Date: 20010828
Docket: 2000-3474-IT-I
BETWEEN:
SCOTT P. COWDEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Bonner, T.C.J.
[1] This is an appeal from income tax assessments for the 1994, 1995 and 1996 taxation years. It was heard under the informal procedure. The first issue is the deductibility in all three years of losses from the rental of part of the Appellant's residence. On assessment the Minister of National Revenue (the "Minister") disallowed the deduction of losses on the basis that the activity giving rise to the losses was carried on without a reasonable expectation of profit (REOP) and therefore was not a source of income.
[2] In March of 1994 the Appellant purchased a dwelling for use as his residence and, he testified, for use as a rental property. The rental revenues and expenses as reported by the Appellant are set out in paragraph 14(e) of the Reply to the Notice of Appeal. The portion of the total expenses claimed as deductions in arriving at the losses claimed by the Appellant were 61% in 1994 and 50% in each of the years 1995 and 1996.
[3] There was no suggestion that the costs actually encountered by the Appellant were not entirely predictable. There is no reason to suppose that the revenues earned from the rental operation were substantially less than predictable. Nevertheless it does not follow that the losses claimed, which were approximately two times the gross rental revenues in 1994 and 1995 and nearly equal to the rental revenues in 1996, resulted from an activity carried on without a REOP. In my opinion the evidence suggests that the rental operation was commercial in nature and that it carried with it a reasonable prospect of profit provided always that the expenses charged were proportionate to the cost of renting the space which in fact was allocated to the tenant.
[4] The rental operation consisted of the rental of one room in a four-bedroom house. The Appellant testified that the house was laid out in such a way as to afford reasonable privacy to two persons living in two different parts of the house and, I gather, it was on that basis that, at least in 1994, he sought to deduct half the cost of operating the house from the rental revenues.
[5] The Appellant did not describe the layout and use of the house in any detail. He said that the room rented to the tenant carried with it the "use of the house" but his evidence on this point was not persuasive. He said for example that the tenant was free to use not only the bedroom rented to the tenant, the living room, basement, kitchen and bath but also his office which was located in one of the bedrooms. The Appellant did admit that he used the garage. He also indicated that his daughter visited on weekends and during such visits used one of the bedrooms. My impression was that the extent to which the tenant was allowed to use anything more than his bedroom was minimal.
[6] In effect what was let to the tenant was one room in a seven room house. It was on that basis that I allowed the appeal and referred the assessment to the Minister for recalculation of the loss on the basis that one seventh of the total expenses claimed are deductible. I am of the view that the presence or absence of a R.E.O.P. cannot be determined without setting against the predictable revenues of the operation in question the costs reasonably attributable to the earning of such revenues and nothing more. The Minister can hardly assume that a R.E.O.P. does not exist when he bases that assumption on exaggerated estimates of cost.
[7] The remaining issues relate to claims for deduction arising from various enterprises carried on by the Appellant as sole proprietor. From 1986 to 1992 the Appellant carried on business in Barrie, Ontario as a retailer of snowmobiles and personal watercraft. In 1992 he discontinued the retail business, moved to Toronto and commenced what he described as a small personal consulting business of insurance, estimations and custom machine work. The Appellant said during his evidence in chief that when the retail business closed there was an outstanding debt to the Royal Bank of Canada. That debt was secured on the home of the Appellant's parents. Thus, the Appellant said, filing for bankruptcy was not an option and he "chose" to repay the loan. The Appellant seeks to deduct interest in 1994, 1995 and 1996 on money borrowed from the Toronto Fire Department Employees Credit Union. He stated that the money was borrowed to repay the Royal Bank debt.
[8] In assessing, the Minister assumed that the loan was personal in nature and that the borrowed money on which interest was charged was not used for the purpose of gaining or producing income from a business. In effect the Minister found that the interest was not deductible under paragraph 20(1)(c) of the Income Tax Act (the "Act").
[9] The only documentation produced by the Appellant in support of his claim was a loan record produced by the credit union dated June 1996 showing particulars of principal, interest and balance owing on a personal loan bearing interest at 9.95% and a conventional mortgage bearing interest at 5.95%. The balance owing on the conventional mortgage at the beginning of 1996 was $38,770.47. Nothing in the document produced sheds any light on the use which the Appellant made of the borrowed money. The onus is on the Appellant to establish on the balance of probabilities that he borrowed money, used it as alleged for the purpose of earning income from his business and that the debt giving rise to the interest now an issue results from the borrowing of money used to repay of the original loan. It is difficult to imagine that the Appellant could not have produced documentation supporting at least some of the version of the facts which he now puts forward. His failure to produce such documentation coupled with the view which I formed regarding the Appellant's credibility led me to conclude that the onus was not discharged. I formed the opinion that the Appellant was not inclined to be entirely candid.
[10] In computing income for 1994 from a business carried on under the name S.P.C. Racing the Appellant claimed capital cost allowance in the amount of $5,553.94. That claim appears to have been in respect of a terminal loss on a motor vehicle acquired by the Appellant in 1989 or 1990 for use in the retail business. The Appellant's evidence regarding the vehicle and what happened to it was vague and unsatisfactory. He had difficulty remembering what vehicle was the subject of the terminal loss claimed. He testified that the vehicle was sold in 1997 or 1998. It does not appear to have been disposed of in 1994. There is no evidence of a change in use during 1994 which might have triggered a deemed disposition under ss. 13(7) of the Act. There was no evidence with respect to the undepreciated capital cost of property in the class to which the vehicle belonged. In short there was an almost total absence of evidence from which it could be inferred that the Minister erroneously denied the Appellant the terminal loss deduction which he had claimed. This branch of the appeal therefore failed.
[11] Judgment was issued accordingly.
Signed at Ottawa, Canada, this 28th day of August 2001.
"M.J. Bonner"
J.T.C.C.
COURT FILE NO.: 2000-3474(IT)I
STYLE OF CAUSE: Scott Cowden and H.M.Q.
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: June 1, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge M.J. Bonner
DATE OF JUDGMENT: June 8, 2001
DATE OF REASONS
FOR JUDGMENT: August 28, 2001
APPEARANCES:
For the Appellant: For the Appellant
Counsel for the Respondent: James Rhodes
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-1349(IT)I
BETWEEN:
EVELYN ELLEN WILSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 11, 2001 at Toronto, Ontario, by
the Honourable Judge T.E. Margeson
Appearances
Counsel for the Appellant: John David Buote
Counsel for the Respondent: Meghan Castle
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1996 taxation year is allowed and referred back to the Minister of National Revenue for reconsideration and reassessment in order for the Minister to reconsider any proper receipts in support of any allowable medical expenses in support of this claim when they are presented.
In all other respects, the appeal is dismissed and the Minister's assessment is confirmed, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 10th day of September 2001.
|
"T.E. Margeson" |
J.T.C.C.