Date: 20001128
Docket: 1999-1210-IT-I
BETWEEN:
CLAIRE BALDWIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Louise Lamarre Proulx, J.T.C.C.
[1] These appeals concern the 1991,
1993 and 1994 taxation years. The issue is whether the rental
expenses claimed by the appellant were incurred by her in the
1991 to 1994 taxation years in order to earn rental income from a
property located in the village of Petit-Rocher in the
province of New Brunswick.
[2] There is no appeal in respect of
the 1992 taxation year because no tax was assessed for that year.
However, the rental expenses for that year must be examined
because they were carried over to other taxation years.
[3] In making the reassessments, the
Minister of National Revenue (the "Minister") relied on
the facts set out in paragraph 8 of the Reply to the Notice of
Appeal (the "Reply") as follows:
[TRANSLATION]
(a) on October 16,
1991, the appellant purchased a property located in the Province
of New Brunswick, more specifically, in the village of
Petit-Rocher;
(b) the property
consisted of a 2,500 sq. ft. house, whose purchase price was
$125,000;
(c) the appellant
mortgaged her residence in Candiac for $235,000 in order to
purchase, inter alia, the property located at 713 La Mer
Street in New Brunswick;
(d) the New
Brunswick property constantly produced rental losses:
(i)
1991
$4,832
(ii)
1992
$11,155
(iii)
1993
$19,025
(iv)
1994
$23,541
(e) the annual gross
rental income for the New Brunswick property was as follows:
(i)
1991
$1,200
(ii)
1992
$3,600
(iii)
1993
$3,600
(iv)
1994
$1,600
(f) a lease
for the New Brunswick property was signed in September 1994, the
rental being $400 a month;
(g) the appellant
had no reasonable expectation of earning any profit from the New
Brunswick property in the 1991, 1993 and 1994 taxation years;
(h) the rental
expenses claimed each year in respect of the New Brunswick
property constituted personal or living expenses of the appellant
and were not incurred by her to earn income from a business or
property.
[4] The Notice of Appeal provides the
following explanations for the expenses that were incurred and
the difficulties experienced in renting the property:
[TRANSLATION]
B. Statement of facts
1. These
expenses were incurred in order to add rooms that could be rented
and to improve the appearance and quality of the property in
order to earn more rental income.
2. The
property was and is still rented, but because of the disastrous
economic situation in the area and the closing of a number of
industries in the mining sector, which is the principal source of
job creation in the region, the rents have never been as high or
as productive of profits as we were led to believe with regard to
that property.
[5] The appellant and her husband,
Raynold Domingue, who acted as her agent in this case, testified.
The appellant admitted subparagraphs 8(a) to 8(f) of the
Reply.
[6] The appellant produced as Exhibit
A-1 a document prepared by her agent, which had been sent to
Revenue Canada on October 25, 1996. According to that note and
the appellant's testimony, the mining industry in the area
[TRANSLATION] "was humming with activity" in 1991.
[7] The appellant explained that she
had spent several summers in New Brunswick as a child, that her
parents came from that area and that she still had some distant
cousins there. On a business trip of her husband's to that
area, she visited the village of Petit-Rocher and fell in
love with a waterfront property. The purchase price was wholly
financed by a mortgage on the family home in Candiac (Tabs 2
and 3 of Exhibit I-2).
[8] The deed of conveyance of the
property, dated October 16, 1991, was in the names of the
appellant and her husband (Tab 4 of Exhibit I-2). The
appellant and her husband argued that the purchase was to have
been made by the appellant alone, but the conveyancing document
had been prepared in that way and they went along with it. On
January 8, 1993, a conveyance was made by the two spouses to the
appellant (Tab 6 of Exhibit I-2). One of the clauses
in the sworn statement contained the following: That the
property has been occupied by us as marital property.
[9] When the property was purchased in
1991, as Mr. Domingue explained during oral argument, the vendor
negotiated the following as one of the conditions of sale: that
he and his family would be allowed to remain as tenants on the
property until they found a new place to live. They apparently
stayed until June 1992. This explains why no repairs were made in
1991 and 1992.
[10] The appellant said that the house,
which had been built about seven years previously, was not
finished. There were two upstairs bedrooms needing floors and the
window frames had to be finished, which explains the $10,682 and
$10,766 spent for work carried out in 1993 and 1994.
[11] According to the appellant, the purpose
of purchasing the property was to rent the house to company
executives. This was not possible because, according to the
appellant and her husband, as early as a few months after the
purchase, the region's economy was not doing as well as had
been anticipated. They said they had tried summer rentals as an
alternative but lived too far away for this to be really
effective.
[12] In oral argument, the appellant said
that she had put her own furniture in the house. She did not
mention the cost because the furniture belonged to her.
[13] The appellant is a shareholder in
corporations involved in buying and selling property and buying
rental properties. She did not explain why, on this occasion, she
did not purchase the property in question through these
corporations.
[14] The appellant's tax returns for the
1991 to 1998 taxation years were produced in evidence as Exhibit
I-3. The statement of rental income and expenses in the 1993 tax
return shows a gross income of $48,600, while the gross income
allowed was $3,600. The appellant did not know why the accountant
had included income that was probably from dividends from
corporations in which she is the sole shareholder and had added
it to the gross rental income, thus arriving at a total income of
$48,600 and a net income of $25,975. The same thing was done in
respect of 1994 in the income statement for the fiscal year ended
on December 31, 1994. That statement showed sales of $46,600 and
a net profit of $21,459 while income from the rental property was
$1,600 (Tabs 3 and 4 of Exhibit I-3). The
appellant's explanation was that those documents were
prepared by her accountant, and she said she could provide no
other explanation.
[15] In 1995, the situation returned to
normal. The taxable amount of dividends from Canadian
corporations was $27,500 (Exhibit I-5 and Tab 5
of Exhibit I-3). The income statement shows gross
business income of $4,800 and a net loss of $8,740. In 1996, the
rental income was $2,100, and the net loss was $9,881.
[16] In 1997, gross income was $10,800, with
expenses of $7,878.53, for a profit of $2,921.47. It should be
noted that there were no other expenses with the exception of
those for insurance, interest in the amount of $5,755.27 and
property taxes. In 1998, the gross rental income was $10,800 and
expenses were $7,873.05, for a profit of $2,926.95. Again, the
only expenses claimed were those for insurance, interest and
property taxes.
[17] The appellant's agent referred to
the following decisions: Egger v. The Queen, 98 DTC 3372;
Bélec v. The Queen, 95 DTC 121; Costello v. The
Queen,98 DTC 1362; and Pope et al. v. The Queen,
97 DTC 147.
[18] Counsel for the respondent referred to
the following decisions: Moldowan v. The Queen, [1978] 1
S.C.R. 480; Tonn v. Canada, [1996] 2 F.C. 73 (F.C.A.);
Mastri v. Canada, [1998] 1 F.C. 66 (F.C.A.); Mohammad
v. Canada, [1998] 1 F.C. 165 (F.C.A.); and Stewart v.
Canada, [2000] F.C.J. No. 238.
Conclusion
[19] The decisions cited by the appellant
were in favour of the taxpayers in those cases. The
circumstances, however, were such that the rental property was
purchased in an essentially business context or, if purchased
partly for personal reasons and partly for business reasons, the
capital structure, according to business standards, would have
allowed of earning rental income had it not been for certain
unforeseeable events. In those cases, whatever corrective
measures were possible were taken. According to my analysis of
the evidence, this was not the case here.
[20] I must note that the property seems to
me to have been purchased primarily for personal reasons. It was
love at first sight. It is difficult to believe that, when it was
purchased in 1991, the property was mistakenly conveyed to the
appellant and her husband. It is also difficult to understand why
the sworn statement made in 1993 contained the assertion that the
spouses had used the house for family purposes. There is no
explanation why that property, if it was purchased as rental
property, was not purchased by the appellant through Les
entreprises Claire Baldwin Inc. as she had done for the other
rental properties.
[21] It is clear that, for 1991 and 1992,
the appellant could not make a rental profit from the house in
Petit-Rocher. That house was legally rented to its former
owner. The appellant could, therefore, make no repairs to it. It
is also clear that interest costs would of necessity be markedly
higher than the rental income.
[22] A few months after the purchase, it was
already known that the mining development planned for the region
would not take place. There was no evidence of valid corrective
measures having been taken to cope with this unforeseeable event.
The appellant lived in Candiac, a town near Montréal, and
was thus very far away from the rental location, especially from
the standpoint of summer rentals.
[23] In respect of the 1993 and 1994
taxation years, the repair costs were approximately $10,000 each
year. There was no explanation as to why the work was spread out
over two years. For these years as well, the interest costs alone
were much greater than the gross rental income.
[24] The 1995 and 1996 taxation years
repeated the situation in which interest costs alone were
distinctly higher than the rental income. There were no longer
any repair costs, but the rental income remained very low.
[25] In the 1997 and 1998 taxation years,
after receiving notice from the Minister that the rental losses
might be disallowed, the appellant succeeded in renting the house
for a reasonable gross rental income. She also revamped to some
degree the capital structure to show a positive rental income. It
should, however, be noted that there were no expenses in 1997 and
1998 other than those for insurance, interest and property
taxes.
[26] In respect of the years in question,
that is, from 1991 to 1994, the evidence was not indicative of
the existence of a genuine rental business. I must accordingly
find that the appellant did not operate a rental business in
respect of the property in question.
[27] Therefore, the appeals are
dismissed.
Signed at Ottawa, Canada, this 28th day of November 2000.
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
1999-1210(IT)I
BETWEEN:
CLAIRE BALDWIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on July 26, 2000, at
Montréal, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Agent for the
Appellant:
Raynold Domingue
Counsel for the
Respondent:
Yanick Houle
JUDGMENT
The
appeals from the assessments made under the Income Tax Act
for the 1991, 1993 and 1994 taxation years are dismissed in
accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 28th day of November 2000.
J.T.C.C.
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