Wilkins v. R., [1997] 2 CTC 2281

Somers D.J.T.C. .

This appeal was heard in Toronto, Ontario, on November 25, 1996 pursuant to the Informal Procedure of this Court concerning the Appellant’s 1992, 1993 and 1994 taxation years.

The issues in this appeal are:

(i) whether expenses in excess of the amounts allowed by the Minister were incurred by the Appellant for the purpose of gaining or producing income from business or property;

(ii) whetherthe Appellant had a reasonable expectation of profit from the property in the 1992, 1993, 1994 taxation years; and

(iii) in the alternative, whether the disallowed expenses were reasonable in the circumstances.

In assessing the Appellant, the Minister of National Revenue (the “Minister”) made the following assumptions of fact which the Appellant admitted or denied:

(a) in 1992, 1993 and 1994 the Appellant resided at 159 Oak Park Avenue, Toronto, Ontario which was her principal residence (the “Property”); (admitted)

(b) the Appellant rented out part of the Property to other persons during the 1992, 1993 and 1994 taxation years; (admitted)

(c) during 1992, 1993 and 1994, the Appellant reported rental income, expenses and losses from renting a part of the Property as follows:

	INCOME	EXPENSES	LOSSES
	1992
	$ 6,900.00	$ 25,975.88
	Less:
	personal portion	12,735.13
		13,240.75	$ 6,340.75
	1993
	$6,900.00	$ 30,996.00
	Less:
	personal portion	15,498.20
		15,498.20	$ 8,598.20
	1994
	$5,175.00	$ 27,795.56
	Less:
	Personal portion	16,202.63
		11,592.93	$ 6,417.93;
	(admitted)
(d)	the amounts received in 1992, 1993 and 1994 were to defray the operat
	ing costs of the Property; (admitted)
(e)	the Appellant reported losses from renting the Property in other years as
	follows:
	YEARS	LOSSES
	1987	$ 1,282.00
	1988	$2,125.00
	1989	$ 6,878.00
	1990	$ 7,350.00
	1991	$9,891.00;	(admitted)
(f)	the Appellant did not incur the expenses in the 1992, 1993 and 1994
	taxation years to maintain a bona fide rental property; (denied)
(g)	the rental expenses claimed were not made or incurred for the purpose
	of gaining or producing income; (denied)
(h)	the Appellant had no reasonable expectation of profit from the rental of
	the Property during the 1992, 1993 and 1994 taxation years; (denied)
(i)	the rent allegedly charged was insufficient to cover the mortgage inter
	est expenses incurred; (denied)
(j)	the rental expenses were personal or living expenses of the Appellant,
	(denied)

In assessing the Appellant the Minister relied on sections 3, 9 and 67, subsection 248(1) and paragraphs 18(l)(a), 18( l)(/j) and 20(1)(c) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended for the 1992, 1993 and 1994 taxation years.

However, for the purpose of this appeal, it is sufficient to consider the reassessment in accordance with paragraphs 18(l)(a) and 18(1)(h) of the Income Tax Act.

Section 18: General limitations:

(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) General limitation - an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from business or property.

(h) Personal and living expenses - personal or living expenses of the taxpayer, other than travelling expenses incurred by the taxpayer while away from home in the course of carrying on his business;

The Appellant bought the house in question in 1986 at a price of $112,000 by obtaining a first mortgage of $99,937 and a second mortgage of $35,000. The monthly payment of the first mortgage amounted to $1,000 and $300 on the second mortgage.

The yearly rent collected in the years 1992, 1993 and 1994 was in the amounts of $6,900, $6,900 and $5,175 respectively. The rent was collected for a basement apartment which was arranged for the purpose of creating an income and increasing the value of the property. She made some repairs to the house at a cost of $3,997.91 for the year 1992, $3,300 for the year 1993 and $1,300 for the year 1994.

At the present time her son is living in the basement apartment free of rent. Therefore, the Appellant is not deriving any income from the apartment which she originally built for investment purposes.

The Supreme Court of Canada in the case of Moldowan v. R., (sub nom. Moldowan v. Minister of National Revenue) [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, outlines the deductibility test by applying the principle of “reasonable expectation of profit”.

It appears in this appeal that the Appellant did not buy the house with the purpose of providing a source of income. There was no possibility of making a profit, since the revenue derived did not even cover the cost of interest incurred by the two mortgages. There were other expenses incurred which were added for repairs and maintenance.

The Court must scrutinize the deductions made when the facts illustrate the personal benefit element. In Tonn v. R., (sub nom. Tonn v. Canada) [1996] 1 C.T.C. 205, 96 D.T.C. 6001, at page 221 (D.T.C. 6010), the Fed- eral Court of Appeal, referred to the case of Huot v. Minister of National Revenue, [1990] 2 C.T.C. 2364, 90 D.T.C. 1818:

In this case, the taxpayer acquired certain properties from his parents and in turn rented one of them to his parents for a rental value far below the market rate. The applicant then attempted to deduct losses arising from this arrangement. The Tax Court Judge properly found that the applicant did not entertain a reasonable expectation of profit and dismissed the appeal.

In this appeal, during the years in question the losses were substantial. The property was financed over and above the purchasing price. There is no reasonable expectation of making a profit. In fact, the apartment is now occupied by her son free of rent.

I must therefore conclude that the Appellant did not have a reasonable expectation of profit from renting the property in the 1992, 1993 and 1994 taxation years, that the losses were personal or living expenses and that the Appellant was properly assessed in accordance with paragraphs 18(1)(a) and 18(l)(/i) of the Income Tax Act.

The appeal is therefore dismissed.

Appeal dismissed.