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Citation: 2005TCC725
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Date: 20051109
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Dockets: 2003-1321(IT)I
2003-1322(GST)I
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BETWEEN:
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EDDIE B. ARNOLD,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
CampbellJ.
Introduction:
[1] These appeals were heard together on common evidence. By Notice of Reassessment dated February 28, 2002, the Minister of National Revenue (the "Minister") reassessed the Appellant for the 1999 taxation year under the Income Tax Act, by including a gain on income account of $35,569.00, from the sale of a property on November 26, 1999. In respect to the Goods and Services ("GST") appeal, the Appellant filed a GST New Housing Rebate application on May 25, 1999. The Minister denied the rebate and deemed that the Appellant made a self supply of the property pursuant to subsection 191(1) of the Excise Tax Act. By Notice of Assessment, the Minister assessed the Appellant GST in the amount of $20,440.00, allowed input tax credits ("ITCs") in the amount of $9,703.74 and assessed late remittance penalties plus interest.
[2] The property which is the subject of these appeals is located at 8068 Mount Carmel Blvd., Niagara Falls ("Mount Carmel"). The Appellant and his wife purchased the vacant lot on Mount Carmel Blvd. on March 4, 1997. Title to the property was held jointly. They immediately commenced construction of a 2,200 square foot home with an attached three-car garage. They moved into the property in May of 1997 and the house was completed in June of 1997. The property was sold on November 26, 1999.
[3] The issue is whether the Appellant's acquisition, development and resale of the Mount Carmel property constituted an adventure in the nature of trade.
[4] The Minister's position is that the Appellant purchased and improved the property with a view to re-selling it to make a profit. This would mean that the property constituted inventory to the Appellant and that the gain from its sale is taxable on account of income in accordance with sections 3, 9 and subsection 248(1) of the Income Tax Act. The Minister also submits that the Appellant is a builder as defined by subsection 123(1) of the Excise Tax Act and is therefore deemed, pursuant to subsection 191(1) of this Act, to have made and received a supply of the Mount Carmel property at its fair market value. Penalties and interest were assessed under the Excise Tax Act and the Input Tax Credit Information Regulations on the basis that the Appellant was required to report GST on the self supply of the property. In addition the Minister claims that ITCs have been allowed to the extent that the Appellant was able to provide supporting documentation.
[5] The assumptions of fact upon which the Minister relied in the income tax appeal are as follows:
(a) The Appellant operated a part time business as a kitchen cabinet installer;
(b) The Appellant had knowledge and experience in the industry of residential construction and renovation;
(c) The Appellant acted as a builder in respect of other residential housing construction;
Appellant's Acquisition and Disposition of Subject Property at 8068 Mount
Carmel Blvd.Niagara Falls Ontario
(d) The Appellant and his spouse Linda Arnold acquired title to the Property by deed 115273 registered on March 4, 1997;
(e) The purchase price of the Property was $80,000;
(f) The Property had a frontage of 113.17 feet and a depth of 150 feet;
(g) The acquisition and improvement of the Property was financed in part through a line of credit with Canada Trust;
(h) The Appellant did not arrange any long term financing in respect of the property;
(i) The Appellant was not required to make payments of principal in respect of the property;
(j) In 19978 the Appellant constructed a 2200 square foot home with a three car garage on the property;
(k) Construction of the home on the Property was substantially complete in June 1997 and the Appellant and his family occupied the home at that time;
(l) The cost of constructing the home on the Property did not exceed $176 430.98;
(m) The Appellant failed to provide any documentation to establish a construction cost in excess of the amounts allowed by the Minister;
(n) By deed 146484 registered on November 26, 1999 the Appellant completed the sale of the property by transferring the title for a sale price of $292 000;
(o) The Appellant's gain on the sale of the property was not less than $35 569.02 [$292 000 - ($80 000 + $176 430.98)];
(p) At the time of acquisition of the Property, the Appellant had in mind the possibility of resale at a profit in a relatively short time frame and that possibility was an operating motivation for the acquisition development, and disposition of the Property;
(q) The Appellant's gain from the sale of the Property was on income account;
Prior & Subsequent Property Acquisitions and Dispositions
(r) The Appellant has engaged in the following other transactions that evidence a pattern of conduct consistent with purchasing and developing land as an adventure in the nature of trade:
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PROPERTY
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DATE OF
PURCHASE
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DATE OF
SALE
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FINANCING
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PURCHASE/SALE
PRICE
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7897 Swan
St.
Niagara
Falls
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Jun. 8, 1988
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Feb. 27,
1990
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Short term
financing
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Bought: $42 000
Sold: $245 000
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7982
Cathedral
Dr. Niagara
Falls
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Nov. 15, 1999
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Jun. 30,
2001
(listed for
sale Dec.
2000)
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Line of credit
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Bought: $81 000 +
GST
Sold: $313 000
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(s) The property at 7982 Cathedral Drive("7982") was purchased by the Appellant and his spouse when they sold the Property at issue in this case;
(t) The 7982 property was comparable in terms of size and location to the Property at issue in this case;
(u) The 7982 property was in turn put up for sale within one year after it was acquired by the Appellant;
(v) At the time of acquisition of the 7982 property, the Appellant had in mind the possibility of resale at a profit in a relatively short time frame and that possibility was an operating motivation for the acquisition, development and disposition of the 7982 property;
(w) The 7982 property was sold before the Appellant's subsequent home at 7864 Cathedral Drive was substantially completed.
[6] The assumptions of fact upon which the Minister relied in the GST appeal are as follows:
(a) The Appellant operated a part time business as a kitchen cabinet installer;
(b) The Appellant had knowledge and experience in the industry of residential construction and renovation;
(c) The Appellant has been involved with construction projects in the past;
Appellant's Acquisition and Disposition of Subject Property at 8068 Mount
Carmel Blvd.
(d) The Appellant and his spouse Linda Arnold acquired title to the Property by deed 115273 registered on March 4, 1997;
(e) The purchase price of the Property was $80,000;
(f) The Property had a frontage of 113.17 feet and a depth of 150 feet;
(g) The acquisition and improvement of the Property was financed in part through a line of credit with Canada Trust;
(h) The Appellant did not arrange any long term financing in respect of the property;
(i) The Appellant was not required to make payments of principal in respect of the property;
(j) In 1997 the Appellant constructed a 2200 square foot home with a three car garage on the property;
(k) Construction of the home on the Property was substantially complete in June 1997 and the Appellant and his family occupied the home at that time;
(l) The Appellant was registered for purposes of Part IX of the Act;
(m) The Appellant, an individual, was a "builder" as defined by subsection 123(1) of the Act, and was deemed pursuant to subsection 191(1) of the Act to have made and received a supply of the Property at its fair market value;
(n) The Appellant did not report GST on the self supply of the property at the time of substantial completion and occupancy;
(o) The Appellant did not have adequate documentation as required to allow the Minister to allow the Appellant any further ITCs in relation to the Property than the $9,703.74 allowed;
(p) By deed 146484 registered on November 26, 1999 the Appellant completed the sale of the Property by transferring the title for a sale price of $292,000;
(q) The Minister used the fair market value of the Property as per paragraph 12(p) above to determine GST collectible for purposes of 191(1) of the Act;
(r) At the time of acquisition of the Property, the Appellant had in mind the possibility of resale at a profit in a relatively short time frame and that possibility was an operating motivation for the acquisition, development, and disposition of the Property;
Prior & Subsequent Property Acquisitions and Dispositions
(s) The Appellant has engaged in the following other transactions that evidence a pattern of conduct consistent with purchasing and developing land as an adventure in the nature of trade;
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PROPERTY
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DATE OF
PURCHASE
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DATE OF
SALE
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FINANCING
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PURCHASE/SALE
PRICE
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7897 Swan
St.
Niagara
Falls
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Jun. 8, 1988
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Feb. 27,
1990
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Short term
financing
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Bought: $42 000
Sold: $245 000
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7982
Cathedral
Dr. Niagara
Falls
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Nov. 15, 1999
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Jun. 30,
2001
(listed for
sale Dec.
2000)
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Line of credit
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Bought: $81 000 +
GST
Sold: $313 000
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(t) The property at 7982 Cathedral Drive("7982") was purchased by the Appellant and his spouse when they sold the Property at issue in this case;
(u) The 7982 property was comparable in terms of size and location to the Property at issue in this case;
(v) The 7982 property was in turn put up for sale within one year after it was acquired by the Appellant;
(w) At the time of acquisition of the 7982 property, the Appellant had in mind the possibility of resale at a profit in a relatively short time frame and that possibility was an operating motivation for the acquisition, development and disposition of the 7982 property; and
(x) The 7982 property was sold before the Appellant's subsequent home at 7864 Cathedral Drive was substantially completed.
[7] In giving his evidence, the Appellant began by addressing several of the assumptions in the Income Tax appeal. With respect to assumptions (h) and (i) he stated that he and his wife did not need additional money at the time the lot was purchased and construction began. Eventually they obtained a line of credit. He agreed that he did not have to make payments toward the principal owed on the line of credit but he explained that he chose a line of credit as opposed to a regular mortgage because the interest rate was one-half percent lower at the time. However, at Tab 5 of Exhibit R-1, database information from the Registry Office did show a charge against this property to CIBC Mortgage Inc. in the amount of $219,000.00. In addition the Appellant and his wife had one year to pay the $80,000.00 purchase price for the lot because it was purchased from Henry Jansen, the father of a good friend, Casey Jansen. This friend lived on the adjacent property and was one of the reasons the Appellant wanted to build on this lot. In addition to the one-year period given to the Appellant to pay for the lot, Henry Jansen did not charge the Appellant any interest.
[8] The Appellant disagreed with assumption (l). He testified that the cost of constructing the house was in excess of $220,000.00 and that the purchase price of the lot was additional to that.
[9] The Appellant's comments with respect to assumptions (m) and (n) related to the receipts he was unable to provide in respect to the construction of the house. These related to the paved driveway, the concrete basement, the kitchen counter top and the bricklaying costs. He did state that he obtained some estimates on what these items would have cost but they were rejected. When the Appellant sold this property, the purchasers bought the home on condition that the one-third of the basement that remained unfinished be completed and that the home be converted to a two bedroom home with a larger bathroom. All of these renovations were included in the selling price of $292,000.00.
[10] In respect to assumption (o) the Appellant stated that he actually lost money on the property because, although he sold it for $292,000.00, the cost of the construction, renovations for resale and lot, all totalled $305,000.00.
[11] He disagreed with assumption (p) and stated that the decision to sell the property was made for several reasons. The property was located on a busy street leading into the subdivision, his children were getting older and the layout of the house afforded no privacy to anyone (when they drafted the plans and constructed the house they did not foresee this problem as the children were younger), there was limited place for the children to play and the neighbour that backed onto the rear yard was upset with the activities of these children in their backyard.
[12] In respect to assumption (r) the Appellant testified that they had a mortgage on their prior property, Swan Street, purchased in 1988. He pointed out that the figures contained in this assumption were misleading because the purchase price of $42,000.00 was the purchase price of the vacant lot only. The cost of constructing the house on Swan Street was not included in this figure and therefore the amounts in respect to this property were misleading. The Swan Street property was sold in 1990. The next property, where the Appellant resided for over seven years, until 1997, was not included in the other transactions relied on by the Respondent to show a pattern of conduct respecting the purchase and sale of properties. The next property was the Mount Carmel property, the subject of these appeals. The Appellant clarified that he contracted out most of the work on the Mount Carmel property because he worked full-time as a machinist Monday to Friday. However in his off-time he framed the house and installed the insulation.
[13] When Mount Carmel sold in 1999, the Appellant purchased 7982 Cathedral Drive in late 1999. In respect to assumption (u), the Appellant stated that the Mount Carmel and Cathedral Drive properties were about the same size but that their respective layouts were different because the master bedroom in the Cathedral Drive property was located at the opposite end of the house from the children and the laundry facilities were larger. In addition, this property, although in the same subdivision, was no longer located, as the Mount Carmel property had been, on the bend of a busy street where it was difficult for a vehicle to back out. The Appellant said the Cathedral Drive property was built to meet his growing family's needs.
[14] The Appellant qualified assumptions (u) and (v) and testified that the reason the Cathedral Drive property was sold, about one and one-half years after the purchase, was because he was negotiating with Canadian Tire to purchase a franchise and his family would have to move to northern Ontario. He expected to receive a franchise offer which meant he had to have the $80,000.00 franchise fee available immediately. The sale of this property was meant to free up sufficient cash to enter this business venture. However after the house was listed for sale, Canadian Tire chose someone else to take the franchise. When the house sold and he was not offered the franchise opportunity, they purchased another property within the same neighbourhood because they liked that area.
[15] Regarding assumption (w), the Appellant stated that the 7982 Cathedral Drive property was sold because they needed to raise money for the franchise. When the franchise dealership did not proceed and their house had sold, they decided to build in the same neighbourhood. They rented for several months at 7982 Cathedral Drive from the new owners/purchasers of that property until their new home could be completed.
[16] The Appellant reviewed the modifications and speciality items which he had added to the Mount Carmel property. This created a home specific to the needs of his family. From the front entrance through the hallway and into the kitchen area, the walls were painted in a blue speckled effect with a base of red/blue/green hues. The living room was completed in pink, with a pink carpet containing a red border. The master bedroom was also decorated in pink. The children's bathroom contained dark blue tiles throughout the bathroom walls and floor and on the shower walls. The fixtures in this bathroom were also dark blue and this increased the cost considerably. The carpets were upgraded to 60 ounce, from the type that would generally be used (30 ounce) by a contractor in a property intended for quick resale. Additional under-padding was installed. Casement windows, not crank windows, were used which increased the cost. A special eight inch wide stone trim was completed around the windows. The insulation in the attic was upgraded to R-40 instead of the usual building code R-32. The usual 1/2 inch drywall was upgraded to 5/8 inch. A three-car heated garage was added to accommodate the Appellant's truck with the depth of the garage increased from the standard garage length of 20 feet to 24 feet. Of course these items were all completed at additional costs. A twelve foot by twelve-foot shed was constructed in the backyard to store bikes and toys so that the children's items would not be in the garage where they could possibly scratch the vehicles. In anticipation of finishing the basement, hot water heating was installed in the concrete so that two-thirds of the basement had in-floor heating. A deck, sixteen feet by fourteen feet in size, was constructed to expand the existing five foot by twelve foot decking off the kitchen that had been initially installed. This additional decking was intended as a play area for the children. Instead of the usual twenty-year roof shingles, the Appellant installed heavier thirty-year shingles. A concrete driveway was installed instead of gravel. A built-in cabinet unit was installed from wall-to-wall to accommodate the television and speakers. The upper half of this unit contained glass doors and glass shelves with special lighting to display his wife's Hummels.
[17] The Appellant testified that he installs kitchen cabinets in his spare time. His business is called South Wood Cabinets. He does not construct the cabinets but rather he orders the completed cabinets and simply installs them. This includes replacing and repairing drywall when necessary. He completed installations on Saturdays with the help of his son. In addition to installation of pre-finished cabinets, he has knowledge and experience in framing a house.
[18] The Appellant also addressed why a number of invoices, respecting the construction of houses belonging to other individuals, were in his name. He stated that he kept an open account with several suppliers who would provide him materials at a reduced price. He allowed his friends to use these accounts when they were building their homes so they could also save money by reducing costs. They would either pay the account directly or give the money to the Appellant so he could pay it. He did not believe that this fact should make him a contractor.
[19] On cross-examination, the Appellant clarified assumptions (b) and (c) of the income tax appeal. He denied being involved in any construction projects except for the work he completed for his friends. He stated that his abilities were limited to helping frame a house which included installing windows and doors and installing (not building) kitchen cabinets. In reference to Tab 21, Exhibit R-1, he explained that he filed this lien against the property of a friend when that friend did not pay the account which the Appellant allowed him to use to reduce the costs of building his home. When questioned about the list of services that he completed on this friend's house, he explained that the additional listed activities related to the framing of the house. The owner made a late request that a skylight be installed and the Appellant had to cut the opening and re-frame that area. His friend had also requested that the closet be made larger and that a landing be shortened to accommodate the installation of steps.
[20] In respect to assumption (c) he again re-iterated that he was not a builder and that his activities are limited to activities similar to those listed in Tab 21, Exhibit R-1. He never lined up plumbers, electricians, heating contractors or any other sub-trades. The foundation of the house would already be poured and at that point he would commence the framing.
[21] When he was referred to Tab 16 of Exhibit R-1, he explained that this document entitled "Residential Mechanical Design Form" was a standard form that Castle Plumbing and Heating, the installing contractor, forwarded to City Hall for every house where Castle supplied materials and work. Although the Appellant is listed as the builder on this form, he denied that he was the builder of the house at Morris Lane. He simply assisted the owner, John Owens, who was a friend. He again stated, as he did in giving his direct evidence, that this account would have been charged against his personal account, as Castle provided him materials at reduced rates. Owens therefore saved money on purchasing items from Castle using the Appellant's account. In reviewing the copy of the Offer of Services, from Castle respecting the Owens property (Tab 12 of Exhibit R-1), he stated that although it was addressed to him, it was Owens who took advantage of the Appellant's reduced-rate line of credit with Castle. In the end Owens either paid this amount directly to Castle or paid the Appellant the amount so he could reimburse Castle. He confirmed that Owens gave him a couple of five hundred dollar payments for the framing. When asked who negotiated the price with Castle, the Appellant stated that he took Owens' plans to Castle for a quote because Owens was working. He had the same explanation for the various invoices with Penner Building Centre contained at Tab 9 of Exhibit R-1, which, although addressed to him, were for the Morris Road property owned by John Owens. Again at Tab 13, Exhibit R-1, he identified invoices from Castle for the Schisler Road property as progress billings for another friend whose house he helped frame and consequently allowed this friend to take advantage of his personal money saving arrangements with Castle.
[22] Between 1990 and 1997, on the advice of a real estate agent, he purchased two vacant lots which he considered to be an investment. He did not build on these lots and eventually sold them.
[23] In respect to assumptions (g) and (h), he again confirmed in cross-examination that the financing of the Mount Carmel property came partially from lines of credit with Canada Trust and Ontario Falls Credit Union. He arranged a mortgage collateral to a line of credit because it afforded him a reduced interest rate.
[24] In respect to assumption (h) he clarified that, although he moved into the property in May of 1997, some items such as the driveway and the landscaping had not been completed. It was substantially completed in June of 1997.
[25] Respondent counsel had the Appellant review several documents (Exhibit A-1) which Canada Revenue Agency ("CRA") had not accepted. These included a Home Depot receipt for blinds, a hose cover for a central vacuum, blades for a saw, power tools, cost of mirrors, insurance obtained through Co-operators Insurance together with items respecting the wall-to-wall interior cabinet, the children's built-in television stand and the customized computer desk built in the basement.
[26] Joseph Tubbe, CRA auditor, reviewed the Appellant's cabinetry business including a review of the income tax and GST returns and the financial statements for the various years. During his first meeting with the Appellant in early 2001, the books and records of the business were reviewed and at this time the sale of the house was discussed. Mr. Tubbe confirmed that the Appellant advised him of the negotiations he had with Canadian Tire regarding the franchise purchase. Although the initial meeting was to review the Appellant's part-time business, it was the house that became the subject of the assessment because the Appellant's filings revealed three different addresses over a three to four year period. In addition the Appellant was installing cabinetry and doing some framing. Mr. Tubbe referred to Tab 22 of Exhibit R-1 (City of Niagara Falls listing of building permits and builders - February 1997) and noted that the Appellant was listed as the builder for the Mount Carmel property. At Tab 23, Exhibit R-1 (major construction project listings for Period August 1, 1999 to August 31, 1999) Mr. Tubbe pointed out that the building permit also lists the Appellant as the builder of the 7982 Cathedral Drive property, which was constructed after the sale of the Mount Carmel property. At the time of the meeting with Mr. Tubbe, the Cathedral Drive property was still the place of residence of the Appellant.
[27] Mr. Tubbe noted that the GST rebate application dated June 1, 1999 (Tab 8, Exhibit R-1) listed the fair market value of the Mount Carmel property as $300,000.00. This value would have been estimated and inserted by the Appellant.
[28] In reviewing the various invoices contained at Exhibit A-1, Mr. Tubbe could not specifically recall if he had seen all of this documentation during the audit. He did advise however that he remembered reviewing the Stanford Pro Hardware invoices and rejecting the amounts for tools as he had presumed that they related to the Appellant's cabinetry business and there was no evidence to tie them to the construction costs of the house. He went on to explain that he would not allow many of the other receipts in Exhibit A-1 because they did not conform to the strict GST guidelines respecting receipt contents and information. He would have refused the Co-operator Insurance receipts because no GST was charged to the Appellant and therefore corresponding ITCs were not available. Mr. Tubbe also reviewed the invoices at Exhibit A-2 and much of his evidence respecting this documentation was similar to his comments respecting the documentation at Exhibit A-1. Many of the invoices did not have the required information and were simply handwritten summaries. However he did state, that although he did not recall specifically reviewing the Maple Craft Door invoices, he would accept these invoice expenditures respecting the construction of the house.
[29] Mr. Tubbe reviewed the factors upon which he assessed the Appellant. Lifestyle issues played an important part because the Appellant worked as a machinist with an income (including overtime pay) of $66,000.00. His cabinetry business was not claiming income. Mr. Tubbe also noted that the Appellant owned a new pick up truck and Mercedes Benz.
[30] Mr. Tubbe, on cross-examination, explained that while he had more latitude to allow items under the Income Tax Act and related regulations, a GST rebate claim required specific documentation. He stated that he allowed the items he was able to and rejected those where he either did not have sufficient documentation or third party information to verify the claim.
Analysis:
[31] Although the Minister conceded that both the Appellant and his wife had title to the Mount Carmel property, the resulting issue of allocation of the profit between the spouses was not initially addressed. After discussion with the parties, Respondent counsel agreed that if I concluded that there is profit from the sale of the property, it should be allocated equally between the Appellant and his spouse. After further pressing the matter, Respondent counsel advised that the Minister was effectively statute-barred in respect to assessing the Appellant's wife in regard to these issues.
[32] If I had not insisted that Respondent counsel specifically address this issue, as it related to a possible outcome not only in respect to the Appellant but also his spouse, who was the joint owner, I do not believe it would have been dealt with during the hearing. In some circumstances this could be characterized as an oversight. However I have difficulty in taking such a view here because the joint ownership issue is specifically addressed and conceded in the Minister's assumptions of fact. It is essential that an officer of the Court recognizes that he or she has a duty to address even those areas that may not fully support their position. This duty becomes even more important in cases such as this where the Appellant is self-represented in Court. The end result is always to obtain a fair and just result within the confines of the relevant legislation and case law.
[33] Briefly the Appellant's position is that the Mount Carmel property was his principal residence and it therefore followed that it was an exempt supply. In addition he argued that he was not a builder within the meaning of subsection 123(1) of the Excise Tax Act and therefore not required to pay GST but rather he was entitled to a New Housing GST rebate. The Respondent's position is that the Mount Carmel property was one of several transactions where the Appellant acquired, developed and resold houses with a view to a profit. It was therefore an adventure in the nature of trade, making the profit, on the sale of the property, taxable to the Appellant on account of income. In addition the Appellant as a builder was deemed to have made and received a supply of the property at fair market value, requiring him to report and submit GST on this self supply.
[34] The factors which have been consistently cited and relied on by this Court, in determining whether a transaction involving real estate is an adventure in the nature of trade, were established by Rouleau J. in Happy Valley Farms Ltd. v. The Queen, 86 DTC 6421 and approved by the Federal Court of Appeal in Cardella v. The Queen, 2001 DTC 5451. The case of Cardella is also referred to in the Supreme Court decision in Friesen v. Canada, [1995] 3 S.C.R. 103 where the importance of a taxpayer's intention was discussed. These factors as they relate to the facts of this case are as follows:
(1) Nature of the Property Sold:
The Appellant purchased a vacant lot, built a house on this property and then sold it about 2½ years later. He had constructed several other homes on vacant lots in the same residential area. He also purchased two vacant lots in the same area which he resold without building on these lots. He always treated these two lots as investment properties and he purchased them for resale as vacant lots with a view to making a profit. I agree with Respondent counsel that this is generally a neutral factor in the facts before me. However when I consider the additional vacant lots in the same subdivision purchased and resold for profit, it clearly indicates two different intentions operating in the Appellant's mind respecting those lots upon which he built and those lots that he considered an investment. This factor slightly favours the Appellant's position.
(2) Length of Ownership:
A permit was obtained in January of 1997. The vacant lot was purchased on March 4, 1997 with construction beginning shortly after. The Appellant and his family moved into the home in May of 1997 and the property was considered substantially complete in June of 1997. The property sold on November 26, 1999. Although not determinative, Respondent counsel argued that this was actually indicative of ownership of a shorter duration and that the negotiations with, and the renovations completed for, the eventual purchaser may have indicated an earlier emphasis in time by the Appellant to sell the property. Firstly, I believe that a 2½ year period is not a shorter duration period respecting ownership, as counsel suggests. Although it is not a lengthy period, I believe that a 2½ year period of ownership tends to support the Appellant's position that it was not intended for sale for profit. Secondly, I reject the submissions concerning the negotiations and renovations with the purchaser of this property as it is purely speculative with no evidence adduced concerning this very point.
(3) Frequency of Transactions:
If I look at all the transactions between 1988 and 2001, there were five lot purchases and five homes built over a 13-year period. The dates are as follows:
(a) 7897 Swan Street - June 8, 1988 to February 27, 1990;
(b) 7701 Southwood Drive - 1990 to 1997;
(c) 8068 Mount Carmel - March 1997 to November 1999;
(d) 7982 Cathedral Drive - November 15, 1999 to June 30, 2001;
(e) 7864 Cathedral Drive - 2001 to present.
The evidence supports that the sale of 7982 Cathedral Drive was prompted because the Appellant required cash to purchase the Canadian Tire dealership. These negotiations fell apart in the midst of the sale of this property. This fact certainly accounts for the shorter ownership period in respect to this property. The fifth property is the Appellant's present residence. There is nothing here that jumps out at me to definitively suggest that there is an established pattern of transactions. The second property was owned for 7½ years and the fifth property has been owned for four years. This again supports the Appellant's position.
(4) Work Expended on the Property:
The Appellant is employed full-time as a machinist. He also installs pre-fabricated kitchen cabinets and frames houses in his spare time. His evidence indicated that he did not employ the sub-trades that worked on the Mount Carmel property. He worked on the property only in his spare time. I do not find it unusual that someone with these skills and with a part-time cabinetry business would do what he could in the construction of his home to reduce costs. In addition the uncontradicted evidence supports the Appellant's contention that the Mount Carmel property was highly individualized and customized to suit his family's needs and particular tastes. An individual, even remotely eyeing the market for resale at a profit, while in the midst of construction, would never finish some of the interior decor the way this Appellant did. Blue speckled rooms, pink walls and carpets with accents of red and completely tiled dark blue bathrooms with blue fixtures, are all items that, while attractive to the Appellant's family, could be more of a hindrance in selling this property. It is almost accepted practice that individuals who build with the intent of immediate sale install neutral items and colours that will appeal to the majority of potential homeowners. The Appellant clearly constructed this house according to the family's preferences. Respondent counsel agreed that these items did not make the house attractive to purchasers but submitted that the other items, which included better roof shingles, better insulation, larger garage, more decking and a sprinkler system, were all selling features that purchasers would find attractive. While I agree that some purchasers might want these upgrades, there was no evidence before me that such upgrades translate to an increased profit on resale. In fact the opposite argument can easily be made that they support the fact that the Appellant customized this home with the full intent to stay there. I believe that many of these upgrades would not necessarily translate into an increased sale price.
(5) Circumstances Responsible for Sale:
The Appellant's evidence was that he decided to sell the Mount Carmel property for a number of reasons. In addition to problems with the neighbours, the inability of the house to accommodate his growing family and the problems associated with living on the bend of a busy street influenced his decision to sell Mount Carmel. All of these circumstances are legitimate reasons for selling a property where initially the intent was to construct a home and reside there. They again support the Appellant's position.
(6) Motive:
The facts of this case support my conclusion that the Appellant's primary intention in constructing this property was to build a residence for his family which was very specific to their individual taste and needs. It was only when a number of factors intervened that he decided to sell the property. Certainly with his history of construction and sales, it could be argued that his secondary intention was always to resell for profit. However in the particular facts of this case I rely on the statement of Justice Bowman, now Chief Justice, in Burnet v. Canada, [1995] T.C.J. No. 479 at paragraph 20:
... Most people expect to sell their principal residence at some time and, it is hoped, to realize a tax free capital gain. If this in itself were the test most sales of residential homes would result in taxable income. The converse of this proposition is that it is quite possible to speculate in one's principal residence, but it requires fairly cogent evidence to justify the conclusion that the house where one lives has become an object of trade: Schlamp v. The Queen, 82 DTC 6274. ...
This recognizes that a taxpayer can have more than one intention concerning a property and yet it can still be considered to be the primary residence. Quite often an individual may construct or buy a property with the intent to reside there indefinitely but with the secondary intent to eventually sell that property at a profit and obtain a larger property more suited to the individual's growing requirements and needs. This does not convert a capital property to an adventure in the nature of trade and in fact it is probably not what was intended in those cases that relied on secondary intention. Again this factor supports the Appellant's position.
[35] In addition to the above factors, the following facts support the Appellant's position. The Appellant obtained a line of credit because it gave him an interest rate that was one-half of a percent lower than the current mortgage rate at the time. The evidence does not support the Respondent's assumption that the Appellant did not obtain long-term financing because the Registry Office printout confirmed an encumbrance in the amount of $219,000.00 against this property at the time of sale. This indicates that a mortgage, likely collateral to the line of credit referred to by the Appellant, was registered against the property, although no specific documentation, other than the printout, was submitted.
[36] The Appellant's evidence was that he framed the Mount Carmel house and installed the insulation and that that was "... pretty much it on that house". Since he was employed full-time as a machinist, most of the work was contracted out. It is clear that the Appellant is not in the business of constructing homes. He had knowledge of the construction industry, and he did operate a cabinetry business, but it was a side-line to his full-time employment in an unrelated field. He did assist friends in building their homes but I do not believe that this makes him a builder within the meaning of subsection 123(1) of the Excise Tax Act. I have no reason not to accept the Appellant's evidence that although a number of invoices for building materials were in his name, they were in actual fact for materials supplied to friends for use in the construction of their homes. This allowed his friends to take advantage of the Appellant's preferred interest rate.
[37] Based on all of the above facts the Appellant was not engaged in an adventure in the nature of trade giving rise to business income with respect to the Mount Carmel property. He built the property with the intention of occupying it as his principal residence. Since the Appellant is not a builder, the following issues need not be addressed: (a) whether there was a deemed self supply of the property under subsection 191(1) of the Excise Tax Act, (b) whether the Appellant qualified for the personal use exception under subsection 191(5) and (c) if the self supply was not exempt under subsection 191(5), what the fair market value of the supply was for the purpose of calculating GST and the offsetting ITCs.
[38] The remaining issue is the determination of the amount of the new housing rebate allowed on the Appellant's owner-built home. The Minister denied the Appellant's application for a rebate because the property was purchased, developed and sold as an adventure in the nature of trade. Because I have concluded that the property was not an adventure in the nature of trade, the rebate application must be reconsidered. The Appellant was able to produce some additional receipts at the time of the hearing that he either did not have during the audit or did not submit with his new housing rebate application. I am therefore sending this item back to CRA for reconsideration and reassessment to permit the Appellant an opportunity to produce adequate documentation to support the rebate application; provided the documentation is in accordance with the provisions of the Act.
[39] Although the following issue need not be addressed because of my conclusion in these appeals, I want to comment on the Minister's approach in determining the fair market value of the property. To establish the fair market value, the Minister used the sale price of the property in November of 1999 even though the vacant lot had been purchased in early 1997 and the home built on it was substantially completed in June of 1997. Subsection 191(1) of the Excise Tax Act states that the builder is deemed:
(d) to have made and received, at the later of the time the construction or substantial renovation is substantially completed and the time possession of the complex is so given to the particular person or the complex is so occupied by the builder, a taxable supply by way of sale of the complex, and
(e) to have paid as a recipient and to have collected as a supplier, at the later of those times tax in respect of the supply calculated on the fair market value of the complex at the later of those times.
[40] Pursuant to paragraph 191(1)(d) the taxable supply of the property is deemed to have occurred at the later of the time of substantial completion or occupation by the taxpayer. The evidence here is that the Appellant began to reside in the property in May of 1997 and that the property was substantially completed in June of 1997.
[41] Pursuant to paragraph 191(1)(e) a builder shall be deemed to have paid and received tax in respect of the deemed supply calculated on the fair market value of the supply in accordance with the dates established in paragraph 191(1)(d).
[42] According to the clear and straightforward language of these paragraphs, the fair market value of the Appellant's property would be determined as at June of 1997 and not, as the Minister would have us accept, at the date of sale. The Minister's method of calculating the fair market value is clearly incorrect and inappropriate in the facts of this case, where 2 1/2 years have elapsed since the dates referred to in the Excise Tax Act. It directly contravenes the wording of the relevant provision. Respondent counsel's argument that the Minister recognized that the fair market value was to be determined as of June 1997 and that it was appropriate to base it on the sale price over two years later is simply without merit. Again it was only because I continued to press Respondent counsel on this issue that he offered the argument that the fair market value would simply have to be accepted because the Appellant failed to adduce evidence to the contrary and therefore had not met the onus which is upon him. Although the onus is upon an Appellant to demolish assumptions, an Appellant cannot be expected to meet that onus where those assumptions are based on the incorrect interpretation of any relevant statutory provision. I do not believe this argument could possibly be used to justify an assumption which is simply incorrect in its application by the Minister to the facts of the case. Depending on such factors as location, interest rates, trends and activity in the real estate market and events occurring in the neighbourhood, even relatively short periods between the occupation or substantial completion date and the sale date could result in great differences in the value of a property. The Minister's method clearly contradicts the wording in subsection 191(1) of the Excise Tax Act and as a result the value at the date of sale should never be used, or at least should never be used as a stand alone basis, to determine the fair market value of the property.
[43] The appeals are allowed, without costs.
Signed at Ottawa, Canada, this 9th day of November 2005.
Campbell J.
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