Date: 20000919
Docket: 98-9299-IT-I,
98-9303-IT-I
BETWEEN:
DONALD DUMAS,
RICHARD GENDRON,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] These appeals were heard on common evidence under the informal procedure. They concern the 1994 taxation year.
[2] The issue is whether the appellants had a reasonable expectation of profit from the rental of a property purchased in 1989.
[3] The facts on which the Minister of National Revenue (the "Minister") relied in making the reassessments are set out in paragraph 3 of each Reply to the Notice of Appeal. Since the replies are similar, I shall reproduce that in the appeal of Mr. Gendron.
[TRANSLATION]
(a) in 1989, the appellant purchased as co-owner with Donald Dumas the property located at 16 rue Des Morillon, in Orford, Quebec (hereinafter, the "property");
(b) the property is located in a tourism region (MAGOG-ORFORD);
(c) the appellant and Donald Dumas paid $24,075 in cash and took out a $82,925 mortgage on the property;
(d) in respect of the 1989 to 1994 taxation years, the appellant reported the following rental losses for the property:
Appellant's
Gross Net Share of
Year Profit Expenses Losses Losses
1989 $128 $3,524 ($3,396) ($1,698)
1990 $8,066 $15,146 ($7,080) ($3,540)
1991 $7,134 $14,813 ($7,679) ($3,840)
1992 $5,400 $12,624 ($7,224) ($3,612)
1993 $5,700 $11,516 ($5,816) ($2,908)
1994 $5,800 $11,374 ($5,574) ($2,787)
(e) as itemized below, the fixed costs exceeded the rental income for the property in the period from 1991 to 1994:
Interest
Year Gross Income Fixed Costs Expenses
1991 $7,134 $12,925 $10,444
1992 $5,400 $10,296 $7,450
1993 $5,700 $9,323 $6,197
1994 $5,800 $8,177 $5,094
(f) the appellant had no plan of action to develop a profitable operation;
(g) beginning in 1989, the property was rented by the week or month;
(h) the property was rented for four months in 1992, four months in 1993 and eight months 1994;
(i) after 1994, the property was not rented;
(j) during the period in issue, supply exceeded demand in the rental market in the region;
(k) during the period under audit, the property was listed for sale at $95,000, but there were no prospective buyers;
(l) the appellant did not show that the $2,787 claimed in respect of the property for the taxation year in issue was incurred by him with a view to making a profit or with a reasonable expectation of profit;
(m) the Minister therefore disallowed the $2,787 rental loss claimed by the appellant in respect of the property.
[4] The appellants both testified. I shall set out their evidence jointly.
[5] Mr. Gendron is currently retired. For fifteen years he owned a newspaper in the region. He and the other appellant, Mr. Dumas, are old friends. It was Mr. Dumas who talked to him about purchasing the villa. This villa was part of a Sheraton hotel complex serving the Mount Orford ski resort. The developer of the complex was Mr. Dumas's brother-in-law.
[6] At the time, Mr. Dumas owned a convenience store located near the hotel complex. He was also a real estate agent.
[7] Each of the appellants invested $15,000. Of the $30,000 total, $24,075 was paid in cash to purchase the villa. The remainder went for real estate transaction expenses, including transfer fees and notaries' fees.
[8] At that time, the Mount Orford ski resort seemed to be undergoing vigorous growth and was very popular. Large amounts—$10 million was mentioned—had just been invested in the ski resort. In summer, there was a golf course nearby.
[9] The Sheraton Hotel took care of renting and maintaining the villa, which was available for rent by the year. The villa's tenants had access to the hotel swimming pool. The appellants anticipated an annual rental income of $10,000, based on the cost of renting a hotel room.
[10] Around 1992, the hotel complex went bankrupt. It was taken over by the Malenfant Group, which in turn went bankrupt in 1993.
[11] It was from that point that the appellants began to handle the property rental themselves.
[12] Mr. Gendron published 70 to 100 advertisements for the villa in his newspaper. A copy of the advertising was filed as Exhibit A-1. There were two types of advertisements. One type concerned rental of the villa. According to Mr. Gendron, there were over 40 advertisements of that type. There were also advertisements for the sale of the villa. Over 30 of these were apparently published in the years from 1995 to 1997. Each advertisement referred potential clients to the other appellant, Donald Dumas in his capacity as a real estate agent with Re-Max Magog.
