Vogan v. The Queen, 2004 TCC 657

__________________________________________________________________

Appeal heard on September 14, 2004 at Thunder Bay, Ontario

__________________________________________________________________

JUDGMENT

The appeal from the reassessment made under the Income Tax Act for the 1996 taxation year is allowed, with costs, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 28th day of September, 2004.

Sheridan, J.

REASONS FOR JUDGMENT

Sheridan, J.

[1]      The Appellant, Mr. Sam Vogan, appeals from a reassessment of his 1996 taxation year in which the Minister of National Revenue determined that the profit from the sale of a house he owned was business income. Counsel for the Respondent argued that the sale of this property was but one in a series of transactions leading to the conclusion that Mr. Vogan was in the business of constructing homes for sale; accordingly, the profits realized from the sale of the house ought to be taxable as income from business. Mr. Vogan's position is that the house was his principal residence and the proceeds from its sale are therefore exempt from taxation pursuant to paragraph 40(2)(b) of the Income Tax Act.

[2]      Mr. Vogan lives in Dryden, Ontario. At all material times, he was in full-time employment as an 'A' status millwright. Before acquiring this certification he worked at various jobs in the pulp and paper mill but at no time was he employed in home construction nor does he have any training in that field. What skills he has he acquired on his parents' dairy farm, and at the mill from bricklayers, electricians and other skilled tradesmen. In 1995, Mr. Vogan purchased the property that is the subject of this appeal, a lot at 33 Clearwater Crescent in Dryden. He started construction in late summer and moved into the new house in December 1995, having equipped it with all major appliances and moved in his furniture and personal effects. In March 1996, he sold the property.

[3]      This was not Mr. Vogan's first real estate venture. Listed below are the other transactions in which he was involved between 1992 and 1998:

The gains from the sales of 29 Clearwater Crescent and 11 Gamble Drive were reported as income from business following an audit of Mr. Vogan's activities; there was no evidence that the audit was the catalyst for his having done so. As for 143 Lakeside Drive and 49 Clearwater Crescent, following the reassessment, the Minister determined that the sales of these properties did not give rise to income from business. Finally, the disposition of 20 Gamble Drive, Mr. Vogan's residence for some eight years, occurred after the audit and is not directly relevant to the present case.

[4]      It is in this context that the 33 Clearwater Crescent transaction must be analyzed. Both counsel referred the Court to the test in Happy Valley Farms Ltd. v. The Queen[2] as a guide to determining whether or not the profits from the sale of the property were income from business:

1.      Nature of the property sold. - Real estate property is equally capable of being capital or the subject of trade.

2.      Length of period of ownership. - The sale occurred four months after the time of occupancy; seven months after the purchase of the lot. In considering the inferences to be drawn from this fact, I am guided by the caution of Rouleau, J. who stated that "...there are many exceptions..." to the rule that "...property meant to be dealt with is realized within a short time after acquisition". The present case is distinguishable from the case cited by the Respondent, Isaaks v. Canada[3] where the Appellant bought and resold three properties in quick succession. Although Mr. Vogan owned five homes between 1992 and 1998, the length of ownership varied. Nor do I accept the argument advanced by counsel for the Respondent that the fact that there remained some work to be done (either when he moved into or, at the time of sale of) 33 Clearwater Crescent is indicative of an intention to stay only a short time. Mr. Vogan was doing the construction himself while working full-time; living "on site" would speed up the finishing process. It was costing him money to stay elsewhere until the house was finished. He did not have any dependents living with him whose needs might have dictated a more advanced state of completion. It is reasonable that, under these circumstances, he would move into the house at his earliest opportunity. Finally, as he had made no efforts to advertise 33 Clearwater Crescent, the timing of the appearance of an unsolicited buyer was not something he controlled or instigated.

3.      The frequency or number of other similar transactions by the taxpayer. -Mr. Vogan was involved in five transactions between 1992 and 1998. The sale of 33 Clearwater Crescent straddles the divide between the Minister's determination that the sales of 143 Lakeside Drive and 49 Clearwater Crescent did not generate income from business, and Mr. Vogan's reporting as business income the profits from the sales of 29 Clearwater Crescent and 11 Gamble Drive. Although there were five transactions in total, of that number the first two were without tax consequences; the last two gave rise to taxable business income. To which group does the sale of 33 Clearwater Crescent belong? While it teetered perilously close to being a disposition of business property, there is insufficient evidence to tip the balance in favour of income from business. The sale of 33 Clearwater Crescent marked a transitional point in the nature of this series of transactions, but on balance, I am satisfied that it was not similar to the disposition of the last two properties which gave rise to income from business.

4.      Work expended on or in connection with the property realized. - As the builder, Mr. Vogan put both money and labour into 33 Clearwater Crescent; the test for determining business activity, however, is whether such efforts were to bring "...the property into a more marketable condition during the ownership or if special efforts are made to attract purchasers...". There was no evidence that Mr. Vogan put any thought into what a notional prospective buyer might want; his uncontradicted evidence was that, as with the first two homes, he built entirely to his own personal specifications. He chose vaulted ceilings and a sunken living room for his first home at 143 Lakeside Drive. When he left 143 Lakeside Drive for a smaller, more affordable property, he found to his dismay the more modest design of 49 Clearwater Crescent did not allow for a vaulted ceiling, a feature to which Mr. Vogan is particularly attached. When he began his next house, Mr. Vogan sought a new draftsman who would be able to correct this deficiency. Counsel for the Respondent dismissed vaulted ceilings as not "special enough" to rank with the preferences of the successful Appellant in Freer v. Her Majesty the Queen[4], who "... had the front door personalized with a door knocker...". Surely this is an entirely subjective consideration, one man's lava lamp being another man's Picasso. The point is that, rightly or wrongly, Mr. Vogan's was determined to have a vaulted ceiling for his own sake, not to enhance the saleability of 33 Clearwater Crescent. As for the second prong of this factor, the making of "special efforts are made to attract purchasers", Mr. Vogan's uncontradicted evidence was that he made no effort to advertise the sale of or to list 33 Clearwater Crescentwith an agent, either officially or unofficially.

5.      The circumstances that were responsible for the sale of the property. - I accept Mr. Vogan's evidence, unchallenged on cross-examination, that he sold 33 Clearwater Crescent because he received an unsolicited offer. Counsel for the Respondent urged the Court to discount his stated reasons, arguing that if a person truly does not intend to sell when he acquires a property, then there is no possibility that he might later be moved from that intention by an attractive offer. In rejecting this argument, I am guided, not only by how at odds such a conclusion is with the behavioural norms of a capitalist society, but also by the words of Noël, J. in Racine et al v. Minister of National Revenue, where he held that "... the fact alone that a person buying a property with the aim of using it as capital could be induced to resell if a sufficiently high price were offered to him, is not sufficient to change the 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 that term"[5].

6.      Motive.- What was Mr. Vogan's intention at the time he acquired 33 Clearwater Crescent? The finder of fact is directed in Happy Valley to have regard to the surrounding circumstances as well as the taxpayer's own story of his intentions. Counsel for the Respondent further cited the following paragraph from Racine et al v. Minister of National Revenue[6] where Noël, J. set out the secondary intention test:

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 the 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.

This paragraph, however, is qualified by the immediately preceding paragraph to which I made reference in the discussion under Factor 5 above. The Racine "motivation" test was applied in Isaaks to conclude that the Appellant's course of conduct of buying and reselling in quick succession established his intention to treat the property as a business venture. Counsel for the Respondent argued that Mr. Vogan was in an analogous position: that his history of building homes and later selling them leads to the inference that he had always had the intention (either primary or secondary) of selling 33 Clearwater Crescent. I disagree. In Isaaks, the taxpayer was in the construction business and it is clear from his reasons that Bonner, J. simply did not accept what he described as the Appellant's "flimsy" explanations for why he resold the properties. In the present case, Mr. Vogan was in full-time employment in an unrelated field. The properties were held for various lengths of time before being sold, and in more varied circumstances then in Isaaks. Finally, I find credible the reasons given for why Mr. Vogan decided to sell each property and in particular, 33 Clearwater Crescent. His testimony was corroborated to some extent by Mr. Komm, the agent who had acted for him in some of the transactions. Although counsel for the Respondent referred to an audit in her argument, no officials were called who might have shed additional light on these transactions as revealed by the audit process; nor was Mr. Vogan shaken in his position on cross-examination.

[5]      As stated above, I am of the view that this transaction comes very close to the line in Mr. Vogan's progression of establishing himself in the business of constructing and selling homes. I am unable to conclude, however, that when he acquired the lot at 33 Clearwater Crescent, Mr. Vogan had the intention of building a house for quick resale. On the evidence presented, I am satisfied that his intention was to build himself a home which he was occupying as his principal residence until its sale in March 1996. The appeal is allowed, with costs, and the reassessment referred back to the Minister for reassessment on the basis that at the time of its disposition, 33 Clearwater Crescent was his principal residence within the meaning of the Income Tax Act and did not amount to an adventure in the nature of trade giving rise to business income.

Signed at Ottawa, Canada, this 28th day of September, 2004.

Sheridan, J.