Tax Court of Canada Judgments

Date: 20020321

Docket: 2001-2037-IT-I

BETWEEN:

ANIS MIKHAIL,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Hershfield, J.T.C.C.

[1]            This is an appeal under the Informal Procedure to reassessments of the Appellant's 1997 and 1998 taxation years. The subject reassessments deny the deduction of certain expenses consisting of property taxes, condominium fees, utility costs and motor vehicle and travel expense claims in relation to a rental property owned by the Appellant.

[2]            The subject rental property was a condominium unit located in northwestern Florida that had suffered hurricane damage in 1995 and was taken off the rental market in 1996. Repairs of the damage caused by the hurricane in 1995 were ongoing in the subject years and for some time after. During such repair period the subject property was not suitable for renting out. Given that the property generated no revenues in the subject years, the full amount of the expense claims in each year resulted in a corresponding loss.

[3]            The basis for the reassessments is somewhat confusing and difficult to deal with. The Respondent relies on different provisions of the Act any one of which might result in the dismissal of the appeal. However the principal basis for the reassessments, added by interlocutory motion at the outset of the trial, was to deny the deductions claimed pursuant to subsection 18(3.1) of the Act which would disallow the deductions claimed but, unlike other provisions pleaded, would permit their capitalization (addition to cost ) so as to reduce tax in a future year which is not under appeal.

[4]            In very general terms, paragraph 18(3.1), read together with subsection 18(3.3), applies during a period of construction, alteration or renovation of a property and disallows certain expense claims, such as those claimed in the subject years, until the use of the property for which the construction, renovation or alteration was undertaken can commence. Such disallowed expenses cannot shelter income even after such use commences but are, as stated, capitalized. While this provision might apply in this case, some might argue that there is no issue estoppel on the question of whether that provision decreases a tax in a future year in the event the application of that provision is put at issue again in the year of sale of the subject property. Ordinarily, it is the year in which a particular tax liability arises that this court has jurisdiction to rule - even in respect of occurrences in prior years that impact the liability in that later year. While this may seem to be a red herring, the application of this subsection in the factual circumstances of this case has proven to be somewhat challenging and has resulted in a finding, without the desired conviction, that denying the appeal on the basis reassessed is what is required. To do otherwise would mean that the Appellant may have been better off not to have brought this appeal at all.

[5]            I should also note that I allowed the motion to amend the Reply since ultimately it seemed likely to assist the Appellant in this case and since evidence was brought that it was the provision actually relied on by the appeals officer who confirmed the reassessment. Such decision was made however with appreciation that it's late introduction may have made it more difficult for the Appellant to respond to. The Reply should not confound the Appellant as to the issues to be addressed and the evidence to be brought and the arguments to be made. Last minute amendments to pleadings can have this affect. For these reasons I afforded the Appellant the opportunity to adjourn and consider or seek help to consider the amendment. I believe he understood the choice he was invited to make but he declined that invitation.

[6]            Having expressed such initial reservations, I will briefly describe the basis for the assessment as explained by the appeals officer who gave evidence at the trial. The expenses were initially denied on the basis that there was no reasonable expectation of profit from the activity being undertaken. The appeals officer abandoned this approach but, initially at least, wanted to confirm the assessment on the basis that paragraph 18(1)(a) of the Act denied the expenses claimed since the rental activity had ceased in the subject years. There was no income producing activity in respect of which any expenses could be claimed. However, given that the rental activity ceased during a time when the rental property was undergoing substantial reconstruction she thought it was harsh to deny the expenses. Accordingly, she testified that she finally confirmed the assessment on the basis that subsection 18(3.1) applied. Unlike applying paragraph 18(1)(a), this approach at least recognized the subject expenses as additions to cost. As my analysis will indicate however, subsection 18(3.1) cannot be addressed without first considering paragraph 18(1)(a) which denies expense claims where their incurrence was not for the purpose of earning income. The analysis requires a detailed review of the facts.

FACTS

[7]            The subject property was acquired by the Appellant in April 1994. I accept the Appellant's testimony that the subject property was acquired as a rental property which he felt could generate net rental income. The Appellant testified that prior to coming to Canada he had managed rental properties owned by his family in Egypt and therefore was not inexperienced in relation to such activities. More recently, in 1993, he had converted a personal-use condominium in Winnipeg to a rental property and had operated such rental property at a profit. Such profitable rental activity is confirmed in the Reply in that it recognizes income from the Winnipeg condominium as $7,260.00 in 1997 and $6,293.00 in 1998 with expenses having been claimed in the amounts of $5,278.00 in respect of 1997 and $5,414.00 in respect of 1998. A more complete history of the net income in respect of the Winnipeg rental property is shown on schedule 8 of the Reply. That schedule shows net income in 1996 of $1,312.00. There were net losses in 1994 and 1995 in the amounts of $4,147.00 and $1,185.00 respectively.

[8]            The Appellant testified that his decision in 1994 to acquire a further rental property in Florida was based on his desire to diversify his portfolio of bond holdings to include an additional rental property. While the Florida location presented difficulties and expenses in relation to his attending to operations on a personal basis he determined, nonetheless, that he could achieve a positive income from the rental of the condominium in addition to having some expectation of capital appreciation. I accept that testimony and accordingly accept that current expenses incurred in the operation of the Florida property would be deductible in the normal course of holding it as a rental property.

[9]            The Appellant testified that unlike southern Florida locations, the location of his condominium in northwestern Florida had a seasonal peak in terms of tourism in the summer. That is, his condominium was located at a summer beach resort that reached its peak rental period of some three and one-half months during the summer. While the Appellant testified that there was reduced rental activity for the remainder of the year, there was evidence that the winter months still enjoyed some so-called "snow bird" traffic. Regardless, the highest seasonal rental rates were summer rates and it was acknowledged that that was the prime rental season.

[10]          The Appellant acknowledged that he used the Florida condominium for his own use for approximately one month each year. He testified that this use was over December and January in each year being a period of lower marketability of the rental unit. He testified that his presence at the site of the rental property was necessary and that he chose that slower period in December and January each year to go there to attend to matters that required his personal attention. He had to visit the property and had to stay somewhere. As expenses go, staying at the unit was the least expensive option. On the other hand, the Appellant continued to use the unit in the subject years for the same period and in the four years after the subject years when the unit was not being rented. While one shouldn't be penalized for the location of an investment and while attending at its location is consistent with business requirements, the regularity and duration of these visits, with or without rental activity, suggest a personal element.

[11]          In 1994, the Florida condominium generated gross revenues of $7,676.00.

In 1995 and 1996 it generated $11,591.00 and $5,200.00 respectively. In 1997 and 1998 it generated no rental revenues.

[12]          There was no dispute as to the reason for the failure of the property to generate any rental income in 1997 and 1998. Similarly, it seems that there can be little dispute as to why the revenues dropped off in 1996 compared to 1995 and even why revenues in 1995 were lower than the Appellant might have expected. The whole community in which the Florida condominium was located had been hit by three consecutive hurricanes since the acquisition of the property in 1994.

[13]          To help understand the impact of the hurricanes, the Appellant provided a helpful description of the Florida property including pictures. The Appellant's unit is part of a condominium complex (the Shoreline Towers), located in or near Destin, Florida on an 'L' shaped peninsula accessible by one highway and a bridge. The Appellant testified that that location and the surrounding community had historically not been affected by hurricane problems in 20 years. The Appellant introduced as evidence of hurricane activity, a listing of the 30 most costly hurricanes in the United States from 1900 to 1996. Such listing was taken from a web site, which the Appellant testified was a Government site. The Respondent did not object to the listing tendered as an exhibit and did not question its authenticity or accuracy. The list shows hurricane Eloise as having struck northwest Florida in 1975. The next hurricane (large enough to make the list) was reported as hurricane Alberto which hit northwest Florida in 1994. The Appellant testified that this hurricane hit after he bought the subject unit. The next hurricane hitting the area was in August 1995. It was known as hurricane Erin and is ranked as the fifteenth most costly hurricane to hit the United States in 96 years causing $700 million in damage to the area, which included central Florida and southwest Alabama in addition to northwest Florida. The last and the worst of the hurricanes was hurricane Opal which hit northwest Florida in October 1995. Hurricane Opal is ranked as the fourth most costly hurricane to hit the United States in 96 years costing $3 billion in damage to the area, which included northwest Alabama as well as northwest Florida. It is not in dispute that hurricane Opal devastated the Destin area.

[14]          In the Respondent's Reply, the Respondent stated that hurricane Andrew had affected the subject location in 1992. However, according to the list brought forward by the Appellant, that hurricane hit the southeast coast of Florida and Louisiana and did not affect northwestern Florida where the Appellant's unit was located. That is, the Appellant's evidence supports his testimony that he had reason to believe that Destin, historically at least, was free from the hurricane risks associated with parts of southern Florida. In any event, the Respondent's Reply acknowledges that hurricane Erin hit Destin in August 1995 and that hurricane Opal hit Destin in October 1995. The Respondent admits that hurricane Erin caused the subject unit not to be available for rent for part of August 1995 and further admits that hurricane Opal caused severe and extensive damage not only to the whole of the Shoreline Towers complex where the subject unit was located but to the entire Destin Florida region.

[15]          The extent of the damage to the Appellant's unit caused by these hurricanes was not such that prevented him from occupying it by December 1995 or earning some rental income in 1996. However, there was damage to the Appellant's unit and to the Tower in which his unit was located which were not repaired until 2001. While there was no evidence as to what the repairs to the Tower as a whole were, the Appellant testified, in respect of his unit, that leaking windows and concrete and railing damage to his balcony remained unrepaired until 2001. That damage and other factors all resulting from the hurrricane activity contributed to the unit being removed from the rental market in 1996.

[16]          While the extent of damage caused by hurricane Opal is not in dispute, it seems necessary to elaborate on it somewhat in fairness to describing the circumstances in which the Appellant found himself and to which he had to react.

[17]          The Appellant tendered as an exhibit a picture postcard of the single highway giving access to the Shoreline Towers. Suffice to say that the highway was not recognizable as such but rather simply looked like a ragged portion of the coastline. The Appellant further testified that the single access bridge was severely damaged and that repairs to it and the highway took over a year to complete.

[18]          The Shoreline Towers, indeed all of the Destin area, that had been favoured as a summer tourist attraction, was now a hurricane threatened destination having suffered three hurricanes between the summer of 1994 and the fall of 1995. This obviously affected the area as a tourist attraction and would for some time.

[19]          The attachments to the Respondent's exhibit R-1 provide evidence as to the conditions that prevailed at Shoreline Towers during the subject and later years. The complex consisted of at least three towers, a number of town houses and common areas that included a swimming pool. That the Appellant's unit in Tower III was occupiable by late 1995 and, given rental receipts, apparently rentable in 1996 does not fully describe the general condition of the complex or the rentability of the unit.

[20]          There was damage to all the buildings and common areas. The complex went from affording the condominium association a profitable on-site rental program for owners, which commenced in February 1995, to not having a rental program at all after hurricane Opal. It was not until the end of 1999 that the association proposed to restart the on-site rental program. By March 2000 the association's rental program was underway and a notice (attachment 4 of exhibit R-1) indicated that there was a waiting list of renters who had requested reservations and that there were not enough rental units available to accommodate that waiting list. Members of the association (which included the Appellant) were being urged to sign up to the association's rental program. The Appellant made inquiries of the association and was advised on September 20, 2000 as per attachment 1 to exhibit R-1 that the association was not attempting to rent units in Tower III until repairs were completed. This is consistent with the Appellant's testimony that the damage to the complex indeed to his own unit had not been finally repaired until some five years after the damage was inflicted by hurricane Opal. The repair schedule was not within the control of the Appellant.

[21]          The September 20 correspondence goes on to indicate that the association had snowbird reservations for all of the units in their program (with one exception) and that assuming construction on the Appellant's Tower would be completed on time, they were taking reservations for that Tower starting January 1, 2001. The Appellant was invited to sign-on to the rental program on that basis. The Appellant did not put his unit in the rental program but, regardless, it seems that his unit would not have been rented in January, 2001 since, as stated, the repairs to the Appellant's Tower were not completed until sometime in 2001.

[22]          In spite of conditions following hurricane Opal and the collapse of the on-site rental program, the Appellant was able to retain an independent rental agent in the area to continue rental activities in 1996. This accounts for the 1996 revenues. However, the Appellant testified that the agent was dishonest and that to continue operating the property as a rental unit in the circumstances was proving impossible. Repair work, or the lack of it, made the complex noisy, dusty and likely unsafe and further the amenities of the complex and area were not conducive for renting. It was the Appellant's view that the unit was unrentable. That an unscrupulous agent might find a tenant is not sufficient in my view in these circumstances to support a finding that the property was rentable in 1996 or the subject years. If the on-site rental agency, being a reliable and principled rental agency looking for rental premises in 2000, would not regard the Appellant's unit as rentable, what better corroboration could the Appellant hope for in terms of his determination that his unit was unrentable? Further, the economics of the area had changed in the Appellant's view. Prospects for the property as a viable rental property had changed. Accordingly, the Appellant testified he did what he thought his only option was to do. He listed his unit for sale. Although this tends to support the view that rental activity was at an absolute end, I note that the Appellant did not say that he would not have commenced renting the unit again if it had been repaired earlier. That option was simply not available in the subject years and listing the property for sale did not preclude recommencement of the rental activity. I believe, in the circumstances, it is fair to say that the possibility of future income still existed although the Appellant admitted that his purpose for holding the property in the subject years was to sell it.

[23]          The unit was initially listed for a six-month period at the end of which the listing was renewed for a further six-month period and so on until the property was finally sold in 2001. He continued to pay expenses relating to the unit and to stay there for some 30 days in December and January each year until the unit sold. The amenities of the area and the complex throughout this period were such that the Appellant continued to believe that renting the unit was not a viable option. I agree, it was not.

[24]          To briefly recap, it is clear that hurricane Opal had a long-term disruptive effect on the rentability of the unit. It contributed not only to depressed economic conditions in the area for a considerable period of time but in particular made the complex in which the unit was located less desirable as a tourist rental location. Repairs to the complex took years to be fully complete and throughout this period the amenities of the area and the complex were not conducive to the quiet enjoyment of a resort destination. Even by September 2000 the Appellant's Tower was not felt to be sufficiently restored to be included in the successful resurrection of the on-site rental program.

Respondent's Assessment Position

[25]          As stated above, initially, Revenue Canada assessed the subject years and denied losses on the basis of there being no reasonable expectation of profit from the operation of the rental business. At the objection stage, the appeal division abandoned the reasonable expectation of profit position in favour of relying on paragraph 18(1)(a). The reason for the change in the Respondent's reassessment position was that the subject years were still, as viewed by the appeals officer, part of the start-up years and as such the reasonable expectation of profit doctrine did not seem to apply. Further, that doctrine would be less likely to apply where the losses arose by virtue of circumstances beyond the control of the Appellant. Abandoning the reasonable expectation of profit doctrine as the basis for the reassessments in favour of applying paragraph 18(1)(a) does not likely change the analysis in my view at least in respect of permitting expense deductions after a source of income has been shut down.

[26]          In applying subparagraph 18(1)(a) the appeals officer relied on the fact that there was no income producing activity by 1997. By then the Appellant ceased making any effort at all to rent the property. After 1996 he simply held it for sale. The expenses in 1997 and 1998 were not incurred to earn rental income and paragraph 18(1)(a) would deny their deduction in her view. That is, regardless of the reason that the property was not being rented, there was no intention to derive income during the subject years from the expenses incurred in those years. However, applying paragraph 18(1)(a) seemed harsh in the circumstances, so the appeals officer applied subsection 18(3.1) which on its express terms also seemed to fit the Appellant's case. As stated above this provision allowed for the expenses to be capitalized.

Appellant's Position

[27]          The Appellant asserts that the subject property was a rental property in respect of which current expenses were properly deducted. He relies on McGovern et al. v The Queen 94 DTC 6527 (FCTD) in support of the deductibility of expenses incurred during a sell-off phase of a rental activity. It might have helped if the Appellant had testified that failing a timely sale, he had hoped to rent the property, but he did not. As stated he simply did not see that as an available option at the time.

[28]          Although no argument was advanced by the Appellant as to the application of subsection 18(3.1), he relied on the Court to consider whether it properly applied to his circumstances where the absence of rental activity in the subject years was the direct result of a series of natural disasters. The repairs of course were also a direct result of such disasters and as such the repairs were not the underlying or causal reason for the unit not being used for its intended purpose.

ANALYSIS

[29]          As to the application of paragraph 18(1)(a), I am inclined to say that it should not be so readily applied simply because the income producing asset is up for sale during an extended period of income deprivation particularly in cases such of this where the extended period of income deprivation is caused by extraordinary conditions beyond the control and expectation of the taxpayer. The asset was acquired and held as a rental property. It continued to be a rental property even when the income streamed ended. One should not so readily dismiss an income earning purpose in respect of an expenditure when the characterization of the property has not changed. That is, provided the property has not been put to another use to which such expenditure might more appropriately attach, it remains a rental property and current expenses incurred, including expenses incurred while the property is not earning income, should not be so readily denied as not having been incurred for the purpose of earning income. While contrary to current thinking, I might go so far as to suggest that even if the income stream of an enterprise was at an absolute end, a reasonable sell-off period should be recognized during which holding expenses should be allowed. They are costs attaching to the income earning process which includes start-up costs as well as wind-up costs. That expenses during the last days of the life of an enterprise might relate to income earned in a prior year should not necessarily be fatal to their deductibility where they are costs that are a necessary part of the income producing activity albeit not incurred during the income producing years. Recognizing such expenses gives a truer picture of the profit or loss from a particular activity. Considering the purpose test in paragraph 18(1)(a) then, it should not be required that a purpose be only forward looking although that is how paragraph 18(1)(a) has always been applied. That paragraph does not, after all, say "for the purpose of gaining or producing income in the future".

[30]          While the Appellant did not pursue the rental market at all, in the subject years, I have not found that the rental activity was at an end. The property was unrentable but rental prospects still existed in spite of the Appellant's decision to list the property for sale in the subject years. Even a subjective purpose test should not preclude recognition of such prospects where there is no change in use of the property.

[31]          The property has not become inventory of the Appellant. Neither party argued that it had. Aside from that, the jurisprudence in this area supports not regarding there to be a change of use to inventory in these circumstances. The intention alone to sell a capital property does not constitute the seller as a trader. There must be an element of business-like trader activity which is wanting where capital assets of an enterprise are simply being listed for sale. The property being liquidated remains capital property and arguably should also retain its character as property held in the course of earning income even if, due to disruptive events dictating the liquidation, it is unable to produce income during that period.

[32]          The next question is whether the subject capital property has changed to a personal use property. There are two elements to this question in this case. Firstly, we have continued personal use of the property for one month per year which might suggest that the overall use has changed to personal use so that the subject expenses would properly be denied under paragraphs 18(1)(a) or 18(1)(h); and, secondly, we have property being held for investment recovery in order to minimize loss or enhance gain on the property which, not being an income producing use, might suggest that the use has changed so that the subject expenses would be properly denied under paragraph 18(1)(a). In the former case, capitalization of the subject expenses is clearly inappropriate and in the latter case, while arguably appropriate, no provision of the Act would seem to permit capitalization of such current expenses (unless paragraph 18(3.1) applies as asserted by the Respondent).

[33]          As to whether the subject property has become a personal use property, I find that it has not. In this case the Appellant is a prisoner of circumstances beyond his control. He is locked into an investment with incumbent carrying costs. The investment was made to earn income. It is not for the court to dictate what actions in these circumstances are necessary provided they are reasonable. Putting the property up for sale while it was unrentable was not only reasonable but likely prudent. It was not reflective of a change of use.

[34]          While there does not appear to be any jurisprudence regarding the application of paragraph 18(1)(a) during a sale-off period there is a relevant comparison that might be drawn with reasonable expectation of profit cases that have commented on loss claims during wind-up periods. It is interesting to note that the reasonable expectation of profit doctrine often comes down to determining if there is a source of income. Where a source or potential source is closed or is closing down there can be no source of income unless recognition of it continues for some reason. The question of permitting recognition of a source in a reasonable expectation of profit case after that source has been or is in the course of being shut down would be the same, or so it would seem to me, as the question that arises when considering the application of paragraph 18(1)(a) which requires that the purpose of the expense be to earn income - from a source. In any event, in a recent Informal Procedure case, Heard vs Canada 2001 T.C.J. No. 554, Judge Miller found that the reasonable expectation of profit doctrine should not be applied during a reasonable wind-up period. I endorse this view and suggest that it implicitly accepts the deductibility of expenses during a reasonable wind-up period where the income from a prior source has been cut off. Paragraph 18(1)(a) would dictate a contrary view unless it too allowed that the purpose of an expenditure can be tied to the purpose of holding the property which includes historical purpose where no new purpose overrides.

[35]          The McGovern case referred to by the Appellant supports this view to some extent as well. As in the case at bar, the sell-off in McGovern was due to changing economic conditions resulting from events beyond the taxpayer's control. Unlike the case at bar, in McGovern, the taxpayer did continue some rental activity during the sell-off phase. Expenses (losses) were allowed. While the factual difference of having some rental receipts is not immaterial, I am inclined to apply the principle of that case to the facts here. The Appellant in the case at bar could not reasonably be expected to derive any rents because it was unrentable in the course of holding it as a rental property. The obligations attaching to this income source did not disappear just because the revenue ceased. The analogy to McGovern is valid, in my view, regardless that in the case at bar there were no revenues in the subject years.

[36]          My preoccupation with paragraph 18(1)(a) this far stems from a problem I have with the Respondent's approach in applying subsection 18(3.1). On the one hand, the Respondent asserts that the Appellant did not have the requisite purpose in incurring the subject expenses since he had taken the property off the rental market and held it only for sale. On the other hand, the Respondent wants subsection 18(3.1) to apply. However that subsection cannot apply in my view if paragraph 18(1)(a) applies to deny the subject expense claims. Subsection 18(3.1) denies deductions notwithstanding any other provision of the Act. It cannot, in my view, apply to expenses already denied by any other provision of the Act. To read this provision otherwise would permit capitalizing non deductible expenses. Personal expenses for example could be capitalized under this provision if it did not implicitly require that the expense be otherwise deductible. In applying subsection 18(3.1) then it seems that the Respondent's principal assessing position has to be that paragraph 18(1)(a) does not apply.[1] I am it seems applying my best efforts to agree with the Respondent lest I put the Appellant in the position of being in a worse position for having come to Court than he would have been in had he not appealed.

[37]          Subsection 18(3.1), and subsection 18(3.3) which the amended Reply makes reference to as well, read as follows:

(3.1) Costs relating to construction of building or ownership of land

Notwithstanding any other provision of this Act, in computing a taxpayer's income for a taxation year,

(a) no deduction shall be made in respect of any outlay or expense made or incurred by the taxpayer (other than an amount deductible under paragraph 20(1)(a), (aa) or (qq) or subsection 20(29)) that can reasonably be regarded as a cost attributable to the period of the construction, renovation or alteration of a building by or on behalf of the taxpayer, a person with whom the taxpayer does not deal at arm's length, a corporation of which the taxpayer is a specified shareholder or a partnership of which the taxpayer's share of any income or loss is 10% or more and relating to the construction, renovation or alteration, or a cost attributable to that period and relating to the ownership during that period of land

(i) that is subjacent to the building, or

(ii) that

(A) is immediately contiguous to the land subjacent to the building,

(B) is used, or is intended to be used, for a parking area, driveway, yard, garden or any other similar use, and

(C) is necessary for the use or intended use of the building; and

(b) the amount of such an outlay or expense shall, to the extent that it would otherwise be deductible in computing the taxpayer's income for the year, be included in computing the cost or capital cost, as the case may be, of the building to the taxpayer, to the person with whom the taxpayer does not deal at arm's length, to the corporation of which the taxpayer is a specified shareholder or to the partnership of which the taxpayer's share of any income or loss is 10% or more, as the case may be.

(3.3) Completion

For the purposes of subsection (3.1), the construction, renovation or alteration of a building is completed at the earlier of the day on which the construction, renovation or alteration is actually completed and the day on which all or substantially all of the building is used for the purpose for which it was constructed, renovated or altered.

[38]          These provisions were enacted to prevent soft cost deductions during construction[2]. As noted, they were not intended to alleviate hardships and that being the case there are some difficulties in applying these provisions to the case at bar.

[39]          The costs or expenses being denied by the application of subsection 18(3.1) must be related to the construction, renovation or alteration of a building (which is not the case here) or be costs or expenses that must, firstly, be attributable to the period of construction, renovation or alteration ("construction period expenses"), and, secondly, be construction period expenses "relating to the ownership during that period of land that is subjacent" to that building.[3]

[40]          As to the second requirement for applying subsection 18(3.1) to construction period expenses, the property taxes and condominium fees claimed by the Appellant in this case relate, in large measure at least, to the ownership of land that is subjacent to the building in which the Appellant owned his unit during the repair period. Arguably all such expenses "relate" to the ownership of such subjacent lands even though part of such expenses might be attributable to common areas or even lands subjacent to other buildings. [4]

[41]          As to the first requirement for applying subsection 18(3.1) to construction period expenses, there is no doubt that the subject years fall within a period when the Shoreline complex was undergoing substantial repairs. Is that a period of "construction, renovation or alteration"? That question might be more easily answered except what work was actually done during the subject years is not in evidence. Still, the probability is that extensive repairs were being done at least to the complex that included "buildings". In terms of the broader question, as to whether the period that repairs were undertaken is a period of "construction, renovation or alteration of a building", the Canadian Oxford Dictionary includes in the meaning of the word "renovate" an act to "restore to good condition; repair". The extensive nature of the repairs, necessitated by damage from external forces, lend them to being described as a "restoration to good condition" project. Such extensive repairs over such extended period might even constitute a period of "construction".

[42]          Subsection 18(3.3) suggests that the "construction, renovation or alteration" being referred to in subsection 18(3.1) be such as to prepare it (a building) for a use after completion of the work. This implies an inability to use the property for that use during the construction period. That period is over when the property being constructed, renovated or altered "is used for the purpose for which it was constructed, renovated or altered". What is that purpose where the work is being undertaken for many owners each with a different use of their respective unit? In this case, the use must, in my view, be the quiet, safe enjoyment of the unit affording complete utilisation including rental use which, in respect of the Appellant, did not occur until 2001. It seems then that the subject expenses are capable of being found to be construction period expenses in the subject years.

[43]          As I stated at the outset, I have found the subject reassessment difficult and challenging and has resulted in a finding, without the desired conviction, that denying the appeal pursuant to subsection 18(3.1) is what is required. This appeal might best have been dismissed from the bench by simply adopting the views of the appeals officer since, in the circumstances, I agree that the best result is to apply subsection 18(3.1).

[44]          There is one remaining issue to deal with which is the application of paragraph 18(1)(h) of the Act.

[45]          Schedule B to the Reply denies $99 and $100 of motor vehicle expenses (while in Florida) for 1997 and 1998 respectively as personal expenses as well as $45 and $801 respectively for travel expenses (getting to and from Florida). Further, a portion of all other rental expenses (condo fee, property taxes and utilities) are denied as personal as well. The portion disallowed as personal is one twelfth to reflect the one month each year that the Appellant lived in the unit. This part of the reassessment shall stand as well. Travel and motor vehicle expenses are properly denied as they cannot likely relate to anything other than personal use given that there was no rental activity in the subject years. These expenses do not relate to the holding of the property even in the prospect of having future income potential. As to the Respondent's treatment of the other expenses noted above, apportioning one twelfth as personal, I find that to be reasonable.

[46]          Accordingly the appeals are dismissed.

Signed at Ottawa, Canada, this 21st day of March 2002.

"J.E. Hershfield"

J.T.C.C.

COURT FILE NO.:                                                 2001-2037(IT)I

STYLE OF CAUSE:                                               Anis Mikhail and

Her Majesty the Queen

PLACE OF HEARING:                                         Winnipeg, Manitoba

DATE OF HEARING:                                           December 10, 2001

REASONS FOR JUDGMENT BY:      The Honourable Judge J.E. Hershfield

DATE OF JUDGMENT:                                       March 21, 2002

APPEARANCES:

For the Appellant:                                                 The Appellant himself

Counsel for the Respondent:              Angela Evans

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-2037(IT)I

BETWEEN:

ANIS MIKHAIL,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on December 10, 2001 at Winnipeg, Manitoba, by

the Honourable Judge J.E. Hershfield

Appearances

For the Appellant:                      The Appellant himself

Counsel for the Respondent:      Angela Evans

JUDGMENT

          The appeals from assessments made under the Income Tax Act for the 1997 and 1998 taxation years are dismissed in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 21st day of March 2002.

"J.E. Hershfield"

J.T.C.C.

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