Federal Court of Appeal - Mendoza v. Canada

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Date: 20030114

Dockets: A-120-02

A-119-02

Neutral citation: 2003 FCA 17

CORAM: STRAYER J.A.

SEXTON J.A.

SHARLOW J.A.

A-120-02

BETWEEN:

CRESENCIANO J. MENDOZA

Applicant

and

HER MAJESTY THE QUEEN

Respondent

___________________________________________________

A-119-02

BETWEEN:

ENCARNACION MENDOZA

Applicant

and

HER MAJESTY THE QUEEN

Respondent

Heard at Vancouver, British Columbia on January 14, 2003

Judgment delivered from the Bench at British Columbia on January 14, 2003

REASONS FOR JUDGMENT OF THE COURT BY: SEXTON J.A.

Date: 20030114

Docket: A-120-02

A-119-02

Neutral citation: 2003 FCA 17

CORAM: STRAYER J.A.

SEXTON J.A.

SHARLOW J.A.

A-120-02

BETWEEN:

CRESENCIANO J. MENDOZA

Applicant

and

HER MAJESTY THE QUEEN

Respondent

___________________________________________________

A-119-02

BETWEEN:

ENCARNACION MENDOZA

Applicant

and

HER MAJESTY THE QUEEN

Respondent

REASONS FOR JUDGMENT

(Delivered from the Bench at Vancouver, British Columbia

on January 14, 2003)

SEXTON J.A.

[1] The Applicants apply for judicial review of a decision of the Tax Court which dismissed the Applicants' appeal in connection with two matters relating to the taxation years 1996 and 1997.

[2] The first matter relates to expenses claimed by the Applicants as partners in a business called Fil-Canadian Express (hereinafter called the "Express partnership"). The Express partnership carried on the business of assisting certain Canadians in sending money to their relatives in the Philippines.

[3] During the 1996 and 1997 taxation years, the Applicants claimed as expenses of the Express partnership rent, utilities and maintenance for the use of a room in a property on Chester Street in Vancouver (hereinafter called the "Chester property"). This property was the principal residence of the Applicants during the years in question. The Applicants claimed the expenses related for the use of a room in that house which also happened to be used as a television room by the Applicants.

[4] The Applicants further charged rent, utilities and maintenance for the use of a room in another property located on Hornby Street in Vancouver (hereinafter called the "Hornby property") which they owned under another partnership which they referred to as a rental partnership.

[5] The Tax Court Judge found that the taxpayers had failed to present any documentary proof to confirm that the expenses claimed were actually incurred. The Applicants claimed that while no monies were actually exchanged, there were credit and debit notes in the books of the partnership but these books were not adduced in evidence. The Tax Court Judge found that the Applicants failed to meet the burden upon them to show the expenses had in fact been incurred. He also found that the expenses claimed in connection with the Chester Street property were not deductible because this was the primary residence of the Applicants and the space was not used exclusively for their business.

[6] The second issue relates exclusively to the Hornby property. This property was rented by the Applicants to their son, who was handicapped, and they wished to provide accommodation for him outside of their principal residence. The rent was set at the level of the shelter allowance, which had been provided by the government of British Columbia. This property was a two-bedroom condominium and, on occasion, a student rented the other room.

[7] In both taxation years, the mortgage interest and repair and maintenance expenses substantially exceeded the gross rental income of the property.

[8] The Tax Court Judge concluded that the Hornby property did not constitute a source of rental income because there was no reasonable expectation of profit. He found that there was a personal element involved in the Hornby property in that the Applicants rented it to their son at less than fair market value and he therefore applied the test outlined by the Supreme Court of Canada in Moldowan v. The Queen 77 D.T.C. 5213. In doing so he considered that the evaluation of whether there was a reasonable expectation of profit was to be an objective determination, taking into account the factors of

(a) profit and loss experience in other years;

(b) the nature of the expenses

(d) whether there was an existence or absence of a plan which would indicate a reasonable expectation of profit

In the result, the Tax Court Judge disallowed the expenses in connection with the Hornby property.

[9] On this application the Applicants argued that the Tax Court Judge had erred in his appreciation of the facts in making his decision on the deductibility of the expenses relating to the Express partnership. We are unable to agree that the Tax Court Judge has erred in his appreciation of the facts.

[10] Subsequent to the issuance of the Tax Court Judgment, the Supreme Court of Canada decision Stewart v. Canada [2002] S.C.C. 46 was released. This decision clarified the reasonable expectation of profit test. It was the Applicants' submission, having regard to the Stewart case, that the Tax Court Judge had erred by applying the reasonable expectation of profit test in connection with the claim for expenses on the Hornby property.

[11] In Stewart, the Supreme Court said at paragraph 60

In summary, the issue of whether or not a taxpayer has a source of income is to be determined by looking at the commerciality of the activity in question. Where the activity contains no personal element and is clearly commercial, no further inquiry is necessary. Where the activity could be classified as a personal pursuit, then it must be determined whether or not the activity is being carried on in a sufficiently commercial manner to constitute a source of income.

[12] The Court, in Stewart, held that in determining whether there was a sufficient degree of commerciality in situations where a personal element is involved, the Court can take into account the factors set out in Muldowan such as profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture to show a profit, and the reasonable expectation of profit.

[13] The Tax Court Judge found as a factual matter that there was a personal element involved in the rental of the Hornby Street property. He then went on to take into account the factors outlined in Muldowan. In so doing, in effect, he was examining whether there was a sufficient degree of commerciality in order to constitute a source of income to the Appellants.

[14] The Tax Court Judge concluded that the expenses for the Hornby property far exceeded the income and that there was no prospect of any change. In short there was no reasonable expectation of profit.

[15] Although it is clear that the applicability of the reasonable expectation of profit test has been altered by reason of the Stewart case, it is nevertheless our view that based upon the facts as found by the Tax Court Judge in this case, his conclusions were not in conflict with the principles enunciated in Stewart.

[16] In the circumstances we can find no reversible error on the part of the Tax Court Judge and the applications will therefore be dismissed with costs.

(Sgd.) "J. Edgar Sexton"

J.A.

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET: A-120-02, A-119-02

STYLE OF CAUSE: Cresenciano J. Mendoza v. The Queen

Encarnacion Mendoza v. The Queen

PLACE OF HEARING: Vancouver, B.C.

DATE OF HEARING: January 14, 2003

REASONS FOR Judgment : Sexton J.A.

CONCURRED IN BY:

DATED: January 14, 2003

APPEARANCES:

Cresenciano J. Mendoza FOR THE APPLICANT

Ron D.F. Wilhelm FOR THE RESPONDENT

SOLICITORS OF RECORD:

Cresenciano J. Mendoza (On his own behalf) FOR THE APPLICANT

Morris Rosenberg FOR THE RESPONDENT

Department of Justice

Vancouver Regional Office