Date: 20010803
Docket: 2001-795-IT-I
BETWEEN:
DOREEN LONDON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1] These appeals are from assessments for the 1996, 1997 and 1998 taxation years. By those assessments the Minister of National Revenue disallowed losses claimed by the appellant on the basis that the losses incurred from the rental of a portion of her principal residence were not losses from a business because she had no reasonable expectation of profit ("REOP").
[2] The appellant bought a house at 10 Giffen Place, Brampton, Ontario, in 1989 for $292,000 with a down payment of $65,000 and a five-year mortgage of $227,000 at an interest rate of 8.25%. In 1996 the opening balance was $260,026 and on December 31, 1998 it was $242,821. The increase in the amount of the mortgage appears to have been the result of the bank's adding accrued and unpaid interest to the principal.
[3] The house was an ordinary two-storey residence. The basement had two bedrooms, a living and dining room, a kitchen, and a bathroom. The first floor had a kitchen, living room, family room and sunroom which was to be used for rental purposes. The dining room was used for personal purposes and the laundry room was used for everyone in the house. The second floor had a bathroom, a bedroom with an ensuite bathroom and three other bedrooms.
[4] The appellant stated that she bought the property in 1989 with a view to selling it at a profit. However with the downturn in the real estate market she was unable to do so and therefore she rented it. She treated it as her personal residence throughout and finally sold it in 1999 at a loss.
[5] In the years in which she owned the property she reported the following income, expenses and losses:
YEAR GROSS RENTS EXPENSES RENTAL LOSSES
1989 $ 1,800.00 $ 5,207.00 $ 3,407.00
1990 $ 6,000.00 $24,095.00 $18,095.00
1991 $ 3,850.00 $22,258.00 $18,408.00
1992 $ 4,380.00 $27,492.00 $23,112.00
1993 $11,480.00 $22,802.00 $11,322.00
1994 $12,005.00 $22,737.00 $10,732.00
1995 $ 8,845.00 $22,518.00 $13,673.00
1996 $ 5,220.00 $22,458.00 $17,238.00
1997 $ 1,500.00 $20,101.00 $18,601.00
1998 $ 5,200.00 $17,255.00 $12,055.00
[6] The appellant allocated 80% of all expenses to the rental operation. The pleadings do not raise the question of reasonableness but on the evidence that I heard I should have thought that this percentage was high. At all events the Minister did not question the returns until 1996.
[7] A large part of the expenses was for mortgage interest. In 1996, 1997 and 1998 the interest was $21,725, $19,398 and $12,939 respectively.
[8] The appellant said that in 1998 a tenant by the name of Croasdan (or something of the sort - she was not too clear) occupied two bedrooms and the ensuite on the second floor and that he moved out without paying his rent but she said she was able to collect $8,000 from him in 1999 after he left. She showed me a T-1 adjustment for 1998 which she prepared but never submitted to the tax authorities adjusting her receipts by $8,000, so that the loss for 1998 would have been only about $4,000.
[9] Counsel suggested that Mr. Croasdan was a figment of the appellant's imagination, that he never really existed or occupied the premises and the $8,000 that the appellant allegedly collected in 1999 was simply dreamt up to make the financial results of 1998 look better.
[10] I suppose this hypothesis is not impossible, but I do not lightly make adverse findings of credibility against a witness without cogent evidence. I am prepared to accept the reality of the mysterious Mr. Croasdan but as will become apparent later in these reasons it does not make any difference to the final result whether I do or not.
[11] In September, October and November 1998 the appellant's son Lucius lived in one room on the second floor and paid the appellant $550 per month. From January to May, 1998 the appellant's son Lucius' common-law wife, Lisa Bedley, lived in the same room but she moved out without paying the $2,500 rent for the five months. She also lived there from June to December of 1997 but only paid $1,500 rent out of the $3,500 owing. The appellant kept Lucius' two children with her in the basement.
[12] In 1998 she received rent from one Delon Griffith in the amount of $3,550.
