Michael and Joyce Narine v. Her Majesty the Queen (Informal Procedure), [1995] 2 CTC 2055

Bowman J.T.C.C.:-These appeals were heard together. For Michael Narine the year in question is 1989 and for his wife Joyce Narine the years are 1990 and 1991. The issue in both cases is the deductibility in computing income of losses incurred by them in connection with the rental of property at 53 Bankview Circle, Rexdale, Ontario. The property was owned jointly by Mr. and Mrs. Narine.

In 1989 Michael Narine claimed as a deduction a rental loss of $7,055.24. In 1990 and 1991 Joyce Narine claimed rental losses of $7,351.58 and $2,789 respectively. All of these losses arose in connection with the rental of a portion of their principal residence, specifically a basement apartment.

In 1989 Mr. and Mrs. Narine bought a house in Rexdale containing about 2,800 square feet for $300,000. To finance the purchase a $200,000 mortgage was put on the property. They had three children. The basement contained three bedrooms, a living room, a kitchen, a dining room and a bathroom. They rented the basement to three students at a rental of $350 per month each, or a total of $1,050.

In 1989 Michael Narine declared income of $6,000 from renting the basement and expenses of $13,055.24. This represented 50 per cent of the entire expense of the house, including taxes ($2,427.88), maintenance and repairs ($6,500), mortgage interest ($14,190.91), insurance ($492), light, heat and water ($2,342.78) and cable ($156.92). In 1990 it was his wife who claimed the loss. She claimed 50 per cent of, inter alia, taxes ($3,386.82), maintenance and repairs ($6,000), interest ($14,980.34), light, heat and water ($2,548), insurance ($454), cable ($204), against rental of $6,435, for a loss of $7,351.58. In 1991 Mrs. Narine declared an income of $9,300 against which expenses of $12,089 were claimed. The maintenance and repairs claimed were only $481 and the net loss claimed was $2,789. We do not have the statement of real estate rentals for 1992, but in 1993 the loss claimed in this year by Michael Narine was only $311.60.

For 1994 Mrs. Narine testified that a net profit was realized. By then the mortgage had been paid down to $70,000.

From this a trend may be observed. Substantial repair costs were incurred in 1989 and 1990 as the result of damage done by students. Over the years the Narines had become more experienced in screening the type of tenants they accepted. Their mortgage had been paid down substantially, their repair costs had dropped and their revenues were up.

This was a commercial operation intended to produce a profit and ultimately it did.

The losses were disallowed on the basis that the expenses were personal and living expenses and that there was, to use the words that are regularly intoned as sort of ritual incantation, "no reasonable expectation of profit". There is no basis in this case for the "no reasonable expectation of profit" concept, if indeed it exists at all as an independent fiscal principle. It has been plucked out of the context of Mr. Justice Dickson’s dictum in Moldowan v. M.N.R., [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, and comes originally from the definition of personal and living expenses in section 248 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act”). It may have some application to wealthy professionals and businessmen who dabble in horse racing that has no realistic hope of ever making a profit, or to hobbies such as photography where an amateur photographer tries to write off the costs of film and chemicals on the basis that some day there may be an off-chance that the world will recognize him or her as another Robert Doisneau, but in a commercially-oriented situation of the type we have here it is neither necessary nor appropriate. It may be applied where a homeowner rents a portion of the home to a relative who pays something toward the upkeep of the home. The expression may apply to justify the denial of losses sustained from such an operation because it forms part of the larger definition of personal and living expenses if an economic rent is not charged.

Standing by itself it is inappropriate as a basis for disallowing losses arising from activities that are fundamentally commercial. Other sections of the Act are quite adequate for the purpose-particularly paragraph 4(1 )(a) and section 67. Such is the case here. Where a person rents out to unrelated third parties the basement of his or her dwelling house and seeks to deduct 50 per cent of all of the expenses of the home, that is, in the absence of compelling evidence to the contrary, unreasonable. I agree with Mr. Calabrese that a more appropriate allocation to the rental operation would, on the basis of the evidence, be one third of the expenses.

On another point, I do not think it is appropriate that in some years Mr. Narine should claim the entire profit or loss and in some years Mrs. Narine should do so. The decision seems to have been an arbitrary one made by the accountant. The appellants are joint owners of the property, which was purchased out of their pooled resources. There is no basis, on the evidence, upon which I could conclude that the spousal attribution rules should apply.

In the result the appeals are allowed and the assessments referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellants in the years which they have appealed are each entitled to one-half of the losses computed on the basis that one-third of the expenses of the house are attributable to the rental operation that they carried on.

Appeals allowed.