[OFFICIAL ENGLISH TRANSLATION]
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Docket: 1999-1762(IT)G |
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BETWEEN: |
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ORIGÈNE TREMBLAY, |
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Appellant, |
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and
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Appeal heard on June 1, 2004, at Sept-Îles, Quebec
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By: The Honourable Judge Brent Paris |
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Appearances: |
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Counsel for the Appellant: |
André A. Lévesque |
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Counsel for the Respondent: |
Simon-Nicolas Crépin |
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JUDGMENT
The appeal from the assessments made under the Income Tax Act for taxation years 1993, 1994, 1995, and 1996 is allowed, with costs, and the assessments are referred back to the Minister for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 12th day of August 2004.
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"B. Paris" |
Paris J.
Certified true translation
Colette Dupuis-Beaulne
[OFFICIAL ENGLISH TRANSLATION]
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Reference: 2004TCC424 |
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Date: 20040812 |
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Docket: 1999-1762(IT)G
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BETWEEN: |
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ORIGÈNE TREMBLAY, |
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Appellant, |
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and
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HER MAJESTY THE QUEEN,
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Respondent. |
REASONS FOR JUDGMENT
Paris, J.T.C.C.
[1] The issue at bar in this case is whether the Appellant is entitled to claim rental losses in the amounts of $33,106, $27,602, and $231,993, incurred in taxation years 1994, 1995, and 1996, and whether he is entitled to carry back losses incurred in 1996 to taxation years 1993 and 1994. The losses at issue are the result of a disastrous real estate investment the Appellant made with respect to a rental property located in Longueuil, Quebec.
[2] The Minister of National Revenue (the "Minister") disallowed the rental losses (including a substantial terminal loss incurred in 1996), because the Appellant did not have a reasonable expectation of profit from the rental of the rental property and, therefore, this property did not constitute a source of income for him. The Minister maintains that the activities of the rental property contained a personal aspect and that the rental activity carried on was not commercial in nature. Because these losses were disallowed, there were no losses to carry back to taxation year 1993.
[3] The Appellant denied that the rental activity contained a personal aspect, and he claimed that, while he was the owner of this property, he intended to make a profit, and he carried on the activities in a commercial manner.
Evidence
[4] The Appellant was the only witness called at the hearing.
[5] This is a 72-year-old man who has retired from a long career as a manager with IOC Ltd. (formerly known as the Iron Ore Company of Canada) in Sept-Îles, Quebec. The Appellant and his spouse are residents of Sept-Îles, where his spouse operates her own small retail business.
[6] The Appellant testified that, throughout the years, he had purchased a number of rental properties, including condominiums near Magog and Saint-Sauveur, and in Montréal. Although some of these properties were located near ski resorts and tourist areas, they were never used for personal enjoyment. He always intended to keep them as investments and sources of rental income.
[7] In approximately 1987, the Appellant decided to invest in another rental property in the Montréal area. He learned that the municipality of Longueuil was developing lots in a residential area, and he felt that this area offered a number of rental opportunities for a luxury single family residence. Longueuil was expanding rapidly and a number of industrial manufacturing businesses, namely Canadair and Pratt and Whitney, were located nearby. Also, the airport that was formerly a part of the Saint-Hubert military base was to reopen as a civilian establishment.
[8] The Appellant purchased a vacant lot located at 806 des Roselins, in Longueuil, for $36,000 for the purpose of building a house which he anticipated renting out to supplement his pension income. He claims that he thought he could attract better tenants by offering higher quality housing. He calculated that, at the outset, he would meet the break-even point, and that, in time, he would make a profit owing to increases in rent and reductions in the mortgage. His calculations were based on a $100,000 investment from his own capital and a $200,000 loan.
[9] He had a two-storey, five-thousand-square-foot house built with four bedrooms, three bathrooms, a family room, a games room, a swimming pool, and premium quality finishing. The house was located in the new sector of Longueuil, in a luxury homes neighbourhood.
[10] Shortly after the work began, the Appellant experienced construction problems. The first contractor he hired to do the framing invoiced the Appellant for materials he was using in the construction of another house. The cost of labour and materials was higher than projected, and extra options were added to the house. The Appellant claimed that he had been misled by the contractor who gave him the first estimate for the project; he offered excessively low prices for a number of articles, for example, the brick facing for the house. At one point, the Appellant exhausted his funds and was forced to suspend the work. The house was nearly completed, but it was not ready to be rented out. The Appellant had to perform some of the finishing work himself. The house was finally completed in 1992, at a cost of $430,000, rather than the initially estimated $300,000.
[11] The Appellant spent a considerable amount of time in his house in Longueuil to do the finishing work. He was already retired from the IOC, but his spouse remained in Sept-Îles. He also worked on the North Shore of Quebec on a part-time basis. It would have been more profitable for him to remain in Sept-Îles and work at his part-time employment, but he wanted to finish the house so that he could rent it out.
[12] The Appellant's daughter also lived in the house beginning in 1992. The house was not furnished, except for one bedroom. The kitchen was also usable, as it contained cupboards and built-in appliances. The Appellant testified that his daughter had moved into the house as a favour to him, to discourage vandalism and break-ins; during the construction of the house, one break-in occurred, as did one incident of vandalism. Moreover, the insurer of the house required that the house be occupied for it to be insurable. The Appellant's daughter paid him a nominal amount of rent, which he reported in his income tax returns.
[13] In 1993, the Appellant decided to sell the property. He claimed that he was pressured into doing so, owing to his financial situation. He was seriously indebted to the bank because of all the additional expenses, and he paid considerable amounts of interest each month. He listed the house for sale for $549,000.
