What is the legal test for deductibility of losses against other income?

It appears there are three routes to follow in an analysis of a case of the deductibility of rental losses against other income where there is a personal element involved: 1. Determine there was no reasonable expectation of profit and therefore no source of income to get past section 3 of the Act. The expenses to consider in this approach are not the actual expenses claimed but an objective assessment of what expenses would be reasonable in the circumstances. Assess the reasonable expectation of profit on that basis. 2. Determine there was a reasonable expectation of profit. In this approach one would then review the actual expenses and determine their legitimacy for deduction considering sections 9(1), 9(2), 18(1)(a) and (h) and 67. The result may well be a loss available for deduction against other income. (see Narine v. Her Majesty the Queen, [1995] 2 C.T.C. 2055) 3. Find there is no reasonable expectation of profit and allow the deduction of expenses only up to the amount of the rental income. This mid-position requires some analysis of the disallowed expenses (the losses) to determine if they can be denied on the basis of section 18 or section 67. While I find such an approach not as conceptually appealing, it appears to have served as a useful practical guide to provide certainty and fairness in similar cases. Applying either the first or third approach yields the same result in the situation at hand and logically always will in the case of rental losses. It may though provide a different result in the event of an unexpected profit. It could also have some ramification as to how a taxpayer files a return; under the first approach the return would show no rental revenue or expense, while following the third approach the return would provide both.