REASONS FOR JUDGMENT
Masse D.J.
[1]
This is an appeal from reassessments made under
the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) as amended (the Act),
in respect of the appellant for the 2008, 2009 and 2010 taxation years.
[2]
The issue is whether rent that the appellant
earned from an immovable property located in St‑Irénée, Charlevoix, is business
income or rental property income. The difference is
significant, because, if this is a rental property, a capital cost allowance is
not allowed if the deduction resulted in creating or increasing a loss. However,
a loss may be created or increased through a capital cost allowance in the case
of business income.
[3]
In filing her income tax returns, the appellant
reported business losses from renting the property of $20,564 for 2008, $16,513
for 2009 and $18,560 for 2010, respectively. The Minister of National Revenue
(the Minister) was of the view that the appellant did not operate a business,
but mainly used the immovable property to earn rental income. The Minister thus
converted the business losses from renting the property into rental losses. The
Minister issued notices of reassessment to the appellant in which he disallowed
the appellant’s business expenses as deductions for capital cost allowance of
$6,636 for 2008, $6,445 for 2009 and $6,290 for 2010, respectively. These
capital cost allowance amounts were disallowed because there was no net rental
income from renting the property. According to the Income Tax Regulations,
C.R.C., c. 945 (the Regulations), a capital cost allowance on a rental property
cannot result in the creation or increase of a rental loss.
[4]
This appeal involves only the capital cost
allowances.
Factual background
[5]
The appellant testified that, on May 14, 2004,
she purchased an immovable property, a cottage located in St‑Irénée, Charlevoix,
Quebec. She made significant renovations to the cottage
to prepare it to lodge tenants.
[6]
The appellant stated that she wanted to operate
a tourist accommodation business under the name “La Fille d’Adélia…l’Écossaise”.
To do so, she concluded a contract with Hébergement Charlevoix inc.
(Hébergement) a business specializing in brokering tourist accommodations in
the Charlevoix region. The contract began on September 1, 2006, and was renewed
every year since that date. In this contract, the appellant mandated
Hébergement to advertise and manage the renting of the property. Hébergement
advertises the rental property on its Web site and other sites. Hébergement was
required to find tenants for the appellant and to sign rental contracts on her
behalf. Hébergement was also mandated by the appellant to collect and remit
accommodation tax to the Ministère du Revenu du Québec (at the rate of $2 per
night). The appellant had to pay Hébergement 15% commission on the amounts set
out in rental contracts. From time to time, the appellant rented out the
property herself without an intermediary, but she still had to pay Hébergement
the 15% commission. According to the terms of the contract, the appellant had
to hold a commercial insurance policy. Therefore, the appellant took out an
insurance policy with Promutuel du Littoral, a mutual general insurance company,
to insure the property as a commercial tourist accommodation property. The
insurance amount was $2,000,000 for civil liability. The appellant pays insurance
premiums with interest comparable to a residential dwelling. The appellant
registered her establishment with the Association Touristique Régionale de
Charlevoix, the annual fee for which is $68 (collected by Hébergement) for
advertising the rental property. The property is also subject to quality
assessment criteria established by the Corporation de l’industrie touristique
du Québec (CITQ). The appellant obtained a “Three Star” certificate from the
CITQ. The certificate is reviewed every two years, and the annual fee for it is
$245 (collected by Hébergement). The appellant created a Web site in 2005,
which is regularly updated.
[7]
Since she had acquired the cottage, she rented
it out to tenants for short stays ranging from three days to a few weeks. However,
the Domaine Forget (the Domaine) an international classical music academy, has
rented the cottage for the lodging of instructors and musicians for the summer
season from mid-June to the end of August every year for the last nine years. After
the summer season, the appellant rented out the property to other tenants, but
her main client was clearly the Domaine. The rental season is summer and the
Holiday season.
