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Citation: 2004TCC625 |
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Date: 20041102 |
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Docket: 2001-3616(IT)G |
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BETWEEN: |
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THOMAS LEE, |
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Appellant, |
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And |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
For the Appellant: The Appellant himself
Counsel for the Respondent: Andrea Jackett
____________________________________________________________________
REASONS FOR JUDGMENT
(Delivered orally from the Bench on
June 14, 2004, at Toronto, Ontario)
Mogan J.
[1] This is an appeal with respect to the 1997 taxation year of Thomas Lee. The only witness in this appeal was Mr. Lee himself and he identified himself as a software engineer. He was employed in Canada in 1997 receiving an above average income as an employee. Mr. Lee now resides in the state of Texas, in the U.S.A. and he explained that he moved to Texas in 1999 for employment purposes.
[2] In filing his income tax return for 1997, Mr. Lee reported his employment income in Canada and he also included a Revenue Canada form T776, Statement of Real Estate Rentals, for a rental property identified as Windjammer, Units 314 and 316, 1400 Gandy Blvd. in St. Petersburg, Florida. For those properties, he showed the number of units as two, the gross rents as $520, and the only expense he claimed was for interest in the amount of $1,562.84 resulting in a net loss of $1,042.84. Also, he claimed a terminal loss of $54,800 on the disposition of these properties.
[3] The Appellant stated that around 1991, he purchased two condominium units in St. Petersburg, Florida without having seen them. He listened to a real estate salesman about the possibility of earning rental income and, therefore, he raised $15,000 in cash; arranged an American mortgage on the properties through a company identified as Intellivest Group; and he borrowed $31,400 from the Laurentian Bank. With the two mortgages from Intellivest and the loan from the Laurentian Bank plus his cash down payment of $15,000, he purchased these two units in 1991 without seeing them. He then reported gross rents and a loss for each of the years from 1991 up to and including 1996.
[4] In 1997, he decided that he would not keep the properties any longer. They had shown nothing but losses every year and so he stopped making any payments on the US mortgage knowing that it would be foreclosed. He was content to get out of the properties on that basis. The mortgage was foreclosed and there was entered as Exhibit R-3 a Warranty Deed dated September 4, 1998 between Bankers Trust Company, as trustee for Mortgage Pass Through Certificates, and there is a series of them, and another group called Residential Solutions Inc., a Florida corporation. It recites a number of properties including both Units 314 and 316 in Building 3 which are the two units which Mr. Lee claims that he purchased, and the Warranty Deed seems to transfer property to someone I assume is either the mortgagee or some other third party.
[5] I now return to the Appellant's 1997 income tax return which is Exhibit R-4 and his claim for a terminal loss of $54,800. When he was asked by counsel for the Respondent how he determined the terminal loss of $54,800, he said he started with the Laurentian Bank loan for $31,400 in support of which he produced a copy of a Floating Rate Demand Note with General Trust dated January 17, 1992 (Exhibit R-1), which stated on page 4:
The undersigned hereby acknowledges having applied to General Trust Corporation of Canada for an equity loan in the principal amount of ...
And then the Appellant has ticked $15,700 for a property identified as Renoir Unit B, a style of the condominium he purchased, and since he bought two of them he had a $15,700 loan with respect to each, for a total of $31,400. Again on page 4, the following statement appears:
The Equity Loan, in part, finance the purchase by the undersigned from Intellivest Realty Corporation (the Vendor) of a beneficial interest in and to a unit in the real estate syndication ... of Windjammer Condominium Units. ..."
Therefore, Exhibit R-1 from General Trust confirms the amount borrowed with respect to Windjammer Condominium Units; and Exhibit R-3, which is the Warranty Deed, refers to certain units including Units 314 and 316 in Building 3, a condominium according to the Declaration of Condominium, recorded in the Official Records for Pinellas County, Florida.
[6] So there is outside third party documentation linking the Appellant with those units at Windjammer. Exhibit A-1 is a document he downloaded from the Pinellas County records also showing his name in connection with Units 314 and 316, Windjammer. Exhibit R-1 is the floating rate demand note; Exhibit R-2 being the Laurentian Bank statement for August 1998 showing a balance of $31,400; Exhibit R-3 being the Warranty Deed referring to those units being foreclosed in Windjammer; and Exhibit R-4 which is the Appellant's tax return identifying Windjammer as the rental properties. Therefore, I am satisfied from the external documentation and the credibility of the Appellant himself that he did own properties in St. Petersburg, Florida from 1991 to 1996. Counsel for the Respondent stated in argument that she did not suggest the Appellant was not credible. In my opinion, that was a prudent statement by counsel because it is the responsibility of every barrister to make some kind of appraisal of a witness, and the Respondent's counsel's appraisal of the Appellant as a witness is consistent with my own. I found him to be credible.
[7] Another area of corroboration for the Appellant's evidence is the fact that in paragraph 15(c) of the Reply to the Notice of Appeal, there is a statement of the rental losses which he deducted from 1991 to 1996 and his testimony is that they were allowed each year and never disallowed as a loss deduction by Revenue Canada. Perhaps Revenue Canada did not get around to auditing the Appellant, but there is an acceptance on the part of the Respondent that the Appellant was not only claiming the losses each year but Revenue Canada was allowing them and must have been satisfied that there was some justification for his claiming them. It would take a particularly outrageous act of effrontery for a taxpayer to claim losses like this without any justification whatsoever if he did not own the properties.
[8] Also, the losses for a man earning the Appellant's kind of income, were tolerably low in the sense that they were well under $8,000, some of them being as low as $2,800 and $3,500. They are not the kind of losses that would have necessarily excited the interest of Revenue Canada given the size of the Appellant's income. I therefore conclude that the Appellant is a believable witness, that he made an investment in real property in Florida, and that he suffered a significant loss on the disposition of that property.
[9] There are two or three questions which arise though in terms of measuring the kind of relief which the Appellant might obtain. One question raised by counsel for the Respondent was whether the Appellant claimed the loss in the right year. If he suffered a loss, did it happen in 1997 or 1998? Secondly, she raised the argument of whether the loss is all his because some of the documents indicated that the property might have been registered in the name of the Appellant and his wife. And thirdly, she questioned whether he could document enough of the loss to justify the amount claimed. The Appellant claimed $54,800 as a total loss in his tax return but in his Notice of Appeal he claimed only $31,400. He indicated "I only claimed that because it is the only one I can really prove, even though I did pay $15,000 in cash". There is a fourth question and that is, assuming that he has this cost and if it was for rental purposes, to what extent does it relate to depreciable property which might give rise to a terminal loss, and to what extent does it give rise to non-depreciable property like land or the common elements of a condominium building?
[10] The Appellant did say that in all the years he deducted the losses, he never claimed capital cost allowance, probably because the actual expenses laid out each year exceeded the revenues. He also said that he filed with his tax return a statement from the management corporation in Florida which managed the rental of his two units and he simply used that statement as a vehicle for measuring his loss which probably, in my speculation, would count only actual cash revenue and cash outlays and not take into account the depreciation, or capital cost allowance as it is known for income tax purposes.
[11] Therefore, I will allow part of the Appellant's appeal on the basis that the properties were actually purchased and that he had a business purpose in them because he said he never saw them before he bought them and only saw them once in 1995 when he and his wife took their children to Florida. They saw the properties but did not stay in them because they were rented and so he has never used them personally. In my view, the Appellant has not offered sufficient evidence to justify a terminal loss claim of $54,800. That amount is simply not sustainable.
[12] Counsel for theRespondent brought to my attention a well-known but brief decision of the Federal Court of Appeal in Njenga v. The Queen, 96 DTC 6593, which emphasized the need to prove amounts for losses claimed. She also referred me to a particular decision which followed that by Justice Miller of the Tax Court of Canada in Quaidoo v. The Queen, [2004] 1 C.T.C. 2540. I am going to read a passage from Justice Miller's judgment because it shows the danger in a case like this and the exception, which I think the Appellant has met here. Justice Miller says at paragraph 19, referring to the taxpayer:
... his lack of record keeping, the oddity of invoices as receipts, his vagueness as to exactly what goods were acquired and how, his vagueness as to the nature of the business as a proprietorship or partnership, and if the latter with whom, leaves me unable to rely solely on his oral testimony as to his expenditures. ...
And the appeal was dismissed.
[13] As I have already indicated, I do not have to rely on the oral testimony alone of the Appellant because there are so many documents in evidence which corroborate his story; and I refer to Exhibit R-1, the floating rate demand note; Exhibit R-2, the statement of the Laurentian Bank showing $31,400 owing; Exhibit R-3, the Warranty Deed foreclosing on those units; Exhibit R-4 which is a tax return showing that the Appellant at the time simultaneously claimed a loss with respect to the Windjammer; and Exhibit A-1 which is a document he downloaded from Pinellas County in Florida showing his name on title for Units 314 and 316.
[14] I accept that the Appellant had a cost of $31,400 with respect to the Laurentian Bank loan and that he lost that money when he permitted the first mortgagee in the US to foreclose on the mortgage. That amount is, in my view, a proven loss. I also assume that no person could get mortgage money in Canada without some kind of down payment or equity in the property. That is to say, accepting the fact that he has proven that he borrowed $31,400 for these properties, I cannot imagine the Laurentian Bank or General Trust would have loaned him the full amount of the remaining balance after the first mortgage in the US. In other words, most banks that are going to advance money will advance up to 70 or 80 or 90% but, they want the buyer to put in some of his own money as a hedge against the loan. I do not know what amount is reasonable but, given the fact that the Laurentian Bank was lending $15,700 on each unit, for a total of $31,400, I would assume that they would want him to advance at least half of that for each unit which is $7,500 each, or $15,000 altogether, and that is the amount he mentioned. He stated, "I had to put up a $15,000 down payment" and that kind of ties in, in my view, with the financing proven in the documents because he would have to put up on each unit at least half of the amount the Laurentian Bank put up. So for each unit, the Appellant put up $7,500 and Laurentian Bank put up $15,700 which is approximately double his amount.
[15] Therefore, I am going to accept his oral evidence in all of the circumstances supported by the documentary evidence that he had to put up a cash down payment and I accept his evidence of $15,000. The Appellant therefore has proven to my satisfaction an investment of $31,400 plus $15,000 or $46,400 in these Florida properties. I am satisfied that that is the amount he lost when they were foreclosed by the US mortgagee and that he has suffered that loss. But that is the only amount of loss he has proven here in court today. Therefore, I accept the loss at $46,400.
[16] In my view, I have to regard that amount as a capital loss because I do not know how to take that amount and allocate it between depreciable property and non-depreciable property when there is no method of determining how the accounting of the Windjammer condominium corporation was set up at the time these properties were acquired around 1991 and 1992. So I am going to call it a capital loss.
[17] On the other two issues that have troubled me, which were raised by counsel for the Respondent, I am going to accept the loss of the Appellant alone and not share it 50/50 with his wife because his name is the one that appears. First of all, he claimed the loss himself in the years under appeal as acknowledged in the Reply to the Notice of Appeal. In the demand note, (Exhibit R-1), it shows the borrowers as Thomas and Tracey Lee. In the Laurentian Bank statement it shows the clients of the bank as Thomas and Tracey Lee. The Appellant's name does not appear at all in Exhibit R-3 but his is the only name which appears in the Pinellas records, (Exhibit A-1), and he said he was the one who deducted the losses in each year, and he spoke of the properties as his own. Therefore, I think that while the banking people may have wanted his wife to sign on for bank loans more or less to guarantee the amounts they were lending to him and to protect the bank, I accept the fact that the property belonged to the Appellant alone and therefore the losses are his alone.
[18] Lastly, the question of whether the loss was suffered in 1997 or 1998, I am going to give the Appellant the benefit of the doubt because in 1997, in his mind, he abandoned the properties when he stopped making payments on the US mortgage. He said that he gave up that year and that is why he claimed the loss in that year. He knew he would be foreclosed by the mortgagee in the US and that he would have to then make good from his own resources in paying back the Laurentian Bank. But I gather it was a non-recourse loan in the US so that he was not personally liable on the first mortgage beyond the property itself. So that once it was foreclosed, he probably had no further liability to the American mortgagee, but of course he did have a personal liability to the Laurentian Bank which he paid off. Therefore, because there is no way to allocate this between depreciable property which might give rise to a terminal loss, and other capital property which is not depreciable property, I am going to regard the whole amount of the $46,400 as a capital loss suffered in the 1997 taxation year, and that is the extent of the relief that I can grant the Appellant.
[19] The Appellant will be granted a capital loss of $46,400 which would translate into an allowable capital loss of some lesser amount. I believe it is about 75% for the year that we are talking about. So I believe the Appellant will get an allowable capital loss equal to 75% of $46,400 which will be about $34,800. Therefore, the appeal is allowed in part with no costs to either party. I will not grant costs to the Appellant because he obtained only partial relief; and I will not grant costs to the Respondent because the appeal was allowed substantially to the extent of granting an allowable capital loss of about $34,000.
Signed at Ottawa, Canada, this 2nd day of November, 2004.
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"M.A. Mogan" |
Mogan J.
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CITATION: |
2004TCC625 |
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COURT FILE NO.: |
2001-3616(IT)I |
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STYLE OF CAUSE: |
Thomas Lee and Her Majesty the Queen |
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PLACE OF HEARING: |
Toronto, Ontario |
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DATE OF HEARING: |
June 14, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice M.A. Mogan |
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DATE OF JUDGMENT: |
June 22, 2004 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Andrea Jackett |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
N/A |
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Firm: |
N/A |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |