[OFFICIAL ENGLISH TRANSLATION]
2000-2291(IT)I
BETWEEN:
STÉPHANE MALTAIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on June 26, 2000, at Québec, Quebec, by
the Honourable Judge Pierre Archambault
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Anne Poirier
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1996, 1997 and 1998 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant had a reasonable expectation of profit from the rental of half of his property located at 115 and 117 St-Louis Street in Beaupré.
Signed at Ottawa, Canada, this 8th day of August 2001.
|
"Pierre Archambault" |
J.T.C.C.
Translation certified true
on this 30th day of January 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20010925
Docket: 2000-2291(IT)I
BETWEEN:
STÉPHANE MALTAIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the Bench
on June 26, 2001, at Québec, Quebec,
and edited for clarity and completeness)
Archambault, J.T.C.C.
[1] Stéphane Maltais is challenging the income tax assessments made by the Minister of National Revenue (the Minister) for the 1996, 1997 and 1998 taxation years (years at issue). In respect of each of these taxation years, he claimed a deduction for rental losses relating to a property located at 115-117 St-Louis Street in Beaupré (the property or the duplex). The Minister disallowed these deductions on the grounds that Mr. Maltais did not have a reasonable expectation of gaining or producing an income from the property.
Facts
[2] At the outset of the hearing, Mr. Maltais admitted all the facts stated by the respondent in the Reply to the Notice of Appeal, with the exception of subparagraphs (d), (l), (m) and (n) of the relevant paragraph. The following are the facts that were admitted:
[TRANSLATION]
(a) the appellant owns a two-unit house located at 115-117
St-Louis Street in Beaupré;
(b) the appellant lives in the lower unit, and the upper unit is intended to be rented;
(c) since 1991, the appellant has earned the following income from the upper unit:
|
YEAR |
GROSS RENTAL INCOME |
RENTAL LOSSES |
|
1991 |
$3,000 |
($2,358) |
|
1992 |
$3,000 |
($2,239) |
|
1993 |
$3,000 |
($2,571) |
|
1994 |
$1,500 |
($2,054) |
|
1995 |
$0 |
($6,220) |
|
1996 |
$0 |
($4,668) |
|
1997 |
$0 |
($5,087) |
|
1998 |
$2,000 |
($3,418) |
(e) at all material times, the appellant worked as a papermaker for Abitibi-Price;
(f) the unit stood vacant from July 1994 to December 1997 inclusive;
(g) beginning in January 1998, the appellant rented the unit to a friend for a monthly rental of $200;
(h) the appellant claimed 50% of the following expenses as rental expenses:
|
DESCRIPTION |
1996 |
1997 |
1998 |
|
Insurance |
$490.00 |
$490.00 |
$462.00 |
|
Interest |
$5,898.67 |
$6,471.77 |
$7,343.05 |
|
Maintenance |
$350.03 |
|
|
|
Property taxes |
$552.53 |
$1,519.22 |
$1,336.29 |
|
Public utilities |
$1,695.00 |
$1,695.00 |
$1,695.00 |
(i) the gross annual rental income for the property was always in deficit as against the corresponding fixed charges:
|
YEAR |
1996 |
1997 |
1998 |
|
Gross income |
$0.00 |
$0.00 |
$2,000.00 |
|
Fixed charges |
$8,986.23 |
$10,175.99 |
$10,836.34 |
|
Deficit |
$8,986.23 |
$10,175.99 |
$8,836.34 |
(Note that the appellant claimed 50% of these fixed charges as rental expenses)
(j) the balance on the mortgage for the property located at
115-117 St-Louis Street was $67,809.71 at January 1, 1996;
(k) the municipal assessment in effect for 1995, 1996 and 1997 was $60,020.
[3] In his testimony, Mr. Maltais described the circumstances surrounding the acquisition of the property. It was purchased in 1990 for $52,500, an amount that was entirely borrowed by Mr. Maltais, his mother having guaranteed 10% of the purchase price. Monthly payments (capital and interest) amounted to approximately $400.
[4] At the time the property was purchased, the unit on the upper floor (upper unit) was occupied by a tenant who had lived there for 23 years. The rent was $200 a month. Once he became the new owner, Mr. Maltais persuaded the tenant to agree to a $50 monthly increase in the rent. Mr. Maltais occupied the unit on the ground floor (lower unit) with his spouse. A few years later, in 1995, they had a child.
[5] Unfortunately for Mr. Maltais, the tenant left his apartment in June 1994, and it remained vacant until the end of 1997. Various attempts were made to find another tenant: a big sign was put up on the property and advertisements were placed in newspapers, including the Journal de Québec and the Beaupré Express. In addition, a notice was put up at Mr. Maltais' workplace and at the credit union.
[6] Mr. Maltais explained the problems he had in renting the upper unit. First of all, the supply of rental units exceeded demand. A substantial number of condominiums and other properties located in Mont Sainte-Anne, at one kilometre from Beaupré, meant that landlords in the area faced stiff competition.
[7] Moreover, the unit badly needed to be fixed up. After his tenant left, Mr. Maltais undertook renovation work not just on the upper unit but also for the property as a whole. Among other things, he replaced the windows and insulated the façade and the attic of the house. Mr. Maltais described the work done in the upper unit. In particular, he renovated the bathroom in 1995-1996, at a total cost of approximately $2,000. In late 1996 or early 1997, he installed a new wood floor to replace the carpeting, except in two bedrooms where he laid new carpeting instead. The cupboards were replaced in 1998-1999. Most of the renovation work was done by Mr. Maltais himself, with the help of a friend with whom he traded services.
[8] The upper unit was rented to a friend in 1998 for a rent below the market rent. This person lived there only on a temporary basis and had refused a long-term lease. They agreed instead on a month-to-month lease. The upper unit became vacant once more beginning in March 1999 and was rented again in July 2000 for $275 a month. The rent was increased to $300 beginning on July 1, 2001.
[9] In addition to the problems he had experienced in finding a new tenant, Mr. Maltais talked about the difficulties that had prevented him from carrying out
his initial plan. He had planned to repay the loan sooner than the 20-year amortization period provided for in the contract. Among other things, there was a strike in 1998 that apparently lasted about six months. During this time, the monthly payments were funded by the credit union. In addition, Mr. Maltais separated from his spouse in 2000 and thus had a difficult time.
[10] In her audit report, the auditor acknowledged that Mr. Maltais had received no personal benefit from renting the upper unit. Mr. Maltais also confirmed in his testimony that he had not planned on renting the upper unit to family members and that family members had not occupied that unit at any time.
[11] Mr. Maltais said that, when he purchased the property, he had no knowledge of the tax benefits that could be procured from the rental of a duplex. His objective was to make the rental of the upper unit profitable and, eventually, even to rent out the lower unit.
Analysis
[12] The fundamental issue raised by this appeal is whether Mr. Maltais had a reasonable expectation of profit. Obviously, this is basically a question of fact. However, in order to answer it, the principles laid down by the courts must be applied. To begin with, there is the decision of the Supreme Court of Canada in Moldowan v. The Queen, [1978] 1 S.C.R. 480. The clarifications made by the Federal Court of Appeal in, inter alia, Tonn v. Canada, [1996] 2 F.C. 73, should also be taken into account. In that case, the Court of Appeal indicated that, unless there were personal elements, the courts should apply the reasonable expectation of profit test more sparingly. Furthermore, the courts must act with caution in assessing taxpayers' conduct. I also believe that, in the case at bar, it is important to go back to the time the property was purchased to determine whether the rental of the upper unit could give rise to a reasonable expectation of profit. Obviously, this is a question that must be asked again for each year in respect of which a deduction for losses is claimed.
[13] No personal benefit resulting from the acquisition of the property can be found in the instant case, as there was in one of my earlier decisions, Lussier v. The Queen, 2000 CarswellNat 3661. In Lussier, the taxpayer had purchased a property with the intention of renting it to members of his family. The case at bar concerns a mixed-use project, involving the use of the lower unit for personal purposes and the upper unit for rental purposes.
[14] In argument, counsel for the respondent submitted that purchasing the duplex could provide a personal benefit to Mr. Maltais in that he could also benefit from a form of indirect subsidy given to taxpayers by the Canadian tax system in allowing them to purchase a duplex when it would have been hard for them to purchase a single-family home. Since the purchase price for a single-family home in the Beaupré area had not been established when the evidence was taken, I have allowed the evidence to be reopened, at the request of counsel for the respondent and with the consent of Mr. Maltais. In his testimony, Mr. Maltais indicated that, at the time that he purchased the duplex, he had looked at some single-family homes in Beaupré. According to him, it would have been possible to purchase a single-family home for a cost of between $25,000 and $30,000. In view of this evidence, I think it is difficult to affirm that the tax system directly or indirectly subsidized Mr. Maltais in the purchase of a unit for personal purposes since he could have purchased a single-family home for approximately half of the purchase price for the duplex.
[15] In these circumstances, I believe it is important to follow the approach taken by the Federal Court of Appeal and to apply the reasonable expectation of profit test more sparingly. While Mr. Maltais may possibly have made a bad decision in purchasing the property in 1990, the Court, no more than the Minister, can question his judgment after the fact. It is not unreasonable to think that Mr. Maltais might have had a reasonable expectation of profit in 1990. Furthermore, that expectation did not disappear during the years at issue.
[16] It is clear that a taxpayer cannot go on incurring losses alone, year after year. There comes a time when one must take stock and make the decisions that are in order. Consequently, if the losses were to continue, the question of whether half of the duplex was a source of income could be raised again in future years. However, with regard to the years at issue, I am prepared to give Mr. Maltais the benefit of the doubt and to allow the appeal.
[17] For all these reasons, the appeals of Mr. Maltais are allowed and the assessments for the 1996, 1997 and 1998 taxation years are referred back to the Minister for reconsideration and reassessment on the basis that Mr. Maltais had a reasonable expectation of earning a profit from the rental of half of his property located at 115-117 St-Louis Street in Beaupré.
Signed at Montréal, Quebec, this 25th day of September 2001.
|
"Pierre Archambault" |
J.T.C.C.
Translation certified true
on this 30th day of January 2003.
Sophie Debbané, Revisor