[8]
The appellant has never made an operating profit
from this activity. She has claimed significant recurrent losses from year to
year. The situation was aggravated by the 2008 economic crisis and by the fact
that, since that time, there has been more tourist accommodations and fewer
clients, thus less revenue for the owners of tourist accommodations.
[9]
However, every year, the property underwent
significant renovations. The renovations were made during the winter when the
property was not rented out. The appellant is on site quite often to supervise
the workers and also to manage the property with respect to repairs and
maintenance.
[10]
The cottage can accommodate up to seven people.
The ground floor houses a kitchen, which is a shared space with the dining
room, a living room with a fireplace, three bedrooms, a bathroom with a tub and
shower, and a laundry room. The basement has a living room, a bedroom and a
bathroom with shower.
[11]
The cottage is fully furnished, including household
appliances. There are three televisions with cable, Wi-Fi, a DVD player, and a
CD sound system. telephone service is provided except for long-distance calls.
The cottage is heated with electricity and a wood-burning stove. Firewood is
provided. The kitchen is fully equipped for cooking and serving meals. In
addition, the appellant provides dishes, cutlery, utensils, assorted glassware,
fondue set, microwave oven, toaster, coffeemaker, kettle, refrigerator with
condiments (preserves, vinegar, cooking oil) and non-perishable food items such
as pasta. The cottage has laundry facilities, namely, a washer and dryer as
well as laundry products such as laundry detergent. The appellant provides all
bedding including sheets, pillows, duvets and bed covers. Bathroom amenities are
provided, namely, towels and toiletries. The appellant provides toilet paper,
paper towel and facial tissue for the beginning of the stay. All cleaning
products are provided for the entire stay. Personal hygiene products are not
provided. The appellant does not provide a restaurant or bar service and she
does not prepare meals, as she says this is not a bed and breakfast or an inn. The
appellant is responsible for maintenance including landscaping in the summer
and snow removal in the winter. The appellant makes available to her tenants
some board games and a wide range of tourist brochures promoting the richness
and beauty of the Charlevoix region. The cottage also has an outside patio with
patio furniture. Pets are not allowed, and the cottage is non-smoking.
[12]
The appellant testified that she offers
housekeeping service if tenants want it (but this is not mentioned in the
advertisement posted on Hébergement’s Web site). However, the appellant stated
that tenants rarely use this service even if it is part of the package. People
want peace and quiet and prefer to be left alone. They do not want strangers
coming in to their space. In any case, the linen closet is open to tenants and they
may change their bedding when want to and take all the towels they need at
their convenience. Tenants may use the laundry room to do laundry as needed if
they want to.
[13]
The appellant employs a person who prepares the
cottage for the tenants’ arrival and who welcomes them when they arrive. In
addition, this person also ensures that the cottage is secured when the tenants
leave.
[14]
The rent ranges from $425 to $900 plus
tax for a two-day stay. For a week, the rent is $900 plus tax, and during the
Holiday Season, the rent is $1,100 plus tax. The rental season is summer and
the Holiday Season.
[15]
The appellant has few clients. People rent the
cottage short‑term – only three days or one or two weeks. The
exception is the Domaine, which rents for the summer. According to
Exhibit A‑1, tab 6, during the 2008 taxation year, the
appellant had eight short-term tenants. During the 2009 taxation year, the
appellant had four short‑term tenants. During the 2010 taxation
year, the appellant had five short‑term tenants.
[16]
There is no doubt that the appellant’s main
client was the Domaine. The Domaine rented the cottage fully for a period of 10
weeks during the summer, every year, starting in mid-June until the end of
August. The Domaine took the cottage as is and took care of everything. The
Domaine took the keys at the beginning of the stay and gave them back at the
end of the stay. The Domaine used its own housekeeping, cleaning, bedding and
laundry service. The Domaine maintained the lot. The Domaine took the house in
its care.
