[OFFICIAL ENGLISH TRANSLATION]
2001-3056(IT)I
BETWEEN:
GILLES MONTMINY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on August 6, 2002, at Sherbrooke, Quebec, by
the Honourable Judge Alain Tardif
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Stéphanie Côté
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1993, 1994, 1995 and 1996 taxation years is dismissed, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 13th day of September 2002.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 22nd day of December 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20020913
Docket: 2001-3056(IT)I
BETWEEN:
GILLES MONTMINY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal concerning the 1993, 1994, 1995 and 1996 taxation years.
[2] The points at issue are as follows:
first, whether the expenses claimed annually in respect of the condominium located in the town of Beaupré were incurred by the appellant during the 1993, 1994, 1995 and 1996 taxation years for the purpose of gaining or producing income from a business or property;
second, to determine whether for the 1993, 1994, 1995 and 1996 taxation years the respective amounts of $20,562, $12,823, $13,478 and $10,697, which the appellant claimed as rental losses, were correctly computed.
[3] In making and confirming the reassessments, the Minister of National Revenue (the "Minister") assumed the following facts:
[TRANSLATION]
(a) on February 26, 1990, the appellant purchased a condominium located at 203 Rue Val des Neiges, apartment 4012, in the town of Beaupré;
(b) among other things, the condominium comprises one closed bedroom and a mezzanine, and the total area is approximately 928 square feet;
(c) the condominium is part of a condominium village known as "Domaine Val des Neiges";
(d) the appellant acquired the condominium at a cost of $130,500;
(e) the appellant acquired this hotel-apartment by means of 100 percent financing from a caisse populaire;
(f) the building unit is part of a pool of condominiums the management of which was assigned to a corporation called "Hébergement Mont Sainte-Anne B.B.F. Inc.";
(g) the appellant signed an "Option A" management contract with Hébergement Mont Sainte-Anne B.B.F. Inc.;
(h) Hébergement Mont Sainte-Anne B.B.F. Inc. could rent the appellant's condominium when all the hotel-apartments of Phases 1, 2, 3 and 4 provided with an "Option B" management contract had been rented;
(i) the rental income, that is to say, the gross rental income less commission expenses, credit card expenses and the sports centre share was divided on a 50/50 basis between the mandatary, "Hébergement Mont Sainte-Anne B.B.F. Inc.," and the mandator, the appellant;
(j) before confirming or denying that there was a reasonable expectation of profit, the Minister audited the rental statements for each of the 1993, 1994, 1995 and 1996 taxation years;
(k) the Minister determined for the 1994 taxation year that an amount of $556 was not deductible as interest expense, as a result of which the rental loss was revised to $12,267;
(l) the management of the appellant's condominium always generated losses:
(i) 1990 $16,149
(ii) 1991 $12,382
(iii) 1992 $16,262
(iv) 1993 $20,562
(v) 1994 $12,267
(vi) 1995 $13,478
(vii) 1996 $10,697
$101,797
(m) the appellant always claimed rental losses and never claimed depreciation expense;
(n) gross rental income from the condominium read as follows:
(i) 1990 $114
(ii) 1991 $5,268
(iii) 1992 nil
(iv) 1993 $5,149
(v) 1994 $1,097
(vi) 1995 $1,478
(vii) 1996 $6,150
(o) the appellant used the condominium for personal purposes, mainly in winter, in addition to occasionally allowing members of his family to stay there during the year;
(p) the appellant did not show the Minister that he had relevant experience in the rental field;
(q) the appellant did not show the Minister that he had taken action to reduce the amount of loans during the years in issue;
(r) the appellant had no reasonable expectation of profit from the condominium located in the town of Beaupré during the 1993, 1994, 1995 and 1996 taxation years;
(s) the rental expenses claimed annually in respect of the condominium located in the town of Beaupré constituted personal or living expenses of the appellant and were not incurred by the said appellant for the purpose of earning income.
[4] The appellant first explained and described the circumstances of his decision to acquire a condominium in a region focusing on recreational and tourist activities. He made on-site visits, asked questions, thought the matter over and lastly had the various projects analyzed by a well-known accounting firm. Following the evaluation, he decided on the project at the origin of the facts of this appeal.
[5] The appellant and his spouse testified in support of the appeal. The Notice of Appeal (the "Notice") summarizes the testimony quite well. The appellant and his spouse essentially repeated the content of a portion of the notice, that is to say, two of the three parts.
[TRANSLATION]
(1) Information relevant to Gilles Montminy's case
- On August 26, 1988, the taxpayer purchased a condominium in Phase 3 of the Domaine Val des Neiges project for the purpose of earning rental income.
- The taxpayer purchased the condo since Phases 1 and 2 of that same project had made a profit, as shown in the financial statements signed by the accounting firm of Malette, Benoît, Boulanger, Rondeau et associés, c.a.
- Owners of units in Phases 1 and 2 purchased units in Phase 3, which influenced the taxpayer to buy a condo.
- In 1988, Domaine Val des Neiges joined Best Western, a highly prosperous hotel chain very well known in the North American tourist market.
- Management of the condo unit rental system was assigned to Hébergement Mont Sainte-Anne Inc. That corporation was run by three career hotel operators known for their competence.
- The taxpayer signed a mandate granting Hébergement Mont Sainte-Anne Inc. rental exclusivity in order to maximize his chances of profitability.
- At the time of the acquisition, the taxpayer was sure he could easily resell his condo and realize a capital gain. The real estate market was booming at the time of the purchase.
(2) Relevant facts and unforeseeable profitability factors
- The tourism and, more particularly, the ski industries were very hard hit by the major recession in the early 1990s.
- That recession resulted in a significant decline in rentals, particularly in tourism infrastructures, that is, condominiums near ski resorts (Mont Ste-Anne), thus delaying profitability of condo rentals.
- During those years, the Mont Tremblant ski resort was in full expansion, whereas there was no further investment in the Mont Ste-Anne centre.
- In 1990, an interlocutory injunction obtained by Société de Gestion Cap-aux-Pierres, which owned the neighbouring hotel, prevented Domaine Val des Neiges from operating as a hotel and even forced it to waive its contract with the Best Western hotel chain. This situation continued until 1993, when a highly costly settlement considerably reduced the return to owners. The shortfall for owners was nearly $200,000, the equivalent of the annual returns for 1994 and 1995.
- Certain significant construction defects resulted in major lawsuits. Legal and other expenses were incurred by the owners, thus resulting in losses and reduced profitability.
- In 1993, the manager of Domaine Val des Neiges was no longer able to assume the management and had to file a proposal with its creditors.
- That same year, Société de Développement Industriel du Québec, an agency whose mission is to invest in businesses with profitability potential, agreed to invest and became a creditor holding 25 percent of the shares of Hébergement Mont Ste-Anne.
- At the same time, a new management team was put in place with a new board of directors, which included an observer from Société de Développement Industriel du Québec. The result was a significant increase in revenue and better expenditure control. The owners remained optimistic about the profitability of their investment.
- However, Mont Ste-Anne did not develop and the owners had to bear all the development and marketing expenses alone.
- During that period, the Government of Quebec announced all kinds of major investment projects for the Mont Ste-Anne ski resort but nothing materialized.
- The manager carried the employment of nearly 40 persons, with annual tax contributions of approximately $150,000 and significant local economic benefits.
- In 2001, a new management agreement was signed with Château Mont Ste-Anne. Management of condo rentals was assigned to Château Mont Ste-Anne, which brought much more prestige and ensured profitability in the relatively short term.
[6] The evidence shows that the appellant had three objectives at the time he acquired a condominium:
- to own a condominium to enable him and his family to go skiing;
- to collect maximum income during periods when they did not occupy the condo;
- to realize a significant capital gain in an eventual sale.
[7] In the case of mixed (personal and commercial) use of a condominium, it is more difficult to understand the owner's predominant intention, as a result of which the owner must show on a balance of probabilities that his main intention was the pursuit of profit.
[8] The true pursuit of profit implies the exclusion of any personal activity or use on conditions not comparable to market conditions, except in specific circumstances. That does not prevent the owner of an income property from enabling his family to enjoy it. However, he will have to show that personal occupancy was managed or subject to conditions comparable or similar to those that would have prevailed for third parties; in other words, personal use must not adversely affect potential income.
[9] In this case, depending on the rental agreement in effect, the appellant and his family could use the condo as they wished at a rate corresponding to a fraction of the cost, that is half of what third parties had to pay. In fact, the appellant had to pay the mandatary responsible for rentals the same percentage as the third party rentals. In other words, the rental officers lost nothing, whether the condominium was rented to third parties or occupied by the owner. It was entirely different for the appellant since he received no income and had to pay expenses when he occupied his own condominium.
[10] The appellant could and in fact did benefit significantly from his condominium for essentially personal purposes; the personal use had significant consequences on income. In fact, the appellant deprived himself of substantial income by occupying the premises himself with his family.
[11] It was shown that winter was the high season because of skiing. However, in response to a question from the Court, the appellant said that he had used the condominium approximately 40 days, primarily during the high season. He also said that it had been used for more or less 12 weekends.
[12] I find these figures sufficient to conclude that the personal use was not occasional or limited, with no effect on the condominium's viability or profitability; on the contrary, the personal use had a decisive impact on income and, as a direct consequence, on profitability.
[13] Although the evidence, the burden of which was on the appellant on this important issue, was not very elaborate, I believe I can assume that certain instances of personal use coincided with the Christmas holiday period, school vacation, break periods, etc. However, those are strategically important periods for this kind of operation.
[14] Any personal use or enjoyment of an income property on conditions more advantageous than those set for third parties considerably distorts the fundamental figures that must be considered in order to determine the actual intention to make the operation profitable.
[15] The personal use of a property does not automatically exclude or rule out any possibility of making a profit. However, it is important to establish an accounting system that makes it possible to quantify the extent of the income losses so as to be able to draw valid conclusions.
[16] Using a property or deriving personal benefits from the operation of a business does not automatically result in the conclusion that there is no source of income, particularly if the personal benefit is something marginal with little or no impact on income. However, any low-cost or free personal use distorts profitability to an extent equivalent to the benefit obtained.
[17] In this case, the appellant and his family enjoyed the condominium during strategic periods. Apart from the shortfall for the periods in question, it is likely that the personal use also affected income from third parties since the available periods were shortened by the weekends occupied by the appellant, thus making availability unattractive for the purpose of renting to third parties.
[18] Did the appellant invest for the sole purpose of making profits? I do not believe that he invested for the purpose of incurring losses. He explained that the project had been the subject of a dispute, followed by legal proceedings, all of which created unforeseen expenditures and had an impact on income. Although the appellant also said he had invested for speculative purposes, he never really tried to sell the condominium.
[19] To win his case, the appellant had to show on a balance of probabilities that the condominium acquisition had been motivated and justified by the pursuit of profit. It is important to recall that the condominium was not located where the appellant and his family lived. To get there, he had to travel nearly two hours, which in itself was likely to complicate management to some degree.
[20] In itself, however, this factor was not decisive and was one that could be offset by resorting to competent persons, which the appellant moreover did; at all times during the years when the operations ran at a loss, the appellant had given a mandate to an organization with competence and expertise in the field. The appellant of course had to pay high expenses in order to do so, but this was a kind of "turnkey" arrangement justified by the appellant's lack of knowledge in the matter and by his distance from the premises.
[21] In this respect, the appellant's actions with regard to profit seeking were beyond reproach.
[22] Matters are quite different with regard to personal use. The evidence showed that the appellant and his family derived an appreciable benefit, to the point where it had a considerable effect on the profitability of the operation.
[23] In support of his appeal, the appellant referred to a decision by the Honourable Judge Yvan Mayrand of the Court of Quebec, Civil Division, No. 755-02-002532 997, Paul Laforest c. Le Sous Ministre du Revenu du Québec. In that case, which also involved a number of other similar cases, the Honourable Judge Mayrand found in favour of the appellants. I do not believe that decision is relevant on the bases of a passage from the judgment, which I think is worth quoting:
[TRANSLATION]
. . .