[13] As a real estate agent, Mr. Dumas could advertise through the real estate agency. He also advertised in his convenience store.
[14] Each appellant lives in Orford and has never personally used the villa. They had no intention of living in it. They saw the investment as an easy source of rental income that would supplement their pension income.
[15] The appellants wanted to take part in the economic boom that was then occurring in Orford. They were convinced that the villa would be rented and would be as profitable as the hotel. However, there was a glut of rental properties. Rental prices declined.
[16] The appellants tried to sell the villa in 1995. It was extremely difficult to find a buyer. It was not until 1998 that the villa was sold, and at a reduced price at that.
The parties' positions
[17] The appellants' agent said that, for the appellants, purchasing the property was just a business decision that was made at a time when the Mount Orford ski resort and the entire region were experiencing a boom. There was also the family tie that existed between Mr. Dumas and the owner of the hotel complex. The two appellants were serious businessmen. One owned a newspaper; the other was the owner of a convenience store who also worked as a real estate agent. The purchase was made with a view to earning rental income. The appellants did not acquire the property out of personal interest; they did so for purely business reasons. They paid a significant portion of the purchase price in cash.
[18] The appellants' agent also said that many real estate developments went sour in that region, including Cheribourg, Estrimont and the Mount Orford ski resort itself. The appellants were the victims of poor market conditions.
[19] Counsel for the respondent argued that the appellants failed to make adjustments when their rental income turned out to be lower than they had anticipated. They should have adapted to market conditions, lowering their interest costs by increasing payments against principal. He also argued that the Minister allowed the appellants almost five years to make these adjustments.
Conclusion
[20] In the case at bar, it must first be noted that what is involved is not a rental property whose acquisition cost is financed 100 percent. The appellants paid $30,000. Nor is this a case where the mortgage payments were made using a line of credit the interest on which was added to the interest on the mortgage loan. It is true that the appellants did not reduce the amount of the principal borrowed, but there was no evidence to show whether or not they had the means to do so.
[21] The evidence clearly showed, however, that the purchase was made during a major boom at the Mount Orford ski resort, at a time when that resort was very popular. The villa was part of a Sheraton hotel complex serving the resort. The owner of the complex was the brother-in-law of one of the appellants. It is thus quite plausible that they would have been convinced of the profitability of renting the property they had purchased. The appellants were so convinced that they each invested $15,000. Others also believed in the profitability of the hotel complex. So it was that the Malenfant Group took it over in 1992. Beginning in 1993, the appellants took many steps with a view to renting out the villa. Then, in 1995, noting the villa's lack of profitability as a rental property, they put it up for sale. However, even the real estate sales market was bad. They finally sold the property in 1998.
[22] It might be thought that the appellants did not put the property up for sale in the third year because they, like the other economic stakeholders in the region, believed that conditions would improve. It was perhaps in the same belief that they did not pay down the mortgage loan, if they had the ability to do so, which is not certain. However, they did, in 1995, take the only remedial action open to them, that is, putting their property up for sale.
[23] It is my opinion that, according to the evidence, the decision to purchase was taken for business reasons and not for personal reasons. In those circumstances, the Court must be careful not to substitute its business judgment for that of the purchasers. The decision to buy may have been made with an increase in the property's value in mind, but it was also based on rental profits that, in the circumstances in which the property was purchased, appeared reasonably plausible. In addition, the appellants did what they could to minimize their losses in a difficult market. I must therefore find, on a balance of evidence, that the rental activity was an undertaking of a business nature. The appeals are accordingly allowed, with costs.
Signed at Ottawa, Canada, this 19th day of September 2000.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
98-9299(IT)I
BETWEEN:
DONALD DUMAS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Richard Gendron (98-9303(IT)I) on August 28, 2000, and reasons for judgment delivered on August 29, 2000, at Sherbrooke, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Agent for the Appellant: Alain Francoeur
Counsel for the Respondent: Simon-Nicolas Crépin
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1994 taxation year is allowed.
Signed at Ottawa, Canada, this 7th day of September 2000.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
98-9303(IT)I
BETWEEN:
RICHARD GENDRON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Donald Dumas (98-9299(IT)I) on August 28, 2000, and reasons for judgment delivered on August 29, 2000, at Sherbrooke, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Agent for the Appellant: Alain Francoeur
Counsel for the Respondent: Simon-Nicolas Crépin
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1994 taxation year is allowed.
Signed at Ottawa, Canada, this 7th day of September 2000.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]