Giannakos v. The Queen, 86 DTC 6145, [1986] 1 CTC 325 (FCTD)

Cullen, J.:—This case and that of the plaintiff’s husband, Demetrios Gian- nakos (Court No. T-304-85), were heard together on common evidence. My reasons for judgment in T-304-85 apply equally to this case and read as follows.

The plaintiff in this case and his wife, the plaintiff in case no. 5-303-85, appeal the assessments made by the Minister of National Revenue (“Minister”) for the 1979 and 1980 taxation years. Counsel for the plaintiff, prior to argument, advised the Court that his client was abandoning the appeal of the assessment made by the Minister for the 1979 taxation year. The issue in the 1980 taxation year is whether or not the sale of properties, held jointly by both plaintiffs and disposed of by way of sale, was an adventure in the nature of trade or was the disposition of capital.

In 1976 the plaintiff and his wife jointly acquired two residential properties municipally described as 1324 and 1326 - 16th Ave., S.W. in the City of Calgary, Alberta. For convenience sake, I will refer to all the properties purchased by lot number and hence these two properties are lot 1 and lot 2 respectively. Prior to the acquisition of these properties, the plaintiff and his wife rented lot 1 from the plaintiff's brother who resided at lot 2. The evidence is that the brother listed both properties for sale and, although the plaintiff only wished to purchase lot 1, his brother was not prepared to sell lot 1 by itself and insisted that the two lots be sold as a unit. As indicated the plaintiff then purchased both lots.

Following the acquisition of the properties the plaintiff and his family moved into the house at lot 2 and proceeded to rent the house at lot 1. The house at lot 1 contained three rentable suites which remained rented throughout the four years the plaintiff and his wife owned the property. If tenants left, the premises were “freshened up” and leased with no difficulty.

In June 1977, the plaintiff and his wife acquired the property adjoining lot 2, namely lot 3. This property was also fully rented throughout the three- year period that the plaintiff and his wife owned it. In July 1977 the plaintiff and his wife purchased lot 4, and I accept the evidence of the daughter, Christina Giannakos, that it was for the express purpose of permitting her and her sister Dora to rent it. This eventually proved unfeasible and so this property too was rented. It was rented at a reduced rent due to its state of disrepair and the tenant's undertaking to effect some improvements.

In early 1979 a real estate agent who had sold the plaintiff and his wife lot 4 approached them once again and offered to sell them the two lots adjacent to lot 4, namely, lots 5 and 6. The plaintiff and his wife purchased these two properties.

In addition to the purchase and renting out of properties, the plaintiff operated a pizza restaurant which was really a family operation. The plaintiff and his wife were partners and the children at various times performed certain services. The evidence of the daughter Christina is that when she dropped out of school she helped out at the restaurant and with the rental properties. The restaurant required 14- to 15-hour days, seven days a week at the beginning, and later less time but still needed a significant effort. “It was successful” stated the plaintiff.

The daughter Christina's evidence is that she did some of the “legal work” involved in the renting and also when tenants moved out, there was always a certain amount of work to be done before they advertised for new tenants. “Renting them was easy”, she stated, and the only advertising was a sign in front of their residence at lot 2 indicating a property for rent without mentioning which property. Rent control legislation was a determining factor in setting rents.

Following the purchase of lots 5 and 6, these properties were vandalized resulting in significant damage. The evidence of the plaintiff is that the estimated cost of repairing the damage was between $20,000 and $40,000, and the plaintiff did not have the resources to effect these repairs in February 1979. The properties remained vacant until the sale of lots 1 through 6 in July 1980.

The history of the tax treatment goes like this:

1. The plaintiff and his wife each reported a capital gain of $406,338.96 following the sale of lots 1 through 6.

2. In reporting his income for the 1979 taxation year the plaintiff claimed as an expense interest charges with respect to the rental properties from which the plaintiff derived rental income.

3. Upon reassessment for the 1979 taxation year, the Minister disallowed as an expense in respect of interest payments the sum of $1,669.08.

4. Upon reassessment for the 1980 taxation year, the Minister included as ordinary income of the taxpayer and his wife, the full amount of the gain realized on the sale of the property, less their principal residence exemption (lot 2).

5. Notices of objection were filed by the plaintiff with respect to his 1979 and 1980 taxation years.

6. On January 22, 1985, the Minister confirmed his reassessment for the 1979 taxation year.

7. On January 22, 1985, the Minister issued a further notice of reassessment for the plaintiff's 1980 taxation year so as to treat the gain from lots 1, 3 and 4 as on account of capital.

8. As indicated at the outset, the appeal of the 1979 assessment was abandoned at trial.

What is the correct tax treatment arising from the sale of lots 5 and 6? At the time of this purchase on March 5, 1979, the plaintiff and his wife were losing money on their rental properties. An income and expense analysis (Exhibit D2), with figures taken from the plaintiffs’ tax returns 1978 with three properties, indicates a net loss of approximately $3,900. In 1979, with an additional two properties for 10 months, a net loss of approximately $26,600 is indicated. In 1980, although after the purchase, the five properties for 10 months indicate a net loss of approximately $23,000. A study by the plaintiff of the 1978 and 1979 figures would show these losses and enable him to predict the 1980 losses if he made a further purchase.

Next lots 5 and 6 had a purchase price of $205,000 and the financing was done through a $175,000 first mortgage and a $15,000 bank loan, about 92 per cent of the purchase price. The mortgage required monthly payments of $1,887 and the bank loan $512, or approximately $2,400 per month plus property taxes and repairs. The plaintiff’s evidence was that he anticipated $400 rent from one property and $600 rent from the other for a total of $1,000. How did he propose to make up the difference? Certainly not from the other rental properties where he was losing money and even with savings and increased rents on lot 2 (no rent control here because formerly their residence) he would be hard pressed to meet these obligations plus the losses from the other properties.

We had the evidence of Mr. J. Brown, an insurance agent who sold insurance to the plaintiff and to others in the area, that this was an area in "transition". When asked to explain that, he stated the residential aspect was giving way to large apartments and/or multiple family dwellings. He indicated people were moving out and the old houses built 40 to 45 years ago were being destroyed to make better use of the land.

There is a contradiction in the testimony between the plaintiff and his insurance agent Mr. Brown. The plaintiff states his intention was to move into lot 6, and rent his residence on lot 2. However, the documentation prepared by Mr. Brown clearly gives no indication of this, and in fact the policies placed on lot 5 and lot 6 each show in Exhibit P3, “tenant occupied". Mr. Brown knew they were not occupied at the time but was instructed apparently that they were to be “tenant occupied" and not resided in by the plaintiff and his family. The evidence of the daughter Christina was very forthright, and she corroborates her father's testimony, indicating why they were moving (we didn't need all the space we had in lot 2) and which bedroom each member of the family would occupy. I believe her, that it was the intention to move, had the house not been vandalized. However, that would be equally consistent with the intention to eventually sell at a profit, and living there in the meantime.

Mr. J. Collier, in The Queen v. David Froese, [1977] C.T.C. 526; 77 D.T.C. 5364, states:

As always in cases of this kind the question is essentially one of fact; each case must depend on its particular facts.

If the plaintiff is to be successful, it is incumbent upon him (i.e. he has the onus) to rebut the assumption made by the Minister of National Revenue which is:

In acquiring Lots 5 and 6, one of the major motivating factors of the plaintiffs was the possibility of turning the properties to account by means of resale as part of an adventure in the nature of trade or profit-making concern or undertaking and alternatively if not acquired and sold with the primary intention to sell for profit at the appropriate time then at last (sic) with a dual or alternative intention, ab initio, to do so.

Certainly the distinction between business revenue and capital gains is far from being obvious. Before reaching a decision, the courts have considered various factors or indices to be relevant. In the final analysis, however, the key factor is the intention of the taxpayer at the time he purchased the asset. Was it the taxpayer’s intention to resell at a profit or was it the taxpayer’s intention to hold the asset as an investment?

Consider the facts here: the rental properties he owned were a losing proposition financially; the purchase of lots 5 and 6 could only exacerbate that situation considering 92 per cent financing, the significant cost of that financing and the necessity to use up earnings from the restaurant and all savings to meet his financial obligations. Also, as property in transition, the property values were increasing, thus a loss of revenue now or for a short period of time was reasonable but only if one intended to resell soon at a profit. The circumstances surrounding the purchase of lots 5 and 6 were markedly different than the purchase of the other properties.

I have considered the fact that offers-to-purchase were made and declined, and that the properties were not listed for sale but were sold as the result of an unsolicited offer. However, knowing the market, the plaintiff as a businessman knew offers were possible even without advertising. I have also considered the time frame between the actual purchase, March 5, 1979, and the eventual closing date of October 31, 1980, as some evidence of no intention to sell. It is also clear that property values were rising and a better price might be secured by waiting. The plaintiff makes the point that he was unable to effect repairs due to shortage of funds but it seems to me if he had really been interested in the investment aspect, then repairing the houses one at a time was possible, thereby leading to revenue from rents. Again, it was open to the plaintiff to advertise for a tenant and make a deal similar to the one made with the tenant in lot 4 — allow a reduction or no rent for a period of time with the tenant effecting repairs. This way the property would be rented and tenants would be living there as a protection against vandalism. If truly purchased as an investment, the plaintiff surely should have been prepared to find a solution even if he lost money in the short run. In point of fact the plaintiff boarded up the property and did nothing.

The evidence of real estate agent Mrs. Nancy Rokana was most interesting. With respect to lot 3, she did not have the listing but was able to convince the plaintiff to purchase it as a possible future home for one or more of his children. She did list lot 4 and sold it to the plaintiff using the same or similar suggestions. Because we are not concerned with lots 3 and 4 I'll not comment further, other than to say it sets a pattern of purchases, namely, that they were the idea of the agent, not the plaintiff. Thus, when lots 5 and 6 came on the market, the real estate agent tried to convince the plaintiff to purchase, but his response was, “I don’t need any more headaches.” Persistence paid off for the agent, however, and the plaintiff agreed to buy, and would again accept the agent's recommendations that they move into lot 6, rent lot 5 and rent the present residence lot 2.

When the real estate agent's superior initiated a contest to spur listings and sales, the agent inveigled the plaintiff to list with her, even though he didn't want to sell. The arrangement was that any prospective purchasers were not to talk to the tenants or the plaintiff but to the real estate agent. She undertook to refuse all applications to buy, on her own initiative, and as insurance, put down a purchase price of $805,000 which she was certain would discourage anyone tempted to buy. It certainly confirms that the plaintiff had no wish to sell at that time but, for the reasons stated earlier, the plaintiff has failed to satisfy the onus on him to rebut the assumptions of the defendant.

A further difference here is that rental properties 5 and 6 were virtually insignificant in the market of late 1979 and early 1980. Mr. K. Tarabula, a real estate agent/broker at the time, was the salesman for the two properties on behalf of his employer Torode Holdings. He literally had no interest in the buildings, indicating the land value was the determining factor on price, and if the buildings were torn down and removed, the property would probably be more valuable.

I did not give too much weight to the evidence of the Ministry tax auditors because of the obvious difficulty the plaintiff has with English. If the plaintiff's son John or his daughter Christina were doing the interpreting, it is quite possible that the tax auditor, in answer to his question about why the property was purchased, was told for a profit, and this appears on his query sheet written at the time. However, that could have meant something different to the plaintiff, and John and Christina, than its legal meaning. Also, the tax auditor, in a meeting with the real estate agent Nancy Rokana did not in my view adequately explain why he was there; that there was litigation pending; the possible effect on the plaintiff of her answers. Also this witness seemed to be blaming herself for the vandalism, and the subsequent troubles the plaintiff had with the property — why i don’t know. In any event, she would be a very nervous person trying to recollect the events of property sales made five years previously. The tax auditor said he “wanted to get her knowledge of the transaction" but, from observing the witness and hearing her testimony, anything she stated at the meeting with the tax auditor should be given little weight.

If I had determined that lots 5 and 6 were purchased as an investment, with the vandalism then destroying this “intention” there would have been no difficulty maintaining that position, notwithstanding the eventual sale because of the vandalism. As Lord Wilberforce said in Simmons v. Inland Revenue Commissioners, [1980] 2 All ER 798, “. . . situations are open to review” and at 802 he held that, “. . . frustration of a plan for investment, which compels realization even if foreseen as a possibility, surely cannot give rise to an intention to trade". Along the same line, I paraphrase my comments in Woodbine Developments Ltd. v. The Queen, [1984] C.T.C. 616; 84 D.T.C. 6556, where I was satisfied that at the time of purchase the intention of investment prevailed but that exceptional circumstances can justify the resale of property and its treatment as capital gain.

It is also worth noting that when the real estate agent made out the listing card, she incorporated on it, “land value only". When met with resistance to the sale, and words like, “1 don’t need any more headaches now’, it is inconceivable that she wouldn't have mentioned the land value being worth more than the houses, giving him a no-lose situation.

Thus, on the facts outlined above, I cannot find that lots 5 and 6 were purchased as an investment. There are too many questions arising in the evidence on behalf of the plaintiff to satisfy me that the onus on the plaintiff has been satisfied and therefore the reasssessments on lots 5 and 6 are upheld, and the plaintiff’s action is dismissed, with costs to the defendant.

Action dismissed.