Williams v. R., [1997] 3 C.T.C. 2441

Rip T.C.J.:

1 Egbert Andrew Williams has appealed assessments made under the Income Tax Act (“Act”) for the 1991 and 1992 taxation years on the basis that he be permitted to deduct expenses incurred in the renting of units in a building in which he resided.

2 In February 1990 Mr. Williams acquired a property located in Scarborough, Ontario for $220,000. The property was financed by way of mortgages aggregating the amount of $190,000. The property consisted of a full basement apartment and three bedrooms on the upper floor.

3 At time of purchase Mr. Williams commenced renting the basement apartment and one of the bedrooms. From 1991 to 1992 he reported rental income, expenses and losses from the property as follows:

4 According to the assumptions of fact relied on by the Minister of National Revenue (“Minister”) in making the assessments under appeal in 1993, 1994 and 1995 Mr. Williams reported net rental losses in the amounts of $3,057; $937 and $2,767 respectively. In other words, the property has yet to show a profit.

5 In assessing, the Minister also assumed that the rental income received by Mr. Williams in 1991 and 1992 from the property did not cover mortgage interest expenses and that he rented part of the property to help defray the cost of maintaining his residence.

6 The expenses deducted by Mr. Williams represented 60 per cent of the total expenses on the property.

7 Mr. Williams is employed by Via Rail as a train conductor. He stated his income determined primarily by the number of trips he is called to work and his purpose in purchasing the property was to augment his “uncertain” income, while initially occupying a portion of the premises.

8 At the time of purchase of the property the basement apartment was rented for $780 per month to a lady who had lived there for several years. The tenant also paid 40 per cent of the cost of the utilities. Mr. Williams testified that it was represented to him by the real estate agent that each of the two bedrooms on the upper floor could be rented for $400 per month, with possible increases later on. The appellant intended to occupy the third bedroom. In his view he would be able to garner $18,960 per year from the property, based on renting the basement at $780 a month and the two bedrooms at $800 per month. He anticipated carrying costs of $26,694, the bulk of which was mortgage interest in the amount of $24,437. His personal portion of these expenses would be $10,677 and the portion for the rentals would be $16,016. Thus, he would have a profit of $2,944 a year. There does not appear to have been any provision for capital cost allowance in calculating the anticipated profit.

9 In his Notice of Appeal Mr. Williams stated that “when circumstances permitted” he would rent the entire property and rent himself one bedroom apartment elsewhere. However, as it turned out, the tenant in the basement apartment lost her job and vacated the apartment later on in 1990. Mr. Williams advertised the apartment for rent but was not immediately successful in replacing the tenant. Eventually he rented the basement apartment for $650 per month. He also rented one of the bedrooms for $350 per month, the other unit remained vacant.

10 In April 1995, Mr. Williams moved out of the property and attempted to rent all of the units. However he moved back in January 1997 after evicting a tenant for non payment of rent over a period of four months.

11 Mr. Williams stated that his work forced him to be away from the property approximately three to four days every week. When he purchased the property he was told that the Scarborough campus of the University of Toronto and Seneca College were not too far away and he could rent the bedrooms to students.

12 Mr. Williams testified that his accountant told him that he could claim 60 per cent of the expenses for rental and 40 per cent as a personal expense since he was rarely at home. He suspected that because he was not at home on a regular basis to cater to the tenants, the tenants vacated. He acknowledged that he could not make a profit without renting all of the units in the property. He was not able to rent all of the units and thus found it difficult to make a profit.

13 Mr. Williams claimed he would not have spent $30,000 on the property if he had no reasonable expectation of making a profit. He acknowledged he had a high ratio mortgage and was still paying 14 per cent on a second mortgage.

14 The respondent's counsel took the position that Mr. Williams could not afford to acquire the property alone as a residential property and required tenants to help finance the property. The appellant acknowledged this.

15 The appellant admitted that he did not investigate the rental market too closely before the purchase. When he purchased the property he thought the real estate market was “hot” and he did not realize it was cooling down. He realized that when he acquired the property he had a “good” tenant for the basement and if she had not lost her job he would “make do”. He thought at the time he would sell the property “a couple of years down the road”.

16 Respondent's counsel submitted that the circumstances of this appeal suggest that the loss claimed by the appellant was incurred for a personal or non-business motive: the property was acquired by the appellant for his personal use and rooms in the property were rented for the purpose of helping the appellant finance the purchase of the property. The appellant did not seek a profit from the property; he only wanted help to defray the costs. This, counsel, declared, is not indicative of a profit motive.

17 Counsel reviewed the evidence: the appellant has incurred losses from the property from the outset. He did not take any step to determine if the property was susceptible of yielding a profit. He relied on the representation of the real estate agent and was attracted by the possibility of renting to students at purportedly nearby institutions. He did not investigate the situation he was getting into.

18 The reasons for judgment in Tonn v. R. (1995), 96 D.T.C. 6001 (Fed. C.A.)do not assist the appellant, counsel submitted, since there was a personal element present in the appellant's acquisition of the property. It was not a purely commercial business enterprise. The appellant had no training or previous experience in renting property. The appellant's intended course of action was influenced by the real estate agent's representations. The appellant never made a profit from the property nor is a profit anticipated within the reasonable future. And neither have the rentals generated a positive cash flow. Based on the reasons for judgment in Moldowan v. R. (1977), 77 D.T.C. 5213 (S.C.C.), a decision of the Supreme Court of Canada, the appeals should be dismissed.

19 Mr. Williams explained he “wanted profit” when he purchased the property; he “wanted to make money” from the property. He referred to two cases: McNeill v. R. (1989), 89 D.T.C. 5516 (Fed. T.D.)and McGovern v. Minister of National Revenue (1994), 94 D.T.C. 6527 (Fed. T.D.). Both are decisions of Jerome A.C.J. of the Federal Court. In both of these cases the appeals were allowed because unusual circumstances, or a change of circumstances, occurred that affected the profitability of the condominium rental properties. In neither of these two appeals was there a personal element in the ownership of the condominium unit in question. This is not the case here.

20 Unfortunately I must agree with the submissions of respondent's counsel. Over a reasonable period of time, the property was not going to generate a profit to the appellant. Costs were too high: the property was highly mortgaged and the interest rate was high. The amount of rent that could be gotten from the property was limited. Also, there was a personal element to the acquisition. The appellant, perhaps naively, was influenced in his decision to purchase the property by the real estate agent, and did not seek any independent advice nor did he make any inquiries of his own. His projections were based on ideal conditions and I am not satisfied they were reasonable in the circumstances.

21 The appeals will be dismissed.