Date:
20010528
Dockets:
2000-1070-IT-I,
2000-1072-IT-I
BETWEEN:
PAUL
LECLERC,
THÉRÈSE BEAUDRY,
Appellants,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasonsfor Judgment
Lamarre
Proulx, J.T.C.C.
[1]
These appeals were heard on common evidence and concern the 1991,
1992 and 1993 taxation years.
[2]
The issue is whether the expenses claimed for two rental
properties were incurred to earn income from a business. One of
the rental properties was purchased in 1987 and the other in
1988.
[3]
The facts upon which the Minister of
National Revenue ("the Minister") relied to reassess
the appellant Paul Leclerc are described as follows in
paragraph 3 of the Reply to the Notice of Appeal ("the
Reply"):
[TRANSLATION]
(a)
the appellant and his spouse, Thérèse Beaudry,
purchased two condominiums (hereinafter "the
condominiums") as equal co-owners;
(b)
the first condominium was purchased on October 1,
1987;
(c)
it was located at 4 Boulevard Bélanger in
Beaupré;
(d)
it was purchased for $62,500;
(e)
the second condominium was purchased on January 15,
1988;
(f)
it was an apartment in a condominium complex known as
"Domaine Val-des-Neiges", and it was located at
227 Rue Val des Neiges in Beaupré;
(g)
it was purchased for $115,000;
(h)
during the taxation years at issue, no leasehold improvements
were made to the condominiums;
(i)
the appellant reported the following net rental losses in respect
of the condominiums:
Year
Net
loss
Appellant's share
1988
($16,537)
($8,269)
1989
($10,921)
($5,461)
1990
($13,297)
($6,649)
1991
($20,998)
($10,499)
1992
($18,188)
($9,094)
1993
($20,348)
($10,174)
1994
($13,524)
($6,762)
1995
($13,757)
($6,879)
TOTAL
($127,570)
(j)
the rent was not sufficient to cover the fixed costs, namely
mortgage interest and municipal and school taxes, which totalled
the following amounts:
Year
Rental
income
Fixed costs
1991
$1,877
$20,105
1992
$1,154
$16,090
1993
nil
$14,587
1994
$2,475
$12,380
1995
$3,008
$13,176
(k)
the appellant has therefore not shown that the expenses claimed
for the condominiums for the taxation years at issue were
incurred by him with a view to making a profit or with a
reasonable expectation of profit;
(l)
the amounts of $10,499 in 1991, $9,094 in 1992 and
$10,174 in 1993 were instead the appellant's personal or
living expenses;
(m)
the Minister therefore made reassessments against the appellant
disallowing the following net rental losses:
1991
1992
1993
$10,499
$9,094
$10,174
[4]
The facts are similar in the appellant
Thérèse Beaudry's appeal.
[5]
The appellant Paul Leclerc testified for the appellants.
Monique Thérien testified for the respondent.
[6]
Mr. Leclerc admitted subparagraphs 3(a) and (f) to (j)
of the Reply. As regards subparagraphs 3(b) to (d) of the Reply,
he said that the purchase date was November 5, 1987, that the
condominium number was 211 in a condominium complex known
as Au-pied-du-Mont and that $11,000 had
to be added to the purchase cost for furniture. Exhibit
I-7, the contract of sale, confirms these
corrections.
[7]
As regards subparagraph 3(e) of the Reply, which concerns the
second condominium purchased - the one in Domaine
Val-des-Neiges - the date of the contract is December
22, 1987. The contract was filed as Exhibit I-8. The
purchase price includes furniture, among other things. Both of
the properties in question were therefore purchased in late
1987.
[8]
As regards the statement in subparagraph 3(h) of the Reply, the
appellant Leclerc explained that substantial improvements were
made to the common areas.
[9]
Mr. Leclerc explained that he and the appellant
Thérèse Beaudry, his spouse, were both skiers
and that that was how they became acquainted with the projects in
which they invested. He did not file the prospectus for
the Au-pied-du-Mont project, but he
filed the prospectus for Domaine Val-des-Neiges as
Exhibit A-2. It was the second phase of the project.
According to the prospectus, the real estate project was designed
by specialists in hotel architecture and experienced hotel
managers. The real estate complex was made up of apartment-hotel
units held in divided co-ownership. Each unit was sold with
furniture, bedding, dishes and other accessories. The units were
rented out by a corporation acting as the investors'
mandatary. The corporation had a three-year mandate.
[10]
According to the income estimate in Appendix A, the rental income
earned by the corporation for 1988 to 1990 could amount to
between $9,000 and $12,000 per owner. The owners could deduct
their share of the common expenses and their mortgage interest
from that income. The result was a loss before depreciation for
1987 to 1989 and a small profit of $296 for 1990. No reference
was made to municipal taxes.
[11] The
income earned by the corporation was only a tenth of what had
been forecast.
[12] The
appellant Paul Leclerc said that the purchases were made in
order to invest in serious, profitable businesses. The mortgage
was 73 percent of the price for the first purchase and 75 percent
for the second. The line of credit was repaid on August 2,
1991.
[13] As
Exhibit A-1, the appellant filed the February 1995 listing
for sale of the condominium in the Au-Pied-du-Mont complex. The asking price was $99,500.
The appellants did not receive any offers. In 1999, the mortgages
were paid off in full.
[14]
Exhibit I-11 is the
appellants' statement of income and expenses for 1994 to
1998. It shows that the appellants also have another rental
property in respect of which they incurred loses of $4,701 in
1994, $2,903.93 in 1995 and $2,039 in 1996. There were no losses
on that property in 1997 and 1998.
Conclusion
[15] For
seven years in a row, the appellants incurred rental losses that
were very high given the low gross rental income. They also had
fixed costs that were much higher than that income.
[16] No
corrective action appears to have been taken to make the rental
properties profitable. The appellant Paul Leclerc said
that the line of credit line was repaid in 1991. In this regard,
it is strange to see that the net loss rose from $13,297 in 1990
to $20,998 in 1991. Mr. Leclerc also stated that substantial
improvements were made to the common areas. This did not result
in significantly higher rental income. Mr. Leclerc said that
corrective action was taken by listing one condominium for sale,
but it was listed in 1995, eight years after being purchased, and
it was listed for $20,000 more than the purchase price. Moreover,
no continuing effort to sell seems to have been made. It should
be noted that the projects were in their second phase. There does
not seem to have been any review of gross income from the first
phase.
[17] In my
view, it would not be reasonable to allow such high expenses on
the basis of the capital invested, the low profitability of the
properties purchased and the lack of appropriate corrective
action given that these extended over so many years. I must
conclude that positive rental income was not the appellants'
priority or goal. The expenses incurred were not incurred to make
a rental profit.
[18]
The appeals are dismissed.
Signed at
Ottawa, Canada this 28th day of May 2001.
J.T.C.C.
[OFFICIAL
ENGLISH TRANSLATION]
2000-1070(IT)I
BETWEEN:
PAUL
LECLERC,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeals
heard on common evidence with the appeals of
Thérèse Beaudry
(2000-1072(IT)I) on March 21, 2001, at Québec,
Quebec, by
the
Honourable Judge Louise Lamarre Proulx
Appearances
For the
Appellant:
The Appellant himself
Counsel
for the
Respondent:
Anne Poirier
JUDGMENT
The appeals from the assessments made under the Income Tax
Act for the 1991, 1992 and 1993 taxation years are dismissed
in accordance with the attached Reasons for Judgment.
Signed at
Ottawa, Canada this 28th day of May 2001.
J.T.C.C.
[OFFICIAL
ENGLISH TRANSLATION]
2000-1072(IT)I
BETWEEN:
THÉRÈSE BEAUDRY,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeals
heard on common evidence with the appeals of
Paul Leclerc (2000-1070(IT)I) on March
21, 2001, at Québec, Quebec, by
the
Honourable Judge Louise Lamarre Proulx
Appearances
Agent for
the
Appellant:
Paul Leclerc
Counsel
for the
Respondent:
Anne Poirier
JUDGMENT
The appeals from the assessments made under the Income Tax
Act for the 1991, 1992 and 1993 taxation years are dismissed
in accordance with the attached Reasons for Judgment.
Signed at
Ottawa, Canada this 28th day of May 2001.
J.T.C.C.
[OFFICIAL
ENGLISH TRANSLATION]
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