Dunston V.R., [1996] 2 CTC 2035 (Informal Procedure)

O’Connor J.T.C.C.: — These appeals were heard on common evidence in Toronto, Ontario on October 23, 1995 pursuant to the Informal Procedure of this Court.

Issue

The issue is whether the Appellants are entitled to a deduction for certain rental losses. The rental losses claimed for each Appellant were $5,002.25 for the 1989 taxation year and $3,565.57 for the 1991 taxation year. In addition the deduction claimed for Glenoris Dunston for the 1990 taxation year was $8,448.40. The Appellant, Don Johnson, claimed no rental loss for the 1990 taxation year.

Facts

The essential facts are as follows:

1. The rental property in question was jointly purchased by the two Appellants in March of 1987 for $167,000 and was the principal residence of the Appellants.

2. In financing the purchase of the property the Appellants obtained a mortgage in an amount of approximately $107,000. There was also a second mortgage on the property.

3. Commencing in January of 1989 two rooms were rented to tenants. These two rooms were essentially bedrooms served by a common bathroom. The tenants also at times used certain other portions of the property, including the kitchen and the living-room.

4. In the 1989, 1990 and 1991 taxation years the expenses of the property were apportioned 50%, 40% and 40% to the rented premises.

5. The rental income expenses and losses were as follows:

YEAR	INCOME	EXPENSES	LOSSES
1989	$4,800.00	$14,804.50	($10,004.50)
1990	$4,250.00	$12,698.40	($ 8,448.40)
1991	$4,200.00	$11,331.14	($ 7,131.14)
1992	$4,200.00	$11,674.00	($ 7,474.00)
1993	$1,400.00	$2,412.00	($ 1,012.00)

6. Included in the expenses for the 1989, 1990 and 1991 taxation years were mortgage interest payments in the respective amounts of $22,260, $22,369 and $20,435.35.

7. The Appellants explained that they charged below market rents for the rooms in question because they were rented to students at the request of the university which had urged low rentals because students would not be able to afford anything higher.

8. The reason why the Appellant, Don Johnson, claimed no deduction in 1990 is, according to the Appellants, that their accountant had advised them that that was the best way to proceed. Another possible reason for this is that Don Johnson had business losses in 1990 and may not have considered it prudent to claim the rental loss as well.

9. The Appellants testified further that they experienced a small rental profit in 1994 and anticipated a small rental profit in 1995. From an examination of the figures above it is also apparent that the losses did diminish in 1993.

10. The Appellants explained further that the initial mortgage had been paid down and certain exhibits were filed in this connection. It appears that the original first mortgage of approximately $107,000 was in or about June of 1991 reduced to $95,000. The returns in 1991 only indicate one mortgage and it would thus appear that the second mortgage was paid off in 1991.

Submissions of the Appellants

The Appellants point to the declining losses in 1993 and small profits in 1994 and 1995 and argue that they had a reasonable expectation of profit in the years in question.

Submission of the Respondent

The Respondent’s submission is that there was no reasonable expectation of profit principally because the rentals charged were insufficient to cover the fixed costs of the property.

Analysis and Decision

It is clear that the interest on the mortgage or mortgages (ignoring other fixed costs such as taxes and insurance) totally negated the possibility of a profit in the years in question. Further, in my opinion, the improving profit picture relative to the rentals was not sufficient to justify the conclusion that there was a reasonable expectation of profit in the years in question. Moreover, no firm proof was given as to the 1994 and 1995 years and, as can be seen from the figures above, the reduction in the loss in 1993 appears directly related to the fact that the expenses actually claimed were considerably reduced, i.e., from approximately $11,000 to $14,000 in the four years prior to 1993 to only $2,412 in 1993.

In my opinion it is not possible to conclude that there was a reasonable expectation of profit in the years in question and consequently the appeals are dismissed.

Appeals dismissed.