Date: 20000915
Docket: 1999-4021-IT-I
BETWEEN:
JEAN-ROCH MASSÉ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Tardif, J.T.C.C.
[1]
This is an appeal respecting the 1994, 1995, 1996 and 1997
taxation years.
[2]
The questions at issue are the following:
[TRANSLATION]
(a)
Did the appellant have a reasonable expectation of profit from
property rental with respect to the condominium during the 1994,
1995, 1996 and 1997 taxation years?
(b)
If the appellant did have a reasonable expectation of profit from
property rental with respect to the condominium during the 1994,
1995, 1996 and 1997 taxation years, was the net rental income he
reported correctly computed by him?
[3]
In support of the reassessments, the Minister of National Revenue
(the "Minister") made the following assumptions of
fact:
[TRANSLATION]
(a)
the appellant purchased a condominium in Florida in March
1992;
(b)
the condominium purchased was Unit 161 in Building 28
located at Waterside Village in Palm Beach;
(c)
according to the insurance contract effective March 20, 1992
obtained from the appellant, the condominium was insured for
US$77,990;
(d)
on the statements of real estate rentals (Waterside Village
Florida) for the 1994, 1995 and 1996 taxation years (the 1997
statement was not available to the Minister as the appellant had
filed an electronic return), amounts of $106,250 for the real
property and $13,161 for the movable property are reported as the
undepreciated capital cost on December 31;
(e)
the appellant stated that to finance the purchase of his
condominium in Florida he had remortgaged his personal residence
in Ste-Foy and taken out a personal loan;
(f)
the amounts borrowed in order to purchase the condominium in
Florida were estimated at $88,900;
(g)
for the 1993 to 1997 taxation years inclusive, the appellant
reported the following gross and net rental income:
Year
Gross
income
Net loss
1993
5,250
(11,654)
1994
2,926
(10,719)
1995
5,192
(10,793)
1996
3,719
(9,812)
1997
4,232
(6,972)
(h)
the gross rental income reported for the 1994, 1995 and 1996
taxation years was less than the interest amounts, which were
$8,340 in 1994, $8,001 in 1995 and $7,603 in 1996;
(i)
according to information obtained from the appellant, the
condominium was rented for four weeks in 1993, four weeks in
1994, five weeks in 1995, four weeks in 1996 and four weeks in
1997;
(j)
the appellant stated that for his 1996 taxation year he had
reported rental income from himself for two of the four weeks the
property was rented;
(k)
the appellant stated that he had used his condominium for
personal purposes for two weeks in each of the years in
issue;
(l)
the appellant deducted nothing for his personal use of the
condominium on the statements of real estate rentals which he
submitted for the 1994, 1995 and 1996 taxation years;
(m) the
appellant has not shown that the expenses claimed in respect of
the condominium for the taxation years in issue were incurred by
him with a reasonable expectation of earning a profit;
(n)
on April 27, 1998, the appellant signed a T-2029 form
entitled "WAIVER IN RESPECT OF THE NORMAL REASSESSMENT
PERIOD" with regard to his rental income and expenses for
the 1994 taxation year;
(o)
the Minister issued reassessments to the appellant denying the
rental losses claimed by him in respect of the Florida
condominium for the taxation years in issue.
[4]
The appellant admitted all the facts on which the respondent
relied, with the exception of those set out in
subparagraphs (d), (l) and (m).
[5]
The evidence showed that the appellant was a prudent businessman,
methodical and meticulous in the administration of his company.
His representations before the Court were moreover articulate and
supported by very well prepared charts.
[6]
The appellant purchased a condominium ("condo") in
Florida which was part of a vast complex built by a large Quebec
concern, "Groupe Pomerleau". The purchase was made in
March 1992.
[7]
At the time of the purchase, the real estate developer informed
all those concerned, including the appellant, that a rental
service was available to handle the rental of the purchased unit
if the purchaser so desired. The appellant testified that he
found the project very attractive since he could hope to receive
relatively satisfactory income in the short term in the order of
US$11,000 a year.
[8]
The appellant invested solely on that basis, not having conducted
any research to determine whether the possibility of that kind of
income was realistic. He soon realized that the situation was not
so simple or promising. He in fact noticed that the person
responsible for rentals, a former manager of a Florida hotel, was
not very dynamic and demonstrated little enthusiasm about renting
condo units that had already been sold.
[9]
After his purchase in March 1992 and having observed that the
income was very disappointing, the appellant decided nearly three
years later, in 1995, to charge a neighbour, a Ms. Rioux,
the owner of a condo on the same site, with the rental of his
unit. He admitted that the purpose of his neighbour's
initiatives was first of all to rent her own condo and that he
benefited by receiving tenants that she could not accommodate.
The appellant said that the arrangement was a very good one and
had the additional advantage of not being costly.
[10] The
appellant could not state or describe the steps his neighbour
took to rent his condo, except to say that he believed she had
posted advertisements at various locations.
[11] The
appellant also contended that things improved considerably after
he turned to his neighbour.
[12] In actual
fact, as admitted in subparagraph (i), the condo was rented
for four weeks in 1993, four weeks in 1994, five weeks in 1995,
four weeks in 1996 and four weeks in 1997. The rental was set at
$550 a week in the high season, that is, from the holiday period
in December until the end of March. In the low season, which was
the rest of the year, the rental was $350 week.
[13] For the
years in issue, the appellant received rental income of $2,926 in
1994, $5,192 in 1995, $3,719 in 1996 and $4,232 in 1997. That
income included the amount of the rent which he billed himself
for his personal occupancy.
[14] From
these facts, which are essentially arithmetical and in no way
open to interpretation, it is hard to understand and especially
to see how or in what manner the situation improved after
Ms. Rioux was entrusted with renting the condo.
[15] Analysis
of the income also shows that the rental rates were not firm and
that the appellant was accommodating with certain tenants. He
gave the following explanation: [TRANSLATION] "It was better
to reduce the price and have the property rented than not to have
it rented."
[16] The
evidence also showed that most of the tenants were the
appellant's friends or business acquaintances, or the
appellant himself and his family. Very few strangers or third
parties occupied the appellant's condo during the years in
issue, a fact which also contradicts the appellant's
assessment of the effectiveness of Ms. Rioux's
services.
[17] For the
1994, 1995 and 1996 taxation years, the gross rental income was
less than the interest amounts, which were $8,340 in 1994, $8,001
in 1995 and $7,603 in 1996. After 1996, no doubt following the
audit of his file, the amount of interest declined as the
appellant reduced the amount of the mortgage.
[18] The main
facts revealed by the evidence were moreover communicated to the
respondent through a questionnaire completed by the appellant,
which it is appropriate to reproduce here:
[TRANSLATION]
Questionnaire
1.
Please submit the aforementioned contract of purchase for the
property
A photocopy of the American documentation concerning the contract
of purchase for my condominium at Waterside is appended to this
questionnaire.
Description of rented unit (e.g., duplex, basement apartment,
cottage, etc.)
Condominium.
Area of rented unit:
Approximately 1,040 square feet.
Age of property at time of purchase:
The condominium was brand new at the time of purchase.
Number of rooms rented (where applicable):
The unit is a five-and-a-half room condominium, all of which is
available for rent.
Number and nature of services provided:
The condominium has all the amenities usually found in a
condominium residence, and there is access to Canadian television
and all the usual services available to owners at the Waterside
Village site (such as a community hall, two swimming pools,
courts for games such as tennis, and a reception service).
If you rent part of your personal residence, please apportion
its area according to the number of square feet of the rented
portion and of the portion which you occupy:
The condominium is entirely occupied by the tenant when
rented.
If a principal residence has been converted into a rental
property, state the fair market value of the property at the time
of the conversion:
This Florida residence has always been a property intended
entirely for rental purposes.
2.
For what purpose was the property originally purchased?
The initial and ultimate purpose of the purchase of this Florida
condominium purchase was and still is rental of the unit.
