Ron Mills v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2089

Teskey, J.T.C.C. (orally):—The appellant elected to have his two appeals against assessment for 1989 and 1990 heard pursuant to the informal procedure.

Issues

The two issues are: (1) did the appellant have a reasonable expectation of profit from a house he was renting, and (2) if the answer is yes to the above issue in either year, was there a terminal loss on a deemed disposition when he ceased to be in the rental business?

Facts

There is no dispute as to the facts. The appellant purchased the house in question with a three-car detached garage on approximately two acres of land (the "property") in 1980. The property is in a rural hamlet which has a population that fluctuates between 35 and 50 people. It is 30 miles from the nearest city and ten miles from the nearest town.

In the summer of 1983, he decided to build a new house to move into and to rent the house and property in question. Since 1984, the property has been available to rent. He claims in the fall of 1983 that he worked out in his head a statement of profit and loss and that he felt he would make a profit as the mortgage thereon was paid down and as interest rates fell. During the trial he produced in writing his mental projected profit and loss statement for the years 1984 and 1985 (Exhibit A-4 and Exhibit A-5). The income for both these years was based on the assumption that there was a rental market for the property at $450 per month for both years and interest would be substantially lower in 1985. Exhibit A-4 shows his projected rental income and loss for 1984, the projected loss being $1,352 and shows his actual income and loss, with the loss being $6,189. A-5 shows his projected rental income and statement for 1985 which shows a profit of $172 based on an interest expense of $4,140 and rental income of $5,400. It also shows his actual rental income and expenses which produced a loss of $4,331. This loss is as a result of interest not falling but rising and the rental income being only $1,750, some 32% less than projected.

In actual fact the gross rentals received and the losses for these years are as follows:

The appellant claims that the property was worth $66,000 and filed an appraisal report (Exhibit A-1) which was prepared for mortgage purposes, dated March 22, 1982, showing total value for land and building at $66,000; however, he received, in 1983, an unsolicited offer to purchase the house and property (not produced) for $56,000, which was not accepted or countersigned. In August of 1988 he received another unsolicited offer to purchase the house and property (Exhibit A-3) for $35,000. In March of 1993, he received and accepted an offer to purchase the house and property (Exhibit A-2) for $25,000.

Respondent's position

The respondent argues that the appellant never had a reasonable expectation of profit even though the appellant was allowed his losses in 1984, 1985, 1986 and 1987 and, therefore, these appeals should be dismissed as the disallowed expenses are personal pursuant to paragraph 18(1)(h) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") and since there never was a business there cannot be a deemed disposition resulting in a terminal loss.

Appellant's position

The appellant argues that he believed, based on the assumptions he made, that a profit would be made in year two (1985) and he then is entitled to maintain the property for a reasonable period of time before he is deemed no longer to be in the rental business and, therefore, the Court should allow him his expenses for 1988 and/or 1990 and be given a terminal loss on a deemed disposition in either 1988, 1989 or 1990. He refers the Court to Whitmore v. M.N.R., [1990] 1 C.T.C. 2145, 90 D.T.C. 1018 (T.C.C.).

Analysis

In Whitmore, supra, I said, at page 2149 (D.T.C. 1020) that the principle enunciated in Hibberd v. M.N.R., [1983] C.T.C. 2017, 83 D.T.C. 14 (T.R.B.), does not apply to a business adventure that produces a profit and then, through external forces, loses its profitability. In Hibberd, supra, the Court found that, although he never did make a profit, he had a reasonable expectation of profit, which expectation was lost through external forces beyond his control.

I am satisfied that in the business of renting a single family house there is really no such thing as start-up costs that last several years as in some businesses, such as some farming operations. In a normal house used as a permanent residence business, unless there are some changing external factors, a permanent residential rental business should produce a profit in its first year of operation. The appellant claims that he was knowledgeable in what rents would be received for the property when he started to rent it. History proves that his estimate of rental income was vastly flawed. Without evidence from some outside, qualified authority I am not prepared to accept the appellant's statement that his projected rental income of $345 a month was based on reality and not pie-in-the sky dreaming. The assumption of a rental income of $450 a month and the rate of interest to be paid on the mortgages are the two keys to the proposed business. Since I am not prepared to find that when the house was originally rented a reasonable, prudent investor would purchase the property and expect to receive $450 a month rental each and every month of the year, year in and year out except for the normal allowance for vacancy, I can only conclude the appellant never did have a reasonable expectation of obtaining that rental nor of obtaining a profit. Having come to this conclusion, I do not have to deal with the second issue.

The appeals are dismissed.

Appeals dismissed.