Eugène Bélec v. Her Majesty the Queen (Informal Procedure), [1995] 1 CTC 2809

Bowman J.T.C.C.:-This is an appeal from the assessments for the 1989, 1990 and 1991 taxation years.

Originally, there were three points at issue, 1.e.:

A. the deduction of the amounts of $13,000, $13,000 and $16,380 for the years 1989, 1990 and 1991 as alimony,

B. a capital gain of $35,951 assessed by the Minister of National Revenue for the 1990 year instead of a capital loss of $129 computed by the appellant,

C. the deduction as expenses of $5,682 and $13,512 for the 1989 and 1990 years for a rental property located in Ste-Agathe-des-Monts.

At the beginning of the hearing, counsel for the respondent informed me that he:

A. accepted the position of the appellant with respect to the 1990 capital gain, that is to say that the appellant had a capital loss of $129 rather than a capital gain of $35,951,

B. agreed that the amounts claimed as expenses concerning the building in Ste-Agathe-des-Monts had indeed been paid.

The points at issue thus remain the following:

A. whether the amounts spent on the building in Ste-Agathe- des-Monts had been paid with a reasonable expectation of profit,

B. whether the amounts of $13,000, $13,000 and $16,380 claimed in 1989, 1990 and 1991 as alimony were deductible in computing the appellant’s income under paragraph 60(b) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). This question may be broken down into three parts:

I. whether the appellant and his wife were separated under a written separation agreement,

II. whether the appellant paid the amounts in question to his wife,

III. assuming that he did pay such amounts, whether they were paid under a written agreement in accordance with paragraph 60(b) of the Act.

The appellant purchased the building in Ste-Agathe-des-Monts in May 1989 for $95,000. The purchase was financed by two mortgages totalling $90,000 held against the building in Ste-Agathe-des-Monts and another house that he owned.

He intended to rent the first floor to a tenant and the basement, including the garage, to a person who would manage a household appliance repair business.

In 1989, the appellant rented the first floor as a residential dwelling to a tenant from July to December for $500 per month, and the basement as commercial premises to a business, Service Appareils Ménagers, for $300 per month, for a gross income of $4,800. With expenses of $10,482, including interest of $7,037, his loss was $5,682.

He converted the carport into a garage with the intention of operating the household appliance business. Thus there were three parts to the building: the first floor, the basement and the garage.

In 1990, he was unable to rent the basement or to use the garage for his business because of municipal zoning regulations, which prohibited the use of the building as commercial premises. He rented the first floor during January and February at $500 per month and for the rest of the year at $525 per month. With expenses of $19,762, including interest of $13,084, his loss in 1990 was $13,512. After 1989, the basement and garage remained empty in spite of his efforts to rent them.

The situation remained unchanged in 1991 and 1992. The rents for the first floor were higher, and expenses, particularly interest, were lower, with the result that his losses were less. For example, in 1992 he received rental payments of $10,010, while the interest increased to $9,566 for a loss of $4,894. In 1992, he succeeded in renting the basement.

In 1993, he sold the building. The Minister did not disallow the losses sustained in 1991 and 1992. I attach no importance to this fact. The Minister is not bound by what he did in another year. The only question here is to determine whether the assessment for the year in question is correct, and in this determination the actions of the Minister in other years are irrelevant.

Nevertheless, the figures for the subsequent years show at least two things: that the appellant was beginning to make progress towards a situation where he could make a profit and that the lower interest he had to pay had a dramatic effect on his earning potential.

His losses were essentially attributable to two elements:

A. the interest that he had to pay,

B. the fact that the municipal zoning prevented him from renting the basement and the garage as commercial premises.

On the basis of these facts, the Minister disallowed the deduction of his losses on the assumption that there was no reasonable expectation of profit.

It must be noted that these losses were incurred solely in a business context. There was no personal element, either in his purchase nor in his use of the building. The appellant is an experienced businessman. He took his decision in good faith on his best business judgment and on the facts available to him at the time. It is not up to the Minister (or this Court) to substitute his business acumen for that of the taxpayer, with the benefit of hindsight. The question to be asked is not, "Knowing what I know now, would I have embarked upon this enterprise?". The answer is no doubt "no", because the question only comes up when there are losses. The question should rather be: "In view of what the taxpayer knew or, as a reasonable man, ought to have known, was it reasonable for him to expect that he could make a profit, not necessarily at the beginning, but within a reasonable period of time?".

