Tarantino v. The Queen, docket 98-1215-IT-I (Informal Procedure)

Date: 20000113

Dockets: 98-1215-IT-I; 98-1216-IT-I

BETWEEN:

NICOLA TARANTINO, MARGHERITA TARANTINO,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent,

Reasons for Judgment

(delivered orally from the bench at Toronto, Ontario on November 25, 1999)

Beaubier, J.T.C.C.

[1] These appeals, pursuant to the Informal Procedure, were heard together on common evidence by consent of the parties at Toronto, Ontario, on November 25, 1999. Nicola Tarantino, the husband of Margherita Tarantino, was the only witness.

[2] Paragraph 4 to 10 inclusive of the reply to Mr. Tarantino's notice of appeal read:

4. In computing income for the 1993, 1994 and 1995 taxation years, the Appellant claimed rental losses from a property located at 53 Burrard Road, Etobicoke, Ontario (the 'Property') in the amounts of $9,309.00, $8,060.00, $3,762.00 respectively.

5. The Minister of National Revenue (the 'Minister') assessed the Appellant for the 1993, 1994 and 1995 taxation years by Notices of Assessment mailed on March 24, 1994, March 30, 1995 and April 4, 1996 respectively.

6. On January 17, 1997, the Appellant filed with the Minister a waiver in prescribed form within the normal reassessment period in respect of the 1993 taxation year.

7. In reassessing the Appellant for the 1993, 1994 and 1995 taxation years, by concurrent Notices of Reassessment mailed on March 27, 1997, the Minister disallowed the deduction of the rental losses.

8. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) the Appellant and his spouse purchased the Property (a three-bedroom bungalow) on November 1, 1990 for $220,000.00 and financed 100% of the purchase price with a first mortgage of $160,000.00 on the Property and a second mortgage of $60,000.00 on their principal residence;

(b) the Appellant and his spouse purchased their principal residence in November, 1985 for $128,000.00;

(c) the Appellant reported rental losses in respect of the Property for the 1990, 1991 and 1992 taxation years, in the following amounts:

Gross Net

Year Income Loss*

1990 $ 3,600.00 $ 848.00 (two months)

1991 $13,200.00 $18,464.00

1992 $12,000.00 $18,442.00

*The Appellant and the Appellant's spouse each claimed half of the reported rental losses.

(d) for the 1993, 1994 and 1995 taxation years, the Appellant reported gross rental income, expenses (before capital cost allowance) and losses from the rental of the Property as follows:

	1993	1994	1995
Gross Rental Income Expenses	$12,000.00	$12,300.00	$12,600.00
Property Taxes	2,695.00	2,695.00	2,746.00
Maintenance & Repairs	240.00	6,410.00	356.00
Interest	23,732.00	15,196.00	13,301.00
Insurance	254.00	280.00	271.00
Light, heat & water	3,408.00	2,484.00	3,116.00
Financing fees	289.00	230.00	184.00
Legal, accounting & other professional fees		125.00	150.00
Advertising	-	-	-
Total Expenses	$30,618.00	$28,420.00	$20,124.00
Net Rental Loss	$18,618.00	$16,120.00	$7,524.00
- Claimed by Appellant	$9,309.00	$8,060.00	$3,762.00
- Claimed by Appellant's spouse	$9,309.00	$8,060.00	$3,762.00

(e) the interest payable on the mortgages in respect of the Property exceeded the gross rental income realized from the Property;

(f) the disallowed rental expenses were not incurred for the purpose of gaining or producing income from a business or property;

(g) the disallowed rental expenses were personal or living expenses of the Appellant;

(h) the Appellant had no reasonable expectation of profit from renting the Property during the 1993, 1994 and 1995 taxation years.

B. ISSUES TO BE DECIDED

9. The issues are:

(i) whether the expenses disallowed by the Minister in respect of the alleged rental operation were incurred by the Appellant for the purpose of gaining or producing income from a business or property;

(ii) whether the Appellant had a reasonable expectation of profit from the rental of the Property during the 1993, 1994 and 1995 taxation years; and

(iii) in the alternative, whether the disallowed expenses were reasonable in the circumstances.

C. STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT

10. He relies on sections 3, 9 and 67, subsection 248(1) and paragraphs 18(1)(a), 18(1)(b), 18(1)(h) and 20(1)(c) of the Income Tax Act (the 'Act') as amended for the 1993, 1994 and 1995 taxation years.

Assumptions 8(a) to (e) inclusive are either correct or were not refuted.

[3] At the time of purchase, being the property at 53 Burrard Road, Etobicoke, the Appellants lived at 37 Burrard, just down the street. The property was a three-bedroom bungalow with an unattached garage. Mr. Tarantino worked for an airline and Mrs. Tarantino worked for Eaton's. They planned to fix up the basement and rent it and the main floor as two suites. They also planned to pay down the borrowed capital. The property was purchased solely with rental in mind, to supplement their expected retirement incomes. They immediately began to pay an extra $25.00 per week down on their borrowed principal. Both had modest incomes, so this was a very large sacrifice.

[4] The rental market at first was not strong. More important, their plans to fix the basement were ruined when Eaton's began to collapse and they feared the losses of Mrs. Tarantino and their son's jobs. Because of this, they did not spend money on the basement as soon as they planned (in 1991, -2 and -3).

[5] They did fix up the basement during 1993, -4 and -5, the years in question, and rented it from 1996 on. As a result of that, paying down the principal and refinancing over the years at lower rates, their gross and net (losses) and gains before capital cost allowance from the property in recent years are:

	1996	1997	1998
Gross rent	$19,500.00	$19,500.00	$19,500.00
Net (loss) or gain	($ 1,648.00)	$ 2,177.16	$ 2,657.74

Mr. Tarantino expects a large profit in 1999. Using the test set out in Enno Tonn v. The Queen, 96 D.T.C. 6013, the Court finds this rental was purely commercial. It was a rental of a residential house which was 100% financed.

[6] The house was right down the street from their residence, so they could personally supervise, repair and maintain it as they planned to do and as they did. This saved substantial costs. Their plan was to realize rents in their old age - a long-term investment plan. There was no plan to flip. They did plan to pay down the principal early and to fix up the basement to increase rents. This schedule was interrupted by the Eaton's closing in 1991, but it was carried out in 1993, 1994 and 1995, the years in question. The court finds that the Eaton's problem was an unpredictble force beyond their control and that the rents they achieved, when they finally could complete their plans, constitute reasonable rents which could have occurred earlier, but for the Eaton's catastrophe which adversely affected them.

[7] Thus, the appellants had no training or rental experience. They had a plan which was delayed for three years by unforeseeable circumstances. The venture, as planned, had a capability of showing a profit within the strictures of the Income Tax Act, and it did so in 1997. 1997, practically speaking, was six years after the operations began.

[8] In the court's view, the appellants had a reasonable expectation of profit from their venture when they purchased it and during the years in question. The appeal is allowed. The appellants are each awarded separate sums of party-and-party costs, respecting these appeals, which are fixed at $650.00 each.

Let the above Reasons for Judgment, delivered orally from the Bench at the Tax Court of Canada, 200 King Street West, Toronto, Ontario, on November 25, 1999, be filed.

"D.W. Beaubier"

J.T.C.C.