Date: 20011123
Docket: 2000-3155-IT-I
BETWEEN:
EVANGELOS KOUROS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
___________________________________________________________
Agent for the Appellant: George Kouros
Counsel for the Respondent: Rosemary Fincham
___________________________________________________________
Reasonsfor Judgment
(Delivered orally from the Bench on October 15, 2001, at St. Catharines, Ontario)
Bowie J.
[1] These appeals are from assessments of tax for the 1996 and 1997 taxation years. In filing his income tax returns for those two years, the Appellant claimed to be entitled under section 3 of the Income Tax Act (the Act) to deduct from his other income, losses incurred in connection with certain real estate which I shall refer to as "the property."
[2] The losses deducted in 1996 were in the amount of $10,291.20 and in 1997 they were $3,970.39. The losses for 1996 consist of interest of $214.26, and $10,076.94 for property taxes. The Appellant's brother, who acted as his agent and also gave evidence, said he believed that the $10,076 consisted of both property taxes and other expenses in the nature of utility costs. It is unclear exactly how that $10,076 is made up, but I do not think anything turns on it. The question is whether the property was or was not a source of income, as that expression is used in section 3 of the Act, in the two years in question, and that, in turn, depends upon whether it can be considered to be a property that had a reasonable prospect of producing rental income. In 1997 the Appellant claimed a loss of $3,976.39 being the property taxes. In both years the Appellant reported no revenue from the property.
[3] The Appellant is a physician with a busy practice in Welland, Ontario. In 1981 he purchased the property, which is located in Ridgeway near Welland. It is apparently now within the municipality of Fort Erie. The property consists of a gasoline retail outlet with one island, a garage, a convenience store, a take-out restaurant and ice cream bar and a used car lot. When the Appellant purchased the property in 1981 he bought it as an investment, and certainly at that time it was a source of income. The property was rented to various people who ran the garage, the store, the restaurant and the car lot, separately.
[4] By 1983, or thereabouts, those tenants had left, and the property was unrented. The Appellant and his brother operated a gas station business in the City of Welland. The property in Ridgeway being without tenants, they then began to operate a gasoline retail business at that property, and sold gasoline and diesel fuel until about 1991. It was not clear to me from that evidence whether they operated any other business there in addition to the gasoline and diesel retail. By 1991, however, it had become apparent to them that the Ridgeway operation was not profitable and, in fact, had become a drain upon the profits being made from the gasoline station in Welland.
[5] The Appellant's brother testified that this resulted from a number of factors beyond their control, and I am sure that is true. The local economy, for one thing, had taken a significant downturn. There was a general business malaise around the Ridgeway property, with the closure of other businesses, and this, combined with the fact that the property is very near the United States border and that gasoline prices there were significantly lower than on the Canadian side of the border, meant that sales of gasoline declined drastically. Many people crossed the border to fill their gasoline tanks in the state of New York rather than purchasing their gasoline in Ontario. As a result, they ceased operating the gasoline retail business in Ridgeway in 1991 or thereabouts.
[6] From that point forward until the present day, the Appellant has been attempting in one way or another to find a tenant who will rent the Ridgeway property. At issue between the parties at the hearing of the appeal was just how much and how effectively the Appellant was attempting to find a tenant. Ms. Fincham says that the Appellant was not making any very organized efforts to find a tenant. No realtor was retained to do so, and whatever signs were on the property were not very prominent and not likely to attract tenants, in her view of the matter.
[7] The Appellant's view is that no realtor was willing to expend any efforts on trying to find a tenant without being paid a significant amount of money up-front, which he was unwilling to do. The signs, in his view, were adequate as they were placed near the roadway where they were easily visible to passing traffic. The evidence shows that there have been a number of inquiries made over the years between 1991 and the present from people who might have had an interest in renting the property. It appears that the majority of those inquiries have come since the years under appeal. In fact, it may be that all of them have. Again, the evidence is less than totally clear. On two or three occasions -- one of them as recently as this month -- there has been sufficient interest to lead to some negotiations, and even the preparation of a draft agreement, but no lease has been entered into. The Appellant's brother, it appears, represented him in all of these negotiations that took place, and has generally carried out the role of agent for the purpose of trying to find a tenant, so far as I can make out from the evidence, throughout from 1991 to the present.
[8] In any event, since 1991 the property has produced no rental income whatsoever for the Appellant, and has been virtually unused, with the following two exceptions. First, the gasoline and diesel tanks were filled in November 1995 at a cost of approximately $4,800. The invoices for that fuel show the sale as being to Kouros Ent. which I take to be Kouros Enterprises, which, it appears, is the name attached to the business run by the Appellant and his brother in Welland, Ontario, where their retail gas station has operated, presumably profitably, throughout the years with which we are concerned here. The Appellant's brother testified that there was somebody in attendance and selling gasoline from the time the tanks were filled in 1995 through to the end of November 1996. It appears that no rent was paid to Dr. Kouros for the use of the property during that period of time as he declared gross income of nil in both 1996 and 1997 in connection with the property. Dr. Kouros testified that filling the gasoline tanks and attempting to sell gasoline there was an attempt to demonstrate to anybody who might be interested in renting the property that it could be a viable location for a gasoline station, and thereby assist in renting the property. So far as the documentary evidence shows, no revenues were assigned from any sales that took place there to the property itself, nor was any rent paid for the property. But property taxes, the $214.26 of interest that I referred to earlier, and perhaps some utility expenses were charged against the property. I can only deduce from all of this that Dr. Kouros in effect donated the use of the property to Kouros Enterprises, the partnership through which he and his brother sell gasoline in Welland.
[10] The attempt to show that it is a viable location for a gasoline station obviously failed because by the end of November, 1996, the fuel that was put in the tanks a year earlier had not all been sold, and what remained was removed from the tanks and taken to Welland to be sold at the Kouros Enterprises station.
[11] The other use that has been made of the property since 1991 is that twice a year, in May and July, the Appellant, his brother and his brother's son sell fireworks at the property, presumably for a short period of time, because it is a very seasonable business. The Appellant's nephew testified that they sold fireworks there at retail each year, and that they divided the profits from those sales three ways, with each of them receiving something between $300 and $400 per year from that. There was no evidence that any rent was charged by the Appellant to this casual business, nor do I expect that that business could viably exist and pay anything like a market rent for the use of the premises. The evidence of the Appellant and his brother shows that the Appellant has in recent years (since the two years under appeal) shown some interest in developing the property in some way, although the evidence, again, is extremely vague on that.
[12] I come to the question, then, whether this property can be said in the two years under appeal, 1996 and 1997, to have been a source of income having some reasonable expectation of profit. Mr. George Kouros, on behalf of his brother, argues that it was a source of profit or a source of income during that period, because it was the Appellant's intention to rent it, and if he did rent it, it would be profitable. That, however, is not the legal test that the authorities have laid down for me to apply. In Moldowan v. The Queen[1] the Supreme Court of Canada made it clear that, at least in the context of a business, there must be some reasonable expectation that a profit can be produced before there can be said to be a source of income for the purposes of section 3 of the Act. It is only if there is a source of income that losses may be taken into account under section 3 and netted against positive income from other sources.
[13] In my view, this case is indistinguishable from Enstone v. R,[2] a decision of Lamarre Proulx J. of this Court, which was later affirmed by the Federal Court of Appeal.[3] In that case, the Appellant had a property at 132 Faraday Street, Ottawa, which remained unrented for a significant period of time. During the years that it was unrented, the property incurred costs which the Appellant sought to offset against other income. At paragraph 22 Judge Lamarre Proulx said:
In the years in question, the 132 Faraday property was not an ongoing rental activity due to a stoppage of activity of a length that was much outside normal commercial practice. Sometimes a rental activity has to be stopped for the purpose of major repairs. This may not change the nature of the activity if it is done in accordance with commercial practice. In this particular case, the length of the stoppage was not within the normal commercial bounds. The evidence has shown that the property did not have tenants for nine years and contrary to what was done on the Hinton properties, no substantial repairs were made on the Faraday property and there was no advertising for rental nor listing with a leasing agent. As there was no ongoing rental business regarding that property, the expenses incurred in those years for the basic upkeep of the property, are not current expenses for the purpose of earning income from a business or from a property. ...
In the Federal Court of Appeal the reasons for dismissing the appeal were given by Sharlow J.A. At paragraphs 31 and 32 she stated:
It is significant that Mr. Enstone does not say what plans he has for the 132 Faraday Street property. He does not say that he has any intention of finding tenants for that property. He expresses the view that it is 'already profitable'. Why would he make this comment with respect to a property that is not rented? Perhaps he meant that the value of the 132 Faraday Street property is sufficient economic justification for the maintenance costs he has incurred. It is far from clear from this comment that he had any intention of using the 132 Faraday Street property as a rental property. Nor is there any other evidence that is capable of establishing as a matter of fact that the 132 Faraday Street property is part of any rental business.
Counsel for Mr. Enstone argues that the evidence establishes that Mr. Enstone always regarded the three rental properties as a single business, and that he had simply made a business decision to delay the expenditures that would be required to make 132 Faraday Street property attractive to renters. However, the Tax Court Judge clearly did not interpret Mr. Enstone's evidence that way.
There are, of course, some significant differences in the facts between that case and the one before me, specifically with respect to intent. There seems to have been some doubt, at least on the Federal Court of Appeal's view of the evidence, as to whether Mr. Enstone intended to rent his Faraday Street property. I have no doubt that Dr. Kouros intended, and still intends, to rent his Ridgeway property. What is significantly similar about both cases is that for a very long period of time they have not produced rental income. With respect to the Ridgeway property of this Appellant, there is no evidence that satisfies me that in 1996 or 1997 there was any reasonable prospect that any revenue whatsoever would be produced by this property in the foreseeable future, nor was the Appellant taking any significant steps at that time to remedy the situation. The one step that he took was to put gasoline in the tanks and, in effect, permit the partnership business, Kouros Enterprises, to use the property without paying rent, in the hope that this would show that it was a viable property.
[14] He was not, however, willing to put any money whatsoever into either the hiring of a real estate agent to look for a tenant, or through significant improvements making the property more attractive to potential tenants or by developing it in some way, turning it into a property that would produce revenues. I have no doubt that this was a viable income-producing property and source of income within the meaning of that expression in section 3 when it was bought in 1981 and through 1983, when the tenants left. I presume that it continued to be such from 1983 for some period of time thereafter.
[15] I have no evidence before me as to what financial arrangements there were between the Appellant and the partnership, Kouros Enterprises, consisting of the Appellant and his brother, with respect to the payment of rent for the property between 1983 and 1991. Assuming for the sake of argument that a market rent was being paid throughout those years, nevertheless it had become apparent by 1991 that a gasoline station could not viably be operated on the property. Certainly by 1992 or 1993, if not by 1991, this property simply was not viable to be operated as a rental property, at least under the conditions that Dr. Kouros was attempting to operate it under and in the economic climate which by that time prevailed.
[16] Nothing happened between then and 1996, the first of the years under appeal, that would make it a viable rental property. Indeed, they demonstrated in 1996 that it was not a viable rental property by filling the gas tanks, attempting to operate it as a gas station, and being unable in the space of a year to empty those tanks even once. In the end, they had to remove what gasoline remained and truck it into Welland and sell it there.
[17] As regrettable as it may be, I find myself bound by Enstone and countless other decisions, which deal with the question of what constitutes a source of income for the purposes of section 3 of the Act, and in my view this property cannot satisfy the requirements in 1996 and 1997. Consequently, the amount paid for interest, municipal taxes and, if any, for utilities, at that point could not be said to be the losses incurred by a source of income. They may or may not be costs that can be capitalized, and I specifically make no finding as to that, as it is an issue that might arise some other day. If it does, it should be dealt with in the context of all of the other evidence going to that issue if and when the time comes. I am bound to dismiss these two appeals.
Signed at Ottawa, Canada, this 28th day of November, 2001.
"E.A. Bowie"
J.T.C.C.
COURT FILE NO.: 2000-3155(IT)I
STYLE OF CAUSE: Evangelos Kouros and
Her Majesty the Queen
PLACE OF HEARING: St. Catharines, Ontario
DATE OF HEARING: October 15, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge E.A. Bowie
DATE OF JUDGMENT: October 22, 2001
APPEARANCES:
Agent for the Appellant: George Kouros
Counsel for the Respondent: Rosemary Fincham
COUNSEL OF RECORD:
For the Appellant:
Name: --
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada