Date: 19990315
Docket: 97-1925-IT-G
BETWEEN:
ROBERT OUELLETTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] This is an appeal concerning the 1992 and 1993 taxation years. The issue is whether the expenses that the appellant claimed as deductions were incurred for the purpose of earning rental income. The position of the Minister of National Revenue (the “Minister”) is that they were not expenses of that nature. The appellant takes the opposite position.
[2] The facts on which the Minister relied in making his reassessments are set out in paragraphs 20, 22 and 23 of the Reply to the Notice of Appeal (the “Reply”) as follows:
[TRANSLATION]
20. In computing his income for the years 1990 to 1994 inclusive, the appellant reported income and expenses allegedly from rental property, as follows:
|
1990 |
1991 |
1992 |
1993 |
1994 |
|
|
Gross income |
$0 |
$8,400 |
$0 |
$0 |
$0 |
|
Expenses |
$0 |
$20,335 |
$50,057 |
$33,001 |
$27,601 |
|
Net income |
$0 |
($11,935) |
($50,057) |
($33,001) |
($27,601) |
. . .
22. In making the reassessments in issue, the Minister of National Revenue assumed the following facts, inter alia:
(a) in 1974, the appellant purchased a property consisting of a farm of about 60 arpents, with buildings, located in the village of St-Augustin, on which he had a residence built for his personal use;
{b) in April 1990, the appellant put that property, which is described as 12,281 Côte-des-Bouchard in St-Augustin (hereinafter “the property”), up for sale through a real estate agent;
(c) the appellant subsequently decided to rent the property out, provided that the lease include a promise to purchase;
(d) from June 9, 1990 to December 31, 1990, the appellant rented the property to Gilles Forgeot for $1,200 per month, Mr. Forgeot having made a promise to purchase;
(e) on or about October 28, 1990, the appellant informed Gilles Forgeot that he did not wish to renew his lease, since Mr. Forgeot was not following through on the promise to purchase;
(f) on or about December 15, 1990, Gilles Forgeot signed an offer to purchase the property from the appellant, and agreed with the appellant that he would continue to occupy the property, on the same terms as those set out in the 1990 lease, until the sale took place;
(g) the appellant received rent of $1,200 per month until August 1991, inclusive;
(h) on or about October 9, 1991, the appellant brought an action against Gilles Forgeot seeking the cancellation of the offer to purchase, the eviction of Mr. Forgeot and damages;
(i) the Superior Court of Quebec ordered that Mr. Forgeot vacate the appellant’s property by June 4, 1992;
(j) the appellant has rented neither his residence nor his farm since then;
(k) the appellant has in the meantime put his property back up for sale;
(l) the appellant moved back into his residence around the month of June 1994 or shortly thereafter;
(m) the appellant always had the intention of keeping his property and living on it himself;
(n) the appellant had no reasonable expectation of profit in respect of his property in St-Augustin;
23. In addition, in confirming the reassessments in issue, the Minister relied on the following facts, inter alia:
(a) from 1975 to 1983, the appellant rented his farm to various farmers for the minimal sums of $100 to $300 per year;
(b) the appellant reported no income from his farm from the time he purchased it until 1991;
(c) the appellant reported no income from renting his residence for the 1990 taxation year;
(d) the appellant put no time and effort into renting his residence or his property during the years in issue;
(e) the appellant, and friends of the appellant, lived in the residence located on the property during the summers of 1992 and 1993;
(f) the appellant only put his property up for sale because of financial difficulties and would have sold it only for a price that was well above the fair market value of the property, because in spite of everything his preference was to keep the property;
(g) the appellant rented out the property in order to be able to keep it for his retirement, and he never had a reasonable expectation of profit in respect of that property.
[3] The facts on which the appellant relied are set out in paragraphs 6 to 21 of his Notice of Appeal, as follows:
[TRANSLATION]
6. During the summer of 1974, the appellant acquired a property in St-Augustin on which he built a residence;
7. From 1974 to 1990, the appellant also owned a property in Montreal where his medical clinic and his residence were located. The appellant went to his St-Augustin property on weekends and holidays;
8. In early 1990, the appellant stopped living on the property in St-Augustin for health reasons;
9. Starting in June 1990, he rented the property in St-Augustin to Gilles Forgeot for a monthly rent of $1,200, as set out in a lease that was duly executed on June 2, 1990;
10. In early 1991, Gilles Forgeot made an offer to purchase the property in St-Augustin for $325,000, and the appellant accepted the offer, it being conditional on the agreement of purchase and sale being signed within 90 days of the acceptance;
11. The contract was never signed, and so the offer to purchase and the acceptance lapsed;
12. As of August 1, 1991, the tenant, Gilles Forgeot, stopped making rent payments;
13. The tenant, Gilles Forgeot, caused considerable damage to the property. He kept animals and mistreated them. The Humane Society seized some animals, and so there was a great deal of media attention focused on the property;
14. The appellant started legal proceedings for the eviction of Gilles Forgeot and claiming from him unpaid rent as well as damages for the deterioration of the property;
15. Gilles Forgeot was evicted at the end of May 1992;
16. Mr. Justice Durant of the Superior Court ordered Gilles Forgeot to pay the appellant $156,700, broken down as follows:
Vandalism: $ 71,500
Worry and anxiety: $ 7,500
Exemplary damages: $ 35,000
Exemplary damages: $ 30,700
Rent (10 months) $ 12,000
Total : $156,700
17. Gilles Forgeot never paid that money, and the appellant was unable to execute the judgment;
18. The appellant incurred about $50,000 in court costs, expert report costs and professional fees to obtain that judgment;
19. After Gilles Forgeot was evicted, the appellant started the work of cleaning, repairing and restoring the residence, the land and the septic tanks with a view to renting out the property again;
20. The appellant put up a “for rent” sign on the residence but he was unable to rent it. People who were interested in renting the residence changed their minds when they learned that the property was the one that had got all the media attention;
21. On September 17, 1992, the appellant gave Sophie Drouin of Remax 2001 Inc. a mandate to sell the residence for $325,000, the price that had been offered by Gilles Forgeot at the beginning of 1991. The appellant hoped to sell at a high price in order to recover the money he had paid out on repairs and legal fees.
[4] The appellant’s Answer to the Reply to the Notice of Appeal (the “Answer”) states the following facts, at paragraphs 17 to 27:
[TRANSLATION]
17. In 1988, for health reasons, the appellant had to choose between selling his residence in Montreal or his residence on Côte-des-Bouchard in St-Augustin de Mirabel, as will be shown at the hearing;
18. The appellant chose to sell the residence in St-Augustin, as demonstrated by the mandate given to the real estate agent;
19. During June 1990, since no purchaser had come forward, the appellant decided that it would be more profitable to rent out the property. He thereupon placed an advertisement in a local newspaper, with a view to renting the St-Augustin property;
20. On or about June 9, 1990, the appellant and Gilles Forgeot signed a lease with respect to the St-Augustin property. The lease was for a term of 7 months ending on December 31, 1990, and was not conditional on a promise to purchase being made;
21. The lease was of short duration to enable the appellant to assess how Gilles Forgeot looked after the property;
22. On several occasions, the appellant verbally informed Gilles Forgeot that his occupancy of the property was unsatisfactory and that he would not be renewing the lease when it expired on December 31, 1990;
23. Gilles Forgeot then informed the appellant of his intention to purchase the property and asked him to prepare an offer to purchase which he would submit to his lawyers;
24. The appellant prepared an offer to purchase which he gave to Gilles Forgeot;
25. On or about October 28, 1990, when the appellant had still not received the offer to purchase, he informed Gilles Forgeot that he did not intend to renew the lease that was to expire on December 31, 1990;
26. On or about December 15, 1990, Gilles Forgeot presented the appellant with an offer to purchase the St-Augustin property, which was accepted by the appellant on December 15, 1990;
27. The offer to purchase provided that the conveyance had to be signed by April 1, 1991, but no such signing ever took place.
[5] The appellant, real estate agent Sophie Daoust, Marjolaine Martin (a flight attendant), Roger-Luc Chayer and Daniel Diquinzio (an accountant), were called to testify by counsel for the appellant. Richard Bastien was called as a witness by counsel for the respondent.
[6] The appellant is a psychiatrist. He suffered a heart attack at the age of 39. He had his office and a residence on rue Delorimier in Montréal, and the country house in Mirabel. The appellant found the trip between the two places tiring, and in 1988 he put his property in St-Augustin (Mirabel) up for sale, as indicated in paragraphs 17 and 18 of the Answer. That first mandate was not filed as evidence. Sophie Daoust, a real estate agent, entered the listing of the property for sale as Exhibit A-4. It shows that the mandate ran from April 17, 1990 to July 1, 1990, and that the property for sale was the house only, for $139,500. Because the house was not selling, the real estate agent suggested renting it. An advertisement was published in the newspaper La Presse on April 28, 1990, under the heading [TRANSLATION] “Country houses for rent” (Exhibit A-1). That advertisement sought to rent the house alone for $1,000 monthly. The advertisement, and possibly a “for rent” sign on the property itself, apparently elicited a call from one Rita Savoie, an Air Canada flight attendant. She was married to Gilles Forgeot, who raised bison and fallow deer.
[7] The appellant said that he obtained information about Ms. Savoie and learned that she was indeed employed by Air Canada and was a responsible person. Marjolaine Martin, a friend of the appellant, confirmed in her testimony that she knew Ms. Savoie by sight and that Ms. Savoie was in fact an Air Canada employee. It is difficult to see what relevance that testimony has, since Ms. Savoie was neither a co-tenant nor a guarantor.
[8] The lease was introduced as Exhibit A-2. It is only one page long, and is dated June 2, 1990. The tenant is Gilles Forgeot. The description of the premises gives only the municipal address and the few details set out relate only to the contents of the house.
[9] While there is no clause in that document concerning a promise to purchase, as stated in paragraph 20 of the Answer, there was assuredly another agreement between the parties, since on October 28, 1990, the appellant wrote to his tenant to inform him that he did not intend to renew the lease on the house because they had not been able to arrange the purchase of the farm within the time allowed. That letter, introduced as Exhibit I-6, reads as follows:
[TRANSLATION]
. . .
Because we have not been able to arrange the purchase of the farm within the time allowed, I must inform you that I do not intend to renew your lease on 12,281 Côte-des-Bouchard, St-Augustin, on January 1, 1991.
As you know, it is my intention to sell the farm, not to rent it out, and I must keep it available for an eventual purchaser.
I will be available on October 15 should you wish to discuss this matter.
. . .
[10] After receiving this letter, the tenant signed a document on December 1, 1990, cancelling the lease as of January 1, 1991 (Exhibit A-5). However, on December 15, 1990, the tenant made an offer to purchase the entire property for $300,000 (Exhibit A-6). The promisor/purchaser provided a cheque for $10,000, which was cashed by the appellant.
[11] Paragraph (c) of clause 7 of that offer to purchase (Exhibit A-6) reads as follows:
[TRANSLATION]
(c) the farm equipment consisting of farm machinery and household items as described in the lease signed in June 1990:
· - tractor
· - Columbia riding mower
· - farm implements
· - carts
· - dishwasher
· - curtains and blinds
· - downstairs living room furniture
· - etc.
[12] This allegation, which refers to equipment described in the lease signed in June 1990, suggests that the lease filed as Exhibit A-1 does not represent the entire agreement entered into by the parties in June 1990.
[13] The reason given by the appellant for not including the rental income in his tax return for 1990 is that the rental payments would have been applied to the purchase price to be paid by the tenant for the farm.
[14] The offer to purchase (Exhibit A-6) referred to in paragraph [10] of these reasons was accepted by the appellant on the very day it was received. However, the conveyance was never signed by the promisor/purchaser.
[15] In November 1991, the Humane Society was called out to the farm premises because of alleged mistreatment of the deer. Exhibit A-7 is a clipping from a local newspaper about the incident.
[16] On March 30, 1991, the appellant started eviction proceedings against the tenant of the farm. On May 28, 1992, the first decision was rendered ordering the tenant to quit the premises on June 4, 1992. The subsequent judgment of the Superior Court dated August 7, 1992, was filed as Exhibit A-8. The judge concluded that the tenant had been occupying the appellant’s property without having any right to do so since August 1, 1991, that he had seriously damaged the property, that he was acting in bad faith toward the appellant and that he was guilty of unlawful and intentional interference with the appellant’s rights.
[17] The appellant subsequently received from his lawyers a statement of account for a total amount of $36,180.79, dated October 1, 1992, and another dated May 3, 1993, for $4,431.19. Exhibit A-9 contains those billings, along with those of other professionals whose services had been required for the purposes of evicting the tenant and for the purposes of the claims against him.
[18] The appellant argued that the house has been up for rent since June 1992, that is, since the eviction of the previous tenant. A “for rent” sign was placed on the premises. However, a mandate was given to Ms. Daoust, a real estate agent, on September 17, 1992, to sell the entire property for $325,000 (Exhibit I-5). That mandate lasted until July 1994. From June 1992 to January 1994, the appellant worked on restoring the premises, and on several occasions stayed there with friends. In 1994, he sold the Montréal property and went back to live on the St-Augustin property, where he also set up his office.
[19] Roger-Luc Chayer is a journalist and a former patient, and now friend, of the appellant’s. He explained that one day, around the end of 1992 or the beginning of 1993, he told the appellant that he had some French friends who were looking for a place to breed huskies. The appellant told him that his property was for rent, but the location was not suitable.
[20] Daniel Diquinzio is an accountant employed by the Union des producteurs agricoles. He was not the appellant’s accountant at the time of the events in question and counsel for the respondent objected to his testimony because its purpose was to prove reasonable expectation of profit, and this was expert testimony. Counsel argued that the proper procedure had not been followed. I agreed to hear the testimony, subject to that objection. Because Mr. Diquinzio’s testimony was based only on the figures shown in Exhibits I-2 and I-3, I do not believe that this testimony was such as would take the other party by surprise. It was testimony that the appellant could have given himself. The witness arrived at a bit of a profit for the year 1992, for which no amount is indicated for maintenance and repairs, and for the year 1993, for which the property tax figure shown is more than $1,000 lower than the actual amount thereof. In any event, that aspect will have no bearing on my decision, as will be seen below.
[21] Richard Bastien, an auditor with Revenu Québec, regarded the fact that there was no indication that an effort to rent had been made, for example, by placing advertisements in newspapers or on community bulletin boards, to be an important factor in his decision not to allow the rental losses. What he saw in the facts of this case was merely proof of a person who wanted to sell his property and agreed to rent it to someone solely for that purpose.
Conclusion
[22] Despite the able argument of counsel for the appellant, I am of the opinion that the evidence clearly established that the appellant rented out the farm not for the purpose of earning rental income but with a view to disposing of the property. The rental income was not reported in 1990 because, according to the appellant, that income could eventually have been taken into account when he disposed of the property. Exhibit I-6, which is a letter from the appellant to his tenant and is reproduced in paragraph [9] of these reasons, clearly indicates that the appellant did not want to continue renting because what he wanted was to sell the property. That was also his decision in 1988, as stated in paragraph 18 of the Answer, which appears in paragraph [4] of these Reasons. There is no evidence of any effort having been made to rent in 1992 and 1993. The mandate given to the real estate agent in 1992 and renewed right up to 1994 (Exhibit I-5) was exclusively a mandate to sell.
[23] The legal fees incurred by the appellant were so incurred in order to evict a promisor/purchaser who had damaged the property and who failed to proceed with the purchase. They were not incurred for the purpose of earning rental income.
[24] The appeal is accordingly dismissed with costs to the respondent.
Signed at Ottawa, Canada, this 15th day of March 1999.
“Louise Lamarre Proulx”
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]