Stewart v. Minister of National Revenue, (2002) 288 N.R. 297 (SCC)

• Judge: McLachlin, C.J.C., L'Heureux-Dubé, Gonthier, Iacobucci, Major, Bastarache, Binnie, Arbour and LeBel, JJ.
• Court: Supreme Court (Canada)
• Case Date: May 23, 2002
• Jurisdiction: Canada (Federal)
• Citations: (2002), 288 N.R. 297 (SCC);2002 SCC 46;[2002] ACS no 46;[2002] CarswellNat 1071;[2002] 3 CTC 439;AZ-50127965;[2002] SCJ No 46 (QL);212 DLR (4th) 577;JE 2002-962;[2002] 2 SCR 645;288 NR 297;56 DTC 6969

Stewart v. MNR (2002), 288 N.R. 297 (SCC)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Temp. Cite: [2002] N.R. TBEd. MY.049

Brian J. Stewart (appellant) v. Her Majesty The Queen (respondent)

(27860; 2002 SCC 46; 2002 CSC 46)

Indexed As: Stewart v. Minister of National Revenue

Supreme Court of Canada

McLachlin, C.J.C., L'Heureux-Dubé, Gonthier, Iacobucci, Major, Bastarache, Binnie, Arbour and LeBel, JJ.

May 23, 2002.

Summary:

The taxpayer purchased four condominium units using borrowed monies. The interest payments on the borrowed monies exceeded the rental income. The taxpayer claimed the losses as deductions from income. The Min­ister disallowed the deductions on the ground that there was no "source of income" where the taxpayer had no "reasonable expectation of profit" (i.e., the intention was to use the purchase as a tax shelter to offset losses against income with a significant capital gain years in the future). The taxpayer appealed.

The Tax Court of Canada, in a judgment reported 98 D.T.C. 1600, dismissed the appeal. The court agreed that there was no reasonable expectation of profit and noted that the taxpayer did not use available monies to reduce the debt load to reduce the interest expenses and the resulting losses. The taxpayer appealed.

The Federal Court of Appeal, in a judg­ment reported 254 N.R. 326, dismissed the appeal. The court agreed that there was no expectation or intention to earn a profit; that the purchase was designed to provide losses to offset other income and eventually realize a gain from the appreciation of the value of the condominiums. There was no realistic plan to produce a profit. The taxpayer ap­pealed.

The Supreme Court of Canada allowed the appeal. The reasonable expectation of profit analysis was not an independent "source of income" test (i.e., a reasonable expectation of profit was not a condition precedent to having a "source of income"). Where you needed to distinguish between activities having a personal or hobby nature as opposed to commercial ventures, then rea­sonable expectation of profit was one factor to be considered in ascertaining whether the taxpayer had a commercial intent. Here there was no personal element to the taxpayer's rental activities. Accordingly, those activities constituted a "source of income" from which he was entitled to deduct his rental losses.

Income Tax - Topic 1129

Income from a business or property - Deductions - General - Requirement that expense be incurred for producing income - [See all Income Tax - Topic 1140.4 ].

Income Tax - Topic 1140.4

Income from a business or property - Deductions - General - Business loss - Reasonable expectation of profit - Since the 1977 Supreme Court of Canada deci­sion in Moldowan v. Minister of National Revenue, a taxpayer could not have a business or property "source of income" unless there was a "reasonable expectation of profit" - The Supreme Court of Canada stated that "the Moldowan REOP test has become a broad-based tool used ... in any situation where the view is taken that the taxpayer does not have reasonable expec­tation of profiting from the activity in question. From this it is inferred that the taxpayer has no source of income, and thus no basis from which to deduct losses and expenses relating to the activity. The REOP test has been applied independently of provisions of the [Income Tax] Act to second-guess bona fide commercial deci­sions of the taxpayer and therefore runs afoul of the principle that courts should avoid judicial rule-making in tax law. ... As well, the REOP test is problematic owing to it vagueness and uncertainty of application; this results in unfair and arbit­rary treatment of taxpayers. As a result, "reasonable expectation of profit" should not be accepted as the test to determine whether a taxpayer's activities constitute a source of income." - See paragraph 47.

Income Tax - Topic 1140.4

Income from a business or property - Deductions - General - Business loss - Reasonable expectation of profit - A taxpayer purchased four condominium units using borrowed monies - The inter­est payments greatly exceeded the rental income - The taxpayer deducted the losses from income - The Minister disallowed the deductions on the ground that there was no "source of income" where the taxpayer had no "reasonable expectation of profit" (i.e., the intention was to use the purchase as a tax shelter to offset losses against income with a significant capital gain years in the future) - The Tax Court of Canada and Federal Court of Appeal affirmed the decision, finding no expecta­tion or inten­tion to earn a profit and that the purchase was designed to provide losses to offset other income and eventual­ly realize a gain from the appreciation of the value of the condominiums - The Supreme Court of Canada allowed the taxpayer's appeal - The reasonable expec­tation of profit analy­sis was not an inde­pendent "source of income" test (i.e., a reasonable expectation of profit was not a condition precedent to having a "source of income") - The court stated that "there was no personal element to the taxpayer's endeavour, and its com­mercial nature was never questioned. As a result, the [taxpay­er's] rental activities constitute a source of income from which he is entitled to deduct his rental losses." - The hope of a future capital gain and the expectation of deduct­ing interest expenses now did not detract from the commercial nature of the rental operation or its charac­terization as a source of income - See paragraphs 7 to 69.

Income Tax - Topic 1140.4

Income from a business or property - Deductions - General - Business loss - Reasonable expectation of profit - The Supreme Court of Canada departed from the Moldowan reasonable expectation of profit test to set out the correct test for determining whether a taxpayer has a business or property source of income under the Income Tax Act - The first stage was to determine whether the tax­payer's activity was in pursuit of profit or a per­sonal endeavour - If the activity was not a personal endeavour, the next step was to determine whether the source of the income is a business or property - The court stated that "the issue of whether or not a taxpayer has a source of income is to be determined by looking at the commer­ciality of the activity in question. Where the activity contains no personal element and is clearly commercial, no further inquiry is necessary. Where the activity could be classified as a personal pursuit, then it must be determined whether or not the activity is being carried on in a suf­ficiently commercial manner to constitute a source of income. However, to deny the deduction of losses on the simple ground that the losses signify that no busi­ness (or property) source exists is contrary to the words and scheme of the Act. Whether or not a business exists is a sepa­rate question from the deductibility of expenses. ... to disallow deductions based on a reasonable expectation of profit anal­ysis would amount to a case law stop-loss rule which would be contrary to estab­lished principles of interpretation ... which are applicable to the Act." - See para­graphs 48 to 60.

Income Tax - Topic 1264

Income from a business or property - Deductions - Business losses - Reason­able expectation of profit - What consti­tutes - [See all Income Tax - Topic 1140.4 ].

Cases Noticed:

Moldowan v. Minister of National Rev­enue, [1978] 1 S.C.R. 480; 15 N.R. 476, not folld. [para. 1].

Mohammad v. Minister of National Rev­enue, [1998] 1 F.C. 165; 216 N.R. 303 (F.C.A.), refd to. [para. 15].

Landry v. Ministre du Revenu national (1993), 173 N.R. 213 (F.C.A.), refd to. [para. 28].

Hugill v. Minister of National Revenue (1995), 95 D.T.C. 5311 (F.C.A.), refd to. [para. 29].

Sirois v. Minister of National Revenue (1988), 88 D.T.C. 1114 (T.C.C.), refd to. [para. 30].

Tonn et al. v. Minister of National Rev­enue, [1996] 2 F.C. 73; 191 N.R. 182 (F.C.A.), refd to. [para. 31].

Corbett v. Minister of National Revenue, [1997] 1 F.C. 386; 205 N.R. 365 (F.C.A.), refd to. [para. 32].

Allen v. Minister of National Revenue (1999), 99 D.T.C. 968 (T.C.C.), affd. [2000] D.T.C. 6559 (F.C.A.), refd to. [para. 33].

Nichol v. Minister of National Revenue (1993), 93 D.T.C. 1216 (T.C.C.), refd to. [para. 33].

Bélec v. Minister of National Revenue (1995), 95 D.T.C. 121 (T.C.C.), refd to. [para. 33].

Kaye v. Minister of National Revenue (1998), 98 D.T.C. 1659 (T.C.C.), refd to. [para. 33].

Dorfman v. Minister of National Revenue, [1972] C.T.C. 151 (F.C.T.D.), refd to. [para. 36].

Smith v. Anderson (1880), 15 Ch. D. 247 (C.A.), refd to. [para. 38].

Terminal Dock and Warehouse Co. v. Minister of National Revenue, [1968] 2 Ex. C.R. 78, affd. 68 D.T.C. 5316 (S.C.C.), refd to. [para. 38].

Hickman Motors Ltd. v. Minister of Na­tional Revenue, [1997] 2 S.C.R. 336; 213 N.R. 81, refd to. [para. 39].

Ludco Enterprises Ltd. et al. v. Minister of National Revenue, [2001] 2 S.C.R. 1082; 275 N.R. 90, refd to. [para. 42].

Canderel Ltd. v. Minister of National Revenue, [1998] 1 S.C.R. 147; 222 N.R. 81, refd to. [para. 43].

Roopchan v. Minister of National Revenue (1996), 96 D.T.C. 1338, refd to. [para. 44].

Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411; 208 N.R. 161; 193 A.R. 321; 135 W.A.C. 321, refd to. [para. 47].

Minister of National Revenue v. Shell Canada Ltd., [1999] 3 S.C.R. 622; 247 N.R. 19, refd to. [para. 47].

Engler v. Minister of National Revenue (1994), 76 F.T.R. 214; 94 D.T.C. 6280 (T.D.), refd to. [para. 53].

Neuman v. Minister of National Revenue, [1998] 1 S.C.R. 770; 225 N.R. 190, refd to. [para. 65].

Walls and Buyver v. Minister of National Revenue (2002), 289 N.R. 219 (S.C.C.), refd to. [para. 65].

Statutes Noticed:

Income Tax Act, S.C. 1970-71-72, c. 63, sect. 9(1), sect. 18(1)(a), sect. 18(1)(h), sect. 20(1)(c)(i), sect. 248(1) [para. 14].

Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 3(a), sect. 9 [para. 49].

Authors and Works Noticed:

Fien, Cy, To Profit or Not To Profit: A Historical Review and Critical Analysis of the "Reasonable Expectation of Profit" Test (1995), 43 Can. Tax J. 1287, pp. 1298 [para. 23]; 1304, 1306 [para. 44].

Krishna, Vern, The Fundamentals of Ca­nadian Income Tax (6th Ed. 2000), pp. 102, 103 [para. 21]; 240 [para. 51].

Nichols, Brian S., Chants and Ritual In­cantations: Rethinking the Reasonable Expectation of Profit Test, Report of Proceedings of the Forty-Eighth Tax Conference (1997), vol. 1, pp. 28:4, 28:5 [para. 37].

Owen, John R., The Reasonable Expecta­tions of Profit Test: Is There a Better Approach? (1996), 44 Can. Tax J. 979, p. 1002 [para. 39].

Silver, Sheldon, Great Expectations: Are They Reasonable?, Corporate Management Tax Conference (1995), Real Estate Transactions: Tax Planning for the Sec­ond Half of the 1990s (1996), pp. 6:6, 6:7 [para. 37].

Counsel:

Richard B. Thomas and Lisa Wong, for the appellant;

Richard Gobeil and Donald G. Gibson, for the respondent.

Solicitors of Record:

McMillan Binch, Toronto, Ontario, for the appellant;

Morris Rosenberg, Deputy Attorney Gen­eral of Canada, Ottawa, Ontario, for the respondent.

This appeal was heard on December 12, 2001, before McLachlin, C.J.C., L'Heureux-Dubé, Gonthier, Iacobucci, Major, Basta­rache, Binnie, Arbour and LeBel, JJ., of the Supreme Court of Canada.

On May 23, 2002, Iacobucci and Basta­rache, JJ., delivered the following joint reasons in both official languages for the Court.