October 07, 2011

The Attorney General of Canada (Applicant) v. Michael Mastri and June Mastri (Respondents)

97 DTC 5420
Federal Court of Appeal
June 27, 1997

(Court Files Nos. A-651-96 and A-650-96.)

Deductions — Rental losses — Whether Federal Court of Appeal decision in Tonn et al. v. M.N.R. authority for proposition that rental losses deductible where no personally element involved, even if no reasonable expectation of profit — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 9(1), 18(1)(a), 18(1)(b), 18(1)(h) and 67.

The taxpayers acquired a three-bedroom condominium townhouse as their principal residence in December, 1990, financing virtually the entire purchase price through mortgages. They rented the condominium on a short-term lease during 1991, and then commenced to reside therein in December, 1991. The Minister disallowed rental losses claimed by the taxpayers as deductions in computing their income for 1991. In allowing the taxpayers’ appeals in part, the Tax Court of Canada purported to rely on Tonn et al. v. M.N.R. (FCA). finding that, although the taxpayers had no reasonable expectation of profit from their rental activities, the Minister had failed to establish any personal element or any foreseeable tax advantage for them. The Court’s conclusion, therefore, was that the non-capital portion of the taxpayers’ rental losses was deductible. The Crown applied to the Federal Court of Appeal for a judicial review of the Tax Court’s findings.

Held: The Crown’s application was allowed. Tax Court judge had misapprehended the Tonn decision in concluding that, in the absence of any reasonable expectation of profit the taxpayers’ rental losses were deductible in the absence of any personal element. Similarly, the Minister’s argument that the Tonn case had been wrongly decided was simply devoid of merit, even though the decision in the Tonn case was not binding on another panel of judges in the Federal Court of Appeal. The Tonn case correctly decided. It merely affirmed the common-sense understanding that courts are not to second-guess the business acumen of a taxpayer whose commercial venture turns out to be less profitable than anticipated. In this case, moreover, he Tax Court judge had erred in finding no personal element in the taxpayers’ situation. Hence the matter was returned to the Tax Court for redetermination on the basis that the taxpayers’ appeals to that Court be dismissed.