The appellant’s position
[17]
The appellant maintains that the property in
question is not a rental property within the meaning of subsection 1100(14.1)
of the Regulations. According to the appellant, the property was tourist
accommodations. The appellant stated that she operated a business and that she
was not earning rental property income. She is therefore entitled to claim a
capital cost allowance deduction even if it creates or increases a loss.
[18]
According to the appellant, the Court must allow
the appeal.
The respondent’s position
[19]
The respondent maintains that, in this case, the
appellant did not operate a business during the years at issue, in accordance
with subsection 9(1) of the Act. The respondent argues that the appellant
used the immovable property mainly for the purpose of earning a rental income. Thus,
the Minister was justified in disallowing, for each of the years at issue, the
capital cost allowance the appellant had claimed because, during the years at
issue, she reported no net income from the rental of the property, in
accordance with subsections 1100(11) to 1100(14) of the Regulations. In
addition, according to the Minister, the appellant paid the accommodation tax,
association fees and membership fees in order to earn rental income, not
business income.
[20]
Thus, according to the respondent, the appeal
must be dismissed.
Statutory provisions
[21]
The relevant sections of the Act read as
follows:
9. (1) Subject to
this Part, a taxpayer’s income for a taxation year from a business or property
is the taxpayer’s profit from that business or property for the year.
(2) Subject
to section 31, a taxpayer’s loss for a taxation year from a business or
property is the amount of the taxpayer’s loss, if any, for the taxation year
from that source computed by applying the provisions of this Act respecting
computation of income from that source with such modifications as the
circumstances require.
. . .
18. (1) In
computing the income of a taxpayer from a business or property no deduction
shall be made in respect of
(a) an outlay or expense except to the
extent that it was made or incurred by the taxpayer for the purpose of gaining
or producing income from the business or property;
(b) an outlay, loss or replacement of
capital, a payment on account of capital or an allowance in respect of
depreciation, obsolescence or depletion except as expressly permitted by this
Part;
. . .
20. (1)
Notwithstanding paragraphs 18(1)(a), 18(1)(b) and 18(1)(h),
in computing a taxpayer’s income for a taxation year from a business or
property, there may be deducted such of the following amounts as are wholly
applicable to that source or such part of the following amounts as may
reasonably be regarded as applicable thereto
(a) such part of the capital cost to the
taxpayer of property, or such amount in respect of the capital cost to the
taxpayer of property, if any, as is allowed by regulation;
. . .
248 (1) In this
Act,
. . .
“business” includes a profession, calling, trade, manufacture or
undertaking of any kind whatever and, except for the purposes of paragraph
18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f),
an adventure or concern in the nature of trade but does not include an office
or employment;
[22]
The Regulations provide the following:
PART XI
CAPITAL COST ALLOWANCES
Division I
Deductions Allowed
1100. (1) For the purposes of paragraphs 8(1)(j)
and (p) and 20(1)(a) of the Act, the following deductions are
allowed in computing a taxpayer’s income for each taxation year:
(a) subject to subsection (2), such amount as the taxpayer
may claim in respect of property of each of the following classes in Schedule
II not exceeding in respect of property
. . . [The classes and percentages allowed are listed here]
of the undepreciated capital cost to the taxpayer as
of the end of the taxation year (before making any deduction under this
subsection for the taxation year) of property of the class;
. . .
(11) Notwithstanding subsection
(1), in no case shall the aggregate of deductions, each of which is a deduction
in respect of property of a prescribed class owned by a taxpayer that includes
rental property owned by him, otherwise allowed to the taxpayer by virtue of
subsection (1) in computing his income for a taxation year, exceed the amount,
if any, by which
(a) the aggregate of amounts each of which is
(i)
his income for the year from renting or leasing
a rental property owned by him, computed without regard to paragraph 20(1)(a)
of the Act, or
(ii) the income of a partnership for the year from renting or leasing a
rental property of the partnership, to the extent of the taxpayer’s share of
such income,
exceeds
(b) the aggregate of amounts each of which is
(i) his loss for the year from renting or leasing a rental
property owned by him, computed without regard to paragraph 20(1)(a) of
the Act, or
(ii) the loss of a partnership for the year from renting or leasing
a rental property of the partnership, to the extent of the taxpayer’s share of
such loss.
