Date: 20020118
Dockets: 1999-3734-IT-G,1999-3738-IT-G,
1999-3739-IT-G, 1999-3740-IT-G
BETWEEN:
DOMENICA SCENNA,
FERNANDO NORCIA,
KERRY NORCIA,
RITA NORCIA,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
O'Connor, J.T.C.C.
[1]
These appeals were heard together on common evidence at
Toronto, Ontario on December 6, 2001. It was agreed at the
outset that notwithstanding there are four appeals, there would
be only one set of costs.
FACTS
[2]
In January, 1991 Domenica Scenna, Fernando Norcia, Kerry Norcia
and Rita Norcia in partnership (the "Partnership")
purchased a property located at 2291 Fifth Line, Churchill,
Ontario, (the "Property"). The Property was legally
described as Part Lot 15, Concession 4, Township of Innisfil. It
comprised 11 acres of land with an 8,000 square
foot ranch style bungalow thereon with an indoor pool and a 5000
square foot workshop. The Property was on Highway 11
(Yonge Street). The price for the Property was $485,000 of which
the Partnership financed $293,000 by way of a mortgage. The
balance was put up as follows: $70,000 by Rita, $70,000 by
Domenica and $70,000 collectively by Fernando and Kerry (these
latter two later married), for a total of $210,000. The figures
do not tally precisely because of closing costs and adjustments
and some minor differences as to the amount of the mortgage.
These discrepancies are immaterial.
[3]
Kerry Norcia testified that the Partnership purchased the
Property with the intention of a quick resale (within two years).
Exhibit A-2 is a letter from Kerry Norcia to Academy Realty dated
November 13, 1990, which reads as follows:
Academy
Realty
Nov 13/90
Armando:
- We're really looking for some land or house that will be
a good investment. We want to be able to sell it within a two
year span.
- As you know we're not looking for a house that we will
live in as we aren't getting married until Oct 91 (we will
call you when we want a house for ourselves).
We, Fernando & his sisters want to invest in something
that we can turn over & make a profit.
- See what you can find.
Thanks.
Kerry
[4]
The Appellants state further they looked at 6 or 7 properties
over a one-year period before deciding on this Property
which was listed at $620,000 and which, as mentioned, they bought
for $485,000. Kerry Norcia stated further that before the
purchase the Appellants spoke with real estate agents and town
officials and received assurances that the Property could be
rezoned from agricultural to commercial use which was key to
being able to sell at a substantial profit. Kerry Norcia stated
further that the partners' life savings went into the
Property. She also stated the Partnership thought they could
resell at a profit, albeit lower, even if the rezoning
failed.
[5]
The Property was first listed for sale by the Partnership on
August 15, 1992 at $569,900 (Exhibit A-5) and then
again on August 20, 1994 at $339,900 (Exhibit A-6).
Kerry Norcia, indicated that there were other listings with
approximately five brokers but the only two listings produced
were Exhibits A-5 and A-6.
[6]
Despite efforts of the Appellants, consisting of meetings with
Town Planners, with the Deputy Mayor and with others, the Town
essentially changed its mind and denied the zoning change. The
Partnership did not make a formal application for the zoning
change as that was too expensive and probably futile.
[7]
To mitigate the Partnership's losses and defray carrying
costs of the Property, the Partnership, realizing delays were
anticipated to prepare the Property and attempt to have it
rezoned, advertised extensively to rent it and when these efforts
failed Kerry Norcia and Fernando Norcia occupied the Property as
a residence and maintained same and paid rent to the Partnership.
Kerry Norcia testified that the Property was certainly not her
choice for a personal residence. It did not suit Kerry and
Fernando. They knew very few people in the area and the commute
to Toronto, where they worked, at times involved trips of
approximately one and a half to three hours each way. They were
there principally to maintain the Property. During their
occupation from the spring of 1991 to the ultimate sale of the
Property in 1996 they continued to try to sell or rent the
Property to others using approximately five agents without
success. They paid basic rent, utilities and part of the mortgage
interest, a total of $3,000 to $3,500 per month.
[8]
In 1994 the Partnership wrote down the Property to its then
estimated fair market value of $300,000. The Partnership arrived
at that figure as constituting a mean figure between what they
were asking for the Property in that year namely $339,900 and
what is referred to as the "low-ball" offer they
received of $265,000.
[9]
Based on the original price of $485,000 together with capitalized
carrying costs, the write down of the Property to $300,000
resulted in a loss of $306,376, which was allocated to the
Partners as follows:
Fernando Norcia
-
$ 76,594
Kerry Norcia
-
$ 51,603
Domenica
Scenna
-
$ 76,593
Rita Norcia
-
$102,126
Although the loss was taken in 1994, all Parties carried
portions of their respective losses to the 1991, 1992, 1993, 1994
and 1995 taxation years. The specific amounts in each year are
set forth in the Replies to the Notices of Appeal. The
discrepancies in the figures and the allocation of the loss were
not explained, however, the Replies to the Notices of Appeal do
not address that issue. They simply deny that the Appellants were
entitled to any inventory write down or deductions of losses and
they deny that the fair market value was $300,000.
[10] The
Property sold finally in 1996 for $290,000. This was roughly the
then balance of the mortgage with the result that the Appellants
lost practically all the monies they personally put in to
purchase the Property.
[11] At first
the Appellants had attempted to deduct rental losses but after an
audit the Minister disallowed this approach. The Appellants
changed accountants and then filed on the basis of inventory
write down and after a further audit this approach was denied as
well.
SUBMISSIONS OF COUNSEL FOR THE APPELLANTS
[12] Counsel
for the Appellants submits that although there was only one
property involved, in his opinion, it constituted inventory and
the Appellants were entitled to write down their losses in
accordance with subsection 10(1) of the Income Tax Act
("Act") discussed below and that further, in
accordance with paragraph 111(1)(a) of the Act,
they were entitled to spread the losses over the various years as
they did. He contends further that this case is similar to that
of Friesen v. The Queen, a Supreme Court of Canada
decision cited at 95 DTC 551 where there was only one vacant lot
involved and where the Court held that that vacant lot could be
considered as inventory and allowed the appropriate inventory
write down. This decision is analzyed below.
[13] Counsel
contends further that the Appellants' intention was to flip
the Property and realize a profit but that was frustrated by a
down turn in the market and the failure of the Town to rezone
from agricultural to commercial, notwithstanding the
Appellants' efforts to achieve that rezoning.
[14] Counsel
contends further that the definition of "business"
includes an adventure in the nature of trade and even a single
adventure can qualify.
[15] Thus,
there was a business, which suffered a loss when the inventory
was written down, and the Appellants are entitled to treat the
loss as they did.
[16] Counsel
for the Appellants also submits that the Appellants had a
reasonable expectation that they could have the Property rezoned.
It had the features described above and there was commercial
development on the concession immediately behind them. Further,
within the month after purchase, the Property was advertised for
rent and continued all through the period of time that it was
owned by the Partnership, right until it was sold in 1996 to be
advertised for rent or sale, including the time in which the home
was occupied by Kerry Norcia and Fernando Norcia.
[17] In the
Replies, the position is taken by the Respondent that this is
personal-use Property. Counsel for the Appellants submits
that none of the actions of the Appellants are consistent with
personal-use property. If you buy a house for yourself it is not
normal that before you buy it and after you buy it, you
investigate rezoning the Property commercial and further it is
not normal that while you're occupying it you continuously
list it for rent and/or sale.
[18]
Furthermore, the Property was not suitable as a personal
residence, given the circumstances regarding Fernando Norcia
and Kerry Norcia described above.
[19] Related
to the issue of personal-use property is whether or not the
Property was rented to Kerry Norcia and Fernando Norcia at
fair market value.
[20] The
evidence was that the Property was continuously advertised for
rent, and that Kerry Norcia and Fernando Norcia paid an
amount that no other party was willing to pay. They paid at first
$850.00 a month, then $900.00 a month and later $950.00 a month,
plus utilities, and that was more than anybody else was willing
to pay. It is fair market, that is the definition of "fair
market value", what an arm's length person is prepared
to pay.
[21] Produced
before the Court was the 1994 listing, because it was
relevant to the issue of the fair market value of the Property in
1994. It was listed for $339,000, and the only offer received was
$265,000.
[22] By
definition, "fair market value" has to fall within
those two numbers. The Property in fact was sold two years later
for $290,000. Counsel submits that the Appellants have produced
sufficient evidence to establish that the value of the Property
in 1994 was $300,000 and there is no contrary evidence before the
Court.
[23] The
Appellants investigated property values in the area for a year
before they purchased. For six months of that year, they worked
with an agent. They did not do this as a frivolous or trivial
matter. It was their life savings.
[24] They
purchased the Property for several hundred thousand dollars less
than its original list price. They investigated the rezoning
potential before they bought the Property and arrived at a level
of certainty that they could risk this adventure.
[25] When
their attempts to rezone, or their expectations of rezoning, were
frustrated, they listed the Property for sale within the two-year
time window, consistent with their stated intention, and they
listed it for $569,900. That was their expectation. That is what
an agent listed it for. That's what they reasonably believed
the Property was worth.
[26] What the
Appellants did not anticipate was that rezoning would be
frustrated and that a recession would continue to erode value.
But where taxpayers make a bona fide genuine commercial
investment, with a view to profit, what they lose is on account
of income.
[27] The
Minister has to have a compelling basis to deny losses that were
incurred by taxpayers in a good faith commercial enterprise. The
Property was sold for $290,000. The losses are real, they are not
paper, they are not tax-driven.
[28]
And if this Court finds that the intentions of the Appellants
were to buy this Property as commercial property; that the
Appellants that occupied the house paid fair market rent; and
that the Appellants bought the Property with the intention of a
future sale at a profit, then the Property is inventory.
[29] Counsel
adds that the Respondent acknowledges that the Appellants entered
into a Partnership, and in 5(c) of the Replies the Respondent
acknowledges that the Partnership purchased the Property.
[30] At common
law and in Ontario by statute, a "partnership" is a
defined term. It has a very specific meaning. A
"partnership" exists under the Partnership Act
and also under the common law where two or more people carry on a
business with a common view to profit. Without a business with a
profit motive, there can be no partnership.
[31] Counsel
adds that since the rent is fair market value, there is no
personal benefit. The definition of "fair market value"
is the price arrived at between an arm's length buyer and
seller. Thus when there were no takers at the posted rent, and
the Norcias, Kerry and Fernando, paid the posted rent, plus the
utilities, they paid fair market value.
[32] Counsel
for the Appellants admits that the Partnership could not make a
profit from the rental of the Property but that is not the point.
The Appellants bought with the intention of selling at a quick
profit. Their intention was an adventure in the nature of trade,
therefore a business was being carried on with the right and
obligation to determine profit on the basis of inventory write
down.
SUBMISSIONS OF COUNSEL FOR THE RESPONDENT
[33] Counsel
for the Respondent submits that the Property was used as a
principal residence by two of the four Partners. These two paid
rent but the rent did not represent fair market value. The
Partnership could never make a profit from the rental of the
Property as it was never properly capitalized. The Property was
used for personal purposes.
[34] The
Partnership was not in the business of real estate. The Property
was not inventory to the Partnership. The Partnership never
actually applied for a rezoning to build a commercial property
and that for all of those reasons the Appellants could not
declare a loss and allocate it as they did pursuant to paragraph
111(1)(a) of the Act. He submits also that the
Property was not inventory as defined in
subsection 248(1) of the Act and therefore the
Appellants are not entitled to the deductions they seek because
subsection 10(1) of the Act and section 1801 of
the Income Tax Regulations do not apply. Counsel concludes
that there was no non-capital loss as defined in subsection
111(8) of the Act for the
Appellants' 1994 taxation year that was deductible
in computing taxable income for the 1991, 1992, 1993, 1994 and
1995 taxation years and that the Minister properly denied
the deductions claimed by the Appellants in all of those
years.
[35] The
Friesen case is, of course, probably the seminal case now
on the whole issue of, can a single piece of property that may or
may not be an adventure in the nature of trade be treated as
property that is subject to an inventory write down.
[36] Counsel
for the Respondent attempted to distinguish the majority judgment
of the Supreme Court of Canada in Friesen as follows. The
central question in these appeals is whether the Appellants are
entitled to take advantage of the inventory valuation method in
subsection 10(1) of the Act. This involves a careful
examination of the wording of the provisions of the Act and a
consideration of the proper interpretation of these sections in
light of the basic structure of the Canadian taxation scheme
established in the Act.
[37] The plain
reading of this section is that it is a mandatory provision
requiring a taxpayer who computes income from a business to value
the inventory at the lower cost or market value or as permitted
by regulation. Thus, prima face, the taxpayer must meet two
requirements in order to use this section: the venture at issue
must be a 'business and the property in question must be
'inventory.'
[38] Counsel
for the Respondent submits there was no adventure in the nature
of trade nor any business.
[39] Counsel
submits that IT-218R, which replaced IT-218 and was discussed in
Friesen, lists a number of factors, which have been used
by the courts to determine whether a transaction involving real
estate is an adventure in the nature of trade creating business
income or a capital transaction involving the sale of an
investment. Four of these factors are discussed below.
1.
The taxpayer's intention with respect to the real estate at
the time of purchase and the feasibility of that intention and
the extent to which it is carried out. An intention to sell the
property for a profit will make it more likely to be
characterized as an adventure in the nature of trade.
Now, what are the taxpayers' intentions? We know in this
case the intention was to buy a property and sell it. We know
that. Now the question is, was that the thought at the time of
purchase? Yes, it was.
The next thing, the feasibility of that intention: and that is
where the Appellants' position begins to break down and is
clearly different from this factor, because there was no
feasibility to their plan.
They had no real estate experience. They did not live in the
area. They looked at only five properties. They said that they
were going to flip the Property within two years, but the first
listing was 18 months after purchase.
The evidence, in terms of seeking to have the Property
rezoned, is that they spoke to a couple of people. No one was
ever retained professionally to assist them with that. Nothing
was done in an official capacity by way of submission, and
nothing has been adduced in evidence to show that in fact an
application was ever made.
So to the extent that their plan was carried out, I would
submit to you it was not carried out, because there is nothing
there that really shows - the evidence, I would submit is
overwhelming to show that their efforts were minimal at best, and
misdirected at worse.
2.
The nature of the business, profession, calling or trade of the
taxpayer and associates. The more closely a taxpayer's
business or occupation is related to the real estate
transactions, the more likely it is that the income will be
considered business income rather than a capital gain. The
Appellants were not in the real estate business.
3.
The nature of the property and the use made of it. We know that
this was not like in Friesen. This was not vacant land. We
know it was agriculturally zoned land. It was not commercially
zoned land. That is what they needed to get, in order for it to
be of value to a potential purchaser, which they didn't get.
We also know that the taxpayers made use of it as a personal
residence.
4.
The extent to which borrowed money was used to finance the
transaction and the length of time that the real estate was held
by the taxpayer. Transactions involving borrowed money and rapid
resale are more likely to be adventures in the nature of trade.
This was not a highly leveraged property. They had put down their
life savings. In fact, we heard that they extended themselves.
They put down $210,000 on a property that cost $485,000.
[40] Counsel
points out that the partners involved in the venture in
Friesen were experienced business people who treated the
transaction as a business venture. The land involved was
undeveloped real estate, which was suitable for resale but
unsuitable as an income producing investment or for personal
enjoyment.
[41] This
Property, unlike Friesen, was suitable for residing
in.
[42] The
Property does not meet the factors the Supreme Court of Canada as
outlined in Friesen, factors set forth in the
Interpretation Bulletins referred to in its judgment.
[43] In
summary Counsel for the Respondent submits that the facts in
these Appeals are sufficiently different from those in
Friesen, that the majority judgment of the Supreme Court
of Canada in Friesen is not applicable.
ANALYSIS AND DECISION
[44] The
relevant provisions of the Act in 1994 read as
follows:
9. (1) Subject to this
Part, a taxpayer's income for a taxation year from a business
or property is the taxpayer's profit from that business or
property for the year.
(2)
Subject to section 31, a taxpayer's loss for a taxation year
from a business or property is the amount of the taxpayer's
loss, if any, for the taxation year from that source computed by
applying the provisions of this Act respecting computation of
income from that source with such modifications as the
circumstances require.
...
10. (1) For the purpose of computing
income from a business, inventory shall be valued at its costs to
the taxpayer or its fair market value, whichever is lower, or in
such other manner as may be permitted by regulation.
...
(2)
Notwithstanding subsection (1), for the purpose of computing
income for a taxation year from a business, the inventory at the
commencement of the year shall be valued at the same amount as
the amount at which it was valued at the end of the preceding
taxation year for the purpose of computing income for that
preceding year.
...
248. (1) In
this Act, ...
"business" includes a profession, calling, trade,
manufacture or undertaking of any kind whatever and, except for
the purposes of paragraph 18(2)(c), section 54.2 and
paragraph 110.6(14)(f), an adventure or concern in the
nature of trade but does not include an office or employment;
...
"inventory" means a description of property the cost
or value of which is relevant in computing a taxpayer's
income from a business for a taxation year ...
[45] Although
the Appellants were not experienced real estate investors, they
did invest their life savings and must have had reasonable
grounds for doing so. They had examined approximately six or
seven other properties and concluded that this Property had the
most likely profit potential if the zoning change from
agricultural to commercial could have been effected. The early
indications were that it could be done but this position on the
part of the Town changed. There are commercially zoned areas
close to the Property and I believe the Appellants had a
reasonable expectation that the zoning change could be obtained.
If so, all indications were that a quick profit could be
obtained. Thus, in my view, the adventure that they undertook was
an adventure in the nature of trade and as such a business was
being carried on and the Appellants are entitled to the inventory
write down provided for in subsection 10(1). As well, they have
the ability to carry the resulting loss back and forward to other
years in the manner that they have done.
[46] I find
the facts in this case to be sufficiently similar to those in
Friesen, and hold that that decision governs the
disposition of these appeals.
[47] I cite
the following from the majority decision of the Supreme Court of
Canada in Friesen:
... the appellant was a participant in an adventure in the
nature of trade involving a piece of Calgary real estate known as
the Styles Property. The Styles Property was acquired for the
sole purpose of reselling it at a profit. ... Contrary to the
expectations of the investors, real estate prices fell instead of
rising.
...
II. Analysis
A. Introduction
The narrow issue in this appeal is whether land held
for resale as an adventure in the nature of trade may be valued
as inventory under s. 10(1) of the Income Tax Act. ... In
my opinion the provisions of the Income Tax Act allow land
held as an adventure in the nature of trade to be valued as
inventory under s. 10(1) and therefore I would allow this
appeal.
B. The Scheme of the Income Tax Act
...
Section 3 of the Income Tax Act sets out the
ground rules for the computation of a taxpayer's income for a
taxation year. Section 3 recognizes two basic categories of
income: "ordinary income" from office, employment,
business and property, all of which are included in s.
3(a), and income from a capital source, or capital gains
which are covered by s. 3(b). The whole structure of the
Income Tax Act reflects the basic distinction recognized
in the Canadian tax system between income and capital gain.
Subdivision b of Division B of the Act entitled
"Income or Loss from a Business or Property" contains
all the rules which govern business and property income. The
leading section in this subdivision is s. 9 which provides that a
taxpayer is taxable on the profit for a business or
property for the year. Profit is not defined in the Income Tax
Act.
...
D. Plain Meaning of Section 10
...
The plain reading of this section is that it is a mandatory
provision requiring a taxpayer who computes income from a
business to value the inventory at the lower of cost or market
value or as permitted by regulation. Thus, prima facie,
the taxpayer must meet two requirements in order to use this
section: the venture at issue must be a "business" and
the property in question must be "inventory".
(1) Is the Appellant's Venture a
Business?
The definition of "business" in s. 248(1)
specifically includes an adventure in the nature of trade.
...
An adventure in the nature of trade is not defined in the Act
but is a term which has a meaning established by the common
law.
Both parties in this appeal accept that the
appellant's real estate venture constitutes an adventure in
the nature of trade. Nevertheless, it is useful to briefly
examine the requirements for an adventure in the nature of trade
since these requirements serve to limit the scope of ventures
which are eligible to use the provisions of s. 10(1).
The concept of an adventure in the nature of trade is a
judicial creation designed to determine which purchase and sale
transactions are of a business nature and which are of a capital
nature. ...
...
The first requirement for an adventure in the nature of
trade is that it involve[s] a "scheme for
profit-making". The taxpayer must have a legitimate
intention of gaining a profit from the transaction. Other
requirements are conveniently summarized in Interpretation
Bulletin IT-459 "Adventure or Concern in the Nature of
Trade" (September 8, 1980) which references Interpretation
Bulletin IT-218 "Profit from the Sale of Real Estate"
(May 26, 1975) for a summary of the relevant factors when the
property involved is real estate.
IT-218R, which replaced IT-218 in 1986, lists a number
of factors which have been used by the courts to determine
whether a transaction involving real estate is an adventure in
the nature of trade creating business income or a capital
transaction involving the sale of an investment.
...
... I affirm the succinct summary of the law contained in
IT-218R:
The word "business" is defined in
subsection 248(1) so as to include, inter alia, an
adventure or concern in the nature of trade. This definition can
cause an isolated transaction involving real estate to be
considered a business transaction. As a business, any gain or
loss which arises therefrom is, by virtue of section 9, required
to be included in computing income or loss, as the case may
be.
(2) Is the Styles Property
"Inventory"?
In order to take advantage of the valuation method in
s. 10(1), a taxpayer must also establish that the property in
question is inventory. A definition of "inventory" is
contained in s. 248(1) of the Act:
"inventory" means a description of property the cost
or value of which is relevant in computing a taxpayer's
income from a business for a taxation year;
The first point to note about this definition of inventory is
that property is not required to contribute directly to income in
a taxation year in order to qualify as inventory. Provided that
the cost or value of an item of property is relevant in
computing business income in a year that property will
qualify as inventory. Generally the cost or value of an item of
property will appear as an expense (and the sale price as
revenue) in the computation of income.
Reduced to its simplest terms, the income or profit from
the sale of a single item of inventory by a sales business is the
ordinary tracing formula calculated by subtracting the purchase
cost of the item from the proceeds of sale. This is the basic
formula which applies to the calculation of profit before the
value of inventory is taken into account, as is made clear by
Abbott, J. in Minister of National Revenue v. Irwin,
[1964] S.C.R. 662, at pp. 664-65:
The law is clear therefore that for income tax purposes gross
profit, in the case of a business which consists of acquiring
property and reselling it, is the excess of sale price over cost,
subject only to any modification effected by the "cost or
market, whichever is lower" rule.
...
IT-218R clarifies that real estate which is held by the
taxpayer as capital property may be used as personal-use property
or as an investment for the purpose of gaining or producing
income. The sale of this kind of property creates capital gain or
capital loss. On the other hand, real estate which is purchased
for profitable resale value is inventory which creates business
income or loss. In determining whether the gains from a sale of
real estate are income or capital, particular emphasis is placed
on the taxpayer's intention at the time of the initial
purchase of the real estate. Thus, a particular piece of real
estate becomes either inventory or capital property in the hands
of the taxpayer from the time of the original
purchase.
...
... I prefer to follow the well-established line of cases
which have specifically held as part of their rationes
decidendi that real estate held for resale in an adventure in
the nature of trade constitutes "inventory" for the
purposes of s. 10(1) ...
...
Section 10(1) of the Income Tax Act recognizes
the well accepted commercial and accounting principle of
requiring a business to value its inventory at the lower of cost
or market value. This principle is an exception to the general
principle that neither profits nor losses are recognized until
realized. As well, it represents a departure from the general
principle that assets are valued at their historical cost. The
underlying rationale for this specific exception to the general
principles is usually explained as originating in the principle
of conservatism. The generally accepted accounting principle
applicable in this situation is explained by D.E. Kieso et
al., Intermediate Accounting (2nd ed. 1986), at pp. 421-22,
as follows:
A major departure from adherence to the historical cost
principle is made in the area of inventory valuation. Applying
the constraint of conservatism in accounting means recognizing
known losses in the period of occurrence. In contrast, known
gains are not recognized until realized. If the inventory
declines in value below its original cost for whatever reason
..., the inventory should be written down to reflect this loss.
The general rule is that the historical cost principle is
abandoned when the future utility (revenue-producing ability) of
the asset is no longer as great as its original cost. A departure
from cost is justified on the basis that a loss of utility should
be reflected as a charge against the revenues in the period in
which the loss occurs. Inventories are valued, therefore, on
the basis of the lower of cost and market instead of on an
original cost basis.
[Emphasis added.]
...
In summary, I conclude that the valuation method in s.
10(1) is available for inventory held as part of an adventure in
the nature of trade. The valuation method becomes relevant in any
particular taxation year through the calculation of business
income. Business income is calculated according to well-accepted
commercial and accounting principles. According to these
principles the value of inventory is relevant to the computation
of income in years prior to sale since it comprises part of the
cost of sale. According to the same principles inventory is to be
valued at the lower of cost or market value, a specific exception
to the general principle of realization. This exception is well
accepted in the specific instance relevant to this appeal: the
valuation of real estate inventory. ...
[48] There are
certain differences in the fact situations in Friesen and
in these appeals. Notably in Friesen the parties agreed
that there existed an adventure in the nature of trade. However
the Supreme Court of Canada did not simply rely on that agreement
but went on at length to analyze when an adventure in the nature
of trade exists. One of the main factors in the determination is
the intention of the parties at the time of purchase. If that
intention is to sell relatively quickly this points strongly to
an adventure. That was the intention in these appeals. Moreover I
accept the submissions of Counsel for the Appellants on the other
differences in the two cases relative to two of the partners
occupying the Property, the lack of real estate experience and
the level of financing for the Property. These factors are not,
in my opinion, when considered in the light of the submissions of
Counsel for the Appellants, sufficient to hold that the
Friesen decision should not apply.
[49] Toward
the end of this hearing there were references to certain pending
cases in the Supreme Court of Canada on the concept of reasonable
expectation of profit. On further reflection, I do not believe
that that concept is important in the disposal of these appeals.
Consequently I do not feel it necessary to await for the Supreme
Court of Canada to render its judgments.
[50]
Consequently, the appeals are allowed. The Appellants are awarded
one set of costs.
Signed at Ottawa, Canada, this 18th day of January,
2002.
"T. O'Connor"
J.T.C.C.
COURT FILE
NO.:
1999-3734(IT)G, 1999-3738(IT)G,
1999-3739(IT)G, 1999-3740(IT)G
STYLE OF
CAUSE:
Domenica Scenna, Fernando Norcia,
Kerry Norcia and Rita Norcia v. The Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
December 6, 2001
REASONS FOR JUDGMENT
BY:
The Honourable Judge Terrence O'Connor
DATE OF
JUDGMENT:
January 18, 2002
APPEARANCES:
Counsel for the
Appellant:
Paul E. Hawa
Counsel for the
Respondent:
David W. Chodikoff
COUNSEL OF RECORD:
For the
Appellant:
Name:
Paul E. Hawa
Firm:
Berkshire Group
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-3734(IT)G
BETWEEN:
DOMENICA SCENNA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the
appeals of
Fernando Norcia v. Her Majesty the Queen
(1999-3738(IT)G),
Kerry Norcia v. Her Majesty the Queen
(1999-3739(IT)G) and
Rita Norcia v. Her Majesty the Queen
(1999-3740(IT)G) at Toronto, Ontario,
on December 6, 2001, by the Honourable Judge
Terrence O'Connor
Appearances
Counsel for the
Appellant:
Paul E. Hawa
Counsel for the
Respondent:
David W. Chodikoff
JUDGMENT
The
appeals from the reassessments made under the Income Tax
Act for the 1991, 1992, 1993, 1994 and 1995 taxation years
are allowed, and the matter is referred back to the Minister of
National Revenue for reconsideration and reassessment in
accordance with the attached Reasons for Judgment.
The
Appellants are awarded one set of costs for these four
appeals.
Signed
at Ottawa, Canada, this 18th day of January, 2002.
J.T.C.C.
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