Reiter v. R., [1997] 3 C.T.C. 2657

Lamarre Proulx T.C.J.:

1 The Appellant is appealing by way of the informal procedure the reassessments of the Minister of National Revenue (the “Minister”) for the 1992, 1993 and 1994 taxation years.

2 The question at issue is whether the Appellant was carrying on a rental operation the principal purpose of which was to make a profit, or in other words, a rental operation which was a genuine commercial undertaking.

3 In establishing the Appellant's reassessments, the Minister made the assumptions of fact described in paragraph 4 of the Reply to the Notice of Appeal (the “Reply”) as follows:

a) during the 1992, 1993 and 1994 taxation years, the Appellant was co-owner of a condominium located at 23 Hudson Club, 44, Chemin de l'Anse, Unit 23, Ste-Madeleine de Rigaud, Québec and sole owner of a condominium located at 3250 Des Luminaires, Unit 19, Ste-Adèle, Québec;

b) the Appellant claimed continuous rental losses for these two condominiums for the taxation years 1985 to 1994 inclusive (see attached Schedule A);

Schedule A
23, Hudson Club
	Revenus	Dépenses	Revenu net
1994	9,000	14,463	(5,463)
1993	9,000	16,776	(7,776)
1992	6,500	19,363	(12,863)
1991	4,500	18,581	(14,081)
1990	---	17,700	(17,700)

3250, Des Luminaires, Ste-Adèle
	Revenus	Dépenses	Allocation Coût en capital	Revenu net
1994	---	10,305	---	(10,305)
1993	---	7,970	1,792	(9,762)
1992	---	8,227	1,886	(10,113)
1991	---	9,187	1,985	(11,172)
1990	5,000	10,374	2,090	(7,464)
1989	4,200	9,594	2,200	(7,594)
1988	6,000	9,648	2,316	(5,964)
1987	6,750	9,296	2,438	(4,984)
1986	6,625	9,568	2,566	(5,509)
1985	1,250	2,038	1,316	(2,104)

4 The Appellant and her husband testified. Subparagraphs 4a) and 4b) were admitted. Both properties were purchased as investments. When the property in Ste-Adèle was purchased, it was occupied by a tenant who paid rent of $650 per month. That tenant vacated the property some months after its purchase and the Appellant stated that afterwards she was unable to find a year-round tenant. The property was listed for sale in 1990 when the Appellant and her husband purchased the property located in Hudson. They indicated that they purchased this latter property as an investment and as a rental property. They did not appear to have been discouraged by the fact that their property in Ste-Adèle was generating annual rental losses of $10,000. That property was sold in 1994. They had expected to rent the Hudson property for $1,000 to $1,100 per month. It was listed for leasing with a real estate agent and the monthly rental asked was $1,000 to $1,100.

5 Exhibit A-2 is a lease of the Hudson property dated August 26, 1995, the term provided for being 33 months at a monthly rental of $1,200.

6 During the years in issue, the Appellant had an annual employment income of approximately $45,000.

Analysis

7 Counsel for the Respondent referred the Court to the decision of the Federal Court of Appeal in Tonn v. R. (1995), 96 D.T.C. 6001 (Fed. C.A.). In that decision, at page 6004, the Federal Court of Appeal referred to the following statement of Thorson, P. in Royal Trust Co. v. Minister of National Revenue (1957), 57 D.T.C. 1055:

[T]he first approach to the question whether a particular disbursement or expense was deductible for income tax purpose was to ascertain whether its deduction was consistent with ordinary principles of commercial trading or well accepted principles of business ... practice.

8 I quote Linden, J.A. at page 6013 of the Tonn decision, supra:

... However, where circumstances suggest that a personal or other-than-business motivation existed, or where the expectation of profit was so unreasonable as to raise a suspicion, the taxpayer will be called upon to justify objectively that the operation was in fact a business. Suspicious circumstances, therefore, will more often lead to closer scrutiny than those that are in no way suspect.

9 The evidence in this case has shown an easy acceptance of substantial losses from an operation over a number of years. Such acceptance raises doubt as to whether the principal purpose of the operation was to make a profit. Rather, it points toward some other purpose such as the carrying of the investment costs during the time it would take for the investment to increase in value, and the simultaneous lowering of the income tax payable on employment income, which is reduced by the said losses.

10 The monthly rental payment of $650 for the Ste-Adèle property, which was anticipated when the Appellant purchased the property, comes to an annual total of $7,800. Consequently even if, in the best of circumstances, the property had been rented on a yearly basis, it would have generated no profit but only losses. The same may be said for the Hudson property. Even in the best of circumstances, it would not have generated any profit if it had been rented on a yearly basis, at the anticipated rate of $1,000. Even if rented at $1,200, as it is at the present time as per Exhibit A-2 aforementioned, the total amount would not have covered the expenses in the years in dispute.

11 Except for entering into a listing agreement with a real estate agent for the leasing of the properties, no other effort was made to rent them. There did not seem to be any inquiry as to what was done by the agent in attempting to rent the properties. The fact that the rental properties remained unoccupied did not seem to bother the Appellant or her husband.

12 The number of years of substantial rental losses, the fact that the anticipated amount of rental payments was not sufficient to cover expenses and generate profits, and the absence of effort to rent the properties lead me to the conclusion that these properties were not purchased and were not dealt with as rental properties. In the years in issue, the Appellant did not carry on a genuine commercial rental operation and the losses cannot be deducted in computing the Appellant's income since such losses were not incurred for the purpose of gaining or producing income from a business.

13 The appeals are dismissed.