. . .
(14) In this section and section
1101, “rental property” of a taxpayer or a partnership means
(a) a building owned by the taxpayer or the partnership,
whether owned jointly with another person or otherwise, or
(b) a leasehold interest in real property, if the leasehold
interest is property of Class 1, 3, 6 or 13 in Schedule II and is owned by the
taxpayer or the partnership,
if, in the taxation year in respect of which the
expression is being applied, the property was used by the taxpayer or the
partnership principally for the purpose of gaining or producing gross revenue
that is rent, but, for greater certainty, does not include a property leased by
the taxpayer or the partnership to a lessee, in the ordinary course of the
taxpayer’s or partnership’s business of selling goods or rendering services, under
an agreement by which the lessee undertakes to use the property to carry on the
business of selling, or promoting the sale of, the taxpayer’s or partnership’s
goods or services.
(14.1) For the purposes of
subsection (14), gross revenue derived in a taxation year from
(a) the right of a person or partnership, other than the
owner of a property, to use or occupy the property or a part thereof, and
(b) services offered to a person or partnership that are
ancillary to the use or occupation by the person or partnership of the property
or the part thereof
shall be considered to be rent derived in that year from the
property.
(14.2) Subsection (14.1) does not
apply in any particular taxation year to property owned by
(a) . . .
(b) an individual, where the property is used in a business
carried on in the year by the individual in which he is personally active on a
continuous basis throughout that portion of the year during which the business
is ordinarily carried on; or
(c) . . .
Analysis
[23]
In this case, the issue is whether the appellant
earned rent from “La Fille d’Adélia…l’Écossaise” so that the property can be
considered a rental property rather than a business. A rental property is
defined in subsection 1100(14) of the Regulations. It is a building that
produces rent. Rent is defined in subsection 1100(14.1) as “gross revenue
derived in a taxation year from the right of a person or partnership, other
than the owner of a property, to use or occupy the property or a part thereof”.
However, according to paragraph 14.2(b), there is an exception, and “[s]ubsection
(14.1) does not apply in any particular taxation year to property owned by an
individual, where the property is used in a business carried on in the year by
the individual in which he is personally active on a continuous basis”.
[24]
The issue of whether income from an immovable
property is income from a business or income from a rental property is not easy
to analyze and determine. Much has been written on this issue by the courts and
scholars.
[25]
In Wertman v. Canada (Minister of National
Revenue), [1965] 1 Ex.C.R. 629, [1964] C.T.C. 252, 64 DTC 5158, Judge
Thurlow of the Exchequer Court of Canada dealt with an apartment building. He
ruled as follows at paragraphs 22 and 23:
[22] Under
the Canadian statute what is taxed as income from a property or a business is
the “profit therefrom” for a taxation year, and this poses the question “what
is the profit from the property or business?” In the great majority of cases it
is quite immaterial whether the profit is regarded as arising from a business
or from property, but when the question does arise, it is in my opinion simply
one that must be resolved on the facts of the particular case and I know of no
single criterion on which it may be determined. That the rentals are primarily
or entirely receipts from property may be a factor of great importance but it
is not necessarily conclusive for the question in a case such as the present
one is not so much what the income is derived from but whether the income can be
fairly described as income from a business within the meaning of that term as
used in the Act. Moreover, cases are I think readily conceivable where
particular income may be accurately described as income from property and just
as accurately regarded as income from a business.
[23] On the evidence in the present case the sum received as
rentals from the Park Strand should I think be regarded as having accrued to
the appellant and his wife and son predominantly, if not entirely, in their
capacity as owners of the property rather than as traders, and I also think
that the rentals should be regarded as having accrued predominantly, if not
entirely, from the use by tenants of the property in the sense that they
represent payments for the tenants’ occupation thereof rather than payments
arising from the process of letting apartments and providing certain limited
services such as heat of which the tenants have the benefit. To my mind while
there is a sense in which the rentals can be said to be revenues from a business
of letting apartments or operating an apartment building for the purpose of
securing rentals, it is a fanciful and unrealistic way of describing them for
it puts the emphasis of the description of their source where it does not
belong viz., on the mere sine qua non or conduit pipe of the letting activity
rather than on the fact that they arise from the use or exercise of the owners’
right of occupation of the property by tenants who pay not for the letting but
for the use of the property. There may well be cases wherein the extent of
various services provided by the landlord under the terms of the leasing
contract is such that the rental paid by the tenant can be regarded as in a
substantial measure a payment for such services as well as for the use of the
property and the interrelation of the use of the premises with the use of such
services may be so extensive that the whole sum paid could readily be regarded
not as mere rental of property but as true receipts of a business of providing
apartments and services to tenants but I do not regard this as a case of that
kind. The nature of the services provided in my opinion also has a bearing on
the question some, such as maid service and linen and laundry service, being
more indicative of a business operation than the heating of the building which
in my view is so closely concerned with the property itself as to offer no
definite indication one way or the other. Nor do I think that the fact that the
management of the property occupies the appellant’s time or the fact that he
uses his car to go to and from the property indicate that the operation is a
business for at most these facts indicate that he renders a service to himself
and to the other owners of the building which so far as charged for represents
a proper outgoing against revenue for the purpose of ascertaining the net
profit divisible among the owners regardless of whether the rentals are mere
income from property or income from a business. If the appellant had a profit
from such charges it would no doubt be taxable as his income but there is no
indication that he had any profit therefrom and no such issue has been raised.
Moreover while the appellant’s share of the net profit of the Park Strand may
to him represent both his share of the profit and in a sense the result of his
efforts the share of his wife in her hands does not represent return for effort
on her part but simply income from her property and it is her share alone with
which the case is concerned. On the whole there appears to me to be nothing in
the situation which affects the rentals with a trading character as distinct
from mere income receipts from property and I am accordingly of the opinion
that the profits from the Park Strand were not profits from a business and that
the operation of the Park Strand was not a business in which the appellant and
his wife were partners. Section 21(4) therefore cannot be invoked to support
the assessment.
[26]
In Walsh v. Canada (Minister of National
Revenue – M.N.R.), [1966] Ex.C.R. 518, [1965] C.T.C. 478, 65 D.T.C.
5293, the appellants owned two large apartment buildings and a shopping centre.
The properties were managed for the owners by a management company. Tenants
were supplied with heat, stoves and refrigerators, carpets and drapes, and
parking spaces. Shared hallways were carpeted. An elevator, coin-operated
laundry, window washing, repair of electric and plumbing facilities, decorating
as required, and a telephone in the entrance lobby were also provided. Judge
Cattanach ruled that the appellants earned income from a rental property, not from
a business. Judge Cattanach explained at paragraphs 22 and 25:
[22] In my
view, prima facie the perception of rent as land owner is not the
conduct of a business, but cases can arise where the extent of the various
services provided by the landlord under the terms of a leasing contract and the
time and labour devoted by him are such that the rental paid by the tenant can
be regarded as in a substantial measure payment for such services as well as
for the use of the property and the interrelation of the use of the premises
with the use of such services may be so extensive that the whole sum could
readily be regarded not as mere rental of property, but as true receipts of a
business of providing apartment suites and services to tenants. It is a
question of fact as to what point mere ownership of real property and the
letting thereof has passed into commercial enterprise and administration.
. . .
[25] On the
evidence I think that the rentals received by the appellants should be regarded
as having accrued to them as owners of the properties rather than as traders
and that the rentals accrued from use by the tenants of the property in that
the rentals represent payments for their occupation thereof rather than from a combination
of such use and the other services from which the tenants benefitted. I regard
the additional services which were provided to tenants as being relatively
insignificant and insufficient to convert the appellants from land owners into
the conductors of a business. The services such as the provision of heat,
electric stoves and refrigerators, janitorial services to the common hallways,
snow removal, carpeting in some rooms of the suites and drapes for windows are
those which tenants have come to expect and are those which landlords normally
provide in living accommodation of this kind. These are refinements offered to
the tenants in connection with the occupation of suites and, in most instances,
are also property for the use of which, along with the suites themselves, rent
is paid. The heating of the building and snow removal are ancillary to the
property itself and are exercised in the landlords capacity as owner of the
property rather than as a service to tenants although the tenants incidentally
enjoy the benefits thereof. While the nature of services provided has a bearing
on the question, the services above described are not such as would
characterize the rental received therefor as income from a business rather than
income from property, as services such as the provisions of breakfast, maid,
linen, laundry and such like services might do.
[27]
In Canadian Marconi v. Canada, [1986] 2
S.C.R. 522 (S.C.C.), Justice Wilson of the Supreme Court of Canada observed as
follows at paragraph 7:
[7] The
distinction between income from a business and income from property is a
difficult one to draw but it is one which the Act compels us to make. There are
two reasons for the difficulty. First, the terms “business” and “property” are
broadly and loosely defined in s. 248(1) of the Income Tax Act. As a
consequence the definitions on a fair reading can be construed in such a way as
to overlap. Second, persons or corporations generally engaged in trading-type
activity often use property as a means of earning income. On first reflection
this sort of income could realistically be considered either business income or
property income. The observation of Thurlow J. (as he then was) in Wertman
v. Minister of National Revenue, 64 D.T.C. 5158 (Ex. Ct.), at p. 5167, that
cases are “readily conceivable where particular income may be accurately
described as income from property and just as accurately regarded as income
from a business” is frequently apposite. The courts have handled the difficult
task of deciding whether a particular receipt is business income or property
income by applying certain set criteria or indicia of trading activity and, in
the case of a corporate taxpayer, by applying a presumption in favour of the
characterization of its income as income from a business. I shall examine these
in reverse order.
[28]
In Jong v. Canada, [1998] T.C.J. No. 300
(QL), 98 DTC 1616, Judge Margeson of the Tax Court of Canada stated the
following at paragraph 8 of his judgment regarding Walsh, supra:
[8] . . .
a prima facie case is made out that the amount received from the
property was from rental and not from a business unless the Appellant can show
that the range of services provided by the landlord was such that the payment
received can be regarded as substantial payment for the services.
[29]
In Arbutus Garden Apartments Corp. v. The
Queen, [1998] T.C.J. No. 469 (QL), [1998] 3 C.T.C. 2972 (T.C.C.), Judge
Bowman (later Chief Justice) dealt with an apartment complex consisting of
seven buildings containing 302 units located on 12 acres. The owners employed
full time five managers as well as two maintenance employees and two gardeners.
When they had problems due to a high vacancy rate, the owners hired someone to
rectify the situation. Judge Bowman considered that the owners provided
tenants with far more services than is usually done in a residential apartment
building. He found that, in light of the facts before him, the owners operated
a business. Judge Bowman wrote the following at paragraphs 24, 25 and 26
of his judgment:
[24] Essentially
it is a question of fact depending on all of the circumstances. I think that
the operation of the Arbutus Apartments goes well beyond the mere passive
perception of rentals. It is clearly a business. It involved the hiring of five full
time managers, who lived in the project with their spouses, two full time
maintenance persons, and two full time gardeners.
[25] During
and prior to the year in question the project was having problems, with a high
vacancy rate and high turnover of tenants. Mrs. Janet Roethe was brought
in, in an attempt to turn the project around and she was apparently successful.
