Date: 19980603
Docket: 95-1894-IT-G
BETWEEN:
DR. SALVA GIDEON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1] These appeals were heard at Toronto, Ontario on May 19, 1998 pursuant to the General Procedure of this Court.
Issue
[2] The issue is whether the Appellant, a family doctor with a good income, is entitled to certain rental losses claimed in the years 1990, 1991 and 1992. A secondary issue is whether the Appellant who claimed 100% of the rental losses should only have been entitled to 50% thereof because she and her husband were co-owners of the property in question. The original losses the Appellant claimed were $20,686 in 1990, $13,967 in 1991 and $24,441 in 1992. The Appellant submitted as Exhibit A-22 a report of Joseph Flabbi, C.A. (who testified concerning that report) with the result that the actual losses in these appeals are $16,714 in 1990, $24,313 in 1991 and $14,818 in 1992.
[3] Given the fact that the property in question ("property"), namely 6 Pleasant Valley Place, Brampton, was acquired jointly by the Appellant and her husband, the actual amounts of the losses claimed should only be 50% of the last mentioned amounts namely $8,357 for 1990, $12,156 for 1991 and $7,409 for 1992 It is to be noted that in 1996 and 1997 the Appellant only claimed 50% on her returns.
[4] The basic issue, as in most cases of this nature, is whether the Appellant, in acquiring the property had a reasonable expectation of profit.
[4] In the present case, the Appellant has experienced losses since 1990. These losses have been declining and, based on the report of Joseph Flabbi (Exhibit A-22), the Appellant expects a profit in 1998 from the rental operation.
[5] The Appellant and her husband, Shehadeh Gideon, purchased the property from Bramalea Ltd. ("Bramalea") in May of 1990. The property is a two storey residence in Brampton. The Appellant's husband made efforts to rent it out. There was never any intent of the Appellant and her husband to live in the property. They had their own residence. The property was purchased as a rental property. The property was not advertised in the newspapers. The Appellant wanted "safe" tenants citing an example of a relative's property being damaged by tenants not known by the relative. Mr. Gideon put a for rental sign on the lawn and phoned relatives and acquaintances hoping to find a good tenant. The rental market generally in the area indicated monthly rentals of between $1,000 to $1,300 for comparable properties. Caldwell Bankers, in a letter dated July 18, 1994, stated the monthly market averages were $1,223 in 1990, $1,149 in 1991 and $1,212 in 1992. The Appellant testified that she hoped to get $1,500 because the property was superior to the average type of home and further was close to a school.
[6] Prior to the purchase of the property the Appellant had offered to buy a condominium unit in Brampton, Ontario from Bramalea. For that transaction she made a deposit of $20,000. However, she decided not to close on that transaction because the condominiums in the area were not selling. Further Bramalea's representations proved incorrect and prices and rents were falling. Bramalea would not let her off the hook and the best settlement that she was able to obtain was to forfeit the $20,000 deposit and agree to buy from Bramalea the property at 6 Valley Place.
[6] The price for the property was $336,900 (Bramalea had asked for $376,000) with an initial downpayment of $30,000 and a further payment on closing. The first morgage, in an amount of $252,000, was for one year at an interest rate of 13.75%. That mortgage was replaced after the first year by a new mortgage with an interest rate of 9.65% for a period of three years. That mortgage was in turn replaced by a longer term mortgage and the interest rate is now at 5.95%. The Appellant, in addition to the regular weekly mortgage instalments, paid an amount equal to 10% of that instalment which 10% went to reduce the principal.
[7] The property was rented to the Appellant's brother Nick Hinn from August 1, 1990 to February 1, 1991 at a rental rate of $1,000 per month. The rent was paid. Mr. Hinn moved out of the property prior to February, 1991 because his recently pregnant wife wanted to move closer to her mother and also the Hinns wanted a lower rent.
[8] The Appellant then leased the property to the parents of her husband at $1,000 per month commencing April, 1991. The husband's parents continue to live in the property to this day. In 1993 the monthly rent was raised to $1,100 and the amount at present is $1,250.
[9] The principal of the mortgage reduced over the years from $252,000 in 1990 to $205,443 as at December 31, 1996.
Position of the Appellant
[11] The Appellant's basic position is that for various reasons she had a reasonable expectation of profit at the time of purchase. She recognizes that the tenants were relatives but states she was reluctant to rent to just any third party. She realized she could not expect a profit in the early years but that after a certain number of years, given her intention of paying down the principal of the mortgage, she expected a profit.
Position of the Minister
[12] Counsel for the Minister contends that the rent charged was below market, that the property was rented to relatives, that the parents of the Appellant's husband could not afford the rent, that there were losses even though capital cost allowance was not clained and that the Appellant's main reason for buying the property was to resolve the condominium matter with Bramalea and concludes that the Appellant had no reasonable expectation of profit.
Analysis and Decision
[13] Three recent decisions of the Federal Court of Appeal, namely Tonn, 96 DTC 6001; Mastri, 97 DTC 5420 and Mohammad, 97 DTC 5503 have analyzed and distilled the factors to be considered in determining whether a taxpayer can be said to have a reasonable expectation of profit from a rental operation.
[13] These decisions, in essence, say that when there is a personal element involved, i.e., in this case the renting of the property to relatives, the taxpayer has a stronger burden of proof to establish that he or she had a reasonable expectation of profit. Further, the cases demonstrate that when there are high fixed costs such as mortgage interest and taxes, a taxpayer must show that he or she intended to pay down the mortgage thus producing profitability at a point in time.
[14] In my opinion the Appellant has succeeded in discharging that stronger burden of proof. My reasons follow:
1. The Appellant was a very credible witness.
2. The property was acquired as a rental operation.
3. The rents charged, although at the low end of the market, were reasonable in the circumstances and there was no firm evidence the rent was not paid.
4. The mortgage instalments were weekly and this, coupled with the 10% added amounts described above were reducing principal reasonably quickly.
5. The Minister has not allowed a sufficient start-up time, having assessed the first three years of the rental operation.
6. The economic situation in the years in question impacted negatively on the rental operation.
6. The losses claimed have been reduced considerably.
[15] Consequently, the appeals are allowed with costs and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the following basis:
1. The Appellant is entitled to a rental loss in 1990 equal to 50% of $16,714 or $8,357;
2. The Appellant is entitled to a rental loss in 1991 equal to 50% of $24,313 or $12,156; and
3. The Appellant is entitled to a rental loss in 1992 equal to 50% of $14,818 or $7,409.
Signed at Ottawa, Canada this 3rd day of June 1998.
"T.P. O'Connor"
J.T.C.C.