Date: 20010724
Docket: 2000-2494-IT-I
BETWEEN:
PIERRE CARRIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] This is an appeal under the informal procedure for the 1997 and 1998 taxation years.
[2] The issue is whether the rental expenses claimed by the appellant were incurred for the purpose of earning income from a property under section 9 and paragraph 18(1)(a) of the Income Tax Act (the "Act").
[3] The facts on which the Minister of National Revenue (the "Minister") relied in making his reassessments are described in paragraph 6 of the Reply to the Notice of Appeal as follows:
[TRANSLATION]
(a) the property located at 1292 Rue de la Forêt-de-Vernon in Cap-Rouge was purchased by the appellant and another person in 1981;
(b) with respect to the property located at 1292 Rue de la Forêt-de-Vernon in Cap-Rouge, the appellant purchased the other person's share in 1992;
(c) the property is the appellant's personal residence;
(d) the property is a three-bedroom single-family house;
(e) each year the appellant rents his residence during the summer months;
(f) the appellant has reported successive and uninterrupted rental losses for 10 years;
(g) of a possible six months yearly rental, the appellant leased his residence for four months in 1996, zero months in 1997 and two months in 1998;
(h) during the years in issue, the appellant's property incurred a yearly loss:
Taxation year 1997 1998
Rental income $ 0 $ 1 500
Expenses:
Property taxes $ 2,348 $ 2,538
Repairs $ 1,151 $ 1,419
Interest $ 5,555 $ 4,876
Insurance $ 489 $ 490
Advertising $ 365
Heating $ 1,517 $ 1,419
$11,425 $10,742
Less: Personal use $ 5,713 $ 5,371
Expenses claimed $ 5,712 $ 5,371
Loss $ 5,712 $ 3,871
(i) during the years in issue, the appellant was not concerned about the property's profitability;
(j) the gross annual income, if any was made during the years in issue, merely offset the property expenses in part;
(k) the appellant had no reasonable expectation of earning a profit from the property located at 1292 Rue de la Forêt-de-Vernon in Cap-Rouge during the 1997 and 1998 taxation years; and
(l) the rental expenses claimed each year in respect of the property located at 1292 Rue de la Forêt-de-Vernon in Cap-Rouge constituted personal or living expenses of the appellant and were not incurred by the said appellant for the purpose of earning income.
[4] In his notice of appeal, the appellant states that at no time was he informed of the requirement that rental expenses be incurred for the purpose of earning a profit. He claimed that when he began to rent his house, he inquired with Revenu Québec as to whether rental income had to be included in computing his income. He was apparently told that it was but that he was entitled to deduct his expenses against that income. He was not told that this activity had to be profitable. He also stated that this fact was not mentioned in the income tax guide either.
[5] The appellant explained that, in 1987, five years before retiring, he had attempted to start up a business with another person. In 1990, that business went bankrupt. At the same time, he broke up with his common-law spouse. She rented the house for two years.
[6] The appellant retired in 1992. That same year, he purchased his former spouse's share in the property, which they had acquired in 1981. Since the appellant has a cottage, he rents his house during the six months of the year when he lives at the cottage. In 1993, repairs were made to the roof.
[7] The appellant filed, as Exhibit A-1, a letter that he had sent to Revenu Québec on June 8, 1994, concerning the deduction of those rental expenses. He answered questions on the rental property's profitability and explained why the rental was not profitable and the means he was taking to increase its profitability. He filed that letter to show that Revenu Québec had accepted his position. He filed, as Exhibit A-2, another letter to Revenu Québec dated April 17, 1996, which is to the same effect as the first.
[8] The appellant filed, as Exhibit A-3, the classified advertisements showing that the property was in fact for rent. It was offered for six months for $900 a month. He filed as Exhibit A-4 a statement of income and expense for 2002 in which there was an anticipated income of $1,050, given that the expenses were lower.
[9] Exhibit I-1 is the appellant's income tax return for 1994. The rental statement indicates that the rental income was $5,400 and the expenses were $9,986.40. Exhibit I-2 is the appellant's income tax return for 1995. Gross rental income was $3,300 and expenses were $7,570.13. Exhibit I-3 is the appellant's income tax return for 1996. Gross income was $3,000 and expenses were $8,267.33. Exhibit I-4 is the income tax return for 1997. Rental income was zero and expenses were $5,712.83. Exhibit I-5 is the income tax return for 1998. Gross income was $1,500 and expenses were $5,371.41.
[10] Exhibit I-6 consists of computerized statements of the appellant's income tax returns for 1987 to 1999. Rental expenses for each year were far greater than rental income.
[11] The respondent's witness, Claude Potvin, explained that the clientele for this property was very limited and that expenses were much too high.
[12] Of the decisions to which counsel for the respondent referred, I will cite those by the Federal Court of Appeal in Landry v. The Queen, 94 DTC 6624, at pages 6625 and 6626:
...
There comes a time in the life of any business operating at a deficit when the Minister must be able to determine objectively, after giving someone a head start for a number of years, as the case may be, that a reasonable expectation of profit has turned into an impossible dream. . . .
...
Apart from the tests set out by Mr. Justice Dickson, the tests that have been applied in the case law to date in order to determine whether there was a reasonable expectation of profit include the following: 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 years 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, and failure to adjust. . . .
and in Tonn v. Canada, [1996] 2 F.C. 73, at pages 103 and 104:
... I otherwise agree that the Moldowan test should be applied sparingly where a taxpayer's "business judgment" is involved, where no personal element is in evidence, and where the extent of the deductions claimed are not on their face questionable. However, where circumstances suggest that a personal or other-than-business motivation existed, or where the expectation of profit was so unreasonable as to raise a suspicion, the taxpayer will be called upon to justify objectively that the operation was in fact a business. Suspicious circumstances, therefore, will more often lead to closer scrutiny than those that are in no way suspect.
[13] In the instant case, one must first note the appellant's personal interest in the rental property, which remained his principal residence over the years. Based on Tonn, supra, this is an element that must be considered in disposing of such matters, although this may not be the decisive factor in a decision.
[14] An expense is deductible under the Act if it has been incurred for the purpose of earning income from a business or property. It is well established in case law that the term "income" refers to a source of income, which means a profitable activity or one which is carried on with a reasonable expectation of profit.
[15] In the case under appeal, in addition to the important personal factor, since the property was the appellant's residence, the decisive factors in this case are the extended number of years when it was rented at a loss, the uncertain rental income and the failure to adjust in order to remedy the situation. I must conclude that the evidence showed that the activity had no chance of being profitable in the circumstances in which it was carried on.
[16] With respect to the lack of information concerning the requirement that an activity be profitable, as was alleged by the appellant, it must first be noted that ignorance of the Act does not prevent its application. Furthermore, according to Exhibit A-1 filed by the appellant himself, he was aware of this requirement in 1994. Given that the taxation years in issue are 1997 and 1998, the appellant therefore had the time to react.
[17] The appeals are dismissed.
Signed at Ottawa, Canada, this 24th day of July 2001.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
2000-2494(IT)I
BETWEEN:
PIERRE CARRIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on July 9, 2001, at Québec, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Marie-Aimée Cantin
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1997 and 1998 taxation years are dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 24th day of July 2001.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]