Bowman
J.T.C.C.:
—
These
appeals
are
from
assessments
for
the
1989,
1990
and
1991
taxation
years.
They
involve
the
deductibility
of
losses
sustained
by
the
appellant
in
respect
of
a
single
family
dwelling
in
Tucson,
Arizona.
The
principal
basis
of
disallowance
of
the
losses
was
that
the
rental
operation
had
“no
reasonable
expectation
of
profit”.
This
phrase,
which
forms
part
of
the
definition
of
personal
or
living
expenses
in
section
248
of
the
Income
Tax
Act,
has
been
the
subject
of
much
litigation.
The
recent
decision
of
the
Federal
Court
of
Appeal
in
Tonn
v.
R.,
[1996]
1
C.T.C.
205,
96
D.T.C.
6001
has,
it
is
to
be
hoped,
laid
to
rest
some
of
the
misunderstandings
surrounding
the
ambit
of
the
obiter
dicta
in
Moldowan
v.
R.
(sub
nom.
Moldowan
v.
Minister
of
National
Revenue),
(sub
nom.
Moldowan
v.
The
Queen),
[1978]
1
S.C.R.
480,
[1977]
C.T.C.
310,
77
D.T.C.
5213.
In
this
case
the
appellant
seeks
to
deduct
losses
of
$28,259.52,
$11,711.51
and
$17,820.00
sustained
in
respect
of
the
house
in
Tucson.
The
appellant
is
a
lawyer
practising
as
a
sole
practitioner
in
Aylmer,
Ontario.
He
was
called
to
the
bar
of
Ontario
in
1975.
Shortly
after
setting
up
practice
he
bought
a
triplex
with
another
person
and
kept
it
for
three
or
four
years.
Although
the
co-owner
was
supposed
to
deal
with
the
tenants
they
frequently
would
see
the
appellant
about
problems.
Later,
he
bought
an
office
building
in
St.
Thomas
of
which
the
upper
floor
was
rented
to
a
church
group.
He
occupied
the
lower
floor.
Neither
of
these
real
estate
investments
worked
out
and
both
buildings
were
sold.
Next
he
bought
a
building
in
Aylmer
with
an
office
in
the
back.
Ultimately
that
building
was
lost
under
a
power
of
sale
in
a
mortgage.
In
1980,
the
appellant
and
his
wife
visited
Tucson,
Arizona,
on
holiday.
It
was
at
that
time
a
city
of
about
500,000
persons.
It
is
located
ap-
proximately
120
miles
south
east
of
Phoenix
and
about
100
miles
north
of
the
Mexican
border.
They
found
it
an
attractive
city
and
since
that
time
the
appellant
and
his
family
have
visited
it
a
number
of
occasions
on
vacation.
The
appellant
in
1981
bought
a
house
in
an
older
area
of
Tucson.
He
paid
$60,000
US
of
which
$49,000
was
financed
by
a
first
and
second
mortgage.
He
rented
it
out
on
a
yearly
basis
for
about
$400
per
month,
a
rental
which
yielded
an
annual
loss
of
about
$3,000.
He
became
dissatisfied
with
the
investment
and
sold
it
in
1986
for
$62,000
US.
The
appellant
and
his
family
kept
going
to
Tucson
and
he
became
aware
of
a
new
development
in
Tucson,
“Fairfield
in
the
Foothills”.
It
appears
to
have
been
a
somewhat
upscale
development
and
he
viewed
Tucson
as
a
place
to
which
upper
income
retirees
would
come
on
a
seasonal
basis,
as
well
as
movie
producers
for
periods
of
time
when
filming
movies.
He
found
a
house
in
the
subdivision
at
4500
N.
Placita
Del
Tio.
It
was
a
one
storey,
single
family
structure.
He
bought
it
in
January
1989
for
$220,000
US.
The
purchase
was
financed
by
a
first
mortgage
of
$156,626.39
and
a
second
mortgage
of
$42,759.00.
The
balance
due
on
closing,
after
adjustments,
was
$22,875.46.
This
was
financed,
at
least
in
part
if
not
entirely,
by
a
loan
from
a
Canadian
bank
to
the
appellant’s
practice
followed
by
a
payment
to
him
of
his
capital
in
the
practice.
Although
the
Department
of
National
Revenue
originally
disputed
the
deductibility
of
the
interest
on
the
loan
to
the
practice,
it
was
ultimately
accepted
that
the
interest
on
that
loan
was
deductible,
and
the
point
is
not
in
issue
here.
The
interest
under
the
first
mortgage
was
originally
8
per
cent
per
annum,
but
it
was
adjusted
to
10
per
cent
per
annum
in
1990.
For
1993
the
interest
rate
under
this
mortgage
was
adjusted
to
8
per
cent.
The
interest
under
the
second
mortgage
was
also
adjusted
and
ranged
from
10.75
per
cent
annually
in
1989
to
as
low
as
6.5
per
cent
in
1992.
In
addition
to
the
cost
of
the
house
the
appellant
spent
about
$30,000
US
on
furniture
and
fixtures
and
an
additional
$6,000
on
capital
improvements.
The
appellant
had
some
success
in
renting
the
property.
The
attached
Schedule
I,
which
was
entered
as
Exhibit
A-4,
shows
the
actual
rents
received
and
the
costs
up
until
1995.
The
property
was
sold
in
March
1996.
Schedule
II
also
Exhibit
A-4
is
a
projection
that
was
prepared
and
given
to
the
Department
of
National
Revenue
at
the
time
the
assessment
was
being
discussed,
either
at
the
objection
or
the
assessment
level.
Evidently
no
such
projection
was
made
at
the
time
the
property
was
purchased.
Schedule
III
is
a
comparison
of
the
actual
results
from
1990
to
1992
with
the
projected
results
and
was
adduced
as
Exhibit
A-14.
The
figures
shown
under
“Budget”
can
not
in
every
case
be
reconciled
with
the
figures
in
Schedule
II.
For
example
the
projected
rents
for
1990
to
1992
inclusive
totalled
$90,700
US,
not
$81,730.
From
the
figures
in
these
schedules,
a
number
of
observations
might
be
made.
The
difference
between
the
interest
paid
and
projected
over
these
three
years
was
$6,389
—
a
relatively
small
amount
in
the
overall
picture.
The
largest
difference
between
the
projections
and
the
amounts
realized
by
the
appellant
is
attributable
to
the
failure
to
obtain
rentals
that
were
anywhere
close
to
those
that
he
expected.
The
appellant
testified
that
he
expected
about
$2,800
per
month
during
the
“high”
season,
and
about
$2,100
per
month
in
the
“low”
season
and
a
10
per
cent
vacancy
rate.
Had
these
expectations
been
realized,
he
would
have
had
gross
rentals
of
about
$26,500
US
per
year
and
he
would
have
had
a
loss
in
1990
and
in
1991
and
a
profit
in
1992,
1993
and
1995.
In
fact
a
small
profit
was
realized
in
1994.
In
applying
the
Tonn
decision,
as
well
as
the
approach
that
I
have
taken
in
a
number
of
other
cases
referred
to
in
Tonn,
I
am
aware
that
it
is
not
the
place
of
this
court
to
second-guess
the
business
acumen
of
a
taxpayer
who
embarks
bona
fide
on
a
commercial
venture
that
turns
out
to
be
less
profitable
than
he
or
she
anticipated.
I
need
not
repeat
what
has
been
said
on
other
occasions.
Moreover,
the
Tonn
decision
supports
the
allowance
of
a
reasonable
period
for
a
business
to
get
started.
Nonetheless,
there
must
be
sufficient
of
the
indicia
of
commerciality
to
justify
the
conclusion
that
a
real
commercial
enterprise
is
being
conducted.
Where
there
is
no
personal
element,
and
the
enterprise
has
a
sufficient
degree
of
economic
realism
to
warrant
a
finding
that
a
business
genuinely
exists,
the
Tonn
decision
supports
the
deduction
of
losses.
Do
these
elements
exist
here?
I
think
not.
If
one
steps
back
a
few
paces
and
looks
at
the
matter
with
a
purely
commercial
eye,
what
does
one
see?
A
lawyer
from
Aylmer,
Ontario
who
finds
an
attractive
city
in
the
middle
of
the
desert
in
southern
Arizona
about
2,000
miles
from
Aylmer.
Over
the
years
Tucson,
Arizona
becomes
a
place
where
he
an
his
wife
enjoy
vacationing.
He
buys
one
house
and,
after
a
bad
experience
in
renting
it,
sells
it.
Later,
he
buys
for
$220,000
US
another
house
in
an
upscale
area
hoping
to
obtain
high,
short
term
rentals
from
movie
producers
and
affluent
snowbirds.
He
spends
a
further
$30-40,000
US
furnishing
it.
He
and
his
family
sometimes
stay
there
when
it
is
not
occupied.
The
purchase
is
financed
to
the
hilt,
by
a
first
and
second
mortgage
and
the
balance
is
financed
by
a
borrowing
from
a
Canadian
bank
—
admittedly
by
his
law
practice
with
the
immediate
purpose
of
paying
out
his
capital
in
the
proprietorship,
but
realistically
the
borrowed
moneys
went
into
the
Tucson
property.
There
is
certainly
a
personal
element
involved
here
and,
given
the
financing
arrangements
and
the
unrealistic
expectations
for
the
incomeproducing
potential
of
a
single
family
dwelling
located
about
2,000
miles
away
it
is
impossible
to
see
this
as
having
the
requisite
degree
of
commerciality
to
justify
the
deduction
of
the
losses
sustained.
The
case
falls
far
closer
to
my
decisions
in
Cheesemond
v.
R.
(sub
nom.
Cheesemond
v.
Canada),
[1995]
2
C.T.C.
2567
(headnote
only)
(T.C.C.),
and
Fish
v.
R.,
(sub
nom.
Fish
v.
Canada)
[1995]
2
C.T.C.
2755
(headnote
only)
(T.C.C.)
than
it
does
to
such
cases
as
Smith
v.
R.,
[1996]
1
C.T.C.
2022
(headnote
only)
(T.C.C.)
and
the
other
cases
cited
in
Tonn.
The
appeal
is
therefore
dismissed
with
costs.
Appeal
dismissed.