[OFFICIAL ENGLISH TRANSLATION]
2001-1813(IT)I
BETWEEN:
MICHEL SAUCIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on January 28, 2002, at Montréal, Quebec, by
the Honourable Judge François Angers
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Stéphane Arcelin
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1997 and 1998 taxation years are dismissed.
Signed at Ottawa, Canada, this 7th day of March 2002.
|
"François Angers" |
J.T.C.C.
Translation certified true
on this 15th day of May 2003.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20020307
Docket: 2001-1813(IT)I
BETWEEN:
MICHEL SAUCIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers, J.T.C.C.
[1] These are appeals by the appellant under the informal procedure from assessments made for 1997 and 1998. The appeals were heard at Montréal on January 28, 2002.
[2] The appellant appealed after the Minister of National Revenue ("the Minister") disallowed his rental losses from his property at 3714 Des Aulnes in Notre-Dame-de-la-Merci. Those losses amount to $12,045 for 1997 and $15,371 for 1998. The Minister argued that the losses were not incurred by the appellant for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a) of the Income Tax Act ("the Act") but were personal expenses of the appellant within the meaning of paragraph 18(1)(h) of the Act.
[3] The appellant is currently a foreman. At the time he purchased the property in question, he was running his own canopy sales and installation business in the municipality of Lachenaie. It all began in March 1991, when he purchased the property in question in Notre-Dame-de-la-Merci in the Laurentians for $70,000. It was an old house that had been abandoned for five years. The appellant thought it would be possible to transform it into an income property for his retirement. It had a habitable floor area of 2,891 square feet and a basement that was just as spacious.
[4] According to the appellant, many repairs were needed. The roof and the ceilings had to be redone, and there was a problem with water leaking into the walls. Before doing all of that work, the appellant put in a kind of bachelor apartment for himself in the basement. There were two mortgages on the property: one granted in April 1991 that secured a loan of $52,500 and another granted in October 1991 that secured a $20,000 loan.
[5] The appellant did renovation work in 1991, 1992 and 1993. Photographs were taken in 1992, and they show that he did most of the renovations to his property that year. It can be seen from the photographs that the roof was completely redone and that the upper floor was divided into two dwelling units. The first, measuring 40 feet by 30 feet, is identified as unit 1, while the other, measuring 50 feet by 32 feet, is identified as unit 2. The same photographs show that part of the interior finishing of unit 1 was done in 1992. However, unit 1 was not completed for rental purposes until 1994. The appellant in fact rented it in the summer of 1994.
[6] The appellant said that his primary intention was to convert his property into a seniors' residence. He filed in evidence two letters confirming that in 1993 he had taken steps to implement his project. His application was apparently denied because his property was too far from the hospital centre and because the centre could not refer seniors to his property as the property was outside the territory served by the centre.
[7] The work was done largely by the appellant. While occupying his bachelor apartment, he worked weekends to complete his renovations. After completing unit 1 so that it could be rented in the summer of 1994, the appellant suffered a heart attack in the spring of 1994 and was inactive for nine months.
[8] During the two years that followed, he continued to occupy his bachelor apartment and performed work on an irregular basis on weekends. He did all he could under the circumstances. In November 1996, he suffered a second heart attack followed by a second period of inactivity, of about seven months this time. In 1997, his canopy company ceased operating and he fell into a depression.
[9] He tried to sell the property in 1997. Even with the help of a real estate broker, he was unable to find a buyer. His financial problems increased, and in 1997 and 1998 he had to withdraw the money he had put in a registered retirement savings plan (RRSP). In all, he withdrew nearly $70,000. He allegedly used about $7,000 of the after-tax amount for personal purposes. Although there are no details on this in the evidence, the appellant allegedly used the balance to meet his financial obligations with regard to the property.
[10] All of those steps notwithstanding, he was unable to rent unit 2. In 1997 and 1998, the appellant did not rent the basement, which he was no longer occupying. It was not in a rentable state. In September 1998, the bank repossessed the property. In return for the payment of $5,700, it also forgave a debt owed to it by the appellant, arising from a loan on a line of credit and the unpaid balance on his credit card. The appellant had put $19,000 on his line of credit, and the unpaid balance on his credit card was $2,300. The appellant testified that he had incurred those two debts for the purpose of investing the money obtained-aside from about $500-in the property.
[11] The appellant called René Faucher as a witness. Mr. Faucher confirmed that the appellant had done the renovations to the property and that his intention had been to rent it to seniors. He said that the appellant had put up a sign in 1992 or 1993 for that purpose. The witness did not recall seeing any advertisement for the rental of the units.
[12] He also confirmed that in 1997 the appellant had intended to sell his property. He said that the appellant was unable to rent his units because they were not completely finished. On cross-examination, he said that he had seen the appellant swimming occasionally but that most of the time he worked on the property.
[13] The appellant was asked on cross-examination about the contradictions between his testimony at trial and the answers he gave in a questionnaire sent to him by one of the respondent's representatives on December 14, 1999, which was filed as Exhibit I-1. The appellant answered question 5 in the questionnaire by stating that he had initially purchased the property in order to make a second home or cottage of it. He explained his answer by adding that he had spent the first three years doing renovations and had not deducted his expenses. In answering question 12, he reiterated that the property was initially a second home and that the loss of his business was what had obliged him to convert it into an income property. His answer to question 6 was that he had begun renting the units around 1996. During his testimony, the appellant admitted the contradictions and explained that he had given false information in the questionnaire. He had just received a call from the bank, and he feared that the bank would come after him again. He claimed that the tax authorities knew he had been renting since 1994, as in his tax return for that year he had reported rental income.
[14] The appellant explained that he had planned on being able to rent unit 1 for the entire year and unit 2 during the summer in 1998. In actual fact, the rental of the property constantly generated rental losses, as shown by the following table:
|
1994 |
($5,600) |
|
1995 |
($4,798) |
|
1996 |
($10,954) |
|
1997 |
($12,045) |
|
1998 |
($15,371) |
[15] The gross yearly income from the rental of the property for the same years was as follows:
|
1994 |
$6,000 |
|
1995 |
$6,000 |
|
1996 |
$6,000 |
|
1997 |
$4,000 |
|
1998 |
$1,000 |
[16] As well, until 1996, the appellant subtracted 25 percent from his total expenses to reflect his personal-use portion thereof. He did not do so in 1997 and 1998 because he did not occupy the basement apartment in those two years.
[17] The appellant told the Court that he purchased the property with the intention of making it an income property and not a second home. In his testimony, he referred to all the efforts he made to renovate the property and convert it into dwelling units. He said he had proved that two or even three units could be built in the property. He expended all his energy and spent all his time working on it. The profitability of his project was delayed by his illness. In spite of everything, he did all he could in the circumstances.
[18] Counsel for the respondent argued that the appellant's initial intention was to make the property a second home. It was not until 1993 that he took steps to convert it into a seniors' residence. He very quickly realized that this was impossible, and his intention changed in 1994. It was necessary to make the property profitable while retaining a personal portion, namely the basement. Although he did not go to the property often, he occupied it when he went there with his wife.
[19] Counsel for the respondent admitted that the appellant had spent time and money renovating the property. His personal financial problems, the financial problems of his canopy business and his health caused difficulties for him. Counsel submitted to the Court that, leaving all of that aside, the appellant did not have a reasonable expectation of profit from the property. The rental problems, the degree of completion of the units, and the potential income are all significant indications that there were serious obstacles to the implementation of the project. No other conclusion is possible if one looks at the income and expenses for 1998.
[20] According to counsel for the respondent, the appellant's intention when he purchased the property, the fact that he occupied it during the years following the purchase and the fact that it was in a resort area show that there was a personal element.
[21] In the alternative, counsel submitted that the personal-use portion should be in proportion to the occupation. The square footage of the basement was equal to that of the two units, meaning that half of the property was used for personal purposes.
[22] What must therefore be determined is whether the expenses deducted by the appellant for each of the 1997 and 1998 taxation years were incurred for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a) of the Act or whether they were personal expenses of the appellant within the meaning of paragraph 18(1)(h) of the Act.
[23] Those legislative provisions 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) General limitation - 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;
(h) Personal and living expenses - personal or living expenses of the taxpayer, other than travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer's business.
Subsection 248(1) defines "personal or living expenses" as follows:
248(1) . . .
"personal or living expenses" - "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.
[24] In Tonn v. Canada, [1996] 2 F.C. 73, Linden J.A. analysed the above legislative provisions, which lay down some of the rules applicable to deductions, and the tests set out in Moldowan v. The Queen, [1978] 1 S.C.R. 480. Although I will not reproduce that entire analysis, Linden J.A. concluded in Tonn, inter alia at page 96 (paragraph 28):
The Moldowan test, therefore is a useful tool by which the tax-inappropriateness of an activity may be reasonably inferred when other, more direct forms of evidence are lacking. Consequently, when the circumstances do not admit of any suspicion that a business loss was made for a personal or non-business motive, the test should be applied sparingly and with a latitude favouring the taxpayer, whose business judgment may have been less than competent.
[25] Linden J.A. continued by stating that the cases in which the "reasonable expectation of profit" test is employed can be placed into two groups: cases where the activity has a strong personal element and cases where the taxpayer's motive for the activity lacks any element of personal benefit and where the activity cannot be classified as a hobby. He added that Moldowan, supra, has been utilized in regular commercial type situations and that the facts of each case will determine whether the activity is to be considered a business activity.
[26] The appeals in question relate to the appellant's activities in 1997 and 1998 in connection with his property. The history of the property before those two years is obviously important in terms of the use that may have been made of the property and the return it may have generated. For example, it seems clear to me that the appellant made personal use of the property, if only because he occupied the basement for his personal purposes during the renovations and was able to take advantage of the fact that the property was located near a lake and in a resort area. Moreover, he subtracted a personal-use percentage of 25 percent in his tax returns until 1996.
[27] On November 30, 1996, the appellant suffered a second heart attack. He testified that he did not go to the property for a period of 11 months because he would have been too far from the hospital centre in the event of an emergency. After that period, he said, he went there just a few times to make sure everything was in order. This was confirmed by René Faucher, who testified that he did not see the appellant often after his heart attack.
[28] I therefore conclude that, for the 1997 and 1998 taxation years, there was no personal element in the appellant's business. In fact, given the appellant's financial problems and the state of his health, I do not think that the property could have given him any personal satisfaction or benefit during those two taxation years.
[29] The question nonetheless arises as to whether the appellant was operating a commercial enterprise in relation to the property. Although he initially intended to convert it into three dwelling units, he was able to rent only one of them. The other two were never finished. Even the bachelor apartment, which he did not occupy in 1997 and 1998, was not suitable for rental purposes.
[30] In 1997, he did no advertising except for distributing flyers. He advertised in 1998, but he did not elaborate on the nature or extent of the advertising. The problem he had renting the property was due to the fact that he had not finished two of the three units.
[31] During all the rental years, that is, from 1994 on, he made no profits. Between 1991 and 1998, the appellant was able to complete only one unit. Although he had health problems and had long periods of convalescence, he could have completed the units after 1992, since most of the renovation work had been done that year. To make profits, the necessary sources of income must be put in place.
[32] The appellant is a businessman. He cannot deny the fact that a lack of income merely increases losses. Difficulty finding tenants was never a factor that interfered with the profitability of the business. What did was the fact that two of the three units were not ready to be rented and that unit 1 could not be rented in the winter. It was apparently not winterized until 1998.
[33] Even if I were to give the appellant some latitude, as Judge Bowman did in Bélec (E.) v. Canada, [1995] 1 C.T.C. 2809, and to give his business the benefit of a start-up period, I do not think that I can stretch that period to 1997 and 1998.
[34] I recognize that the appellant had problems implementing his project. Given the time, energy and money he invested in that project, he is deserving of admiration. His health suffered. However, all of his efforts were unable to transform his project into a business capable of making a profit.
[35] His attempt to sell the property in 1997 was unsuccessful. The making of a capital gain could have been a factor in the appellant's favour, but it must be excluded because he purchased the property in question in 1991 in order to generate income for his retirement. In 1997, the appellant was not retired.
[36] For all these reasons, and taking into account the factors set out in the case law, I conclude that the appellant, in the time given to him, could not have expected his project to become profitable. Accordingly, there was no reasonable expectation of profit from the operation of that business.
[37] The appeals are therefore dismissed.
Signed at Ottawa, Canada, this 7th day of March 2002.
|
"François Angers" |
J.T.C.C.
Translation certified true
on this 15th day of May 2003.
Erich Klein, Revisor