Many businesses are risky or require considerable expenditure at the outset. Some succeed, some fail. It would be manifestly unfair for the Minister to be able to participate in the profits of those that succeed and to disallow the expenses of those that do not succeed on the assumption that the Minister, with his business hindsight, should be able to consider that the entrepreneur did not have a reasonable expectation of profit. It would be equally unacceptable to permit the Minister to disallow the deduction for losses at the beginning of a business’s activities on the assumption that there was no reasonable expectation of profit, and then, after the business succeeded, to demand part of the profits as taxes by saying to the taxpayer "The fact that you lost money when you began the business proves that you did not have a reasonable expectation of profit, but as soon as you earn some money, it proves that you have now such an expectation".

On the basis of the facts established in evidence, I am convinced that Mr. Bélec had a reasonable expectation of profit. Therefore his rental losses of $5,682 and $13,512 are deductible in computing his income for the years 1989 and 1990.

As for the alimony paid by Mr. Bélec to his wife, there are several questions: A. Were the appellant and his wife separated during the 1989, 1990 and 1991 years?

Mr. Bélec and his wife, Mrs. Louise Venne Bélec, were married in 1961. According to the evidence, they were separated in 1984, and since then have not lived together. I accept Mr. Bélec’s testimony on this point.

In 1989, Mr. Bélec apparently signed a purchase agreement to acquire a building, and in this agreement stated the following:

The purchaser states that he was married for the first time to Mrs. Louise Venne, under the regime of separation as to property in a marriage contract signed before Mr. Raymond Hamel, Notary, on August 25, 1961 and that his civil status and matrimonial regime have not changed and are not in the process of being changed.

c'	[Translation.]

This statement does not conform to the evidence before this Court and although I do not approve of the habit of signing documents that contain false statements, I must base my decision on the facts established before me.

B. Were they separated under a written agreement?

A document was adduced as evidence. It reads as follows:

To whom it may concern

We hereby agree to the following:

By mutual consent, since June 25, 1984, we have been living separate and apart.

Eugene Bélec

200-180-842

48A St-Jean-Baptiste

Valley field, Quebec

JET 1Z4

Louise Venne Bélec

216-189-605

25 est Préfontaine

Ste-Agathe-des-Monts

Quebec J 8C 1R7

Eugene shall pay an alimony of $150 per week to Louise.

Louise shall assume full responsibility for Lauren, our son.

[Translation.]

This is a written agreement signed by both spouses. Mr. Lamarre claimed that it was not an agreement provided under the provisions of paragraph 60(b) of the Act. It must be admitted that it is a very informal document prepared by people who are not trained in law, but in my view, it is nevertheless a written agreement and I accept its validity.

C. The next question is to determine whether it was signed before January 1, 1989. The document is not dated. The only evidence concerning the date is the testimony of Mr. Bélec, to the effect that he sent a copy of the agreement to the ministère du Revenu du Québec along with his income tax return for the year 1984. A stamp on the copy indicates that Revenu Québec received it.

I am convinced that the agreement was signed before the end of 1988 and that Mr. Bélec and his wife were separated during 1989, 1990 and 1991 in accordance with this written agreement.

D. Mr. Bélec adduced as evidence the cheques and receipts signed by his wife, which conclusively established that he paid the amounts in question to his wife.

E. The only remaining question is whether he paid these in accordance with the written agreement. According to the provisions of the agreement, he was required to pay $7,800 per year to his wife. Nevertheless, he paid her $13,000 in 1989, $13,000 in 1990 and $16,380 in 1991. There is nothing in the written agreement or in the other documents adduced as evidence before the Court that required him to pay supplementary amounts. He increased the payments voluntarily. The increases are not under the written agreement, but this fact does not negate his right to deduct the portion of the payment stipulated in the agreement. The conclusion that any voluntary increase in the payments provided by the agreement negates the deductibility of the portion included in the agreement is absurd, and would make Mr. Bélec a victim of his own generosity and his own sense of responsibility. If there are two ways to interpret the Act, one of which leads to a reasonable conclusion and the other to a nonsensical conclusion, I prefer the one that leads to a reasonable conclusion.

Mr. Bélec is entitled to deduct the amount of $7,800 as alimony for each of the years 1989, 1990 and 1991.

The appeals are allowed, along with costs, if any, and the assessments for the years 1989, 1990 and 1991 are referred back to the Minister of National Revenue for reconsideration and reassessments in accordance with these reasons, including the concession made by the respondent with respect to the $129 capital loss in 1990 computed by the appellant.

Appeals allowed.