Tax Court of Canada Judgments

Date: 19981014

Docket: 97-3080-IT-I

BETWEEN:

ANTHONY M. HAYES,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Christie, A.C.J.T.C.

[1] These appeals are governed by the Informal Procedure prescribed under section 18 and following sections of the Tax Court of Canada Act. The years under review are 1992, 1993 and 1994.

[2] At the commencement of the hearing of these appeals on October 2, 1998 the appellant raised two matters pertaining to limitation periods provided for in the Tax Court of Canada Act ("the Act"). The first was whether the Reply to the Notice of Appeal had been filed within the prescribed time.

[3] The Court file indicates that on October 17, 1997 Chief Judge Couture made an order extending the time within which the appellant could appeal from assessments pertaining to the years under review. The Order is dated October 17, 1997. The third paragraph reads:

"This Court orders that the time within which appeals may be instituted is extended to the date of this Order and the appeals, received with the application, are deemed to be valid appeals."

[4] The Court file indicates that the appeals were forwarded to Revenue Canada on October 24, 1997. The Reply to the Notice of Appeal was filed with the Registry on December 23, 1997 and copy was sent on that date to the appellant by registered mail. Subsection 18.16(1) of the Act provides:

"18.16 (1) The Minister of National Revenue shall file a reply to a notice of appeal within sixty days after the day on which the Registry of the Court transmits to that Minister the notice of appeal unless the appellant consents, before or after the expiration of the sixty day period, to the filing of that reply after the sixty day period or the Court allows the Minister, on application made before or after the expiration of the sixty day period, to file the reply after that period."

The appellant did not consent to the filing of the Reply after the 60-day period. Subsection 27(5) of the Interpretation Act provides:

"27. (5) Where anything is to be done within a time after, from, of or before a specified day, the time does not include that day."

On the basis of what has been said so far, the Reply should have been filed within 60 days after October 24, 1997, which is December 23, 1997. That is the date on which the Reply was filed. Further, it should be noted that paragraph 18.18(1)(a) of the Act provides:

"18.18 (1) For the purposes of calculating a time limit for the purpose of section 18.16, 18.17 or 18.22,

(a) the period beginning on December 21 in any year and ending on January 7 of the next year shall be excluded;"

This means that the Reply did not have to be filed prior to Monday, January 12, 1998. In this regard it is to be borne in mind that Saturday and Sunday, January 10 and 11, 1998 are not to be counted in calculating the 60-day period. Section 15 of the Act provides:

"15. Where the time limited for the doing of a thing under this Act expires or falls on a holiday or a Saturday, the thing may be done on the day next following that is not a holiday or Saturday."

Subsection 35(1) of the Interpretation Act declares that Sunday is a holiday.

[5] The second preliminary point relates to fixing the date for the hearing of the appeals. Subsections 18.17(1) and 18.17(1.1) of the Act provide:

"18.17 (1) Subject to subsection (1.1), the Court shall fix a date for the hearing of an appeal referred to in section 18 that is not later than one hundred and eighty days or, where the Court is of the opinion that it would be impracticable in the circumstances to fix a date for the hearing of the appeal within that period, three hundred and sixty-five days after the last day on which the Minister of National Revenue must file a reply to the notice of appeal pursuant to subsection 18.16(1) or (3).

18.17 (1.1) The Court may, in exceptional circumstances, fix a date for the hearing of an appeal referred to in section 18 at any time after the periods referred to in subsection (1)."

The Notice of Hearing, which is dated July 24, 1998, states that the appeals were scheduled to be heard at Ottawa on October 2, 1998. There is nothing on the Court file to show that the question whether "it would be impracticable in the circumstances" or whether "exceptional circumstances" existed was considered. I think the consequence is that subsection 18.17(1) was not complied with as it should have been. But this administrative oversight, cannot, of itself, determine the question whether the reassessments under appeal are in error. That must be decided on the merits of the relevant circumstances pertaining to the reassessments. But the administrative oversight will be drawn to the attention of the Registrar with a view to avoid repetition in other cases. In Ginsberg v. The Queen, 96 DTC 6372 the Federal Court of Appeal held that the failure of the Minister of National Revenue to reassess tax "with all due dispatch" as stipulated in subsection 152(1) of the Income Tax Act did not afford a ground upon which to vacate the reassessment.

[6] There are two minor errors in the Reply in respect of which counsel for the respondent was granted leave to amend the Reply. In paragraph 3 "her" should be "his" and in paragraph 7(a) "Federal" should be "Provincial".

[7] The question to be decided is whether the appellant is entitled to deduct certain claimed rental losses in computing his income for 1992, 1993 and 1994.

[8] Paragraph 7 of the Reply to the Notice of Appeal reads:

"7. In confirming the reassessments of the Appellant's income tax returns for the 1992, 1993 and 1994 taxation years, the Minister made the following assumptions of fact:

(a) during the 1992, 1993 and 1994 taxation years, the Appellant was employed by the Provincial Government;

(b) the Appellant's personal residence was located at 25 Rosegarden Crescent, Ottawa, Ont.;

(c) the Appellant rented a portion of his personal residence to arm's length third parties for the 1992, 1993 and 1994 taxation years;

(d) the Appellant claimed 50% of the operating expenses for the 1992 and 1993 taxation years, and 40% of operating expenses for the 1994 taxation year;

(e) the rent charged was insufficient to cover the proportionate share of operating expenses;

(f) the Appellant's calculation of rental losses for the 1992, 1993 and 1994 taxation years can be summarized as follows:

Taxation Years

1992 1993 1994

Revenues $ 1,200 $ 2,275 $ 3,300

Expenses:

Property Taxes 1,412 1,361 1,080

Maintenance & Repairs 1,521 1,124 573

Interest 5,920 6,339 4,745

Insurance    374 351 351

Light, Heat, Water 952 1,012 897

Other    512 286    0

Total Expenses $10,691 $10,473 $ 7,646

Net Rental Losses $(9,490) $(8,198) $(4,346)

(g) the Appellant had no reasonable expectation of profit from the rental property in the 1992, 1993 and 1994 taxation years;

(h) the expenses claimed by the Appellant for the 1992, 1993 and 1994 taxation years with respect to the rental of his personal residence were not allowable for the purposes of computing his rental losses for the 1992, 1993 and 1994 taxation years as they were not made or incurred by the Appellant for the purpose of gaining or producing income from a business or property but were personal or living expenses of the Appellant; and

(i) the Appellant ceased renting any portion of the personal residence after the 1994 taxation year."

[9] In order for losses pertaining to the rental of property to be deductible in computing a taxpayer's income they must exist in relation to a source of income. Subsection 9(2) of the Income Tax Act, which is one of the basic rules regarding income or loss from a business or property, provides:

"9(2) Subject to section 31,[1] a taxpayer's loss for a taxation year from a business or property is the amount of his loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source mutatis mutandis."

[10] In Moldowan v. The Queen, 77 DTC 5213 Dickson J. (later Chief Justice), in delivering the judgment of the Supreme Court of Canada, said at page 5215:

“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.”[2]

and later on the same page:

“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.”

I emphasize the words "objective determination". In Kerr and Forbes v. Minister of National Revenue, 84 DTC 1094 (T.C.C.) this is said at page 1095:

"The existence of a reasonable expectation of profit is not to be determined by the presence of subjective hopes or aspirations, no matter how genuine or deep-felt they may be. The issue is to be decided by objective testing."

[11] In Tonn et al. v. The Queen, 96 DTC 6001 the Federal Court of Appeal examined Moldowan in some detail, and what was said in the Court's reasons for judgment raised serious concern in some quarters about the ramifications of Tonn in relation to Moldowan. Indeed, in Attorney General of Canada v. Mastri, 97 DTC 5420, counsel for the Attorney General submitted that Tonn was wrongly decided and urged the differently constituted panel of the Court of Appeal in Mastri to "overrule" Tonn or at least "clarify" what was decided by that appeal. Robertson J.A., speaking for the Court, said at page 5423:

"In summary, the decision of this Court in Tonn does not purport to alter the law as stated in Moldowan. Tonn simply affirms the common-sense understanding that it is not the place of the courts to second-guess the business acumen of a taxpayer whose commercial venture turns out to be less profitable than anticipated."

[12] The appellant said that tenants left on short notice and he had some difficulty in renting the property. The rental periods were as follows: 1992 – March 1 to June 30; 1993 – January 1 to March 31 and September 1 to December 31; 1994 – January 1 to November 30. The appellant confirmed what is said in paragraph 7(i) of the Reply to the Notice of Appeal about ceasing to rent the property.

[13] The amounts set out in paragraph 7(f), as being what was sought to be deducted in computing income, are verified by the statements of rental income that were filed with the appellant's returns of income. Those documents are in evidence as exhibits. The figures in that paragraph speak for themselves, and they establish that when objectively regarded, a reasonable expectation of profit did not exist in any of the years under appeal. It will be noted that in 1992 income was 20% of interest alone. The same percentages for 1993 and 1994 are 36 and 70. Even if interest being the major expense is disregarded, the other expenses exceed income in 1992 and 1993. In 1994, again disregarding interest, income exceeded expenses by $399.00.

[14] The appeals are dismissed.

Signed at Ottawa, Canada, this 14th day of October 1998.

"D.H. Christie"

A.C.J.T.C.C.

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