Date: 20010822
Docket: 2000-4791-IT-I
BETWEEN:
FRED MAYSKY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
Docket: 2000-4945-IT-I
BETWEEN:
SYLVIA MAYSKY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Miller, J.T.C.C.
[1] These are appeals by way of Informal Procedure by Mr. Fred Maysky and Mrs. Sylvia Maysky heard on common evidence for the 1996 and 1997 taxation years. Fred Maysky appeals the Minister of National Revenue's ("Minister") assessments disallowing rental losses of $10,129.95 and $7,924.96 for 1996 and 1997 respectively. Sylvia Maysky appeals the Minister's assessments disallowing rental losses of $5,454.59 and $4,267.29 for the 1996 and 1997 taxation years respectively.
[2] The rental losses claimed by the Appellants in 1996 and 1997 pertain to a property at 12039 63rd Street, Edmonton, Alberta. This home was built in 1958 by Mr. Maysky and his parents as their family home. Mr. Maysky's father died in 1969 and Mr. Maysky's mother developed the downstairs of the property as a rental area. Throughout the 1970's Mr. Maysky assisted his mother with the rental arrangements. For health reasons Mr. Maysky's mother moved out in the 1980's and the main floor was then also turned into rental accommodation. Mr. Maysky looked after the rental arrangements from then on. Upon his mother's death he became the sole owner of the property. He also owned and rented out the property next door until he sold that property in 1991. He sold the property at that time as the market in Edmonton was good and the property demanded a higher maintenance than 12039 63rd Street. He believed the sale of the property would reduce his overall debt load. In 1992 he rented part of 12039 63rd Street to an acquaintance of a relative of his. He did not charge fair market value rent as the tenant could not afford it. In 1993 that tenant committed suicide. Other tenants moved out and by 1994 the property was vacant, which it remains to this day. The last tenant left some considerable damage in 1994 which Mr. Maysky maintains took a couple of months to tidy up.
[3] Around 1992 Mr. Maysky changed careers and started as a realtor. His evidence was that throughout the 1990's he concentrated on selling real estate, hoping this income would not only subsidize the rental property but ultimately allow him to reduce the debt load, which in 1996 was approximately $120,000. Mr. Maysky was not able to specifically allocate to what the $120,000 debt pertained, though it was clear that a significant portion represented a line of credit in support of Mr. Maysky's realtor activities.
[4] Mr. Maysky provided few details on what steps he has taken since 1994 to generate revenue. His plan was simply to reduce the debt load to ultimately result in greater profit from the property. He indicated that profit could arise whether from rental income, of which there was none after 1994, or capital appreciation. He believed the property values had gone up since the mid-1990's. He claimed he maintained the property throughout the 1990's for two reasons; so that it would retain its value and it would be more readily rentable. Mr. Maysky showed the property to less than ten prospective tenants in 1996 and 1997. His main effort at advertising appears to have been a sign in the window. Mr. Maysky claims to have been suffering from depression at this time. I conclude that due to health and to commitment to his realtor activities he spent little or no time in attempting to rent the property in the years in question. He maintained his former home with a sense of pride in it, and also as it provided solid valuable security to the banks. He indicated it was not how much money he could squeeze out of the property but that he wanted the property to be an asset to the neighbourhood. He was not prepared to rent it out to anyone who might possibly damage it. He has yet to find a responsible tenant.
[5] Mr. and Mrs. Maysky allocated the losses on a 65-35% basis, although Mr. Maysky owned 100% of the property. Mr. Maysky was vague as to the split of responsibilities, but indicated the allocation was the recommendation of his accountant.
[6] With respect to the expenses claimed in 1996 and 1997 Mr. Maysky could not itemize the maintenance and repairs, nor could he allocate the interest expense between the rental property and his realtor business.
[7] Respondent's counsel presented four arguments in the alternative:
1) There was no reasonable expectation of profit in the 1996 and 1997 taxation years and therefore the property in question did not constitute a source of income for the Appellants against which any losses could be deducted.
2) As the Appellants were not actively engaged in renting property in 1996 and 1997 the expenses were not therefore incurred for the purpose of gaining or producing income within the meaning of section 18(1)(a) of the Income Tax Act ("Act").
3) The maintenance and repair expenses were capital in nature, and the interest expenses were personal and therefore neither of these were deductible.
4) The expenses claimed were unreasonable.
[8] The Respondent relies on the well-known trilogy of Moldowan v. The Queen, 77 DTC 5213, Attorney General of Canada v. Mastri et al., 97 DTC 5420 and Tonn et al. v. The Queen, 96 DTC 1806 as establishing the principle that to have a source of income a taxpayer must have a reasonable expectation of profit from that source, objectively determined, and that without a source of income there is no basis upon which to claim a rental loss. As I have stated on previous occasions, the test is one which looks to section 3 of the Act as a gate-keeping section. If the situation does not justify getting past section 3, there is no need to apply any further provision of the Act. The application of the reasonable expectation of profit test can differ depending on whether the alleged source is property or business and further whether there is a personal element involved. In this case I am faced with a situation of the alleged source being property and also with the existence of a "personal element". The personal element stems from the property having formerly being the Appellant's home, from the Appellant using the property as collateral for a line of credit pertaining to his realty business and from the Appellant's acknowledgement of retaining pride in maintaining the home as an asset to the neighbourhood. I have no hesitation in seeking an objective determination of whether or not there was a reasonable expectation of profit. This is an appropriate case for doing so: this is not a matter of second guessing the Appellant's business judgment.
[9] Factors to examine in coming to an objective determination of the reasonable expectation of profit from this property, suggested by Respondent's counsel, are those cited in Landry v. The Queen, 94 DTC 6624 case as follows:
the time required to make an activity of this nature profitable
the presence of the necessary ingredients for profits ultimately to be earned
the profit and loss situation for the year subsequent to the years in issue
the number of consecutive years during which losses were incurred
the increase in expenses and decrease in income in the course of the relevant periods
the persistence of the factors causing the losses
the absence of planning
the failure to adjust
I would add to this list the motivation of the taxpayer in making the expenditures. Mr. Maysky's evidence was clear that for health reasons and due to concentrating on the realtor business he spent little time on his rental property. Indeed, there are no ingredients for profits to be earned as there was simply no revenue. Even by reducing his debt load to zero, which was the extent of his plan, Mr. Maysky would not have earned a profit. The property had a history of losses while generating revenue prior to the years in question, and a history thereafter of simply no revenue. There may well have been a reasonable expectation of profit in the late 1980's and early 1990's, though I am not ruling on that point, however by 1994 there is no basis to find any expectation of profit. Expenses remained constant and revenues dropped to nothing. Mr. Maysky did nothing to obtain revenues and his sole plan was to reduce debt. So why did he continue incurring expenses on this vacant property? Three reasons: first, he retained a pride of ownership in his family home. He wanted it to be considered as an asset to the neighbourhood and not simply something to squeeze money from. Second, he wanted to ensure it retained its value for future sale purposes. Mr. Maysky knew exactly what it was worth in 1998 and also today. He is in the realtor business and knows when he can maximize a gain on sale. Third, he needed to ensure the property was an attractive security to the bankers so they would continue to accept it as collateral for his personal line of credit. These are not the motivations of one determined to earn rental income from property. None of these motivations reflect any expectation of profit from rental income.
[10] On an objective basis there is no reasonable expectation of profit and therefore no source of income. The expenses do not require further scrutiny under other provisions of the Act as they have not made it past the section 3 gate. The appeals are dismissed.
Signed at Ottawa, Canada this 22nd day of August 2001.
"C.J. Miller"
J.T.C.C.
COURT FILE NO.: 2000-4791(IT)I and 2000-4945(IT)I
STYLE OF CAUSE: Fred Maysky and The Queen
Sylvia Maysky and The Queen
PLACE OF HEARING: Edmonton, Alberta
DATE OF HEARING: August 15, 2001
REASONS FOR JUDGMENT BY: The Honourable C.J. Miller
DATE OF JUDGMENT: August 22, 2001
APPEARANCES:
For the Appellants: Fred Maysky
Counsel for the Respondent: Michael Taylor
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-4791(IT)I
BETWEEN:
FRED MAYSKY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of
Sylvia Maysky (2000-4945(IT)I) on August 15, 2001 at Edmonton, Alberta, by
the Honourable Judge Campbell J. Miller
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Michael Taylor
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1996 and 1997 taxation years are dismissed in accordance with the attached reasons for judgment.
Signed at Ottawa, Canada this 22nd day of August 2001.
|
"C.J. Miller" |
J.T.C.C.
2000-4945(IT)I
BETWEEN:
SYLVIA MAYSKY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of
Fred Maysky (2000-4791(IT)I) on August 15, 2001 at Edmonton, Alberta, by
the Honourable Judge Campbell J. Miller
Appearances
Agent for the Appellant: Fred Maysky
Counsel for the Respondent: Michael Taylor
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1996 and 1997 taxation years are dismissed in accordance with the attached reasons for judgment.
Signed at Ottawa, Canada this 22nd day of August 2001.
|
"C.J. Miller" |
J.T.C.C.