Date: 20001122
Docket: 98-9344-IT-I
BETWEEN:
CHRIS SKRETAS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.T.C.C.
[1] Chris Skretas has appealed income tax assessments for 1990, 1991, 1992 and 1993 taxation years on the basis that the Minister of National Revenue ("Minister") erred in denying him rental losses in computing income.
[2] Mr. Skretas testified with the benefit of a Greek interpreter. Mrs. Skretas, the appellant's wife, also testified on behalf of her husband. Their testimony was not consistent.
[3] According to Mr. Skretas he and his wife acquired a three-bedroom two-storey home on Ashbourne Drive in Etobicoke, Ontario ("Ashbourne property") in 1987 for the purchase price of $172,000, of which $150,000 was financed by way of mortgage. The purpose of the acquisition was to earn income from the Ashbourne property. The top floor of the house had three bedrooms and a washroom. The main floor contained a living room, dining room, kitchen, a small room and a washroom. There was one room in the basement which was subsequently improved. Mr. Skretas testified that his wife "had kids" in the living room and dining room. This was an open area which permitted children to play. Apparently Mrs. Skretas operated a day care centre.
[4] Mr. and Mrs. Skretas and their family did not live on Ashbourne Drive. They lived at 41 Burnelm Drive in Etobicoke, approximately two blocks from the Ashbourne property.
[5] According to Mr. Skretas, Mrs. Skretas ran a day care centre out of the Ashbourne property and their home. The three bedrooms on the second floor of the Ashbourne property were rented to a Ms. Valcourt and her children. Mr. Skretas said his wife had about five or six children in day care during all the years in appeal.
[6] The Ashbourne property was owned by both Mr. and Mrs. Skretas with money contributed by each of them and each of them contributed to payments of the mortgage. However it was only Mr. Skretas who deducted the losses in respect of the property in computing his income for the years in appeal.
[7] Mr. Skretas did not deny the Minister's assumption that in 1987, 1988 and 1989 he reported net rental losses from the Ashbourne property in the amounts of $17,915, $11,304 and $13,809, respectively. He acknowledged that he did not keep books and records of expenses and receipts from the Ashbourne property. However, he did retain all receipts for expenses he incurred during the years in appeal.
[8] The Minister also assumed that the Ashbourne property was not rented during 1993 notwithstanding that Mr. Skretas reported income from the property in that year in the amount of $9,000. Mr. Skretas explained that Ms. Valcourt no longer resided in the property in 1993 and it was used only for day care. He said his wife charged fees for the children left with her and she declared the income from the day care business. However she did not claim any expenses with respect to the Ashbourne property.
[9] Mr. Skretas testified that Ms. Valcourt paid rent of $500 every two weeks. He said that the $500 included the rent plus the attendance of two of her children at day care.
[10] The appellant does not know the rent for accommodations similar to the Ashbourne property in the community.
[11] Mr. Skretas also testified that at no time did he rent any of the Ashbourne property to members of his family. He did concede however that his son, who at the time of trial was 33 years old, left the family residence on Burnelm Drive during evenings to find "peace and quiet" in the basement of the Ashbourne property.
[12] The appellant testified that he expected to make profit from the Ashbourne property by renting it and also from the income his wife would earn from looking after children. The Ashbourne property, the appellant said, did not have a profit because rents were low. He stated he anticipated making a profit if all of the house could be fixed-up; that is, the basement would be finished and available for rent. Ideally the top floor and the basement would be rented and the main floor, that is the living room and dining room, would be used for day care. Mr. Skretas appeared to indicate that if this was accomplished he would be able to earn enough income to pay bills "without pressure, with ease". He said he did not expect to make a profit but only to pay for the Ashbourne property, to pay the mortgage and "the house would be ours".
[13] Mr. Skretas testified that during the years in appeal, he incurred expenses for installations of a kitchen in the basement, a washroom, a shower and air conditioning. Also, costs were incurred for landscaping. Mrs. Skretas, on the other hand, testified that during the years in appeal there were no improvements made to the basement because the family had incurred adverse financial problems which did not permit them to proceed with their plans.
[14] Respondent's counsel reviewed Mr. Skretas' statement of income and expenses. No allocation of the Ashbourne property expenses was made as to personal and business use. Mr. Skretas stated that he did not charge his wife any rent for the use of Ashbourne property for day care since the "building belonged to both of us". Mr. Skretas, to be fair, could not explain how expenses were determined since these calculations were made by Mrs. Skretas.
[15] Ms. Valcourt also testified. She now resides in Winnipeg and attended Court in Toronto apparently at the request of Mr. and Mrs. Skretas.
[16] Ms. Valcourt acknowledged renting the three bedrooms and kitchen of the Ashbourne property during the years in appeal. She stated that the rent included all utilities except for the telephone. She rented the property from June 1st 1989 to June 30th 1992. She mentioned two children were with her when she first moved to the premises and a third child was born in January 1990. Ms. Valcourt confirmed she paid rent of $500 every two weeks by cheque. The rent included parking, all the facilities as well as the three bedrooms, kitchen and also the use of the playroom, that is the dining room and the living room.
[17] Ms. Valcourt stated that she did not pay Mr. or Mrs. Skretas anything for her children attending day care. All day care fees for Ms. Valcourt's children were paid by the municipality of Metropolitan Toronto.
[18] Ms. Valcourt stated that Mrs. Skretas did not use Ashbourne property for the use of a day care on a regular basis. Usually, when Mrs. Skretas attended at the Ashbourne property to check on it, the children played in the yard.
[19] In cross-examination Ms. Valcourt stated that the rent she paid to Mr. Skretas may have been $575 every two weeks, as she had written "To Whom it may Concern" on August 1, 1997, although she was not sure.
[20] Mrs. Skretas testified that she operated a day care consisting of five children from her residence on Burnelm Drive. She indicated that in the course of looking after the Ashbourne property she would sometimes take the children to the Ashbourne property. She confirmed that her son did make use of the basement in the Ashbourne property so that he could relax since approximately 10 to 12 people lived on Burnelm Drive.
[21] Counsel for the respondent reviewed with Mrs. Skretas various claims made by Mr. Skretas for rental expenses. For example, claims included food and children's books. Mrs. Skretas stated that certain goods were directed to be delivered to her personal home although the goods were for the Ashbourne property. She explained that she would stay at her home until the delivery truck arrived and then instruct the driver to deliver the goods to the Ashbourne property.
[22] Also included among expenses incurred to earn rental income by Mr. Skretas were clothing for young girls, cookware, laundry hampers, pictures and freezer bags, a videocassette recorder, carpet cleaner and similar material.
[23] Mrs. Skretas stated in cross-examination that the main purpose of acquiring the Ashbourne property was as a facility to provide day care to five more children. The property was acquired not necessarily for rental purposes but for the operation of a day care centre. Once the house was acquired, she testified, it was rented first to see "how the house would go by renting" and then a day care centre would be set up. However, at the time, her son was also starting a business and the family gave priority to the son's business. The Ashbourne property was never improved to the extent desired and anticipated by the appellant and his wife.
[24] It is obvious that the Ashbourne property was not acquired for the purpose of earning income from property. The intention of Mr. and Mrs. Skretas in acquiring the Ashbourne property was for Mrs. Skretas to earn income from operating a day care on the site, an intention that was shortly abandoned. Mr. Skretas, the appellant, never had the intention, reasonable or otherwise, to earn income from the Ashbourne property. Any rent from the property was only a mechanism to be used by the Skretas family to pay down the mortgage and cover expenses. Any income, within the reasonable future, would be generated from Mrs. Skretas' day care operation. And from Mr. Skretas' evidence it appears that Mrs. Skretas would not pay rent for her use of the property as a day care facility. The expenses claimed by Mr. Skretas in the years in appeal were personal or living expenses within the meaning of subsection 248(1) of the Income Tax Act ("Act") and are not permitted as a deduction in computing income: paragraphs 18(1)(a) and (h).
[25] Also, many expenses (such as installations of the kitchen, washroom, shower and air conditioning) referred to by Mr. Skretas appear to be capital expenses and ought not to have been included as an expense in calculating Mr. Skretas' income from the property. The particulars of these expenses were not canvassed at trial.
[26] The respondent also raised the issue in her pleadings that the disallowed expenses are not deductible by virtue of section 67 of the Act since they are not reasonable in the circumstances. Since Mr. Skretas is the beneficial owner of an undivided one-half interest in the Ashbourne property, it is not reasonable that he deduct 100 per cent of the Ashbourne property expenses in the first place, even if I had found that the claims were not personal or living expenses.
[26] The appeals are dismissed.
Signed at Ottawa, Canada, this 22nd day of November 2000.
"Gerald J. Rip"
J.T.C.C.