98-957(IT)I
BETWEEN:
HUBERT H. YAU,
Appellant,
and
HER MAJESTY THE QUEEN
Respondent.
Appeal heard on common evidence with the appeal of Irene M. Yau (98-961(IT)I) on October 19, 1999 at Toronto, Ontario, by
the Honourable Deputy Judge D.E. Taylor
Appearances
Counsel for the Appellant: Joy Casey
Counsel for the Respondent: Suzanne M. Bruce
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1994 and 1995 taxation years is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 5 day of November 1999.
|
"D.E. Taylor" |
D.J.T.C.C.
98-961(IT)I
BETWEEN:
IRENE M. YAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Hubert H. Yau (98-957(IT)I) on October 19, 1999 at Toronto, Ontario, by
the Honourable Deputy Judge D.E. Taylor
Appearances
Counsel for the Appellant: Joy Casey
Counsel for the Respondent: Suzanne M. Bruce
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1994 and 1995 taxation years is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 5th day of November 1999.
|
"D.E. Taylor" |
D.J.T.C.C.
Date: 19991105
Docket: 98-957(IT)I
BETWEEN:
HUBERT H. YAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
98-961(IT)I
IRENE M. YAU
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Taylor, D.J.T.C.C.
[1] These are appeals heard on common evidence in Toronto, Ontario, on October 19, 1999, against assessments under the Income Tax Act (the "Act") in which the Respondent had disallowed certain amounts claimed by the Appellants as "rental losses".
[2] I reproduce the Notice of Appeal of Hubert H. Yau, which is identical in all relevant respects to that of Irene M. Yau. Both Appellants gave testimony and in general it followed the information provided in this Notice of Appeal.
"REASONS FOR THE APPEAL
The issue to be decided is whether the Appellant's expenditures in relation to the property and claimed as rental losses were incurred by him for the purpose of gaining or producing income.
The Appellant submits that at all material times the expenditures in relations to the property were incurred by him for the purpose of gaining or producing income.
The Appellant had a reasonable expectation of profit when purchasing the property, and has continued to act reasonably so as to earn income.
FACTS IN SUPPORT OF THE APPEAL
On or around July 22, 1987, the Appellant, jointly with his spouse, Irene M. Yau, acquired a property municipally known as 18165 Lakeworth Boulevard, Port Charlotte, Florida ("the property") from the vendor, Port Charlotte Homebuilders Inc. The Appellant purchased the property with the purpose of earning rental income.
The property is a free standing home with a swimming pool. It is soundly constructed and is located in an attractive subdivision.
Prior to purchasing the property, the Appellant attended financial planning seminars and discussed the merits of owning rental property in Florida with other property owners. The Appellant was advised that the purchase of a property for rental in Florida was a sound investment and one from which he would realize a profit.
Prior to purchasing the property, the Appellant was advised by an agent of Port Charlotte Homebuilders that he could expect the property to be rented at least 60% of the time. The Appellant was further advised that Port Charlotte Homebuilders would advertise the availability of the property for rental and would manage the property on a day-to-day basis.
The purchase price for the property was $98,725.98 USD. The Appellant also purchased furnishings for the property directly from Port Charlotte Homebuilders at the cost of approximately $10,000.00 USD.
The Appellant provided a down payment of $6,400.00 USD and financed the balance of the purchase price through a line of credit. The interest rate for the line of credit increased from 1987 to 1990.
The property was first rented in March, 1988 and continues to be available for rental. The rental occupancy rates through to 1995 are as follows:
|
YEAR |
OCCUPANCY RATE (%) |
|
1988 |
70 |
|
1989 |
52 |
|
1990 |
39 |
|
1991 |
44 |
|
1992 |
39 |
|
1993 |
21 |
|
1994 |
27 |
|
1995 |
17 |
The Appellant took steps to increase the profitability of the property steps include but are not limited to the following:
(a) In 1990, the Appellant mortgaged his property in Mississauga and reduced the indebtedness on the line of credit, thereby reducing the financing charges associated with the property;
(b) In 1992, the Appellant borrowed $10,000.00 from his father and $6,500.00 from his children at lower interest rates, thereby further reducing the financing charged associated with the property;
(c) In 1995, the Appellant retained Florida Home Finders to act as his rental agent, at a lower fee than that charged by Port Charlotte Homebuilders. In 1996, the Appellant retained Southern Sands Inc. As his rental agent, at a lower fee than that charged by both Florida Home Finders and Port Charlotte Homebuilders.
The Appellant submits that he has acted reasonably and had a reasonable expectation of profit from the property."
[3] In response thereto the Respondent filed the Reply to the Notice of Appeal which stated among other comments:
(b) the disallowed rental losses were claimed in respect of Lakeworth, a Florida bungalow purchased by the Appellant and Irene M. Yau, (the "Appellant's spouse"), in 1987;
(c) in each and every taxation year since 1987, the Appellant has claimed a rental loss;
(d) the Appellant reported gross income, expenses and net losses from Lakeworth in the 1992, 1993, 1994 and 1995 taxation years as follows:
TAXATION GROSS NET
YEAR INCOME EXPENSES LOSS
1992 $12,714.49 $25,410.20 *$12,695.71
1993 $ 9,823.93 $23,150.31 *$13,326.38
1994 $ 9,661.01 $23,105.80 *$13,444.79
1995 $ 6,998.64 $23,658.85 *$16,660.21
*The total net loss reported in respect of Lakeworth was split between the Appellant and his spouse, 40% of the total net loss reported was claimed by the Appellant's spouse and the remaining 60% was claimed by the Appellant;
(e) the claimed expenses of Lakeworth were personal or living expenses of the Appellant;
(f) the Appellant did not have a reasonable expectation of profit from Lakeworth in the 1994 or 1995 taxation years."
[4] In addition to the information in the Notice of Appeal, the Appellants emphasized certain other aspects of the situation which they regarded as significant - that in 1986 they paid off the mortgage on their residence and looked for some investment opportunities with the funds each month which would now be available. As a result of some serious investigations, consultations and advice, including such advice from those whom they understood to be knowledgeable in income tax and real estate matters, they flew to Florida and inspected the subject property. As they saw it, the construction was sound, the down payment was within their means, and the monthly costs allowing for the rental, which purportedly would be expected, would be manageable and within a few years, according to their calculations, produce a profit. Among the points cited by the Appellants which adversely affected these projections were - increased mortgage interest rates earlier in this period, difficulties with rentals not remaining at the early levels and the construction of additional homes (finally about 250) in the development, many of which were also available for rent. In addition they found that costs of operating and particularly maintenance were quite high, and in an effort to minimize this, they tried to do much of the work themselves. Counsel for the Respondent, in cross-examination, brought out in addition to several other salient points, that a major part of the financing difficulty arose because the Appellants had opted at the start for a form of Line of Credit financing from their Canadian bank, rather than a standard fixed term mortgage, and that left them at the mercy of fluctuating interest rates. Security for the bank financing had been arranged using their now mortgage free Canadian residence. While arguing that they had hoped to retire in Florida in maybe 20 years from the date of the purchase of the property, they contended that would only have been when it was paid off or at least easily managed. They had changed Florida management companies, and while they still owed some $190,000.00 Canadian on the Property, the new management was doing better in their opinion.
[5] In argument, counsel for the Appellants stressed that they had carefully examined the investment and the prospects they saw, before entering into the arrangement. During the course of the years that followed, up to the present, they had consistently taken steps to minimize their losses and strived toward making a profit.
[6] Counsel for the Respondent stressed the early losses would not be overcome by the best efforts of the Appellants, and that the proposition, financed as it was, far from their own location in Canada which required on site management, and their own lack of experience and knowledge about the real estate business virtually doomed it to failure from the start. Further, the Respondent had allowed the losses for some seven years.
[7] Both counsel referred to some recent relevant case law in particular, Cheesmond v. R., [1995] 2 C.T.C. 2567, 95 D.T.C. 4022, Tonn et al. v. R. [1996] 1 C.T.C. 205, 96 DTC 6001, Green v. R., [1997] 1 C.T.C. 2668, Mastri v. R., 216 N.R. 74, 97 DTC 5420, Mohammad v. R., 97 DTC 5503, [1997] 3 C.T.C. 321.
CONCLUSION
[8] In my view the issue was correctly summarized by counsel for the Respondent. I would particularly note the case of Cheesmond (supra) which dealt with a similar situation in precisely the same development. That appeal was dismissed by the learned Judge Bowman of this Court and with that I certainly agree. However, I would place the emphasis in these appeals on the issue raised by the Respondent "reasonable expectation of profit" rather than that stressed in Cheesmond - section 67 and paragraph 20(1)(c) of the Income Tax Act; and the 100% financing factor. These points were examined in a very recent judgment of the Supreme Court of Canada in Shell Canada Limited and Her Majesty the Queen, file no. 26596, dated October 15, 1999.
[9] I would also quote from Mastri (supra):
"The Tax Court Judge having erred in his application of Tonn, and in light of the fact that his finding of lack of reasonable expectation of profit has not been challenged, the taxpayers are not entitled to deduct their respective shares of the rental loss from other income sources."
[10] The Appellants cannot claim that the issue of "reasonable expectation of profit" in tax matters is only of recent vintage and it is regrettable that those from whom they sought advice prior to the purchase did not see fit to steer them to case law which was readily available, relevant and instructive on that critical point. The Respondent's permissive attitude in the years prior to 1994 in this matter might well be categorized as generous in the extreme but perhaps it served to imbue the Appellants with a false sense of satisfaction and security about the unprofitable results.
[11] The appeals are dismissed.
Signed at Ottawa, Canada, this 5th day of November 1999.
|
"D.E. Taylor" |
D.J.T.C.C.
COURT FILE NO.: 98-957(IT)I
STYLE OF CAUSE: Hubert H. Yau and H.M.Q.
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: October 19, 1999
REASONS FOR JUDGMENT BY: The Honourable Deputy Judge D.E. Taylor
DATE OF JUDGMENT: November 5, 1999
APPEARANCES:
Counsel for the Appellant: Joy Casey
Counsel for the Respondent: Suzanne M. Bruce
COUNSEL OF RECORD:
For the Appellant:
Name: Joy Casey
Firm: Toronto, Ontario
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
COURT FILE NO.: 98-961(IT)I
STYLE OF CAUSE: Irene M. Yau and H.M.Q.
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: October 19, 1999
REASONS FOR JUDGMENT BY: The Honourable Deputy Judge D.E. Taylor
DATE OF JUDGMENT: November 5, 1999
APPEARANCES:
Counsel for the Appellant: Joy Casey
Counsel for the Respondent: Suzanne M. Bruce
COUNSEL OF RECORD:
For the Appellant:
Name: Joy Casey
Firm: Toronto, Ontario
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada