Lee v. The Queen, 92 DTC 6067, [1992] 1 CTC 64 (FCTD)

Pinard, J.:—This is an appeal from a decision of the Tax Court of Canada dated March 7, 1988, dismissing plaintiff's appeal from income tax assessments respecting his 1979 and 1980 taxation years. The proceeding in this Court is a trial de novo.

In 1977, the plaintiff jointly purchased a 114-unit apartment building situated at 33,710 Marshall Road, Abbotsford, British Columbia (the “ Marshall Road Property") with two companies whose shareholders were his acquaintances.

The Marshall Road Property was sold in 1979 and in filing his income tax return for his 1979 taxation year, the plaintiff reported the gain arising from the sale of his interest in the said property as a capital gain. He purchased an income averaging annuity contract with all or a portion of the proceeds of sale of the Marshall Road Property and has included payments therefrom in reporting his income for his 1980 and subsequent taxation years.

In addition, the plaintiff claimed a reserve with respect to the sale of the Marshall Road Property in his 1979 taxation year and amounts in respect of that reserve have been included in calculating the taxpayer's income for his 1980 and subsequent taxation years.

In the notice of reassessment issued by the defendant on May 16, 1983, the defendant reassessed the plaintiff with respect to his 1979 taxation year on the basis that the gain arising from the sale of the Marshall Road Property was a gain on account of income and not a capital gain and was not eligible for transfer to an income averaging annuity contract. The defendant also disallowed, for the 1980 taxation year, the reserve claimed by the taxpayer with respect to the gain arising from the sale of the Marshall Road Property.

By notice of objection dated August 5, 1983, the plaintiff objected to the defendant's reassessment of May 16, 1983 on the basis that the sale of the Marshall Road Property gave rise to a gain on account of capital and not a gain on account of income.

By notice of confirmation dated August 9, 1984, the defendant gave confirmation to the plaintiff of its reassessment of May 16, 1983 that the gain arising from the Marshall Road Property was a gain on account of income and not a gain on account of capital.

By notice of appeal dated November 5, 1984 the plaintiff appealed to the Tax Court of Canada, which appeal was heard March 2, 1988 and mailed March 11, 1988. His Honour Judge Rip of the Tax Court of Canada dismissed the plaintiff's appeal.

The plaintiff submits that his gain from the sale of the Marshall Road Property was a gain on capital account and not a gain on income account, and that consequently, such gain was eligible for transfer to an income averaging annuity contract.

Conversely, the defendant says that the gain on the Marshall Road Property has been properly included on account of income and was accordingly not a capital gain nor eligible for an income averaging annuity contract. More specifically, the defendant submits that the plaintiff's profit has been properly included in income being part of a business, trade or adventure in the nature of trade.

The basic question, therefore, is whether the plaintiff's profit from the sale of the Marshall Road Property was a capital gain or whether it was a profit from a business, within the meaning of section 9 and subsection 248(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), therefore to be included in the plaintiff's income pursuant to section 3 of the same Act.

It has been consistently held in cases of this kind that such a question is one of fact; also, the onus of disproving the Minister's assumption, in assessing the plaintiff as he did, that the sale of land amounted to a “business” or"a venture or concern in the nature of trade", is on the plaintiff. Indeed, the following comments in the following two cases apply to the instant case:

In The Queen v. David Froese, [1977] C.T.C. 526, 77 D.T.C. 5364, Collier, J. stated, at page 527 (D.T.C. 5365): “As always in cases of this kind the question is essentially one of fact: each case must depend on its particular facts."

In Hillsdale Shopping Centre Ltd. v. M.N.R., [1981] C.T.C. 322, 81 D.T.C. 5261, Urie, J., for the Federal Court of Appeal, stated, at pages 328-29 (D.T.C. 5266):

It was next said that the learned trial judge has erred in proceeding on the basis that the onus of disproving that the Minister's assumption that some part of the proceeds of the expropriation were taxable, lay upon the taxpayer.

If a taxpayer, after considering a reassessment made by the Minister, the Minister's reply to the taxpayer's objections, and the Minister’s pleadings in the appeal, has not been made aware of the basis upon which he is sought to be taxed, the onus of proving the taxpayer's liability in a proceeding similar to this one would lie upon the Minister. This defect may be due to a number of reasons such as a lack of clarity on the part of the Minister in expounding the alleged basis of the taxability which could include an attempt by the Minister to attach liability on one of two or more alternative bases thus failing to make clear to the taxpayer the assumption upon which he relies.

In all other cases the onus is on the taxpayer to disprove the Minister's allegation of liability on the assumptions propounded. In the instant case, throughout the whole proceedings the appellant was made aware that the Minister assessed part of the proceeds of the expropriation as profit from a business contrary to the allegation of the taxpayer so that this ground of attack is without merit.

In the case at bar, the plaintiff has been a pulp mill worker for 30 years and has little formal education. Between 1971 and 1981, he purchased and/or sold, sometimes alone, sometimes in association with his wife P.L. Lee or others, the following properties:

G.N. Lee 50%, P.L. Lee 50%

In addition, the plaintiff purchased, in April 1981, at the price of $40,000, a farm located in the municipality of Matsqui.

The plaintiff purchased the Marshall Road Property on a partnership basis in which he owned 50 per cent and Robert Lee Ltd. and G.V.C. Holdings Ltd., two traders in real estate, each owned 25 per cent. The plaintiff claims that he sold his interest in the property for the following reasons: he was the only co-owner who was willing to contribute time and effort to the rental of the property; he found that the up-keep was an onerous responsibility for him since he was living some distance from the property and since he was otherwise employed full time as a pulp mill worker; the plaintiff also explained that after the purchase, because of increasing vacancies, the property was being operated at a substantial loss; since the others would not assist in servicing the operating loss, the plaintiff was forced to borrow funds to maintain the property; finally, the plaintiff testified that in 1979, he was willing to assist 13 of his relatives in their efforts to immigrate to Canada from China; in anticipation of their arrival, he claimed to have disposed of his interest in the Marshall Road Property with the intent that he could use the proceeds of sale to purchase homes to shelter his immigrant relatives.

In my view, the problem raised by this action is one in respect of which the applicable principles are those stated by Noël, J. in Racine, Demers and Nolin v. M.N.R., [1965] C.T.C. 150, 65 D.T.C. 5098, where at page 159 (D.T.C. 5103) he aptly defines the concept of secondary intention to resell as follows:

[Translation]

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

Here, the inference flowing from the circumstances surrounding the transaction leads to the conclusion that indeed there was a secondary intention that effectively motivated the plaintiff at the time he acquired his share of 50 per cent of the Marshall Road Property. The plaintiff has failed to establish on a balance of probability that he acquired title to the property for the purpose of investment to the exclusion, at the time of acquisition, of any purpose of disposition at a profit.

Indeed, the acquisition of the Marshall Road Property was the plaintiff's first experience in partnership with traders in real estate and the cost was in excess of anything he had spent on property previously. Robert H. Lee and George Wong, the respective principals of the latter trader corporations, both testified that the plaintiff at the relevant time did not tell them about his intentions with respect to his decision to purchase the property as he did.

Robert H. Lee, the principal of Robert Lee Ltd., had a particularly good experience in the real estate business. There was tremendous reliance on his advice when the plaintiff first made the decision to buy the property, and again when he made his mind to list the property with another real estate agent and to sell it after having received a number of offers.

It is also significant that in filing their income tax returns for their 1979 taxation year, Robert Lee Ltd. and G.V.C. Holdings Ltd. each reported its gain arising from the sale of its interest in the Marshall Road Property as a gain on account of income and not a capital gain.

In addition, the plaintiff's share in the property was made entirely with borrowed funds. The desire to purchase a newer and bigger apartment building was constantly stated by the plaintiff as an important factor which influenced his decision to sell the properties previously acquired by him. At the time he purchased the Marshall Road Property, the plaintiff once more fulfilled such a desire and that, in my view, revealed a pattern of activities more consistent with an intention or turning the property to account than that of merely making a long-term capital investment.

In that context, the fact that the property was sold at a profit, and that, less than two years after its acquisition by the plaintiff and his trader partners, is also indicative of such an intention or turning the property to account.

Finally, with respect to the other reasons given by the plaintiff to explain his decision to sell, namely the onerous responsibility for him to up-keep the property, the operating loss of the property and his desire to shelter his immigrant relatives, they are not convincing. From his past personal experience as well as from his association with traders in real estate in this specific acquisition, the plaintiff must have known, under the circumstances prevailing at the time of purchase, about the time and effort required to maintain such an apartment building and also about normal operating losses during the initial years. In my view, the plaintiff was undoubtedly aware that such an onerous responsibility for him could likely be well compensated by the gain resulting from the resell of the property during the initial years. With regard to his relatives from China, only six ultimately came to Canada, and none of them ever lived in a dwelling owned by the plaintiff.

I must therefore conclude that the plaintiff's gain on the Marshall Road Property has been properly included by the Minister of National Revenue on account of income being part of a business, trade or adventure in the nature of trade, and was accordingly not a capital gain nor eligible for an income averaging annuity contract.

For the above reasons, the action will be dismissed with costs against the plaintiff.

Appeal dismissed.