Date: 20010828
Docket: 2000-3474-IT-I
BETWEEN:
SCOTT P. COWDEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Bonner, T.C.J.
[1]
This is an appeal from income tax assessments for the 1994, 1995
and 1996 taxation years. It was heard under the informal
procedure. The first issue is the deductibility in all three
years of losses from the rental of part of the Appellant's
residence. On assessment the Minister of National Revenue (the
"Minister") disallowed the deduction of losses on the
basis that the activity giving rise to the losses was carried on
without a reasonable expectation of profit (REOP) and therefore
was not a source of income.
[2]
In March of 1994 the Appellant purchased a dwelling for use as
his residence and, he testified, for use as a rental property.
The rental revenues and expenses as reported by the Appellant are
set out in paragraph 14(e) of the Reply to the Notice of Appeal.
The portion of the total expenses claimed as deductions in
arriving at the losses claimed by the Appellant were 61% in 1994
and 50% in each of the years 1995 and 1996.
[3]
There was no suggestion that the costs actually encountered by
the Appellant were not entirely predictable. There is no reason
to suppose that the revenues earned from the rental operation
were substantially less than predictable. Nevertheless it does
not follow that the losses claimed, which were approximately two
times the gross rental revenues in 1994 and 1995 and nearly equal
to the rental revenues in 1996, resulted from an activity carried
on without a REOP. In my opinion the evidence suggests that the
rental operation was commercial in nature and that it carried
with it a reasonable prospect of profit provided always that the
expenses charged were proportionate to the cost of renting the
space which in fact was allocated to the tenant.
[4]
The rental operation consisted of the rental of one room in a
four-bedroom house. The Appellant testified that the house was
laid out in such a way as to afford reasonable privacy to two
persons living in two different parts of the house and, I gather,
it was on that basis that, at least in 1994, he sought to deduct
half the cost of operating the house from the rental
revenues.
[5]
The Appellant did not describe the layout and use of the house in
any detail. He said that the room rented to the tenant carried
with it the "use of the house" but his evidence on this
point was not persuasive. He said for example that the tenant was
free to use not only the bedroom rented to the tenant, the living
room, basement, kitchen and bath but also his office which was
located in one of the bedrooms. The Appellant did admit that he
used the garage. He also indicated that his daughter visited on
weekends and during such visits used one of the bedrooms. My
impression was that the extent to which the tenant was allowed to
use anything more than his bedroom was minimal.
[6]
In effect what was let to the tenant was one room in a seven room
house. It was on that basis that I allowed the appeal and
referred the assessment to the Minister for recalculation of the
loss on the basis that one seventh of the total expenses claimed
are deductible. I am of the view that the presence or absence of
a R.E.O.P. cannot be determined without setting against the
predictable revenues of the operation in question the costs
reasonably attributable to the earning of such revenues and
nothing more. The Minister can hardly assume that a R.E.O.P. does
not exist when he bases that assumption on exaggerated estimates
of cost.
[7]
The remaining issues relate to claims for deduction arising from
various enterprises carried on by the Appellant as sole
proprietor. From 1986 to 1992 the Appellant carried on business
in Barrie, Ontario as a retailer of snowmobiles and personal
watercraft. In 1992 he discontinued the retail business, moved to
Toronto and commenced what he described as a small personal
consulting business of insurance, estimations and custom machine
work. The Appellant said during his evidence in chief that when
the retail business closed there was an outstanding debt to the
Royal Bank of Canada. That debt was secured on the home of the
Appellant's parents. Thus, the Appellant said, filing for
bankruptcy was not an option and he "chose" to repay
the loan. The Appellant seeks to deduct interest in 1994, 1995
and 1996 on money borrowed from the Toronto Fire Department
Employees Credit Union. He stated that the money was borrowed to
repay the Royal Bank debt.
[8]
In assessing, the Minister assumed that the loan was personal in
nature and that the borrowed money on which interest was charged
was not used for the purpose of gaining or producing income from
a business. In effect the Minister found that the interest was
not deductible under paragraph 20(1)(c) of the Income
Tax Act (the "Act").
[9]
The only documentation produced by the Appellant in support of
his claim was a loan record produced by the credit union dated
June 1996 showing particulars of principal, interest and balance
owing on a personal loan bearing interest at 9.95% and a
conventional mortgage bearing interest at 5.95%. The balance
owing on the conventional mortgage at the beginning of 1996 was
$38,770.47. Nothing in the document produced sheds any light on
the use which the Appellant made of the borrowed money. The onus
is on the Appellant to establish on the balance of probabilities
that he borrowed money, used it as alleged for the purpose of
earning income from his business and that the debt giving rise to
the interest now an issue results from the borrowing of money
used to repay of the original loan. It is difficult to imagine
that the Appellant could not have produced documentation
supporting at least some of the version of the facts which he now
puts forward. His failure to produce such documentation coupled
with the view which I formed regarding the Appellant's
credibility led me to conclude that the onus was not discharged.
I formed the opinion that the Appellant was not inclined to be
entirely candid.
[10] In
computing income for 1994 from a business carried on under the
name S.P.C. Racing the Appellant claimed capital cost allowance
in the amount of $5,553.94. That claim appears to have been in
respect of a terminal loss on a motor vehicle acquired by the
Appellant in 1989 or 1990 for use in the retail business. The
Appellant's evidence regarding the vehicle and what happened
to it was vague and unsatisfactory. He had difficulty remembering
what vehicle was the subject of the terminal loss claimed. He
testified that the vehicle was sold in 1997 or 1998. It does not
appear to have been disposed of in 1994. There is no evidence of
a change in use during 1994 which might have triggered a deemed
disposition under ss. 13(7) of the Act. There was no
evidence with respect to the undepreciated capital cost of
property in the class to which the vehicle belonged. In short
there was an almost total absence of evidence from which it could
be inferred that the Minister erroneously denied the Appellant
the terminal loss deduction which he had claimed. This branch of
the appeal therefore failed.
[11] Judgment
was issued accordingly.
Signed at Ottawa, Canada, this 28th day of August 2001.
"M.J. Bonner"
J.T.C.C.
COURT FILE
NO.:
2000-3474(IT)I
STYLE OF
CAUSE:
Scott Cowden and H.M.Q.
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
June 1, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge M.J. Bonner
DATE OF
JUDGMENT:
June 8, 2001
DATE OF REASONS
FOR
JUDGMENT:
August 28, 2001
APPEARANCES:
For the
Appellant:
For the Appellant
Counsel for the
Respondent:
James Rhodes
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-1349(IT)I
BETWEEN:
EVELYN ELLEN WILSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 11, 2001 at Toronto,
Ontario, by
the Honourable Judge T.E. Margeson
Appearances
Counsel for the
Appellant:
John David Buote
Counsel for the
Respondent:
Meghan Castle
JUDGMENT
The
appeal from the assessment made under the Income Tax Act
for the 1996 taxation year is allowed and referred back to the
Minister of National Revenue for reconsideration and reassessment
in order for the Minister to reconsider any proper receipts in
support of any allowable medical expenses in support of this
claim when they are presented.
In all other respects, the appeal is dismissed and the
Minister's assessment is confirmed, in accordance with the
attached Reasons for Judgment.
Signed at Ottawa, Canada, this 10th day of September 2001.
J.T.C.C.
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