The appellant, an experienced real estate investor, acquired four condominium units from which he earned rental income.
The properties were highly leveraged, resulting in significant interest expenses and rental losses.
The Minister of National Revenue disallowed the deduction of these losses on the basis that the appellant had no 'reasonable expectation of profit' and therefore no source of income under section 9 of the Income Tax Act.
The Supreme Court of Canada allowed the appeal, rejecting the 'reasonable expectation of profit' test as a stand-alone test for determining a source of income.
The Court established a two-stage approach, finding that the appellant's rental activities lacked any personal element and were clearly commercial, thus constituting a valid source of income from which interest expenses could be deducted.
