Wood v. The Queen, docket 98-2072-IT-I (Informal Procedure)

Date: 19991110

Docket: 98-2072-IT-I

BETWEEN:

DORIS WOOD,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Hamlyn, J.T.C.C.

[1] These are appeals for the 1991, 1992, 1993 and 1994 taxation years with respect to disallowed rental losses.

[2] The subject condominium property at Todd Brooker's Mountain Lodge municipally known as R.R. #3, Blue Mountain Road, Collingwood, Ontario (the "Property") was purchased in 1989.

[3] In computing income for the 1991, 1992, 1993 and 1994 taxation years, the Appellant claimed rental losses of $18,241, $18,636, $22,316 and $16,006 in respect of the Property.

[4] The Minister of National Revenue (the "Minister") reassessed the Appellant to disallow the rental losses. Concurrent notices for the 1991 and 1992 taxation years were sent February 2, 1996 and concurrent notices for the 1993 and 1994 taxation years were sent March 7, 1996.

[5] From the Appellant's Notice of Appeal, adopted as part of the sworn evidence, the Appellant stated:

I am not responsible for the drastic change in the economy since my decision to purchase this investment property in 1989. The investment property in question was purchased in 1989 with a view to gain or produce income. It was a professionally managed investment. ... I purchased the property with a reasonable expectation of profit as the mortgage would be gradually paid down with the income received. The property was purchased with 25% down leaving a first mortgage of $142,425.00 dollars. ... I projected a rental income of approximately $18,000 which would more than cover mortgage payments and taxes. I was being very conservative in my projections by anticipating rentals for 50% of the year. At the time, other properties in the area were renting for 70% of the year. ... [T]he economy took a turn for the worse beginning in 1991 and as a result profits and income suffered in every investment. I could not have predicted this drastic change when I made my investment decisions at the time of purchase.

I also object to the argument that the property was used for personal reasons and that, as a result, the expenses were for living rather than for investment purposes. I visited the property once in the winter and once in the summer to check up on the condition of the property and to observe how it was being managed and cared for. These twice yearly visits involved one overnight stay as there was a considerable driving distance involved. I have records which show this minimal usage. ... The property was available for rent for the remaining days of each year.

[6] The following assumptions of the Minister were accepted by the Appellant at trial:

- in January of 1989, the Appellant's spouse purchased the Property;

- the Property was purchased for $189,900, carrying a first mortgage of $142,425;

- in the 1991, 1992, 1993 and 1994 taxation years, the Appellant claimed gross rents, expenses and rental losses from the Property as follows:

Taxation Year	Gross Rents	Expenses	Rental Loss
1991	$3,261	$21,502	$18,241
1992	$3,188	$21,824	$18,636
1993	$1,115	$23,431	$22,316
1994	$2,059	$18,065	$16,006

- the interest expense claimed in respect of the Property exceeded gross rents from the Property;

- the Appellant was a guarantor of the first mortgage taken by the Appellant's spouse on the Property;

- since the 1989 taxation year, the Appellant claimed rental losses from the Property.

[7] The following assumptions of the Minister were not accepted by the Appellant at trial:

- the gross rents and expenses in respect of the Property were not reasonable in the circumstances;

- in the 1991, 1992, 1993 and 1994 taxation years, rental expenses claimed in excess of the gross rents reported by the Appellant were not made or incurred or, if made or incurred, they were not made or incurred for the purpose of gaining or producing income from a business or property but were personal or living expenses of the Appellant;

- the disallowed expenses were not reasonable in the circumstances;

- in the 1991, 1992, 1993 and 1994 taxation years, the Appellant had no reasonable expectation of profit from the Property;

- the Property was purchased by the Appellant's spouse for personal use;

- the Property was available for the Appellant's personal use;

- the reported rental losses for the 1991, 1992, 1993 and 1994 taxation years did not account for their personal use of the Property.

OTHER EVIDENCE PRESENTED AT TRIAL

[8] The Property was purchased and registered in the Appellant's husband's name. The funds for the purchase came from family funds, specifically, savings and registered retirement savings. The Property was purchased with two objectives: to obtain asset growth and to obtain rental income. While the Property was registered as indicated, a trust agreement was filed in January 1992 to show that the Appellant and her husband were both the beneficial owners of the Property. The Appellant, in her evidence, also confirmed that decisions made in relation to the Property were consulted decisions between the Appellant and her husband. During the period in question, aside from her rental activities the Appellant was a full-time schoolteacher and a part-time real estate agent.

[9] The Appellant stated the purchase was not for family recreational purposes nor was it used for family recreational vacations. The Appellant and her family used the facility three or four days per year in order to attend condominium owners' meetings. On those occasions, a fee was paid to the management for service use of the Property. From the exhibits filed, the condominium was part of a hotel complex managed by a resort management group in a contractual unit rental arrangement with the condominium owners. The owners' powers and rights under the management agreement were restricted.

[10] The Appellant asserted she had an expectation of generating a positive cash flow from the Property rentals after the purchase. She stated her projected conservative estimates were based on a survey of local rental rates charged and her understanding of expected occupancy that revenues would exceed expenses within three to five years. On cross-examination however, the specifics or basis of the Appellant's projections was not be clearly sustained. Notwithstanding, the evidence showed the location and the development was appropriate for both a winter and summer resort. The management of the resort in all aspects including the setting of rental rates and the operation was done in a businesslike commercial manner. The failure, according to the Appellant, was a result of the well-noted economic downturn that materially affected recreational facilities. After an investment of over fifty thousand dollars, the Appellant stated that in 1995 the Property was lost through a power of sale under the mortgage.

ANALYSIS

1993 TAXATION YEAR

[11] In the Reply to the Notice of Appeal, the Minister's position was that the Appellant's appeal with respect to her 1993 taxation year was invalid as there was no tax payable by the Appellant for that tax year. The evidence confirms for the Appellant the assessment for 1993 was a nil assessment. The well-established legal principle is that there is no appeal from a nil assessment thus the conclusion is the 1993 taxation year is not a valid appeal.

THE OWNERSHIP OF THE PROPERTY

[12] The title was taken by the Appellant's husband. The Appellant guaranteed the mortgage. The Appellant maintained it was her rental property. The totality of the evidence however, given the family source of the purchase funds, the joint decision making processes of both the Appellant and her husband in relation to the Property and filed trust agreement showing both the Appellant and her husband as beneficial owners of the Property leads to a conclusion the Property was owned by both the Appellant and her husband. Further, this evidence also supports a conclusion the rental operation was a partnership between the Appellant and her husband.

THE PERSONAL USE ELEMENT IN RELATION

TO THE RENTAL OPERATION

[13] Under the management agreement, the Appellant was entitled to personal use of the Property subject to time limitations and service charges. The Appellant and her husband, I conclude from the evidence, did not avail themselves of this right other than on an extremely minimal per annum basis and only when there was a condominium meeting in relation to their rental property. Moreover, when it appeared the rental business was not going to be successful they did not appropriate the Property for personal use, they made a decision to let the Property go and indeed lost it under a power of sale.

WAS THERE A BUSINESS

[14] The motivation of the Appellant in acquiring the Property with her husband was to operate a rental property business as part of the Todd Brooker Mountain Lodge and that was their preponderant purpose for the years in question. The ingredients present leading to the Appellant's belief there would be a profit included the location, the in-place management group, a survey of accommodation rates and an anticipation of fifty percent occupancy rates. Moreover, the capital committed was significant in relation to the purchase price of the Property. The Appellant and her husband operated and handled the Property in an atmosphere of commerciality. However, because of the economic downturn, the losses were significant, the business failed and the Appellant and her husband lost the Property. The facts lead to a conclusion there were sufficient composite elements to lead to a conclusion of a reasonable expectation of profit and this was a potentially viable business.

[15] Further, I conclude the expenses incurred were reasonable and not personal and were made for the purpose of gaining or producing income from the rental property business.

DECISION

[16] For the taxation years 1991, 1992 and 1994 the appeals are allowed and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that the Appellant and her husband were operating an equal partnership viable rental business and had a reasonable expectation of profit from that business and the Appellant is entitled to deduct fifty percent of the losses that she claimed in relation to that business.

[17] For the taxation year 1993, the purported appeal is quashed.

Signed at Ottawa, Canada, this 10th day of November 1999.

"D. Hamlyn"

J.T.C.C.