Nardone v. R., [1997] 2 CTC 3021

Taylor T.CJ.:

This is an appeal heard in Toronto, Ontario, on February 17, 1997, against assessments in which the Respondent disallowed rental losses claimed by the Appellant as deductions against other income — from employment and unemployment insurance benefits — in filing her income tax returns for the years 1991, 1992 and 1993. There was little dispute from Mrs. Nardone with respect to the assumptions made by the Minister in striking the assessment. The more critical comments from the Reply to the Notice of Appeal were:

6. In computing income for the 1991, 1992 and 1993 taxation years, the Appellant claimed rental losses from a property located at 48 Corley Avenue, Toronto, Ontario (the “Property”) in the amounts of $7,392.34, $7,338.58 and $6,374.97 respectively.

9.(a) the Appellant purchased the Property (a two bedroom house) in January 1990 for $159,000.00 as her principal residence;

(d) during the year in question, the Appellant resided at the Property, occupying one of the two bedrooms in the house, and rented the other bedroom;

(i) the Appellant had no reasonable expectation of profit from renting part of the Property during the 1991, 1992 and 1993 taxation years.

Mrs. Nardone, in her testimony, relied on the standard reasons often advanced for the losses:

— current market rents of $600.00 per month (for one bedroom in 1990)

— unanticipated economic turndown

— unable to realize projected rents

— higher than normal vacancy rates

— increased advertising costs

— large repair costs

It was essentially the position of the Appellant, and her husband who also gave testimony, that the rent charged (sometimes as low as $325.00 per month) was all the “market would bear”.

Counsel for the Respondent, in a comprehensive and pointed, yet considerate cross-examination, led the Appellant back to the real question. After purchase of the property in 1990, certainly by 1991, was it at all possible for her to show that there was any prospect of profit in the years under appeal, let alone a reasonable expectation of profit, when mortgage interest alone far exceeded any anticipated rental revenue? Counsel extracted from the Appellant clear agreement that a structural change (perhaps doing the basement so it could be used — at some considerable additional costs) or economic adjustment (lower interest rates, higher rentals, etc.) would be required before even the prospect of positive returns could be anticipated. All of this was known to her at the start.

Analysis

As noted above, the cross-examination of Mrs. Nardone by Counsel for the Respondent was a model of detailed, incisive and objective questioning

— the type which these “rental loss” claims almost always demand, but do not always receive.

The Appellant used the prospect of obtaining some rental income as a factor in her decision to purchase the property, understanding that this would serve to reduce somewhat the cost of maintaining the whole house, while using a portion of it as a personal residence. She had no hope of making a profit. She says now (and from 1995 on) she has had positive returns, but the Court had no substantiation for that, only the statement of Mrs. Nardone, and that point — if viable — will be dealt with in due time by the authorities. It is not before the Court in this matter.

Reference to the recent case of Sardinha v. The Queen (not published but listed by the Tax Court of Canada as 96-860(IT)I) could be helpful for the Appellant in considering these comments, particularly the quotation:

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.

Appeal dismissed.