Gregory E Cecato v. Minister of National Revenue, [1984] CTC 2125, 84 DTC 1110

Taylor, TCJ:—This is an appeal heard in Toronto, Ontario on December 8, 1983, against income tax assessments for the years 1978 and 1979, in which the Minister of National Revenue had disallowed certain expenses claimed by the taxpayer as deductions from rental income. In so doing, the respondent relied inter alia, upon paragraphs 18(l)(a), 18(l)((b), 18(l)(h) and 20(l)(a) of the Income Tax Act, SC 1970-71-72, c 63, as amended, and upon section 1100 of the Income Tax Regulations. The position of the appellant and his agent was “‘all expenditures claimed for rental expenses are vouchered, supportable and deductible as claimed’’. Because of the rather novel posture taken by counsel for the respondent in the reply to notice of appeal, and at the trial, certain particularly significant portions of the reply are quoted as follows:

4. The Respondent by Notices of Reassessment dated June 15, 1981 reduced the rental loss deductible from other income to $1,234.99 for 1978 and $1,253.98 for 1979 by disallowing a portion of the expense deductions claimed by the Appellant on the basis that the expenses disallowed consisted of amounts not expended for the purpose of gaining or producing income and amounts that were outlays on account of capital. The expenses allowed by the Respondent are indicated in Table I for 1978 and Table II for 1979.

	TABLE I
	1978 Taxation Year
	Claimed by		Allowed by
	Appellant		Respondent
Revenue	$1,980.00		$1,980.00
Maintenance & Repairs	$1,745.35		$ 245.35
Other Expenses	6,095.03		6,095.03
Total Expenses	7,840.38		6,340.38
Less Personal Use (25%)	1,960.09	(50%)	3,170.19
Net Total Expenses	5,880.29		3,170.19
C.C.A.	80.90		44.80
Total Deductions	5,961.19		3,214.99
Loss	$3,981.19		$1,234.99

	TABLE II
	1979 Taxation Year
	Claimed by		Allowed by
	Appellant		Respondent
Revenue	$1,980.00		$1,980.00
Maintenance & Repairs	$ 4,254.80		$ 500.00
Other Expenses	5,896.28		5,896.28
Total	10,151.08		6,396.28
Less Personal Use (25%)	2,537.77	(50%)	3,198.14
Net Expenses	7,613.13		3,198.14
C.C.A.	70.13		35.85
Loss	$5,563.18		$1,253.98

5. In assessing tax as aforesaid, the Respondent relied, inter alia, upon the following findings or assumptions of fact:

(a) The Appellant during the period under appeal owned and lived with his wife and two children at the residence located at 66 Empress Avenue, Hamilton, Ontario;

(b) the Appellant during the period under appeal rented out less than 50% of the living space of the abovementioned residence;

(c) the Appellant, in calculating his income for the 1978 and 1979 taxation years deducted 75% of the expenses of operating and maintaining his residence as rental expenses;

(d) the difference between the 75% of residence expenses claimed by the Appellant and the 50% of residence expenses allowed by the Respondent were not amounts incurred by the Appellant for the purpose of gaining or producing income from business or property but were personal or living expenses of the Appellant;

(e) of the sum of $1,745.35 claimed by the Appellant as maintenance and repair expenses in 1978, $1,500.00 represented payments and outlays on account of capital for aluminum siding, eaves troughs, carpeting, electrical equipment and wall paper;

(f) of the sum of $4,250.80 claimed by the Appellant as maintenance and repair expenses in 1979, $3,754.80 represented payments or outlays on account of capital for a fire escape, humidifier, furnace, lumber, carpeting and sod;

(g) the amount of capital cost allowance claimed by the Appellant and disallowed by the Respondent for the 1978 ($36.10) and 1979 ($34.29) taxation years did not relate to property of the Appellant with a capital cost greater than nil and used to earn income from business or property.

In testimony, it was asserted by the appellant that the amounts classified as “capital” by the respondent were really current expenses and that his estimate of 50 per cent for “rental” purposes of the total house was more appropriate than the Minister’s 25 per cent. It was also alleged by him, and vigorously argued by his agent, that it was the appellant’s firm belief on purchase of the house that he could make a profit. Mr Cecato did agree with counsel for the Minister that certain of the fixed expenses, interest on the mortgage, taxes, and light, heat and water, should have made it plain to him that at the fixed rent of $165 per month (at acquisition) there was no possibility of making a profit. Mr Cecato countered that perhaps he had been a bit naive and gullible when deciding to buy the property on the basis of any expectation of profit. Considerable detail regarding a fire escape, carpeting, aluminum siding, etc was provided by the agent and the appellant at the hearing. However, I should leave these distinctions relatively untouched, since, in my view, the major thrust of the respondent’s argument went to the heart of this matter, that since there was no “reasonable expectation of profit” in the rental operation, losses incurred were not deductible from other income. In short, for there to be a “source of income”, there must be a “reasonable expectation of profit”, and a rental loss can be viewed from the perspective set out by the Supreme Court in William Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213. In this matter, the Court notes the contradiction between that position taken by the Minister at the trial of the issue and the results arrived at in the assessment by the Minister. Had the rationale proposed at the trial been used as the basis for the assessment, the entire loss claim might have been disallowed. Nevertheless, I am not aware of any jurisprudence which would prohibit the Minister at the hearing of an appeal from relying on just such a fundamental argument.

In my opinion, Moldowan, (supra), does provide a sufficient basis for comparing “rental loss” to “farm loss” as indicated by the Minister. An earlier case Coleman E Hall v MNR, [1970] CTC 510; 70 DTC 6333, laid down essentially the same line of reasoning, and cases subsequent to Moldowan, (supra), such as Barry S Arbus v MNR, [1980] CTC 2872; 80 DTC 1744; Wesley H Warden v MNR, [1981] CTC 2379; 81 DTC 322; Donald Arthur Porter v MNR, [1981] CTC 2445; 81 DTC 385, emphasize the same point although perhaps in different language. Conversely, in this matter, the agent for the appellant did not refer the court to any jurisprudence which would support a proposition that the shortfall between income and expenses has some inherent claim to deductibility from other income, simply by attributing to it the term ‘‘rental loss”. Section 18 of the Act does not provide for deductions; it is a section that specifically prohibits deductions except under certain circumstances, the basic one of which is that the “outlay or expense” must be made “for the purpose of gaining or producing income from the business or property”. There was no evidence that this was met or could have been met in this matter and I accept the Minister’s proposition in this appeal. So-called “rental losses” are not deductible from other income when a reasonable expectation of profit has not been demonstrated. It would appear to me a misrepresentation of the Act to unreservedly attribute “tax shelter” characteristics to all rental operations.

Whether some other income tax treatment, such as an accumulation of the losses, and use of the “carry back/carry forward” provision of the Act; or increasing the capital cost of the property by the amount of the losses, or anything else, is appropriate, is not a subject for determination in this particular appeal. Suffice it to say that the appellant in this matter has failed to show that the expenses claimed fulfill the requirements of paragraph 18(l)(a) of the Act, and his claim for relief in addition to that already accorded by the Minister must be denied. As already noted, the Court makes no specific comment on the losses which have been allowed to him by the Minister and deducted from other income.

The appeal is dismissed.

Appeal dismissed.