[13] Counsel for the respondent called a Mr. Hall of CCRA and he established that all three of the appellant's children, Lucius, Deborah and Carlisle, used 10 Giffen Place, Brampton, as their mailing address for their income tax returns and that also some T-4 slips from their employers were sent to that address. From this he asks me to infer that the children were all living at 10 Giffen Place.
[14] Such an inference is not justified. These days children move about frequently. The only thing permanent is their parents' home. Using that as a mailing address does not prove they live there.
[15] Counsel also argued that the appellant gave between $7,000 and $17,000 in each year under appeal to her church or to other charitable causes. He suggests that with a relatively small income she should have used that money to pay down her mortgage.
[16] Mrs. London struck me as a woman of extreme compassion and generosity. She allowed Lisa and her children to live at her house rent-free for extended periods. She testified - and I believe her - that she often went hungry so that other people could eat.
[17] Her gifts to the church are one aspect of this predisposition. I am certainly not, in an income tax appeal, going to draw and adverse inference from the fact that where the appellant, in choosing between God, Caesar, the money-lenders and mammon, followed the admonition in Matthew 6:24 and chose God.
[18] However admirable Mrs. London may be — and she certainly is — and however persuasive Mr. Fitz-Andrews may have been — and he certainly was — I do not think that it can reasonably be said that the appellant was carrying on a business that would entitle her to deduct the substantial losses that she sustained in the years in question.
[19] I say this for several reasons. In the first place, I do not think that it meets the test of a business enunciated in Kaye v. The Queen, 98 DTC 1659 at 1660:
[4] I do not find the ritual repetition of the phrase particularly helpful in cases of this type, and I prefer to put the matter on the basis "Is there or is there not truly a business?" This is a broader but, I believe, a more meaningful question and one that, for me at least, leads to a more fruitful line of enquiry. No doubt it subsumes the question of the objective reasonableness of the taxpayer's expectation of profit, but there is more to it than that. How can it be said that a driller of wildcat oil wells has a reasonable expectation of profit and is therefore conducting a business given the extremely low success rate? Yet no one questions that such companies are carrying on a business. It is the inherent commerciality of the enterprise, revealed in its organization, that makes it a business. Subjective intention to make money, while a factor, is not determinative, although its absence may militate against the assertion that an activity is a business.
[5] One cannot view the reasonableness of the expectation of profit in isolation. One must ask "Would a reasonable person, looking at a particular activity and applying ordinary standards of commercial common sense, say 'yes, this is a business'?" In answering this question the hypothetical reasonable person would look at such things as capitalization, knowledge of the participant and time spent. He or she would also consider whether the person claiming to be in business has gone about it in as orderly, businesslike way and in the way that a business person would normally be expected to do.
[6] This leads to a further consideration — that of reasonableness. The reasonableness of expenditures is dealt with specifically in section 67 of the Income Tax Act, but it does not exist in a watertight compartment. Section 67 operates within the context of a business and assumes the existence of a business. It is also a component in the question whether a particular activity is a business. For example, it cannot be said, in the absence of compelling reasons, that a person would spend $1,000,000 if all that could reasonably be expected to be earned was $1,000.
[7] Ultimately, it boils down to a common sense appreciation of all of the factors, in which each is assigned its appropriate weight in the overall context. One must of course not discount entrepreneurial vision and imagination, but they are hard to evaluate at the outset. Simply put, if you want to be treated as carrying on a business, you should act like a businessman.
[20] Second, there is a very significant personal element here. The appellant used it as her personal residence and her son and his common-law wife lived there from time to time.
[21] Third, the way the appellant ran the rental operation did not look much like a business. Very little advertising was done, the bookkeeping ranged between rudimentary and haphazard, people were allowed to stay on without paying rent - for example Lisa Bedley or the mysterious Mr. Croasdan, who allegedly moved out after a lengthy stay without paying any rent, but from whom the appellant was apparently able to collect $8,000. If I had not accepted the story it would have put the appellant's case in a very bad light. However, although I have accepted her rather improbable story, her conduct bespeaks a generous, forbearing and trusting nature but not a very commercial one. Business should be made of sterner stuff.
[22] The appellant did nothing to pay down the mortgage. Indeed, it increased. Ultimately, one has to draw the line and say "enough is enough". In Donyina v. The Queen, file 2001-934(IT)I, I summarized 12 principles that I considered useful in cases of this sort. The twelfth was as follows:
12. When to start a business and when to abandon it are business decisions in which neither the taxing authorities nor the court should intervene (Nichol). Nonetheless if losses go on being incurred year after year for an inordinate length of time sooner or later one has to apply what I shall call the "Enough is enough" principle and decide that what might have been a viable business has, with the effluxion of time, became hopeless and the best thing to do with it is to give it a decent burial. Nonetheless, a businessman's judgement to maintain a business must be treated with great respect.
[23] Finally, I come to the contention that the property was trading property acquired with a view to selling as soon as possible, so that it became inventory of an adventure in the nature of trade and that all of her expenses should be deductible currently or at all events capitalized and deducted when the property is sold.
[24] I dealt with this point in Donyina as follows:
10. If what is ostensibly a rental property was acquired and held in the course of an adventure in the nature of trade and it was reasonable to expect a profit on the resale the losses (i.e. carrying costs net of rentals received) should not be disallowed on the basis of REOP (Roopchan). The court should however examine with some care an ex post facto declaration that property that was carried for some years at a loss is part of a speculative venture in which the motive was resale at a profit. This is not something that one would expect someone readily to admit if the property were sold at a profit.
[25] The appellant stated that she bought the property with a view to flipping it at a profit. This may well be so. I suspect many of the properties bought in the late 1980s when real estate in Toronto was booming were bought in the hope of selling them at a profit and declaring a capital gain. If it happened to be your principal residence so much the better because the entire gain was tax-free. When the bottom fell out of the market in 1989 and the early 1990s these same properties became the subject of the myriad of REOP cases that have flooded our courts. One must be extremely sceptical of the "adventure in the nature of trade" argument that surfaces after many years of losses, and only after the taxpayer's losses have been disallowed.
[26] The short answer is that assuming the property was bought with the view of selling it at a profit its quality of inventory has been lost with the effluxion of time. This is particularly true where the property is also the taxpayer's principal residence.
[27] I have tried to find reasons that would warrant giving the appellant some relief. She is a good woman and I know her resources are very limited. However the expenses claimed are so vastly disproportionate to the revenues and have gone on for so long with no end in sight (except for the sale) that there is no justifiable way in which I could find in her favour.
[28] The appeals are dismissed.
Signed at Ottawa, Canada, this 3rd day of August 2001.
"D.G.H. Bowman"
A.C.J.
COURT FILE NO.: 2001-795(IT)I
STYLE OF CAUSE: Between Doreen London and
Her Majesty The Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: July 18, 2001
REASONS FOR JUDGMENT BY: The Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF JUDGMENT: August 3, 2001
APPEARANCES:
Agent or the Appellant: Kenneth Fitz-Andrews, C.A.
Counsel for the Respondent: Scott Simser, Esq.
COUNSEL OF RECORD:
For the Appellant:
Name: --
Firm: --
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-795(IT)I
BETWEEN:
DOREEN LONDON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on July 18, 2001, at Toronto, Ontario, by
The Honourable D.G.H. Bowman
Associate Chief Judge
Appearances
Agent for the Appellant: Kenneth Fitz-Andrews, C.A.
Counsel for the Respondent: Scott Simser, Esq.
JUDGMENT
It is ordered that the appeals from assessments made under the Income Tax Act for the 1996, 1997 and 1998 taxation years be dismissed.
Signed at Ottawa, Canada, this 3rd day of August 2001.
|
"D.G.H. Bowman" |
A.C.J.