John Michael Kanzo v. Minister of National Revenue, [1981] CTC 2809, 81 DTC 788

Guy Tremblay:—This case was heard in Toronto, Ontario, on September 30, 1980. It was taken under advisement after the filing of the last written submissions on November 26, 1980.

1. The Point at Issue

In accordance with the Notice of Appeal and the Reply to Notice of Appeal, the point is whether the appellant, in computing his income for the 1977 taxation year, is correct in deducting the sum of $2,055.76 as rental loss. According to the calculation of the respondent, there was a profit of $758.72 from the property and not a $2,055.76 loss.

2. Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 According to that judgment, the assumptions of fact on which the Department of National Revenue bases the assessment is deemed to be correct unless they are contradicted by the appellant. In the present case, the assumptions of fact are described in paragraph 4 of the Reply to the Notice of Appeal:

4. In assessing the Appellant as aforesaid, the Respondent relied upon the following findings or assumptions of fact:

(a) from the period January 1 — July 31, 1977, the Appellant and John Lockwood were co-owners of a 2 bedroom condominium apartment at 5 Massey Square, Toronto, Ontario, each owner holding a 50% interest;

(b) on August 1, 1977, the Appellant became the sole owner of the apartment referred to in paragraph (a) herein;

(c) the total area of the apartment was approximately 1,000 square feet;

(d) throughout the 1977 taxation year, one bedroom, occupying 100 sq. ft. of the apartment, was rented consecutively to tenants @ $160.00 per month, for a total rental income of $2,920.00 (sic);

(e) the total undepreciated capital cost of furnishings in the rented bedroom at December 31, 1977 was $950.50;

(f) the furnishings in the rented bedroom are property included in Class 8 of Schedule Il of the Income Tax Regulations, and the Appellant therefore was entitled, in his 1977 taxation year, to a deduction for capital cost allowance at the rate of 20% on the undepreciated capital cost of the class at December 31, 1977, in the amount of $190.10;

(g) all other furnishings in the condomimium apartment were not acquired by the Appellant for the purpose of gaining or producing income from a business or property, but amounts expended therefor were personal and living expenses of the Appellant;

(h) an amount not greater than $461.30, being 10% of the expenses claimed by the Appellant in his 1977 taxation year, was expended by the Appellant for the purpose of gaining or producing income from property;

(i) an amount not less than $4,151.63, being 90% of the expenses claimed by the Appellant, were personal and living expenses of the Appellant.

3. The Facts

3.01 In computing his income for the 1977 taxation year, the appellant attempted to deduct the sum of $2,055.76 as a rental loss, which loss he calculated as follows:

3.02 The respondent did not permit the appellant to deduct the amount of $2,055.76 as a rental loss in his 1977 taxation year and recomputed the appellant’s income as follows:

3.03 Concerning the period from January 1 to July 31, 1977, the expenses of $2,482.23 claimed by the appellant are detailed as follows. They appear in Exhibit A-2:

3.04 During the trial, the appellant changed the portion of personal use from /3 ($827.41) to /3 ($1,654.82) including in fact the portion of the coowner who also lived there. The real expense claimed was $827.41 and the net income was $292.59 ($1,120-$827.41). The profit for the appellant is $146.30.

3.05 For the period of August 1st to December 31, 1977, the expenses of $2,130.70 claimed by the appellant are detailed as follows. They appear in Exhibit A-2.

This gross amount of expenses is not disputed by the respondent.

3.06 The amount of $1,523 was claimed as a capital cost allowance by the appellant.

In his written submission, the appellant reduced the said amount to $1,230.40.

3.07 Originally, in fact, the appellant claimed no capital cost on the assets of the bedroom used by himself; 100% capital cost allowance on the assets of the bedroom used by the tenant; and 50% on the assets of the kitchen, dining room, living room, vestibule, bathroom and patio.

The reduction of $292.60 ($1,523-$1,230.40) applied to items in the kitchen and to an antique display cabinet, a china cabinet and a mirror.

3.08 The appellant filed as Exhibit A-1, the plan of his two bedroom suite; as Exhibit A-3, “The capital cost allowance schedule worksheet” (8 pages) concerning the items (description, date of acquisition, cost, estimated replacement value on January 1, 1977, estimated depreciation and estimated fair market value); as Exhibit A-4 the “capital cost allowance” of the items located in the different rooms.

The appellant also filed as Exhibit A-5 clippings from the Toronto Star of October 13, 1979 which announced in the column “Shared Accommodation”: luxurious apartment for $150 per month; and fully furnished 2 bedroom apartment for $45 per week.

Mr Wilkinson, the tenant, confirmed the testimony of the appellant to the effect that he rented more than just a bedroom and that he actually used all rooms of the apartment except the master bedroom.

4. Law-Analysis

4.01 Law

The main dispositions of the Income Tax Act and Regulations involved in the present case are 3, 9(1), 18(1)(a), (h), 20(1)(a) (of the Act) and 1100(1 )(a) of the Regulations.

4.02 Analysis

The main contention of the respondent concerns the capital cost allowance claimed by the appellant. The latter indeed claims 50% of the capital cost of the items despite the fact that during the first seven months of the year there were two owners and one tenant.

In this case, the income involved is income from property and not income from a business. It is the Board’s opinion that, after the correction made in paragraphs 3.04 and 3.06, the appellant computed the income and mainly the capital cost allowance according to the Income Tax Act and Regulations and according to generally accepted accounting principles. Moreover, the expenses were made for the purpose of gaining or producing income and they were reasonable.

Therefore the appeal is allowed in part.

5. Conclusion

The appeal is allowed in part and the matter is referred back to the respondent for reassessment in accordance with the above Reasons for Judgment.

Appeal allowed in part.