Date: 19991125
Docket: 98-106-IT-I
BETWEEN:
FÉLIX J. DUBÉ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Tardif, J.T.C.C.
[1] In this appeal, the sole issue is whether the appellant, the owner of a building that contains three housing units, had a reasonable expectation of profit in carrying on the activity of renting the housing units for the 1994 and 1995 taxation years.
[2] The facts revealed by the evidence are relatively simple. The appellant wished to acquire an old building, constructed in 1919 and located in the village of Saint-Quentin in New Brunswick, in order to convert it into rental housing units.
[3] A check with the municipality showed that the appellant could not carry out his plan, owing to the small size of the lot and to legal restrictions.
[4] The owner of the lot adjacent to the said building also hoped to purchase the building, but for the purpose of demolishing it in order to carry out a planned expansion of his own business.
[5] The appellant and the owner of the adjacent lot therefore agreed that the appellant would purchase the building but would then move it in order to clear the lot; in this way, both the appellant and the owner would get what they wanted.
[6] After purchasing the building, the appellant immediately resold it to his neighbour, after which he moved the building in order to clear the lot.
[7] The old building was moved, at a cost of approximately $12,000, to a lot where the appellant could carry out the desired modifications. He obtained a $45,000 loan to modify and convert the building into three rental housing units.
[8] After completing the work, he took the necessary steps to rent the three available housing units. Surpluses were generated during the initial years of operation.
[9] In 1986, the appellant decided to occupy one of the three housing units with his family. Initially, he lived in the unit located in the basement. Later, he moved to the ground floor unit.
[10] Beginning in 1988, the three-unit building, of which one of the units housed the appellant and his family, generated yearly operating losses, as indicated by the following chronological table of amounts:
|
Taxation Year |
Gross Revenue |
Net Loss |
|
1988 |
$3,022 |
$ 991 |
|
1989 |
$2,585 |
$1,849 |
|
1990 |
$2,500 |
$2,177 |
|
1991 |
$5,880 |
$3,274 |
|
1992 |
$3,000 |
$4,591 |
|
1993 |
$2,700 |
$4,454 |
|
1994 |
$2,700 |
$3,414 |
|
1995 |
$2,700 |
$3,971 |
|
1996 |
$3,600 |
$7,392 |
[11] The appellant justified his losses by asserting that the building was very old and was filled with latent defects which had to be corrected and repaired at considerable expense.
[12] In particular, he described problems related to the exterior cladding, windows, roofing, insulation, etc.
[13] He also explained the losses by the fact that no one wanted to rent his housing units, owing to prohibitive heating costs. In this regard, he had to guarantee to certain tenants that he would reimburse them for any such costs over a reasonable, predetermined amount. He also asserted that supply was greater than demand and that he lost a number of leases because the floor space of his units was far greater than what potential tenants were seeking.
[14] The appellant stated that he had to resolve all sorts of unforeseeable problems which delayed profitability considerably. He described the steps, actions and initiatives that he took to find tenants when one of his units became available.
[15] He could theoretically have received an income of approximately $7,200 had both housing units been rented. But the amount he actually received was quite different. This difference has been acceptably and plausibly justified and explained for the period in issue, namely 1994 and 1995.
[16] In the very near future, however, he will be required to make a decision based essentially on the mathematical reality of the operation, since he exhausted everything, and I mean everything, in order to explain certain losses. Should further losses be recorded for later years, it might be wondered, from the viewpoint of both income and expenditures, whether the appellant can, rationally, have a reasonable and realistic expectation of profit in carrying on his commercial activity, after investing so much in a community where the number of potential tenants is very limited.
[17] With respect to the years in question, bearing in mind that it is essential to consider the matter from the perspective of the periods in issue, my response on the point in issue is affirmative. For the 1994 and 1995 taxation years, the appellant did have a reasonable expectation of profit in carrying on the activity, and the appeal is accordingly allowed. The matter will therefore be referred back to the Minister of National Revenue for reassessment on the basis that the appellant was entitled to take into account the losses recorded for 1994 and 1995, since he had a reasonable expectation of profit.
Signed at Ottawa, Canada, this 25th day of November 1999.
"Alain Tardif"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 6th day of July 2000.
Stephen Balogh, Revisor