Citation: 2010 TCC 206
Date: 20100415
Docket: 2008-3345(IT)I
BETWEEN:
ÉLIAS JAVIER AYALA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
This is an appeal,
under the informal procedure, from the reassessments made March 29, 2007,
pursuant to the Income Tax Act, R.S.C. (1985) c. 1 (5th Suppl.), as
amended (the Act), for the appellant's 2004 and 2005 taxation years.
[2]
The questions at issue
in this case are:
a.
Did the Minister of
National Revenue (the Minister) properly conclude that the profit from the
appellant's disposal of three buildings in 2004 and 2005 was business income
and not capital gain?
b.
Did the Minister
properly disallow the appellant's deduction for depreciation of $11,400,
claimed for the buildings on Wurtèle
Street and Monty Avenue for the 2004 taxation year?
c.
Did the Minister
properly disallow the appellant's expenses of $13,320.35 for the building
on 2nd Avenue and $511.08 for the building on Wurtèle Street?
[3]
The appellant has
worked in the construction business since 1991. Since April 30, 2002, he
has operated a general renovation business, under the name "Rénovation
Ayala" and on February 17, 2005, he incorporated "Rénovation Ayala
Inc." whose economic activities included construction and general
renovations, interior and exterior finishing. From 1996 to 2005 inclusively, he
appellant sold seven buildings, including three sold in 2004 and 2005 by real
estate agents. The appellant did not reside in any of the buildings sold in
2004 and 2005.
[4]
In determining the
appellant's tax liability for the 2004 and 2005 taxation years, the Minister
made the following assumptions in regard to each of the three buildings sold
during those taxation years, as stated at paragraph 13 of the Reply to the
Notice of Appeal:
[translation]
Building located at 9332-9334
2nd Avenue, Montréal, Quebec
(e)
in his income tax return for the 2004 taxation year,
the appellant declared a taxable capital gain of $33,977.58 regarding the
sale of the building; (admitted)
(f)
the building has two rental units; (admitted)
(g)
the appellant acquired the building on May 8,
2003, for $142,000; (admitted)
(h)
to finance the acquisition, the appellant took
out a mortgage for $106,500; (admitted)
(i)
the appellant's main consideration at the time
he acquired the building was to sell it for a profit; (denied)
(j)
the appellant made or had repairs made to the
building for $13,679.65; (admitted)
(k)
the appellant sold the building on January 20,
1004, for $247,000; (admitted)
(l)
the appellant was the owner for approximately
8 months and 14 days; (admitted)
(m)
the appellant did not declare any rental income
for this building; (denied)
(n)
in his income tax report for his 2004 taxation
year, the appellant deducted $37,045 as expenses related to the sale of the
building; (admitted)
(o)
the appellant did not incur certain expenses
referred to in the previous paragraph, for a total of $13,320.35; (no
knowledge)
Building located at 2081-2085
Wurtèle Street, Montréal, Quebec
(p)
in his income tax report for the 2005 taxation
year, the appellant declared a taxable capital gain of $32,262 regarding the
sale of the building; (admitted)
(q)
the building has three rental units; (admitted)
(r)
the appellant acquired the building on March 20,
2002, for $90,000; (admitted)
(s)
to finance the acquisition, the appellant took
out a mortgage of $67,500; (admitted)
(t)
the main consideration for the appellant at the
time he acquired the building was to sell it for a profit; (denied)
(u)
the appellant made or had repairs made to the
building for $6,290.80; (admitted)
(v)
in 2003, a second mortgage for $97,500 was
registered on the building; (no knowledge)
(w)
the appellant sold the building on April 8,
2005, for $175,000; (admitted)
(x)
the appellant was the owner of the building for
approximately 3 years and 19 days; (admitted)
(y)
in his income tax return for his 2005 taxation
year, the appellant deducted $18,475 as expenses related to the sale of
the building; (admitted)
(z)
the appellant did not incur certain expenses
referred to in the preceding sub‑paragraph, for a total of $511.08; (admitted)
Building located at 11970
Monty Avenue, Montréal, Quebec
(aa)
in his income tax report for the 2005 taxation
year, the appellant declared a taxable capital gain of $9,736 regarding
the sale of the building; (admitted)
(bb)
the building has eight rental units; (admitted)
(cc)
the appellant acquired the building on May 14,
2004, for $390,000; (admitted)
(dd)
to finance the acquisition, the appellant took
out a mortgage for $249,999; (admitted)
(ee)
the appellant's main consideration at the time
he acquired the building was to sell it for a profit; (denied)
(ff)
the appellant sold the building on May 9, 2005,
for $435,000;
(gg)
the appellant was the owner of the building for
approximately 11 months and 25 days; (admitted)
(hh)
in his income tax return for his 2005 taxation
year, the appellant deducted $25,528 as expenses related to the sale of the
building. (admitted)
[5]
During the
reassessments, the Minister made the following changes:
|
ADJUSTMENTS
|
|
|
2004
|
2005
|
|
Prior income
|
$92,338
|
$68,011
|
|
Add
|
|
Business income following the disposition of the building at 9332-9334 2nd Avenue, Montréal,
Quebec
|
$80,106
|
|
|
Business income following the disposition of the building at 2081-2085 Wurtèle Street, Montréal, Quebec
|
|
$66,386
|
|
Business income following the disposition of the building at 11970 Monty Avenue, Montréal, Quebec
|
|
$15,122
|
|
Disallowed capital cost allowance
|
$11,400
|
|
|
Subtract
|
|
Taxable capital gain declared by the appellant on the disposition
of the building at 9332-9334, 2nd Avenue, Montréal, Quebec
|
($33,978)
|
|
|
Taxable capital gain declared by the appellant on the disposition
of the building at 2081-2085 Wurtèle Street, Montréal, Quebec
|
|
($32,262)
|
|
Taxable capital gain declared by the appellant on the disposition
of the building at 11970 Monty Avenue, Montréal, Quebec
|
|
($9,736)
|
|
Revised income
|
$149,866
|
$107,522
|
[6]
At the hearing, the
appellant testified and confirmed that he sold his buildings in 2004 and 2005
to be able to purchase a 16 or 20 unit building for his retirement. His project
did not succeed, however, because the real estate agent he had hired to find
this type of building was unable to do so. The appellant also claimed that he
acquired the buildings in question with the intent to keep them for the long
term but had to sell them because they were too small, poorly located or
required too many repairs. The surge in the housing market during the years in
question also motivated him to sell his buildings.
[7]
The appellant's
testimony, however, is inconsistent with his previous statements or
submissions. According to the audit report, information supplied by the
appellant at the initial interview indicate his sole intention was to sell his
buildings for a profit, and he stated he acquired the buildings for the purpose
of repairing them and selling them at a higher price. In response to the first
question at paragraph 3 of the initial interview questionnaire, the appellant
stated he purchased, repaired and sold the buildings. This fact was supported
by the taxpayer's representative in his statements following the assessment
project:
[translation]
Mr. Ayala, as any investor, made
investments in real estate with the intention of earning a profit: selling for
a profit at the appropriate time.
[8]
In his notice of
objection dated June 1, 2007, the appellant stated the following:
[translation]
I do not at all agree with the auditor's decision that gives me
different intentions than I had. I invested [sic] in real estate, I
purchase and sell buildings that is what I did.
[9]
In regard to real
property, the Act does not have a criterion that allows for a distinction to be
made between capital gain and business income (including income from an
adventure in the nature of trade), requiring the Court to refer to the criteria
developed in the case law. However, there is no criterion to determine with
certainty whether a transaction leads to a capital gain or business income.
Each situation is a specific case to be analyzed in light of the facts.
[10]
Among the criteria
developed by the case law, the following are of note:
i.
The nature of the
property sold;
ii.
The length of time the
taxpayer was in possession as owner of the property;
iii.
The frequency and
number of operations carried out by the taxpayer;
iv.
The improvements made
by the taxpayer to the property;
v.
The circumstances
surrounding the sale of the property; and
vi.
The taxpayer's
intention at the time the property was acquired, as indicated by the taxpayer's
actions.
[11]
In addition to these
criteria, Canadian courts have developed the "secondary intention"
criterion that may apply even when the taxpayer's main intention has been
established as making a long-term investment. This criterion applies if, at the
time the property was acquired, the taxpayer had considered the possibility of
selling the property for a profit if the long-term investment project could not
be achieved for whatever reason.
[12]
In the present case,
the appellant is a construction/renovation contractor with experience in the
field and a business history. Between 1996 and 2005 inclusively, he made seven
building sales for profit. He carried out the maintenance and repair work
himself on the buildings sold.
[13]
The appellant admits he
sold two of his buildings within a year and the other after three years. To
sell his buildings, the appellant relied on real estate agents from the Sutton
Group. The sales of the buildings were not the result of unsolicited purchase
offers.
[14]
According to the
evidence, the appellant's method of operations was to purchase buildings,
renovate them and sell them at a profit. At the time the buildings were
acquired, the appellant had at least the secondary intention, if not the
primary intention, of selling them for a profit. The appellant was unable to
show that, in light of the circumstances surrounding the acquisition of the
buildings, he intended to keep them for the long term. On this, the Court
cannot rely solely on the appellant's testimony, which, at any rate, includes
statements that contradict prior statements.
[15]
The review of the
applicable criteria leads to the conclusion that is it more likely that the
appellant acquired the buildings for the purpose of rapid re-sale rather than
as a long-term investment.
[16]
The Minister properly
denied the appellant's depreciation deduction of $11,400, claimed for the
buildings on Wurtèle Street and Monty Avenue because the buildings in question constitute property in inventory and
not capital property.
[17]
The Minister properly
disallowed the appellant's expenses of $13,320.35 for the building on 2nd Avenue and $511.08 for the building on Wurtèle Street. These expenses cannot be allowed because they were
not supported by documentary evidence. The appellant claims these invoices were
lost by his accountant. During the audit the appellant was asked for these
invoices and he did not indicate they had been lost by his accountant. Since
the accountant in question was not called to testify at the hearing to confirm
the loss of these invoices, a negative inference is drawn.
[18]
For these reasons, the
appeals must be dismissed.
Signed at Ottawa, Canada, this 15th day of April 2010.
"Réal Favreau"
Translation
certified true
on this 31st day
of May 2010.
Elizabeth Tan,
Translator
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