Date: 19980202
Docket: 97-159-IT-I
BETWEEN:
BLAIR SIMPSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
McArthur, J.T.C.C.
[1] These appeals are from reassessments for the 1992 and 1993 taxation years concerning the disallowance of rental losses sustained by the Appellant on a one bedroom condominium in Whistler, British Columbia. The losses were disallowed on the ground that he had no reasonable expectation of profit.
[2] In 1990 the Appellant, together with James and Janette Morris, purchased the condominium for $153,000. The Appellant retained a 50% interest. They financed the purchase with the proceeds of a 1st mortgage totalling 75% of the purchase price and $50,000 in cash from their own separate funds. A rental projection, prepared by the management company expounding the anticipated income, was placed in evidence. The property was listed for sale in May 1991. James and Janette Morris transferred their one-half interest to Danik Industries Ltd. (Danik) in May 1992. The Appellant and Danik sold the entire interest for $115,000 in December 1993.
[3] The Appellant, in his income tax returns filed for the 1990, 1991, 1992 and 1993 taxation years, sought to deduct losses of $6,667.69, $9,221.53, $3,519.88 and $3,398.00 from the letting of the property. These losses were substantially attributable to the annual interest paid and a management fee equal to 40% of the gross income paid to the property managers pursuant to a rental pooling agreement. The Appellant explains the losses on the basis that the rental projections were not met in part because of poor snow conditions.
[4] The condominium was in a winter and summer resort area with world class skiing and golfing facilities. The Appellant is a skier and golfer. He is a 33 year old sales manager with Motorola Corporation and has a business degree from Sir Wilfred Laurier University.
[5] The Appellant reported income, expenses and losses from the property as follows:
Blair Simpson
Schedule of Rental Losses from the Property sought to be deducted
in computing income for the 1990, 1991, 1992 and 1993 Taxation Years
|
Particulars |
1990 |
1991 |
1992 |
1993 |
|
|
Revenue |
3,418.24 |
6,387.55 |
6,519.20 |
3,966.33 |
|
|
Less: |
|||||
|
Interest expense |
13,644.72 |
20,814.60 |
8,492.83 |
7,721.55 |
|
|
Other expenses |
3,108.90 |
4,016.00 |
5,066.12 |
4,242.58 |
|
|
Rental loss for the year |
13,335.38 |
18,443.05 |
7,039.75 |
7,997.80 |
|
|
Appellant's share of such rental loss |
6,667.69 |
9,221.53 |
3,519.88 |
3,998.90 |
|
[6] The rental projections provided by Nordic Accommodations reflected gross rental income in 1989 of $13,775.43. The Appellant stated he purchased the unit based on this projection with the anticipation that there would be a progressive increase over the years. This gross rental was subject to all deductions which included 40% of the gross to Nordic for operating the rental pool, interest, taxes, maid service and utilities.
[7] Based on a gross income of $14,463.00[1], the expenses for Nordic fees and interest and taxes for 1990 would total
1) Interest (taxes) $13,644.00
2) Nordic fees 5,785.00
Total $19,429.00
[8] Based on these projections, the loss is in excess of $4,000.00 annually. In addition the other expenses exceeded $3,000.00 annually for each relevant year. The property was occasionally occupied by the Appellant for his own personal use but he did pay the fair rental amount less the management fee. Both parties referred the Court to Tonn v. The Queen, 96 DTC 6001.
[9] In other cases, I have been reluctant to find "no reasonable expectation of profit". Generally where there is a genuine commercial operation it is more appropriate to focus on the reasonableness of the expenses claimed[2]. A reasonable investor would not purchase an investment that yields nothing but large losses after paying interest on 75% of the acquisition costs. Linden J. in Tonn (supra) suggested that the Minister of National Revenue should not impose his business judgment on the taxpayer, yet, in the present instance, the foreseeable expenses are so disproportionate to the foreseeable revenues that it is unreasonable to allow their deduction. Each case must be determined on its own facts. In some cases losses are unforeseeable but here the most optimistic projections will not result in a profit in the foreseeable future. Even excluding the interest expense, the operation yielded little or no profit, notwithstanding the fact that the Appellant imputed a rent when he stayed in the property personally.
[10] One must ask why the Appellant would invest in an obvious money loser. The property is located in an attractive recreational area and capital appreciation could be reasonably anticipated. An inference is that there was a personal element involved in its acquisition. Whatever the operation is, it must be concluded that it is not a commercial operation.
[11] The appeals are dismissed.
Signed at Ottawa, Canada, this 2nd day of February 1998.
"C.H. McArthur"
J.T.C.C.