Rowe T.C.J. (Orally):
1 HIS HONOUR: The appellant appeals with respect to an assessment of income tax for the 1994 taxation year. In that particular year, in computing income, the appellant deducted the amount of $8,345.00 as a business loss, and claimed a rental loss in the sum of $10,147.00.
2 The deduction of the business loss arose from a claim relating to the appellant's investment in a purported business connected with a band known as “Big Medicine”.
3 At one point the appellant had obtained, from the composer and author of a song, Mr. Jay Thomas, the rights to that particular song, as evidenced by the agreement filed as Exhibit A-4.
4 Then there was an agreement, or mechanical licence, as exhibited by the document filed as Exhibit A-5, which entitled the appellant, as owner of the song “Desperate Eyes”, to a royalty rate of 6.47 cents per unit after the first 15,000 units had been sold.
5 Mr. Lamoreux, a friend, advisor and administrator for the appellant-who was not present-testified that in the 1970s Mr. Phillips had been involved with a coffee house operation and had hired, from time-to-time, certain musicians.
6 The band that was formed, Big Medicine, put out a compact disc of which the song, Desperate Eyes, formed a part. The submission on the evidence, by counsel for the appellant, was that there was, in fact, a business, and that a bad business decision should not be held against the appellant.
7 The difficulty that I have, on all of the evidence, is that there was no proof to establish the appellant had a right to the income of the band in any way, other than as the holder of the copyright, by way of assignment, which had been licensed pursuant to Exhibit A-5.
8 There was no evidence before me on which I can find that whatever expenditure was made-by the appellant in 1995-was made in such a way so as to satisfy the business test when his right to profit from the song was, in any event, established pursuant to his royalty agreement.
9 Mr. Lamoreux testified that, to his recollection, there was an agreement signed by all of the members of the band, but he felt the right of participation by Phillips was 10 per cent but, again, we do not have a contract before us, and it may well have contained certain other provisions, like in the royalty agreement, that funds did not flow to Phillips until a certain threshold point had been reached.
10 Accordingly, with respect to that aspect of the appeal, the Minister, in my view, was correct in denying the business loss, as claimed, relating to the music business.
11 The larger issue was the question as to whether or not the appellant is entitled to a rental loss arising from the acquisition by him in 1983 for property located at 2204 Queen Street East, Toronto in an area known as “The Beaches”.
12 The appellant paid $126,900.00 for the property. And Mr. Lamoreux, who owns the property next door, testified that they are properties with heritage designations, having been constructed in, approximately, 1908.
13 The initial intention of Mr. Phillips was to sell the property but the real estate market entered a severe downturn and, as a consequence, the decision was taken by Phillips to hold on to the property and to turn it into a viable rental property.
14 Mr. Lamoreux was retained to act as an administrator and to supervise the renovations that had to been done over the course of the years, having come on-stream, in effect, in that administrative capacity in 1991. Mr. Lamoreux was familiar with the building, and spent time on-site to supervise the renovations.
15 He also testified that he was able, over the years, once renovations were completed and there were no vacancies due to renovations, to have a group of tenants with a steadier income stream and, as a consequence, revenue of the property rose to the point, and expenses were reduced to the point, where, in 1996, there was a small loss of $636.54. And, pursuant to the balance sheet, filed as Exhibit A-3, a profit of $3,608.00 was produced in 1997.
16 The revenue was increased to $30,900.00, and the expenses were reduced, as a consequence of the management/administration fees of Mr. Lamoreux being only $6,000.00, but there was an extraordinary item in there of legal costs in the sum $3,192.00.
17 Mr. Lamoreux's evidence was that he now feels each of these five rental units, in this old Victorian building, having six apartments, one of which is occupied by the appellant, now has new bathrooms, new wiring, new paint and is generally in a condition where the amount of maintenance in the future will be reduced.
18 He testified the building is a nice building in a good area, and is in a desirable location which will produce ongoing tenants at a time in which the vacancy rate in Toronto is reduced and rents can probably rise on a 2 or 3 per cent basis over the next two years.
19 The issue is, of course, whether or not, in 1994, it can be said the appellant had a reasonable expectation of profit from that particular property.
20 Counsel for the respondent quoted the case of Stein v. R. (1996), 96 D.T.C. 1526 (T.C.C.), a decision of Judge Archambault of the Tax Court of Canada. The facts in that particular case are different. And as Judge Archambault found at page 1532 the following:
In my view the Minister acted properly in disallowing the rental losses. The evidence has established clearly that Mr. Stein did not acquire the condo for the purpose of earning rental income.
At the time of acquisition of the condo, Mr. Stein never intended to rent it and to make a profit from such activity. Instead, he acquired the property for the speculative purpose of re-selling it quickly at a profit.
At first, that is what he attempted to do. When this failed, he tried to either sell or rent the property. Clearly the intention to rent was only ancillary to the overall business objective pursued by Mr. Stein in selling the condo at a profit.
The rental income would only mitigate his carrying charges while he held onto the property until its disposition.
I find as a fact that the intention of renting the property did not play any role in his decision to acquire the condo at the end of 1983.
I conclude that the taxpayer never had any expectation of profit from the renting of the condo. To this extent, Mr. Stein failed to discharge his onus of proving that the Minister's assessment was ill-founded.
21 In this particular instance, by 1990 and most definitely by 1994, the appellant, Donald Phillips was in the rental business, in the sense that he was deriving rental from property, namely that old Victorian house.
22 Between '90 and '94 the apartments were renovated and upgraded, and tenants were sought and then maintained with an eye to having people who would stay and who could pay the rents on a regular basis.
23 It is clear that, because the appellant occupied one of the six units, there was a personal element to that extent. However, this is not like the circumstance where the appellant occupied one floor and rental people the other. Here, there were six apartments on two levels; small bachelor apartments, and five of them were rented out, and it was overwhelmingly a building which had the character of a rental property.
24 With regard to the jurisprudence commencing with Moldowan v. R. (1977), 77 D.T.C. 5213 (S.C.C.), and the decision of the Federal Court of Appeal in the case of Tonn v. R. (1995), 96 D.T.C. 6001 (Fed. C.A.), and a recent decision of the Federal Court of Appeal in Mastri v. R., [Reported[1997] 3 C.T.C. 234 (Fed. C.A.)] identified as A-65096, and also the Federal Court of Appeal in Mohammad v. R., A-652-96, [Reported(1997), 97 D.T.C. 5503 (Fed. C.A.)] I am of the view that the appellant, in this particular case, has established that there was, in fact, a reasonable expectation of profit for the year 1994.
25 In my view, the appellant did that which a person should do, which is to adapt to a changing circumstance, and thereafter to act in a manner which is reasonable, which can be seen to lead to the point where there is, in fact, a reasonable expectation of profit from the property, and that profit has been realized. The expenses declined; the income rose.
26 And, in 1994, in accordance with the jurisprudence, I find that, in fact, the appellant was in that particular situation which fortunately turned out to be the case.
27 Accordingly, therefore, the appeal is allowed, and the assessment is referred back to the Minister of National Revenue for reconsideration and re-assessment on the basis that the rental losses, as claimed, for the year 1994 be allowed.
28 The appellant is entitled to no further relief, except that the degree of success entitles the appellant to costs.
29 THE REGISTRAR: Order, please rise: court is adjourned.
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