Walton v. The Queen, 82 DTC 6220, [1982] CTC 228 (FCTD)

Cattanach, J:—These are appeals by the plaintiff from a decision of the Tax Review Board dated April 15, 1976 whereby the assessments of the plaintiff to income tax for his 1971 and 1972 taxation years were confirmed.

The Minister included in the plaintiff’s 1971 income an amount realized upon the sale of properties in West Vancouver, BC as income from a venture in the nature of trade and allowed as a deduction a portion of that amount not received in the year as a reserve and included that amount in the plaintiff’s 1972 taxation year.

The amounts are not in dispute, only the taxability thereof is disputed.

This is the standard type of case which has become colloquially known as a “trading” case.

The question raised in these appeals is the same as frequently raised as to whether the gain realized upon the sale of real property is income from a business or as “business” has been extended by paragraph 139(1 )(e) of the Income Tax Act in force at the relevant time to include an adventure or concern in the nature of trade and so taxable as income from a business by virtue of section 4 of the Act, or whether it is merely the enhancement in value of a capital asset and so not taxable under the provisions of the Act as they then read.

The plaintiff bought three adjacent properties on Esquimalt Avenue in West Vancouver in very close proximity to the municipal offices of the Corporation of West Vancouver, BC, where he was employed as a town planner, on three dates following in annual succession for increasing amounts each for differently avowed purposes.

In October, 1964, he bought a house municipally known as 1523 Esquimalt Avenue for a price of $12,000. It was a modest house of wood frame construction with an area of about 750 square feet or less, built in 1919, on a 50-foot lot. The lot area was 6500 square feet.

The plaintiff proffered many reasons and purposes which prompted this purchase.

His wife had left him and taken their infant son with her. He lost his employment in the British Columbia civil service because he devoted his efforts to finding his wife and son to the detriment of his responsibilities to his employer and he had exhausted his savings in his search.

He was living in a room in the City of Vancouver, 10 miles from the employment he had obtained in West Vancouver some nine months after the loss of his prior employment.

He said 1523 Esquimalt was purchased (1) to recoup his lost savings, (2) to induce his wife to return to him, on the advice of his solicitor, and (3) as a place to live close to his work.

I fail to see how the purchase of a house could recoup lost savings unless it was to be turned to account for a profit. Perhaps he had in mind the ownership of land as the source of all real wealth and as a stable influence. He repeatedly stated that he always wanted to build something.

As an inducement for the return of his wife it was but a pious and forlorn hope which came to naught. I fail to appreciate how the plaintiff could have anticipated otherwise, and that has been substantiated by events subsequent.

Having bought the house, the plaintiff occupied it for a year. That coincides with his expressed purpose to be close to his work.

However, he found that he was being constantly importuned by tradesmen with whom, as a bachelor, he was obliged to deal about impending planning developments and the like.

Therefore, after about a year in occupation, he moved back to the City of Vancouver and resumed his 10-mile journey to work which he had sought to avoid by the purchase of the house and he leased the house to a tenant at a monthly rental somewhere between $115 and $125.

The income so generated was not sufficient to meet the current expenses as disclosed in the plaintiff's 1970 and 1971 tax returns and would likely be the same in the prior years, in 1970 there was a loss of $376.47 and $326.51 in 1971.

The appellant remarried in July 1967.

He made a gift of 1523 Esquimalt Street in that year to his wife as he stated in his notice of objection to an assessment to gift tax, since abolished, as a wedding gift in the hope that she might derive small income from it. The value of the property was also stated to have been $4,000 to coincide with the maximum annual gift allowable in the circumstances and at that time, which the plaintiff said was in accordance with his accountant’s advice. The Department of National Revenue eventually forewent the gift tax.

The plaintiff did not deny that a further motivating factor in the transfer of 1523 Esquimalt Avenue to his wife was to avoid any possible reassessment of the property to municipal realty tax when combined with 1541 Esquimalt (which the plaintiff had purchased in 1966) as an apartment site at a higher rate than if both were taxed as single residences.

I need not concern myself per se with the taxability of the gain realized upon the eventual sale of 1523 Esquimalt. Initially the Minister had assessed the gain on that house as income to the plaintiff. Later the Minister excluded that gain from the assessment of the plaintiff to tax thereon, maybe because he may have concluded that it was not income from a business or not income to the plaintiff. That issue is not before me.

In June, 1966 the plaintiff bought the house known municipally as 1541 Esquimalt Avenue, which is adjacent to 1523, at the price of $16,650. The lots were the same in size, each with a 50-foot frontage. The house was of similar age and construction as 1523 but enjoyed an additional room, which increased the area to about 800 square feet.

The plaintiff bought the house at 1541 Esquimalt because the owner, a widow, offered it to him at that price. He reiterated that he always had wanted to own something and to build something.

1541 was rented and the plaintiff continued to rent to the same tenant at a Slightly higher rent than 1523, justified because the house was slightly larger.

Despite the higher rent, in the neighbourhood of $135 per month, that rent did not produce income of any consequence.

In the plaintiff’s tax return for 1969 he showed a loss on 1541 of $520.97.

However, he did include in his expenditures depreciation at $663.37.

The depreciation he claimed in accordance with the Income Tax Regulations served to reduce the plaintiff’s income tax, a factor of which he made specific mention as an advantage accruing to him.

When the depreciation is disregarded the net rental return to the plaintiff from 1541 for 1969 was $142.42.

In 1970 the depreciation on 1541 was $597.05 and the loss was $431.77. Thus the actual rental income over cash outlays was $165.28.

In 1971 (only part of the year) there was a loss of $10.05 before terminal loss of unrecovered capital cost of $5,373.46.

In the fall of 1967, less than one year from the purchase of 1541 Esquimalt, the second purchase, the plaintiff purchased a third house municipally known as 1509 Esquimalt Avenue, also adjacent to 1523 Esquimalt, at a price of $20,000. The plaintiff explained the greater price over 1541 by the greater frontage of 67 feet and it being a corner lot.

1523 was the centre, 1541, the second purchase, was adjacent to 1523 on the west and 1509, the third purchase, was adjacent to 1523 on the east. The total purchase price for the three properties in the space of three years was $48,650.

All three purchases were financed either by mortgages or the assumption of mortgages and the down payment by bank loans.

The purpose given for the purchase of 1509 by the plaintiff was that he and his wife were anxious to raise a family and 1509 would be an ideal home to that end.

The plaintiff had ready explanations as to why he would be able to live at 1509 when he had been unable to live at 1523, two doors away, about two years earlier. He would be returning as a married man and would not be doing the household shopping and so would not be subjected to enquiries as to the city’s plans with respect to zoning and the like.

The plaintiff and his wife were living in an apartment in the City of Vancouver. The rent from 1523 had helped to defray the expense of the plaintiff’s living accommodation. Incidentally, he had chosen to live in the City of Vancouver because it was closer to the recreational facilities he enjoyed. The better accommodation occupied by him and his wife would, in fact, be defrayed by the rent from 1523 and 1541.

The plaintiff approached the owner of 1509 with the view to purchasing the house, which was modest and comparable to those at 1523 and 1541. The owner agreed to sell for $20,000 but possession could not be given until June, 1968. This was acceptable to the plaintiff.

Despite the plaintiff’s professed intention to occupy the house at 1509 Esquimalt, he never did and he advanced several explanations therefor predicated upon his own health and the difficulties Mrs Walton experienced in giving birth to a child. She was eventually successful in doing so. The health of both required ready access to medical help.

It was also advanced as a reason for the purchase of 1509 as a residence for the plaintiff and his prospective family that it was immediately adjacent to 1523 and 1541, both of which were rented and that the plaintiff could readily supervise the buildings and their upkeep. However, he was prevented from doing this because a deteriorating disc prevented him from doing overly strenuous physical work.

The house at 1509 Esquimalt was rented at the time of the purchase to a yearly tenant. That was why possession could not be given until June 1968. The plaintiff continued to rent this property and never did occupy it personally.

The property at 1523 Esquimalt had been transferred by the plaintiff to his wife as a gift in 1967.

Mrs Walton was a registered nurse and worked as such. When her earnings necessitated the payment of income tax thereon she utilized the depreciation on the property as a deduction to reduce her income tax.

In taxation years when Mrs Walton had no taxable income the plaintiff applied the depreciation on 1523 to his own income.

As was the case with 1523 Esquimalt, 1509 showed a loss in the plaintiff’s 1969 tax return of $1,340.58, of which $702 was depreciation. The plaintiff’s out-of-pocket expenses were $638.58. In 1970 the loss was $776.56, including depreciation of $631.80, making out-of-pocket expenses of $104.76. In the 1971 taxation year, the loss was $83.22.

In 1969 or thereabouts, the plaintiff foresaw that his employment as a town planner with the Municipality of West Vancouver might come to an end and that the relationship with his employer was becoming strained.

Accordingly, in 1971 when the plaintiff and his wife received an unsolicited offer of $130,500 for the three properties, they accepted that offer with alacrity.

The offer, while unsolicited, was the first and only offer received by them.

There is no doubt that the plaintiff and his wife were acting in concert in the consummation of the sale.

The purchaser was a developer and acquired these three adjacent properties as part of an apartment site. The developer acquired a fourth adjacent lot still further increasing the frontage of the three lots owned by the plaintiff and his wife which three lot frontage totalled 167 feet.

The zoning to which these properties was subject permitted the construction of an apartment on a 99-foot frontage.

The plaintiff, from his occupation and training, was knowledgeable in these matters.

He expressed the view that an apartment on the site of the three properties would not be economically viable. First because the regulation was that the width of the building was limited to one-half of the frontage (and must be situate in mid-frontage leaving 25 feet on each side). The width of the building on that site would be 50 feet only.

Added to this was the second limitation imposed by the light angle. The building was thereby restricted to seven stories in height.

This did not deter the developer from acquiring the three properties for part of the site upon which an apartment was erected.

The second property was stated by the plaintiff to have been purchased as a form of investment and to produce rental income therefrom.

This was the purpose stated in the notice of appeal to the Tax Review Board dated March 14, 1975.

The same purpose applied to the purchase of the other two properties, 1523 and 1509, in the notice of appeal to the Tax Review Board.

Before me the plaintiff emphasized that 1509 was purchased as a home for his wife and potential family. In fact it never served that purpose but continued to be rented to the tenant in possession.

What was done on purchase is much more compatible than the professed intention of occupying the premises as a home, but if either had been the exclusive intent at the time of purchase, the ultimate disposition would have been that of a capital asset and so not taxable under the legislation as it then was.

In the notice of objection to the assessments exactly the same stance was taken, that is the disposition of the three properties was the disposition of capital property of an investment nature and so a capital gain and not income from a business.

In the present statement of claim the same statements are repeated, the houses were bought as a capital investment and thus the realization thereof is not income from a business which includes an adventure or concern in the nature of trade.

Whenever faced in cross examination with inconsistencies between the allegations in the notice of objection, notice of appeal to the Tax Review Board and statements made by the plaintiff as recorded in the transcript of evidence, his stock explanation was that his solicitors did not follow his instructions or that he made a mistake in instructing his solicitors. He had many solicitors.

The same solicitors prepared the notice of objection and the notice of appeal to the Tax Review Board.

The matter was presented to the Board by counsel engaged.

The present statement of claim was prepared by another solicitor. That solicitor was replaced by yet another and that solicitor was discharged and the plaintiff acted on his own behalf.

Before me the plaintiff advanced yet another purpose for his acquisition of the properties.

He repeatedly expressed his desire to own something tangible — to build something. Consistent with his expressed desire to recoup his lost savings that would mean to own something which would produce income.

He discountenanced the concept of an apartment building as being not economically viable. In its place he advanced the idea of building town houses which was permissible under the zoning by-law. There could be four dwellings on a single lot and in all likelihood the number of multiple dwellings would increase on an enlarged site as became available to the plaintiff.

However, the plaintiff took no serious steps to advance his concept. He had an architect’s design drawing. He sought no financing. He sought no building permit. The relationship between the plaintiff and the municipal council must have been bordering on the acrimonious because he said he hesitated to apply for a building permit for his expectation was that it would be refused to him. That was unreasonable. If the plaintiff had a right to a building permit, he is entitled to it and if refused unjustly there are remedies available to him to which I would expect he would not be hesitant to resort.

This purpose was not advanced in any previous proceedings and was expressed for the first time before me. His failure to do so he explained to me as being on advice of counsel. That explanation is not acceptable to me, as well as being false and the plaintiff recanted.

For the plaintiff to have advanced this purpose at the time of trial as having been present at the time of purchase, was an afterthought on his part and not properly admissible on the face of the pleadings. The utmost latitude was extended to the plaintiff since he was a layman acting on his own behalf.

In response to a question he did state that it was his intention, if he had built town houses, either to rent them or to sell them, whichever should the circumstances dictate.

That answer clearly indicates that if such had been the plaintiff's purpose at the time of acquisition of the property, the town houses to be built thereon would be inventory or stock in trade.

For the foregoing reasons, this purpose can and must be disregarded as having been present at the time of purchase and is not compatible with his repeated averments that each property was a capital asset or investment.

There remains, however, with respect to 1509 and 1541 Esquimalt the avowed purpose of the plaintiff that he bought those properties as a form of investment productive of rental income. The avowed purpose of using 1509 as a home was never done and could not have been the plaintiff’s sole purpose.

If the plaintiff’s exclusive purpose at the time of acquisition of these two properties had been as an investment to realize rental income therefrom, then profit from the sale of them after the plaintiff decided to discontinue this investment project would not be profit from a business nor an adventure in the nature of trade.

If that was not his exclusive purpose at that time, there can, in the circumstances, be no doubt that the acquisition of these two properties had for its purpose, or one of its possible purposes, subsequent disposition at a profit and that the resulting profits are, therefore, taxable.

In assessing the plaintiff as he did, the Minister assumed, inter alia, that the plaintiff acquired his interest in the properties adjacent to 1523 Esquimalt west for the purpose of the assembling of an apartment site for eventual resale at a profit.

The Minister made this assumption to coincide with the exact facts that transpired. That is included within the broader words “disposition at a profit” regardless of the specific means of doing so.

The question of fact as to what the plaintiff’s purpose was in acquiring these two properties is one that must be decided after considering all the evidence.

The appellant’s evidence at trial that his purpose was to build town houses and perhaps only rent them (not sell them as he testified) is only part of the evidence.

Statements after the event as to intention at the time of acquisition must be considered along with the objective facts, and such later statements of intention must be looked at very carefully, being self-serving statements.

For the reasons previously expressed, I do not accept the plaintiff’s statement at trial that he intended to build town houses. That is at variance with his numerous other statements as to what his intention was at the material time — the time of acquisition.

The only statement made by him which has any degree of consistency was that he acquired the properties as an investment to produce rental income.

The onus is upon the plaintiff to establish that this was his purpose at the time of acquisition to the exclusion of subsequent disposition at a profit.

The onus is also upon the plaintiff to demolish the Minister’s assumption to the contrary and, in my view, he has failed to discharge that onus.

It was of the essence of the plaintiff’s evidence that he sought to recoup his savings. Certainly the property did not produce rental income and as such is not a likely investment to achieve that end. That the plaintiff may have entertained other ideas as to how the property may have been put to profitable use were merely possibilities which occurred to the plaintiff’s fertile mind but without any real likelihood of implementation.

It is true that the plaintiff had no prior history as a trader in real estate. He was, however, a town planner and abreast of the developments in that and related fields. As has been said, and as is embodied in the extended definition of business to include an adventure in the nature of trade — one dip in the waters of trade is sufficient.

The plaintiff and his wife sold the three properties in 1971. With the proceeds of the sale the plaintiff bought a property in a residential district in the City of Vancouver. He at long last realized that objective.

In 1973 the Damoclean sword suspended over the head of the plaintiff fell as he had anticipated. He was discharged by the District of West Vancouver.

He sold the house he had purchased in Vancouver to accept a town planning job in Australia.

He returned to Canada to accept a town planning job with the District of North Vancouver. He lost that job.

He was disillusioned with the profession of town planning in which he was engaged.

Being unemployed, he entered into a speculative real estate transaction prior to his departure for Australia which resulted in nothing to the plaintiff.

The maxim that coming events cast their shadows before may be applied in reverse to the plaintiff. His disillusionment with town planning prompted the plaintiff to look for other means to make his fortune. That venturesome path could well have been embarked upon by the plaintiff in 1964 with his first purchase of real estate.

I am not satisfied that there is a balance of probability that the plaintiff acquired the two properties for the purpose of deriving rental income therefrom to the exclusion of any purpose of disposition at a profit.

Accordingly, it cannot be said that the assumption of the Minister in assessing the plaintiff as he did was not warranted.

The appeals are therefore dismissed with costs to Her Majesty.