Nguyen v. R., [1997] 2 CTC 2997

Taylor T.CJ.:

These are appeals heard on common evidence in Toronto, Ontario, on February 18, 1997, against assessments under the Income Tax Act (the “Act’) in which the Minister of National Revenue disallowed rental losses claimed for the years 1991, 1992, and 1993.

The Notices of Appeal and Replies to Notice of Appeal were identical in content and the critical phrases were:

I have been advised by a Tax Specialist who had carefully studied of my income tax return for 1991, 1992 and 1993.... Obviously, I am the victim of an unqualified Accountant Office licenced by Canadian Government Anh Tuyet, Tran.... The main reason for my rental loss during 1991, 1992 and 1993 was the high interest rate that I have paid to the mortgage while the income from rental was very limited. However, the provision of Earning Income from rental will be visible in the year of 1995 when my mortgage is renewed as the interest will be largely dropped.

Reply to the Notice of Appeal

— in September 1989, the Appellant, in partnership with his spouse, purchased 7495 Rock Hill Road, Mississauga, Ontario (the “Property”) as their principal residence at a cost of $225,000.00;

— the purchase of the Property was financed by a first mortgage of $191,675.00 from Firstline Trust;

— the Appellant began renting a portion of the Property in 1990, and since commencing the purported rental operation, has never reported a profit;

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

— in the 1990 taxation year, the Appellant claimed a rental loss of $4,099.00;

— the rent charged was not sufficient to offset the fixed operating expenses (mortgage interest and property taxes) of the Property;

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

— the Appellant had no reasonable expectation of profit from renting the Property during the 1991, 1992 and 1993 taxation years;

— the rental expenses were personal or living expenses of the Appellant.

The issue is whether the Appellant had a reasonable expectation of profit from renting the Property in the 1991, 1992 and 1993 taxation years

Schedule A to Tuan Ahn Huynh Reply to Notice of Appeal

Rental Income and Expenses

		1991		1992		1993
Rental Income	$	9,600.00	$	10,800.00	$	10,800.00
Property Taxes	$	1,958.08	$	2,113.57	$	2,209.33
Maintenance and Re		1,052.71				1,291.34
pairs
Interest		22,206.67		22,067.09		23,041.33
Insurance		225.00		258.00		275.00
Light, Heat, Water		2,509.12		2,833.64		3,679.31
Cable TV		264.48		286.32		408.64
Total Rental Expenses	$ 28,216.06		$ 27,713.16		$ 30,904.85
Less: Personal Portion	$	9,235.54	$	9,094.35	$	10,918.60
Net Rental Expenses	$	18,980.52	$	18,618.61	$ 20,706.25
Net Rental Income	6	9,380.52)	6	7,818.81)	6	9,906.25)
(Loss)
Appellant’s Share	6	4,690.26)	6	3,909.40)	§	4,953.13)
(50%)

An interpreter for the Vietnamese language was provided by the Court. Mr. Huynh speaking for both Appellants was most distressed and dismayed with regard to the advice paid for and received from the Accountant. All the Court could say on this point was that the lack of qualification or surveillance as he saw it in this field cannot be attributed directly and solely to the Canadian Government. The Court could understand his displeasure and sympathised with his situation, but the selection of assistance and advice

— professionally qualified or not — even the decision not to seek such assistance, rests in the discretion of individual taxpayers. Revenue Canada does provide some general guidelines, but that is all they are — guidelines.

Another point raised by the witness was that he had invested all his available funds in the property and had hoped to make a capital gain from it in a rising market, but the result had been that the Appellants lost the property, and now owed some $10,000.00 in back income taxes for which he requested some flexibility in the time required to make payments. His further request for interest relief was also recorded. Through Counsel for the Respondent the Court was only able to assure him that his situation would be conveyed to the proper collection authorities in the event the appeals were dismissed.

On the merits of the appeal, it need only be said that there is nothing unusual or particularly noteworthy about the facts, wrenching as the situation now stands. There is no evidence whatsoever, and there is open admission by the Appellants, that there was never any hope, let alone expectation, even further removed any reasonable expectation of making a profit on the operation from the start. Even at that the Respondent has not attempted to include the 1990 loss results in any reassessment. By 1991, clearly by 1992, that situation of continuing losses was certain and obvious to the Appellants. They appeared to be straight forward, intelligent, hard-working people, desirous only of making a home and a good life for their children. It may be difficult for them as taxpayers to quite visualise how the deduction of these unwarranted losses from their other income — ultimately adds to the burden of other taxpayers not attempting to claim such relief. But that is indeed the result. In these appeals Mr. Huynh regularly reported two sources of income — employment and family allowances; and Mrs. Nguyen regularly reported employment income and unemployment insurance benefits received. As for the prospect of the often elusive “capital gain”, that does not appear to be a factor which can be taken into consideration in these proceedings.

The case law available on the subject shows that rental of property — even a portion of the property, which results in losses, leads to consideration of its inevitable concomitant — the question of a “reasonable expectation of profit”, when claims are made in filing income tax returns, and particularly where there is a “personal element” — the utilization of part of the property for owner occupation.

Some comment from a recent case from this Court — Sardinha v. The Queen dated November 29, 1996 (not published but listed as 96-860(IT)I) may have application in these circumstances:

Occupying as a “principal residence” a single family home means that all the costs of maintaining the property are personal. Occupying one unit as a “principal residence” does not mean that the “market” basis (what the traffic would bear) can necessarily be applied to the occupant - owner - taxpayer and the balance of the costs incurred shifted to the general public. The decision — a conscious one — to rent the other units at a rate less than their proportionate share of the total expenses, is for the owner to make, and no one should question that decision. But that basic decision, which often automatically results in unrecovered costs does not just automatically permit the owner to regard these uncovered costs as “rental losses”. They are unrecovered costs attributable to the basic decision, and therefore her occupancy of part of the building, has a direct bearing on the result. Simply put, when the rental charge is not sufficient to cover the proper proportion of costs involved, the owner occupier may be required to shoulder the financial responsibility for that decision. The rationale (“what the traffic would bear”) which produces a loss from charging a shortfall non-compensatory rent is the owners proprietary decision. When the same calculation base (“what the traffic would bear”) is applied to the personal use portion of a building, as in this case, it can produce a benefit to the owner (see “use or benefit” in section 248(1) of the Act under “Personal or Living expenses”) as I see it.

The appeal is dismissed.

Appeals dismissed