[14] Even while the house was up for sale, the Appellant tried to rent out the property, but his efforts were mostly in vain: the house was rented for only two months during the summer of 1995, at a monthly rent of $4,000.
[15] In 1996, the Appellant felt that he no longer had the means to keep the house, and he surrendered it to the bank of his own volition, in exchange for discharging the mortgage. At that time, he owed the bank $366,000. This amount was deemed to be the proceeds from the disposition of the house, which resulted in a loss of $217,172 for the Appellant. He claimed this amount as a terminal loss comprising a part of the rental loss claimed for 1996.
[16] The Appellant denied having built the house for his own personal use. He claimed that the house was not adapted to his and his spouse's retirement needs, because it was too large and too costly. The size of their house in Sept-Îles was only 2,000 square feet, and it exceeded their needs. Moreover, his spouse is relatively younger than he is, and at the time the house was built, she had not yet made plans for her retirement. The Appellant also denied the allegation that he had the house built for his daughter. The house simply was not suitable for a single young woman, owing to its size and cost, and the circumstances.
Analysis
[17] In Stewart v. Canada[1], the Supreme Court of Canada stated that the first step in determining whether a taxpayer's activities constitute a source of business or property income is to make a distinction between commercial activities and recreational or personal activities. 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 analyzing the taxpayer's business decisions. However, where the activity contains aspects of a personal nature, a court must be persuaded that the primary intention of the taxpayer was to derive a profit, and there must be evidence of businesslike behaviour which supports that intention, in order to conclude that it was a source of income within the meaning of the Income Tax Act (the "Act"). One of the factors to be considered by the Court is the taxpayer's reasonable expectation of profit from this activity.
[18] Counsel for the Minister maintains that the fact that the Appellant's daughter occupied the property constitutes a personal aspect, which makes it necessary to decide whether the taxpayer had a reasonable expectation of profit during the years at issue. He admitted that there was no evidence to show that the Appellant intended to use the house for his own personal use when he purchased the lot and had the house built. However, in his opinion, the mere fact that the Appellant's daughter occupied the house constitutes the necessary personal aspect.
[19] I feel that, in situations like this one, the concept of "personal aspect" extends to situations in which personal reasons, rather than profit, lead the taxpayer to engage in commercial or rental activities. A personal aspect exists where the taxpayer enjoys or intends to enjoy a benefit or personal profit from the activity at issue.
[20] All of the evidence in this case shows that neither the Appellant nor any member of his family personally enjoyed a benefit from the operation of the rental property. I am allowing the Appellant's testimony whereby he did not build the house for his personal use or for the personal use of any member of his family. The Appellant appeared to me to be straightforward and credible, and his testimony on this point is corroborated by the clearly excessive nature of the house with respect to the needs of a retired couple or a single person. Counsel for the Respondent did not challenge the fact that the purpose of building the house was to rent it out, but he insisted that, because the Appellant and his daughter occupied the house, a personal aspect had been introduced into the rental activity. However, the need to have the house occupied for security and insurance reasons shows that the occupation of the house by the Appellant's daughter was justified by commercial motives rather than personal ones. Again, this evidence was not challenged during cross-examination, nor was the Appellant's claim that the amount of rent charged was reasonable, given the small area of the house his daughter occupied. I am also allowing the fact that the Appellant's occupation of the house was justified, owing to the finishing work he was required to perform and the fact that he gained no personal benefit.
[21] Overall, I consider that the Appellant did not have a non-commercial reason for having this house built and for operating this rental property. It appears that his failure to earn rental income is justified by unfavourable market conditions and by listing the property for sale, not by the fact that his daughter lived there. The Appellant did not choose to waive an opportunity to earn higher rental income in order to allow his daughter to live in the house. She lived in the house while it was not possible to find other tenants, as demonstrated by the rental of the house to unrelated third parties in 1995.
[22] Even if I had concluded that there was a personal aspect in the rental activity in this case, I would have, nonetheless, concluded that the Appellant fulfils the criteria of a reasonable expectation of profit, because he acted in a businesslike manner. Prior to purchasing the lot in Longueuil, he researched the rental market and assessed the development opportunities and economic growth in the area. He prepared cost projections for the construction and rental income projections, and he concluded that there was an opportunity to earn profits. After the house was completed, he took all the measures necessary to rent it, then he decided to list the house for sale to minimize his losses. It was suggested that he should have turned the house over to the bank in 1994 when he was unable to find a tenant, and the fact that he did not do so demonstrated that he was not managing this activity in a commercial manner. However, this is a criticism of the Appellant's business acumen rather than the commercial nature of the activity; it is not, therefore, relevant in the application of the criteria of a reasonable expectation of profit.
[23] I conclude that the Appellant's rental activity was a source of income for him within the meaning of the Act and that he is entitled to the deductions for losses that he has claimed.
[24] The appeal is allowed, with costs.
Signed at Ottawa, Canada, this 12th day of June 2004.
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"B. Paris" |
Paris J.
Certified true translation
Colette Dupuis-Beaulne
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REFERENCE: |
2004TCC424 |
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COURT FILE No.: |
1999-1762(IT)G |
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STYLE OF CAUSE: |
Origène Tremblay and Her Majesty the Queen |
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PLACE OF HEARING: |
Sept-Îles, Quebec |
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DATE OF HEARING: |
June 1, 2004 |
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REASONS FOR JUDGMENT: |
The Honourable Judge B. Paris |
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DATE OF JUDGMENT : |
August 12, 2004 |
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APPEARANCES: |
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For the Appellant: |
André A. Lévesque |
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For the Respondent: |
Simon-Nicolas Crépin |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
André A. Lévesque |
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Firm: |
Bonaventure, Québec |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |