Date: 2001-08-22
Docket: 2000-1120-IT-I
BETWEEN:
ANTHONY DEL CORE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
________________________________________________
For the Appellant: The Appellant himself
Counsel for the Respondent: Scott Simser
________________________________________________
Reasons for Judgment
(delivered orally from the Bench on March 15, 2001 at Toronto, Ontario)
Garon, C.J.T.C.C.
[1] This is an appeal from a reassessment made by the Minister of National Revenue for the 1995 taxation year. By this reassessment, the Minister of National Revenue disallowed the rental loss claimed by the Appellant in respect of the 1995 taxation year.
[2] In making this reassessment, the Minister of National Revenue made the assumptions of fact set out in paragraph 7 of the Reply to the Notice of Appeal. Paragraph 7 of the said Reply reads as follows:
7. In so reassessing the Appellant, the Minister made the following assumptions of fact:
a) the facts hereinbefore admitted;
b) in 1991, the Appellant and Appellant's brother became the registered owners of the Property;
c) the Property was acquired via a "power of sale";
d) at purchase to 1995, the Property was uninhabitable conditions as:
i) the heating was turned off before the Appellant acquired the Property;
ii) insurance company refused to reimbursed(sic) the Appellant for any damages caused by vandalism, as the Property was "vacant at the time of loss".
e) in the 1995 taxation year, the Appellant reported rental income, total expenses and losses on the Property as detailed in Schedule "A" attached hereto;
f) the Appellant claimed rental losses on other years as follows for the Property:
Year Amount
1991 $22,195.
1992 $26,397.
1993 $19,031.
1994 $20,225.
1997 $ 3,498.
g) expenses incurred by the Appellant in the 1995 taxation year were not made or incurred, or if made or incurred, were not incurred or incurred for the purpose of gaining or producing income from a business or property;
h) the claimed expenses were personal or living expenses of the Appellant;
i) the rental expenses claimed were not reasonable in the circumstances.
[3] The relevant portion of the Schedule "A" statement referred to in subparagraph 7 e) of the Reply to the Notice of Appeal is hereinafter reproduced:
For the period from 01-01-1995 to 31-12-1995
Number Avenue, boulevard, street, P.O. Box
334 MORRISH ROAD
City, town Prov Postal code
SCARBOROUGH ONT #Units Gross rents
1 0.00
CCA recapture................................................................................
Other income
________
Gross income[8124] 0.00
Expenses:
Total Personal Deductible
expenses portion expenses
Advertising........................[8204]
Insurance...........................[8213] - =
Interest..............................[8214] 12,761.00 - = 12,761.00
Maintenance and repairs........[8215] 0.00 - 0.00 = 0.00
Management and admin. fees..[8216] 0.00 - 0.00 = 0.00
Motor vehicle expenses
(excluding CCA)..............[8218] 0.00 - 0.00 = 0.00
Office expenses...................[8219] 0.00 - 0.00 = .......0.00
Legal, accounting, other fees .[8220] 0.00 - 0.00 = 0.00
Property taxes.....................[8221] 3,411.79 - = 3,411.79
Salaries, wages and benefits...[8223] 0.00 - 0.00 = 0.00
Travel...............................[8224] 0.00 - 0.00 = .......0.00
Utilities..............................[8225] - =
Other: -__________ = _________
[8242] 0.00 16,172.79
Net income (loss) before adjustments.....................................[8237] -16,172.79
If co-ownership other than a partnership (your share) . %or
Capital cost allowance (your share) .....................................[8207]
Less: Other expenses of the co-owner
- 0.00
Terminal loss........................................................................ - 0.00
Net income (loss) from real estate rentals [8243] -16,712.79
[4] Paragraph 8 of the Reply to the Notice of Appeal reads thus:
8. He states that for the 1996 taxation year, the Appellant had a rental loss in the amount of $4,100.74.
[5] The Appellant, who was the sole witness on the hearing of this appeal, admitted subparagraphs b), c), e) and f) of paragraph 7. He denied subparagraphs d) in part, g), h) and i) of paragraph 7 of the Reply to the Notice of Appeal. With respect to that portion of subparagraph 7 d), which was not admitted, the Appellant stated that all utilities were turned off because of the vandalism, which occurred in the middle of the year 1993. He also admitted paragraph 8 of the Reply to the Notice of Appeal.
[6] The Appellant, who is a dentist, and his brother John, purchased a residential property in January 1991 for $225,000. The building was on a half-acre lot. The Appellant alone paid the entire purchase price. An amount of $5,000 was paid cash and the balance, that is, $220,000 was borrowed by the Appellant from Central Guaranty Trust; the creditor was later on the Toronto-Dominion Bank. The Appellant was able to borrow the latter amount by pledging as a security for the loan term deposits precisely in the same amount, that is, $220,000. The Appellant was charged interest on the above loan at the prime rate plus 2%.
[7] The Appellant explained that he and his brother had to move quickly in order to be able to acquire this property, which was sold by virtue of a power of sale, as mentioned in paragraph 7 of the Reply to the Notice of Appeal. The loan from the Bank could be paid off in full at any time.
[8] The Appellant's brother in return for acquiring the undivided ownership of this property was to provide various services relative to this property. Among other things, he was to collect rents, mow the lawn, and look after the maintenance of his property, his residence being two doors away from the property in issue. The Appellant testified that it was contemplated that some minor renovations and painting were to be carried out on this property. He mentioned $10,000 as being the estimate of the cost of the improvements to the property. At the time of the purchase, the Appellant testified that he does not recall if he enquired if there were any municipal restrictions regarding the question whether the property could be divided into two different units. The work on the property was to be done by him and his brother in order "to save cost". The Appellant mentioned that at the relevant time he was not very busy as a dentist. He also stated that the property was advertised for renting in local newspapers during an unspecified period of time. The Appellant testified that it was his intention to rent the property to a large family. It was a single dwelling.
[9] The Court also learned from the Appellant that his brother John, who was a 50% co-owner of the property, ran into financial difficulties shortly after the purchase of the above property in 1991. More precisely, the Appellant's brother had personal executions registered in 1992 or 1993 against him totalling about $80,000. In passing, the Appellant mentioned at one point that he was no longer on speaking terms with his brother.
[10] The subject property was vandalized in October 1993. At least $50,000 of damage was caused to the property. The insurance company which had insured the property refused to pay for any portion of the damage for the reason that the house was vacant at the time the vandalism occurred.
[11] The Appellant decided that the damage to the property was not to be repaired and no renovation was to be carried on until such time as the financial situation of the Appellant's brother was settled. The Appellant also stated that at that time he could not afford to incur any additional cost, his income from his profession having plummeted. The collateral loan from the Bank tied up his money, to use the Appellant's expression.
[12] The Appellant also disclosed that he reimbursed the Bank for the full amount of the loan in early September 1995, as appears from the return by the Toronto-Dominion Bank of the promissory note with a covering letter.
[13] The Appellant became the sole owner of the property some time later.
[14] The property is still owned at the present time by the Appellant and at the time of the hearing of this appeal it had not been rented.
[15] When the Appellant was asked if he had a business plan with respect to the property in question, he indicated that he wanted to make money from this investment. Statements of real estate rentals for the taxation years ending on December 31, 1994, 1995 and 1996 were put in evidence. No capital cost allowance was claimed in respect of this property during the three taxation years hereinbefore mentioned.
Analysis
[16] The question in issue is whether the Appellant had a reasonable expectation of profit from the property in respect of the 1995 taxation year.
[17] In considering this question, it is useful to bear in mind the principles laid down by the Supreme Court of Canada in the leading case of Moldowan v. The Queen, 77 DTC 5213. The following passage at page 5215 is of particular interest:
There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive.
[18] First, it should be noted that the Appellant sustained large losses in 1991, 1992, 1993 and 1994, the years immediately preceding the year in issue. These losses range from a high $26, 397 in 1992 to a low of $19, 031 in 1993. In the year in issue the loss amounted to $16,172.79. It is true that the situation improved in 1996 and subsequent years. The property had been vacant since its purchase in 1991, that is, during a period of about ten years. It is true that the Appellant was the victim of a number of unfortunate circumstances beyond his control such as vandalism to the property, the serious financial difficulties encountered by the other co-owner. However, I find that as long as the property acquired by the Appellant and his brother John, was capitalized the way it was before sometime in September 1995, there was no realistic prospect that the rental of the property could have produced a net income. The interest expense was payable on a loan representing more than 95% of the purchase price of the property. The interest expense would constitute a most serious hurdle to overcome before this rental operation could be profitable, quite apart from the fixed charges and other expenses relating to the property. In addition, the capital cost allowance factor in respect of the building should be taken into account.
[19] Secondly, looking at the Appellant's conduct and his comments relating to the matter of business plan, I was not persuaded that the Appellant had during the year in issue and for that matter in previous years the intention to rent the property within a short time frame. His subsequent actions after he became the sole owner of the property tend to confirm this. I find that he has not established that his real intention was to earn income from renting this subject property. I am inclined to the view that his dominant intention was probably to make some renovation work to the property and to dispose of it reasonably quickly. He probably wanted, to adopt his terminology, to make a capital gain.
[20] The Appellant argued that the prospect of a capital gain is a factor to be taken into account in determining if a taxpayer had a reasonable expectation of profit. In support of this proposition, the Appellant relied on the case of Tonn et al. v. The Queen, 96 DTC 6001. It is true that there is a reference in the Tonn case at page 6015 in the judgment of Justice Linden speaking for the Federal Court of Appeal which may lend support to the Appellant's argument:
... One reason why real estate and securities alike present good investment possibilities is that they offer the possibility both of earning income and of obtaining capital gains in the future. Purchasers usually intend to profit from both the income and the longer-term capital aspects, and, if they do, they pay tax on both sources of profit.
[21] This judgment simply does not say that the prospect of making a capital gain is a proper matter to be taken into account in determining if a taxpayer had a reasonable expectation of profit from a property. This judgment simply states that it is "A further matter worthy of mention" in the opening sentence of the paragraph containing the passage to which I have referred in the preceding paragraph of these Reasons. In any event, the precise wording of subsections (1) and (3) of section 9 of the Income Tax Act should not be overlooked. These subsections read as follows:
(1) Subject to this Part, a taxpayer's income for a taxation year from a business or property is the taxpayer's profit from that business or property for the year.
...
(3) In this Act, "income from a property" does not include any capital gain from the disposition of that property and "loss from a property" does not include any capital loss from the disposition of that property.
[22] As a result of the combined operation of subsections 9(1) and 9(3) of the Act, it follows that a capital gain is not "profit" from property for the purposes of Part I of the Income Tax Act.
[23] In view of the above, I therefore find that the Appellant had in 1995 no reasonable expectation of profit from the subject property.
[24] Accordingly, the appeal is dismissed.
Signed at Ottawa, Canada, this 22nd day of August 2001.
"Alban Garon"
C.J.T.C.C.
COURT FILE NO.: 2000-1120(IT)I
STYLE OF CAUSE: Anthony Del Core and
Her Majesty The Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: March 14, 2001
REASONS FOR JUDGMENT BY: The Hon. Alban Garon
Chief Judge
DATE OF JUDGMENT: March 20, 2001
APPEARANCES:
Counsel for the Appellant: The Appellant himself
Counsel for the Respondent: Scott Simser
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada