Wallin v. The Queen, docket 98-1944-IT-I (Informal Procedure)

Date: 20000209

Docket: 98-1944-IT-I

BETWEEN:

RAE E. WALLIN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bowman, J.T.C.C.

[1] This appeal is from an assessment for the appellant’s 1993 taxation year.

[2] The sole issue is the deductibility of certain expenses incurred by the appellant in connection with a condominium owned by him in Burlington, Ontario.

[3] In 1989, the appellant bought 60% of the shares of Ryans Pet Food Terminals Inc. ("Ryans") of Burlington. 30% of the shares were bought by his lawyer and 10% by the Royal Bank. There was a loose arrangement between Ryans and another pet food chain, Berry's Pet Foods, but no formal joint venture was entered into.

[4] During the appellant's ownership and operation of Ryans, he travelled on a weekly basis to Burlington, where the company's distributing centre and head office were located. He also maintained a small office in his home in Maitland, Ontario.

[5] On average he spent from 2 to 5 days in Burlington. In the initial months, he stayed in hotels. Since this was expensive, he approached the Board of Directors of Ryans with a proposal that the company buy a condominium. The Board did not want to do so because it would have involved tying up capital.

[6] The appellant decided it would be a good investment for him to buy a condominium. He bought a two-bedroom condominium on May 30, 1990 for $160,000, with a $130,000 mortgage. It was there that he stayed for 2 to 5 days a week when he was in Burlington.

[7] Ryans paid all of the expenses of the condo, including principal and interest on the mortgage, condo fees, property taxes and insurance.

[8] This continued until about August 11, 1992 when Ryans was sold. The appellant offered to sell the condominium to the new purchasers, but they were not interested. He listed the property for sale with a real estate agent. He stated as well that he tried to rent it but without success. His correspondence with the Department of National Revenue does not mention the attempt to rent the property. In his letter of January 22, 1998 he states:

We listed it for sale November 4, 1992. After looking at the condo rental that had collapsed and reviewing the options we decided to sell and get out of it.

[9] In the notice of objection, it is stated:

Rather than renting the property to someone else, Mr. Wallin decided to list the property for sale.

[10] I think that primarily Mr. Wallin wanted to sell the property, although I accept that he probably instructed the real estate agent to look for someone to rent it if it could not be sold.

[11] The property was sold July 26, 1993 and the deal closed September 1, 1993. From the time that Ryans was sold in August 1992 until the sale of the condominium in September 1993, the condominium was vacant.

[12] The appellant incurred expenses relating to the condominium after Ryans was sold. In 1992, he incurred expenses of $5,132.17. This was claimed and evidently allowed. In 1993, he incurred expenses of $14,030.73, consisting of the following:

Mortgage interest $ 9,355.88

Common area charges $ 3,694.00

Property taxes $ 1,214.57

Insurance $ 160.00

Sale adjustments - Taxes $ ( 132.15)

- Condo Fees $ ( 258.57)

Total $ 14,033.73

[13] As well the appellant sustained a loss on the sale of about $43,525.03. He claims that the property was a rental property and that he should therefore be entitled to deduct this amount as a terminal loss pursuant to subsection 20(16) of the Income Tax Act.

[14] Whether the appellant is entitled to a terminal loss on the sale of the property depends on whether it was depreciable property in his hands. The answer to this question depends on whether it was acquired for the purpose of gaining or producing income (paragraph 1102(1)(c) of the Income Tax Regulations). Under subsection 9(3) of the Act income or loss from a property does not include any capital gain or loss from a disposition of that property. Thus, for the purpose of paragraph 18(1)(a) and for the purpose of the capital cost allowance provisions of the Act and Regulations, a purpose of realizing a capital gain is not a purpose of gaining or producing income. Of course one might ask whether, if a person's principal purpose in acquiring a property is sell it and realize a capital gain, is this not an oxymoron on the theory that the intention to sell at a gain destroys its nature as capital property and turns it into inventory. This is not, however the case in which to explore this interesting and difficult question.

[15] The question here is more mundane. Can Mr. Wallin deduct the costs of maintaining the apartment in 1993 during the period when it was vacant prior to its sale? If he can it must be on the basis that during that period he was carrying on a rental business. If I decided this point in his favour it would follow that the apartment was depreciable property and he was entitled to a terminal loss. The Crown concedes that he is entitled to an allowable capital loss of ¾ of the $43,525.03.

[16] The appellant characterizes his acquisition of the condominium as a pure business proposition and an investment. He says that when Ryans reimbursed him for his expenses this was essentially the payment of rent but that he did not mention this in his returns of income for the years 1989, 1990, 1991 and 1992 because there was no profit. The reimbursement simply resulted in a wash. This is not quite accurate. Probably the portion of the reimbursement representing principal repayments would represent an amount in excess of his deductible expenses and would be profit in those years against which capital cost allowance would be deductible.

[17] A simpler explanation is that he bought a condominium in which to stay when he travelled to Burlington and was reimbursed the cost of maintaining it in the same way as he would have been had he stayed in a hotel. If he had not been reimbursed by the company, it is open to question whether his costs of maintaining the apartment would have been deductible.

[18] This explanation seems to me to be more in accordance with reality. I do not think there was ever any intention of making a profit from renting this condominium. It was an investment that he hoped might go up in value. Unfortunately it did not. If there was a business motivation it was connected with his company's business, not the appellant's.

[19] The appeal is dismissed.

Signed at Ottawa, Canada, this 9th day of February 2000.

"D.G.H. Bowman"

J.T.C.C.