Date: 20010621
Docket: 2001-487-IT-I
BETWEEN:
RAMIRO MORALES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1] These appeals are from assessments for the 1997 and 1998 taxation years. By those assessments the Minister of National Revenue disallowed rental losses claimed by the appellant from the rental of 28 Barrington Avenue in Toronto. The respondent's position is that the appellant did not have a reasonable expectation of profit from the rental operation.
[2] The concept of reasonable expectation of profit is an appropriate one to consider in this case because it is the Minister's position that the expenses associated with the rental operation are personal or living expenses within the meaning of paragraph 18(1)(h). The statutory definition of personal and living expenses in section 248 reads in part as follows.
"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.
[3] The assumptions upon which the Minister assessed the appellant are the following.
(a) in December 1988, the Appellant, his spouse, Nanette, and the spouse's sister, Jewel Revil purchased 28 Barrington Avenue, Toronto, Ontario (the "Property"), a detached single family home, for $220,000.00;
(b) Nanette Morales commenced renting the Property in 1989* and reported rental income and claimed rental losses in the 1989 and 1990 taxation years with respect to the Property as follows:
Year Gross Income Loss
1989 $10,200.00 ($45,197.00)
1990 $10,800.00 ($35,395.00);
(c) the Appellant commenced claiming the rental losses in 1991 and reported rental income and claimed rental losses in the 1991 to 1999 taxation years with respect to the Property as follows:
Year Gross Income Loss
1991 $10,200.00 ($31,065.00)
1992 $12,000.00 ($23,074.00)
1993 $12,000.00 ($32,656.00)
1994 $12,360.00 ($32,915.00)
1995 $12,840.00 ($33,381.00)
1996 $7,800.00 ($21,793.00)
1997 $7,800.00 ($28,901.00)
1998 $7,800.00 ($24,287.00)
1999 $12,000.00 ($10,340.00)**
(d) in the 1997 and 1998 taxation years, the Appellant reported rental income, expenses and losses as per Schedule "A", attached;
(e) the Appellant moved into the Property in 1996;
(f) during the 1997 and 1998 taxation years, the Property was the principal residence of the appellant;
(g) in the 1997 and 1998 taxation years, the only tenants occupying the Property were the Appellant's mother and his niece;
(h) the rent charged was not sufficient to offset the mortgage interest for the Property;
(i) amounts claimed as maintenance and repairs in the 1997 and 1998 taxation years, were capital in nature;
(j) the Appellant has not reported a profit from the purported rental operation since it's acquisition;
(k) in the 1997 and 1998 taxation years, the rental expenses were not made or incurred, or if made or incurred, were not made or incurred for the purpose of gaining or producing income;
(l) the Appellant had no reasonable expectation of profit from renting the Property during the 1997 and 1998 taxation years;
(m) in the 1997 and 1998 taxation years, the rental expenses were personal or living expenses of the Appellant.
[4] The factual parts of the assumptions are substantially correct, and the figures are not challenged, except for the price of the house which was $230,000 not $220,000. Also Mr. Morales testified that his spouse's sister was not one of the purchasers. The property was financed by a $190,000 mortgage from the owner and a $50,000 loan from the appellant's wife's parents.
[5] The first thing that strikes one is that since 1989 the property has never yielded a profit. Indeed the interest expense alone is multiples of the rent received. The mortgage has not been reduced in any significant degree. By the end of 1998 it was about $158,000.
[6] The second point is that since 1996 the appellant has lived in the property and shared it with his mother and his niece. Prior to that time it was his brother who lived there. He charged his brother about $1,200 per month. Then, when he moved in in 1996, he charged his mother and niece $750 per month. It is not entirely clear whether his niece paid anything or whether he actually received the amounts reported. In 1999 he seems to have raised the rent his mother paid to about $12,000 per year. Indeed, there is no evidence that the rents paid were fair market value.
[7] Considering the size of the mortgage interest payments in relation to the rents received it is impossible to see how the appellant could ever expect to make a profit.
[8] The appellant is in the same situation as many people who in the late 1980s bought real estate in what appeared to be a booming market, expecting that the boom would never end. The appellant with a refreshing degree of candour that I have not seen too often in these cases testified that he bought the house with the intention of "flipping" it (his word). The bottom fell out of the market in the late 1980s and he was obliged to keep the property and try to recover some of the costs by renting it. It was not at the outset a rental property. More likely it was held in the course of an adventure in the nature of trade. It became a rental property only because of the exigencies of the market place.
[9] He has tried from time to time to sell the property but without success.
[10] In 1997 and 1998 he put on a new roof and replaced the wooden windows with aluminium ones. The expense of this work was treated as maintenance and repairs for 1997 and 1998 in the amounts of $17,178 and $14,700 respectively.
[11] The appellant is critical of Revenue Canada (or CCRA) for failing to tell him sooner that the losses should be disallowed. The agency is put in a difficult situation. If it pounces too quickly wielding the reasonable expectation of profit club it is criticized for being too quick on the draw in not giving the taxpayer enough time to get the business going. In Keeping v. The Queen, 2001 F.C.A. 182, the Federal Court of Appeal reversed a decision of this court which had dismissed an appeal by a school teacher who sold Amway products on the basis that the court should not have applied the no reasonable expectation of profit principle where the appellant had been in operation for less than five years. Here just the opposite criticism is made. On one view of the matter the appellant was fortunate that the agency allowed the deduction of losses for eight years. In any event whether the agency should have pounced on Mr. Morales sooner does not affect the way this case should be decided.
[12] I think this is a clear case of personal or living expenses. The appellant has been living in a house with relatives and incurring losses that are vastly disproportionate to the income that is earned or could reasonably be expected.
[13] In light of this conclusion I need not deal with the questions raised by the respondent whether the new roof and windows are on capital or revenue account or whether the losses should be shared with the appellant's estranged wife.
[14] The appeals are dismissed.
Signed at Montréal, Canada, this 21st day of June 2001.
"D.G.H. Bowman"
A.C.J.
COURT FILE NO.: 2001-487(IT)I
STYLE OF CAUSE: Between Ramiro Morales and
Her Majesty The Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: June 5, 2001
REASONS FOR JUDGMENT BY: The Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF JUDGMENT: June 21, 2001
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Brianna Caryll
COUNSEL OF RECORD:
For the Appellant:
Name: --
Firm: --
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-487(IT)I
BETWEEN:
RAMIRO MORALES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on June 5, 2001 at Toronto, Ontario, by
The Honourable D.G.H. Bowman
Associate Chief Judge
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Brianna Caryll
JUDGMENT
It is ordered that the appeals from assessments made under the Income Tax Act for the 1997 and 1998 taxation years be dismissed.
Signed at Montréal, Canada, this 21st day of June 2001.
|
"D.G.H. Bowman" |
A.C.J.