Virginia Maloney v. Minister of National Revenue, [1989] 1 CTC 2402, 89 DTC 314

Mogan, T.C.J.: —In November 1984 the appellant purchased a house which she rented to her mother for the last two weeks of December 1984 and throughout 1985. The house was sold in the spring of 1986. When computing her income for 1984 and 1985, the appellant deducted certain amounts as losses from operating the house as a rental property. The deduction of those amounts was disallowed by the respondent and the primary issue in this appeal is whether those amounts are losses from property or ''personal or living expenses" within the meaning of the Income Tax Act ("the Act").

Prior to 1984, the appellant's mother had earned her living by caring for elderly people. In Ottawa, the mother had looked after a gentleman who subsequently went to a nursing home in Pembroke. In 1984, the appellant and her mother decided that the appellant would purchase this house at R.R. #1 Embrun, southeast of Ottawa, and rent it to her mother who would then support herself by taking in and caring for one or two elderly people. The house was purchased in November 1984 for $53,000 and the mother moved in right away.

The mother placed advertisements at certain local businesses in Embrun but was unable to obtain any clients/patients because the house was outside the village and not serviced by public transportation. Later in 1985, the mother had health problems and was unable to care for anyone. The appellant was an employee of the Government of Canada in Ottawa and, when computing her taxable income in each year under appeal, she claimed an allowance for her mother as a dependent.

For 1984 and 1985, the appellant filed with her income tax returns a "Statement of Real Estate Rentals" determining her losses as follows:

The obvious arithmetical error in the sum of expenses for 1985 was not explained in evidence but the discrepancy is not significant. The respondent disallowed the deduction of the above losses on the basis that (i) the expenses were not incurred for the purpose of gaining or producing income from property; (ii) there was no reasonable expectation of profit from the property; or (iii) the expenses were personal or living expenses of the appellant.

The definition of "personal or living expenses" in subsection 248(1) of the Act commences as follows:

personal or living expenses" includes

(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. . .

In my view, those words defining “personal or living expenses" aptly describe the expenses incurred by the appellant in 1984 and 1985 with respect to the property she purchased at R.R. #1 Embrun. The property was for the use and benefit of the appellant's mother. The rent paid by the mother to the appellant was not realistic having regard to the cost of the property and the annual expenses of maintaining it. The plan for the mother to support herself by caring for elderly people was not well founded because the property was in a rural area with no public transportation and therefore inconvenient for an elderly client/patient to receive visits from family and friends.

I do not doubt in any way the good faith of the appellant. She presented her own appeal with sincerity and conviction. I find, however, that the plan for the mother to be self-supporting and thereby pay a reasonable rent which would permit the appellant to derive income from the property is a plan that was not well thought out. The subjective, good faith, commercial hopes and dreams of an individual taxpayer do not confer upon his or her enterprise a reasonable expectation of profit if that enterprise does not meet the objective criteria of a prudent business in similar circumstances. I am supported in this view by the decision in Mason v. M.N.R., [1984] C.T.C. 2003; 84 D.T.C. 1001 in which my colleague Bonner, J. stated at page 2004 (D.T.C. 1002):

The expectation of profit referred to in the definition of personal or living expenses" must be assessed objectively. Subjective optimism, no matter how sincere, does not meet the test. The appellant, in reaching a conclusion that the rent obtainable would cover carrying costs and then some, appears to have been more optimistic than realistic.

I find that, in 1984 and 1985, there was no reasonable expectation of profit with respect to the appellant's property at R.R. #1 Embrun; and the expenses connected with that property were "personal or living expenses" to the extent that they exceeded the gross rent which the appellant in fact received. The so-called losses from rental property are therefore disallowed as deductions under paragraph 18(1)(h) of the Act.

Having decided against the appellant on the primary issue, it is not necessary to consider the secondary issue as to whether some of the amounts claimed as expenses were capital outlays and not deductible on a current (incurred) basis. The appeal is dismissed.

Appeal dismissed.