[OFFICIAL ENGLISH TRANSLATION]
2000-2981(IT)I
BETWEEN:
MARIO MARTEL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 4, 2001, at Chicoutimi, Quebec, by
the Honourable Judge Alain Tardif
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Stéphanie Côté
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1997 and 1998 taxation years is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 27th day of July 2001.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 21st day of January 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20010727
Docket: 2000-2981(IT)I
BETWEEN:
MARIO MARTEL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal for the 1997 and 1998 taxation years. The issue is whether the appellant had a reasonable expectation of profit and thus whether the rental losses he claimed were deductible. For the two years concerned, the appellant claimed rental losses of $3,236.91 and $2,846.78, respectively.
[2] The respondent disallowed the losses and assessed the appellant accordingly, assuming the following facts:
[TRANSLATION]
(a) the appellant lives at 802 Rue du Chanoine-Gaudreault in La Baie and considers the basement of his personal residence to be a rental property;
(b) the appellant purchased the house, which was built in 1980, for $62,000 on May 31, 1988;
(c) since purchasing the property, the appellant has not made any significant improvements or repairs to the rental unit;
(d) the dwelling has not been rented since 1996 and was probably not rented during most of 1995, since the gross rental income reported by the appellant was only $200 for the 1995 taxation year;
(e) the appellant has reported the following rental income (losses) since 1989:
YEAR GROSS INCOME NET INCOME (LOSS)
1998 Nil ($ 2,846)
1997 Nil ($ 3,236)
1996 Nil ($ 3,559)
1995 $ 200 ($ 4,193)
1994 $ 2,400 ($ 2,633)
1993 $ 2,400 ($ 2,744)
1992 $ 2,400 ($ 6,191)
1991 $ 1,200 ($ 5,927)
1990 $ 2,400 ($ 1,702)
1989 $ 1,890 ($ 1,996)
(f) at all relevant times, the appellant was a police officer and held that job on a full-time basis;
(g) the appellant had no plan to make the dwelling profitable during the years at issue;
(h) the appellant's primary intention was to pay his mortgage as quickly as possible, and renting his dwelling helped him achieve that goal;
(i) for the 1997 taxation year, the appellant reported no rental income but claimed the following rental expenses:
EXPENSE TOTAL PERSONAL RENTAL
advertising $ 61.50 0 $ 61.50
insurance $ 549.36 $ 274.68 $ 274.68
interest $ 2,373.83 $ 1,186.92 $ 1,186.91
repairs/maintenance $ 333.05 0 $ 333.05
property taxes $ 1,898.10 $ 949.05 $ 949.05
utilities $ 431.72 0 $ 431.72
Total expenses $ 5,674.56 $ 2,410.65 $ 3,236.91
(j) for the 1998 taxation year, the appellant reported no rental income but claimed the following rental expenses:
EXPENSE TOTAL PERSONAL RENTAL
advertising $75.00 $0 $75.00
insurance $225.00 $112.50 $112.50
interest $1,303.74 $651.87 $651.87
repairs/maintenance $580.00 $0 $580.00
property taxes $1,990.82 $995.41 $995.41
Total $4,174.56 $1,759.78 $2,414.78
Total according $4,606.56 $1,759.78 $2,846.78
to the appellant
(the appellant made a miscalculation of $432)
(k) the appellant says that he spent about 10 minutes a week, or about an hour a month, on the general maintenance of the rental unit during the years at issue;
(l) the appellant has not claimed any depreciation expenses for the rental unit because he has always incurred a rental loss;
(m) since January 1999, the rental unit has no longer been available because the space taken up by it is now being used for personal purposes;
(n) the appellant has not shown that the expenses claimed for the years at issue in respect of the rental unit in his basement were incurred by him for the purpose of gaining or producing income from that unit or with a reasonable expectation that he would make a profit from that unit;
[3] Among the facts assumed, the appellant admitted subparagraphs 6(a), (b), (d), (e), (f), (i), (j), (l) and (m) after being sworn in.
[4] In support of his appeal, the appellant called a number of witnesses and testified himself. He basically repeated the information submitted in support of his case at the time of the review, with a few more details and additions, including the time spent maintaining and managing the dwelling in the basement of his home. The appellant adduced significant, even substantial evidence concerning the efforts he made and the initiatives he took to rent the dwelling at issue in the assessment.
[5] The evidence showed that the appellant had purchased a home primarily as a place for his family to live. The home had a dwelling in the basement that was rented at the time of the purchase.
[6] The appellant did not change anything in the basement dwelling; he explained moreover that he had taken several initiatives and made many efforts to ensure that the dwelling was always occupied or rented, since the tenant left a little while after he purchased the home.
[7] Despite all those efforts, it appears that the dwelling was vacant several times and that it was lived in by his brother for quite a long time.
[8] The dwelling was described as badly soundproofed and as being affected by a repetitive, unpleasant noise that was caused by the motor activating a pump system required because of the low level of the home.
[9] The dwelling had a separate entrance. Its windows were unattractive, since they were what are commonly known as "basement windows"; they were small and let little light through, since they were moreover located in the upper part of the property's foundations.
