Citation: 2013TCC384
Date: 20131203
Docket: 2011-3473(IT)I
BETWEEN:
ROD ZIELINSKI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2013-3475(IT)I
AND BETWEEN:
DIANA ZIELINSKI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller J.
[1]
The Appellants are
spouses of each other and their appeals were heard on common evidence. The
issues were (a) whether the gains realized by the Appellants from the sale of
real property in 2006 and 2007 were capital or income receipts; and (b) whether,
in selling the properties, the Appellants incurred expenses in excess of the
amounts allowed by the Minister of National Revenue (the “Minister”).
[2]
Only Rod Zielinski
testified at the hearing.
[3]
These appeals concern
the sale of vacant land and a duplex in 2006 and the sale of vacant land in
2007.
Purchase and Sale of the Vacant Land
[4]
On July 2, 1993, the
Appellants purchased, as joint tenants, two adjacent parcels of land in Pincher Creek, Alberta for a total cost of $41,906. The total acreage purchased was 43.
Although Mr. Zielinski stated that he and his spouse purchased the properties
on July 15, 1992, the documentary evidence showed that they made an offer to
purchase the properties on that date and they received title to the properties
on July 2, 1993.
[5]
The Appellants built
their principal residence on the vacant land in 1993. In December 1993, they
made an application to the regional planning commission to subdivide the land
to create a country residential parcel containing 10.97 acres from the 43 acres.
Their application was contrary to the existing land use bylaws and it was
refused.
[6]
The Appellants then
actively campaigned with the residents in the area to change the land use
bylaws. In 1997, Mr. Zielinski was elected to the municipal council for Pincher
Creek and he sat on the subdivision committee. In October 1997, the Appellants
were granted approval to subdivide the 43 acres into five lots. I will refer to
these lots as lot 1, lot 2, lot 3, lot 4 and lot 5. Lot 5 was an access road
and it measured approximately 3 acres.
[7]
Between 1997 and 2007
and excluding the access road, the Appellants sold all of the vacant land
except approximately 3.7 acres. Their course of action was to sell lot 1 and
then further subdivide the remaining three lots and offer them for sale. The
sales were as follows:
(a)
On April 1, 1998, lot 1
was sold.
(b)
In June 2000, the
Appellants were granted approval to further subdivide lot 3 into two lots
(referred to as lots 6 and 7) and lot 4 into two lots (referred to as lots 8
and 9). Their principal residence was on lot 8 and it was sold on August 7,
2001. Lot 6 was sold on November 2, 2001.
(c)
In 2002, the Appellants
started to build their second principal residence on lot 2 and they moved into
this residence in July 2003.
(d)
On June 10, 2005, lot 9
was sold.
(e)
In April 2006, the
Appellants were granted approval to subdivide lot 2 into two lots (referred to
as lot 10 and lot 11) and lot 7 into two lots (referred to as lot 12 and lot
13). The second principal residence was located on what I now call lot 10.
(f)
On December 18, 2006,
the Appellants sold lot 13 for $69,000.
(g)
On July 13, 2007, the
second principal residence (lot 10) was sold.
(h)
In 2007, the Appellants
built their third principal residence on lot 11.
(i)
On June 1, 2007, the
Appellants sold lot 12 for $70,000.
Purchase and Sale of Duplex
[8]
In July 2001, the
Appellants purchased a duplex located at 1105 and 1111 John Avenue in Pincher
Creek. They lived in the duplex while their second principal residence was
being built on lot 10. When they moved out of the duplex in July 2003, Mrs.
Zielinski’s mother and the Appellants’ son lived in the duplex until it was
sold in July 2006. The proceeds of disposition for the duplex were $121,500.
[9]
The Minister has
assumed that, in July 2003, when the duplex ceased to be the Appellants’
principal residence, its fair market value was $99,597. Mr. Zielinski disagreed
with this assumption but he was unable to give another valuation for the
property.
[10]
The properties which
are at issue in this appeal are the sale of lot 13 and the duplex in 2006 and
the sale of lot 12 in 2007. In 2006, the Appellants each reported taxable
capital gains in the amount of $14,878 from the disposition of real property.
They did not report any gains from the disposition of property in 2007.
[11]
In reassessing the
Appellants, the Minister included the following amounts in income for each
Appellant:
2006
Sale of lot 13 $30,776.58
Sale of Duplex $10,952.00
2007
Sale of lot 12 $31,453.64
Appellants’ Position
[12]
It was the Appellants’
position that they purchased the vacant land as a place to build their dream
home and raise their three children. However, this was the largest piece of
land they ever bought and, at the time of purchase, they did not understand the
work involved in owning and caring for the acreage. Mr. Zielinski stated that
he was employed as a power linesman. He worked 40 hours a week and numerous
hours of overtime each year. His spouse was also employed full time and they
were raising a family. They could not keep up with the work involved in caring
for the 43 acres of land and they decided to sell the “excess land”. They only
continued to subdivide the land because they found that the larger acreage did
not sell.
[13]
The Appellants did not
give a reason for selling the Duplex.
Decision
[14]
Counsel for the
Respondent relied on the decision in Happy Valley Farms Ltd v Minister
of National Revenue, [1986] 2 CTC 259 (FCTD) where Rouleau J. discussed the
tests used in determining whether a gain is an income or capital receipt. He
stated:
14 Several tests, many of them similar to those pronounced by the
Court in the Taylor case, have been used by the courts in determining
whether a gain is of an income or capital nature. These include:
1. The nature of the property sold. Although virtually any form of
property may be acquired to be dealt in, those forms of property, such as
manufactured articles, which are generally the subject of trading only are
rarely the subject of investment. Property which does not yield to its owner an
income or personal enjoyment simply by virtue of its ownership is more likely
to have been acquired for the purpose of sale than property that does.
2. The length of period of ownership. Generally, property meant to
be dealt in is realized within a short time after acquisition. Nevertheless,
there are many exceptions to this general rule.
3. The frequency or number of other similar transactions by the
taxpayer. If the same sort of property has been sold in succession over a
period of years or there are several sales at about the same date, a
presumption arises that there has been dealing in respect of the property.
4. Work expended on or in connection with the property realized. If
effort is put into bringing the property into a more marketable condition
during the ownership of the taxpayer or if special efforts are made to find or
attract purchasers (such as the opening of an office or advertising) there is
some evidence of dealing in the property.
5. The circumstances that were responsible for the sale of the
property. There may exist some explanation, such as a sudden emergency or an
opportunity calling for ready money, that will preclude a finding that the plan
of dealing in the property was what caused the original purchase.
6. Motive. The motive of the taxpayer is never irrelevant in any of
these cases. The intention at the time of acquiring an asset as inferred from
surrounding circumstances and direct evidence is one of the most important
elements in determining whether a gain is of a capital or income nature.
15 While all of the above factors have been considered by the
courts, it is the last one, the question of motive or intention which has been
most developed. That, in addition to consideration of the taxpayer's whole
course of conduct while in possession of the asset, is what in the end
generally influences the finding of the court.
16 This test has been carried one step further by Canadian courts
into what has generally been referred to as the “secondary intention” test.
This has meant, in some cases, that even where it could be established that a
taxpayer's main intention was investment, a gain on the sale of the asset would
be held taxable as income if the court believed that, at the time of
acquisition, the taxpayer had in mind the possibility of selling the asset if
his investment project did not, for whatever reason, materialize. In Racine, Demers and Nolan v.
Minister of National Revenue, [1965] C.T.C. 150, 65 D.T.C. 5098 (Ex. Ct.)
, Noel, J. provided the following summary of the secondary intention test at 159
(D.T.C. 5103):
... the fact alone that a person buying a property with the aim of
using it as capital could be induced to resell it if a sufficiently high price
were offered to him, is not sufficient to change an acquisition of capital into
an adventure in the nature of trade. In fact, this is not what must be
understood by a “secondary intention” if one wants to utilize this term.
To
give to a transaction which involves the acquisition of capital the double
character of also being at the same time an adventure in the nature of trade,
the purchaser must have in his mind, at the moment of the purchase, the
possibility of reselling as an operating motivation for the acquisition; that
is to say that he must have had in mind that upon a certain type of circumstances
arising he had hopes of being able to resell it at a profit instead of using
the thing purchased for purposes of capital. Generally speaking, a decision
that such a motivation exists will have to be based on inferences flowing from
circumstances surrounding the transaction rather than on direct evidence of
what the purchaser had in mind.
Analysis
[15]
It is my view that the
Appellants’ actions with respect to both the vacant land and the duplex were
consistent with a business venture.
Vacant Land
[16]
Although Mr. Zielinski
stated that he and his spouse purchased the vacant land for the pleasure and
enjoyment of their family, almost immediately after they received title to the
land on July 2, 1993, they sought to have the property rezoned so that it could
be subdivided. According to the documents filed by Mr. Zielinski, the first
rezoning application was filed with the regional planning commission on
December 13, 1993. (See page 10 of exhibit A-1 where the Appellant lists the
cost of filing the application.) Between 1993 and 1997, they actively
campaigned with the residents in the area to change the land use bylaws. Mr.
Zielinski even ran for public office to, among other things, effect this goal.
Shortly after Mr. Zielinski was elected to municipal council, the municipal
by-laws were changed and the Appellants subdivided their land so they could
sell portions of it. In both direct and cross examination, Mr. Zielinski stated
that his intention was to sell the excess land. Although the vacant land was
purchased in 1993 and the lots of land at issue were sold in 2006 and 2007, I
do not find that the length of ownership of the land is a factor which favours
the Appellants. They applied to subdivide the land the same year that they
purchased it. From 1997 until 2006, they continued to subdivide the land to a
level that made the acreage ready for sale. They worked to make the land more
marketable and to attract purchasers. They improved the road into the property,
put in culverts and fenced the individual lots. At all times, they actively
sought to sell portions of the acreage.
[17]
Although the entire
acreage was purchased in 1993, the lots at issue in this appeal, lots 12 and
13, were only created in April 2006. They were held for a short period of time
as they were sold in 2006 and 2007.
[18]
I found the Appellants’
stated reason for selling the vacant land unconvincing. It is my view that the
Appellants had the intention when they purchased the vacant land to subdivide
it and sell the lots.
Duplex
[19]
The Appellants
purchased the duplex on John Street in 2001. It was their principal residence
until 2003. However, I was not told whether they lived in the total duplex or
just one half of the duplex. At some point in time, they renovated the duplex
and sold it in 2006. Mr. Zielinski said he didn’t recall that the duplex was
ever vacant but he did not receive any rental income for it. He did not give a
reason for renovating the duplex or selling it.
[20]
There was evidence that
the Appellants had purchased and sold property in the past. In 1996, they
purchased a house located at 1126 John Avenue in Pincher Creek; they renovated
the house and then sold it in 2000.
[21]
When I consider all of
the evidence, I am satisfied that the Appellants purchased the duplex with the
intention of selling it. When they bought the duplex, they were building their
principal residence on lot 10 of the vacant land and they knew their stay in
the duplex would not be permanent. I am not persuaded that they purchased the
duplex to be a permanent residence for the members of their family. They
renovated the duplex so that they could sell it for the maximum amount. The
Appellants had lived in the Pincher Creek area since 1991 and they were well
aware of the real estate market in the area.
[22]
In conclusion, I find
that the sale of the vacant land and the duplex was a business venture or an
adventure in the nature of trade and the gain was properly assessed as income.
[23]
The Appellants have
also argued that they incurred additional costs for both the vacant land and
the duplex which were not allowed by the Minister. The additional costs for the
vacant land were the survey costs in the amount of $5,148.78 paid to Brown,
Okamura and Associates. However, they were not able to quantify any additional
costs incurred with respect to the duplex.
[24]
The appeals will be
allowed on the basis that the Appellants incurred additional costs of $5,148.78
in preparing lots 12 and 13 for sale. As a result, using the Minister’s
methodology, I have calculated that the cost of lot 13 was $8,011.35 and the
cost of lot 12 was $7,511.05. The amount to be included in each Appellant’s
income from the sale of lot 13 in 2006 is $30,284.97 and from the sale of lot
12 in 2007 is $30,992.73. The amount included in each Appellant’s income in
2006 from the sale of the duplex remains as assessed at $10,951.50.
Signed at Ottawa, Canada, this 3rd
day of December 2013.
“V.A. Miller”
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