Date: 20000926
Docket: A-596-99
CORAM: LÉTOURNEAU J.A.
ROTHSTEIN J.A.
McDONALD J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
AND:
EDWARD MILEWSKI
Respondent
Heard at Ottawa, Ontario, Tuesday, September 26, 2000
Judgment delivered from the Bench at Ottawa, Ontario, Tuesday, September 26, 2000
REASONS FOR JUDGMENT BY: ROTHSTEIN J.A.
CONCURRING REASONS BY: LÉTOURNEAU J.A.
CONCURRED IN BY: McDONALD J.A.
Date: 20000926
Docket: A-596-99
CORAM: LÉTOURNEAU J.A.
ROTHSTEIN J.A.
McDONALD J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
- and -
EDWARD MILEWSKI
Respondent
REASONS FOR JUDGMENT
(Delivered from the Bench at Ottawa, Ontario
on Tuesday, September 26, 2000)
ROTHSTEIN J.A.
[1] The issue in this appeal from the Tax Court of Canada is whether Bowman T.C.C.J. (as he then was) erred in finding that partnership losses and interest expenses incurred by the appellant in his 1993 and 1994 taxation years were deductible in computing his income for income tax purposes.
[2] The appellant invested in rental property with a very small initial cash payment. The balance of the investment was financed by borrowing.
[3] The Minister disallowed certain partnership losses and interest expenses deducted by the appellant. In the view of the Minister, because of the significant borrowing to finance the investment and related interest expenses, the appellant had no reasonable expectation of profit. See Moldowan v. The Queen, [1978] 1 S.C.R. 480.
[4] In the present case, according to the offering memorandum, the principal of the borrowing was to be paid according to an amortization schedule of 25 years. Counsel for the Minister did not point to anything in the evidence which suggested that payments were not or would not be made according to the amortization schedule. Bowman T.C.C.J. found at paragraph 20 of his reasons:
| The investment was clearly long-term and bona fide, with the expectation that in the fullness of time the debt would be paid down and ultimately paid off and the appellants would have a lasting investment. |
[5] I think this is sufficient to satisfy the reasonable expectation of profit test in the circumstances of this appeal. This appeal is unlike Stewart v. The Queen, [2000] F.C.J. No. 238, leave to appeal to the S.C.C. granted [2000] S.C.C.A. No. 184, where, according to the evidence in that case, the purpose of the acquisition and holding of the property was a capital gain from its disposition at the end of the projected holding period and not profit from the rental of the property. Here, according to the Tax Court Judge, the expectation was that the debt would be paid down and the appellant would then have a lasting investment, i.e. to realize profit from holding a rental property.
[6] Counsel for the Minister concedes that to meet the reasonable expectation of profit test, an investment need not be currently profitable. However, he does not indicate what principle the Court should adopt to determine when the profit must be expected to satisfy the test. He says it will depend on the facts of each case. However, to follow this approach without further guidelines, the Court would be left without a principled basis to determine when profit must be expected in order to meet the test. The determination would essentially be arbitrary. This is unsatisfactory.
[7] If there was no indication of any principal repayment or the annual interest expense results in losses for an indefinite period of time, i.e. an unusually long amortization period or, as in Stewart, there was no profit expected over the intended holding period, there might be no reasonable expectation of profit. However, those are not the facts here.
[8] Here, the amortization period was 25 years. That is not an unusual amortization period for long-term investments in real estate. As the principal is paid down, the interest expense decreases and, all other things being equal, profitability will "in the fullness of time" be achieved. The Tax Court Judge found the investment was long-term in nature. In these circumstances, I think the reasonable expectation of profit test was met.
[9] In view of this finding, it is unnecessary to address the question of whether the reasonable expectation of profit test applies at the limited partnership rather than at the partners' level or any of the other reasons of the Tax Court Judge for coming to his conclusion.
[10] I would dismiss the appeal with costs. A copy of these reasons will be filed in Court file A-597-99.
"Marshall Rothstein"
J.A.
Date: 20000926
Docket: A-596-99
CORAM: LÉTOURNEAU J.A.
ROTHSTEIN J.A.
McDONALD J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
AND:
EDWARD MILEWSKI
Respondent
REASONS FOR JUDGMENT
(Delivered from the Bench at Ottawa, Ontario
on Tuesday, September 26, 2000)
LÉTOURNEAU J.A.
[1] Mr. Justice McDonald and I agree with the reasons delivered by our colleague Rothstein J.A.. However, we would go further and add the following.
[2] This is, for all practical purposes, another attempt at judicially reforming the "deductibility of interests" rule so as to limit the amount of interests a taxpayer can deduct to the amount of his income obtained from his investment of the borrowed money: see Les Entreprises Ludco Ltée c. Sa Majesté la Reine, F.C.A., A-884-97, March 30, 1999, leave to appeal to the Supreme Court of Canada granted on April 20, 2000.
[3] In the present instance, the appellant's contention is that the respondent has no reasonable expectation of profit because his financing arrangements for his investment in a limited partnership consisting of a condominium rental operation involved payments of interests that exceeded his income from that partnership. However, as Bowman T.C.C.J. (as he then was) pointed out, the limited partnership was, admittedly, a viable business with a reasonable expectation of profit. Indeed, the partnership started making a profit in its second year of operation. In addition, the respondent's investment in this viable and profitable business was devoid of personal interest and the business was genuine.
[4] The appellant's position in these proceedings would extend the application of the "no reasonable expectation of profit" doctrine to the individual partners for their involvement in a partnership which, in all respects, carries on a profitable business. This position postulates that, as a result of the respondent's financial arrangements, the partnership in which the respondent invested did not carry on a business and was not a source of income, but only for the amount of the interest losses exceeding the income produced by the business. The learned Tax Court judge was of the view that "this was wrong as a matter of logic, law and common sense". We agree with him.
[5] We will dismiss the appeal with costs. Copy of these reasons will be filed in Court file no. A-597-99.
"Gilles Létourneau"
J.A.
"I agree
F.J. McDonald J.A."