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Citation: 2004TCC41
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Date: 20040112
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Docket: 2001-759(IT)G
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BETWEEN:
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ANTHONY REALE,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Rip, J.
[1] The issues in this appeal by
Anthony Reale from an assessment of income tax for 1995 in which
the Minister of National Revenue disallowed a business loss on
the disposition of a property located in Florida are:
(a) whether the appellant and
his wife carried on business in partnership for the acquisition
of a property in Boco Raton, Florida which they sold in
May, 1994;
(b) if there was a partnership,
whether the partnership incurred a business loss on the
disposition of the Florida property; and
(c) whether the appellant is entitled
to deduct in 1995 the loss, if any, from the purported
partnership between himself and his wife.
[2] Mr. Reale was not represented by
counsel.
[3] Before 1992, Mr. Reale was the
principal shareholder and operator of Dominion Builders Inc., a
construction company carrying on business in Toronto. In the late
1980's and early 1990's the Toronto construction trade
was depressed, according to Mr. Reale, and he "considered
the possibility of doing some work in the United States; as in
Canada".
[4] Mrs. Reale's parents lived in
Florida about six months a year. On a visit to his in-laws in
Florida in 1989, Mr. Reale and his wife decided to purchase
an "old property" in Boca Raton, Florida ("Florida
property"). The property included a three-bedroom
residence, and a swimming pool. It was located on the
inter-coastal waterway, about a 20 minute drive from
Mr. Reale's in-laws. To finance the purchase of
the Florida property, the Reales mortgaged their home in Toronto,
borrowing $250,000 from the Royal Bank of Canada, and
"raised as much capital as we could". They registered
"Dominion Builders" as a business name in Florida.
[5] On or about December 15, 1989 the
Reales acquired the Florida property for US$350,000. Their
intention, Mr. Reale reiterated, was to renovate the property and
resell it at a profit. In 1999, Mr. and Mrs. Reale
demolished all of the residence on the property, except for one
wall and began extensive construction essentially constructing a
new residential building. Mr. Reale stated that the property was
available for occupancy and sale by 1991, although renovations
were not wholly completed until the property was sold on
May 17, 1994 for US$700,000 (C$959,000). The residence
was vacant at all times until the sale.
[6] Mr. Reale stated that neither he
nor Mrs. Reale resided on the property. During construction, when
he was in Florida, he either slept in a sleeping bag or stayed at
Mrs. Reale's parents' home. When Mrs. Reale and
their children visited Florida, they would stay at Mrs.
Reale's parents' home. The children were university
students at the time. Mrs. Reale visited Florida "on
numerous occasions to supervise renovations but always stayed
with her parents", Mr. Reale insisted.
[7] During construction, Mr. and Mrs.
Reale "put in" to the property $500,000 to $600,000 of
their "own money". They defaulted on the mortgage of
their home to the Royal Bank of Canada and their house in Toronto
was sold for $450,000.
[8] Mr. Reale testified that he listed
the Florida property for sale. He was unable to produce any
copies of listing agreements because, he said, the realtor was
out of business and one of the agents was deceased. He said he
had three separate agents trying to sell the house.
[9] Dominion Builders Inc. constructed
commercial buildings since 1983; it had no experience in
residential construction. Mrs. Reale had no construction
background but looked after the corporation's accounting and
administration. Business records were maintained for Dominion
Builders Inc.
[10] Mr. Reale maintained receipts from
suppliers of building material to the Florida property. These
were produced at trial. All the invoices were issued in 1990.
Some of the invoices refer to the
"Reale residence". Mr. Reale replied that in the
construction industry contractors, architects and engineers refer
to the personal residence even if it is not a personal residence.
He insisted that "this does not mean the house was built for
us". As far as reference to Dominion Builders is
concerned, that was the name he registered to carry on the
business, he explained.
[11] In cross-examination, Mr. Reale asked
"why would I build a $350,000 home in Florida" when
business in Toronto is "lousy?"
[12] Mr. Reale acknowledged costs of
construction of the Florida property may have been high. He
explained that he was "frequently away" from Florida
and was not "hands on"; this, caused expenses to rise.
He declared that he built the residence without any particular
prospective customer in mind. He had offers to sell before May,
1994, but they were "low".
[13] I do not agree with the Minister that
Mr. and Mrs. Reale did not carry on a business in partnership
with respect to the acquisition, renovation and disposition of
the Florida property. While it is true that Mr. Reale did not
maintain books and records that one would reasonably expect to be
maintained for such a business, he has maintained many, if not
all, of the invoices sent to him during the construction of the
residence on the property. I accept his testimony that he did not
acquire the property as a residence for his family. The money
invested and the source of the loans are not compatible with the
acquisition of a family home, in particular when one's main
source of income, Dominion Builders Inc., is in a bad way.
