Date: 20020607
Docket: 2001-3489-IT-I
BETWEEN:
MYRON RUDIAK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
For the Appellant: The Appellant himself
Counsel for the Respondent: George Boyd Aitken
Reasonsfor Judgment
(Delivered orally from the Bench, on April 25, 2002, at Kitchener, Ontario)
McArthur J.
[1] The issue in these appeals is whether in the 1997, 1998 and 1999 taxation years the Appellant's losses from the operation of a bed and breakfast business were restricted by subsection 18(12) of the Income Tax Act which reads as follows:
18(12) Notwithstanding any other provision of this Act, in computing an individual's income from a business for a taxation year,
(a) no amount shall be deducted in respect of an otherwise deductible amount for any part (in this subsection referred to as the 'work space') of a self-contained domestic establishment in which the individual resides, except to the extent that the work space is either
(i) the individual's principal place of business, or
(ii) used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business;
(b) where the conditions set out in subparagraph (a)(i) or (ii) are met, the amount for the work space that is deductible in computing the individual's income for the year from the business shall not exceed the individual's income for the year from the business computed without reference to the amount and sections 34.1 and 34.2; and
(c) any amount not deductible by reason only of paragraph (b) in computing the individuals's income from the business for the immediately preceding taxation year shall be deemed to be an amount otherwise deductible that, subject to paragraphs (a) and (b) may be deducted for the year for the work space in respect of the business.
[2] In 1996, the Appellant and his wife Carol sold their large Toronto home to purchase and renovate a stately old residence in Stratford, Ontario. The purchase price was $285,000 and the renovations amounted to $205,000. Their adult children had moved on and the Appellant had retired from a career in marketing. His pension income was approximately $70,000 annually. The Notice of Appeal contains the following:
In August 1996, we purchased a large residential building in Stratford for the singular purpose of establishing and operating our partnership business, The White House Bed & Breakfast. This was to be a small private prestige Inn offering Inn-style comfort in our bedrooms and private guest rooms as well as gourmet breakfasts. The property was of historic interest and was zoned R-2 allowing 4 guest rooms. In the past the building had been owned and operated by the Stratford Festival as a staff residence and guest house.
The building itself and location was well-suited for the new business, but needed major renovations and repairs to meet our business requirements.
With planned renovations, there would be sufficient driveway space for off-street parking for 10 automobiles. There was the capability to create four guest bedrooms with private baths and the front of the house with a large foyer, a principal front parlour room and large dining hall would be designated for guest-use only.
A separate apartment would be constructed to provide living quarters for the owners. A large renovated kitchen would be used to service guests and provide a personal TV lounge and eating area for ourselves. A new laundry room facility would be added to service the business and personal use.
In the following eight months, the building was extensively repaired, renovated and redecorated. A 4 room separate owner's apartment with private entrance was constructed. New electrical, plumbing and gas services were installed. Three guest bedrooms were fitted with private bathrooms. A 4th guest bedroom was set up to be used for guest overflow accommodation. Fire detection and emergency lighting systems were installed; plaster and flooring throughout the building was repaired, and all the guest rooms were individually decorated and furnished.
The White House Bed & Breakfast Inn opened for business in July 1997. At that time there were over 200 other establishments offering 'bed & breakfast' services in the town of Stratford in addition to several hotels and about 12 motels in the immediate area. Our competitive advantage was to be built on the elegance and privacy of our guest house, a superb cuisine and excellent service. Our business plan which was provided to the Canada Trust company as the basis for a major business loan, forecasted that our business would grow steadily each year and would be profitable in 5 years.
We expected CCRA to treat us as a small business with normal expectation of profit guidelines and filed our tax returns accordingly. In our notice of objection we recommended that CCRA follow this approach with profit to be expected in 2002.
...
... The costs for the construction of the owner's apartment were not charged to the business, nor was any depreciation on the building claimed as business expense.
[3] After an audit by Revenue Canada, a revised business and personal use ratio of 50% was agreed upon and the Minister of National Revenue applied the restrictions in subsection 18(12) on the basis that the Appellant and his wife were using their home for business purposes. In Lott v. The Queen, [1998] 1 CTC 2869, in referring to subsection 18(12), my colleague, Bowie J. stated:
... It is quite clear in the words of subsection (12) that it is intended to restrict the extent to which individuals who use their homes for business purposes may deduct a portion of the cost of maintaining the home from their business income. The rule which this subsection establishes is that costs arising out of the maintenance of the home in which a business operates may be deducted only if subparagraph (i) or (ii) is satisfied, and then only to the extent that it does not have the effect of putting the business into or contributing to a loss position."
[4] The Appellant contends that their living quarters are entirely separate from the area dedicated to the bed and breakfast which is a self-contained domestic establishment. He adds that Revenue Canada never physically inspected the property despite repeated invitations to do so. To illustrate his position, the Appellant provided pictures of the interior and exterior of both the business area and the personal living area. He added:
... Subsection 18(12) does not apply to our business as we are not running a business out of our home. We live in an apartment or 'self-contained domestic establishment' located within the building which is used to operate the business, similar to a hotelier or a motel operator who resides in a suite in the same building. Our Inn-style bed & breakfast is operated like an Inn. We provide quality and luxurious accommodation to our guests in an area which is private and completely separate from our own living quarters. We do not share part of our home with our guests and we do not live in the guest areas.
I accept that statement of the Appellant as part of the facts. The bed and breakfast was open during the theatre season from approximately the beginning of May to the end of November. The Appellant and his wife rarely used the bed and breakfast area during the off-season. It is a regulatory and practical obligation that the operators live on or adjacent to the bed and breakfast business premises. While the Appellant and his wife had their private residence, their private kitchen was used for the preparation of an elegant guest breakfast. Laundry and office facilities contained in the personal area were also used for business purposes. Guests did not have access to these facilities.
