Date: 20000708
Docket: 1999-4957-IT-I; 1999-4958-IT-I
BETWEEN:
CONSTANCE MAITLAND, DARLENE KONDUC,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasons for Judgment
Porter, D.J.T.C.C.
[1] These appeals were heard on common evidence by consent of the parties under the informal procedure in Edmonton Alberta, on June 5, 2000.
[2] They arise out of the operation of the “This Is It Bed and Breakfast” business by the Appellants during the taxation years 1995, 1996 and 1997, from premises purchased by them for that purpose. The business was to provide accommodation for out of town visitors to the close-by University of Alberta in Edmonton. The Appellants and other family members also resided on the premises.
[3] In the case of Darlene Konduc, the Minister of National Revenue (the "Minister") has disallowed expenses of $4,946.32 and $7,463.67 for the 1995 and 1996 taxation years respectively, and reduced a minimum tax carry-forward credit by $409.23 for the 1997 taxation year. In reassessing Constance Maitland, the Minister disallowed expenses of $16,377.77 and $10,462.10 respectively. In doing so, he relied on the provisions of subsection 18(12) of the Income Tax Act (hereinafter called “ITA”). The Appellants maintain in these appeals that subsection 18(12) of the ITA does not apply in the circumstances at hand. That, then, is the issue.
[4] The issue turns both on a question of law, that is, the interpretation to be given to the words “self-contained domestic establishment” in subsection 18(12) of the ITA and upon the factual situation in which the Appellants operated their business. The calculations themselves are not in issue between the parties, but simply whether or not subsection 18(12) of the ITA applies.
The Law
[5] Subsection 18(12) of the ITA reads as follows:
"18(12) Work space in home – Notwithstanding any other provision of this Act, in computing an individual’s income from a business for a taxation year,
(a) no amount shall be deducted in respect of an otherwise deductible amount for any part (in this subsection referred to as the “work space”) of a self-contained domestic establishment in which the individual resides, except to the extent that the work space is either
(i) the individual’s principal place of business, or
(ii) used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business;
(b) where the conditions set out in subparagraph (a)(i) or (ii) are met, the amount for the work space that is deductible in computing the individual’s income for the year from the business shall not exceed the individual’s income for the year from the business, computed without reference to the amount ...
(c) any amount not deductible by reason only of paragraph (b) in computing the individual’s income from the business for the immediately preceding taxation year shall be deemed to be an amount otherwise deductible that, subject to paragraphs (a) and (b), may be deducted for the year for the work space in respect of the business.”
[6] The words “self-contained domestic establishment” are defined in subsection 248(1) of the ITA as follows:
“self-contained domestic establishment”means a dwelling-house, apartment or other similar place of residence in which place a person as a general rule sleeps and eats;”
[7] I might say, at the outset, that the name attached to the business by the Appellants is not in any way conclusive. In considering whether or not the premises in question fall within the definition of a “self-contained domestic establishment”, it matters not whether they called their business a “bed and breakfast”, which usually involves the connotation of being in the private residence of a person, or a “hotel” which it does not. The Court must concern itself more with the substance and nature of the operation, rather than the title put upon it by the Appellants.
[8] Bowie J. of this Court dealt with the purpose of subsection 18(12) of the ITA in the case of Lott et al v. Her Majesty the Queen, 1997 CarsewellNat 2064, [1998] 1 C.T.C. 2869, and said this:
“...It is quite clear in the words of subsection (12) that it is intended to restrict the extent to which individuals who use their homes for business purposes may deduct a portion of the cost of maintaining the home from their business income. The rule which this subsection establishes is that costs arising out of the maintenance of the home in which a business operates may be deducted only if subparagraph (i) or (ii) is satisfied, and then only to the extent that it does not have the effect of putting the business into, or of contributing to, a loss position. By its terms it is applicable to “a business”, and nothing in the words of the subsection can reasonably be construed as limiting their operation to any particular type of business, or as excluding from them any particular type of business.”
[9] He also said, in dealing with the interpretation to be put upon “self-contained domestic establishment” in subsection 248(1) of the ITA:
“It is argued, first, that this does not apply to the Appellants’ house, because Mr. Lott ate most of his meals away from home, Mrs. Lott ate dinner at her place of alternate work in the latter two years, and when she ate breakfast and lunch in the house, it was not then a residence, but a day-care establishment, because the children were there. So, the argument goes, it cannot be said that, as a general rule, they slept and ate in their house. I find no merit in this argument. The evidence was that they slept in the house all the time, and that they ate their meals there, except when they took them at a restaurant, at work, or as guests somewhere else. Common sense has not yet been displaced as an aid to interpretation. In this case it tells us that the Lotts’ house, even though they selected it for its suitability as a day-care centre, is their residence, and a self-contained domestic establishment.”
[10] I adopt the words of Bowie J. as an approach to the interpretation of the words in question.
The Facts
[11] The facts relied upon by the Minister, which are similar in each appeal, are set out in the Replies to the Notices of Appeal signed on behalf of the Deputy Attorney General of Canada. They read as follows:
"...
(b) the Appellant is a 2/3 partner in the Business;
(c) the Appellant's partner is a 1/3 partner in the business;
(d) the Business operated in a three story, 3,500 square foot house;
(e) the top floor is approximately 1,000 square feet containing 3 bedrooms;
(f) the top floor is used strictly for personal purposes, one bedroom for one partner, one bedroom for her son and one bedroom for an office;
(g) the second floor is approximately 1,250 square feet and contains 5 bedrooms;
(h) the second floor has 3 bedrooms available for rent and 2 bedrooms are used as a suite for the other partner;
(i) the main floor is approximately 1,250 square feet and is used in the business;
(j) in addition to the Business both the Appellant and her partner carry on other separate businesses;
(k) 60% of the house is dedicated to the business;
(l) the Appellant and her partner carry on the business in a self-contained domestic establishment in which they reside;
..."
[12] The evidence revealed that the facts are not greatly in dispute, other than item 12(l), which is the issue itself. Evidence was given by both Appellants and by Dr. Lloyd Steier. I did not find the evidence of the latter particularly helpful, as it was based on reports from his students who did a study of the business in question, and he had no personal knowledge of the operation.
[13] It was clear from the evidence of the Appellants that they bought this property in 1994 for the purpose of setting up the business in question. It had been previously used as a fraternity house for students. It needed considerable renovations to turn it into the type of business the Appellants had in mind. They undertook this work and also took up residence in the premises themselves.
[14] The plan was to make the facility available for visiting professors and the like to the local University. The idea was to make it seem as much as possible like a home away from home, in contrast to a regular hotel room. Visitors could even have business meetings on the premises if they so chose. They had individual rooms and also common areas where they could sit, visit or eat. The kitchen was on the ground floor and served both the needs of the Appellants and their guests.
[15] The Appellant Konduc used two of the five rooms on the second floor as her master bedroom and sitting room. The remaining rooms were guest rooms. There were three of them. Her rooms could have been adapted for use of the guests if she had moved out.
[16] The third floor was used by the Appellant Maitland and her son and not by guests at all. There was an office also on this floor.
[17] The main floor consisted of common areas used by both the guests and the Appellants.
[18] Out of eight rooms in the house, it is clear that they rented out three rooms and shared the use of the ground floor common areas. Five rooms on the second and third floors were reserved for their own private use.
[19] Various figures were advanced in the evidence, but at the end of the day, it seems to me that overall, the rentable rooms were rented out between 30% and 40% of the available time.
[20] The Appellants worked on the basis of 180 days per annum each. They each had other occupations and interests. They needed 24 hour coverage for everything from bookings, attending to the needs of their guests, preparing breakfasts which they served, and other general duties. It was clear from the evidence that they set and maintained high standards and developed a very good reputation. Pictures were produced in evidence which clearly showed a warm and happy environment. They also showed the building had originally been constructed as a residence as opposed to a hotel or commercial building.
[21] Although in particular the Appellant Konduc had other premises to which she sometimes went to stay, it is clear that for the major part of the time, during the years in question, both Appellants used the rooms in the premises as their principal places of residence. They slept and ate there more than anywhere else.
[22] A number of documents were provided in evidence relating to licenses and permits that the Appellants had received from various different authorities. I did not find these particularly useful as again, they simply applied a name to the operation taking place in the premises and did not deal in any substantive way with the actual nature of the business being carried on there.
Conclusion
[23] Counsel for the Appellants has argued that subsection 18(12) of the ITA does not apply to the premises in question as he maintained they were not a “self-contained domestic establishment”. He maintained that the only reason the Appellants resided on the premises was due to the nature of the business, much as the manager of a motel or small hotel sleeps in his own suite on the premises. By analogy, he advanced arguments that the meaning of the words “principal” and “primary”, all required more than 50% use by the taxpayer. He, on behalf of his clients, conceded that 60% of the space was used for the business and thus, he says it is primarily a business.
[24] The Minister, on the other hand, has argued that this clearly is not a hotel in the commercial sense of that word. It was not run like a hotel and was held out to be a home away from home. A major part of the premises was used exclusively by the Appellants and family members and they shared common areas, according a degree of privacy to guests, when the latter were there.
[25] The Minister has accepted that a business was carried on in the premises and that there were legitimate business expenses incurred. However, he maintains that due to subsection 18(12) of the ITA, the losses incurred by the business, taking into account those expenses, cannot be set-off against other income for the same years. They might have been carried forward to be set-off against future profits. However, the business closed down before that time arrived.
[26] Upon considering all of the evidence, I find that this was not a “hotel” operation, but indeed was a “bed and breakfast” operation within the normal meaning of that word; that is to say that guests came and stayed in the home of the Appellants. It is true that there was more of a commercial nature to the operation than is often the case. Nonetheless, the Appellants occupied exclusively, with family members, a major part of the premises and shared with their guests other common areas. It is clear that it was originally a dwelling house. It had been used for intervening purposes, but during the time in question, it was occupied as a residence by the Appellants. When no one else was there, they still occupied it as their residence. Although they had other places available to them to stay from time to time, as a general rule, they slept and ate on these premises. It was a dwelling house or a similar place of residence. It was not a commercial office building or regularly constructed hotel or motel. In my view, it clearly falls within the definition of a “self-contained domestic establishment”, set out in the ITA. In my opinion, it is not realistic to draw an analogy between this situation and a manager living in a suite in a regular motel or hotel. In that situation, the operation is clearly a hotel or motel in which the manager lives in a small part. Here, this was clearly their home into which they received paid guests and that remained so despite the high quality of their operation, the hard work they put in, and their original plans to operate it as a bed and breakfast operation.
[27] In the event, both appeals are dismissed.
Signed at Calgary, Alberta, this 8th day of July 2000.
"Michael H. Porter"
D.J.T.C.C.