[OFFICIAL ENGLISH TRANSLATION]
98-225(IT)I
BETWEEN:
DENIS BLOUIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on July 21, 1998 at Québec, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Agent for the Appellant: Michel Martel
Counsel for the Respondent: Alain Gareau
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1993, 1994 and 1995 taxation years are dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 7th day of August 1998.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Date: 19980807
Docket: 98-225(IT)I
BETWEEN:
DENIS BLOUIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] These are appeals for the 1993 to 1995 taxation years. There is only one issue for those three years, namely whether the appellant was carrying on a rental business with regard to a certain property.
[2] The facts on which the Minister of National Revenue ("the Minister") relied in making his reassessments are set out in paragraphs 8, 9 and 10 of the Reply to the Notice of Appeal ("the Reply"):
[TRANSLATION]
8. When the appellant filed his tax returns for the 1993, 1994 and 1995 taxation years, he claimed in computing his income $5,169 for 1993, $6,355 for 1994 and $5,910 for 1995 as net rental losses with respect to the property.
9. By notices of reassessment dated October 7, 1996, for the 1993, 1994 and 1995 taxation years, the Minister denied the appellant the net rental losses referred to in paragraph 8.
10. In making the reassessments of October 7, 1996, the Minister assumed the following facts, inter alia:
a. a loss has always been incurred on the property since it was acquired in 1992;
b. the property is a single-family home;
c. the appellant's intent in building was to use the property as a personal residence;
d. the appellant had no reasonable expectation of earning a profit from the activity of renting his property during any of the 1993, 1994 and 1995 taxation years;
e. the appellant has not shown that he incurred expenses with respect to the property for the purpose of gaining or producing income from a property or business for the 1993, 1994 and 1995 taxation years.
[3] The Notice of Appeal reads as follows:
[TRANSLATION]
SCHEDULE A
. . .
2. These losses are directly related to a loss of rental income, since the rented house did not generate enough income to cover all the expenses associated therewith.
3. That loss occurred because of a shortage of income, since the house was not always rented 100 percent of the time on a yearly basis, and because of non-recurrent expenditures that necessitated further loans, thus increasing interest charges, and also because of repairs (property maintenance) that were out of the ordinary.
4. Moreover, I never lived in that house. I lived in another house that I also own.
SCHEDULE B
1. The auditor working for Revenue Canada did not understand that the house was built for the purpose of selling it.
2. However, because of several problems during and at the end of construction, the cost price was a little too high for a quick sale. I was obliged to rent the house until such time as it was sold.
3. Subsequently, the many expenses occasioned by bad tenants further increased the cost price of the house.
4. I cannot rent the house at a higher price because of the current market conditions. It is better to have a little less than nothing at all.
5. The house is still for sale, but given the decrease in the price of houses since 1994, it may be necessary to be patient to get a fair price for it.
6. I can provide receipts for the many expenses incurred with a view to selling the house.
7. The office where the objection was dealt with is:
Revenue Canada
165 Rue de la Pointe-aux-Lièvres sud
Québec, Quebec G1K 7L3
[4] The notice of objection, which was filed as Exhibit I-5, states the following:
[TRANSLATION]
I challenge the assessments in question because it is my view that the rental losses incurred on my Ste-Foy property in the above-mentioned years are deductible since I built the house for the purpose of selling it. However, since I could not sell it, I put it up for rent intending to sell it when there was demand.
I did not intend to use it for personal purposes since, after it was built, I held open houses, and a sales office was set up to meet clients. The fact that I did not receive any valid offers was what prompted me to rent it until a buyer could be found.
[5] Michel Martel, an accountant, acted as the appellant's agent at the hearing.
[6] The appellant admitted subparagraphs 10(a) and (b) of the Reply. He denied subparagraph 10(c).
[7] He explained to the Court the specific circumstances in which he acquired the property located at 1741 Rue Ste-Famille in Ste-Foy. Initially, there was an agreement between a real estate agent, a builder and the appellant. The appellant had purchased a lot, on which the builder built a house and sold it to the appellant. The house was to serve as a model home for the purposes of three parties: the builder could have built other houses; the appellant, who had a small flooring installation business at the time, could have benefited through an increase in his clientele; and the real estate agent could have earned commissions. It would seem that the agreement did not get beyond the stage of building the house. In any event, the appellant ended up owning a house that he immediately put up for sale. He apparently could not find any buyers and therefore decided to rent it.
[8] Exhibits I-1, I-2 and I-3 are the financial statements for the property in question for the three years at issue. They describe the income and expenses as follows:
[TRANSLATION]
STATEMENT OF INCOME AND EXPENSES
FOR THE 12 MONTHS ENDING ON DECEMBER 31, 1993
INCOME
Rent $7,650.00
$7,650.00
EXPENSES
Municipal and school taxes $1,634.25
Fire and liability insurance 241.00
Interest on loan 9,971.23
Electricity 93.36
Maintenance & repairs 879.45 $12,819.29
Net loss for the year $ 5,169.29
STATEMENT OF REAL ESTATE RENTALS
For the period 01/01/94 to 31/12/94
. . .
GROSS RENTAL INCOME 4,350.00
EXPENSES Total - Personal = Deductible
expenses portion amount
Property taxes 1,645.00 1,645.00
Maintenance and repairs 1,267.00 1,267.00
Insurance 357.00 357.00
Electricity 51.00 51.00
Interest on loan 7,315.00 7,315.00
Advertising and stationery 70.00 70.00
Total deductible expenses 10,705.00 10,705.00
NET RENTAL INCOME before capital cost allowance ( 6,355.00)
STATEMENT OF REAL ESTATE RENTALS
For the period from: 01-01-1995 to: 31-12-95
Gross income . . . 6,870.00
EXPENSES
Total Personal
expense portion
Advertising 208.00
Insurance 340.00
Interest 8,658.00
Maintenance and repairs 1,166.00
. . .
Property taxes 1,634.00
. . .
Utilities 774.00
Total expenses 12,780.00
. . .
Deductible expenses 12,780.00
Net income (loss) before adjustments . . . ( 5,910.00)
[9] In 1992, the appellant obtained permission from the municipality of Ste-Foy to put a secondary suite in the basement, which would have added to the rental income. The suite was never put in because it would have cost too much. According to an estimate by Mr. Martel, it would have cost between $15,000 and $20,000.
[10] Mr. Martel, who was the agent for the appellant at the hearing, has also been renting the property in question for the past three years. His rent is $660 a month. He stressed that this is a normal rent for such a house.
[11] Counsel for the respondent argued that the fixed costs greatly exceeded the rental income and that, in such circumstances, there cannot have been a business carried on with a reasonable expectation of profit.
[12] The agent for the appellant tried to argue that, by obtaining the permit to build a second dwelling unit in the property, the appellant had done what was necessary to make the rental operation profitable.
[13] According to the case law, as given concrete expression by the Supreme Court of Canada's decision in Moldowan v. The Queen, [1978] 1 S.C.R. 480, the expression "income from a business or property" means income from a source that is a profitable business or that at least has a reasonable expectation of profit. That is the income referred to, inter alia, in sections 3 and 9 and paragraph 18(1)(a) of the Act. In the Act, the term "business" therefore refers to a business established so as to generate profits. The same meaning is given to income from property.
[14] That the property was purchased for resale is really of no significance in determining the commercial nature of the activity of renting it. Nor do I have to take into account the possibility of a second dwelling unit, since it was never built.
[15] It must be determined whether the rental operation was a business enterprise, that is, an enterprise likely to make profits. To make this determination, it is necessary to look at the fixed costs, namely the mortgage interest, the property taxes and the insurance. In the appellant's case, the cost of electricity must also be added, since, according to Exhibit I-4, electricity, heat and hot water costs were to be borne by the landlord. Some allowance must also be made for current expenses and other expenses that might be incurred. Such expenses must be considered in relation to the potential income so that the likelihood of profits may be determined.
[16] It is my view that on the balance of evidence one can only conclude that the rental activity was not in the nature of a business enterprise. As set up, that activity could not generate profits. The only thing that was certain when the rental activity was undertaken was that substantial rental losses would be incurred given the significant fixed costs associated therewith, which were much higher than the potential rental income.
[17] I must therefore conclude that the Minister assessed correctly in fact and in law when he disallowed the rental expenses, since, given that the rental activity was not a business within the meaning of the Act, the expenses in question were not incurred for the purpose of gaining income from a business or property.
[18] The appeals are dismissed.
Signed at Ottawa, Canada, this 7th day of August 1998.
|
"Louise Lamarre Proulx" |
J.T.C.C.