97-1820(IT)I
BETWEEN:
SUSAN KIMBERLY DWINNELL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on April 9, 1998 at Toronto, Ontario, by
the Honourable Judge Terrence P. O'Connor
Appearances
For the Appellant: The Appellant herself
Counsel for the Respondent: Madeleine Schwarz
JUDGMENT
The appeals from the ressessments made under the Income Tax Act for the 1991, 1992, 1993 and 1994 taxation years are allowed, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada this 28th day of April 1998
|
"T.P. O'Connor" |
J.T.C.C.
Date: 19980428
Docket: 97-1820(IT)I
BETWEEN:
SUSAN KIMBERLY DWINNELL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
O'Connor, J.T.C.C.
[1] These appeals were heard at Toronto, Ontario on April 9, 1998 pursuant to the Informal Procedure of this Court. The Appellant was the only person to give evidence.
Issue
[2] The issue is whether the Appellant was entitled in the years 1991 through 1994 to deduct certain rental losses with respect to her home in Oshawa, Ontario.
Facts
[3] I find the basic facts to be as follows.
1. On February 25, 1989 the Appellant, a school teacher, purchased a two storey home at 150 Sagebrush Street in Oshawa, Ontario (the "Property") for a price of $164,500 as her principal residence.
2. Subsequent to the purchase the Appellant prepared the basement area for rental. She was prepared to rent it out in early 1991. The tenant for the basement area was to share the kitchen, a bathroom, a laundry room and use the same entrance as the Appellant. Further, the tenant was to share the phone bill and the T.V. Cable was available to the television in the basement area and the Appellant's television on the first floor.
3. The bathroom in the basement was unfinished and could not be used. Also, there was no kitchen in the basement. The Appellant explained that as it was impossible for her to afford those improvements she was only able to rent the non-self-contained basement at $300 as opposed to $400 to $450 per month had the basement area been self-contained.
4. The Appellant advertised in neighbourhood facilities such as her church and local store as well as by word of mouth. She did not want just any tenant because of the considerable shared areas and facilities described above.
5. The Appellant intended to improve the basement with the expectation of increased rents but she was not able to afford this for the main reason that her expected salary increases on her teaching income were frozen under the Social Contract for a period commencing September 1992 and terminating only in June 1995.
6. The expenses were higher than normal for the following principal reasons:
(a) the electric furnace and water heater bills were very high. The Appellant wanted to replace these but could not afford to do so until 1994 at which time she did so; and
(b) the Appellant encountered an unforeseen large expense resulting from a heated contest with her ex-husband over the custody and child support of her four children. To pay her lawyer's fees she had to increase her mortgage from $76,000 to $110,000, thus increasing the interest expense.
7. The rent and expenses claimed are set out in the Reply to the Notice of Appeal as follows:
|
YEAR |
INCOME |
INTEREST EXPENSE |
MAINT. & REPAIR |
TOTAL EXPENSES |
RENTAL PORTION |
LOSS CLAIMED |
|
|
|
|
|
|
|
|
|
1991 |
$ 600 |
$7,490 |
$1,650 |
$15,406 |
33%-$5,083 |
$4,483 |
|
|
|
|
|
|
|
|
|
1992 |
$3,600 |
$6,660 |
$ 100 |
$12,597 + Prop. |
50%-$6,290 Tax _2,600 |
$5,298 |
|
|
|
|
|
|
|
|
|
1993 |
$3,600 |
$6,580 |
$ 300 |
$11,954 + Prop. |
50%-$5,977 Tax 2,640 |
$5,017 |
|
|
|
|
|
|
|
|
|
1994 |
$3,600 |
$7,973 |
$3,615 |
$19,645 |
33%-$6,541 |
$2,941 |
|
|
|
|
|
|
|
|
8. The Appellant explained that her accountant had done her returns for 1991 and 1994 and allocated the rental portion at 33%. The Appellant herself did her returns in 1992 and 1993 and claimed 50%. She admitted that the 50% was erroneous and that it should have been 33% for the rental portion throughout the four years. The Appellant also acknowledged that her method of calculating real estate taxes in 1992 and 1993 was incorrect.
9. The Appellant projected a profit in 1995 as shown on Exhibit A-1 which projections were made on the basis that the mortgage amount used was the original mortgage amount as reduced by any payments on account of capital thereon.
Analysis and Decision
[4] The issue is whether the Appellant had a reasonable expectation of profit given the foregoing circumstances. I found the Appellant to be forthright, direct and credible. She admitted her mistakes adding that this rental operation was her first experience at same. In my opinion, for the following reason, the Appellant had a reasonable expectation of profit, especially considering the adjustments which will be detailed later. My reasons for this finding are:
(a) The amounts claimed are modest and do not appear to be exaggerated. This is more so when the adjusted figures below are considered.
(b) The mortgage had to be increased for the unforeseen reasons discussed above.
(c) The freezing of the Appellant's salary resulted in her inability to finish the bathroom and install a kitchen in the basement and thus not be in a position to charge higher rents.
(d) There was a projected profit for 1995 although this is tempered by the fact that the original amount of the mortgage as reduced is used in that projection.
[5] Notwithstanding this general finding in favour of the Appellant, in my opinion the replacement of the furnace and water heater expenses in 1994 were capital in nature and not deductible.
[6] Consequently the appeals are allowed and the matters are referred back to the Minister for reconsideration and reassessment on the following bases:
1991 - the allowable loss should be $4,060. This results from only allowing 11/12th's (i.e. $14,122) of the total expenses claimed because the contemplated rental operation only commenced in February of 1991 as opposed to January 1, 1991. 33% of $14,122 is $4,660. The rental income was $600, consequently the allowable loss is $4,060.
1992 - the allowable rental loss should be $1,415. This results from adding the property tax ($2,600) to the total expenses claimed to produce an amount of $15,197. The 33% rental portion becomes $5,015. The rental income was $3,600 for a loss of $1,415.
1993 - the allowable rental loss should be $1,216. This results from adding the property taxes ($2,640) to the total expenses claimed to produce an amount of $14,594 and the 33% rental portion becomes $4,816. The rental income was $3,600, for a loss of $1,216.
1994 - the allowable rental loss should be $1,924. This results from reducing the total expenses claimed by the combined cost of the furnace and hot water tank thus $19,645 - $2,905 producing $16,740. 33% of $16,740 is $5,524. The rental income was $3,600 to produce a loss of $1,924.
Signed at Ottawa, Canada this 28th day of April 1998.
|
"T.P. O'Connor" |
J.T.C.C.
COURT FILE NO.: 97-1820(IT)I
STYLE OF CAUSE: Susan Kimberly Dwinnell and The Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: April 9, 1998
REASONS FOR JUDGMENT BY: The Honourable Judge T.P. O'Connor
DATE OF JUDGMENT: April 28, 1998
APPEARANCES:
For the Appellant: The Appellant herself
Counsel for the Respondent: Madeleine Schwarz
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: George Thomson
Deputy Attorney General of Canada
Ottawa, Canada