Date: 20010515
Docket: 2000-4261-IT-I
BETWEEN:
JOAO SEBORRO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1] These appeals are from assessments for the appellant's 1996, 1997 and 1998 taxation years. They involve the disallowance of losses in the rental of a portion of the principal residence of the appellant and his wife.
[2] This case is typical of many that come before this court where a taxpayer buys a house as a principal residence and then rents a portion to strangers or to family members to defray some of the costs of owning the house, such as mortgage interest, maintenance and repairs or property taxes. As a rule some portion of the costs is deducted in computing income.
[3] The appellant is a hard working and honest immigrant. He has always rented a part of his house to others to help pay part of the costs. The pleaded assumptions, which I shall reproduce below, disclose a history of rental losses going back to 1987.
[4] The assumptions are as follows.
(a) the Appellant and his spouse purchased the Burnfield Property (a house) in 1991 as their principal residence for $258,000.00 and they financed the purchase with a first mortgage of $193,500 and a second mortgage of $15,000.00;
(b) the Appellant and his spouse purchased the Athol Property (a house) in September, 1997 as their principal residence for $190,000.00;
(c) the Appellant and his spouse sold the Burnfield Property in 1997;
(d) both the Appellant and his spouse were the registered owners of the Burnfield Property and they are the registered owners of the Athol Property;
(e) the Appellant claimed 100% of the rental losses in respect of the Burnfield Property and the Athol Property;
(f) the Appellant and his spouse resided at the Burnfield Property in the 1996 taxation year and for the first eight months of the 1997 taxation year;
(g) the Appellant and his spouse have resided at the Athol Property since September, 1997;
(h) for the 1996, 1997 and 1998 taxation years, the gross rental income, expenses and net rental losses reported by the Appellant in his returns of income for those years in respect of the Burnfield Property and the Athol Property, were as follows:
Burnfield Property Athol Property
1996 1997 1997 1998
9 months 2 months
Gross Rental Income $ 7,600 $ 5,400 $ 1,200 $ 6,000
Expenses
Advertising $ - $ - $ - $ -
Insurance 800 550 100 450
Interest 19,888 14,293 1,325 16,651
Maintenance & repairs 10,997 4,587 8,700 6,850
Legal, accounting fees 150 150 75 150
Property taxes 2,300 2,301 362 2,240
Utilities 4,438 4,259 740 2,860
Total Expenses $38,573 $26,140 $11,302 $29,201
Less Personal Portion
of Expenses 16,455* 15,594* 4,996* 16,061*
Net Expenses $22,118 $10,546 $ 6,306 $13,140
Net Rental Loss $14,518 $ 5,146 $ 5,106 $ 7,140
*personal portion as a
percent of total
reported expenses 43% 60% 44% 55%
(i) part of the Burnfield Property and the Athol Property (a basement apartment) was rented to the Appellant's daughter in the 1997 taxation year and to the Appellant's son in the 1998 taxation year;
(j) during the 1996, 1997 and 1998 taxation years, the Appellant did not advertise the properties as being available for rent;
(k) the maintenance and repair expenses claimed by the Appellant as rental expenses for the 1996, 1997 and 1998 taxation years, if incurred, were outlays on account of capital;
(l) the Appellant did not provide any documentation to support the claimed rental expenses;
(m) the interest payable on the mortgages in respect of the Burnfield Property and the Athol Property exceeded the gross rental income the Appellant realized from these properties;
(n) the Appellant had no planned course of action to reduce the principal amount owed in respect of the Burnfield Property and the Athol Property;
(o) for the nine years before the years in question, the Appellant claimed rental losses in the following amounts:
Gross Net
Year Income Income
1987 $4,700 $ 3,162
1988 $5,940 $ 1,815
1989 $6,000 $ 9,762
1990 $6,000 $ 3,432
1991 $4,950 $11,645
1992 $2,100 $14,185
1993 $7,520 $ 8,015
1994 $7,200 $ 7,819
1995 $7,200 $12,604
(p) the disallowed rental expenses were not incurred for the purpose of gaining or producing income from a business or property;
(q) the disallowed rental expenses were personal or living expenses of the Appellant;
(r) the Appellant had no reasonable expectation of profit from renting part of the Burnfield Property in the 1996 and 1997 taxation years and part of the Athol Property in the 1997 and 1998 taxation years.
[5] The losses incurred up to 1995 were allowed.
[6] I do not think the assumptions have been rebutted. There was in my view a strong personal element. Part of the time a portion of the Burnfield property was rented to the appellant's daughter and her child. The appellant's daughter sometimes paid and sometimes did not. An even stronger indication of a personal element is that the appellant and his wife lived in the two properties. The real purpose of renting the upstairs or the basement of the houses was not to make a profit but rather to defray some of the interest costs. This was admitted by the appellant and I think it is self-evident.
[7] On a subsidiary issue, $10,998 was spent in 1996 on a complete renovation of the basement of the Burnfield property. The invoice from the construction company that did the renovation is as follows.
To provide general contracting services
At 26A Burnfield Avenue, Toronto, ON.
As follows:
. Remove all basement flooring, walls
old basement kitchen and all appliances.
. To install new 4 pieces bathroom.
. To install new kitchen and kitchen
appliances.
. To renovate the basement completely and
convert it into a basement apartment.
This expense is obviously capital.
[8] Quite apart from that I think the personal element is so strong that the expenses are personal or living expenses within the meaning of paragraph 18(1)(h) of the Income Tax Act. Paragraph (a) of the definition of "personal or living expenses" in section 248 reads
"personal or living expenses" includes
(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit.
[9] It is interesting to note that the expression "reasonable expectation of profit" appears in that definition in connection with a business. Rental income or loss is generally income from property.
[10] In any event I do not think that the losses were incurred in a truly commercial enterprise. The rental of the property was an attempt to defray in part the interest and other expenses incurred in connection with the ownership of the principal residence of the appellant and his wife.
[11] The appeals are therefor dismissed.
Signed at Toronto, Canada, this 15th day of May 2001.
"D.G.H. Bowman"
A.C.J.