Takla v. R., [1997] 1 CTC 2252, 96 DTC 3269 (Informal Procedure)

Brulé J.T.C.C.: These appeals stem from a reassessment by the Minister of National Revenue wherein he disallowed a deduction of rental losses in the taxation years 1990, 1991 and 1992. The appellants are husband and wife and the appeals were heard on common evidence.

Facts

There is really no dispute of the facts and they are herein taken from the Notices of Appeal of the Appellants as follows:

1. In November, 1989 George and Fabiola Takla jointly purchased the residential duplex at 121 Lorindale Dr., Oshawa for $177,000.

2. To facilitate the acquisition of the property Mr. and Mrs. Takla arranged to borrow $150,450 from Confederation Trust in the form of a CMHC insured mortgage.

3. Mr. and Mrs. Takla also borrowed $35,000 from a related party, Yanni Nakhla Abdelmassih, in the form of a demand loan bearing interest at 15% per annum.

4. The demand loan was used to fund the down payment and repairs to the property.

5. Mr. and Mrs. Takla entered into the real estate venture to gain rental income from the property and profit from long term appreciation of the property.

6. Mr. and Mrs. Takla used the property as a rental property in 1990, 1991 and 1992.

7. Mr. and Mrs. Takla rented the residence as a duplex in 1990, and as a single home in 1991 and 1992.

8. The property had two separate apartments (basement and main floor). Both had separate entrances and utility metres.

9. Mr. and Mrs. Takla did not use the property as their residence.

10. No relation of Mr. and Mrs. Takla used the property as their residence.

11. The residence was rented to arm’s length parties.

12. In computing their income for the 1990, 1991 and 1992 taxation years, the Appellants deducted Rental Losses in each of their returns in the amounts of $13,829, $9,556 and $5,259 respectively.

13. By Notice of Reassessments dated December 1, December 5 and December 12, 1994, the Minister of National Revenue disallowed the deduction of Rental Losses in computing each of the Appellant’s income for the 1990, 1991 and 1992 taxation years in the amounts of $13,829, $9,556 and $5,259 respectively.

14. In June 1995, the Appellants sold their residence at 422 La Sabre Street, Oshawa to pay off debts and as a consequence moved into 121 Lorindale Dr., Oshawa. This move was necessitated by their economic situation and was not their intention when they acquired the property to ever occupy it.

15. By Notice of Confirmation dated November 16, 1995, the Minister of National Revenue confirmed the assessments of the 1990, 1991 and 1992 taxation years of the Appellants on the basis that: “The expenses incurred resulting in rental losses of $13,829 in 1990, $9,556 in 1991 and $5,259 in 1992, claimed as deductions from income were not outlays or expenses incurred for the purpose of gaining or producing income within the meaning of paragraph 18( 1 )(a).”

Appellants’ Position

The appellants relied largely on the case of Tonn v. R., [1996] 1 C.T.C. 205, 96 D.T.C. 6001 (F.C.A.). In addition, their agent cited Eleuteri v. R. (sub nom. Eleuteri v. The Queen) (June 26, 1995), Doc. 94-2015(IT)I, 94-2018(IT)I (T.C.C.); Wright v. R., [1996] 1 C.T.C. 2029 (T.C.C.); McGovern v. Minister of National Revenue [1994] 2 C.T.C. 231, (sub nom. McGovern v. R.) 94 D.T.C. 6527; Friesen v. R., (sub nom. Friesen v. Canada) [1995] 3 S.C.R. 103, [1995] 2 C.T.C. 369, 95 D.T.C. 5551 and Roopchan v. R., (sub nom. Roopchan v. Canada) [1995] 2 C.T.C. 2415, 96 D.T.C. 1338 (T.C.C.).

In all of these recent appeals the appellants were successful, at least in part. As a result the agent for the appellants believed their appeals should be allowed.

Respondent's Position

Counsel for the respondent distinguished some of these cases to the present appeals, especially the Tonn case (supra). While there seems to be new emphasis on “reasonable expectation of profit” as expressed in Tonn the judgment in the case of Wright (supra) referred to the following on page 6 (C.T.C. 2033):

The issue of reasonable expectation of profit is not to be determined by 20/20 hindsight after the fact, but what must be examined are the facts as they existed at the time the investment was made. Even though events changed and profitability became less likely, that in itself is not determinative of the issue.

The respondent’s counsel made reference to the quotation from the judgment of Bowman J.T.C.C. found in Cheesemond v. R., (sub nom. Cheesemond v. Canada) [1995] 2 C.T.C. 2567(D), at paragraph 10 as follows:

The defect in the appellant’s case lies not in the “no reasonable expectation of profit” concept - which may apply to hobby farmers - but in the wholly unreasonable claim to deduct the interest expense on 100% of the cost of the property, indeed, more than 100% initially. Both section 67 and the concluding words of paragraph 20(1 )(c) put a limit of reasonableness on interest expenses and in my opinion if a person acquires an investment and finances it to the full extent of the cost it is unreasonable to expect that he can write off the entire financing cost. Obviously in the first few years of a business or investment it is normal that mortgage interest costs should put the overall operation in a loss position even where the mortgage is not an unduly excessive part of the purchase price and a reasonable portion is financed by the taxpayer out of his or her own funds. That situation should reverse itself within a few years. Here, however, there is no foreseeable end to the losses that are attributable entirely to the interest expenses, which exceed the gross income in two of the three years.

Analysis

While in Tonn the appeal was allowed this, perhaps, was primarily because the appellants discharged one mortgage and converted the loan of one individual to share capital, thus reducing expenses of interest and allowing the project to be continued. In the present appeals the appellants not only abandoned their rental ideals but did not seem to have the plan under control from the outset. They cannot succeed in their appeals and hence they are dismissed.

Appeal dismissed.