Victor Lorentz v. Minister of National Revenue, [1985] 1 CTC 2144, 85 DTC 131

Christie, ACJTC:—This appeal relates to the appellant’s 1980 taxation year. The issue is whether he is entitled, under section 3 of the Income Tax Act (“the Act’’), to deduct rental expenses in the sum of $9,473 in respect of a residential property at 5007 West 21st Avenue, Bradenton, Florida (“the property’’) against sources of income other than rental from the property.

The appellant entered into a contract on September 26, 1979, with Spencer and Phyllis Valenzano to purchase the property for $59,000 (US) plus $1,500

(US) for fixtures and furnishings. He paid $1,000 (US) down. The balance was due on October 26, 1979. To meet this obligation the appellant borrowed funds from the Canadian Imperial Bank of Commerce at Mississauga, Ontario. On October 23, 1979, the bank issued an instrument in favour of Mr Realty Services Inc which was handling the transaction in the sum of $57,870.25 (US) which, at that time, was equivalent to $68,868.20 (Cdn). The appellant testified that the rate of interest was “around 15 per cent’’.

The property was described in evidence as a three bedroom, two car garage home. The contract for sale and purchase provided that it would be rented to the Valenzanos for two weeks after the closing date for $100 (US) per week. The appellant said it was his hope to rent the property for $700 to $800 (US) per month. The nature of the basis upon which this expectation was founded was not explained in evidence. The reality was that $700 to $800 was above the market. The best the appellant could manage was $550 (US) per month. He entered into an agreement to lease the property to a Curt Cobburm for one year commencing November 20, 1979, at the rental just mentioned. By March 1980, the appellant had decided to sell the property and listed it for that purpose. Mr Cobburm did not remain for the agreed period. He left after six or seven months because of what the appellant said were “personal problems”. The property and what was in it was sold on January 9, 1981, for $61,000 (US). In the notice of appeal to this Court dated March 17, 1983, it is said that it became evident in 1980 that the property was a “white elephant”. Although at the hearing the appellant described himself as a sales engineer, he testified that when he purchased the property he had experience as a real estate agent in the Canadian market. During the course of cross-examination he candidly admitted that, prior to purchasing the property, he did not prepare a projection indicating anticipated profit having regard to rental income and expenses. As previously indicated, the purchase was very heavily financed with borrowed money at a substantial rate of interest. It is not novel for persons experienced in dealing in real estate to omit to take what might be regarded as fundamental commercial steps when dealing in real estate on their own account: Walker v MNR, [1984] CTC 2634 at 2635; 84 DTC 1545 at 1546. The appellant made no arrangements to have the property managed in his absence by someone experienced in the field of rental properties. He said he had an arrangement with Mrs Helen Ouellette, an employee of Mr Realty Services Inc, to “look after” the property gratis. The precise character of this arrangement is obscure. Furthermore it was admitted that it could not be expected to endure over a substantial period.

Whether the appellant is entitled to succeed depends on the answer to the question whether his dealings with the property constituted a business in 1980. If the answer is yes, he is entitled to succeed, but if not the appeal must be dismissed. The question just posed, in turn, raises the question whether the appellant has established by a preponderance of evidence of the existence in 1980 of a reasonable expectation of profit. As has been judicially observed on a number of occasions, the existence of a reasonable expectation of profit is not to be determined by subjective hopes or aspirations, no matter how deep felt they may be. The issue must be determined by objective testing. In order to discharge the onus which rests upon him in the circumstances of this case, the appellant need not show that in purchasing the property he acted on the basis of some unbiased sophisticated analysis or advice regarding the prospects of rental income vis-à-vis rental expenses. Nevertheless, he must place evidence before the Court from which it can be objectively concluded that his conduct was that which could be expected of a reasonably prudent person becoming involved in a commercial undertaking designed to extract profit from renting real estate.

In the course of his argument counsel for the respondent, Mr Templeton, made the point, inter alia, that even if the appellant had succeeded in renting the property for $700 (US) per month and there had been no default on the part of the tenant, the income would not have been sufficient to even meet the interest factor alone in the expenses claimed. Other expenses pertained to such things as property taxes, maintenance and repairs, insurance, etc.

In my opinion, having regard to the whole of the evidence, the appellant has failed to establish that he had a reasonable expectation of profit from the property during the year under review. It follows that he cannot succeed. The appeal is dismissed.

Appeal dismissed.