[5] The private residence was off-limits to the guests and, for the most part, remained locked. It had its own private garage and entrance, eating area, family room, washroom and bedroom. The guest area was self-contained with three private ensuite bathrooms, a dining room for the breakfast, a sitting area and verandah.
[6] The Appellant relies on the decision of Judge Bowman in Sudbrack v. The Queen, 2000 DTC 2521. The Respondent distinguishes the facts in Sudbrack from the present and refers to cases that are contained in his book of authorities which include Broderick v. The Queen, [2001] 3 C.T.C. 2033, Ellis v. The Queen, 94 DTC 1731, Lott v. The Queen, [1998] 1 C.T.C. 2869,Maitland v. The Queen,
[2000] 3 C.T.C. 2840 and Sudbrack referred to earlier.
[7] The Appellant testified on his own behalf and Mr. Hansen, a municipal assessment officer, gave evidence for the Crown. The Respondent argued that the whole of the property constitutes the workspace of self-contained domestic establishment as defined by subsection 18(12). The focus of the Appellant's argument is that he and his wife were not running a business out of their home, that their home was self-contained although attached to the bed and breakfast building. The Respondent countered this with the argument that their living area was not separate and was commingled with the bed and breakfast business area and the line between the two areas was not clear. The Respondent referred to the following areas of the entire structure that had mixed use (my observations are included after each reference):
(a) the garage was used in part for the bed and breakfast storage; (this was obviously a limited business use);
(b) the kitchen was used to make the breakfast for guests of the bed and breakfast; (the guest did not use or occupy the kitchen. The prepared breakfast was served in the guest's dining room);
(c) the laundry room served both the bed and breakfast and personal use; (this is accurate but again the guests did not use the Appellant's laundry room);
(d) the office in the Appellant's apartment was used for the needs of both; (it was the Appellant's private office and used exclusively by him);
(e) two weeks annually the bed and breakfast area was used to accommodate friends and family; (while this is accurate, it is insignificant in the overall scheme);
(f) four months of the year, the off-season, the Appellant and his wife had access to the bed and breakfast area; (same comments as in item (e));
(g) heating and electrical services were common to both areas; (I do not believe this is significant);
(h) the City of Stratford did not recognize a separate apartment in their municipal tax bill; (What does that prove?);
(i) the Appellant was obligated to live on the bed and breakfast premises to comply with municipal zoning requirements; (not relevant);
(j) the Appellant's bed and breakfast brochure advertised "Welcome to our home". (advertising puffing and privilege).
[8] The question is whether the bed and breakfast area used exclusively for business purposes was "any part of" a self-contained domestic establishment in which the Appellant resided. "Self-contained domestic establishment" is defined in section 248 as follows:
248(1) In this Act,
"self-contained domestic establishment" means a dwelling-house, apartment of other similar place of residence in which place a person as a general rule sleeps and eats;
The bed and breakfast guest premises and the Appellant's living area were physically separate. The business was carried on in the renovated confines of the original house. The Appellant and his wife's place of residence was wholly-contained within the newly-constructed addition to the rear of the business premises. The guests did not use this separate residence. The Appellant did use his private kitchen and laundry facilities and a small garage area for the business, but I find that this does not detract from the Appellant's position that it was minor in comparison to the overall picture. The fact remains that the guests did not use the kitchen, laundry area or office.
[9] I have read the several cases cited and I find that the one closest to the present situation is Sudbrack, supra. The Respondent's position in the present case is that the bed and breakfast business is the entire structure. Following the reasoning of Judge Bowman of this Court, I find on the facts that the living quarters of the Appellant and his wife were a separate apartment built at the back of the bed and breakfast area and constitute a self-contained domestic establishment. Obviously, there was some overlapping, and the Rudiaks used the bed and breakfast area occasionally as a personal living area. This was limited to less than 10% of a calendar year.
[10] The facts in this case are distinguishable from those in Broderick, which also dealt with a bed and breakfast and the application of subsection 18(12). In Broderick, as in the other cases cited apart from Sudbrack, the Appellant operated a business in his home. In the present case, I find the Appellant did not operate a business in his home. His home was the separate addition constructed at the rear as is clearly shown on the sketches marked "C" and "D" to Exhibit A-1.
[11] It is unfortunate that the Respondent did not make a physical inspection of the premises. I find that the guests did not occupy the Appellant's self-contained domestic establishment. It was a separate structure, locked and reserved exclusively for the Appellant's dwelling or apartment. This is not the usual living arrangements commonly found in bed and breakfast operations. I believe most bed and breakfast businesses are assimilated in the operator's home and the operators and guests use common facilities such as the same entrance, living room, TV room, dining room, etc. The Appellant's bed and breakfast was somewhat unique. The result is that subsection 18(12) does not apply. I believe that the parties have agreed upon a 50-50 allocation of specific expenses. If there remains a dispute with respect to the figures, the parties may request a telephone conference with me to deal with the matter.
[12] The appeal is allowed, with costs, and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that subsection 18(12) does not apply.
Signed at Ottawa, Canada, this 7th day of June, 2002.
"C.H. McArthur"
J.T.C.C.
COURT FILE NO.: 2001-3489(IT)I
STYLE OF CAUSE: Myron Rudiak and Her Majesty the Queen
PLACE OF HEARING: Kitchener, Ontario
DATE OF HEARING: April 23, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge C.H. McArthur
DATE OF JUDGMENT: April 30, 2002
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: George Boyd Aitken
COUNSEL OF RECORD:
For the Appellant:
Name: N/A
Firm: N/A
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada