Edward Laurence v. Minister of National Revenue, [1987] 1 CTC 2234, 87 DTC 173

Sarchuk, T.C.J.:—Edward Laurence (Laurence) appeals from reassessments to tax for his 1978, 1979, 1980 and 1981 taxation years.

The appellant is an individual who during the taxation years in issue was a resident of Yorkton, Saskatchewan. During each of those years he was a shareholder and employee of Yorkton Broadcasting Company Limited (Yorkton), which owned and operated aircraft. In assessing the tax liability of the appellant the Minister of National Revenue made the following assumptions of fact:

(a) That in 1978 a benefit or advantage having a monetary value of $1,750 was conferred on the Appellant as a shareholder of “Yorkton” through his personal use of an aircraft that was owned and operated by “Yorkton”.

(b) that in 1979 a benefit or advantage having a monetary value of $2,000 was conferred on the Appellant as a shareholder of “Yorkton” through his personal use of an aircraft that was owned and operated by “Yorkton”.

(c) that in 1980 a benefit or advantage having a monetary value of $2,250 was conferred on the Appellant as a shareholder of “Yorkton” through his personal use of an aircraft that was owned and operated by “Yorkton”.

(d) that in 1981 a benefit or advantage having a monetary value of $2,500 was conferred on the Appellant as a shareholder of “Yorkton” through his personal use of an aircraft that was owned and operated by “Yorkton”.

The appellant took the position that all of his flying time in the aircraft owned by Yorkton was for business purposes.

On May 15, 1986 this Court heard the appeals of Yorkton with respect to reassessments of tax for its 1978 to 1981 taxation years inclusive. One of the issues in those appeals was whether Yorkton was entitled to deduct in computing its income for these taxation years expenses incurred by it in the operation of its aircraft pursuant to subsection 18(1) of the Income Tax Act.

It was agreed by all parties that the decision in the Yorkton appeals would be applied to the case at bar. In those appeals, I held that the respondent was correct in assessing Yorkton on the basis that the aircraft were flown 60 per cent of the time for personal use by Laurence and 40 per cent of the time for business use. [See [1987] 1 C.T.C. 2222.] It follows therefore that the respondent was correct in determining that the appellant as a shareholder of Yorkton had conferred on him by Yorkton a benefit or advantage in the amounts assessed through his personal use of Yorkton's aircraft in each of the years in issue.

The respondent's assessments were challenged by Laurence in relation to another issue. During Laurence’s 1978 taxation year he purchased a con- dominium in Hawaii. In each of the four taxation years before me Laurence deducted from his income amounts claimed to be losses arising from the operation of the condominium. It was the appellant's contention that he was entitled to do so in accordance with sections 9, 18 and 20 of the Act since the property was acquired with the intention and reasonable expectation that it would produce income.

The respondent's position is that the expenditures deducted by the appellant were not made or incurred by him for the purpose of gaining or producing income from a business or property but were in respect of personal or living expenses of the appellant for each of the said taxation years The respondent reassessed on the basis that the activities of Laurence in relation to his condominium in Hawaii were not carried on in such a manner as to constitute the carrying on of a business by him with a reasonable expectation of profit and that therefore any outlays or expenses arising from such activities are not deductible.

Laurence is the general manager of the radio station owned and operated by Yorkton. Since at least 1974 it had been his practice to take an annual vacation in Hawaii. He testified that a great number of people appeared to use Hawaii as a vacation spot since it was a reasonably economic place to go to at that time. Others were purchasing property and in 1977 and 1978 the area appeared to be booming. As a result of that perceived trend the appellant purchased a condominium in 1978. The cost of the unit with additions and fixtures was $81,624 of which 25 per cent was paid in cash and the balance was financed by way of a long-term mortgage.

Laurence alleged that prior to the purchase he spoke to real estate agents who indicated that space was scarce in Hawaii and that he would be able to recover the cost of his investment by way of rentals. He said that he made certain financial projections at that time on the basis of rental income of $1,200 per month which was the then current rate for similar units. None were produced. After acquiring the condominium he considered the possibility of using a rental agent in Maui. He found that there was no guarantee that such an agent would be successful, that many of them were fly-by- night and in any event were very expensive. He also discovered that they accepted no responsibility for screening the tenants nor for any damages which might be incurred by the tenants. As a result of this he rejected that option and chose to try to rent the property on his own. He stated that he knew a number of people who enjoyed Hawaii amongst whom there was an informal exchange of rental information. He contacted Yorkton area travel agents and offered the unit to their clients. Laurence personally occupied the unit during the months of January and February in 1979, 1980 and 1981.

Counsel submitted that the evidence clearly established that the condominium was purchased as an investment and that the deductions claimed were made and incurred for the purpose of gaining or producing income.

I adopt for the purposes of this appeal two excerpts from the decision by Dickson, J., as he then was, in William Moldowan v. The Queen, [1977] C.T.C. 310 at 313; 77 D.T.C. 5213 at 5215:

Although originally disputed, it is now accepted that in order to have a “source of income” the taxpayer must have a profit or a reasonable expectation of profit.

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking . . .

I have considered the evidence of Laurence and the exhibits filed on his behalf. I cannot find in that evidence or in the documents anything which would lead me to conclude that he was carrying on a business within the meaning of paragraph 18(1)(a) of the Act.

The property was rented for 31 days in 1978, 80 days in 1979, 33 days in 1980 and 21 days in 1981. The financial statements disclosed gross rental income (in Canadian funds) for the years 1978 to 1984 inclusive in the following amounts $1,143, $4,370, $1,371, $2,201, $1,904, $3,570 and $5,559. For those same years the net losses (in Canadian funds) were $4,120, $5,832, $8,216, $8,717, $9,720, $9,476 and $5,913. No capital cost allowance was claimed by the appellant in any of the years in issue. It should be noted that in the years 1983 and 1984 the property was rented on a long-term lease basis. Even in those years the rental income failed to meet the expenses.

Looking at all the figures presented for each of the four taxation years in question and viewing the capability of the condominium as capitalized to show a profit I cannot find any reasonable expectation of profit. It is illogical to suggest that there can be a source of income within the meaning of the Income Tax Act if the maximum possible profit that can be expected does not cover the necessary expenses of operating it particularly where it appears that the situation is not likely to change in the foreseeable future.

Other factors which assisted me in reaching that conclusion are the rather casual manner in which the appellant approached the rental of the condominium; the fact of his use of the condominium for two months each year during the height of the season; his failure to prepare any proper or reasonable projections of anticipated profit and expenses prior to purchase; the apparent failure to take into account that off season rentals might be difficult to obtain and would not produce the same level of rental income; and the high cost of management of the property. His hopes that he would be able to rent the property and his statement that "he felt it would be rented five to six months of the year, that is 55 to 60 per cent of the time” does not appear to be based on any pragmatic or businesslike assessment of the rental situation in Hawaii.

Having regard to all of the evidence before me I find that the appellant has failed to establish that he had a reasonable expectation of profit from this property in the taxation years under appeal.

The appeals are dismissed.

Appeals dismissed.