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Docket: 2003-2596(IT)I |
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BETWEEN: |
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CHRISTINE LAROCHE, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
[OFFICIAL ENGLISH TRANSLATION]
__________________________________________________________________
Appeal heard on May 20, 2004, at New Carlisle, Quebec
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Before: The Honourable Justice Alain Tardif |
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Appearances: |
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Agent for the Appellant: |
Léonel Tremblay |
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Counsel for the Respondent: |
Marie-Claude Landry |
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JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 2001 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that expenses totalling $4,744 were incurred for the purpose of earning income from property and on the basis that a total of $1,795.40 is also a qualified interest expense paid for the purpose of earning income from property, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 16th day of July 2004.
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" Alain Tardif " |
Tardif J.
Translation certified true
on this 30th day of July 2004.
Sharlene Cooper, Translator
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Citation: 2004TCC470 |
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Date: 20040716 |
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Docket: 2003-2596(IT)I |
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BETWEEN:
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CHRISTINE LAROCHE, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This is an appeal from an assessment made under the Income Tax Act ("Act") for the 2001 taxation year.
[2] The assessment was made following the Respondent's refusal to accept various expenses totalling $4,744 and an interest payment of $1,795.40. In other words, did the Respondent correctly disallow the expenses claimed by the Appellant on the ground that she had ended her business, which consisted of renting commercial premises to her spouse? The claimed expenses were disallowed on the basis that the Appellant had ceased operating her business.
[3] In the Reply to the Notice of Appeal, the Respondent listed the assumptions of fact relied on to make and confirm the assessment. These assumptions are listed in paragraph 5 of the Reply to the Notice of Appeal.
[translation]
(a) During the taxation year at issue, the Appellant was employed by the Centre Hospitalier Baie-des-Chaleurs;
(b) In her income tax returns for the 1990 to 2001 taxation years, the Appellant reported the following amounts as gross income and rental expenses, with respect to a building located at 208 Narcisse, New Richmond:
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Year |
Gross Income |
Expenses |
Net Income (Net Losses) |
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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 |
$548 $12,000 $7,000 $6,000 $6,000 $5,750 $5,100 $4,500 $0 $0 $0 $0 |
$548 $5,844 $4,383 $4,799 $4,413 $3,515 $3,306 $2,915 $3,758 $5,275 $4,980 $4,744 |
$0 $6,156 $2,617 $1,201 $1,587 $2,235 $1,794 $1,585 ($3,758) ($5,275) ($4,980) ($4,744) |
(c) The nature of the rental expenses the Appellant claimed for the 2001 taxation year consisted of the following:
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Description
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Amount |
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Interest Maintenance and Repairs Management and Administration Costs Property Taxes Electricity, Heating, etc.
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$1,795.40 $1,115.23 $259.61 $636.39 $938.05
$4,744.68 |
(d) For the purposes of his audit, the Minister had some telephone conversations with the Appellant's spouse, who acted as the Appellant's agent;
(e) During these telephone conversations, the spouse stated that:
(i) the Appellant purchased the building for $28,000;
(ii) the building used to be a post office;
(iii) the spouse occupied the entire premises for his engineering business;
(iv) the Appellant rented the building to her spouse for a cost of $500 per month;
(f) In a letter sent to the Minister on December 3, 2002, the Appellant stated that:
(i) the building was purchased for one reason only: to provide her spouse, then self-employed, with an appropriate workplace;
(ii) in 1997, the Appellant's spouse ceased practising his profession due to health problems;
(iii) since then, she has wanted to sell the building to a third party, rather than renting it out;
(iv) the building was offered for sale through a real estate agent and by the Appellant and her spouse;
(g) At all relevant times, the Appellant demonstrated her intention to sell the building.
(h) No rental income has been collected since 1998;
(i) No effort was made to rent the building; the Appellant did not post a "FOR RENT" sign in front of the building until the end of 2001;
(j) Furthermore, the Minister audited the expenses the Appellant claimed relative to the building;
(k) During his audit of the claimed expenses, the Minister found that interest expenses totalling $1,795.40 were not associated with the building.
[4] Although she was present at the hearing, the Appellant did not testify; her spouse, Léonel Tremblay, represented her.
[5] After informing the Appellant of the Court's practice of reviewing the assumed facts when making an assessment, her agent indicated that most of the assumed facts were true and accurate.
[6] However, he identified some slight differences, including, among others, paragraph (e) (iii), indicating that the cost of renting the premises was generally $500 per month; however, it could vary based on his own income. It is important to remember that the tenant of the commercial premises, which the Appellant owned, was her spouse.
[7] With regard to paragraph (f)(iv), he indicated that the building had been offered for sale through two real estate agents successively.
