Yet no one questions that such companies are
carrying on a business. It is the inherent commerciality of the
enterprise, revealed in its organization, that makes it a
business. Subjective intention to make money, while a factor, is
not determinative, although its absence may militate against the
assertion that an activity is a business.
[5]
One cannot view the reasonableness of the expectation of profit
in isolation. One must ask "Would a reasonable person,
looking at a particular activity and applying ordinary standards
of commercial common sense, say 'yes, this is a
business'?" In answering this question the hypothetical
reasonable person would look at such things as capitalization,
knowledge of the participant and time spent. He or she would also
consider whether the person claiming to be in business has gone
about it in as orderly, businesslike way and in the way that a
business person would normally be expected to do.
[6]
This leads to a further consideration — that of
reasonableness. The reasonableness of expenditures is dealt with
specifically in section 67 of the Income Tax Act, but it
does not exist in a watertight compartment. Section 67 operates
within the context of a business and assumes the existence of a
business. It is also a component in the question whether a
particular activity is a business. For example, it cannot be
said, in the absence of compelling reasons, that a person would
spend $1,000,000 if all that could reasonably be expected to be
earned was $1,000.
[7]
Ultimately, it boils down to a common sense appreciation of all
of the factors, in which each is assigned its appropriate weight
in the overall context. One must of course not discount
entrepreneurial vision and imagination, but they are hard to
evaluate at the outset. Simply put, if you want to be treated as
carrying on a business, you should act like a businessman.
[20] Second,
there is a very significant personal element here. The appellant
used it as her personal residence and her son and his common-law
wife lived there from time to time.
[21] Third,
the way the appellant ran the rental operation did not look much
like a business. Very little advertising was done, the
bookkeeping ranged between rudimentary and haphazard, people were
allowed to stay on without paying rent - for example Lisa
Bedley or the mysterious Mr. Croasdan, who allegedly moved
out after a lengthy stay without paying any rent, but from whom
the appellant was apparently able to collect $8,000. If I had not
accepted the story it would have put the appellant's case in
a very bad light. However, although I have accepted her rather
improbable story, her conduct bespeaks a generous, forbearing and
trusting nature but not a very commercial one. Business should be
made of sterner stuff.
[22] The
appellant did nothing to pay down the mortgage. Indeed, it
increased. Ultimately, one has to draw the line and say
"enough is enough". In Donyina v. The Queen,
file 2001-934(IT)I, I summarized 12 principles that I
considered useful in cases of this sort. The twelfth was as
follows:
12.
When to start a business and when to abandon it are business
decisions in which neither the taxing authorities nor the court
should intervene (Nichol). Nonetheless if losses go on
being incurred year after year for an inordinate length of time
sooner or later one has to apply what I shall call the
"Enough is enough" principle and decide that what might
have been a viable business has, with the effluxion of time,
became hopeless and the best thing to do with it is to give it a
decent burial. Nonetheless, a businessman's judgement to
maintain a business must be treated with great respect.
[23] Finally,
I come to the contention that the property was trading property
acquired with a view to selling as soon as possible, so that it
became inventory of an adventure in the nature of trade and that
all of her expenses should be deductible currently or at all
events capitalized and deducted when the property is sold.
[24] I dealt
with this point in Donyina as follows:
10.
If what is ostensibly a rental property was acquired and held in
the course of an adventure in the nature of trade and it was
reasonable to expect a profit on the resale the losses
(i.e. carrying costs net of rentals received) should not
be disallowed on the basis of REOP (Roopchan). The court
should however examine with some care an ex post facto
declaration that property that was carried for some years at a
loss is part of a speculative venture in which the motive was
resale at a profit. This is not something that one would expect
someone readily to admit if the property were sold at a
profit.
[25] The
appellant stated that she bought the property with a view to
flipping it at a profit. This may well be so. I suspect many of
the properties bought in the late 1980s when real estate in
Toronto was booming were bought in the hope of selling them at a
profit and declaring a capital gain. If it happened to be your
principal residence so much the better because the entire gain
was tax-free. When the bottom fell out of the market in 1989 and
the early 1990s these same properties became the subject of the
myriad of REOP cases that have flooded our courts. One must be
extremely sceptical of the "adventure in the nature of
trade" argument that surfaces after many years of losses,
and only after the taxpayer's losses have been
disallowed.
[26] The short
answer is that assuming the property was bought with the view of
selling it at a profit its quality of inventory has been lost
with the effluxion of time. This is particularly true where the
property is also the taxpayer's principal residence.
[27] I have
tried to find reasons that would warrant giving the appellant
some relief. She is a good woman and I know her resources are
very limited. However the expenses claimed are so vastly
disproportionate to the revenues and have gone on for so long
with no end in sight (except for the sale) that there is no
justifiable way in which I could find in her favour.
[28] The
appeals are dismissed.
Signed at Ottawa, Canada, this 3rd day of August 2001.
"D.G.H. Bowman"
A.C.J.
COURT FILE
NO.:
2001-795(IT)I
STYLE OF
CAUSE:
Between Doreen London and
Her Majesty The Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
July 18, 2001
REASONS FOR JUDGMENT
BY:
The Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF
JUDGMENT:
August 3, 2001
APPEARANCES:
Agent or the
Appellant:
Kenneth Fitz-Andrews, C.A.
Counsel for the
Respondent:
Scott Simser, Esq.
COUNSEL OF RECORD:
For the
Appellant:
Name:
--
Firm:
--
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-795(IT)I
BETWEEN:
DOREEN LONDON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on July 18, 2001, at
Toronto, Ontario, by
The Honourable D.G.H. Bowman
Associate Chief Judge
Appearances
Agent for the
Appellant:
Kenneth Fitz-Andrews, C.A.
Counsel for the Respondent: Scott
Simser, Esq.
JUDGMENT
It is
ordered that the appeals from assessments made under the
Income Tax Act for the 1996, 1997 and 1998 taxation years
be dismissed.
Signed at Ottawa, Canada, this 3rd day of August 2001.
A.C.J.
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