Husain v. R., [1998] 1 CTC 2665, 98 DTC 1215

Beaubier T.C.J.:

This appeal pursuant to the General Procedure was heard at Toronto, Ontario on October 24, 1997. The Appellant testified. The Respondent called Ini Rajan, C.G.A., an appeals officer with Revenue Canada, and Michael Vantil, a Technical Advisor with Revenue Canada.

The Appellant has appealed reassessments for his 1990, 1991 and 1992 taxation years which deny him deductions claimed for expenditures which he alleges were deductible from income in respect to occupancy costs and professional fees relating to four condominiums which he owned in the Metropolitan Toronto area in those years.

At the opening of the hearing, the Respondent applied to amend the Reply to the Notice of Appeal to vary paragraph 9 so that it referred to paragraph 18( 1 )(£>) of the Income Tax Act (the “Art”) rather than paragraph 18(1)(a) of the Act and to add paragraph 10. Mr. Husain objected to the amendments. The Court allowed the amendments on the following bases: (1) There is no surprise since the proposed amendments describe the essence of the dispute between the parties from the beginning.

(2) They do not affect the assumptions of the Respondent, since no assumptions were made in the Reply either before or after the amendments.

Paragraphs 9 and 10, as amended, read:

9. He respectfully submits that the professional fees and soft costs are capital in nature and therefore prohibited from deduction by paragraph 18(1 )(b) of the Act or are otherwise prohibited by subsections 18(3.1) and (3.3) of the Act.

10. He respectfully submits that the Appellant did not, at any material time, have a reasonable expectation of profit from his rental activities. Accordingly, he did not carry on a business within the meaning of section 9 of the Act and is not entitled to deduct the expenditures in question.

The professional fees claimed as deductible from income by the Appellant consist of $4,558 in 1990 respecting the purchase of condominium number 1402 at 1131 Steeles Avenue and $1,867 in 1991 respecting the purchase of condominium number 909 at 4460 Tucana Court. The Appellant’s claims to deduct these fees from income are dismissed. Most of each set of fees relates to legal and other fees and disbursements incurred for the purpose of purchasing the properties themselves. A small item in each was incurred by the Appellant for obtaining an extra copy of a form which was required in the course of making each capital purchase. These claims are denied because they are related to the actual purchase of the two capital properties themselves. They were not incurred for the purpose of earning income from the properties.

The remaining item in dispute is the sum of $26,437 of “occupancy costs” incurred by the Appellant in 1990. These amounts are detailed in the Notice of Appeal as follows:

The Respondent denied these claims on the basis that the Appellant was not in the business of renting property in 1990. In essence, the question is whether the Appellant had a reasonable expectation of profit from renting the properties in 1990.

The particulars respecting the properties are set forth in the following paragraphs contained in the Appellant’s Notice of Appeal. They are very well drafted and the portions quoted are in accordance with the evidence led in Court.

I purchased four properties detailed as follows directly from the builder for rental business.

	ADDRESS	UNIT #	BUILDER	CONTRACT
				DATE
1.	205 Wynford Drive	407	Palisades Realty Hold- Feb 15, 1987
	North York, Ontario		ing Corporation

2.	205 Wynford Drive	801]	Palisades Realty Hold- Feb 25, 1987
	North York, Ontario		ing Corporation
3.	1131 Steeles Ave W.,	1402	Primrose Towers	Jan 4, 1989
	North York		Three Ltd.
4.	4460 Tucana Court	909	Kingsbridge Grand	Jan 26, 1989
	Mississauga.		Ltd.

Possession of these properties was taken on the following date:

	ADDRESS	UNIT #	DATE POSSESSION TAKEN
1.	205 Wynford Dr.	407	Oct 16, 1989
2.	205 Wynford Dr.	801	Nov 1, 1989
3.	1131 Steeles Ave.	1402	April 13, 1990
4.	4460 Tucana Court	909	Nov 1, 1991

The properties were rented to arm’s length tenants on the dates mentioned against each, and rental business income was reported for tax purposes in the relevant taxation years.

	ADDRESS	UNIT #	DATE	INCOME REPORTED
			RENTED
				1990	1991]	1992
1.	205 Wynford Dr.	407	Nov 1, 1989	17372	12900	12900
2.	205 Wynford Dr.	801]	Dec 1, 1989	19337	13388	13750
3.	1131 Steeles Ave	1402	Sept 13, 1990	7007	14400	12240
4.	4460 Tucana Court	909	Nov 9, 1991		1646	11615

As from the date of possession. I was responsible for all payments such as Property Taxes, Mortgage Interest, Insurance, Legal Expenses and Common Expenses (Light, Heat and Water) relating to these properties. Thus, all the incidents of title passed to me as from the date of possession.

