McGill v. R., [1996] 2 CTC 2517 (Informal Procedure)

Taylor J.T.C.C.: — These are appeals heard in Toronto, Ontario, on December 13, 1995, against assessments of income tax for the years 1989, 1990, 1991 and 1992 in which the Respondent disallowed claims for rental losses in the amounts of $11,454.60, $9,125.47, $8,260.87 and $12,850.00 respectively.

The Notice of Appeal read:

1. Contrary to the statement made by M. Johnstone in a letter dated Dec. 22, 1994 that I did not provide the auditor with documentation to prove revenue and expenses. I assent [sic] that I did provide the auditor with the requested information. This information included mortgage interest statements, property tax statements, house insurance statements and some utility invoices and some repair and maintenance invoices. I admit that some of the utilities and repairs invoices were lost.

2. The Appeals Division insists that I did not deduct a portion of the expenses for personal use. There was no personal use of the property. I have not lived at that property since 1988. The property was fully rented or available for rent during the entire period under review.

3. M. Johnstone in the Dec. 22, 1994 letter to me stated that I had been allowed sufficient expenses to offset the entire declared rental revenue. This was never done. Revenue Canada has denied me my legitimate expenses. This I deem to be totally unfair. Ms. Sorg’s letter dated August 5, 1994 verifies that the expenses were never allowed.

4. On Page 2 of her letter of August 5, 1994, Ms. Sorg stated that I told the auditor that I never rented the property for a profit, but in order to help with the mortgage payment and protect the property from vandalism. I have never told the auditor that I did not want to make a profit. I tried my best to make a profit but I faced rent controls and difficult economic conditions which made it difficult to find great tenants who would pay reasonable rents.

Like many other landlords, I was forced to rent the home at bargain prices. It cost me a lot of money to prevent the Bank from repossessing the property. In addition, some of the tenants did some damage to my property which I had to repair.

The Auditor obviously misunderstood me when I said that I never tried to make a profit or have an objective to make a profit.

5. Revenue Canada claims that my rental property never had a reasonable expectation of profit and hence they denied my claim for rental loss. This I deem to be grossly unfair. Had I made a profit, Revenue Canada would have taken their share of my profit as Income Tax. When I make a loss, they deny my claim. Revenue Canada cannot be allowed to have it both ways. They cannot blow and suck at the same time. This approach is very damaging to the spirit of enterprise and entrepreneurship. Revenue Canada is destroying the very fabric of capitalism which is the right to take a risk in order to make a profit.

For the Respondent, the position was:

A. Statement of Facts

1. Except as expressly admitted hereinafter, he denies the facts alleged in the Notice of Appeal.

2. With respect to paragraph number 1 of the Notice of Appeal, he admits only that the Appellant provided some of the requested information regarding the rental expenses he claimed.

3. In computing income for the 1989, 1990, 1991 and 1992 taxation years, the Appellant claimed rental losses from a property located at 8 Carl Crescent, Scarborough, Ontario (the “Property”) in the amounts of $11,454.60, $9,125.47, $8,260.87 and $12,850.00 respectively.

4. The Minister of National Revenue (the “Minister”) assessed the Appellant for the 1989, 1990, 1991 and 1992 taxation years by Notices of Assessment mailed on April 29, 1992, September 16, 1991, June 16, 1992 and June 18, 1993 respectively.

5. In reassessing the Appellant for the 1989, 1990, 1991 and 1992 taxation years, by Notices of Reassessment mailed on August 18, 1994, the Minister disallowed the deduction of the rental losses.

6. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) the Appellant and his then spouse purchased the Property (a three bedroom semi-detached house) in October, 1982 for $99,000.00 as their principal residence;

(b) the Appellant sold the Property in July, 1992;

(c) on his income tax returns for the 1989, 1990 and 1991 taxation years, the Appellant stated that his address was 8 Carl Crescent, Scarborough, Ontario;

(d) during 1989, 1990, 1991 and until July 1992, the Appellant rented part of the Property to other persons;

(e) for 1989, 1990, 1991 and 1992 the Appellant reported rental income, expenses (before capital cost allowance) and losses from the Property as follows:

YEAR			(LOSS)
	INCOME	EXPENSES
1989	$5,400.00	$28,091.00
- Personal amount - 40%		11236.40
		$16,854.60	$(11.454,60)
1990	$6,000.00	$25,209.12
- Personal amount - 40%		10,083.65
		$15,125,47	$( 9.125,47)
1991	$6,000.00	$23,768.12
- Personal amount - 40%		9.507.25
			$( 8.260,87)
		$14260.87
1992	$7,200.00	$20,050.00
- Personal amount		NIL.
		$20.050.00	a 12.850.00)

(f) interest expense included by the Appellant in total Property expenses for the 1989, 1990, 1991 and 1992 taxation years amounted to $17,624.00, $17,625.12, $17,625.12 and $16,900.00 respectively;

(g) the disallowed rental expenses were not incurred for the purpose of gaining or producing income from a business or property;

(h) the Appellant had no reasonable expectation of profit from the Property during the 1989, 1990, 1991 and 1992 taxation years;

(i) the rental expenses were personal or living expenses of the Appellant;

B. Issues to be Decided

7. The issues are:

(i) whether the expenses disallowed by the Minister were incurred by the Appellant for the purpose of gaining or producing income from a business Or property;

(ii) whether the Appellant had a reasonable expectation of profit from the Property in the 1989, 1990, 1991 and 1992 taxation years; and

(iii) in the alternative, whether the disallowed expenses were reasonable in the circumstances.

C. Statutory Provisions, Grounds Relied on and Relief Sought

8. He relies on sections 3, 9 and 67, subsection 248(1) and paragraphs 18(l)(a), and 18( 1 )(h) of the Income Tax Act (the “Act”) as amended for the 1989, 1990, 1991 and 1992 taxation years.

9. He submits that the disallowed expenses were not incurred for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1 )(a) of the Acct.

10. He further submits that the Appellant did not have a reasonable expectation of profit from renting the Property in the 1989, 1990, 1991 and 1992 taxation years, that the losses were personal or living expenses of the Appellant, and that the Appellant was properly reassessed in accordance with paragraphs 18(l)(a) and 18(1 )(h) of the Act.

11. In the alternative, he submits that the disallowed expenses were unreasonable in the circumstances.

From the testimony of the Appellant, it was clear that he had not lived in the house during the relevant periods and had only used a small portion of the garage for personal storage purposes. That eliminated “personal or living expenses” as an item for consideration. But in my view it remained for the Appellant to substantiate the business basis for the deductions claimed. His testimony continued that during the four years at issue he had been required to retain ownership and possession of the house, because it was the one asset held between himself and his wife, from whom he had separated - but with whom he had not been able to reach a settlement until 1992. During these years, because of the depressed housing market, he would have had great difficulty getting rid of the house anyway. He attempted to reduce his ongoing costs by renting it for whatever he could get for it. He kept the small rents, and paid the bills. His tax return, including the rental statements had been prepared by an accountant, and the Appellant could not explain them and knew very little about them. It appeared to be his view that since he had collected some amounts he termed “rent”, and that he would have collected more if he had been able to rent the property at a higher price and for longer periods of time, he should be entitled to deduct the expenses he had incurred, just retaining and maintaining the house. He did state that he had made some improvements to the basement area, but he was not able to identify how these improvements were designed or intended to change the economies of the situation in any effective way. He had worked only sporadically during this period, and had not lived in the house because he was either travelling, looking for work, or he was working out of town. He had collected unemployment insurance for some part of this time, and this formed a major source of his income.

I am satisfied that there was never any real intention or prospect of renting the house for any purpose of earning a profit. It is unfortunate that due to his marital situation he was unable to deal effectively and economically with the property, but that is not part of the specific question before the Court. The “losses” which the Appellant now wishes to claim did not represent the result of “income from property”, as I understand that term, but rather provided him with some funds with which to reduce expenses and also to keep someone in the house to look after it when he was away. This second objective seemed to be the major purpose. If he had been able to sell the house - notwithstanding the interest of his ex-wife, by his own admission he probably would have sustained a serious loss on the sale - a personal capital loss since this had been used only as a “principal residence”. Merely discontinuing its use as a “principal residence” by the taxpayer does not automatically change the use into a business based operation. The losses he now wishes to claim are of much the same character only delayed until 1992; there is no relationship to deductibility from other taxable income.

I do not find even in the broad and encompassing recent judgement of the Federal Court of Appeal in Tonn v. R. (1995), [1996] 1 C.T.C. 205, 96 D.T.C. 6001 a basis for allowing these appeals.

The appeals are dismissed.

Appeal dismissed.