In addition to the work done by the full time staff, many services were
contracted out, such as gardening, painting and pool maintenance. There were
eight acres of gardens, with elaborate landscaping and two outdoor swimming
pools, games rooms, a health spa, and a number of party rooms.
[26] Far
more services were provided to the tenants (many of whom were seniors) than
would normally be the case in an apartment building. Mrs. Roethe testified
that in the early part of the seven years in which she worked at attempting to
rehabilitate the project she spent five days a week at the property.
[30]
In Orcheson v. The Queen, 2004 TCC 427,
[2004] 3 C.T.C. 2524; 2004 D.T.C. 2686, the appellants owned three cottages
fronting on Lake Simcoe near Keswick, Ontario. The appellants provided
firewood, barbeques, picnic tables, , a boat, a canoe, boat launching dock, the
possibility of swimming and fishing in Lake Simcoe and of snowmobiling, ice
fishing, skating and cross-country skiing, in addition to fully furnished cottages.
The cottage was clean when a tenant moved in and supplied with fresh linen. The
appellants provided cleaning services and snow removal; they cleaned the yard
and provided boat launching and docking. Justice Teskey provided a history of
relevant case law starting with Wertman, supra, and up to Arbutus,
supra. Justice Teskey described the evidence submitted by the appellants
as being very unsatisfactory. He ruled that the income from the cottages was
property income, not business income, by stating the following at
paragraphs 30 and 31 of his judgment:
[30] The use
of Lake Simcoe for boating, swimming or fishing is not a service. The use of a
barbeque, a picnic table, a phone, a television and deck chairs are likewise
not a service. Clean linen changed daily as well as daily cleaning of the
cottages would be services. There is no evidence that this volume of service
was performed. Both appellants have full time jobs in Toronto.
[31] Since
income herein is rental income, the Court must start with the premises that it
is income from property, as opposed to income from a business. Since the
evidence has not established that a substantial portion of the rents were for
services, I can only find that the income was from property.
[31]
In Venditti v. Canada, [2008] T.C.J. No.
417 (QL), 2008 TCC 553, [2009] 2 C.T.C. 2372, the appellants lived full time
in Ontario, Canada, and they all worked full time in Canada. In 1996, the appellants
acquired a condominium in Florida. The appellants expected to have an occupancy
rate of 26 weeks per year and to be able to charge between $75 and $90 per
night for short‑term rentals and approximately $52 per night for long‑term
rentals. The appellants hired the services of a broker to help them with the
rental of the property. Their intention in purchasing the property was to
register it as a business, which they did in accordance with Florida’s laws. The
property was inspected and approved by the government of Florida for short-term
rentals. The property rental included utilities, toiletries, furnishings, linen
and a heated pool. The appellants considered that they operated a business, not
a rental property. My colleague, Justice Valerie Miller, found that the
income generated by renting the property was rental income, not business
income. She stated the following at paragraph 19 of her Reasons for
Judgment:
[19] The
evidence presented by the Appellants does not allow me to conclude that a
substantial portion of the rentals they received from the property was for the
services they offered. The Appellants stated that the property was fully
furnished including linen. There was no evidence that the services provided by
the Appellants were anything beyond what would have been provided by any
landlord offering furnished apartments for rent.
[Emphasis
added.]
[32]
I note that Orcheson and Venditti,
supra, are very similar to the case at bar.