At the time of purchase, the vendor even told me that I could
earn annual rental income of $10,000 to $11,000 just by using the
existing on-site services.
3.
When did you begin to rent the property? Please state the month
and year.
The condominium has been made available for rental from the
start.
4.
What financing arrangements were made in order to rent the
property?
There were no financing arrangements apart from having the entire
rental cost paid at the time a rental agreement was entered
into.
Please submit the loan agreement and confirmation of the
interest deducted[1] against your rental income for:
1994
:
$8,340
1995
:
$8,001
1996
:
$7,603
There are two loan agreements for the financing of this
condominium:
· There
was an initial agreement for a mortgage on my condominium in
Sainte-Foy to finance the Florida condominium.
The reason is that a Canadian lending institution may not
extend mortgage financing for a property located outside the
country.
· A
second financing agreement to obtain the balance through an
investment loan was entered into with the caisse populaire that
had provided the original loan.
You will find those two documents appended to this
questionnaire.
I would ask you to note that these financing arrangements are now
no longer with the Caisse populaire Laurier, but rather are with
the Caisse populaire de Sainte-Foy.
As for confirmation of interest paid, reference documentation is
also appended hereto.
5. What improvements have been made to
the property to facilitate its rental?
Please be precise as to the kind of repairs or improvements made
to the rental unit concerned and state the costs and the years
concerned.
First, the unit was originally completely furnished with a
maximum of practical amenities and comfort for tenants: numerous
items for the kitchen, laundry facilities, towels, sheets, toilet
articles and so on.
And in 1996, all the walls and ceilings were painted.
6. On a monthly basis, where applicable,
please provide the following details for the taxation years: 1993
to 1997 inclusive.
YEAR
RENTAL
NAME
OF
TENANT'S
AMOUNT
TENANT
RELATION
TO YOU
(Family, friend, etc.)
1992[2] US$1,100.00 - 2
wks
Denis
Malépart
No relation
US$1,100.00 - 2
wks
André
Breton
No relation
1994 C$1,400.00 - 2
wks
Béco
Inc.
Business relationship
Yvan Leblanc
C$1,526.00 - 2
wks
(No lease exists.) No relation
1995 C$1,400.00 - 2
wks
Béco
Inc.
Business relationship
Gilles Huard
C$2,169.00 - 3
wks
(No lease exists.) No relation
1996 C$1,400.00 - 2
wks
Béco
Inc.
Business relationship
Yvan Leblanc
C$1,054.00 - 2
wks
Jean-Roch Massé[3]
N/A
1997 US$1,350.00 - 2
wks
Jn-Philippe
Jacquet
No relation
US$1,100.00 - 2
wks
Mr.
William
No relation
1998[4] US$1,600.00 - 4
wks
Benoît Boivin
No relation
US$ 785.00 - 1.5
wks
Béco
Inc.
Business relationship
Yvan Leblanc
US$1,600.00[5] - 4
wks
Jean-Guy Caron Friend
US$ 350.00[6]
- 1
wk
Daniel Morin,
C.A.
Accountant for my
business, Béco
Inc.
Please submit the leases concerned.
The only leases prepared for these rentals are appended hereto,
except where my business leased my condominium directly for its
business relations (in which case, it paid me directly).
7.
How do you set the rent for each unit (e.g., based on market
comparisons, with a view to attracting a specific type of tenant,
etc.)?
The only factor guiding me in determining rental costs at
Waterside Village is the policy of the condominium owners'
association. The weekly cost stated in that policy is $550 in
high season and $350 in low season. A person may rent for
somewhat less than those rates but that should not be the
rule.
8.
If the unit was not rented for a given period of time, state
whether it was available for rental. If it was not, explain why
not.
My condominium was always available for rental.
9.
If the unit was available for rental, what efforts did you make
to find tenants? Specifically describe the advertising you did,
providing supporting documents regarding advertisements placed,
rental agencies used, etc.
