Date: 20000218
Docket: A-337-98
| C O R A M: DESJARDINS J.A. |
ROTHSTEIN J.A.
SHARLOW J.A.
BETWEEN:
BRIAN J. STEWART
Applicant
- and -
HER MAJESTY THE QUEEN
Respondent
Heard at Toronto, Ontario, on Tuesday, February 8, 2000
Judgment delivered at Ottawa, Ontario, Friday, February 18, 2000
REASONS FOR JUDGMENT BY: ROTHSTEIN J.A.
CONCURRED IN BY: DESJARDINS J.A.
SHARLOW J.A.
Date: 20000218
Docket: A-337-98
CORAM: DESJARDINS J.A.
ROTHSTEIN J.A.
SHARLOW J.A.
BETWEEN:
BRIAN J. STEWART
Applicant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
ROTHSTEIN J.A.
The issue in this appeal from the Tax Court of Canada is whether the learned Tax Court judge erred in finding that rental losses incurred by the appellant were not deductible in computing his income for income tax purposes because there was no reasonable expectation of profit.
In 1986 the appellant acquired two condominium units in London, Ontario and two in Surrey, British Columbia. All four units were acquired from the same vendor/developer. They were not acquired for personal use by the appellant.
The appellant incurred losses from the outset. For the taxation years 1990, 1991, and 1992, the appellant claimed losses of $27,814, $18,673, and $12,306 respectively. The losses arose primarily from interest on money borrowed to acquire the units. The Minister disallowed the losses claimed on the basis "that for the years under review there does not appear to be a reasonable expectation of profit".
The appellant appealed to the Tax Court of Canada. McArthur T.C.C.J. found that the appellant did not "discharge his burden of showing that the reasonable expectation of profit doctrine was satisfied". Further, he found that as there was no source of income for which the interest was incurred, it was not deductible under paragraph 20(1)(c ) of the Income Tax Act. He dismissed the appeal.
On appeal to this Court, the appellant submits that the Tax Court judge erred in applying the reasonable expectation of profit test and in finding that the appellant did not have a reasonable expectation of profit. He says that interest is deductible pursuant to paragraph 20(1)(c).
The reasonable expectation of profit test derives from the well-known case of Moldowan v. The Queen, 77 DTC 5213 (SCC). In that case, Dickson J. (as he then was) determined that in order to have a source of income for purposes of the Income Tax Act, the taxpayer must have a profit or a reasonable expectation of profit. At page 5215 he states:
| Although originally disputed, it is now accepted that in order to have a "source of income" the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v. M.N.R. [72 DTC 6131], [1972] C.T.C. 151. See also s. 139(1) (ae) of the Income Tax Act which includes as "personal and living expenses" and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred. |
| There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer"s training, the taxpayer"s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v. Matthews (1974), 28 DTC 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land. |
It is argued by the appellant that Moldowan has no application unless the particular activity or property has an element of personal use. We do not think Moldowan is necessarily so limited. The Moldowan principle is that in order to have a source of income, the taxpayer must have a profit or a reasonable expectation of profit. No subsequent Supreme Court authority has altered the Moldowan principle.
Where a loss from a business or property is claimed, it is necessary to question whether there is a business or property that is a source of income. When someone owns real property that yields some rent but never a profit over an intended holding period, the question arises as to whether the property was acquired or is being held for some objective other than profit. The objective may be found to be personal use in some form or another, but it might be anything other than an intention to derive a profit. In such a case the losses cannot be deducted because the property is not a source of income. In this case the learned Tax Court judge was presented with losses claimed in respect of the condominium units and he did not err in applying the reasonable expectation of profit test to determine whether indeed they were a source of income.
Given that there was no element of personal use, did the learned Tax Court judge err in finding no reasonable expectation of profit? The reasonable expectation of profit test is not an opportunity for the Minister to second guess the business judgment of the taxpayer and it cannot justify the disallowance of losses caused by the unforeseen development of an unfavourable economic environment.
However, that is not why the learned Tax Court judge found there was no reasonable expectation of profit in this case. Here, the vendor/developer provided an offering memorandum with a projection over a holding period ending with the sale of the units in 1997. The learned Tax Court judge found:
| The Reemark plan, which was provided to the Appellant before he purchased the four units, included the pro forma schedule and projections, as discussed above. The effect of the plan was to use rental losses to offset other income and realize a gain at the end of the day from the expected appreciation in the value of the property. The Reemark plan held out no expectation of profit from the rental income. |
Clearly, the Tax Court judge found that the expectation from 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.
Although the appellant testified as to taking some steps to make the condominium units profitable, an intention to pay down outstanding debt to create a positive cash-flow, and encountering unanticipated problems, the learned Tax Court judge did not accept this as evidence. He took into account the appellant"s experience in real estate investing and found that the appellant understood the developer"s projections that there would be no profit over the intended holding period and that the appellant did not have a realistic plan to produce a profit.
There is no overriding or palpable error in the findings of fact of the learned Tax Court judge. We accept his findings of fact and his conclusion that the appellant did not satisfy the burden of showing a reasonable expectation of profit from the four condominium units and that they did not comprise a source of income. It follows that the losses are not deductible.
Paragraph 20(1)(c) provides for the deductibility of interest in computing a taxpayer"s income from a business or property. As there is no source of income in this case, the deductibility of interest pursuant to paragraph 20(1)(c ) does not arise.
The appeal will be dismissed with costs.
"Marshall Rothstein"
J.A.
FEDERAL COURT OF CANADA
Names of Counsel and Solicitors of Record
| DOCKET: A-337-98 |
| STYLE OF CAUSE: BRIAN J. STEWART |
| - and - |
HER MAJESTY THE QUEEN
DATE OF HEARING: TUESDAY, FEBRUARY 8, 2000
PLACE OF HEARING: TORONTO, ONTARIO
| REASONS FOR JUDGMENT BY: ROTHSTEIN J.A. |
Delivered at Ottawa, Ontario
Thursday, February 17, 2000
APPEARANCES: Mr. Richard B. Thomas
| For the Appellant |
Mr. Richard Gobeil
| For the Respondent |
| SOLICITORS OF RECORD: McMillan Binch |
Barristers and Solicitors
Royal Bank Plaza, South Tower
Suite 3500
200 Bay Street
Toronto, Ontario
M5J 2J7
| For the Appellant |
| Morris Rosenberg |
Deputy Attorney General for Canada
| For the Respondent |
FEDERAL COURT OF APPEAL
Date: 20000211
Docket: A-337-98
BETWEEN:
BRIAN J. STEWART
Appellant
| - and - |
| HER MAJESTY THE QUEEN |
Respondent
REASONS FOR JUDGMENT