[33]
Scholars have summarized the case law well. Authors
Peter W. Hogg, Joanne E. Magee, Jinyan Li, and various other
collaborators stated at page 160 of Principles of Canadian Income Tax
Law, 7th edition (Toronto: Carswell, 2010):
Prima facie, of course, the rents derived from letting an apartment building,
office building or shopping centre, are income from property. The rents are
paid for the use of the property, not services provided by the landlord. The
difficulty arises from the fact that a landlord will often supply to tenants,
in addition to the right to occupy the rented premises, services of various
kinds. Where the services supplied consist of only those services which are of
a kind customarily included with rented premises, for example, maintenance of
building, heating, air conditioning, water, electricity, and parking, the rent
is still regarded as income from property. But if the services supplied go
beyond those which are customary for an office building or apartment building
or shopping centre (or whatever the property is), it becomes more plausible to
characterize the owner’s operation as a business rather than the mere letting
of property. Services provided by an apartment building that would be
indicative of a business classification would include services normally
provided by a hotel, i.e., housekeeping, laundry service, restaurant and room
service, etc. The extreme case is, of course, a hotel, where the extent of the
services supplied to guests makes it obvious that it is a business. Where the
range of services supplied by the landlord falls below hotel level, it becomes
a question of degree whether the nature and extent of the services makes it
appropriate to characterize the income as earned from a business.
[34]
Learned professor Vern Krishna in his book, Fundamentals
of Income Tax Law (Toronto: Carswell, 2009) came to the same conclusion at
page 253.
[35]
Thus, it can be seen that this is really a subtle
problem of classification. The higher the level of services supplied by the
taxpayer, the likelier it is that the taxpayer operates a business; the lower
the level of services, the likelier it is that the income is from the use of a
property. In general, individuals who own buildings have been recognized by the
case law as earning property income.
[36]
There is no bright-line test. This is a question
of degree. Income earned from a property by an individual is presumed to be
rent from a property. Given that in this case, the income is rental income, the
Court must base itself on the principle that this is income from a property
rather than income from a business, unless the appellant can show that the
range of services she provided was such that the payment could be considered as
being largely put towards those services. In other words, the income is
considered as a business activity only when the owner provides or makes
available to the tenants any services, which make the rental activity more than
a mere rental of immovable property. The issue is whether a substantial loss in
rent that the appellant received for the property constituted the price paid
for services.
[37]
In this case, the appellant offered a cottage that
is fully furnished including household appliances. There are televisions with
cable and Wi-Fi and telephone service. Electric and wood heating is provided. The
kitchen is fully equipped for cooking and serving meals. Some condiments and
non-perishable food items are provided. There are a washer and dryer as well as
laundry products. The appellant provides all bedding. Towels and toiletries are
provided as well as cleaning products.
[38]
Personal hygiene products are not provided. The
appellant does not provide restaurant or bar service. The appellant offers
housekeeping service, but her tenants use it only rarely, and in the case of the
Domaine, not at all. The appellant takes care of landscaping in the summer and
snow removal in the winter, but in the case of the Domaine, the tenant takes
care of it.
[39]
There is no doubt that the most important tenant
was the Domaine. The Domaine rented the cottage for a period of 10 weeks in the
summer, every summer. That is more than double the time that all other tenants
rented the cottage (see Exhibit A‑1, tab 6). The largest part
of the income from the property (more than half in 2008 and almost two thirds
in 2009 and 2010) was from the Domaine. The Domaine rented the entire cottage
and used the telephone and Internet services. However, the Domaine did not want
additional services such as cleaning, housekeeping, washing, laundry or meals. The
Domaine maintained the premises itself including landscaping (there was no need
for snow removal because the Domaine rented the cottage only in the summer). The
Domaine simply wanted to rent the cottage and its contents to use it as it
wished. The Domaine did not want anything else as additional services. Although
other tenants used additional services such as landscaping and snow removal,
they only rarely used the housekeeping service. I am not satisfied that a large
part or a substantial part of the rent was paid for services.
Conclusion
[40]
In my view, the case at bar is similar to those
in Orcheson and Venditti, supra. As it was not established
in evidence that a substantial part of the rent that the appellant received for
the property constituted the price paid for services, I must find that the
income was from a property. I am of the view that the property was used by the
appellant principally for the purpose of gaining or producing gross revenue
that is rent.
[41]
For these reasons, the appeal is dismissed.
Signed at Kingston, Ontario, this 8th
day of August 2014.
“Rommel G. Masse”
Translation certified true
on this 22nd day of September 2014
Margarita Gorbounova, Translator
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