http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/71776/index.do 
Morris v. The Queen (May 9, 2014 – 2014 TCC 142) was a case dealing with alleged rental losses incurred during 2009 and 2010:
The Reassessments
[12] In 2009, there was no rental income in respect to the Sinclair property, but the Appellant claimed rental losses of approximately $13,071, comprised of mortgage interest of $10,872, insurance of $482, utilities of $482 and property taxes of $1,235.
[13] Total rental income in 2010 consisted of the $2,000 paid for the month of December in that year. Claimed total rental losses in this year totalled $26,014 and were comprised of mortgage interest of $25,584 and maintenance of $430, leaving a claimed net rental loss of $24,014.81. In both 2009 and 2010, all claimed expenses were denied with the exception of one-twelfth of the mortgage interest ($2,132) in respect to the December rental.
Issues
[14] The first issue that must be addressed is whether the Appellant had commenced a rental business between August, 2009 and November, 2010. If there was a business, the second issue is whether the Appellant can deduct the claimed rental expenses in 2009 and 2010.
The property was rented from December of 2010 to March of 2011. It was then listed for sale and sold on May 31, 2011.
The taxpayer’s position was that the property was being repaired to put it into a condition to rent. Those repairs according to the taxpayer commenced in 2009 and continued throughout 2010. The taxpayer however produced no receipts for any of the alleged repair work. Nonetheless the court rejected the Crown’s argument that there was no rental business on the evidence before the court.
[25] While repairs may take a longer period of time to complete than anticipated, findings on the reasonableness of the delays will be dependent upon the facts in each case. In the case of
Preiss v. Canada, 2009 TCC 488, [2010] 1 CTC 2164, J. D’Arcy did not find that a four-year delay affected the taxpayer’s intention to produce rental income. However, in that case, there was evidence of legitimate delays relating to zoning delays and health issues. Nevertheless, the testimony of the Appellant and his wife was not impinged on cross-examination and I have no evidence to support my suspicion that actual work may not have commenced until sometime in late 2010. I also have the glaring assumption of fact at paragraph 14(o) stating that the Respondent acknowledges that the Appellant and his wife were renovating the property between August, 2009 and December, 2009. Consequently, I have no alternative but to conclude that a rental operation was in existence between August, 2009 and November, 2010.
Similarly the court rejected the Crown’s secondary argument that subsection 18(3.1) of the Income Tax Act precluded the deduction of these losses:
[27] Finally, in respect to the Respondent’s alternative argument, I conclude that the deductibility of claimed so called “soft costs” is not precluded by subsection 18(3.1) of the Act. The Respondent submitted that the deductibility of those expenses should be disallowed on the basis that they were related to the construction, renovation or alteration of the property. If the repairs do constitute construction, renovation or alteration within the meaning of the Act, then it must be determined whether the mortgage on the Sinclair property should be capitalized pursuant to subsection 18(3.1). That is, if the mortgage proceeds are found to be used to purchase the Sinclair property and not to finance its construction, renovation or alteration, then the interest payable on the mortgage will remain deductible pursuant to paragraph 20(1)(c) as a current expense. J. Margeson in
Magnowski v The Queen, 2000 DTC 2244, at paragraph 71, explained the purpose of limiting the deductibility of soft costs under subsection 18(3.1) as follows:
… to prevent taxpayers from using construction costs to create a loss which would shelter income from other sources. The rules also appear to assume that “soft costs” represent a disguised portion of the cost of land and buildings.
…
[29] Even if I had not concluded that the repairs at the Sinclair property were merely cosmetic in nature, I had no evidence before me that the mortgage proceeds were used to finance any of the repair work. The Respondent on cross‑examination of the witnesses did not ask any questions respecting the use of the mortgage proceeds. In addition, there were no assumptions of fact made in this regard. Therefore, even if the Appellant did engage in construction within the meaning of subsection 18(3.1) of the Act, he would not necessarily be precluded from the deduction of the mortgage interest since the Respondent did not establish that the funds were used to pay for the construction. Consequently, the Respondent’s alternative argument must also fail.
The appeals were allowed, but without costs.