However, for properties #1, #2 and #3 the legal title was retained by the builder due to either certain differences and/or technical reasons (More than a certain % of the units in the buildings had to be occupied or possession taken, before Completion Certificate was granted by the Borough). Accordingly, the legal title to the properties was passed on the following dates to me immediately after the builders got the Completion Certificate from the Borough and/or the differences were resolved.

During the period I got the possession of above properties and the date legal title was transferred as mentioned above, the builder paid the Property Taxes, Mort- gage Interest, and Common Expense (Light, Heat, Water) costs on my behalf and on my account for these properties.

	ADDRESS	UNIT#	DATE LEGAL TITLE
			TRANSFERRED
1.	205 Wynford Dr.	407	July 24, 1990
2.	205 Wynford Dr.	801	July 25, 1990
3.	1131 Steeles Ave.	1402	July 30, 1990

The builders were paid for these amounts through post dated cheques for properties #1 and #2 and for property #3 the builder was paid the total amount on transfer of title to me. The total amount in each case was settled on transfer of title.

In Moldowan v. R., (1977), 77 D.T.C. 5213 (S.C.C.), at 5215 , Dickson, J. said:

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer’s training, the taxpayer’s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v. Matthews (1974), 28 DTC. 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

In reference to the criteria outlined by Dickson, J., the following is the case:

l. The profit and loss experienced in past years.

There is no evidence which indicates that the Appellant had previous experience of renting residential properties.

2. The taxpayer’s training.

There is no evidence that the taxpayer had any prior training in renting residential properties.

3. The taxpayer’s intended course of action.

The Appellant made a plan and projection in respect to each property that he purchased. It estimated interest rates at 9.25%, whereas the interest rates exceeded 12% in respect to all of the properties. It estimated light, heat and water at a figure that, particularly in the case of hydro, turned out to be 25% too low. It did not allow for any vacancy rate. It dramatically overestimated the actual rent to be received. It did not allow for capital cost allowance. The plan anticipated a profit after four years in respect to 909-4460 Tucana Court and after three years in respect to the other properties.

It should be noted that in respect to all of the properties the Appellant’s anticipated date of occupancy was delayed for many months, the interest rates rose dramatically to the point where they were virtually 50% above the interest rates that he anticipated at the time he drew the plan, and the hydro rates were raised unexpectedly by the 25% amount referred to. At the same time rental rates dropped due to the recession that occurred in the Toronto area beginning in about 1990. Whereas the Appellant anticipated renting each of the properties except 909-4450 Tucana Court in 1988, due to various delays, he did not receive actual possession until 1990 when he was finally able to rent them.

The Appellant managed the properties himself, repaired them himself and rented them himself. There has been virtually no vacancy. However, the rentals have amounted to about $12,000 per year and the amount of interest on the mortgages on each property has exceeded or virtually equalled the amount of rent each year. In addition to the interest, the Appellant has had to pay property taxes, repairs and maintenance, light, heat and water, advertising and other expenses.

The Appellant’s original plan in respect to each property allowed for an annual increase in each rent. Simultaneously, his estimates of interest charges showed annual reductions and he did not allow for

vacancy.

4. The capability of the venture as capitalized to show a profit after charging capital cost allowance.

None of the projections of any of the properties would have shown a capability of any of the properties having a profit within a reasonable period after possession had capital cost allowance been calculated. This is particularly true if any vacancy rate had been estimated.

On the evidence, the Appellant has proven to be a good manager since he has had almost no vacancies, he has sold properties in order to restrict his losses as much as possible, and he has managed the properties and maintained them himself. To date he has not made a profit.

The Appellant’s plans were detailed and reasonable as far as they went. But they did not allow for a vacancy rate, they did not allow for capital cost allowance and they did not allow for any margin of error whatsoever. In 1990, the Appellant did not have a reasonable expectation of profit from renting the properties. Nor did he have a reasonable expectation of profit from renting the properties when he purchased them. The appeal in respect to the occupancy costs in 1990 is dismissed.

The appeal is dismissed in its entirety.

Because the appeal is dismissed on these facts, the Court does not find it necessary to review the estoppel grounds submitted by the Respondent nor the evidence relating to the estoppel question.

The Respondent is awarded its party and party costs.

Signed at Ottawa, Canada, this 29th day of October, 1997.

Appeal dismissed.