[10] Besides all the major physical drawbacks previously described, the appellant, who is a career policeman, said that his work and the fact that he had children could also have been a disadvantage or could at the very least have made some potential tenants less interested in the dwelling he wanted to rent.
[11] I have no doubt that the appellant took many steps and made many attempts to rent his dwelling, especially since the income enabled him to reduce the expenses associated with his occupancy of the premises. Moreover, proving that fact was the main purpose of the testimony given by the appellant and his many witnesses, who demonstrated it fully.
[12] The property in which the dwelling in question was located was first and foremost the private family residence of the appellant's family; its primary and fundamental role was therefore to be a place for his family to live.
[13] The dwelling downstairs had a separate entrance. Although it was roughly comparable in size to the surface area of the ground floor, the quality of the premises and the living quality could definitely not be compared to those of the premises occupied by the appellant and his family.
[14] This considerable difference in the quality of the premises in the basement and on the ground floor was also made very clear by the extensive evidence adduced by the appellant himself. I am referring, in particular, to the soundproofing, the lighting and the noise.
[15] Given that significant difference in the quality of the premises, it is surprising that the appellant thought he could allocate half of the expenses-such as insurance, interest, maintenance, property taxes and utilities-to the rental of the basement dwelling. If the appellant's reasoning and figures were accepted, the effect would be to assert that the rental value of the space occupied by him and his family on the ground floor was the same as that of the badly soundproofed, badly lit basement in which there were numerous, repetitive noises.
[16] I do not consider it necessary to elaborate on this at length to conclude that such a distribution was totally inappropriate, unacceptable and unjustifiable, since there is no question that the quality of the premises in the basement was absolutely not comparable to the quality of the premises lived in by the appellant and his family. These are comments on the relevance of the expenses claimed. Before assessing what the value of the premises in the basement for rent might have been in comparison with the living quarters occupied by the appellant's family, it should first be determined whether a business was being carried on.
[17] To be successful, the appellant had to show on the balance of evidence that he had a reasonable expectation of profit during the years at issue.
[18] What was the evidence on this fundamental aspect? The evidence certainly established that the appellant made efforts and took several initiatives to rent the basement of the family residence. Can that fact alone-although demonstrated very clearly-be enough to prove that the appellant had or ought to have had a reasonable expectation of profit?
[19] I do not think so. To have a reasonable expectation of profit from the use of property, it is necessary that there be a plan, a structure and, above all, appropriate elements that can create an expectation of profit that is reasonable but also realistic.
[20] Becoming the owner of property part of which generates some income is not sufficient to consider and conclude that there is an expectation of income therefrom. It is essential to isolate the property or the part of the property that generates income in order to be able to precisely identify the operating expenses that can be attributed or linked to that property or the part concerned so that all the inputs specific thereto can be assessed.
[21] Second, it is just as important to make an appropriate assessment of the real value of the property that is to generate potential income. The income and expenses must be realistically estimated and must relate solely to the property that may generate income. The owner of the property or the part of the property that is possibly going to generate a profit must be able to show that everything has been organized so as to minimize expenses and maximize income, which is the only formula or method capable of producing profits.
[22] What is the situation in this case? The appellant purchased a home in which the selling owner had fitted out the basement, which he rented and which generated income as a result. The appellant therefore assumed that the existence of the rent was beneficial, since it made it possible to claim part of the expenses against the income. The venture was risk-free since any losses that were incurred could be claimed against his income from other sources.
[23] The only benefit was not the potential income or surpluses, which the evidence showed to be unrealistic, but rather the losses. In other words, the appellant did achieve his goals by having the losses absorbed, thus obtaining a major benefit.
[24] Determining whether a reasonable expectation of profit exists or existed is an exercise that must basically take account of the property or the part of the property that generates income. It is important that the analysis consider only the elements that relate to that property or part. In the case at bar, the evidence did not show in any way that the home was purchased for a business or commercial purpose. The appellant's primary and fundamental goal was to give his family a place to live.
[25] The carrying out of the personal family plan was improved or even facilitated by the fact that there was a source of income, namely the basement dwelling. Is this enough in itself to conclude that there was a business that could generate a profit in an exclusively administrative and accounting sense? I do not think so.
[26] In my opinion, a profit could never have been generated given the description of the premises, the real rental potential and, finally, the possible income versus the actual expenses.
[27] On the other hand, if account is taken of the income, however small it may have been, of the possibility of changing the basement's role at any time to accommodate or deal with the family's new needs and, finally, of the possibility of claiming losses against his income from another source, these were benefits that were more than sufficient to explain or justify the venture.
[28] However, there was no separate business activity but rather a personal family business, part of the cost of which would be paid through the tax benefits resulting from the losses, which were much more likely than profits.
[29] Although the evidence was silent on this point, I am not convinced that the appellant would have agreed to deprive his family of the space available in the basement when the family's need for space increased, even if the basement had been rented when that need arose.
[30] Such a need for space was normal, foreseeable and inescapable at the very time the home was purchased. This leads me to conclude that there was never a reasonable expectation of profit in the accounting sense. There was an expectation of profit, but it was basically a personal or family profit.
[31] For all of these reasons, the appeal is dismissed.
Signed at Ottawa, Canada, this 27th day of July 2001.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 21st day of January 2003.
Sophie Debbané, Revisor