Tweedie v. R., [1997] 2 CTC 2946

Dubienski DJ.T.C.:

This is an appeal from assessments made by the Minister of National Revenue for the 1991, 1992 and 1993 taxations years.

The Facts

The facts of the case came primarily from the evidence of the Appellant.

The Appellant is a welder by trade having mainly worked on pipelines extensively throughout Canada since 1958. He retired from active work on October 1, 1996. He has established a small business for the purposes of welding in his hometown and presently is engaged in that as a retirement project.

During the years of employment, the Appellant and his wife engaged in real estate investments from time to time. As of the dates under appeal, the Appellant and his wife own certain properties.

In 1986, they purchased property in Fort Frances, renovated it into a duplex. Of this the Appellant says it paid for itself and had some profits. The only evidence with regard to this property is gleaned from the returns filed with the appeal dates showing a loss in 1991, a small profit in 1992 and 1993 but all accounting does not show any allowance for capital cost allowance.

Some time previous, the Appellant and his wife had acquired property in Thunder Bay which in 1991 showed a loss of $3,000. The Court has no evidence of previous financial record of this property. The property was sold in the 1991 taxation year; no reason was given for the sale.

In the meantime, the Appellant and his wife became interested in acquiring property in Florida. They had close friends who already had purchased a condominium in Florida and apparently were satisfied with the situation.

The Appellant decided to look at the market and in 1991 travelled with his wife to Florida to do so. They examined the area where their friends were located, in an area called Sandpiper Quay, and particularly in the complex in which their friends lived. The friends advised them that their situation was viable and that they had purchased their property furnished for $82,000 and owned their condo since the early 1980’s, but there was no evidence as to the actual financial returns that they enjoyed.

The Appellant and his wife were interested in the tourist situation, particularly that known as “the Snowbirds” and concluded that this was a good area to set up rental property. Their appraisal of the area was that it was beautiful and the price would be within their means, they could get a mortgage and that it was a good area to attract elderly people who would be the best tenants. They made enquiries from the operator of the condominium complex through whom they would purchase the property and also discussed the matter with the bank manager from whom they would negotiate their loan.

They did not get any information from the previous owners or discuss with them the financial history or profit and loss statements and the Appellant advised that they made no pro forma projections to ascertain best case Or worst case scenarios and made no market analysis as such. From reiterated statements, it would appear that the Appellant and his wife depended mainly on the discussions with their friends and decided that to purchase a condo would be a viable investment and help for a retirement income.

As a result, the property in question was purchased for $60,000 (all monies in US dollars) and paid for by a deposit of $15,000 and a mortgage of $45,000. Further expenses included fees of $2,000 and a purchase of furniture of $10,000 making a total capital investment of $72,000.

With regard to the mortgage, it was suggested by the bank manager, who said it was a sound investment, that they take a commercial mortgage that would provide for floating interest between 4.5% and 8.75%.

From investigation, it was decided and anticipated that the property would be rented from November to April, that is November, December as “off season”, and January to April inclusive, “full season”. This would allow them to mainly concentrate their interest in the tourist season catering to seniors.

When they purchased the property, there was a tenant whose lease was to expire in December 1991 but he vacated in August with the result that the Appellant only collected $2,447.12 based on a settlement with the tenant.

The Appellant advises that his promotion to obtain tenants mainly consisted by word of mouth through himself and his wife, there was no advertising and they left a good deal of the efforts to rent with the complex agents to advertise and to deal with the local Chamber of Commerce.

Although no pro forma or evidence before the Court, the Appellant says he hoped the property would pay for itself and he would assist to pay off the capital from his own personal earnings. It turned out, that because of the losses suffered through the years in question, he had to subsidize the renting costs considerably. The necessity of acquiring US dollars at the high rate of exchange was a major factor of cost to him. This cost is not reflected in the loss claimed by the Appellant nor in the capital cost allowance.

The Appellant gave evidence that the losses, in his opinion, because of low rental income, was due to a lack of tenants and it was suggested by some that this lack of tenants was due to the crime problem in Florida in 1992 and 1993. The evidence we have of that is a newspaper article that said there was a general decline in Florida of the tourist business but the Appellant cannot give any information with regard to the locale where his property was situated.

The Appellant also says he suffered losses due to unexpected adverse charges being, an increase in interest rates, an increase in condominium rates per month from $172 to $223 and an increase in garbage collection added $350 per year.

He also says the increase in US exchange on his personal contributions to the maintaining of the property caused him considerable losses. However, the Court does not have the opinion that this is relevant. The exchange cost points to his personal desire to save his property. He commented that he hoped and he thought that he could pay off in eight years mainly from the earnings. This does not reflect itself in the viability history of the investment. In 1994, 1995 and 1996 there were further losses so the Appellant and his wife decided to sell as of July 1996 and sold in December 1996 as of January 15, 1997 for $88,500 gross in US dollars.

Promotional information of the resort rental schedules was filed and from it was determined that the condominium owned by the Appellant was the least desirable class in the complex, since the rental for the high season was $1,750 per month and off season $900.

Benefit

The desirability is based on view and the top rental for the complex was $2,250. These figures are for the peak season; for November and December, the comparable rate would be $1,300.

The resort rental schedule also indicated that the rentals were subject to 6% Florida State tax, 3% county tax and some discounts.

The Appellant made it clear that he wished to rent monthly mainly, from November to April inclusive and avoid other months on a yearly lease. He had confirmed that he had been advised by the complex rental office to expect at least four months per year in winter. This did not materialize either in the years under appeal or subsequently to the time of disposition.

A calculation shows initially the viability of the investment was close to the line and as it turned out — a losing proposition.

The Appellant submits he acted reasonably in deciding to enter a project and in each year thereafter until he decided to sell, but expectations did not materialize due to unanticipated failure of tenants, raise in interest rates and high exchange rates paid on monies he paid to subsidize the losses.

The Court accepts the Appellant’s statement that he wished to make an investment driven by the profitable and that the personal element was minimal. His evidence says that the Appellant is clear that he had a reasonable expectation of the rental property showing a profit and being viable.

An appraisal of the steps that the taxpayer and his wife took to decide whether or not to embark upon a rental business in Florida were certainly not in depth but appear reasonable when appreciating that the Appellant and his wife were not skilled in business.

Couture, C.J.T.C. in Baker v. Minister of National Revenue (1987), 87 D.T.C. 566 (T.C.C.) refers to the question as to whether or not the taxpayer conducted himself in a business-like manner — quoted with approval in Tonn v. R. (1995), 96 D.T.C. 6001 (Fed. C.A.)by Linden, J.A. at page 6011:

In the present appeal, it appears to me that the Appellant conducted himself like a normal average investor, an investor who was not sophisticated because lack of professional training, but nonetheless had a working knowledge of the basic rules of investment. He knew the area where the property was located. He received assurances from the real estate agent that there would not be any problem renting the property throughout the year and furthermore the agent had indicated the rent that could be obtained. The fact that the rental projections did not materialize, which was the main and only cause of the failure of the venture should not be imputed to the Appellant. It was simply part of the risk related to the venture.

An appraisal of the evidence indicates to me that one might at first analysis, gauge the actions of the taxpayer to be inappropriate, ill-advised and not based on facts that would give a reasonable expectation of profit, to answer the test.

However, I am satisfied that the facts before me fall well within those of Tonn as Linden, J. summarizes at page 6015: “A small rental business was launched without the aid of sophisticated market analysis at a time when the rental market looked promising. Soon after, as a result of unforeseen circumstances, it became precarious. No personal benefit accrued to the taxpayers by the rental arrangement. The property was not a vacation site. This house was not used to give free or subsidized housing to relatives or friends. They made an honest error in judgment and lost money instead of earning it. It is not for the Department or the Court to penalise them for this, using the reasonable expectation of profit test, without giving the enterprise a reasonable length of time to prove itself capable of yielding profits.” It is obvious from the evidence that as soon as the taxpayer saw that the investment was a poor one, arrangements were made to sell and the property was sold.

As has been said, the Court should not in hindsight substitute its appraisal of the situation as to the reasonableness of the investment for that of the taxpayer.

I therefore allow the appeal.

Appeal allowed.