Toolsie v. The Queen, 86 DTC 6117, [1986] 1 CTC 216 (FCTD)

Collier, J.:—This is an appeal from a decision of the then Tax Review Board.

The plaintiff had appealed assessments, by the Minister of National Revenue, of his income tax for 1973,1974 and 1975.

The plaintiff had claimed the following deductions as business expenses:

1973; mortgage interest of $2,805.38 and a fee of $375.00

1974: mortgage interest of $3,691.21

1975: mortgage interest of $3,626.75

The Minister disallowed those items.

In his 1974 taxation year, the plaintiff sold a property known as 147 Merner Avenue, Kitchener, Ontario. He realized a gain on this transaction. He characterized it as a capital gain, drawing tax on only 50 per cent of the amount. The Minister assessed the full gain as income from an adventure in the nature of trade. The amount involved, for tax purposes, is $2,017.

In his 1975 taxation year, the plaintiff sold a property known as 44 Walton Avenue, also in Kitchener. He realized a gain on this transaction. The same dispute arose as with the Merner property: taxable as a capital gain or taxable as income, from an adventure in the nature of trade. The amount involved, for tax purposes is $8,516.

The plaintiff had also claimed, for 1973 and 1974, expenses for office and personal residence, of $368.93 and $250.90. These were allowed by the Tax Review Board. They are not in issue in this appeal.

For 1973, 1974, and 1975 the plaintiff claimed, as a deductible expense, bank loan interest as follows:

1973 — $320

1974 — $450

1975 — $540

At this trial, counsel for the defendant stated those amounts should be allowed.

The plaintiff is a lawyer practising on his own in Kitchener, Ontario. He was Called to the bar in 1969. He purchased a house at 139 Meaford Drive, Waterloo. After meeting his present wife in 1969, he purchased and moved into another house at 19 Furness Drive in Kitchener. The Meaford Drive property was then rented.

In 1969, his wife owned a property of approximately 200 acres, described as the Holiday Beach property. In 1970 he purchased it from her for $70,000. In 1971, 120 acres were sold for $75,000. Of the remaining 80 acres, one lot was later sold.

In 1969, the plaintiff had purchased a three-acre property, called the St. Jacob’s property. In the latter part of the 1970s he attempted to divide the property into lots for purposes of development or sale. In 1974, there was a curious transaction between the plaintiff and a builder, in respect of one lot in the three acres. This appeared to be an attempt to get the Municipal Council to approve severance of part, at least, of the property into lots.

The plaintiff also owned, as of 1972, another property (381 Louisa Street) in Kitchener. This was rented out.

In March 1972, the plaintiff purchased a 22-unit apartment building at 44 Walton Avenue in Kitchener. The purchase price was $252,000. The plaintiff transferred the Meaford Drive, Furness Drive and Louisa Street properties to the vendor. His equity in those properties was approximately $32,500. He assigned, as well, two mortgages amounting to approximately $29,000.

He testified the object of this transaction was to consolidate his assets, and have an income-producing investment. He felt he could combine that income with his income from his law practice, and deduct business expenses and depreciation from the total. He found out that was not permissible. He raised the rents of some of his tenants. Some left.

As early as June 1972, he was indicating to real estate agents he was in the market to sell 44 Walton: see exhibits 6 and 7, where he wrote he was prepared to take “a home in trade” in lieu of a down payment. In October, the property was listed for sale at $265,000. In 1973, it was listed for $280,000. It was finally sold for $280,000 in May 1974. The gain gave rise, as earlier recounted, to part of the present tax dispute.

The plaintiff said, and argued, he was not in the business of trading in apartment buildings or properties; this was an investment project; it early did not look financially sound; he sold.

I do not accept the plaintiff’s statements as to his pure investment intention. When one looks at the history of his earlier real estate dealings, and at the Merner Avenue purchase and sale (which I shall deal with later), I am satisfied the plaintiff at all times had two equally motivating intentions: to try and create a source of income, but to sell, at any time, when circumstances warranted or dictated. The Walton Avenue venture was, to my mind, an adventure in the nature of trade. The plaintiff was, in my view, a trader or venturer in real estate, as well as a practising lawyer.

I turn to the Merner Avenue matter.

Shortly after the Walton Avenue purchase, the plaintiff had acquired a residence home at 194 Stirling Avenue North in Kitchener. In April or May of 1973, he was walking in the neighbourhood. He saw a small cottage, with a large lot, for sale. He made an offer of $14,000. He said it was a bargain. The transaction closed on June 1 1973. He said he purchased it for rental purposes. A prospective tenant appeared. The tenant wanted to buy. On June 4, the tenant offered $18,000. The plaintiff accepted.

I have no difficulty in classing this as an adventure in the nature of trade, and the gain taxable as income.

The Merner purchase and sale illustrates, as I see it, the plaintiff’s approach to matters involving real estate: to turn them to account whenever a reasonable opportunity arose.

The remaining issue is that of mortgage interest.

It arises this way. The plaintiff acquired his present residence (194 Stirling North) in May 1972. He arranged a loan of $37,500. As security he gave a third mortgage on 44 Walton Avenue, and a first mortgage on the Stirling Avenue property. There was a mortgage fee of $375.

The plaintiff contends the fee and the mortgage interest are deductible as a business expense. The submission, which I found somewhat difficult to follow, runs this way: The plaintiff, in his personal capacity, or as a lawyer, put up approximately $61,000 to purchase the Walton Avenue business; that was, in effect, a loan to J. Vincent Toolsie, in his capacity as an apartment building owner; when the Stirling Avenue residence was purchased, J. Vincent Toolsie, in his capacity as apartment owner, repaid $37,100 of the loan, to Toolsie, in his personal capacity

There is, at the outset, one practical difficulty with this. There are no records supporting this alleged contractual arrangement between the plaintiff in one capacity, and the plaintiff in another capacity. Nor is there any hard evidence of money changing hands. All that really happened is that J. Vincent Toolsie borrowed money to purchase a home. In my view, the Minister's assessment is correct. The mortgage interest and placement fee are not deductible. The cases relied on by the plaintiff:

Trans-Prairie Pipelines Ltd. v. M.N.R., [1970] C.T.C. 537; 70 D.T.C. 6351;

and

Sternthal v. The Queen, [1974] C.T.C. 851; 74 D.T.C. 6646 are, in my opinion, quite distinguishable.

The appeal is dismissed, except as to the three items of bank loan interest. The assessment will be referred back to the Minister for reassessment, on the basis that the amount of $320 is deductible for 1973, $450 for 1974, and $540 for 1975. The assessment is otherwise confirmed.

Substantial success was with the Minister. Costs will be against the plaintiff.

Appeal dismissed.