Léger J.T.C.C.: — All the parties agreed that the two appeals would be heard at the same time and that the testimony heard is applicable to both cases.
The appellants are owners of a triplex situated on Notre-Dame-de- Grâce Street in Longueuil. The taxation years in question are 1986 and 1987.
The appellants were equal co-owners.
The property comprised a ground floor and a second floor, each housing one 5 1/2-room apartment, and a basement occupied in part by a bachelor apartment.
The bachelor apartment was rented to a person dealing with the appellants at arm’s length.
The appellants occupied one of the two 5 1/2-room apartments in addition to having the use of the part of the basement that was not occupied by the bachelor apartment (about 50 per cent of the area of the basement).
The other 5 1/2-room apartment was rented to a person, Mr. Martel’s sister, who was not dealing with the appellants at arm’s length.
The rent of the apartment occupied by the appellant’s sister was $100 per month. The Minister alleged that the rent of $100 per month was an amount well below the fair market value of rent for such an apartment. This apartment was not rented by them with a reasonable expectation of profit. The income and expenses related to that apartment were thus of a personal nature.
For 1986, the appellants sought to deduct the amount of $16,215.10 in respect of “maintenance and repair” expenses.
The Minister admitted that $1,718 was eligible for deduction as the amount attributable to the “bachelor” rental portion of the triplex, whereas the remainder claimed was incurred in respect of the personal portion of the property.
For 1987, the appellants sought to deduct $2,257.22 in respect of “maintenance and repair” expenses.
The Minister alleged that the rent paid by Mr. Martel’s sister was not a reasonable rent having regard to market conditions and was not a “transaction at arm’s length”.
The respondent relied inter alia on paragraphs 18(l)(a), (b) and (h) and on subsection 248(1) of the Income Tax Act.
He contended that he was justified in disallowing the income and expenses attributable to the apartment rented to the appellant’s sister because that apartment was not rented with a reasonable expectation of profit and therefore did not constitute rental property.
He contended that he was justified in revising the portion of the triplex used personally by the appellant Daniel Martel to 83 1/3 per cent since only the portion occupied by the bachelor apartment was used for rental purposes.
The appellants on the other hand said that the apartment at 842 Notre- Dame-de-Grâce Street was a property within the meaning of paragraph 18(1 )(a) of the Income Tax Act and that the assessment made by the Minister of the said use for personal purposes, with respect to the rental income and the rental expenses incurred, was exaggerated.
Paragraphs 18(1 )(a), (b) and (h) of the Income Tax Act read as follows:
Deductions
18. General limitations.
(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
18(l)(a)
(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;
18(l)(b)
(b) Capital outlay or loss. — an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;
18(l)(h)
(h) Personal and living expenses. - personal or living expenses of the taxpayer, other than travelling expenses incurred by the taxpayer while away from home in the course of carrying on his business;
Subsection 248(1) defines what must be understood by “personal or living expenses”:
“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 a reasonable expectation of profit,
The two parties to the case testified to establish the value of the rents of the property in issue. The appellants produced Guy Lemonde, a chartered accountant, in order to conduct an economic appraisal of the income and expenses generated by the property.
Mr. Lemonde was not a professional appraiser. He used his accounting knowledge to give us his opinion on the economic value of the income and expenses generated by the property.
I was not impressed by Mr. Lemonde. His method was not based on a thorough study of the market and I accept neither his method of proceeding nor his conclusions.
On the other hand, the Minister summoned Roger Lussier, a property and income appraiser. He has been a chartered appraiser since 1973, and he explained to us that he had been involved in industrial, commercial, agricultural and residential appraisals since that time. He is now employed by the Minister of National Revenue as an appraiser. I was quite impressed by Mr. Lussier’s testimony. He proceeded to make a professional appraisal of the rents of properties similar to the property in issue by comparing income from properties similar to the building in question built in 1967 and 1968, like the property on Notre-Dame-de-Grace Street and properties located in locations similar to that of the building in issue, and, in all cases, triplexes. Using the comparative method based on multiple sources such as the “M.L.S.” book published by real estate vendors during 1986 and 1987, he gave his opinion, based on numerous comparisons, that the average rent charged by an experienced owner was $435 a month for the second floor and $255 a month for a basement apartment.
Daniel Martel’s testimony revealed that the rent obtained for the basement bachelor apartment was about $235 a month, which compares favourably with the conclusion by the witness Roger Lussier. All the conclusions arising from Mr. Lussier’s testimony were based on the concept of fair market value and optimum value. I unreservedly accept Mr. Lussier’s testimony and I therefore find that the respondent was justified in disallowing the income and expenses attributable to the apartment leased to the appellant Daniel Martel’s sister because that apartment was not leased with a reasonable expectation of profit and therefore did not constitute a rental property as defined in section 18 and paragraph 18(1 )(a) cited above. I also find that there were “personal and living expenses” in the expenses incurred, as defined in paragraph 18(1 )(h) and subsection 248(1) cited above.
For these reasons, the appeal is dismissed.
Appeal dismissed.