Schlamp v. The Queen, 82 DTC 6274, [1982] CTC 304 (FCTD)

Nitikman, D J:—This action, heard in the City of Saskatoon, is by way of an appeal by plaintiff from a reassessment of his income for the 1974 and 1975 taxation years by which the Minister of National Revenue (the Minister) increased plaintiff’s net income from $10,729.19 to $24,964.05 for the 1974 taxation year and from $8,402.97 to $61,329.05 for the 1975 taxation year. In issue are:

For the 1974 taxation year, a profit made by the taxpayer on the sale of his residence at 810 2nd Avenue E in the City of Swift Current in Saskatchewan; and a benefit which the Minister claims the taxpayer received by reason of free rent of his residence at 41 Macdonald Crescent, also in said City of Swift Current.

For the 1975 taxation year, a profit on the sale of 41 Macdonald Crescent, claimed farm expenses disallowed, a benefit which the Minister claims taxpayer received by reason of free use of the residence at 41 Macdonald Crescent during January of this taxation year, appropriation of funds in the sum of $100 from Schlamp Construction Ltd, a corporation in which plaintiff owned 85% of the issued shares of the Company’s capital stock, the remaining 15% being owned by his wife, and a further claim by the Minister that a loan from Schlamp Construction Ltd to plaintiff to acquire 41 Macdonald was not repaid by January 31, 1976 and taxed under subsection 15(2) of the Income Tax Act, less credit balance in plaintiff’s loan account on January 31, 1976.

It is the Minister’s position that both 810 2nd Avenue E and 41 Macdonald Crescent were in each case in the nature of an adventure in trade and the resulting net profits are taxable as income.

Plaintiff was born in 1924 and raised on his parents’ % section acre farm near Swift Current. He was married in 1963 and became the owner of a small acreage a short distance from his parents’ farm. He subsequently bought further acreage, on which he built a barn, and sold the earlier acreage.

In 1964, along with his farming activities on his second acreage, he began working for Zack’s Construction, a construction company in Swift Current, as a labourer and as a carpenter’s helper. In 1966 he began work on his own doing odd jobs, increasing from this to further building and construction phases and subsequently developing a construction business, which he operated as Schlamp Construction, building and selling homes built on contract and on a speculative basis.

The business progressed and in September, 1973, he caused Schlamp Construction to be incorporated as Schlamp Construction Ltd and which I shall hereafter refer to as “the Company”.

In the fall of 1971 he commenced building his first residence for himself and family, consisting of his wife and two young boys, on a lot at 860 2nd Avenue SE (860) in Swift Current, which lot he bought from the City. The house, a one-storey, full basement structure with inside dimensions of 960 square feet, contained a living room, combined kitchen and dining room, bathroom and two bedrooms, all on the main floor, and one further bedroom in the basement. The family moved into the home in January, 1972. In March, 1972, shortly after he had moved into 860, he purchased from the City a further lot, at 810 2nd Avenue (810) for the sum of $2,004. Transfer of that lot was made in favour of plaintiff and his wife as joint tenants and not as tenants in common. In the fall of that year, he commenced building a new residence on 810, which the family moved into in January, 1973. 810 was approximately the same size and type as the one at 860, save that the basement contained not only a bedroom but, as well, a rumpus room, bathroom and office. 860 was sold in the summer of 1972 at a profit of approximately $2,000, but the plaintiff continued living in it for a number of months, pending building completion of 810.

In August, 1973 plaintiff bought from the City a lot at 41 Macdonald Crescent (41 Macdonald) for $3,052, with title issuing in his name alone. This lot was in the east end of the City, close to a highway, school and shopping centre, with the homes already built in the area being classed average and above average in type. Plaintiff employed an architect in connection with the residence he was building on said lot and when completed, the inside dimensions of the residence were about 2,000 square feet with, among other things, three bedrooms on the main floor. Plaintiff and family moved into 41 Macdonald in July, 1974, about a month after 810 was sold.

In the summer of 1975, plaintiff purchased 640 acres of land for $80,000, with the full amount of the purchase price raised by a loan from Western Savings and Loan Company. Possession date was 1976.

In July of 1975 (after plaintiff entered into the agreement to purchase the farmland) plaintiff sold 41 Macdonald for $66,000, but continued occupying it until November, 1975, so the period he lived in said 41 Macdonald was approximately 18 months.

Following the sale of 41 Macdonald, plaintiff bought a property at 427 Macdonald Drive from one Lockman for $44,700, using part of the proceeds of the sale of 41 Macdonald for payment, and paying the remaining proceeds into the company. He lived in 427 Macdonald for about seven months, when he sold it at a slight loss, following which he rented a home from the Company, living there for some 14 months, when the home was sold. He then moved into an apartment which he occupied for about seven months, following which he moved into another residence, which he rented from the Company, living there for about one and a half years. In or about August, 1979, he moved out to the farm he had purchased in 1975.

The above, in brief, sets out some of the pertinent facts relating to the profit issue which resulted in the Minister’s decision on that phase of his reassessment.

The purchase, construction and sale of 860 2nd Avenue SE does not form part of the reassessment, but a review of the facts is pertinent in showing a course of conduct on plaintiff’s part. Plaintiff's evidence is that the reason for selling 860 was because, when building on the lot began, the street was unimproved. There was no road, and when the road was built he found the grade was much higher than his lot, and in the springtime there was resulting muck, and water settling would not run off. But 810 was purchased on March 23, 1972 and plaintiff’s evidence was that staking of the road began “probably March or April. I don’t know. I am not sure just when it was.” And when examined for discovery, he said nothing about water collecting or the high grade of the road by way of complaint. He was asked and answered:

Q Can you remember if you sold that in the wintertime?

A No, I don’t remember.

Q Now, why did you sell the house?

A I don’t really remember the exact reason for it either. It was my first home, kind of a shot in the dark.

Q What do you mean a shot in the dark? In terms of building it you mean?

A Yeah, arrangements and so on.

Q You were sort of learning how to build a house?

A That’s right, kind of a practise home.

Q It was a practise home?

A Well, I wouldn’t say a practise home. I said kind of. By that I mean, you know, I was learning on the job partly.

Q So were there things about it that you were dissatisfied with?

A Well, I don’t remember if there was anything in particular that we absolutely hated.

It is significant that plaintiff was able to sell 860 in the summer of 1972, despite the difference in grade between the road and the house and at a profit of several thousand dollars. I find myself unable to accept plaintiff’s reason for selling 860, but inasmuch as the transaction does not form part of this appeal, and as I earlier said, is only dealt with to show a continuing course of conduct, I leave it at that.

In respect of the sale of 810 and the purchase of the 41 Macdonald lot, plaintiff explained that his wife had given birth to a baby and when the baby arrived, a problem of bedroom space arose. There had also been some difficulty about accommodating guests. On cross-examination he was asked whether one of the problems in 810 was lack of space. His answer was:

No. We didn't have a problem. That is not what I said yesterday either. We didn’t have a problem on 810 with accommodating guests because we had two bedrooms on the main floor, and we had a guest room on the bottom floor. The problem only came when the baby arrived.

His further evidence was the boys were then six and eight years old. They had a bedroom on the main floor and he and his wife used the other bedroom. When the baby arrived they put the baby on the main floor and the two boys slept in the basement. After the baby came they felt they needed a roomier house because they wanted the family all on the same floor. And in cross-examination he gave the following answers to questions:

Q After the baby was born, you found out that 810 was too small?

A Yes.

Q After the baby was born, you decided on a larger house?

A Right.

Q Is that correct?

A Right.

Q and after the baby was born, you then bought the lot for 41 Macdonald, right?

A Right.

When it was pointed out to him that the baby was born in April, 1974, while the lot was purchased August, 1973, some eight to ten months prior to the baby’s birth, he then said that it might have been possible that the lot was purchased at the time his wife got pregnant.

It is significant that after building 810 2nd Avenue and prior to purchasing 41 Macdonald, he started building seven homes on a commercial basis and at the time he bought the lot at 41 Macdonald, he had already purchased three lots around that street. He was also asked and answered:

Q But in 19— how many lots did you buy, sir, around Macdonald?

A I had a number of them there that we were building houses on to sell.

Q How many?

A I don’t remember just now exactly how many. I don’t have no figures.

Q All forgotten?

A I know we built quite a few, but I don’t know how many, whether it was ten, or fifteen, or five.

Q And you need a lot for each one of them, right? You can’t build a house without a lot, right?

A That is right.

And further, on cross-examination:

Q Okay. And 41 Macdonald Crescent is in the north east part of town; is that correct?

A That is right.

Q Okay. And it is an area that appealed, and you gave a number of reasons; close to the highway, school, shopping centre; is that correct?

A Yes.

Q Okay. Now, you bought other lots in there; is that correct?

A Yes.

Q Okay. And did you buy other lots there before you bought the lot on 41 Macdonald?

A Yes.

As has already been noted, plaintiff bought the lot at 41 Macdonald on August 19, 1973. His evidence, and it is not in dispute, is that the total cost of the house and lot was $33,000, that this amount was lower than it would have been had he purchased it on the open market because he built it himself, and that the amount of $33,000 covered the cost of the lot, building, materials and labour.

As earlier set out, plaintiff sold 41 Macdonald in July of 1975, after having lived in it approximately 18 months. The sale price was $66,000. The reason he gives for that transaction is that he was desirous of purchasing a 640 acre farm he had heard about in which he became very interested, purchasing it for $80,000. The money for it came by way of a loan from Western Savings and Loan Company. 41 Macdonald was listed for sale after plaintiff signed the agreement to purchase the farm.

In his evidence regarding the purchase of the 640 acre farmland, he further said when shown it by the listing agent he became very excited about it. He was always interested in a farm, but was not in a position to satisfy that desire. By the fact remains, he did not use the sale proceeds of 41 Macdonald to apply against the purchase price. He used $44,600 of the proceeds to purchase 427 Macdonald Drive and paid the rest into his Company account. I recognize as well, that he had to build a farmhouse on the land, but that surely could have been done in a reasonably short period. Instead he remained in Swift Current, living in various places earlier enumerated, and did not move onto the farm till about August, 1979, about four years after he had purchased it.

It is not in dispute that 860 and 41 Macdonald Crescent were, at all material times, in each case the principal residence of the taxpayer and it is common ground that at the time plaintiff built, lived in and sold 810 and 41 Macdonald, he was a builder and contractor, and through his company built custom homes (that is, homes which the customer had arranged to purchase before they were built), as well as homes built on a speculative basis for sale with a view of earning profit in all cases.

In John Muzyka v MNR, 24 Tax ABC 409; 64 DTC 168, an appeal to the Tax Appeal Board released February 13, 1964, the headnote reads in part:

In 1957 the appellant, who had had several occupations, acted as his own builder in the construction of a commercial building as an alleged investment. Rentals were obtained for over a year but, for several reasons, the appellant sold the building at a profit early in 1959. He objected when the Minister treated his profit as income subject to tax. The evidence showed that the appellant had used borrowed money for the construction of the commercial building, that he had erected several other buildings before and after the transaction in issue, and that he had not been engaged in any other full-time activity during the relevant period.

J O Weldon, QC, who heard the appeal, in dealing with profits of a builder normally taxable, said at page 170:

The designation of builder usually denotes the occupation of a person who builds for a living. From his activities it can be said that he is in the building business. The income from that type of business may arise in various forms such as, rentals, mortgage interest or the profits made in connection with the normal building operations of the business. The last-mentioned form of income is what remains of the sale proceeds, for example, of a house after deducting the cost of the land, architects’ fees, material costs, labour costs, legal costs and the real estate agent’s commission to mention a few of the outgoings.

And at 171:

Thus, in the ordinary course of events, a builder’s profits are taxable income, and he is not entitled to consider any part of his profits as capital gains.

And further on the same page:

A clarion note of caution should be sounded here for the benefit of a builder who is about to sell what he thinks to be a well matured real estate investment. If he expects the profit to be derived therefrom to be treated as a capital gain, he should bear in mind that there is a special burden on him as a builder to show, if called upon to do so, why the profit in question should not be regarded as a profit of his building business.

In John W Welton v MNR, [1978] CTC 3153; 78 DTC 1848, an appeal before the Tax Review Board heard by Roland St-Onge, QC, the headnote reads in part:

The taxpayer, a building contractor, had five residences between 1959 and 1972 all of which he sold at a profit. The fifth residence was built in 1968 by his company, the total cost being approximately $70,000. He sold this property in 1972 for 1147,500, realizing a profit of $66,155 after the payment of real estate commission. The taxpayer did not include this profit in his income, since he did not feel that the profit realized on the sale of the residence was taxable. The Minister reassessed the taxpayer including the profit in his income in the 1972 taxation year on the basis that the sale constituted an adventure in the nature of trade. The taxpayer appealed.

Held: The appeal was dismissed. The taxpayer’s past conduct supported the conclusion that the taxpayer had acquired the property in question with the intention of turning it to account for a profit at the first opportunity.

And at 1850, the following is stated:

The past course of conduct of the appellant is so convincing that it forces me to believe that the property in question was acquired through his wife with the intention of turning it into account for a profit at the first opportunity.

The number of transactions which were carried out in the same fashion over a period of seventeen years cannot be put aside to rule the reverse. . . . Furthermore, the short period of holding is an indication that this property was acquired as stock in trade and the fact that he received that property at cost from the company and was able to personally realize a profit is another indication that this residence was stock in trade.

In Mainland Crystal Glass Ltd v The Queen, [1977] CTC 117; 77 DTC 5080, heard before Smith, DJ, the learned trial judge, in his analysis of evidence, said at 121 [5083]:

As always in these cases, the answer will turn upon the facts of this particular case. In cases of this kind also, judges have frequently held that while the oral evidence of the taxpayer in court must be considered, his actions at the time of the transaction are often of much greater weight than his oral statements made long afterwards. The facts which tend to support the plaintiff’s position in this case must be balanced against those that tend in the other direction, to determine, on a balance of probabilities, what is the true nature of the transaction. And the burden of proving that the Minister was wrong in making his reassessment lies on the plaintiff.

In assessing plaintiff’s evidence, I have taken into account that when he testified in Court, he stated he suffers from depression and requires medication, which affects his concentration, but giving full effect to that condition, I am not impressed and do not accept his reasons for building and selling his residences at 810 2nd Avenue E and 41 Macdonald Crescent. As Smith, DJ said in Mainland Crystal Glass Ltd v The Queen, supra, “His [referring to the appellant taxpayer] actions at the time of the transaction are often of much greater weight than his oral statements made long afterwards.”

As a builder and contractor, the onus is on plaintiff to prove the profit on the sales of 810 and 41 Macdonald should not be treated as income. He has not met this onus. Plaintiff’s conduct supports the conclusion plaintiff acquired 810 2nd Avenue E and 41 Macdonald Crescent with the intention of turning same into profit. I have no hesitation in holding that both 810 and 41 Macdonald were built and sold by the plaintiff in the nature of an adventure in trade and the accruing profits are earned income as found by the Minister, and I would not disturb his assessment on that phase.

If I had not concluded that plaintiff’s intention at all times was to engage in an adventure in trade, I would have held the doctrine of secondary intention applies. Namely even if he had the intention of living in the respective residences for a short or a long period, he also had another intention, namely to use the property within the ambit of his activity as a builder. In other words, there was always present in plaintiff’s mind a dual intention. The home could serve as his residence for the time being, but could be sold for a sizeable profit if the occasion presented itself.

In connection with the sale of 810, plaintiff argued that since plaintiff and his wife were joint owners of the property (joint tenants, not as tenants-in- common), in the event I found the resulting profit was income only one-half thereof should be charged against plaintiff, the other half being chargeable against the wife, citing in support Andronis v MNR, [1977] CTC 2193; 77 DTC 134. But in that case the evidence was clear the wife had contributed of her own money towards the purchase of the property which, after certain transactions, was sold at a profit and accordingly one-half of the income was charged agaisnt the wife and the other against the husband.

In the within case, there was no evidence suggesting any contribution by the wife to the purchase of the land and building of this residence. The reverse is the case. This is further supported by the fact that title to 41 Macdonald issued in the name of plaintiff alone. Plaintiff’s claim on this issue is rejected.

A further claim by plaintiff relates to the sale price of 810. The memorandum of agreement between the parties, dated August 8, 1974 (Ex. P-7), provides the sale price to be $34,000, payable $28,000 on or before August 1, 1974 and the balance of $6,000 On or before August 1, 1975, together with interest on the amount remaining unpaid from time to time at 11 /2% per annum, to be paid at the same time as the principal amount. The mortgage (Ex. P-8) securing said $6,000 was executed in favour of the vendors for said $6,000, repayable as to principal and interest as set out in the memorandum of agreement. The mortgage was actually paid off in 1976. Plaintiff contended that in the event of my finding the profit from the sale of 810 was income, the $6,000 should not be included in plaintiff's income until 1976. I do not agree. The mortgage formed part of the sale price. it represented money or money’s worth and, in my opinion, forms income in plaintiff’s 1974 taxation year.

However, in calculating the portion of income represented by the $6,000 mortgage, the taxpayer is entitled to “a reasonable amount as a reserve in respect of such part of the amount so included in computing the income as may reasonably be regarded as a portion of the profit from the sale;”[para- graph 20(1 )(n) of the Income Tax Act].

I deal now with the Minister’s assessment that in plaintiff’s 1974 taxation year, for the period from July 1 to December 31, plaintiff received a benefit from the Company by reason of free use of 41 Macdonald as a residence and, in plaintiff’s 1975 taxation year, he received a similar benefit from the Company for free use of said premises as a residence during the month of January in that year, said benefits being based on a rental value of $350 per month and totalling $2,100 for the 1974 taxation year and $350 for the 1975 taxation year.

In his evidence plaintiff testified he purchased and paid for the lot at 41 Macdonald and he paid for the building and labour for said construction of the residence on that lot. This is not correct. The evidence makes clear that the Company paid for the lot and for all the labour and material for the construction of the residence by Company cheques. I am in no doubt that while title to the lot issued in the name of plaintiff, the Company was the real owner of the land in question and the residence constructed thereon. That situation continued until January 31, 1975. This is shown by the accountants’ working paper (EX P-17), which reads:

SCHLAMP CONSTRUCTION LTD.

Loan Receivable — J. Schlamp

Re: House

	Dr.	Cr.	Balance
Jan. 31/75 Je 17 —
Loan re purchase of Spec. 10	33,647.87		33,647.87
Jan. 31/76 Je 20 — Payment		4,000.00	29,647.87
Jan. 31/77 Je 10 —
Balance to Shareholders Loan		29,647.87	—

It is common ground that Spec. 10 identifies 41 Macdonald.

And a copy of the financial statement of the Company for the year ending January 31, 1975 (Ex. D-22) shows as 1975 assets “Shareholder’s loan re: house (note 2) 33,648”. Note 2 reads:

SHAREHOLDER’S LOAN

The company has advanced funds to the principal shareholder for the purpose of acquiring a residence. This loan is interest free and is repayable over the next twenty years:

Plaintiff testified the loan was to bear interest at 11%. I accept the written record (Ex. D-22) in preference to the oral testimony of plaintiff in this regard. I believe plaintiff is in error. Exhibits P-17 and D-22 confirm that the company was the owner of 41 Macdonald till purchased by plaintiff in January, 1975. Exhibit D-22, which also lists assets in 1974, shows no loan to shareholders, but does show under the heading “Long-Term” under liabilities, Shareholders’ advances (note 3) in 1975 $3,951 and in 1974 $2,286. Note 3 reads:

SHAREHOLDERS’ ADVANCES

SHareholders’ loans are unsecured; there are no definite terms of repayment nor provision for interest.

In the result, I am satisfied the company was the owner of 41 Macdonald until the loan of $33,648 was made by it to plaintiff on January 31, 1975 for the purchase by him of said property, the plaintiff had the free use of said residence from July 1, 1974, when plaintiff moved into the residence, till January 31, 1975, and this constituted a taxable benefit to plaintiff.

It is not in dispute that a monthly rental of $350 for 41 Macdonald is reasonable and I agree that the benefits of $2,100, added to plaintiff’s income for the 1974 taxation year, and $350 added to plaintiff’s income for the 1975 taxation year, were correctly added to plaintiff’s income for the respective years.

Further, with respect to the loan on January 31, 1975 in the sum of $33,648 from the company to the plaintiff [shown in the accountant’s working papers (Ex. P-17) as 33,647.87], there is shown as well, on January 31, 1976, a payment by plaintiff of $4,000, leaving a balance payable at that time of $29,647.87. A furthert deduction by way of plaintiff’s credit balance in his shareholder’s advance account on January 31, 1976 of $6,725.46 leaves a balance then owing by plaintiff in the sum of $22,922.54. The company’s fiscal year is January 31st and the loan balance of $22,922.54 remained unpaid at the end of the company’s 1975 fiscal year.

Having held that the purchase and sale of 41 Macdonald was an adventure in the nature of trade, it follows that the balance owing was properly included as income of plaintiff in his 1975 taxation year. (Subsection 15(2) of the Income Tax Act.)

No evidence was adduced supporting the addition to income of the sum of $100 alleged to be “Appropriation of funds from Schlamp Construction Ltd,” and this amount should not be included in the calculation of plaintiff’s income for the 1975 taxation year.

There remains only the issue of claimed farm expenses in the sum of $1,996.43 in the 1975 taxation year, disallowed as not incurred as farm expenses on the acreage operated by plaintiff in that taxation year. Plaintiff’s testimony is the acreage was sold in either 1976 or 1977.

From the evidence adduced, I would allow the claim of $1,001.43 as “horse expenses” as a properly deductible expense. I agree with the disallowance of the balance of the claim.

The appeal in respect of plaintiff’s 1974 taxation year is dismissed except for reasonable reserve allowance in respect of the $6,000 mortgage forming part of the sale price of 810, which is referred back to the Minister for consideration and to which extent the appeal is allowed.

Save for the relatively minor amounts which I have held should be deducted from the reassessment of plaintiff’s income for the 1975 taxation year and to which extent plaintiff’s appeal is allowed, the remainder of the appeal is dismissed. The 1975 taxation year reassessment is referred back to the Minister for reconsideration and reassessment. In the circumstances, defendant will have costs of the action against plaintiff.