[8] Finally, he expressed his complete disagreement with the decision relative to the interest. In his testimony, he essentially reiterated all of the assumed facts without adding anything new, with the exception of the interest expenses, which he justified with well-prepared, very clear, written explanations.
[9] Thus, he dismissed the aspect, which remains somewhat unclear, of a claim for interest paid on a line of credit, since a line of credit is generally used for multiple purposes. It is rarely possible to determine with great precision the purpose for which the interest paid on a line of credit was used. The Appellant, with the collaboration of her spouse, carried out this exercise, establishing in a plausible and reasonable manner the validity of her claims concerning the amount of interest paid and claimed.
[10] The representations were very consistent with the content of the Notice of Appeal; it is appropriate to reproduce the content: (Exhibit I-1)
[translation]
. . .
Canada Customs and Revenue Agency
Audit Division
Rimouski Tax Services Office
180 Cathédrale Street
Rimouski, QC G5L 5H9
Attn.: Diane Tremblay
Ref.: SIN xxx xxx xxx - 2001 income tax return
Building 208, Narcisse, New Richmond
Dear Madam:
I am writing in response to your letter dated November 13, in which you indicate that you have decided to disallow the rental expenses for the 2001 taxation year. I disagree with this decision for the following reasons:
1. Use of the building
The building in question was purchased in December 1990 for the sole purpose of providing my spouse, who was self-employed at the time, with an appropriate workplace. From 1991 to 1997, the building, as well as my spouse's business, generated a profit and created jobs on which Revenue Canada collected its share of taxes. In 1997, he had to cease operating his business due to health problems. Wishing to sell the building rather than rent it to a third party, the building was offered for sale through a real estate agent. In fact, since initially being offered for sale, we, in addition to two real estate agents, attempted to sell the building. In the fall of 2001, after repainting the exterior, the building had still not been sold and it represented a significant financial burden; thus, we decided to try to rent it in addition to trying to sell it.
2. Taxes
Since the building would have been deemed commercial if sold, we had to charge GST and QST, which makes it much more difficult to sell, as this adds 15% to the price. This does not represent a problem for commercial buyers, because they recover the taxes. However, for residential buyers, the taxes are added to the purchase price. To date, most parties showing an interest have been private persons who wish to convert the building into a residence.
Thus, among other factors, the federal government is hindering the sale by increasing the price; on disposition, it will take a share of the profits, if applicable. In spite of this, it in no way wishes to share the costs of maintaining the building! This is your idea of justice!
3. Size of the market
It is difficult to sell the real property at issue due to a limited market coupled with low demand. Businesses are leaving the City to relocate. The real estate market, which was poor in 1997 when the building was offered for sale, does not seem to have improved since: many houses are for sale; a number of commercial premises are either for rent or for sale. By limiting the period for deducting selling expenses, as suggested by the interpretation of section 18(1)(a), a copy of which you sent to us, and on which you based your decision, you are penalizing investors in the area for their limited market. In fact, you are discouraging investment. Investment involves a higher degree of risk because the market is particularly limited in the area. In this context, it is much more difficult to dispose of property that is acquired for the purpose of operating a business. Is this the message that the federal government wishes to send to the regions?
We trust that these points will lead you to reconsider your decision. There is no obvious solution to our problem. Drop the price and take a loss? Allow the City to seize the building for non-payment of taxes?
. . .
Christine Laroche
. . .
[11] Mr. Tremblay indicated that he ceased operating his business as a consulting engineer for health reasons; since then, his wife has also wished to cease any commercial activities associated with the building she owned, which was rented to him for the purpose of practising his profession as an engineer.
[12] Essentially, he indicated that the building ceased to be rented on the unanimous advice of stakeholders with expertise in real estate to the effect that it would be much more difficult to sell a building that was being rented, given the fact that a potential purchaser would be limited in terms of the various options for use of the building at issue.
[13] This is a very plausible and completely reasonable explanation. This concern was even more significant because it seemed as though the real estate market was quite passive. There were not many potential buyers; hence the Appellant had an interest in doing everything possible to maximize the number of possible prospects.
[14] The evidence revealed that the Appellant did in fact make a considerable effort to sell her building, which was sold in 2003. After maximizing her efforts for an outright sale, she changed her plans and was willing to rent the building if it could not be sold.
[15] Ms. Tremblay, who was responsible for auditing the Appellant's file, testified that she disallowed the expenses simply because the Appellant had ceased her business, according to the Appellant's own statements.
[16] After making this determination, she acknowledged that the issue of the interest was not analyzed in depth; however, the fact that this interest, largely from an interest payment on a line of credit, was not of a nature that would lead one to question this aspect of the file.
