Peach v. R. – TCC: Taxpayer denied business losses on rental property, must include gain on transfer of property to son

Peach v. R. – TCC:  Taxpayer denied business losses on rental property, must include gain on transfer of property to son

Peach v. The Queen (January 23, 2020 – 2020 TCC 12, Monaghan J.).

Précis:  The taxpayer claimed business losses on real property owned by him in 2011.  He also claimed losses from a financial services business carried on by him under the name Harold’s Financial Services (“HFS”) in 2011.  (He had unsuccessfully appealed the same points in respect of his 2009 and 2010 taxation years in a prior appeal before both the Tax Court and the Federal Court of Appeal.)  Finally he did not report a gain ($14,437) on a property disposed of by him to his son (for what CRA alleged was less than fair market value).  The Tax Court accepted CRA’s position on both points and dismissed the appeal.  There was no award of costs since this was an informal procedure appeal.

Decision:   The taxpayer failed to establish that the rental losses claimed arose from a business activity carried on by him:

[26]  In conclusion, despite his suggestions to the contrary, in my view, in 2011 Mr. Peach was not pursuing a profit from the three properties. Rather, the arrangements were dominated by personal relationships and the endeavour was a personal one. To put it simply, I agree with Justice Bocock that in 2011, as in 2009 and 2010, these properties “were simply a personal endeavour undertaken without the needed pursuit of profit and any revenue or expenses related to the rental properties were not received or expended from a source of income”.  Accordingly, I find that the rental properties were not a source of income in 2011.  [Footnote omitted.]

Similarly the financial services business expenses were found to be unreasonable:

[49]  In conclusion, I am satisfied that any expense Mr. Peach incurred for the purpose of earning income from HFS, in excess of the expenses allowed by the Minister, is unreasonable and therefore not deductible. I want to be clear that I am not basing this conclusion on any judgment about Mr. Peach’s business judgment. Rather, I am satisfied that no commercially-minded business person would continue to incur expenses in the amounts Mr. Peach claims to have done year after year, were such business person in Mr. Peach’s circumstances.

The Court also upheld the Minister’s assessment of a capital gain on the transfer of property to the taxpayer’s son (subject to an adjustment for window replacement):

[68]  I am prepared to find that Mr. Peach has established, but just, on a balance of probabilities that the cost of the windows in 2007 should be included in his cost of the property. Therefore, his adjusted cost base of his interest in Bishop’s Place is $1,556 more than the Minister assumed, being 50% of the cost of the window replacement.

[69]  Accordingly, Mr. Peach’s taxable capital gain in 2011, as computed by the Minister, should be reduced by $778 representing 50% of his share of the cost of the windows. That is, Mr. Peach’s capital gain is $28,875, computed as one-half of the difference between (i) the $160,000 fair market value of the property, and (ii) the total adjusted cost base and costs of disposition of $102,250 (being the $99,138 assumed by the Minister plus $3,112 for the windows). As result, his taxable capital gain is $14,437.

The Court permitted the opening of an otherwise statute-barred year:

[86]  Accordingly, I am satisfied that the Minister has established that Mr. Peach made misrepresentations and that those misrepresentations were attributable to carelessness or neglect. The reassessment dated January 16, 2018 is valid notwithstanding that the Minister issued it beyond the normal reassessment period for 2011.

Thus the appeal was dismissed, but without costs since this was an informal procedure appeal.