Date: 20001128

Docket: 1999-1210-IT-I

BETWEEN:

CLAIRE BALDWIN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Louise Lamarre Proulx, J.T.C.C.

[1]      These appeals concern the 1991, 1993 and 1994 taxation years. The issue is whether the rental expenses claimed by the appellant were incurred by her in the 1991 to 1994 taxation years in order to earn rental income from a property located in the village of Petit-Rocher in the province of New Brunswick.

[2]      There is no appeal in respect of the 1992 taxation year because no tax was assessed for that year. However, the rental expenses for that year must be examined because they were carried over to other taxation years.

[3]      In making the reassessments, the Minister of National Revenue (the "Minister") relied on the facts set out in paragraph 8 of the Reply to the Notice of Appeal (the "Reply") as follows:

[TRANSLATION]

(a)         on October 16, 1991, the appellant purchased a property located in the Province of New Brunswick, more specifically, in the village of Petit-Rocher;

(b)         the property consisted of a 2,500 sq. ft. house, whose purchase price was $125,000;

(c)         the appellant mortgaged her residence in Candiac for $235,000 in order to purchase, inter alia, the property located at 713 La Mer Street in New Brunswick;

(d)         the New Brunswick property constantly produced rental losses:

            (i)          1991                             $4,832

            (ii)         1992                             $11,155

            (iii)        1993                             $19,025

            (iv)        1994                             $23,541

           

(e)         the annual gross rental income for the New Brunswick property was as follows:

            (i)          1991                             $1,200

            (ii)         1992                             $3,600

            (iii)        1993                             $3,600

            (iv)        1994                             $1,600

(f)          a lease for the New Brunswick property was signed in September 1994, the rental being $400 a month;

(g)         the appellant had no reasonable expectation of earning any profit from the New Brunswick property in the 1991, 1993 and 1994 taxation years;

(h)         the rental expenses claimed each year in respect of the New Brunswick property constituted personal or living expenses of the appellant and were not incurred by her to earn income from a business or property.

[4]      The Notice of Appeal provides the following explanations for the expenses that were incurred and the difficulties experienced in renting the property:

          [TRANSLATION]

B. Statement of facts

1.          These expenses were incurred in order to add rooms that could be rented and to improve the appearance and quality of the property in order to earn more rental income.

2.          The property was and is still rented, but because of the disastrous economic situation in the area and the closing of a number of industries in the mining sector, which is the principal source of job creation in the region, the rents have never been as high or as productive of profits as we were led to believe with regard to that property.

[5]      The appellant and her husband, Raynold Domingue, who acted as her agent in this case, testified. The appellant admitted subparagraphs 8(a) to 8(f) of the Reply.

[6]      The appellant produced as Exhibit A-1 a document prepared by her agent, which had been sent to Revenue Canada on October 25, 1996. According to that note and the appellant's testimony, the mining industry in the area [TRANSLATION] "was humming with activity" in 1991.

[7]      The appellant explained that she had spent several summers in New Brunswick as a child, that her parents came from that area and that she still had some distant cousins there. On a business trip of her husband's to that area, she visited the village of Petit-Rocher and fell in love with a waterfront property. The purchase price was wholly financed by a mortgage on the family home in Candiac (Tabs 2 and 3 of Exhibit I-2).

[8]      The deed of conveyance of the property, dated October 16, 1991, was in the names of the appellant and her husband (Tab 4 of Exhibit I-2). The appellant and her husband argued that the purchase was to have been made by the appellant alone, but the conveyancing document had been prepared in that way and they went along with it. On January 8, 1993, a conveyance was made by the two spouses to the appellant (Tab 6 of Exhibit I-2). One of the clauses in the sworn statement contained the following: That the property has been occupied by us as marital property.

[9]      When the property was purchased in 1991, as Mr. Domingue explained during oral argument, the vendor negotiated the following as one of the conditions of sale: that he and his family would be allowed to remain as tenants on the property until they found a new place to live. They apparently stayed until June 1992. This explains why no repairs were made in 1991 and 1992.

[10]     The appellant said that the house, which had been built about seven years previously, was not finished. There were two upstairs bedrooms needing floors and the window frames had to be finished, which explains the $10,682 and $10,766 spent for work carried out in 1993 and 1994.

[11]     According to the appellant, the purpose of purchasing the property was to rent the house to company executives. This was not possible because, according to the appellant and her husband, as early as a few months after the purchase, the region's economy was not doing as well as had been anticipated. They said they had tried summer rentals as an alternative but lived too far away for this to be really effective.

[12]     In oral argument, the appellant said that she had put her own furniture in the house. She did not mention the cost because the furniture belonged to her.

[13]     The appellant is a shareholder in corporations involved in buying and selling property and buying rental properties. She did not explain why, on this occasion, she did not purchase the property in question through these corporations.

[14]     The appellant's tax returns for the 1991 to 1998 taxation years were produced in evidence as Exhibit I-3. The statement of rental income and expenses in the 1993 tax return shows a gross income of $48,600, while the gross income allowed was $3,600. The appellant did not know why the accountant had included income that was probably from dividends from corporations in which she is the sole shareholder and had added it to the gross rental income, thus arriving at a total income of $48,600 and a net income of $25,975. The same thing was done in respect of 1994 in the income statement for the fiscal year ended on December 31, 1994. That statement showed sales of $46,600 and a net profit of $21,459 while income from the rental property was $1,600 (Tabs 3 and 4 of Exhibit I-3). The appellant's explanation was that those documents were prepared by her accountant, and she said she could provide no other explanation.

[15]     In 1995, the situation returned to normal. The taxable amount of dividends from Canadian corporations was $27,500 (Exhibit I-5 and Tab 5 of Exhibit I-3). The income statement shows gross business income of $4,800 and a net loss of $8,740. In 1996, the rental income was $2,100, and the net loss was $9,881.

[16]     In 1997, gross income was $10,800, with expenses of $7,878.53, for a profit of $2,921.47. It should be noted that there were no other expenses with the exception of those for insurance, interest in the amount of $5,755.27 and property taxes. In 1998, the gross rental income was $10,800 and expenses were $7,873.05, for a profit of $2,926.95. Again, the only expenses claimed were those for insurance, interest and property taxes.

[17]     The appellant's agent referred to the following decisions: Egger v. The Queen, 98 DTC 3372; Bélec v. The Queen, 95 DTC 121; Costello v. The Queen,98 DTC 1362; and Pope et al. v. The Queen, 97 DTC 147.

[18]     Counsel for the respondent referred to the following decisions: Moldowan v. The Queen, [1978] 1 S.C.R. 480; Tonn v. Canada, [1996] 2 F.C. 73 (F.C.A.); Mastri v. Canada, [1998] 1 F.C. 66 (F.C.A.); Mohammad v. Canada, [1998] 1 F.C. 165 (F.C.A.); and Stewart v. Canada, [2000] F.C.J. No. 238.

Conclusion

[19]     The decisions cited by the appellant were in favour of the taxpayers in those cases. The circumstances, however, were such that the rental property was purchased in an essentially business context or, if purchased partly for personal reasons and partly for business reasons, the capital structure, according to business standards, would have allowed of earning rental income had it not been for certain unforeseeable events. In those cases, whatever corrective measures were possible were taken. According to my analysis of the evidence, this was not the case here.

[20]     I must note that the property seems to me to have been purchased primarily for personal reasons. It was love at first sight. It is difficult to believe that, when it was purchased in 1991, the property was mistakenly conveyed to the appellant and her husband. It is also difficult to understand why the sworn statement made in 1993 contained the assertion that the spouses had used the house for family purposes. There is no explanation why that property, if it was purchased as rental property, was not purchased by the appellant through Les entreprises Claire Baldwin Inc. as she had done for the other rental properties.

[21]     It is clear that, for 1991 and 1992, the appellant could not make a rental profit from the house in Petit-Rocher. That house was legally rented to its former owner. The appellant could, therefore, make no repairs to it. It is also clear that interest costs would of necessity be markedly higher than the rental income.

[22]     A few months after the purchase, it was already known that the mining development planned for the region would not take place. There was no evidence of valid corrective measures having been taken to cope with this unforeseeable event. The appellant lived in Candiac, a town near Montréal, and was thus very far away from the rental location, especially from the standpoint of summer rentals.

[23]     In respect of the 1993 and 1994 taxation years, the repair costs were approximately $10,000 each year. There was no explanation as to why the work was spread out over two years. For these years as well, the interest costs alone were much greater than the gross rental income.

[24]     The 1995 and 1996 taxation years repeated the situation in which interest costs alone were distinctly higher than the rental income. There were no longer any repair costs, but the rental income remained very low.

[25]     In the 1997 and 1998 taxation years, after receiving notice from the Minister that the rental losses might be disallowed, the appellant succeeded in renting the house for a reasonable gross rental income. She also revamped to some degree the capital structure to show a positive rental income. It should, however, be noted that there were no expenses in 1997 and 1998 other than those for insurance, interest and property taxes.

[26]     In respect of the years in question, that is, from 1991 to 1994, the evidence was not indicative of the existence of a genuine rental business. I must accordingly find that the appellant did not operate a rental business in respect of the property in question.

[27]     Therefore, the appeals are dismissed.

Signed at Ottawa, Canada, this 28th day of November 2000.

"Louise Lamarre Proulx"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

1999-1210(IT)I

BETWEEN:

CLAIRE BALDWIN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on July 26, 2000, at Montréal, Quebec, by

the Honourable Judge Louise Lamarre Proulx

Appearances

Agent for the Appellant:                       Raynold Domingue

Counsel for the Respondent:                Yanick Houle

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1991, 1993 and 1994 taxation years are dismissed in accordance with the attached Reasons for Judgment.

         

Signed at Ottawa, Canada, this 28th day of November 2000.

"Louise Lamarre Proulx"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]