Thomas v. The Queen, docket 98-87-IT-G

Date: 19991102

Docket: 98-87-IT-G

BETWEEN:

CYRIL THOMAS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Beaubier, J.T.C.C.

[1] This appeal pursuant to the General Procedure was heard at Saskatoon, Saskatchewan on October 7, 1999. The Appellant was the only witness.

[2] Paragraphs 9 and 10 of the Reply to the Notice of Appeal read:

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

(a) The facts admitted above are true;

(b) The Appellant constructed a house (the "Elrose House") in the town of Elrose in 1982;

(c) At the time the Appellant built the Elrose House, he had intended to retire in the town of Elrose and to reside in the Elrose House during his retirement;

(d) The appellant and his family used the Elrose House as a principal residence until 1985;

(e) In 1985 the Appellant left Elrose to accept a teaching position in the town of Marsden;

(f) The Appellant intended to sell the Elrose House when he left Elrose in 1985;

(g) When the Appellant was unable to sell the Elrose House in 1985, he rented the Elrose House;

(h) The Appellant rented the Elrose House at a depressed market price because it was better to have someone in the house paying low rent rather than to leave the house empty;

(i) The Appellant would have sold the Elrose House at any time during the period he rented the house if an offer to purchase had been received;

(j) In 1992 the Appellant signed a quit claim on the Elrose House title in favour of the Royal Bank of Canada who held the mortgage on the Elrose House;

(k) The Elrose House was sold by a Realtor on July 2, 1992 for $38,000.00;

(l) In 1992, the Appellant reported employment income of $30,537.21 from the Battle River School District and reported pension income of $28,430.52 from the Saskatchewan Teachers Superannuation Commission;

(m) The Appellant retired from his teaching/Principal position in Marsden in 1992;

(n) The Appellant claimed net rental losses from renting the Elrose House from 1987 to 1992 (the "Activity");

(o) The Appellant did not report any net rental income or net rental losses from the Activity in 1985 and 1986;

(p) From 1987 to 1992 the Appellant reported the following net losses from the Activity:

TAXATION YEAR	GROSS INCOME	GROSS EXPENSES	NET RENTAL LOSS
1987			($1,076)
1988			($1,106)
1989	$5,400	$6,706	($1,306)
1990	$3,300	$7,152	($3,852)
1991	$3,000	$6,775	($3,775)
1992	**$ NIL	*$36,535	($36,535)

* Includes terminal loss of $33,710.47

** Later he amended this to 4 months x $250 = $1,000 gross revenue

(q) The Activity did not provide the Appellant with a source of income from 1985 to 1992;

(r) The Appellant's gross revenue from the Activity did not cover the cost of the interest alone on the mortgage on the Elrose House;

(s) The Appellant had no plans or intended course of action to make a profit from the Activity;

(t) The Appellant has not substantiated the construction costs of the Elrose House;

(u) The Appellant estimated the cost of the Elrose House as he constructed the house himself and did not maintain invoices;

(v) The Appellant claimed a terminal loss on the Elrose House calculated as follows:

Undepreciated Cost of the Building $70,940

Disposal Proceeds -$37,230

Terminal Loss claimed $33,710

(w) The Undepreciated Capital Cost ("U.C.C.") of the Elrose House was not the actual cost of the property but was based on an appraisal that the Appellant had prepared in 1985;

(x) The Appellant has not proven the U.C.C. of the Elrose House;

(y) The Appellant has submitted the following amounts as U.C.C. of the Elrose House in the Capital Cost Allowance schedules submitted in his 1991 and 1992 Income Tax Returns as follows:

January 1, 1991 $68,000

December 31, 1991 $68,000

January 1, 1992 $70,940

(z) The Appellant has not shown why the U.C.C. on December 31, 1991 was $68,000, yet on the next day, January 1, 1992 was $70,940;

(aa) The expenses claimed in the amount of $2,824.70 were personal or living expenses of the Appellant, and further were not reasonable in the circumstances;

(bb) The Appellant has not properly calculated the terminal loss claimed;

(cc) The Appellant did not have a reasonable expectation of profit from the Activity in the 1992 taxation year;

(dd) The Elrose House is not a depreciable property of a prescribed class; and

(ee) The Minister initially assessed the 1992 taxation year on April 14, 1993 and reassessed the Income Tax Return for 1992 on April 4, 1996 which is within 3 years after the date of mailing of the original assessment pursuant to 152(3.1) of the Act.

B. ISSUES TO BE DECIDED

10. The issues are:

a) Did the Minister reassess the tax for the 1992 taxation year within the statutory limitation period pursuant to subsection 152(3.1) and 152(4) of the Act?

b) Was there a reasonable expectation of profit from the Activity in the 1992 taxation year?

c) Were the expenses in the amount of $2,824.70 incurred by the Appellant for the purpose of gaining or producing income from a business or property and reasonable in the circumstances, or were they personal and living expenses of the Appellant?

d) Was the Elrose House a depreciable property of a particular class used for the purpose of gaining and producing income from a business or property and did the Minister properly deny the terminal loss in the amount of $33,710.47?

e) If the court finds that the Appellant is entitled to a terminal loss, which is not admitted, but expressly denied, on the Elrose House, what is the correct amount of terminal loss to be allowed?

[3] At the hearing Appellant's counsel agreed that issues 10(a) and (d) were no longer disputed. Assumptions 9(b), (d), (e), (f), (g), (h), (i), (j), (k), (l), (m), (n), (o), (p), (t), (v), (w) and (y) are correct.

[4] At all material times the Appellant was a school teacher or a school principal. In 1982 he was a school principal in the small grain-farming town of Elrose, Saskatchewan. At that time farming there was quite prosperous. He sold his existing home for a $10,500 profit and built a new home. Its lot cost him $5,460 and he testified that the materials and hired labour cost him $68,000. He had earlier told Revenue Canada that the materials and labour cost him $59,000. Unfortunately he threw his receipts out during a move in 1994 before he was reassessed.

[5] In 1986 he moved from Elrose to Marsden, Saskatchewan to teach. He listed the house for $68,000 and could not sell it. (It had been appraised on April 18, 1985 for mortgage purposes at a value of $76,400). Seniors housing had been built in Elrose and it could not be rented to seniors; it had to be rented to young couples. At the beginning of the school year the house was rented for $500 per month to a school teacher for the school term on an oral lease. The mortgage payments for principal and interest were $513.86. Subsequent rentals deteriorated as described in assumption (p). Each summer the Appellant and his wife returned to Elrose, lived in the house, painted it and repaired it and advertised it for sale or listed it for sale. In October, 1990 it was advertised for sale at $60,000 and tenders were invited. In June, 1992 the Appellant transferred it to the Royal Bank of Canada in satisfaction of his mortgage which then had a balance owed of $41,785.96. The bank sold the house on July 2, 1992 for $38,000.

[6] The history is that of an Appellant who was caught in the declining market of agriculture in small town Saskatchewan. The parallels of this case to that of Mastri v. R. (F.C.A.), 97 DTC 5420 are readily apparent. Robertson, J.'s decision in that case concluded with these two paragraphs:

Before concluding, I wish to register my respectful disagreement with the finding made below that no "personal element" exists in the circumstances of this case. On the contrary, the evidence clearly shows that the Mastris entered into an agreement to buy the townhouse with the intention of occupying it themselves and that, roughly a year after purchase, they actually used the home as their principal residence. In my opinion, one can scarcely speak of the absence of a personal element in this situation - particularly since there is no evidence indicating that, at the time the taxpayers agreed to purchase the property for $159,000, consideration was given to whether the townhouse could be rented profitably.

The Tax Court Judge having erred in his application of Tonn, and in light of the fact that his finding of lack of reasonable expectation of profit has not been challenged, the taxpayers are not entitled to deduct their respective shares of the rental loss from other income sources. The applications for judicial review should be allowed, the judgments of the Tax Court set aside and the matter remitted for redetermination on the basis that the taxpayers' appeals to that Court be dismissed. The taxpayers are entitled to one set of reasonable and proper costs for both judicial review applications.

[7] In the Court's view the determination of when a reasonable expectation of profit existed must arise in 1986 when the Appellant first rented the property. At that time he had no experience in renting. He simply had to rent his residence because he could not sell it at a price he considered reasonable. The rental market was weak in Elrose and his chief competition was the Seniors Housing project which was not renting well either. In these circumstances he rented in 1986 at a loss to help carry the costs of the house until he could sell it. Thus, he had no reasonable expectation of renting for a profit in 1986. He was simply attempting to maintain the house and assist in covering his expenses until he could sell it. It had been his personal home and, like the Mastris, he was caught in a falling real estate market in both rentals and sales. That was the picture in 1986. Thereafter it steadily worsened.

[8] The Appellant had no previous training or experience in rentals. He simply intended to rent until he could sell at his price so as to cover his expenses as best he could and maintain the house. The house as capitalized never had any possibility of showing a profit after charging capital cost allowance in the face of the competition from Seniors Housing in Elrose.

[9] Unfortunately that continued to be the case each year until he finally transferred the house to the bank. Thus, there never was a reasonable expectation of profit. The Appellant was never in business.

[10] For these reasons the appeal is dismissed. Party and party costs are awarded to the Respondent.

Signed at London, Ontario this 2^nd day of November 1999

"D.W. Beaubier"

J.T.C.C.