Date: 20000615
Docket: 1999-3452-IT-I
BETWEEN:
SEWPERSAUD LATCHMAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Sarchuk J.T.C.C.
[1] These are appeals of Sewpersaud Latchman from assessments of income tax in respect of his 1995, 1996 and 1997 taxation years. The Appellant has elected to have the informal procedure provided by section 18 of the Tax Court of Canada Act apply.
[2] In computing income for the years in issue, the Appellant claimed rental losses from a property located at 32 Drayton Crescent, Brampton in the amounts of $13,018, $14,581 and $15,301 respectively. The Minister of National Revenue (the Minister) assessed to disallow the deduction of these losses on the basis that the Appellant did not have a reasonable expectation of profit from renting the property and that the losses were personal or living expenses of the Appellant within the meaning of paragraphs 18(1)(a) and 18(1)(h) of the Income Tax Act (the Act).
[3] In March 1989, the Appellant, his wife and his brother Vidia Latchman (Vidia) purchased a detached single family home located at 32 Drayton Crescent, in Brampton, for $215,000. The purchase was financed by way of a first mortgage of $155,000 at 12.5% interest. The Appellant and his spouse held a two-third interest and Vidia owned the remainder. The property at the time of purchase consisted of a three-bedroom bungalow with an unfinished basement. At all relevant times, it was the principal residence of the Appellant and his family. At some point of time following the acquisition, the Appellant commenced construction in the basement, which when completed in 1991, consisted of three bedrooms, a kitchen and a washroom. In 1990 just prior to completion, the Appellant's mother and father-in-law and two brothers-in-law moved into these quarters.
[4] The Appellant says that he collected rent from his in-laws at the rate of $100 per week until August 1995 when following a dispute, his wife, their three children and all of the in-laws left the premises. Shortly thereafter, the Appellant's brother Vidia and his family moved into the basement quarters and, according to the Appellant, paid rent of $100 per week until this "tenancy" ended on December 31st of that year. The Appellant says that in 1996, the basement unit was rented to a friend. Gross rental incomes of $5,200 and $6,400, respectively, were reported by him in 1996 and 1997. While the Appellant's testimony is not entirely clear, it appears that several tenants may have occupied that unit during this period.
[5] From 1992 through to the end of the last taxation year in issue, the Appellant reported rental income and claimed rental losses as follows:
|
Year |
Gross Income |
Loss |
|
1992 |
$6,000 |
($ 6,621) |
|
1993 |
$6,000 |
($ 8,873) |
|
1994 |
$5,200 |
($6,507) |
|
1995 |
$5,200 |
($13,108) |
|
1996 |
$5,200 |
($14,518) |
|
1997 |
$6,400 |
($15,301) |
For the taxation years in issue, the rental income, expenses and net rental losses are set out in Schedule "A" to the Reply to the Notice of Appeal.[1]
[6] In 1995, the Appellant obtained permission from the municipal authorities to construct a two-storey addition to the property for what he said was solely rental purposes. For that reason, he obtained a loan from the bank in the amount of $50,000 and commenced construction in the fall of that year. The addition was not completed until some time in 1998 and, according to the Appellant, increased the size of the residence by approximately 1,000 square feet. The Appellant contends that these facts confirm his position that at all times he was conducting a viable rental business which was and will continue to be operated on a basis certain to produce a profit in the foreseeable future.
[7] In order to succeed the Appellant must demonstrate that the expenditures in issue were made for the purpose of gaining or producing income from a property. Subsection 9(1) of the Act defines the concept of business income by reference to profit while subsection 18(1)(a) of the Act contains specifically prescribed statutory limitations on expense deductions. In particular, the latter sets out a general prohibition which denies a deduction unless the amount is paid or incurred for the purpose of gaining or producing income. Paragraph 18(1)(h) specifically limits the deductibility of personal or living expenses, which are defined in subsection 248(1) of the Act to exclude expenses in connection with a property unless it is maintained in connection with a business carried on for profit or with a reasonable expectation of profit.
[8] In Moldowan v. The Queen,[2] the following criteria for determining whether a reasonable expectation of profit existed were proposed by Dickson J. (as he then was):
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), 74 DTC 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.
[9] The Appellant's representative argued that this was not a case involving the presence of a personal benefit because he was not providing accommodation to his relatives in return for assistance with mortgage payments or by providing them with preferential rental costs. To accept this submission would require the Court to ignore the fact that he purchased the property with the intention of occupying it and did in fact occupy it at all times as his family's principal residence. It is equally difficult to accept his contention that no personal element was involved in the construction and ultimate use of the basement quarters by his in-laws and later his brother.
[10] While it is inappropriate for the Court to second-guess or to substitute its business judgment for that of a taxpayer, where circumstances strongly suggest that a personal motivation existed and where the expectation of profit was so unreasonable as to raise a suspicion, it becomes the responsibility of a taxpayer to demonstrate that there are sufficient of the indicia of commerciality to justify the conclusion that a true business is being conducted. The testimony of the Appellant regarding his plans and arrangements fails to provide such indicia. There is an absence of convincing evidence in a number of respects such as the Appellant's ability to pay down a meaningful portion of the monies borrowed to acquire the property and to construct the additions as well as the question whether the rates charged for the unit while it was rented to the in-laws, the brother, and then to a friend and others reflected market rates. Furthermore, the rental incomes in the taxation years in issue barely covered 50% of the fixed costs and were, in all years, less than 50% of the amount of interest payable on borrowed funds. In my view, the substantial expenses and resulting losses when compared to the gross revenues are inconsistent with what one would reasonably expect from a business venture.
[11] On balance, I am satisfied that during the taxation years in issue the Appellant was not engaged in a commercial enterprise and that his expectation of profit was unreasonable in the circumstances. Accordingly, the appeals are dismissed.
Signed at Ottawa, Canada, this 15th day of June, 2000.
"A.A. Sarchuk"
J.T.C.C.