Date: 20010528
Dockets: 2000-1070-IT-I,
2000-1072-IT-I
BETWEEN:
PAUL LECLERC,
THÉRÈSE BEAUDRY,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Lamarre Proulx, J.T.C.C.
[1] These appeals were heard on common evidence and concern the 1991, 1992 and 1993 taxation years.
[2] The issue is whether the expenses claimed for two rental properties were incurred to earn income from a business. One of the rental properties was purchased in 1987 and the other in 1988.
[3] The facts upon which the Minister of National Revenue ("the Minister") relied to reassess the appellant Paul Leclerc are described as follows in paragraph 3 of the Reply to the Notice of Appeal ("the Reply"):
[TRANSLATION]
(a) the appellant and his spouse, Thérèse Beaudry, purchased two condominiums (hereinafter "the condominiums") as equal co-owners;
(b) the first condominium was purchased on October 1, 1987;
(c) it was located at 4 Boulevard Bélanger in Beaupré;
(d) it was purchased for $62,500;
(e) the second condominium was purchased on January 15, 1988;
(f) it was an apartment in a condominium complex known as "Domaine Val-des-Neiges", and it was located at 227 Rue Val des Neiges in Beaupré;
(g) it was purchased for $115,000;
(h) during the taxation years at issue, no leasehold improvements were made to the condominiums;
(i) the appellant reported the following net rental losses in respect of the condominiums:
Year Net loss Appellant's share
1988 ($16,537) ($8,269)
1989 ($10,921) ($5,461)
1990 ($13,297) ($6,649)
1991 ($20,998) ($10,499)
1992 ($18,188) ($9,094)
1993 ($20,348) ($10,174)
1994 ($13,524) ($6,762)
1995 ($13,757) ($6,879)
TOTAL ($127,570)
(j) the rent was not sufficient to cover the fixed costs, namely mortgage interest and municipal and school taxes, which totalled the following amounts:
Year Rental income Fixed costs
1991 $1,877 $20,105
1992 $1,154 $16,090
1993 nil $14,587
1994 $2,475 $12,380
1995 $3,008 $13,176
(k) the appellant has therefore not shown that the expenses claimed for the condominiums for the taxation years at issue were incurred by him with a view to making a profit or with a reasonable expectation of profit;
(l) the amounts of $10,499 in 1991, $9,094 in 1992 and $10,174 in 1993 were instead the appellant's personal or living expenses;
(m) the Minister therefore made reassessments against the appellant disallowing the following net rental losses:
1991 1992 1993
$10,499 $9,094 $10,174
[4] The facts are similar in the appellant Thérèse Beaudry's appeal.
[5] The appellant Paul Leclerc testified for the appellants. Monique Thérien testified for the respondent.
[6] Mr. Leclerc admitted subparagraphs 3(a) and (f) to (j) of the Reply. As regards subparagraphs 3(b) to (d) of the Reply, he said that the purchase date was November 5, 1987, that the condominium number was 211 in a condominium complex known as Au-pied-du-Mont and that $11,000 had to be added to the purchase cost for furniture. Exhibit I-7, the contract of sale, confirms these corrections.
[7] As regards subparagraph 3(e) of the Reply, which concerns the second condominium purchased - the one in Domaine Val-des-Neiges - the date of the contract is December 22, 1987. The contract was filed as Exhibit I-8. The purchase price includes furniture, among other things. Both of the properties in question were therefore purchased in late 1987.
[8] As regards the statement in subparagraph 3(h) of the Reply, the appellant Leclerc explained that substantial improvements were made to the common areas.
[9] Mr. Leclerc explained that he and the appellant Thérèse Beaudry, his spouse, were both skiers and that that was how they became acquainted with the projects in which they invested. He did not file the prospectus for the Au-pied-du-Mont project, but he filed the prospectus for Domaine Val-des-Neiges as Exhibit A-2. It was the second phase of the project. According to the prospectus, the real estate project was designed by specialists in hotel architecture and experienced hotel managers. The real estate complex was made up of apartment-hotel units held in divided co-ownership. Each unit was sold with furniture, bedding, dishes and other accessories. The units were rented out by a corporation acting as the investors' mandatary. The corporation had a three-year mandate.
[10] According to the income estimate in Appendix A, the rental income earned by the corporation for 1988 to 1990 could amount to between $9,000 and $12,000 per owner. The owners could deduct their share of the common expenses and their mortgage interest from that income. The result was a loss before depreciation for 1987 to 1989 and a small profit of $296 for 1990. No reference was made to municipal taxes.
[11] The income earned by the corporation was only a tenth of what had been forecast.
[12] The appellant Paul Leclerc said that the purchases were made in order to invest in serious, profitable businesses. The mortgage was 73 percent of the price for the first purchase and 75 percent for the second. The line of credit was repaid on August 2, 1991.
[13] As Exhibit A-1, the appellant filed the February 1995 listing for sale of the condominium in the Au-Pied-du-Mont complex. The asking price was $99,500. The appellants did not receive any offers. In 1999, the mortgages were paid off in full.
[14] Exhibit I-11 is the appellants' statement of income and expenses for 1994 to 1998. It shows that the appellants also have another rental property in respect of which they incurred loses of $4,701 in 1994, $2,903.93 in 1995 and $2,039 in 1996. There were no losses on that property in 1997 and 1998.
Conclusion
[15] For seven years in a row, the appellants incurred rental losses that were very high given the low gross rental income. They also had fixed costs that were much higher than that income.
[16] No corrective action appears to have been taken to make the rental properties profitable. The appellant Paul Leclerc said that the line of credit line was repaid in 1991. In this regard, it is strange to see that the net loss rose from $13,297 in 1990 to $20,998 in 1991. Mr. Leclerc also stated that substantial improvements were made to the common areas. This did not result in significantly higher rental income. Mr. Leclerc said that corrective action was taken by listing one condominium for sale, but it was listed in 1995, eight years after being purchased, and it was listed for $20,000 more than the purchase price. Moreover, no continuing effort to sell seems to have been made. It should be noted that the projects were in their second phase. There does not seem to have been any review of gross income from the first phase.
[17] In my view, it would not be reasonable to allow such high expenses on the basis of the capital invested, the low profitability of the properties purchased and the lack of appropriate corrective action given that these extended over so many years. I must conclude that positive rental income was not the appellants' priority or goal. The expenses incurred were not incurred to make a rental profit.
[18] The appeals are dismissed.
Signed at Ottawa, Canada this 28th day of May 2001.
|
"Louise Lamarre Proulx" |
|
|
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
2000-1070(IT)I
BETWEEN:
PAUL LECLERC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Thérèse Beaudry (2000-1072(IT)I) on March 21, 2001, at Québec, Quebec, by
the Honourable Judge Louise Lamarre Proulx
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 1991, 1992 and 1993 taxation years are dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada this 28th day of May 2001.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
2000-1072(IT)I
BETWEEN:
THÉRÈSE BEAUDRY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Paul Leclerc (2000-1070(IT)I) on March 21, 2001, at Québec, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Agent for the Appellant: Paul Leclerc
Counsel for the Respondent: Anne Poirier
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1991, 1992 and 1993 taxation years are dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada this 28th day of May 2001.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]