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Docket: 2002-3322(IT)I |
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BETWEEN: |
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F.R. QUINN, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on June 16, 2003 at Toronto, Ontario
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By: The Honourable Justice J. M. Woods |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Donna Dorosh Dwayne Morgan, Student-at-Law |
____________________________________________________________________
JUDGMENT
The appeal in respect of assessments made under the Income Tax Act for the 1998, 1999 and 2000 taxation years is dismissed.
Signed at Toronto, Canada this 11th day of September, 2003.
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"J.M. Woods" |
J.M. Woods J.
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Citation: 2003TCC423 |
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Date: 20030911 |
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Docket: 2002-3322(IT)I |
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BETWEEN: |
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F.R. QUINN, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Woods J.
[1] Mr. F.R. Quinn appeals income tax assessments for the 1998, 1999 and 2000 taxation years that disallowed rental losses on a property located at Hilton Head Island in South Carolina.
[2] The appeal was heard under the Court's Informal Procedure.
Facts
[3] Mr. Quinn was an executive with Texaco Canada ("Texaco") and has been retired for several years. At Texaco, Mr. Quinn was involved in the purchase and lease of real estate in Canada and had dealings with many of Canada's top developers. Through one of these contacts, he purchased a residential property on Hilton Head, an island resort off the coast of South Carolina.
[4] The Hilton Head property was divided among four groups of owners each of whom had use of the property for 13 weeks. However, it was not technically what is called a "time share property." The Quinn family acquired a one-quarter share in 1992 or 1993. Title was taken in the names of Mr. Quinn and three other family members in order to facilitate the family's use of the adjoining golf course. The other family members did not contribute to any of the costs associated with the property.
[5] Mr. Quinn stated that the property was purchased to earn rental income and he estimated that, if the property was rented for eight or nine weeks out of the 13 that he had available, he would make a profit of approximately 15 percent. He realized that the operation would not make a profit for the first several years but thought that profits would be generated after about five years.
[6] The property was also used by the family for personal purposes. Mr. Quinn stated that when the property was not able to be rented, the family would use it or it would remain vacant. Based on the personal use reported in the tax returns for the 1999 and 2000 taxation years, the property was used by the family over 40 percent of the 13 weeks that were available. There was no evidence of personal use in the 1998 taxation year.
[7] Mr. Quinn engaged three agents to find tenants for the property but preferred to rent by word of mouth. The property was also advertised on the internet. Mr. Quinn tried to rent the property in the summer, the high season, since the family did not use the property during those months.
[8] The property has not yet earned a profit but Mr. Quinn still believes that it has income-earning potential. Several of the factors that produced the continuing rental losses were unforeseen: a poor rate of exchange, a dispute with the original owner which caused the owners to take over management of the property, high maintenance fees, excessive refurbishing of the premises, and the lack of tourism after the World Trade Centre incident on September 11, 2001.[1]
[9] In his tax returns for the relevant taxation years, Mr. Quinn reported the following losses: [2]
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1998 |
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1999 |
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2000 |
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Cdn. $ |
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US $ |
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US $ |
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Gross Rental Income |
$ |
3,620.00 |
$ |
2,368.00 |
$ |
4,700.00 |
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Expenses |
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Advertising |
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$ |
110.00 |
$ |
- |
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Interest |
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2,846.22 |
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2,730.05 |
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Management & admin. |
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4,032.46 |
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4,319.48 |
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Maintenance & repairs |
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325.71 |
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Commission & no show |
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2,905.00 |
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Telephone, stamps |
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40.00 |
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50.00 |
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Total Expenses |
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$ |
7,354.39 |
$ |
10,004.53 |
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- Less Personal Use Portion of Expenses |
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2,161.32 |
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3,323.04 |
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- Net Expenses |
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$ |
5,193.0 |
$ |
6,681.48 |
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Net Rental Loss |
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$ |
2,825.07 |
$ |
1,981.49 |
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Capital Cost Allowance |
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1,390.06 |
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1,397.00 |
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Net Rental Loss Claimed in US $ |
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$ |
4,215.13 |
$ |
3,378.49 |
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Net Rental Loss Claimed in Canadian $ |
$ |
6,751.00 |
$ |
6,262.65 |
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[10] The personal use portion of expenses that were reported in the tax returns was based on weeks that the Quinn family used the property. Mr. Quinn stated that he did not take excessive or misleading deductions in respect of the property. For example he did not claim a deduction for travel costs in maintaining the property.
[11] Mr. Quinn's belief in the income-earning potential of the property was based on a gut feel about the property and its location through his many years of experience in real estate. He bought the property when prices were low and he thought Florida would lose some of its appeal as a tourist destination in favour of areas that were not so far to travel.
[12] During the audit, Mr. Quinn was requested to fill out a rental questionnaire that asked for information about the rental operation. The answers he provided to these questions in the form were not detailed. For example, the part of the form pertaining to income projections reads:
Q. Provide a detailed projection of how you intend to develop your rental operation into a profitable enterprise. This projection should include time frames, capital expenditures required, marketing plans, estimated rental income, reductions in overhead, etc. Current financial data should be provided where possible.
A. RENTAL INCREASES, IE. NO OF WEEKS, HOPEFULLY RISE IN CANADIAN DOLLAR. RENTAL REVENUE HAS RISEN FROM 1998 $2441 TO 2000 $4700 - 2001 LOOKS GOOD.
Mr. Quinn stated that he thought he had provided some income projections to the auditor but he was not able to locate these for purposes of the hearing. He stated, however, that they would have been rough projections.
[13] The Minister of National Revenue (the "Minister") disallowed the rental losses claimed in respect of the property for the 1998, 1999 and 2000 taxation years.
Issue
[14] The issue is whether the rental losses claimed by Mr. Quinn for the 1998, 1999 and 2000 taxation years are deductible for purposes of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the "Act").
Submissions of Parties
[15] The Crown takes the position that the losses should be disallowed, primarily on the basis that there is no source of income, but also by virtue of paragraph 18(1)(a) and section 67. In the alternative, the Crown submits that capital cost allowance should be reduced pursuant to Regulation 1100(11) so as to not exceed rental income. It is also suggested that, if Mr. Quinn's evidence that the family did not contribute to the costs of the property is rejected, Mr. Quinn should only be entitled to 25 percent of the rental losses since there were three other family members on title.
[16] The Crown's main argument is that there was no source of income and for this position relies on Stewart v. R., [2002] 3 C.T.C. 439 (S.C.C.) and Titus v. The Queen, 2003 DTC 5158 (F.C.A.).
[17] Mr. Quinn, on the other hand, submits that with his 40 years of experience in sophisticated real estate deals, he would not have purchased the property if he had thought it would not earn a profit. He admitted that there was some element of risk but thought that it was fairly small.
Analysis
[18] In order for the rental operation on the Hilton Head property to constitute a source of income, Mr. Quinn's predominant intention must be to carry on the rental activity for profit and there must be objective evidence to support that intention. The Supreme Court in Stewart described the test as follows:
[54] It should also be noted that the source of income assessment is not a purely subjective inquiry. Although in order for an activity to be classified as commercial in nature, the taxpayer must have the subjective intention to profit, in addition, as stated in Moldowan, this determination should be made by looking at a variety of objective factors. Thus, in expanded form, the first stage of the above test can be restated as follows: "Does the taxpayer intend to carry on an activity for profit and is there evidence to support that intention?" This requires the taxpayer to establish that his or her predominant intention is to make a profit from the activity and that the activity has been carried out in accordance with objective standards of businesslike behaviour.
[55] The objective factors listed by Dickson J. in Moldowan, at p. 486, were: (1) the profit and loss experience in past years; (2) the taxpayer's training; (3) the taxpayer's intended course of action; and (4) the capability of the venture to show a profit. As we conclude below, it is not necessary for the purposes of this appeal to expand on this list of factors. As such, we decline to do so; however, we would reiterate Dickson J.'s caution that this list is not intended to be exhaustive, and that the factors will differ with the nature and extent of the undertaking. We would also emphasize that although the reasonable expectation of profit is a factor to be considered at this stage, it is not the only factor, nor is it conclusive. The overall assessment to be made is whether or not the taxpayer is carrying on the activity in a commercial manner. However, this assessment should not be used to second-guess the business judgment of the taxpayer. It is the commercial nature of the taxpayer's activity which must be evaluated, not his or her business acumen.
[19] Mr. Quinn testified that his intention with respect to this recreational property was to earn a profit and that factors unforeseen at the time of purchase caused the extensive rental losses. In my view, this intention is not supported by the objective evidence and I find that Mr. Quinn's predominant intention was to use the property for personal purposes.
[20] The personal use aspect of the Hilton Head property was significant. From the outset, the property was intended as a vacation property for the family. Title to the property was taken in names of four family members to facilitate use of the adjoining golf course. The family made extensive use of the 13 weeks that were purchased. Although Mr. Quinn testified that the family used the property when it could not be rented, it is significant that the family's use occurred when it was convenient for the family. Mr. Quinn tried to rent the property in the summer months which he said was the high season. However, he also stated that the family did not need to use the property in the summer as they could golf in Canada then.
[21] Concerning the rental activity, the property has been owned for about ten years and it has never been profitable. It is significant that five of these loss years were prior to the taxation years at issue. Further the rental losses in the taxation years at issue were significant and the rental revenues were small compared to the cost of maintaining the property.
[22] Notwithstanding the poor profit performance with respect to the property for the five years prior to the taxation years at issue, there was little evidence to show that Mr. Quinn made a serious attempt at earning a profit from the rental operation. He testified that he had engaged three agents to find tenants and that the property was listed for rent on the internet. He also testified that he preferred to rent the property by word of mouth as this was less expensive than using the agents. In my view, there was not sufficient evidence of a predominant intention to earn a profit from the property when compared with the extensive personal use of the property by Mr. Quinn and his family. If there had been a predominant intention to earn a profit, further efforts should have been taken to stem the flow of losses. The rental operation in effect reduced the expenses on what was predominantly a recreational property for the family. This finding is supported as well by the lack of a detailed business plan and Mr. Quinn's brief responses in the CCRA questionnaire.
[23] Looking at the evidence as a whole, Mr. Quinn has not established that the rental operation on the Hilton Head property was a source of income. Accordingly, the appeal is dismissed.
Signed at Toronto, Canada, this 11th day of September, 2003.
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"J.M. Woods" |
J.M. Woods J.
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CITATION: |
2003TCC423 |
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COURT FILE NO.: |
2002-3322(IT)I |
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STYLE OF CAUSE: |
F.R. Quinn v. Her Majesty the Queen |
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PLACE OF HEARING: |
Toronto, Ontario |
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DATE OF HEARING: |
June 16, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice J.M. Woods |
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DATE OF JUDGMENT: |
September 11, 2003 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Donna Dorosh Dwayne Morgan, Student-at-Law |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |