Haber v. The Queen, 83 DTC 5004, [1982] CTC 405 (FCTD)

Jerome, ACJ:—There are two issues in this action, which is brought by way of an appeal under the Income Tax Act, in which the taxpayer, Chis- topher Haber, appeals a determination from the minister.

Firstly, that the taxpayer, for his 1974 taxation year, was not entitled to treat his residential property at 2277 Lakeshore Road in Burlington as his principal residence and was, therefore, subject to taxation as a capital gain on profit realized from a sale, in the year of its purchase, at that time.

The second issue has to do with the profit also realized, at that time, by the taxpayer through the acquisition and resale of a piece of property at King Road which the taxpayer maintained was done in the nature of an investment, and which the minister maintained was a transaction to be treated as income from business as that phrase is used in the Income Tax Act.

I will deal with the principal residence question first because it is easily resolved, there does not seem to be much room for difficulty. The plaintiff is technically caught by the language of section 54(g) in which “principal residence” is defined; and essentially reduces itself to either the property in which the plaintiff was ordinarily resident which was not the situation here, or one which if the plaintiff was not ordinarily resident he had designated in the usual manner, or the manner prescribed by the section, as his principal residence.

The facts are that the plaintiff never did inhabit 2277 Lakeshore; and maintained that when he realized a gain on the sale of the property, within a year of its acquisition, he did not report that gain as he considered the property to be his principal residence having acquired it with that intention.

However, during that year, the plaintiff also resided on lan Road, which he also purchased and resold during the year, from which he also realized a gain, and the plaintiff did not report that gain because he considered that property to be his principal reidence.

The plaintiff did not file a designation as contemplated by the section 45(2). In any event, I had difficulty in comprehending how such a choice would be open to the plaintiff since the language of section 54(g)(iii) would permit only one such designation as an official residence by any taxpayer during the year. In his return, where the taxpayer is asked to designate his official residence, the taxpayer had already designated the other property.

In any case, the only effect of the election is to alter the interpretation of when a taxpayer may occupy an official residence. So that there does not appear to be, in the language of the statute or in any of the facts, any support for an interpretation in any way in disagreement with that taken by the minister. In my opinion, the minister had no choice since the taxpayer had not sought designation of 2277 Lakeshore as his principal residence but, in fact, had occupied and, for taxation purposes, treated some other property as his principal residence during that same taxation year.

Accordingly, the appeal with respect to the taxation of the plaintiff’s residential property at 2277 Lakeshore Road, that is to say the taxation of the gain realized by the plaintiff on the sale of that residential property, is dismissed.

In respect to the property at King Road, the issue is whether the plaintiff acquired the property as an investment as the plaintiff contends, or whether the facts that lead to the inference that the property was acquired and resold in the manner of dealing in real estate so as to lead to the conclusion that it was, in fact, an adventure in the nature of real estate trade and, therefore, taxable as income from a business as defined in the Income Tax Act.

The plaintiff adduced evidence to show that as a graduate from law school in 1973, he was initially inhabiting rental property together with his wife, and when he joined a law firm in Burlington, his original home, examined the possibility of acquiring residential property there, and in fact went on to acquire 2277 Lakeshore Road which he purchased on May 24, 1973 and sold on May 23, 1974. The plaintiff indicated in his testimony that he and his wife changed their mind about occupying that residence and instead purchased a residence at 1377 lan Road where they lived from February 1974 to July 1974 when that property was sold.

On the sale of the 2277 Lakeshore Road property, the plaintiff realized a gain of $14,148.94 which was the subject matter of discussion with the minister, which I have resolved above.

I think his testimony described his interest in the property at King Road which, he said, had potential for development since it contained a building with some four or five apartments, a greenhouse and a barn, it was his hope that, without too much expense, he could refurbish the buildings by cleaning and painting, and they would not need structural improvements to make them commercially viable. He also hoped to rent the greenhouse and the barn to a florist.

The plaintiff's evidence is that he had every reason to believe that his family would support him in the venture and to lend him the necessary funds for the down payment. So, on January 8, 1974, he signed an offer to purchase the property for the sum of $192,000 with a deposit of $500 as the offer was originally prepared, but with a subsequent change to $2,500.

The offer to purchase is Exhibit A-4 and the bottom of page 2 has not one but three signatures of the plaintiff Christopher J Haber. The first is the signature of C J Haber dated January 8, 1974. The second, the same signature dated February 5, 1974. The third, the same signature date February 8, 1974. The plaintiff’s explanation for the three signatures is that the offer had been returned to him twice with some changes put in by the vendor.

Exhibit A-5 is an offer to purchase the property from the plaintiff, in the name of Night Construction as purchaser, in the sum of $255,000. It is significant that this offer was signed by the purchaser on February 8, also accepted by the plaintiff as vendor on February 8. The plaintiff thereby effected a resale of this property, for all intents and purposes, simultaneously with his acquisition of it and not, I should stress, simultaneously with his acquisition of title, but with his execution of the agreement to purchase. It follows, of course, that the plaintiff did not hold the property for investment and development and did not have any occasion to expend any energy in the direction of improvement of the property or its rezoning which, he has indicated, were his initial intentions in holding this as an investment.

At the conclusion of the plaintiff’s testimony in chief and-eross-examina- tion by counsel for the crown, I questioned the plaintiff about the coincidence of the dates on the two offers to purchase in light of his evidence that he had initially offered to purchase the property and then some two or three weeks later, entirely without solicitation on his part, was approached by a realtor on behalf of the ultimate purchaser Night Construction. The plaintiff’s answers were, at best, uncertain about the coincidence of the two dates, and about whether in fact on the occasion of the second signing which was on February 5, 1974, if not on the first signing which was January 8, 1974, he had knowledge of the forthcoming offer by Night Construction. His answer was that he was unceratin about the details with respect to the exact timing, especially in reference to the second signing February 5 and the first approach by the agent on behalf of Night Construction.

The witness naturally claimed that since these events occurred some eight years ago, some of the details would naturally be unclear in his mind. But there seemed to be, in my opinion, a difference in his ability to recall with detail the other events surrounding his property acquisitions and the acquisition of this piece of property. However, in any case, a direct finding of credibility is not necessary.

There is, from the coincidence of the two offers to purchase, a strong inference that the plaintiff had at least some indication at the time that he launched into the acquisition of this property, and had his opportunity to resell it quickly at a profit. But as a minimum, taken together with other facts, it leaves me in no doubt that the balance of probabilities favour and the conclusion that this plaintiff’s original intention was to purchase this property as a speculative venture for resale rather than for management as an income producing property.

These other facts are that the likelihood of credit arrangements, which would be sufficient to sustain this property, are very remote. There was no indication of more than the most minimal revenue from the buildings since they were only partially occupied at the time of the purchase. There was no indication of any real likelihood that the plaintiff had begun to assemble or could have assembled the necessary funds to go through with the transaction. That is not to say, it would not have been possible for the plaintiff to do so, but only that there was no evidence to indicate that he had made a serious effort that would be necessary to justify placing his signature on the committment for $192,000.

In addition, the offer to purchase Exhibit A-4 contained conditions clearly designated to be for the benefit of the purchaser, allowing him an extension period of some nine months in which he would have the opportunity to be released from his obligation to purchase if he was not able to achieve some rezoning and if he was not able to achieve “financial arrangement satisfactory to himself” which constitutes a virtual option to release himself from the obligation to close the deal. At page 2 of the plaintiff's offer to purchase, paragraph No 5, the vendor agreed to grant partial discharges of mortgages, which I would consider to be more consistent with the intention to sever and therefore to sell a portion of the property than with an interest in long-term acquisition for operation and investment.

That finding does not finalize the matter because even if the plaintiff acquired the property with the intention to resell, it is still, in proper circumstances, open to the court to find that the transaction was a singular one in respect to the parties involved and especially where it is a once-in-a-lifetime venture may conclude that it is in the nature of an investment rather than a business.

It is obvious, however, that where a party involved has both some background or experience in real estate and particularly with an experience of a gain and, in addition, deals with a property in the manner of those who are in the operation of a real estate business rather than in the manner of those who, from outside the real estate business, do so as an investment, that combination is as such to lead only to the interpretation that gain from such a transaction is in the nature of income from a business.

I refer to three decisions. The decision of Mr Justice Mahoney in 1A Blackstone v The Queen, [1973] CTC 842; 74 DTC 6020, in which the taxpayer was a lawyer with no record of real estate trading. He acquired a partial interest in a parcel of farmland in Calgary and even though he and his partners held it for some seven years, the court upheld the minister’s interpretation that the profit realized by the plaintiff was taxable upon disposition as income because the land was never purchased for use for development and was acquired and held as an article of commerce for speculative reasons. I note that that was notwithstanding the absence entirely of previous experience by the taxpayer and furthermore long-term ownership of the property.

The decision of the Federal Court of Appeal delivered orally by Mr Justice Urie in David C McDonald v The Queen on November 20, 1974, [1974] CTC 836; 74 DTC 6644. The court addressed a similar situation in which the taxpayer had shared in the acquisition of real estate and where there was some annual income from the land, although very slight. I quote from that judgment at 837 [6645]:

Having so found, the contention of the Appellant that his interest in the vacant land purchased was an investment and being an isolated transaction outside the ordinary scope of his profession, the profit earned on its resale was not taxable, is in our view, untenable. Even if the fact is accepted that the sale was made due to a threat of expropriation, it was nonetheless a premature occurrence of the Appellant’s ultimate intention, namely to sell his interest in the land at a profit. Although he was not dealing in what is normally considered to be a subject of commerce such as commodities, the transaction from its very inception was purely speculative in character and was, in our opinion, as a matter of law, a venture in the nature of trade.

Finally, the case of Kenneth Marshall v The Queen, [1980] CTC 475; 80 DTC 6357, delivered by Deputy Judge Grant on October 7, 1980. The factual circumstances are similar to the other two cases. I note particularly at 479 [6360] that Mr Justice Grant quotes for approval an excerpt from Wil- lumsen v MNR, [1967] CTC 13; 67 DTC 5022, portion of the judgment of Cattanach, J:

As I conceive it the correct approach to the solution of a problem of this kind of case in any given set of circumstances is first to examine the taxpayer’s acts and operations objectively, bearing in mind that the question is one of fact in each particular case and that the Appellant’s statement at the trial is only part of the evidence and must be considered along with all the objective facts. If, after consideration of these facts, it should be concluded that the inference to be drawn is one of “trading”, then the matter must be considered to ascertain if there is some satisfactory explanation, consistent with the facts as found, which would negative that prima facie inference. If from the facts that are proved it appears to the satisfaction of the Court that, at the time of acquisition, the purpose of the operation was exclusively to provide the taxpayer with a satisfactory investment and that there was not in contemplation, at that time, the possibility of sale, then the inference of trading would be rebutted.

The onus of disapproving the Minister’s assumption, in assessing the appellant as he did falls on the appellant.

In this case, this plaintiff made an offer to purchase a property valued at $192,000 at the time when his reported gross earnings for the year were some $4,000 for his law practice and a further $10,000 for some agency or commission work in his father’s business. No evidence was adduced to indicate how the plaintiff proposed to carry the financial burden on the acquisition of the property or that the property was, in any way, viable to carry it on as an ongoing rental venture.

In addition, the plaintiff acknowledges and these documents disclose that certainly on the occasion of the third signing of his offer to purchase the property on February 8, 1974, and almost certainly on the occasion of his second signing of that offer on February 5, 1974, he was aware of the interest of Night Construction in the acquisition of the property. In fact, there can be no doubt that his execution on February 8, 1974, his third signing of the offer to purchase the property, was simultaneous with his acceptance of the offer to purchase the same property by Night Construction. Both offers contain the same closing date, some nine months later. In fact, when the transaction was closed, title never passed to the plaintiff but passed directly from the vendor to the plaintiff to Night Construction as purchaser.

In the circumstances, as I have indicated, there is a strong likelihood that the plaintiff knew of this opportunity to resell at a profit when he agreed to purchase it. But as a very minimum, the balance of probabilities clearly favour the factual conclusion that this property was acquired by this plaintiff not with the intention to hold it and operate it as a long-term investment, but to resell it. That does not, in itself, exclude any other conclusions except that it is a business transaction, but it strongly supports the minister’s assessment. Since this plaintiff dealt with this property in the manner in which an entrepreneur in the real estate business would do rather than as an investor would do, it should be considered as a venture in the real estate business.

Finally, I have to add that where such a transaction takes place, it may possibly be open to the taxpayer to persuade the minister and try to persuade the court that it is such a singular transaction for the taxpayer that his Status as an investor might be preserved. The plaintiff, in his argument, described that as his right, to have one ticket ahead before falling out of the classification of investor and into the classification of an operator of a real estate business.

Of course I must turn to the evidence that in the two years surrounding the transaction in question the evidence related to the first aspect of this appeal, establishes that in fact, even though it was a very brief experience, the plaintiff during 1973 and 1974 purchased one more residence than he needed, profiting some $14,000 on the Lakeshore residence, and some, as yet unidentified, amount on the lan Road residence. This, however brief experience, seems to me deprives the plaintiff of a claim to the position of engaging in this transaction on King Road as a first-time investor in real estate.

Accordingly, since the facts, to which I have referred, lead without question on the balance of probabilities to the conclusion that the plaintiff's initial intention was to acquire this property not as an investment but as a speculative resale venture. Since he had during that two years, in which he acquired and resold this property, also had done the same with at least one other residential property to his gain, then I must conclude that the minister’s assessment of the gain from the property at King Road in Burlington, which is the subject matter of the second aspect of this appeal, is properly classified as income from a business as that term is used in the Income Tax Act.

Accordingly, the second branch of this appeal must also be dismissed with costs.