Date: 20000203
Docket: 98-2428-IT-G
BETWEEN:
MIAN T. AZIZ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, J.T.C.C.
[1] These appeals are from assessments for the appellant's 1992, 1993 and 1994 taxation years. The issue is the deductibility of losses claimed by the appellant from the rental of a house owned by him at 36 Crocus Drive, Scarborough.
[2] The appellant was born in Pakistan in 1952. He received a degree of Bachelor of Science in Mathematics and Physics from Punjab University. After moving to Canada he took a course in business administration at George Brown University. He also took a course in real estate.
[3] In 1976 he bought a condominium in Port Credit where he lived until 1981, when he sold it at a small profit.
[4] In 1989 he bought the property in question for $251,000. It was financed to the extent of $200,000 by a mortgage to the Canada Trust Co. The balance came from the appellant's savings. His brother and sister-in-law were given a 1% interest as joint tenants, although they paid nothing. The reason for this is a little unclear. It was apparently at the suggestion of the appellant's lawyer.
[5] In a rental questionnaire sent to the appellant by Revenue Canada in response to a question "What was the initial purpose of acquiring the property?" the appellant stated "residential purpose". The statement is a little ambiguous and may be attributable to a linguistic problem. I do not think the case turns on his use of one infelicitous phrase. I think, on balance, that the appellant probably had in mind renting the property to tenants. He owns two other rental properties in Pakistan.
[6] The property was a bungalow. It had 3 bedrooms on the ground floor and one in the basement.
[7] After doing some initial decoration in 1989, he rented the basement to someone called Kevin and the ground floor to his brother and sister-in-law and his mother. His recollection was a little vague about what he charged his brother – between $700 and $800 a month. He charged Kevin $769 per month.
[8] Kevin stayed about a year and was replaced by Michael Natale who paid $550 per month, according to the questionnaire.
[9] In 1992 the appellant's brother and his wife and children moved out, leaving the appellant's mother, Adiba. She could not afford to pay as much as the appellant's brother so she paid $400 per month, according to the questionnaire.
[10] The expenses claimed far exceeded the revenues. I presume the appellant claimed losses in 1989, 1990 and 1991, but they were not put in evidence.
[11] There seems to have been confusion about the figures, not only with respect to the rents received, but also the expenses.
[12] In 1992 the appellant claimed $30,229.27 in expenses and declared $11,000 in rent. The expenses claimed were $2,264 for property taxes (corrected at trial to $2,165), $2,400 for maintenance and repairs, $22,415.27 for interest (corrected at trial to $21,410), $2,800 for light, heat and water and $350 for insurance. The result was a loss claimed of $19,229.27.
[13] In 1993 he claimed a loss of $21,684. He declared $12,000 income. So far as expenses are concerned, he claimed maintenance and repairs of $4,900. In fact, the only substantiation of this figure is a 1994 receipt for $4,900 for roof repairs and rebuilding a bathroom. He claimed interest expense of $22,400. In fact, the mortgage statement for 1993 shows interest expense of $13,090.67. I have been unable to determine where the figure of $22,400 comes from. He claimed $400 for insurance and $3,500 for light, heat and water. These two figures were admittedly estimates even though he seems to have had receipts from which the correct figures could have been determined. There was a receipt for $1,068 for a new furnace.
[14] In 1994 he claimed a loss of $22,794. He claimed $450 for insurance, $3,300 for utilities, (both estimates which might have been accurate within a range of indeterminate magnitude), $5,600 for painting and roof repair. I referred, in discussing 1993, to a 1994 receipt for $4,900. It is conceivable that this receipt also supports the claim of $5,600. However, the total of the 1994 receipts produced is $6,400.
[15] He also claimed $20,774 as interest. In fact, the interest paid in 1994 was $13,243. $20,774 represented principal and interest.
[16] In 1995, the appellant moved into the upper portion of the house but continued to rent the basement to Michael Natale. Since a part of the expenses was treated as personal after 1995, the losses claimed decreased.
[17] Even after the correction of a number of the figures the losses are $18,123, $7,474.67 and $15,604. The Minister of National Revenue disallowed the losses for a variety of reasons:
(a) There was no reasonable expectation of profit;
(b) The expenses were not laid out for the purpose of gaining or producing income (paragraph 18(1)(a));
(c) The expenses were personal or living expenses (paragraph 18(1)(h));
(d) The expenses or some of them were on capital account (paragraph 18(1)(b));
(e) The borrowed money was not used to earn income from a business or property (paragraph 20(1)(c)).
[18] I have, in other cases, criticized the indiscriminate use of the no reasonable expectation of profit concept. Here, I think it has application. It must be remembered that the phrase forms part of the definition of personal or living expenses in section 248. Paragraph (a) of that definition reads:
(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit.
[19] Here, I think the expenses, at least with respect to the upper half of the house where the appellant's mother lived at a reduced rent, fit precisely into that definition. There could be no reasonable expectation or hope of making a profit from renting part of the house to his mother. Fulfilling one's filial obligations of taking care of one's parents is highly commendable, but it does not as a rule result in a deductible business loss.
[20] Even accepting that the NREOP principle stands alone, apart from the definition of personal or living expenses, I do not think that this operation can reasonably be seen as becoming profitable.
[21] In Kaye v. The Queen, 98 DTC 1659, the NREOP principle was discussed, as follows, at page 1660:
[4] I do not find the ritual repetition of the phrase particularly helpful in cases of this type, and I prefer to put the matter on the basis "Is there or is there not truly a business?" This is a broader but, I believe, a more meaningful question and one that, for me at least, leads to a more fruitful line of enquiry. No doubt it subsumes the question of the objective reasonableness of the taxpayer's expectation of profit, but there is more to it than that. How can it be said that a driller of wildcat oil wells has a reasonable expectation of profit and is therefore conducting a business given the extremely low success rate? Yet no one questions that such companies are carrying on a business. It is the inherent commerciality of the enterprise, revealed in its organization, that makes it a business. Subjective intention to make money, while a factor, is not determinative, although its absence may militate against the assertion that an activity is a business.
[5] One cannot view the reasonableness of the expectation of profit in isolation. One must ask "Would a reasonable person, looking at a particular activity and applying ordinary standards of commercial common sense, say 'yes, this is a business'?" In answering this question the hypothetical reasonable person would look at such things as capitalization, knowledge of the participant and time spent. He or she would also consider whether the person claiming to be in business has gone about it in an orderly, businesslike way and in the way that a business person would normally be expected to do.
[22] In Kaye, the appellant's haphazard method of computing income using ballpark guesstimates was regarded as inconsistent with the assertion that a real business was being carried on.
[23] Many of the observations made in Kaye are applicable here.
[24] It is not necessary that I review the leading cases of Moldowan, Tonn, Mastri and Mohammed. Each case turns on its own facts. Generally speaking, no single factor is determinative. All must be taken into account and assigned their proper importance in the context of the case as a whole. In some cases one factor may outweigh all others and in others that factor may be of relatively smaller importance. Here, we have at least three factors that weigh against the appellant's assertion that he had a truly commercial activity - the fact his mother lived in part of the house at a reduced rent, the fact that the mortgage interest payments exceeded the gross rents and the unbusinesslike way of keeping records and computing income. Any one of those factors by itself might not have justified the disallowance of the losses. Cumulatively they pose an insurmountable obstacle to the appellant's showing that the assessments are wrong.
[25] In the circumstances, I need not consider the respondent's alternative contention that some of the expenses are on capital account.
[26] The appeals are dismissed with costs.
Signed at Ottawa, Canada, this 3rd day of February 2000.
"D.G.H. Bowman"
J.T.C.C.