Citation: 2011TCC62
Date: 20110201
Docket: 2010-2795(IT)I
BETWEEN:
ROMANO A. GIUSTI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan J.
[1]
The issue in this appeal is
whether the proceeds of the sale of a condo owned by the Appellant, Romano
Giusti, are on account of capital or income. The Minister of National Revenue
reassessed on the basis that in disposing of the property located at 988 Richards Street in Vancouver (“Richards Street Condo”), the Appellant was engaged in
the business of selling it and added profits of $30,831 to his 2007 income.
[2]
The Appellant had the onus of
proving wrong the assumptions upon which the reassessment was based. For the
reasons set out below, I am not persuaded by his evidence and the appeal must
be dismissed.
Facts
[3]
In making the reassessment, the
Minister made the following assumptions of fact:
a)
since 2004, the Appellant was a real estate
salesman earning commission income;
b)
as a real estate agent, the Appellant had
knowledge and expertise in the real estate market;
c)
the Appellant was involved in the purchase and
the sale of condominium properties located in the Vancouver BC area as follows:
|
Address
|
Purchase
Date
|
Sold
Date
|
Purchase
Price
|
Mortgage
|
Selling
Price
|
Gross
Profit
|
|
#201-330 E 7th
Vanc
|
Nov./94
|
Oct./01
|
|
|
|
|
|
403-3199 Willow
St. Vanc
|
Nov./01
|
May/02
|
|
|
|
|
|
1220 Braeside, West Vanc
|
Nov./02
|
Aug./03
|
|
|
|
|
|
304-1888 York
Ave. Vanc
|
Apr. 28/05
|
Sept. 6/06
|
255,750
|
187,000
|
375,000
|
119,250
|
|
1001-1005 Beach
Ave. Vanc
|
Oct. 16/06
|
Dec. 20/06
|
368,582
|
230,000
|
380,000
|
11,418
|
|
308-988 Richards
St. Vanc
|
Nov. 7/07
|
Jun. 6/07
|
410,900
|
280,000
|
499,000
|
88,100
|
|
603-1188 Quebec
St. Vanc
|
Jan. 31/07
|
|
577,150
|
438,750
|
|
|
|
706-1188 Quebec
St. Vanc
|
Jan. 2008
|
Aug. 14/08
|
640,000
|
|
825,000
|
185,000
|
d)
the Appellant lived in the properties before he
sold them;
e)
in filing his returns for the 2006 and 2007
taxation years, the Appellant did not report the sale of any of the properties
sold in the 2006 or 2007 taxation years;
Richards Property
f)
the Richards Property was purchased on
assignment in April, 2006;
g)
the purchase of the Richards Property was
completed in November 2006;
h)
the Richards Property was listed for sale on
March 30, 2007;
i)
the Richards Property was held by the Appellant
for seven months;
j)
the Appellant did not ordinarily inhabit the
Richards Property;
k)
the Richards Property was not the Appellant’s
principal residence;
l)
the Appellant did not purchase the Richards
Property for the purpose of making it his principal residence;
m)
the Appellant purchased the Richards Property
for the purpose of reselling it;
n)
the Appellant received business income from the sale of
the Richards Property calculated as follows:
|
Proceeds
|
|
$499,000.00
|
|
Less: Purchase price:
|
$423,952.00
|
|
|
Other expenses:
|
44,217.00
|
$468,169.00
|
|
Business income
|
|
$
30,831.00
|
o)
the Appellant failed to report business income of
$30,831.00 earned from the sale of the Richards Property in his 2007 taxation
year (the “2007 Business Income”).
[4]
The Appellant represented himself
and was the only witness to testify. He took issue, in particular, with
paragraphs 11(j), (k), (l) and (m) of the Reply to the Notice of Appeal. His
evidence was that he purchased the Richards Street Condo as his personal
residence with the intention of making it his permanent home. He explained that
he sold the property some seven months after moving in because it did not live
up to his expectations. His concerns arose soon after purchasing the property,
in June, 2006, when he became aware of media reports regarding litigation
between the developer and the marketer of the Richards Street Condo. He put in
evidence articles that he had found on the internet describing their legal
battles.
[5]
When he finally moved into the
condo in November 2006, he was distressed to discover that there were no condominium
bylaws in place, there were street noises from a nearby ambulance depot and
bars, the building itself was noisy and full of irresponsible renters and pets who
made nuisances of themselves, and his parking space turned out to be too small
to accommodate his vehicle. He also discovered that the condo had not been
properly finished: the baseboards were poorly made and ill-fitting, the carpet
was frayed, and the faucets were leaking. A carpenter before he became a
realtor in 2004 and doubting that the developer would remedy the problems, the
Appellant undertook the repairs of these deficiencies himself.
[6]
All of this convinced the
Appellant that he had got himself into a bad deal and early on, he began to
plan his exit strategy.
[7]
The Appellant also addressed the
assumed facts in paragraph 11(c) showing the history of his ownership and sale
between 1994 and 2008 of eight Vancouver properties. This evidence will be dealt with in
detail below.
Analysis
[8]
In his thorough review of the case
law, counsel for the Respondent relied on the test established in Happy
Valley Farms Ltd. v. Minister of National Revenue for determining whether a
sale is an adventure in the nature of trade or on account of capital. Briefly
paraphrased, the following considerations emerge from the Happy Valley Farms
decision:
1. the nature of the property sold;
2. the length of the period of ownership of the
property;
3. the frequency or number of other similar
transactions by the taxpayer;
4. the work expended to make the
property more marketable or to attract purchasers;
5. the circumstances responsible for the sale of
the property; and
6. the taxpayer’s motive or
intention at the time he acquired the property.
[9]
Counsel for the Respondent argued
that when analyzed in accordance with these factors, the evidence showed that
the proceeds generated by the sale of the Richards Street Condo were business
income. For the reasons set out below, the Appellant had failed to persuade me
otherwise.
[10]
Looking first at the nature of the
property, I agree with counsel for the Respondent that this factor is
non-determinative; by its very nature, a condo may be either a capital asset or
inventory in a business.
[11]
Turning, then, to length of
ownership, when coupled with the frequency and number of other similar real
estate transactions, the short duration of the Appellant’s ownership of the
Richards Street Condo supports the conclusion that it was an item of inventory.
Having committed to the purchase of the property in April 2006, the Appellant
took possession in November 2006 and a scant seven months later, he had sold
it. Such a short period of ownership is typical of his other property holdings:
as shown in paragraph 11(c) of the Reply to the Notice of Appeal, between
October 1997 and August 2008, the Appellant bought and sold eight properties in
Vancouver. The first, a condo on East
7th Street he held
for seven years; it clearly falls outside of the pattern of the subsequent
transactions. As for the seventh property, 603-1188 Quebec Street, while shown in the assumptions as not having been
sold, the Appellant testified that indeed, it too had been sold, approximately
a year after its purchase in disappointing circumstances. Leaving aside, then,
the East 7th Street condo, in the space of seven years, the
Appellant acquired and disposed of seven properties
in which he lived for 6, 9, 16, 2, 7, 12 and 8 months, respectively, making for
an average duration of 8.5 months in each property. Absent convincing evidence
to the contrary, that pattern is consistent with the activities of someone
engaged in the business of “flipping houses”.
[12]
The Appellant attempted to justify
his activities: he sold the first property on Willow Street, he said, because
he wanted to be closer to downtown. However, his stated intention was not borne
out by his actions as the next property he purchased, a house on Braeside, was
in West Vancouver, even farther from downtown than the condo he had
left. His reason for selling the Braeside house was that after he and his
girlfriend broke up, he found the West
Vancouver suburbs dull and lonely. So he
purchased the York Avenue condo in the downtown area; it was sold some 16
months later because the building was old and the condo had water leakage
problems. Oddly, at the same time he was selling that property the Appellant,
in his capacity as a real estate agent, was helping his parents with the purchase
of another condo in the same building. I found unpersuasive the Appellant’s
explanation that his parents’ condo did not have water leakage problems because
of its different “exposure”. In any case, he preferred to be in a new building
and that was what attracted him to the property in question, the Richards
Street Condo. It was promoted as a two-storey loft in the downtown core. A
friend of his had purchased a unit there and on paper, at least, it seemed very
promising. After selling the Richards Street Condo (for the reasons considered
in greater detail below), he bought a one-bedroom condo, #603-1188 Quebec Street; a year later, it was sold and he had purchased another unit in the
same building, #706. The Appellant said he moved from #603 to #706 because the
latter had a better view and an extra bedroom which meant he could have a
roommate to help out with the mortgage payments. He did not explain why after
effecting such improvements he then sold #706 some eight months later.
[13]
Considered against that
background, I found equally unconvincing the Appellant’s reasons for his
seven-month sojourn at the Richards Street Condo. The articles documenting the
litigation between the developer and the marketer of the Richards Street Condo
did not greatly assist the Appellant as it is not at all clear to me that he
was aware of them in the summer of 2006; even if he were, I doubt that they
influenced his decision to abandon what he said had always been his plan, to
make the Richards Street Condo his permanent home.
[14]
It also strikes me as odd that any
prospective buyer but, more particularly, the Appellant, who was a real estate
agent by profession and an experienced condo owner, would purchase a unit in a
condominium without first checking into the status of its bylaws. His
explanation was that, to the extent he thought about it at all, he believed
that because the building was still under construction the bylaws would not yet
have been drafted. Even at the hearing, he seemed puzzled as to why examining
the bylaws or inquiring into their existence would be a matter of concern. I
find this attitude difficult to reconcile with his other testimony blaming the
lack of bylaws for the problems caused by unrestricted renters and pets. It
seems likely to me that the reason the Appellant was not particularly
interested in the bylaws was that he knew when he purchased the Richards Street
Condo that he would be selling it soon and the rules and regulations would be
of no real consequence to him.
[15]
The Appellant’s other reasons for
selling the Richards Street Condo had to do with the noise levels in the area
and in the building. I accept his evidence that he could not have known until he
moved in that the windows would be of lower quality than specified and that
more noise infiltrated the building than he had anticipated. However, I do not
find convincing his story that he did not expect the neighbourhood itself to be
so noisy. While he may not have been aware of the ambulance depot, it strikes
me as unlikely that the Appellant, a real estate agent, would not have been
familiar with the character of Richards
Street which, apparently, has many bars
and night spots. Even if he did not know the area, I find it hard to believe
that if he intended to make the Richards Street Condo his permanent residence,
he would not, at the very least, have walked the neighbourhood to see if it was
conducive to his lifestyle – especially given his earlier testimony that he had
fled the quiet of suburbia for the more active downtown area.
[16]
Finally, there is the question of
the shoddy workmanship the Appellant discovered upon moving into the Richards Street
Condo in November 2006. Certainly, he would not be the first to buy a condo
from a floor plan and be disappointed with the final product. Such a discovery
could well be a reason for wanting to get rid of the property. However, the
Appellant’s evidence in this regard must be weighed against what motivated him
to correct such deficiencies. That is considered under the next factor, whether
the work expended on the Richards Street Condo was done to make it more
marketable and to attract buyers.
[17]
The Appellant said that he had
made the improvements to the Richards Street Condo deficiencies for his own
sake: as a carpenter, he was bothered by the sloppy work on the baseboards; as
one who suffers from allergies, he wanted to replace the carpet with hardwood
flooring. There was insufficient tile in the bathroom to adequately protect the
drywall. That all makes sense as far as it goes. In his direct evidence, the
Appellant gave me to understand that as soon as he moved in he set to work on
remedying these defaults in construction. On cross-examination, however, it
became clear that such work really began after the Richards Street Condo had
been listed with one of the Appellant’s co-workers sometime in early 2007. Its
description was posted on the Vancouver Multiple Listing Service
and in February 2007, an open house was held to promote its sale. The
Appellant’s memory of all this was a little foggy but in any event, it did not sell
as quickly as he had hoped. Interestingly, invoices from a tiling company
and Home Depot show that the materials for the improvements were
purchased the following month from which it follows that the work could not have
commenced until roughly mid‑March. The condo then sold at the beginning
of April. In my view, it seems more likely that the Appellant made the
improvements to the Richards Street Condo, not for his own benefit but rather,
to enhance his chances of realizing his original intention of selling as soon
as possible at a profit.
[18]
This brings us to the
circumstances of the sale. As counsel for the Respondent pointed out, the
present matter was not a case of an unsolicited offer to purchase which incited
the owner to change his original intention of holding the property over the
long term. Here, almost from the moment he moved in, the Appellant actively
promoted the sale of the Richards Street Condo by listing it with an agent,
advertising it and spreading the word to his colleagues that it was on the
market. The improvements that he made to it were intended to maximize its
potential for resale.
[19]
Finally, what was the Appellant’s
intention when he acquired the Richards Street Condo? When all of the evidence
above is considered together, I am satisfied on a balance of probabilities that
the Appellant purchased the property with a view to immediate resale. I agree
with him that any buyer is going to have in the back of his mind the prospect of
selling at a profit; that hope is not enough in itself to turn a capital asset
into inventory. But here, I regret to say that I am simply not persuaded that
the Appellant ever intended to acquire the Richards Street Condo as a permanent
residence.
[20]
For the reasons set out above, the
Appellant has not satisfied his evidentiary burden of proving wrong the basis
of the Minister’s reassessment; accordingly, the appeal of the 2007 taxation
year is dismissed.
Signed at Vancouver, British Columbia, this 1st day of February, 2011.
“G. A. Sheridan”
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