97-3397(IT)I
BETWEEN:
STANLEY GODZISZ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on October 20, 1998, at Toronto, Ontario, by
the Honourable Deputy Judge J.F. Somers
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: B. Sood
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1993, 1994 and 1995 taxation years is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 27th day of November 1998.
|
"J.F. Somers" |
D.J.T.C.C.
Date: 19981127
Docket: 97-3397(IT)I
BETWEEN:
STANLEY GODZISZ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Somers, D.J.T.C.C.
[1] This appeal was heard at Toronto, Ontario, on October 20, 1998.
[2] The Appellant appeals from the assessments of income tax for the 1993, 1994 and 1995 taxation years. In each taxation year the Minister of National Revenue (the "Minister") disallowed the deduction of rental losses based on the facts that the expenses were personal or living expenses and, in the alternative, the expenses were not reasonable in the circumstances.
[3] The Minister relied on sections 3, 9, 54 and 67, subsection 248(1) and paragraphs 18(1)(a), 18(1)(h), 38(b), 39(1)(b), 40(2)(g) and 111(1)(b) of the Income Tax Act (the "Act").
[4] In reassessing the Appellant, the Minister made the following assumptions of fact which were admitted or denied by the Appellant:
"(a) the facts hereinbefore admitted;
(b) in December 1985, the Appellant and his spouse purchased a vacant lot at 18701 Countryman Avenue, Port Charlotte, Florida (the "Lot") and by December 1986 a two-bedroom home of approximately 1,900 square feet with garage, swimming pool and lanai had been constructed on the Lot at a cost of $100,000.00; (admitted)
(c) the purchase and furnishing of the Property was financed by a mortgage of $109,000.00 from Canada Trust; (admitted)
(d) at all material times, the management of the Property was undertaken by Port Charlotte Home Builders R.D. Ltd. ("Port Charlotte") who set the rental rates, and in all other respects controlled the rental of the Property; (admitted)
(e) in addition to a management fee, Port Charlotte charged the Appellant 25% of the gross rental fees received when rented to third parties, and 15% of the gross rental fee when the property was occupied by the Appellant; (admitted)
(f) from 1987 to 1995, the Appellant reported rental income and losses on the Property as follows: (admitted)
Gross Income Net Loss
1987 $11,369.00 ($ 6,075.00)
1988 $ 8,396.00 ($ 8, 769.00)
1989 $11,200.00 ($ 8,005.00)
1990 $ 9,350.00 ($11,018.00)
1991 $ 9,065.00 ($ 9,107.00)
1992 $ 6,925.00 ($ 8,522.00)
1993 $ 4,715.00 ($ 9,708.00)
1994 $ 7,512.00 ($10,352.00)
1992 [sic] $ 6,195.00 ($12,112.00);
(g) the Appellant reported rental income, expenses and losses as per Schedule "A", attached; (admitted)
(h) during the 1993, 1994 and 1995 taxation years, the Appellant included in the rental expenses personal and capital expenditures in the amounts of $2,500.00, $2,165.00 and $3,343.00, respectively; (denied)
(i) during the 1993, 1994 and 1995 taxation years, the property was rented for 78 days, 71 days and 82 days, respectively, of which the Appellant occupied the Property for 24 days, 8 days and 30 days, respectively; (denied)
(j) the Appellant had no reasonable expectation of profit from renting the Property during the 1993, 1994 and 1995 taxation years; (denied)
(k) the rental expenses were personal or living expenses of the Appellant; (denied)
(l) at all material times, the Property was used primarily for the personal use or enjoyment of the Appellant. (denied)"
[5] The Appellant testified that he bought a property in Florida for investment purposes coupled with the intention of spending several months a year when he retired. Since the purchase of the property in 1985, he visited and vacationed on his property every year. The total cost of the construction amounted to $100,000.00. The property was financed for $109,000.00, covering the cost of the construction and the amount of $8,000.00 for the purchase of furniture.
[6] The property was purchased as a result of a promotional sale by Port Charlotte Home Builders R.D. Ltd. The literature given to the Appellant stated that he could use the cost of the construction as a tax shelter. The Appellant was influenced by the section of the booklet referring to investment and not by the section "vacation". However, he recognized that the purchase plan was suitable for people of retirement age where he could spend leisurely months.
[7] The plan was prepared by the vendor. The Appellant was more interested in an investment and losses were not a factor that he considered. He did not have an investment plan of his own because he relied on the vendor's. It was the first time he went into such venture.
[8] As shown in subparagraph 11(f) of the Reply to the Notice of Appeal, the Appellant suffered yearly losses from 1987 to 1992, ranging frrom $6,075.00 to $12,112.00. Schedule "A", attached to the Reply to the Notice of Appeal, indicates the rental income and expenses for the years 1993, 1994 and 1995 as follows:
"Rental Income and Expenses
1993 1994 1995
Rental Income $ 4,715.00 $ 7,513.30 $ 6,195.00
Property Taxes $ 1,569.35 $ 1, 628.23 $ 1,154.23
Maintenance and Repairs 536.09 3,930.69 6,281.52
Interest 5,466.79 4,976.36 4,360.85
Insurance 288.60 332.31 253.34
Light, Heat, Water 2,374.34 1,795.66 1,913.72
Advertising 780.00 940.00 nil
Other Expenses 3,407.91 4,262.03 4,343.85
Total Rental Expenses $14,423.08 $17,864.78 $18,307.51
Net Rental Income (Loss) ($ 9,708.08) ($10,352.48) ($12,112.51)"
[9] The interest alone was a major yearly expenditure; the light, heat and water bills were other major expenses. Other expenses were incurred such as paying Port Charlotte Home Builders R.D. Ltd. a commission of 25% of the gross rental fees received when the property was rented to third parties for vacations for a few weeks at a time. A commission of 15% of the gross rental fees was charged to the Appellant when he or members of his family were occupying the property.
[10] The expenses deducted included travelling expenses, that is to and from Florida, which covered gasoline, rented accommodation and meals. Some of the expenses deducted include the cost of groceries and other luxury items such as mascara, etc. The Appellant stated that the purposes of his yearly trips to Florida were to deal with the administration of the property and attending to repairs, if necessary.
[11] In the case of Tonn v. R., 96 DTC 6001, Justice Linden of the Federal Court of Appeal stated the following:
"A closer look at this jurisprudence will illustrate that this is the approach now taken in most of the cases. The cases in which the "reasonable expectation of profit" test is employed can be placed into two groups. One Group is comprised of the cases where the impugned activity has a strong personal element. These are the personal benefit and hobby type cases where a taxpayer has invested money into an activity from which that taxpayer derives personal satisfaction or psychological benefit. Such activities have included horse farms, Hawaii and Florida condominium rentals, ski chalet rentals, yacht operations, dog kennel operations, and so forth. Though these activities may in some ways be operated as businesses, the cases have generally found the main goal to be personal. Any desire for profit in such contexts is no more than a "pious wish" or "fanciful dream". It is only a secondray motive for having set out on the venture. What is really going on here is that the taxpayer is seeking a tax subsidy by deducting the cost of what, in reality, is a personal expenditure."
[12] In the case of Cheesmond v. Canada [1995] T.C.J. No. 775, in which a similar set of facts as those in the appeal at bar were considered whereby a property was purchased in Florida and involved the same company, Port Charlotte Home Builders R.D. Ltd., Judge Bowman of this Court concluded:
"This conclusion does not of course justify the automatic disallowance of all losses in the early years of a genuine viable rental operation. There should be a reasonable period in which to permit the enterprise to become self-supporting. In the years under appeal, however, I do not think it had reached the stage where it can be called either a business or a viable rental operation."
[13] In the present appeal the Appellant had a personal element involved in the purchase of the property: part of the motivation was for retirement purposes. He and his family made use of the property from 1987 to 1995. The Appellant had no business plan, he relied only on the promotional information obtained from the builder. He financed the full amount of the cost of building and furnishing the house. Furthermore, part of the expenses deducted were for living and travelling expenses to and from Florida.
[14] I cannot conclude that rental of the house in Florida was a viable commercial venture.
[15] The appeal is dismissed.
Signed at Ottawa, Canada, this 27th day of November 1998.
|
"J.F. Somers" |
D.J.T.C.C.
COURT FILE NO.: 97-3397(IT)I
STYLE OF CAUSE: Stanley Godzisz and Her Majesty the Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: October 20, 1998
REASONS FOR JUDGMENT BY: the Honourable Deputy Judge J.F. Somers
DATE OF JUDGMENT: November 27, 1998
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: B. Sood
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada