2017 QCCQ 15825, 2017 QCCQ 15825

Dicaire c. Quebec Revenue Agency 2017 QCCQ 15825 JG2338 COURT OF QUEBEC CANADA PROVINCE OF QUEBEC DISTRICT OF BEAUHARNOIS LOCALITY OF SALABERRY-DE-VALLEYFIELD Civil Division No: 760-80-002550-151 DATE: December 19, 2017 ______________________________________________________________________ IN THE PRESENCE OF THE HONOURABLE CÉLINE GERVAIS, J.Q.C. ______________________________________________________________________ Jean-François DICAIRE Plaintiff v.

THE QUEBEC REVENUE AGENCY Defendant ______________________________________________________________________ JUDGMENT ______________________________________________________________________ [ 1 ] Jean-François Dicaire appeals the notices of assessment issued by the Quebec Revenue Agency (Q.R.A.) for the taxation years 2007 to 2011. The notices of assessment were related to the disallowance of rental losses for a condo located in Mont-Tremblant and a property in Cornwall. Mr.

Dicaire’s net worth for 2009 was also in issue. [ 2 ] In their pre-trial representations, the attorneys confirmed that the net worth assessment for 2009 was no more an issue, as well as the assessment for 2008, which was prescribed. The only issue to be decided then was the one regarding the rental losses for the Mont-Tremblant condo. THE FACTS: [ 3 ] Jean-François Dicaire graduated from university in 1993 and started working in the healthcare industry. [ 4 ] In 1994, he buys his first property in Cornwall.

This first purchase is followed by two others, also located in Cornwall, that he bought for rental purposes only. While he kept the third one for seven or eight years, the second one, located on McConnell Avenue in Cornwall, was sold in 2008. [1] [ 5 ] When Mr. Dicaire moved to Ottawa, he bought a condo that he kept for five years. Afterwards, he bought a townhouse in Kingston, then another townhouse in Ottawa, which he rented to university students. [ 6 ] Around 2000, Mr. Dicaire buys a one-bedroom condo in Mont-Tremblant, which he financed by a mortgage on one of his properties.

According to his testimony, he already knew the Mont-Tremblant area, that he has visited with his in-laws. He thought about a possible investment, as the real-estate industry was blooming. He took information and learned that American vacationers were targeted for renting, because of the exchange rate. [ 7 ] Sun Star (Intrawest’s real estate agency) was doing advertising, coordination, visits and cleaning. He chose the condo for its attractiveness (chalet style) and paid it $ 165,000.

He had a preapproved mortgage which was further refused by the Bank, when they realized that Intrawest had a right of first refusal. He testified that this clause did not bother him, as he wanted to keep the condo for a long time, buying it as an investment. [ 8 ] But he realized after two years that the profitability was not what he expected. He noticed a difference between his rental incomes and the one of similar condos, and realized that Sun Star was not doing a rotation while renting of the condos.

Moreover, Sun Star kept 55 % of the income. [ 9 ] He decided then that he couldn’t do worse and that he would rent the condo by himself, which he did until he sold it in 2004. [ 10 ] In the meantime, on November 6, 2002, he bought a two-bedroom condo in Mont-Tremblant, thinking it would be easier to rent

it for families. He also bought the second condo from Intrawest in the same complex but in a different building. [ 11 ] He then gave the condo for rental to Les Versants, real estate agency (Mr. Janson), who required 10 % of the rent for their services. He put ads in the local newspaper and advertised the condo on Kijiji. [ 12 ] In 2005, Mr. Dicaire moved to Quebec and bought two properties on Rue De Mezy in Trois-Rivières in December 2010. [ 13 ] The Q.R.A. considers that Mr.

Dicaire has declared rental losses for the condo for too many years, and that his personal use of the condo, as well as the insufficient efforts he put in renting it, demonstrate that the condo rental is not a business. Thus, the rental expenses should not be allowed. ANALYSIS AND DECISION: [ 14 ] Sections 81 and 128 of the Income Tax Act [2] read as follows: 81. A taxpayer’s loss for a taxation year from a business or property is the amount of such loss computed, with the necessary modifications, by applying the provisions of this Part respecting computation of income from that source. 128.

A taxpayer may deduct, in computing his income from a business or property for a taxation year, only the outlays or expenses made or incurred by him during such year or payable in respect of such year, to the extent that they may reasonably be regarded as being related to such business or property and that they were made or incurred to gain income from such business or property and to the extent provided in this chapter, unless otherwise provided in this Part. [ 15 ] Both parties’ argumentation is based on the test set by the Supreme Court in Stewart [3] .

It is useful to remind what the Supreme Court said in 2002: • “ The following two-stage approach should be employed to determine whether a taxpayer’s activities constitute a source of business or property income: (..) Is the taxpayer’s activity undertaken in pursuit of profit, or is it a personal endeavour? (ii) If it is not a personal endeavour, is the source of the income a business or property? • However, where the nature of a taxpayer’s venture contains elements which suggest that it could be considered a hobby or other personal pursuit, the venture will be considered a source of income only if it is undertaken in a sufficiently commercial manner. • In order for an activity to be classified as commercial in nature, the taxpayer must have the subjective intention to profit and there must be evidence of businesslike behaviour which supports that intention.

Reasonable expectation of profit is no more than a single factor, among others, to be considered at this stage.” [ 16 ] The Court of Appeal, one year after the Stewart decision, describes as follows the way to analyze a situation : « [16] La caractérisation de l'activité est faite au départ de l'affaire et non pas en fonction du résultat obtenu. Sont considérés et évalués les actes, gestes et décisions du contribuable qui sont de nature à démontrer le caractère sérieux de son entreprise.

Si cette analyse conclut à la commercialité de l'activité, la déduction sera permise même si elle comporte une démarche à caractère personnel par certains aspects. » [4] [ 17 ] Our colleague, Diane Quenneville, J.Q.C., defines it in a very clear way: « [6] On peut retenir de l’ensemble de ces décisions que le contribuable doit démontrer une volonté à tirer un profit et doit prouver les gestes et les décisions prises par ce contribuable dans le but raisonnable de tirer un profit.

Il ne peut s’agir seulement de rêves impraticables ou un hobby ou divertissement que l’on qualifie d’entreprise. » [5] [ 18 ] Both counsels have submitted jurisprudence to support their argument. While it is possible to find cases in which a long series of losses can still prove the existence of a business [6] , other cases, on the contrary, show that the primary purpose of the tax payer was personal in nature first, as the rental was done only to lower the expenses related to the property. [7] [ 19 ] The result of the analysis is closely related to the facts proven by both parties.

In this regard, the decision rendered in the Montminy case is important. [8] [ 20 ] In that matter, Mr. Montminy bought a condo unit in a co-ownership village (Domaine Val des Neiges). [ 21 ] The Court said the following regarding the personal occupation of a condo by its owner: « [8] Une véritable recherche de profits sous-entend l’exclusion de toute activité ou utilisation personnelle à des conditions non comparables à celles du marché, à moins de circonstances particulières. Cela n’a pas pour effet d’empêcher le propriétaire d’un immeuble à revenus d’en faire profiter sa famille.

Il devra cependant, démontrer que l’occupation personnelle a été gérée ou assujettie à des conditions comparables ou similaires à celles qui auraient prévalu pour des tiers; en d’autres termes, l’utilisation personnelle ne

devra pas avoir d’impacts négatifs sur les revenus potentiels. (…) [10] L’appelant pouvait et a, dans les faits, bénéficié d’une manière significative de son condominium à des fins essentiellement personnelles; l’usage personnel avait des conséquences significatives sur les revenus. Dans les faits, l’appelant se privait de revenus substantiels en occupant lui-même les lieux avec sa famille. [11] Il a été démontré que la haute saison était la période hivernale à cause du ski.

Or, l’appelant, à une question du tribunal, a fait état d’une utilisation se chiffrant à environ 40 jours durant la haute saison principalement. (…) » [ 22 ] The Court concluded that Mr. Montminy has used the condo for personal purposes in a way that had a considerable impact on the profitability of the business, as Mr.

Montminy and his family were skiers who took advantage of the condo for recreational purposes. [ 23 ] The conclusion is the following: « [36] En l’espèce, l’appelant et sa famille jouissaient d’un condominium dont les frais d’opération étaient réduits par la location à des tiers lors des périodes d’inoccupation.

Il ne s’agissait pas d’une activité pouvant être qualifiée de commerciale par nature. [37] L’appelant n’ayant pas démontré que son intention prédominante était de tirer profit de l’activité et que cette activité a été exercée conformément à des normes objectives de comportement d’homme d’affaires sérieux, je dois rejeter son appel. » [ 24 ] In 2007, the condo was occupied for 48 nights. Of those 48 nights, 7 were used personally by Mr.

Dicaire and his family (two nights from January 1 to 3, two nights in February, and three nights in August). [ 25 ] In 2008, the condo was occupied for 41 nights, of which 17 were used by Mr. Dicaire and his family. It was used for himself and his family from January 21 to 23, from June 20 to 24, from July 18 to 24, from August 29 to September 1, and from October 10 to 13. [ 26 ] In 2009, the condo was rented for 45 nights, of which 17 were reserved for Mr. Dicaire’s personal use.

Those dates were from December 30 to January 2 for three nights, three nights from March 18 to 22, three nights in April, three nights in August, and two nights in November. [ 27 ] The Q.R.A. insists that on two years, Mr. Dicaire occupied the condo for New Year, adding to their argument that the condo was in first place for their personal use. [ 28 ] After hearing Mr. Dicaire’s testimony, the Court is convinced that he decided to use the condo when it was not rented, and does not believe that the condo was not rented on New Year because Mr. Dicaire and his family were occupying it. [ 29 ] According to Mr.

Dicaire, the calculation of those days of use represents an average of 4.5 %. Mr. Dicaire, as well as his accounted, indicated that they declared in the income tax reports a use of 10 %. [ 30 ] The Q.R.A. argues that this should be calculated as an average of 40 % of personal use. The Court believes that this calculation should not be made on the basis of the number of nights that were rented, but on the total nights of the year. [ 31 ] The situation in this case is the contrary of the Montminy’s decision. The Court accepts Mr. Dicaire’s testimony that he never did any skiing while he was the owner of that condo.

He has used it for some week-ends when it was not rented, contrary to Mr. Montminy, who would use it regularly, and rent it when he did not want to be there. [ 32 ] The Q.R.A. also underlines that Mr. Dicaire spent a very low amount of money to advertise his condo. It shall be noted that when Sun Star was taking care of renting the condo, the renting fees were quite high, and, as it included advertising, no other amount of money had to be paid by Mr. Dicaire.

After he gave a contract to Les Versants to rent the condo, and put himself some advertisement on Kijiji, which was free. [ 33 ] It is also important to note that Mr. Dicaire sold the first condo and bought the second one with two bedrooms, as he thought it would be more attractive for potential renters. He also made a good move in leaving Sun Star for Les Versants, reducing his rental fees from 55 % to 10 %. [ 34 ] In determining if Mr.

Dicaire was operating a business, his background has to be taken into account, and the fact that he owned many other rental buildings before he bought the condo in Mont-Tremblant cannot be ignored. [ 35 ] It appears from exhibit D-8, which is a table of rental income for Mr. Dicaire that he owned eight properties from 1997 to 2010. The second condo in Mont-Tremblant is not a onetime purchase, but one in a long series of rental buildings.

The difference is that both Mont-Tremblant condos are located in a recreational area. [ 36 ] Of course, the rental of the condo was not as profitable as the other properties, but this does not mean that Mr. Dicaire was not expecting that he would someday find a profit with that condo unit and he did what was necessary. In this regard, it shall be noted that the rental losses go down every year, being of $ 17,266 in 2007, $ 16,129 in 2008, $ 11,597 in 2010, and $ 8,263 in 2011. [ 37 ] For these reasons, Mr. Dicaire’s appeal should be granted.

FOR ALL THESE REASONS, THE COURT: GRANTS Plaintiff's action; DECLARES the Defendant’s reassessments of the Plaintiff under appeal are vacated; REFERS the reassessments to the Agency for reconsideration and reassessment according to lawful principles set out in the Taxation Act; THE WHOLE with costs. __________________________________ CÉLINE GERVAIS, J.Q.C. Me Gordon S. Campbell GORDON S. CAMPBELL, LAWYER Attorney for the Plaintiff Me Judith Kucharsky LARIVIÈRE MEUNIER Attorneys for the Defendant