Vincze v. R., [1997] 2 CTC 2146

Beaubier T.CJ.:

This matter was heard in Toronto pursuant to the Informal Procedure on September 26, 1996. The Appellant testified.

At issue are rental losses deducted by the Appellant respecting a basement suite in his Toronto home for the years 1991, 1992 and 1993.

The Respondent’s assumptions read as follows:

6. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) the Appellant purchased 17 Milverton Boulevard, Toronto, Ontario (the “Property”) as his principal residence;

(b) in 1991, the Appellant began renting a portion of the Property and, since commencing the purported rental operation, has never reported a profit;

(c) in the 1991, 1992 and 1993 taxation years, the Appellant reported rental income, expenses and losses as per Schedule “A”, attached;

(d) in the 1994 taxation year, the Appellant claimed rental losses on the Property of $2,435.00;

(e) the rent charged was not sufficient to pay the mortgage interest on the Property;

(f) the purported rental operation was a vehicle by which the Appellant hoped to defray the carrying costs of his principal residence;

(g) the Appellant had no reasonable expectation of profit from renting

the Property during the 1991, 1992 and 1993 taxation years;

(h) the rental expenses were not made or incurred for the purpose of gaining or producing income from a business or property, but were personal or living expenses of the Appellant.

Assumptions 6(a), (b), (c) and (d) are correct.

The Appellant purchased the house in January, 1990 for $225,000. He put on a first mortgage of $168,000 and a second mortgage of $30,000. He planned to live in it and flip it. When the bottom fell out of the Toronto real estate market he was caught. However, as soon as he bought it, he fixed the basement up as a separate bachelor suite and started renting it for $500 per month. This demonstrated an intention to rent as well as an intention to flip.

The Appellant had no previous rental experience. He had a plan to rent the suite at a profit which he expected would occur as he paid the first mortgage down and the rental market improved. In the Court’s view this was a start up operation and the Appellant is entitled to a start up period if he can demonstrate a reasonable expectation of profit on the suite.

In the years until 1993 the Appellant had intermittent tenants at $500 per month and frequent vacancies. In 1993 he paid $12,000 on the first mortgage. He also reduced the rent to $375.00 per month, whereupon he obtained a permanent tenant. However, he continued to expense the suite at one-third of the total household expenses which is not reasonable for a basement bachelor suite in a two storey house.

In the Court’s view, one-sixth of the expenses is reasonable for such a suite. That would yield the following results for the years in question: They are reasonable results and allow for a reasonable start up period.

The appeal is allowed. This matter is referred to the Minister of National Revenue for reconsideration and reassessment accordingly.

Appeal allowed.