Provenzano v. R., [1998] 1 CTC 2952

Somers D.J.T.C.:

This appeal was heard in Toronto, Ontario, on October 6, 1997, pursuant to the Informal Procedure of this Court concerning the Appellant’s 1992 and 1993 taxation years.

The issue in this appeal is whether the Appellant had a reasonable expectation of profit from renting a property in the 1992 and 1993 taxation years.

In reassessing the Appellant for the 1992 and 1993 taxation years, the Minister of National Revenue (the “Minister”) disallowed the deduction of the rental losses. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) the Appellant and her spouse purchased the property at 22 Hanover Road, Unit 609 in Brampton, Ontario (the “Property”), a two bedroom condominium in February 1990, at a cost of $221,000.00; (admitted)

(b) the purchase of the Property was financed by giving a first mortgage of $147,000 to the Bank of Montreal, a second mortgage of $14,315 to Bramalea Limited and a third mortgage (line of credit) of $36,500 to Bank of Montreal; (admitted)

(c) in the 1992 and 1993 taxation years, the Appellant reported rental income, expenses and losses from the Property as per Schedule “A” and “B”, respectively; (admitted)

(d) the receipts, invoices or other records provided by the Appellant to the Minister did not adequately support the expenses claimed; (admitted)

(f) the Appellant reported rental losses from the Property in other years as follows: (denied)

Years	Losses
1990	$19,726.00
199]	$13,810.00

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

(h) the Appellant did not have a reasonable expectation of profit from renting the Property during the 1992 and 1993 taxation years; (denied)

(i) the rental expenses claimed were not made or incurred for the purpose of gaining or producing income from a business or property; (denied)

(j) the rental expenses were personal or living expenses of the Appellant. (denied)

The rental income and expenses for the 1992 taxation year are as follows:

Schedule “A” to Diana Provenzano Reply to Notice of Appeal

Rental Income and Expenses

For 1992 Taxation Year

	TOTAL	PERSONAL RENTAL
INCOME	22 Hanover Dr.		$13,200.00
EXPENSES
Property Taxes	$ 2,400.00	$-0-	$ 2,400.00
Maintenance and Repairs	4,445.16	-Q-	4,445.16
Interest	24,000.00	- 0 -	24,000.00
Total Expenses			$30,845.16
Rental Loss			($ 17,645.16)
Deduct: Portion reported by spouse 50%			- 0 -
Rental Loss			($17,645.16)
* as reported by the Appellant

The rental income and expenses for the 1993 taxation year are as follows:

Schedule “B” to Diana Provenzano Reply to Notice of Appeal

Rental Income and Expenses

For 1993 Taxation Year

Period 01-01-1993 to 30-07-93

	TOTAL	PERSONAL RENTAL
Income	22 Hanover Dr.		$ 6,600.00
Expenses
Property Taxes	$ - 0 -	$ - 0 -	$ 1,200.00
Maintenance and Repairs	2,390.00	- 0 -	2,390.00

	TOTAL	PERSONAL RENTAL
Interest	- 0 -	- 0 -	11,220.00
Total Expenses			$14,810.00
Rental Loss	’		($ 8,210.00)
Deduct: Portion reported by spouse 50%			‘— 0 -
Rental Loss			($ 8,210.00)
* as reported by the Appellant

The Appellant stated that she bought the property, jointly with her husband, as an investment. The property was purchased in February 1990, at a cost of $221,000 financed through three mortgages, for a total amount of $197,815.

The property was purchased through a real estate agent and she was assured that the rental capacity was sufficient to offset all expenses incurred. She maintains the rental possibility reduced during the recession. She expects to make a profit in 1997 since the mortgages were reduced. However, she was unable to produce a valid projection of the profits to be derived for the next years, until 1997. Her projection is based only on verbal information given by a real estate agent.

The Appellant and her spouse got married in April, 1990 and lived in the house from May to September 1990, during which time they did not pay rent for the house. The Appellant and her spouse lived in the house again from June 1993 to July 1995, since she had problems with the tenants who moved out voluntarily at her request.

The Federal Court of Appeal in the case of Mohammad v. R., dated on (July 28, 1997), Doc. A-652-96 (Fed. C.A.) stated the following at page 8:

Taxpayers intent on financing the purchase of a rental property to the extent that there can be no profit, notwithstanding full realization of anticipated rental revenue, should not expect favourable tax treatment in the absence of convincing objective evidence of their intention and financial ability to pay down a meaningful portion of the purchase-money indebtedness within a few years of the property’s acquisition...

In the present case, the interest payments for the years 1992 and 1993 far exceed the revenue that can be expected to generate sufficient profits. The Appellant did not present any evidence that the indebtedness will be reduced within a reasonable period, allowing eventually a profit. The Appellant’s argument that the revenue will increase is based more on speculation than on an objective plan. The case law has recognized a start-up period, to allow losses, but since the purchase of the property in 1990, and bearing in mind the insufficient revenue generated, the losses have been considerable.

The Respondent relied on sections 9 and 67, subsection 248(1) and paragraphs 18(1 )(a), 18(1 )(/z) and 20(1)(c) of the Income Tax Act.

In view of all the circumstances, the Appellant did not have a reasonable expectation of profit from renting the property in the 1992 and 1993 taxation years and was properly reassessed in accordance with paragraphs 18(1 )(a) and 18(1)(h) of the Income Tax Act.

The appeal is dismissed.

Appeal dismissed.