It is in evidence that the appellant bought a condo in the Val Des Neiges Complex in Mont Ste-Anne in 1990. The appellant, who was a teacher at the time, was to retire in 1992. He explained that he had bought the condo with the expectation of making a profit in order to ensure additional income when he retired by renting the condo. He never bought the condo for the purpose of occupying it personally and, at the time of the purchase, he had never skied. His condominium is managed under a management mandate, which is in effect. The mandates are comprised of two classes: Group A, which provides for condo rentals for the purpose of making a profit, and Group B, which provides for partial occupancy and partial rental of the condo in question. The appellant is part of Group A, which provides for rental only for the purpose of making a profit.
Emphasis added
[24] In Stewart v. Canada, [2002] S.C.J. No. 46 (Q.L.), the Supreme Court of Canada recently shed new and extremely important light by setting out a new approach for determining whether an activity constitutes a source of income for the purposes of section 9 of the Income Tax Act.
[25] The Supreme Court held that a two-stage approach should be employed to determine whether a taxpayer's activities constitute a source of business or property income.
[26] A passage from the introduction of this important judgment should be reproduced:
. . .
Is the taxpayer's activity undertaken in pursuit of profit, or is it a personal endeavour? If it is not a personal endeavour, is the source of the income a business or property? The first stage of the test is only relevant when there is some personal or hobby element to the activity. Where the nature of an activity is clearly commercial, the taxpayer's pursuit of profit is established. There is no need to take the inquiry any further by analysing the taxpayer's business decisions. However, where the nature of a taxpayer's venture contains elements which suggest that it could be considered a hobby or other personal pursuit, the venture will be considered a source of income only if it is undertaken in a sufficiently commercial manner. In order for an activity to be classified as commercial in nature, the taxpayer must have the subjective intention to profit and there must be evidence of businesslike behaviour which supports that intention. Reasonable expectation of profit is no more than a single factor, among others, to be considered at this stage.
. . .
[27] At paragraph 5 of the judgment in that same case, rendered by Iacobucci and Bastarache JJ., the Supreme Court of Canada held:
. . .
As such, in order to determine whether a particular activity constitutes a source of income, the taxpayer must show that he or she intends to carry on that activity in pursuit of profit and support that intention with evidence. The purpose of this test is to distinguish between commercial and personal activities, and where there is no personal or hobby element to a venture undertaken with a view to a profit, the activity is commercial, and the taxpayer's pursuit of profit is established. However, where there is a suspicion that the taxpayer's activity is a hobby or personal endeavour rather than a business, the taxpayer's so-called reasonable expectation of profit is a factor, among others, which can be examined to ascertain whether the taxpayer has a commercial intent.
At paragraphs 6, 50, 52 and 54, the Court said:
6. In the present appeal, the taxpayer purchased four rental properties which he rented to arm's length parties in order to obtain rental income. There was no personal element to the taxpayer's endeavour, and its commercial nature was never questioned. As a result, the appellant's rental activities constitute a source of income from which he is entitled to deduct his rental losses. We would therefore allow the appeal.
50. It is clear that in order to apply s. 9, the taxpayer must first determine whether he or she has a source of either business or property income. As has been pointed out, a commercial activity which falls short of being a business, may nevertheless be a source of property income. As well, it is clear that some taxpayer endeavours are neither businesses, nor sources of property income, but are mere personal activities. As such, the following two-stage approach with respect to the source question can be employed:
(i) Is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour?
(ii) If it is not a personal endeavour, is the source of the income a business or property?
The first stage of the test assesses the general question of whether or not a source of income exists; the second stage categorizes the source as either business or property.
52. The purpose of this first stage of the test is simply to distinguish between commercial and personal activities, and, as discussed above, it has been pointed out that this may well have been the original intention of Dickson J.'s reference to "reasonable expectation of profit" in Moldowan. Viewed in this light, the criteria listed by Dickson J. are an attempt to provide an objective list of factors for determining whether the activity in question is of a commercial or personal nature. These factors are what Bowman J.T.C.C. has referred to as "indicia of commerciality" or "badges of trade": Nichol, supra, at p. 1218. Thus, where the nature of a taxpayer's venture contains elements which suggest that it could be considered a hobby or other personal pursuit, but the venture is undertaken in a sufficiently commercial manner, the venture will be considered a source of income for the purposes of the Act.
54. . . . Thus, in expanded form, the first stage of the above test can be restated as follows: "Does the taxpayer intend to carry on an activity for profit and is there evidence to support that intention?" This requires the taxpayer to establish that his or her predominant intention is to make a profit from the activity and that the activity has been carried out in accordance with objective standards of businesslike behaviour.
[28] The appellant and his family enjoyed and benefited from the condominium at issue in this appeal. The appellant and the members of his family, ski enthusiasts, enjoyed their premises for recreational purposes. It was mentioned on this point that the appellant might reside there nearly 40 days a year, that is, more or less 12 weekends.
[29] This was a significant use that had considerable, indeed even decisive effects on the operation's profitability. These facts cannot be excluded from the analysis; they constitute a factor that considerably influenced the project's viability.
[30] During the years in issue, the appellant assigned two types of mandates to third parties, which attended to administration and management.
[31] First, the appellant and members of his family were able to live in their condo provided they paid the fees usually required for every rental, approximately 50 percent of rental income. The appellant says that these were substantial outlays, which he clearly found excessive.
[32] Second, the appellant was able to live there at lower cost, but the periods of occupancy had to be subject to advance notice; the letter of understanding is very clear on that point. The relevant clauses should be reproduced:
[TRANSLATION]
Management mandate - Option A (Exhibit A-1)
. . .
4. AVAILABILITY
4.1 The mandator may use his hotel-apartment subject to the terms stated below in paragraphs 4.2 and 4.3, for the periods therein specified.
4.2 The mandator may obtain use of his hotel-apartment for the following periods subject to payment equal to 50 percent of the regular rental price:
- from December 26 of each year to the first Tuesday of the following January;
- from the second Sunday in February to the third Sunday in March of each year;
- from July 15 to the first Monday in September of each year.
4.3 The mandator may occupy his hotel-apartment outside the periods stated in paragraph 4.2 above. The sum of $40 shall then be paid upon each departure for service charges.
Furthermore, if the mandator wishes to have daily maintenance service at his hotel-apartment, he shall pay the additional yearly cost stated in Schedule A hereto.
4.4 Where the mandator is a corporation, the hotel-apartment may be occupied in accordance with the terms and restrictions provided for in this article, by any shareholder of the said corporation and any member of that shareholder's immediate family. The total period of occupancy by the shareholders or the members of their families may not at any time exceed 12 weeks per fiscal year outside the periods stated in paragraph 4.2.
. . .
October 2, 1990
Management and rental mandate - Option B(Exhibit I-1)
. . .
4.0 AVAILABILITY OF DWELLING
The MANDATOR shall notify us twice a year of the availability of his dwelling, as described in article 4.1.
4.1 NOTIFICATION OF AVAILABILITY
Before September 1 for the period between November 1 and April 30 of the following year;
4.1.1 Before March 1 for the period between May 1 and November 30 of each year.
. . .
this 26th day of September 1993
[33] Despite that there were two letters of understanding, the appellant might not have occupied his condo or might have occupied it marginally during periods when there was no third party rental demand.
[34] The burden of proof was on the appellant. The evidence showed that the activity carried on was not primarily commercial. One of the fundamental objectives was for the appellant and the members of his family to take advantage of and enjoy a facility enabling them to engage in their sport while receiving supplementary income, which had the effect of reducing the prohibitive cost of practising that sport. The appellant's family thus determined its periods of personal occupancy and offered the remaining availability on the third party rental market.
[35] A genuine business gives priority to and targets maximum income by employing every means to eliminate or reduce everything that is or can have a contrary effect.
[36] In this case, the appellant and his family enjoyed a condominium whose operating expenses were reduced by renting it to third parties during periods of inoccupancy. This was not an activity that could be characterized as commercial by nature.
[37] The appellant having failed to show that his predominant intention was to make a profit from the activity or that the activity was carried on in accordance with the objective standards of businesslike behaviour, I must dismiss his appeal.
Signed at Ottawa, Canada, this 13th day of September 2002.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 22nd day of December 2003.
Sophie Debbané, Revisor