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Docket: 2002-3736(IT)I 2002-3737(IT)I |
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BETWEEN: |
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SUZANNE LAVICTOIRE
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and
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SERGE LAVICTOIRE, |
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Appellants, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeals heard on March 24, 2003, at Ottawa, Ontario.
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Before: The Honourable Judge Lucie Lamarre |
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Appearances: |
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Agent for the Appellants: |
Jean-Marc Carrière |
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Counsel for the Respondent: |
Marlyse Dumel |
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JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1995, 1996, 1997 and 1998 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellants may deduct 40 per cent of the total expenses incurred and claimed with respect to the property from the month of September 1996 until the end of the 1998 taxation year, with 50 per cent of the deduction to be allotted to each of the appellants.
Signed at Ottawa, Canada, this 2nd day of May 2003.
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"Lucie Lamarre" |
J.T.C.C.
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Citation: 2003TCC312 |
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Date: 20030502 |
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Docket: 2002-3736(IT)I |
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BETWEEN: |
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SUZANNE LAVICTOIRE, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent, |
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AND BETWEEN: |
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Docket: 2002-3737(IT)I |
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SERGE LAVICTOIRE, |
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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
Lamarre, J.T.C.C.
[1] These appeals, heard on common evidence under the informal procedure, are from assessments made by the Minister of National Revenue ("Minister") under the Income Tax Act ("Act") for the 1995, 1996, 1997 and 1998 taxation years.
[2] In computing their income for those years, the appellants calculated net rental losses on a residential building they owned, which was located at 1503 Landry Road, Clarence Creek, Ontario ("Property"). The net rental losses claimed amounted to $13,974.93 in 1995, $12,799.96 in 1996, $6,811.76 in 1997 and $2,926.85 in 1998.
[3] Although, during the years at issue, each appellant owned 50 per cent of the Property, they claimed unequal shares of the losses reported for 1995, 1996 and 1997 (for 1995, they shared the rental loss in a proportion of 1 per cent to 99 per cent; for 1996, the proportion was 15 per cent to 85 per cent, and for 1997, 28 per cent to 72 per cent). The agent for the appellants recognized in his submissions that those allocations were incorrect and that the losses should be shared on a fifty-fifty basis by the two appellants.
[4] In reassessing the appellants, the Minister disallowed the rental losses in their entirety. In so doing, the Minister relied upon the facts stated in paragraph 6 of the Amended Replies to the Notice of Appeal, of which the relevant parts read as follows:
(b) in December 1994, the Appellant and his Spouse purchased a residential building located at 1503 Landry, Clarence Creek, Ontario (the "Property") for $50,000.00 from the Appellant's Father on the condition that the upstairs unit would be rented to the Appellant's Father at reduced rent; (admitted)
(c) at all material times, the Appellant and his Spouse owned the Property; (admitted)
(d) the Property was financed by a loan in the amount of $37,500.00; (admitted)
(e) a loan in the amount of $44,490.12 was used to finance the renovations made to the basement unit; (admitted)
(f) the Appellant and his Spouse purchased the Property with the intention to rent the units to family members with limited incomes (the "Activity");
(g) at all material times, the Appellant received pension income unrelated to the Activity; (admitted)
(h) in reporting the rental income (loss) from the Activity in his income tax returns, the Appellant allocated rental income (loss) for the 1995, 1996, 1997 and 1998 taxation years as follows:
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Appellant
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Spouse |
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1995 |
1% |
99% |
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1996 |
15% |
85% |
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1997 |
28% |
72% |
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1998 |
50% |
50% |
(admitted)
(i) the Property consisted of an upstairs unit (the "Unit # 1") and a basement unit (the "Unit # 2"); (admitted)
(j) at all material times, Unit # 1 is occupied by the Appellant's Father for the sum of $50.00 per month;
(k) during [the] 1996, 1997 and 1998 taxation years, the Appellant rented Unit # 2 to France Lavictoire (the "Appellant's Cousin") for the sum of $500.00 per month;
(l) the Appellant and his Spouse reported net rental losses from the Activity, for the 1995 to 1998 taxation years inclusively, as follows:
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Year |
Gross Rental |
Net Rental |
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_______ |
Income |
Loss |
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1995 |
$ 1,200.00 |
$(13,974.93) |
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1996 |
$ 2,600.00 |
$(12,799.96) |
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1997 |
$ 6,600.00 |
$( 6,811.76) |
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1998 |
$ 6,600.00 |
$( 2,926.85) |
(admitted)
(m) at all material times, the Appellant did not charge fair market rent for Unit # 1;
(n) the Activity, as operated during the 1995, 1996, 1997 and 1998 taxation years, was incapable of yielding a profit;
(o) the Appellant did not have a reasonable expectation of profit from the Activity during the 1995, 1996, 1997 and 1998 taxation years; and
(p) the expenses claimed in relation to the Activity during the 1995, 1996, 1997 and 1998 taxation years were not expenses from a business or property but were personal or living expenses of the Appellant.
(q) The Minister further states that the Activity was undertaken as a personal endeavor, that the expenses claimed by him were not made or incurred for the purpose of gaining or producing income from a business or property but were personal of [sic] living expenses and were not reasonable.
[5] At the hearing, counsel for the respondent advised the Court that the respondent accepted the fact that from September 1996 the basement unit was rented at fair market value, and conceded that 40 per cent of the total expenses claimed by the appellants was deductible. The proportion of 40 per cent was determined based on the square footage of the basement as compared to the total square footage of the Property.
[6] However, in the respondent's view, the upstairs unit occupied by Mr. Alcide Lavictoire, the appellant Serge Lavictoire's father, during the years at issue was not rented at fair market value.
[7] It is the position of the respondent that the rental of that unit to a member of the family for a very low rent was a personal endeavour that was not carried on in a sufficiently commercial manner for it to constitute a source of income within the meaning of the Act and thus give rise to deductible losses. The respondent argues that the expenses claimed in relation to that unit were personal or living expenses that were not incurred for the purpose of producing income from a business or property and that, pursuant to paragraphs 18(1)(a) and 18(1)(h) of the Act, were not deductible. The respondent also submits that the deduction of these expenses is prohibited by section 67 of the Act as they are not reasonable in the circumstances.
[8] The appellants' position is that they did not pay the full market value of the Property when they purchased it in 1994 and this is why a reduced rent was charged to Alcide Lavictoire. I will reproduce the facts as stated by the appellants in their Notice of Appeal. They read as follows:
1. We are appealing the assessments due to the reasons stated for the refusals of the rental losses for the given years. The assessment states that the rental activity did not constitute a source of income as per the Income Tax Act - Part 1, articles 3 and 4, since the activity did not have a reasonable expectation of profit.
2. The relevant facts in support of the appeal are as follows:
· Serge Lavictoire had a stroke in 1992, and has since been unable to work, and has been receiving a Canada Pension since May 1994.
· Medical expenses for Serge Lavictoire amounted to $6,398 for the 1995 to 1998 tax years.
· In December 1994, Serge Lavictoire's father, sold the property he owned to Serge and his wife Suzanne Lavictoire for $50,000.
· For the exchange of having paid a fair price for the home at time of purchase, a reduced rent was offered to Serge's father for the upstairs portion of the property.
· Serge and Suzanne hoped to eventually turn this property into a full rental property, to be able to build their retirement "nest egg".
· In early 1996, Serge and Suzanne hired a contractor to renovate and completely finish the basement, to be able to receive additional rent from the property (total cost of $40,676 in renovations); from September 1996, monthly income increased by $500 per month for the basement apartment.
· In early 1999, Serge Lavictoire's father passed away. From mid May 1999, the upstairs portion of the property has been receiving $665 a month.
· In 2000 and 2001, the property has made a profit requiring the application of CCA to reduce the revenues to zero.
· In 2001, the property was assessed at $106,000 for property tax valuation, and the market value of the property was estimated at $130,000.
[9] In their written submissions, the appellants stated that the market value of the Property was $91,200 when they purchased it. Their lawyer at the time recorded the transfer of the Property at the stated value of $50,000, as discussed between Alcide Lavictoire and the appellants. The Property was therefore transferred with the purchase having been financed through a mortgage of $37,500 and Alcide Lavictoire having made a gift of the balance of the selling price, that is, $12,500.
[10] In 1995, the appellants started renovations to the Property and made an application to the Township of Clarence/Rockland for a change in zoning so as to be able to convert the Property into a duplex. The zoning change was approved in February 1996. During 1995, Alcide Lavictoire paid $100 per month in rent.
[11] In 1996, the appellants spent an additional $40,676 on renovations in order to completely finish the conversion of the basement into a second rental unit. Apparently, Alcide Lavictoire was there to supervise the renovations, ensure the security of the premises and provide access to the contractors. The appellants obtained additional financing of $44,490 to perform the work. In September 1996, the basement unit was rented at its market value of $500 per month. During the renovations in 1996, Alcide Lavictoire's rent was reduced to $50 per month. Apparently, this was due to his role as administrator and as supervisor of the work being done. During 1997 and 1998, his rent remained unchanged (at $50 per month), and the basement unit rental was maintained at $500 per month. The appellants pointed out that revenues exceeded the interest paid on the mortgage by $637 in 1997 and by $1,068 in 1998. However, the other fixed costs (property taxes and insurance) amounted to $2,424 in 1997 and to $2,354 in 1998. Those expenses, added to the other expenses claimed by the appellants, contributed to creating losses in those years.
[12] In early 1999, Alcide Lavictoire passed away and the unit he occupied was rented for $665 per month starting in mid-May 1999. In that year, the appellants said, they earned total revenues of $9,340 and claimed a rental loss of nearly $2,200. They said that for 2000 and 2001 they declared rental profits of $2,934 and $1,406 respectively before the application of capital cost allowance, which brought the rental income down to nil.
[13] It is the position of the appellants that the 1994 agreement of purchase and sale of the Property did not record the Property at fair market value. The appellants' agent argues that in fact the appellants acquired a portion of the Property by way of gift and that through the application of paragraph 69(1)(c) of the Act, they are deemed to have acquired the Property at its fair market value at the time of acquisition. The low rental amount charged to Alcide Lavictoire was to compensate for the transfer of the Property for a very low price. Had the appellants paid the full price for the Property, they would have taken out a higher mortgage and would have paid more interest. With a low mortgage, they were able to rent the Property at a lower rent. Furthermore, lower rent was also charged to Alcide Lavictoire because he had played a significant role in the management of the Property. In the appellants' view, the expenses claimed were in fact reasonable under the circumstances, and they took reasonable steps with a view to gaining or producing income from the Property.
[14] The facts as summarized by the appellants do not convince me that the rental of the Property, except for the rental of the basement as of September 1996 for $500 per month, constituted a source of income for the appellants. Indeed, my understanding is that the low rent charged to Alcide Lavictoire was the consideration given by the appellants for the transfer of the Property at a price below fair market value. If that is the case, the appellants cannot say that a portion of the Property was "gifted" to them, as they gave up rental income at the market rate, income which would have helped them absorb the expenses and eventually make a profit. I do not exactly see the relevance of paragraph 69(1)(c) in this case and it is in any event inapplicable in the circumstances.
[15] Furthermore, if low rent was charged to the vendor as compensation for a purchase price below fair market value, the loss of rental profit is not something that can be added to the low rent so as to constitute a source of income but is rather part of the appellants' cost of acquisition of the Property. The appellants cannot recharacterize the purchase price of the Property as rental income for the sole purpose of deducting expenses that would not otherwise be deductible.
[16] As I have said, the appellants do not dispute the fact that the rent charged to Alcide Lavictoire was clearly below market value. It was a personal arrangement that benefited each party: the appellants acquired a property at a price below fair market value and the vendor could stay in the house as long as he lived for no or very low consideration. In 1999, when Alcide Lavictoire passed away, the appellants almost immediately rented the Property for an amount well over what was paid by Alcide Lavictoire.
[17] It is therefore quite evident that the arrangement constituted a personal endeavour. It is also quite clear that in the years at issue and until Alcide Lavictoire's death, the predominant intention in renting him a portion of the Property was not to make a profit. It was an arrangement intended to accommodate all parties. They did not act in accordance with objective standards of businesslike behaviour. (See Stewart v. Canada, [2002] S.C.J. No. 46 (Q.L.).)
[18] Finally, the fact that Alcide Lavictoire supervised the renovations and was there to look after security on the Property is not an element that I would take into account for the purpose of recharacterizing the personal endeavour as a commercial activity. Indeed, there is no evidence that Alcide Lavictoire declared any income from that alleged work, although his doing so might have justified charging a lower rent.
[19] For all these reasons, I am of the view that the appellants were not justified in claiming expenses beyond those conceded to be valid by the respondent at the beginning of the hearing. The proportion of 40 per cent attributed to the basement was not disputed by the appellants. Consequently, the appeals are allowed and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that the appellants may deduct 40 per cent of the total expenses incurred and claimed with respect to the Property from the month of September 1996 until the end of the 1998 taxation year, with 50 per cent of the deduction to be allotted to each of the appellants.
Signed at Ottawa, Canada, this 2nd day of May 2003.
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"Lucie Lamarre" |
J.T.C.C.
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CITATION: |
2003TCC312 |
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COURT FILE NO.: |
2002-3736(IT)I and 2002-3737(IT)I |
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STYLE OF CAUSE: |
Suzanne Lavictoire and Serge Lavictoire v. The Queen |
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PLACE OF HEARING: |
Ottawa, Ontario |
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DATE OF HEARING: |
March 24, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge Lucie Lamarre |
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DATE OF JUDGMENT: |
May 2, 2003 |
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APPEARANCES: |
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Agent for the Appellant: |
Jean-Marc Carrière |
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Counsel for the Respondent: |
Marlyse Dumel |
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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 |