Qari Mohd Saleem v. Minister of National Revenue, [1984] CTC 2660, [1984] DTC 1579

Tremblay, TCJ:—This case was heard in Toronto, Ontario, on February 16, 1984.

1. The Point at Issue

The point at issue is whether the appellant is correct in deducting the losses of $1,052.79 and $1,182.68 in the computation of his income for the 1977 and 1978 taxation years respectively. These losses were raised from the rental for part of his home.

The respondent disallowed these losses on the basis that the expenses which caused the losses were not incurred for the purpose of gaining or producing income. There was no reasonable expectation of profit and therefore the expenses were personal and living expenses.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessment or reassessments are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

6. In assessing tax as aforesaid, the Respondent relied, inter alia, upon the following findings or assumptions of fact:

(a) the facts hereinbefore admitted (mainly that the rental losses for 1977 and 1978 were $1,052.79 and $1,182.68 accordingly);

(b) in 1975 the Appellant purchased a house for $44,000.00 with a down payment of $5,000.00 and two mortgages for the balance of the purchase price;

(c) during the period from 1977 until 1980 the Appellant rented out approximately 50% of the living space of the above mentioned house and accupied the remainder of the house with his family;

(d) from the time of acquisition of the house in 1975, no profit has been earned by the Appellant from its rental; listed below are the rents received, and the loss history of the Appellant for the 1977-1980 period:

	Rent Received
Year	Annually — Monthly		Losses Claimed
1977	$2,400.00	$200.00	($1,953.00)
1978	1,500.00	125.00	( 2,330.00)
1979	1,800.00	150.00	( 2,594.00)
1980	2,400.00	200.00	( 2,100.00)

(e) the Appellant, already incurring a loss in the 1977 taxation year, increased his

loss in the 1978 taxation year by lowering the rent he charged his tenant;

(f) the Appellant during the period under appeal was employed full time by Canadian Lukens Limited;

(g) the expenses which caused the losses were incurred with respect to the Appellant’s

house and were not made for the purpose of gaining or producing income;

(h) the house was maintained by the Appellant for the use and benefit of the Appellant, his wife and children and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit.

3. The Facts

3.01 The appellant at the beginning of the trial admitted all the assumptions of fact except subparagraphs (g) and (h) quoted in paragraph 2.02 above. Concerning subparagraph (e), however, he gave the following explanation for the diminution of the rent for the 1978 taxation year. The tenant had decided to leave and he (the appellant) wanted to keep him because he knew he was a good tenant. Moreover, repairs had to be made in the rented part and the appellant was using one of the tenant’s rooms to store many things.

3.02 During the years involved, the appellant was a welder-fitter working for Canadian Lukens Limited. The salary income was $14,648.23 for the 1977 taxation year and $16,052.93 for the 1978 taxation year.

3.03 The evidence showed that not only from 1977 to 1980 the appellant suffered losses (subparagraph (d) of paragraph 6 of the reply to notice of appeal quoted above in paragraph 2.02), but also in 1981 and 1982 (Exhibits R-5 and R-6):

3.04 The rate of interest charged in 1980. In 1975, the appellant said he knew the amount of interest he would have to pay for the next five years.

3.05 From 1977 to 1979, the three main expenses incurred concerning the property were as follows:

3.06 The appellant said that he rented 50 per cent of his home to make money and to help him to pay for the three-storey building.

4. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in the present case are 9(2), 18(l)(a) and (h) and 248(1) the definition of “Personal and Living Expenses”. They read as follows:

Sec 9(2)

(2) Loss from business or property. Subject to section 31, a taxpayer’s loss for a taxation year from a business or property is the amount of his loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source mutatis mutandis.

Sec 18. General limitations

(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) General limitation.—an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

(h) Personal or living expenses.—personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business;

Sec 248(1)

In this Act, “Personal or living expenses’’.—“personal or living expenses” includes

(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with reasonable expectation of profit,

(b) the expenses, premiums or other costs of a policy of insurance, annuity contract or other like contract if the proceeds of the policy or contract are payable to or for the benefit of the taxpayer or a person connected with him by blood relationship, marriage or adoption, and

(c) expenses of properties maintained by an estate or trust for the benefit of the taxpayer as one of the beneficiaries;

4.02 Cases at Law

Counsel for the respondent referred to the following cases:

1. William Moldowan v MNR, [1977] CTC 310; 77 DTC 5213;

2. Holley v MNR, [1973] CTC 539; 73 DTC 5417;

3. Mason v MNR, [1984] CTC 2003; 84 DTC 1001;

4. Gregory E Cecato v MNR, [1984] CTC 2125.

4.03 Analysis

4.03.1 The basis for the reassessment is that in order to have ‘‘a source of income” there must be “a reasonable expectation of profit”. Since there was no “reasonable expectation of profit in the rental operation”, losses incurred were not deductible from the other income.

4.03.2 Concerning the “source of income” and the “reasonable expectation of profit”, the Supreme Court of Canada said in the Moldowan, (supra), case:

Although originally disputed, it is now accepted that in order to have a “source of income” the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v MNR (72 DTC 6131), [1972] CTC 151. See also s 139(l)(ae) of the Income Tax Act which includes as “personal and living expenses” and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred.

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer’s training, the taxpayer’s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v Matthews (1974) 28 DTC 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

The Gregory E Cecato, (supra), case is of a “rental loss’’ nature, which is similar as the instant case, Taylor, TCJ made the following comment:

In my opinion, Moldowan, (supra), does provide a sufficient basis for comparing “rental loss’’ to “farm loss’’ as indicated by the Minister. An earlier case Coleman E Hall v Minister of National Revenue, 70 DTC 6333, [1970] CTC 510 laid down essentially the same line of reasoning, and cases subsequent to Moldowan, (supra), such as Barry S Arbus v Minister of National Revenue, 80 DTC 1744, [1980] CTC 2872; Wesley H Warden v Minister of National Revenue, 81 DTC 322, [1981] CTC 2379; Donald Arthur Porter v Minister of National Revenue, 81 DTC 385, [1981] CTC 2445, emphasize the same point although perhaps in different language. Conversely, in this matter, the agent for the appellant did not refer the court to any jurisprudence which would support a proposition that the shortfall between income and expenses had some inherent claim to deductibility from other income, simply by attributing to it the term “rental loss”. Section 18 of the Act does not provide for deductions; it is a section that specifically prohibits deductions except under certain circumstances, the basic one of which is that the “outlay or expense” must be made “for the purpose of gaining or producing income from the business or property”. There was no evidence that this was met or could have been met in this matter and I accept the Minister’s proposition in this appeal. So-called “rental losses” are not deductible from other income when a reasonable expectation of profit has not been demonstrated. It would appear to me a misrepresentation of the Act to unreservedly attribute “tax shelter” characteristics to all rental operations.

4.03.3 The same principles apply in the instant case. Since 1975, the appellant knew the main expenses that would be incurred, hence it was already foreseeable that it would not have been possible to make a profit.

As very often underlined, among others, in the Mason, (supra), case “subjective optimism, no matter how sincere, does not meet the test” ie the objective test. The losses from 1977 to 1982 (paras 2.02 and 3.03) confirm not only the objective test, but the general statement of the appellant that by renting 50 per cent of his personal residence, he wanted to make some money to help him pay for it. However, “making money” in the instant case does not objectively mean “making a profit” and to even “have a reasonable expectation of profit” for at least the next five years.

4.03.4 Unfortunately for the appellant, the burden of proof was on his shoulders and because of the provisions of the Act quoted above, the Court must confirm the reassessments issued by the respondent and must dismiss the appeal.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.