Until recently, responsibility for renting my Florida condominium
was in the hands of Nicole Côté, who, at the
time I made my purchase, was responsible for administering
Waterside Village and in charge of rentals there. Condominium
ownership did and still does lend itself to direct rentals at the
association office in Florida.
But, there is nothing preventing an owner from placing his own
advertisements and following them up. However, as I am a systems
development consultant and have a business (all my time must be
devoted to the management of my business operations in
Québec), I gave Ms. Côté a verbal
mandate to rent my condominium in Florida.
Recently, however, I decided to proceed differently because I was
convinced that the unit could be rented out more. Accordingly,
before Christmas 1997, I charged a female friend in Quebec City,
who also has a condominium in Florida which she rents through
newspaper ads, with renting my condo, for a commission of
10 percent of gross income.
She accepted the contract and has already found me two rentals
and, had it not been for a friend who reserved the condo for one
month but postponed his stay because of the ice storm, then
ultimately delayed it until next fall, I would have had another
rental, for one month, through her.
I am finally quite pleased now because this woman works in a very
organized manner, using follow-up cards, standard
agreements, documentation with instructions for tenants, whom she
sees before proceeding with the rental (in order to ensure that
they are suitable), etc.
10.
Is the property rented at this time? If not, please explain why
not. If the property has been sold, please submit the contract of
sale.
The property is currently rented and has not been sold because I
am now more convinced that the person I have entrusted with its
rental will be more effective than the first.
11.
Do you yourself use the rental property that is not your personal
residence, or is it used by members of your family or by friends
for recreational purposes or vacations? If so, do you require
payment of rent and what is the amount of that rent?
I alone use my Florida condominium without paying and I do
so for the purpose of carrying out owner's visits during slow
periods for rentals when renting it is definitely even more
difficult (low season).
However, my business has occasionally rented it, and paid, with a
view to providing a service to its clientele.
12.
Please submit the statement of revenue and expenditure for 1997,
if available.
That statement of revenue and expenditure is not available at
this time. It will be available at the end of April of this year
and will be forwarded to your department.
13.
Describe in detail the reasons for the rental losses incurred in
1993 to 1996 inclusive. What measures did you take to reduce
expenses or increase income?
One of the reasons was that I expected more from the person
responsible for rentals, who was presented to me as a competent
person in the field when I purchased my condominium in
Florida.
However, a number of factors soon arose that were decisive and
catastrophic with respect to rentals in Florida for small owners
who do not have the networks of the Hilton, Holiday Inn and
other chains.
In this regard, one must not forget the murders of tourists that
were committed over a period of more than one year and caused the
number of tourists visiting Florida to decline sharply.
In addition, and above all, there is the matter of the value of
the Canadian dollar in relation to the US dollar, which fell
further sometime after I purchased my condominium in Florida.
I remember in that regard that, upon finalization of my purchase
agreement with the signing of the contract, within one week I had
to pay $5,000 more than I had anticipated, precisely as a result
of the exchange rate.
As matters now stand, there has been no improvement in this
regard; things are worse. The exchange rate when buying US
currency even exceeds 40 percent.
As for the measures that I have taken, I need not mention that I
cannot do anything about the exchange rate. I also have to stay
within the guidelines suggested by the condominium owners'
association as regards the weekly rental (US$350 in the low
season and US$550 in the high season). There may be some price
cuts to compensate for the exchange rate, but they cannot be too
great because that would entail too great a risk of bringing in
an undesirable clientele with the consequences that would have
for the site.
The decisive step that I have taken is essentially having
handed over responsibility for renting my condominium to this
friend I now have who owns a condominium on the same site. She
has the time to attend fully to her condominium and achieves
success. This arrangement began last fall and, for her, handling
the rental of my condo does not entail any greater expense or
effort than are involved in just renting her own
condominium.
14.
Describe your rental experience prior to the purchase of the
property concerned.
I did not and still do not have a great deal of experience in
this area. I believe that is true of most condominium owners who
rent out their units at the Waterside Village site. However, I
was previously a co-owner of a hotel/motel in
Québec.
In addition, my activities as a management systems development
consultant and in the administration of my business take up all
my time and I must therefore rely on someone else to handle the
rental.
15.
How much time do you devote per day/week/month to the rental
property? What specific tasks do you perform yourself (e.g.,
maintenance, rent collection, selecting tenants, etc.)?
The only tasks I perform myself are maintenance type
tasks, which I do when I visit the condo as its owner, and doing
painting, as I did in 1996. I look after collection of income and
administration of expenses and communicate with the person who
handles the rentals for me. Lastly, I solicit a few acquaintances
in order to rent the condo.
It is very hard to evaluate the time all this represents on an
annual basis. I would estimate between 75 and 100 hours a
year.
16.
Describe your plan for profitability when you began renting your
property. Append any relevant documents.
I had no plan except to rely on the sales infrastructure in place
at Waterside Village. In short, I felt a plan was not necessary
for such a small undertaking. It was only a condominium unit, not
a condominium complex.
17.
Describe your present plan for profitability aimed at having your
operation finally produce net income. Append any relevant
documents.
I very much hope that my Florida condominium will produce
net income.
I nevertheless believe that, for this to happen, it is not
necessary to do anything more than use the services of someone
who is already renting her own condominium on the same site (the
aforementioned friend). That alone will cost me 10 percent
of the gross revenue that will be generated.
I have a choice to make: either my business in Quebec with its
employees or larger-scale rental operations. The choice I have
made will be less costly and will generate more income,
considering that I also have to manage my business, which
requires a great deal of time.
[19] To
determine that there is a reasonable expectation of earning a
profit from the rental of a condo, it is essential that the owner
be able to show that he had a business plan offering a realistic
and reasonable hope of earning real income, having regard to all
the factors associated with the investment.
[20] On this
important and fundamental question, the appellant essentially
stated that the real estate developer had held out to him the
possibility of earning income of perhaps approximately $11,000 a
year, which, in the appellant's view, constituted a
profitable business.
[21] However,
it took the appellant more than two years to realize that the
rental service provided by the developer was ineffective and
inadequate and that it produced no results. He then decided to
rely on Ms. Rioux, a neighbour who was scarcely more active,
judging by her results.
[22] Can it be
concluded from the facts adduced in evidence that the appellant,
a prudent and well-organized businessman, put in place a serious
plan the ultimate purpose of which was to create a profitable
operation? If he did, the evidence did not prove it.
[23] On the
contrary, the preponderance of the evidence showed that the
appellant was certainly interested in the business becoming
viable, but his initiatives and efforts to this end were worse
than marginal. I believe that the appellant's primary concern
was much more enhanced personal well-being through ownership of a
property in Florida than a fixed and firm intention to earn a
profit from the property.
[24] If the
plan had been carried out with a true intention to earn a profit,
the appellant definitely could and should have shown that he had
actually took every measure to ensure greater income than he
actually received. There is a host of means available to rent a
condo in Florida. All the appellant saw fit to do was to rely on
the promoter, who no doubt had scores of other units to rent, and
then on a neighbour who herself rented a similar condo.
[25] The
appellant no doubt operated on the principle that his investment
would theoretically be profitable from a tax standpoint, but he
failed to understand that the actual facts had to support the
theory. The establishment of a genuine business whose main
objective is to make a profit must be preceded by an objectively
realistic and reasonable business plan on which serious and
appropriate action is taken.
[26] For an
undertaking to constitute a source of income, a taxpayer must
have profit in mind or have a reasonable expectation of profit.
Where there is no reasonable expectation of profit, there is no
source of income and no basis on which the taxpayer can calculate
a rental loss in the case of a condominium.
[27] It was
admitted that the amount of interest was greater than gross
income for 1994, 1995 and 1996 (subparagraph (h) of the
Reply). This is a decisive factor regarding which
Robertson J.A. of the Federal Court of Appeal wrote as
follows in Mohammad v. The Queen, [1998] 1 F.C.
165, 97 DTC 5503, at page 173:
. . . Too frequently, the amount of yearly interest payable on
the loan greatly exceeds the rental income that might reasonably
have been earned. This is true irrespective of any unanticipated
downturn in the rental market or the occurrence of other events
impacting negatively on the profitability of the rental venture,
e.g. maintenance and non-capital repairs. In many cases, the
interest component is so large that a rental loss arises even
before other permissible rental expenses are factored into the
profit and loss statement. The facts are such that one does not
have to possess the experience of a real estate market analyst to
grasp the reality that a profit cannot be realized until such
time as the interest expense is reduced by paying down the
principal amount of the indebtedness. Bluntly stated, these are
cases where the taxpayer is unable, prima facie, to
satisfy the reasonable expectation doctrine. Therese are not
cases where the Tax Court is being asked to second-guess the
business acumen of a taxpayer whose commercial or investment
venture turns out to be less profitable than anticipated. Rather
these are cases where, from the outset, taxpayers are aware that
they are going to realize a loss and that they will have to rely
on other income sources to meet their debt obligations relating
to the rental property.
. . .
[28] The
appellant indeed reduced the mortgage debt and consequently the
amount of interest, but it would appear that Revenue Canada's
intervention had something to do with this turnaround. There was
however no change with regard to the energy devoted to increasing
income, even though losses were heavy.
[29] The
appellant consulted no one and prepared no business or recovery
plan. He let things go and continued to rely on an arrangement
which, over several years, had yield only highly disappointing
results.
[30] There
being a tax benefit involved, the appellant did not see fit to
review the situation by questioning his methods or considering
other methods in order to increase income, as he claimed that his
business took up all his available time.
[31]
Furthermore, this was not a purely commercial operation; the
condo purchase was a real source of personal benefits for the
appellant. Indeed, a portion of the rental income came from his
personal use and from use by his family.
[32] It is
normal for any business to experience difficulties in the
beginning and to incur losses in its first years until it is able
to make certain adjustments and get itself on track. However,
this implies that everything has been done in accordance with a
serious and objective business plan in which expenses and revenue
are assessed regularly. It is not essential that the
implementation be entirely in accordance with the initial plan. A
number of unforeseen circumstances may arise, which call for
reaction, questioning or the consideration of corrective
action.
[33] In the
instant case, the appellant invested in a project whose
attractiveness had clearly been exaggerated by the vendor,
without first checking to see whether the vendor's
representations were reasonable and realistic. The appellant
borrowed to finance the purchase, which meant that the losses
would be large. Lastly, he entrusted the rental of his condo to
persons who clearly had no interest, expertise or genuine desire
when it came to maximizing revenue, a nonetheless fundamental
aspect.
[34] There is
therefore reason to believe that the appellant's main
consideration was not profit at all costs but rather the personal
benefit of owning a condo in Florida, a portion of the costs of
which would be paid by the government.
[35] The whole
of the evidence showed that profit was not the ultimate goal
sought during the years in issue; the appellant's actions
demonstrated that profit was not at all a priority.
[36] On a
preponderance of evidence and based on the tests set out in the
case law, I find that, following his purchase of a condo in
Florida in 1992, the appellant had no reasonable expectation of
profit in 1994, 1995, 1996 and 1997.
[37]
Consequently, the appeal is dismissed.
Signed at Ottawa, Canada, this 15th day of September 2000.
"Alain Tardif"
J.T.C.C.
Translation certified true on this 29th day of November
2001.
[OFFICIAL ENGLISH TRANSLATION]
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
1999-4021(IT)I
BETWEEN:
JEAN-ROCH MASSÉ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on July 18, 2000, at
Québec, Quebec, by
the Honourable Judge Alain Tardif
Appearances
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Valérie Tardif
JUDGMENT
The
appeals from the assessments made under the Income Tax Act
for the 1994, 1995, 1996 and 1997 taxation years are dismissed in
accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 15th day of September 2000.
J.T.C.C.
Translation certified true
on this 29th day of November 2001.
Erich Klein, Revisor
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