Daniel Adusei v. Her Majesty the Queen, [1996] 3 CTC 2821 (Informal Procedure)

Teskey J.T.C.C. (orally): — Mr. Adusei, in this country we have several levels of court. The court you have come to today is a trial court. You’ve had your trial. There are two levels of appeal courts: We have the Federal Court of Appeal which is immediately above this court and then above that we have the Supreme Court of Canada.

In our country, we operate under the system what they call “stare decisis" which basically says this. That when a Court higher says something, it’s binding on all the courts that are below it. So when the Supreme Court of Canada says “This is the law on this subject,” then the Federal Court of Appeal and us, who are down below that, we are bound to follow what the Supreme Court of Canada has said.

This issue that is before me today has been dealt with by the Supreme Court of Canada and by the Federal Court of Appeal. By the Supreme Court of Canada in a case called Moldowan v. R. (sub nom. Moldowan v. The Queen) (sub nom. Moldowan v. Minister of National Revenue), [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, then the Chief Justice Dickson of the Supreme Court said “To apply the test for a reasonable expectation of profit, you have to look at the figures, look at the history, look at everything right up to date” but in order to have a reasonable expectation of profit in a situation such as you, it has to be after capital cost allowance. That is why I asked you how much the lot was worth and how much the physical building was worth because you depreciate the building at 5% a year. So if your house is worth $150,000.00 and the lot is worth $50,000, that’s $7,500.00 in depreciation. So that before you can write off any portion of the expenses, the onus is on you to satisfy me that you’re going to make a profit somewhere down the line within a reasonable period of time after depreciation.

Now, this issue was also dealt with by the Federal Court of Appeal last December in a case called Tonn v. R., [1996] 1 C.T.C. 205, 96 D.T.C. 6001, T-O-N-N, and Linden J.A. of the Federal Court of Appeal said first off, “On a reasonable expectation of profit case, you must divide it into two categories: Category (1) is were there is no personal element involved. Category (2) is when there is a personal element involved”. Category (1) does not apply to your case because there is a personal element involved, because you moved into the house. It’s part of your residence. If you had your own house on Street A and you bought a house on Street B and had no intention of ever moving into it, living in it or anything, then the business of renting the Street B house would have no personal element and they set out the Rules when there’s no personal element. But when there is a personal element such as here, they confirmed that the strict decision of Chief Justice Dickson in Moldowan is still the law.

Now, there are two problems with your assessment: First off, 50% or above 50% is unrealistic. If you take the square footage of your bedroom, it is approximately 7%, but if the tenant does have the use of the bedroom, the kitchen, and the dining room, and so on, it undoubtedly should have more. A third, no. Twenty-five percent, probably correct. But your house as structured after depreciation will not pay for itself until your mortgage is way way down, maybe down as far as $50,000.00. Will you ever get anywhere near breaking even?

And then there’s another problem. You said that you and your wife put the purchase price up and she’s your partner. That means that even if you were entitled to write off a portion of the losses, it could only be half of what the right portion is because your wife is an owner. She owns one half of the equity in that house. She gets one half of the income and has to support one half in taxation of the loss.

So, the Minister said “Demonstrate to me that there’s a reasonable expectation of profit according to the law.” You haven’t been able to do it, sir. So what you do is you put your rental in your pocket, you don’t have to declare it on your tax return. So long as it does not exceed reasonable expenses related to it, and you get as much money for your bedroom as you possibly can. But the excess of the expenses is not deductible against your other income and that’s what the law is today from the highest court in this country. There’s nothing I can do for you, except to say carry on and it’s for all those reasons that I have to dismiss your appeal. Thank you for coming.

Appeal dismissed.