[17] Her initial decision was that the Appellant no longer operated a business; thus, it was not necessary to conduct a meticulous assessment of the interest expenses because the business no longer existed. Under the circumstances, it was reasonable to determine that the business no longer existed, especially since such a determination was consistent with the Appellant's own statements, which she repeated in her Notice of Appeal.
[18] Taxation is not a simple matter, and unfortunately, citizens' interpretations, notions and perceptions are not necessarily consistent with the Act.
[19] When does a business cease its operations? For the average person, this moment may correspond to the date the telephone service ceases, the date the office closes, the date there are no longer any employees, etc.
[20] What happens in cases where it takes months to close the books, years to collect accounts receivable, or where months remain on a lease, or where it takes months to dispose of inventory, or to sell assets, etc.? These scenarios effectively illustrate that the end of a business or operation of a property can become a question that is not necessarily easy to answer.
[21] To answer the questions at issue, is it necessary to consider as fatal the explanations included in the Appellant's letter to the effect that she had ceased rental activities? Indeed, she acknowledged that she ceased her rental activities. However, the evidence revealed that this was a forced choice, in light of the intention to sell the building. Furthermore, this interpretation is specifically expressed at the end of paragraph 1 of the Notice of Appeal, which reads as follows:
[translation]
Wishing to sell the building rather than rent it to a third party, the building was offered for sale through a real estate agent. In fact, since initially being offered for sale, we, in addition to two real estate agents, attempted to sell the building. In the fall of 2001, after repainting the exterior, the building had still not been sold and it represented a significant financial burden; thus, we decided to try to rent it in addition to trying to sell it.
[Emphasis added]
RELEVANT LEGISLATION
Relevant portions of the Act read as follows:
18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;
20(1) Notwithstanding paragraphs 18(1)(a), 18(1)(b) and 18(1)(h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto
. . .
c) an amount paid in the year or payable in respect of the year (depending on the method regularly followed by the taxpayer in computing the taxpayer's income), pursuant to a legal obligation to pay interest on
(i) borrowed money used for the purpose of earning income from a business or property (other than borrowed money used to acquire property the income from which would be exempt or to acquire a life insurance policy),
[22] The outcome of the Appellant's appeal depends on whether or not the business or operation of her property ceased. Determining whether or not a business has ceased its activities or whether property has ceased operations is essentially a question of fact.
[23] In this case, was the income-generating activity not essentially the operation of property, that is, a building.
[24] In this regard, I shall reproduce a passage written by J. Durnford, The Distinction Between Income from Business and Income from Property, and the Concept of Carrying on Business (1991) 39 Can. T. Found. 1131 at pp. 1161-62.
There are many judgments to the effect that rentals from real estate held by individuals constitute income from property.
An occasional significant exception to the foregoing exists where there are commercial tenants. In M. Ginsberg v. MNR, [(1953), 9 Tax ABC 321 (Mr. Fordham)] an individual taxpayer's income by way of rentals was held to constitute income from a business. No special services were supplied to the tenants, but the latter included a restaurant on the ground floor, and all the other tenants rented their premises for business purposes. Ginsberg accordingly did not apply the criteria laid down in the leading case of Walsh and Micay, where it was held that the deciding factor was the range of the services supplied to the tenants. This does not mean that Ginsberg was wrongly decided. That judgment does not stand alone. What the courts have done is to introduce, but with little discussion, another criterion. The additional factor seems to be that where a high degree of commerciality is to be found in connection with the premises (such as there being stores and offices), the rentals received will be treated as income from a business without regard to the level of services offered and without regard to the fact that the landlord is an individual rather than a corporation. [Emphasis added]
[25] In determining whether the Appellant's income was earned from a business or from property, the degree of commerciality must be assessed. In this case, the Appellant's spouse did in fact rent the building for the purpose of operating a business. However, the Appellant essentially rented the building to her spouse. Consequently, the degree of commerciality was very marginal. Therefore, it is reasonable to determine that the Appellant earned her income from property.
Expenses incurred for the purpose of earning income from property
[26] In this case, the Appellant ceased renting the building for a very specific reason, that is, to sell the building as quickly as possible. Circumstances led her to reconsider her decision, after a reasonable amount of time; she placed the building back on the rental market. Thus, the Appellant did not definitively abandon her intention of earning income from the building. In addition, it is clear that the expenses are associated with the Appellant's building. As such, we can determine that the Appellant incurred expenses for the purpose of earning income from property.
[27] The appeal is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that expenses totalling $4,744 were incurred for the purpose of earning income from property and on the basis that a total of $1,795.40 is also a qualified interest expense paid for the purpose of earning income from property.
Signed at Ottawa, Canada, this 16th day of July 2004.
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" Alain Tardif " |
Tardif J.
Translation certified true
on this 30th day of July 2004.
Sharlene Cooper, Translator