[14] Mr. Reale was in the construction
business. While he had no prior experience in building homes, he
did have experience, as he said, in negotiating construction
contracts. He knew how to build, he knew the vagaries of the
construction industry, at least in Toronto. If he and Mrs. Reale
did not carry on a business in the ordinary sense of the word,
they did enter into a venture in the nature of trade, a
"business" for purposes of the Act. Indeed, if
Mr. and Mrs. Reale had made a profit on the
disposition of the property, I am pretty certain that the CCRA
would have enforced its right as a partner of Mr. and Mrs.
Reale and assessed their profit as income from a business.
[15] I also find that Mr. and Mrs. Reale
carried on the business in partnership. The Florida property was
registered in their names as tenants in common. I accept Mr.
Reale's testimony that the purpose of the venture was to make
a profit.
[16] However, this is not the end of the
matter. There remains to decide the year of disposition and,
thus, the year the loss was incurred.
[17] Near the end of the trial, bearing in
mind the date the property was sold, May 17, 1994, and the year
in issue, 1995, I queried Mr. Reale as to the fiscal year of the
partnership. He was unable to reply. I requested him to provide
me with some information concerning the partnership's year
end and when he forwarded an explanation, I reconvened the trial
to afford Mr. Reale the opportunity to clarify his evidence and
for the respondent to cross-examine. When the trial
continued Mr. Reale's accountant, Alex Dey, testified on
behalf of the appellant.
[18] Mr. Reale's 1995 income tax return
was produced. The income tax return for 1995 is dated March 24,
1997, 11 months after it ought to have been filed. The Statement
of Business Activities, House Construction, that is, the
construction sale of the Florida property, is a report for the
period May 1, 1994 to April 30, 1995 and is part of the income
tax return. The sale of the Florida property is reported in this
return and a business loss is claimed.
[19] On May 13, 1997, two months after the
1995 income tax return was filed, Mr. Reale filed a "T1
Adjustment Request" for 1995 to the effect that:
Construction business reported in wrong year. See also T1-ADJ
for 1994. Request carried forward from 1994.
The "Statement of Business Activities", House
Construction for 1995, was adjusted so that the reporting period
for the business was January 1, 1995 to December 31, 1995. The
Adjustment Request states:
Year end previously assigned in error as April 30, 1995 but
should have been December 31, 1994, business income properly
included in the 1994 year and now excluded from 1995.
The final year of the business is acknowledged on the
Statement of Adjustments, to be 1994.
[20] Mr. Dey discussed the constant
tardiness by Mr. Reale in filing his own and his
corporation's income tax returns; usually the returns were
filed only after the tax authorities demanded that they be filed.
Mr. Reale's personal 1994 income tax return was filed on
time - this appears to be the only return filed on time - but the
sale of the Florida property was not reported in the return.
[21] Mr. Dey then had no contact with Mr.
Reale, except by telephone twice a year, until late 1996 when Mr.
Reale brought to him notices of demand to file his 1995 income
tax return. Apparently Mr. Reale told Mr. Dey that he had tax
outstanding for 1991, 1992, 1993 and 1994 and wished to carry
back the loss from the disposition of the Florida property. Mr.
Dey asked Mr. Reale for information, including invoices, sale
documents, etc. about the Florida property to determine the loss.
He realized that Mrs. Reale "was involved in this
property" and believed that the property, which was
registered as "tenants in common", was owned by Mr. and
Mrs. Reale as partners.
[22] By the time Mr. Dey was able to review
the sale of the Florida property, he said, the time for objecting
to the 1994 assessments had expired. Therefore, in Mr. Dey's
view, the only way to have its loss claimed in 1994 was to file a
Request for an Adjustment. However, Mr. Dey realized the Notices
of Adjustment could be disallowed and, if so, he would have no
recourse: there were no books or "normal" records one
would expect to see in a normal business operation and these
deficiencies may result in a denial of the request.
[23] At the time, the income tax returns of
Mr. and Mrs. Reale for 1995 had not been filed. He prepared and
filed their income tax returns for 1995 and chose an April 30,
1995 year end for the business. On assessment, he thought he
would be able to object and attempt to convince the fisc to have
the loss from the Florida property included in computing income
for 1994, allowing a carry back of losses to 1991. If he were not
successful in convincing the tax authorities, the loss would
remain in 1995, but would not be available to be carried back as
far as 1991.
[24] The notices of assessments for 1995
were dated April 17, 1997. Mr. Reale then filed the Request for
Adjustment referred to earlier to convince the
Canada Customs and Revenue Agency ("CCRA") to
recognize a December 31 year end for 1995. This would create a
December 31 year end for the partnership for all years, so that
for 1994, the partnership's year would end on December 31.
The disposition would then have occurred in 1994. This was Mr.
Dey's plan.
[25] The CCRA rejected the Request for
Adjustment. The CCRA also disallowed the loss for 1995 on the
basis the appellant did not carry on a business with respect to
the Florida property; that the Florida property was personal
property.
[26] Respondent's counsel submits that
any partnership of Mr. and Mrs. Reale with respect to the Florida
property dissolved on May 17, 1994, the date of disposition of
the property, and for purposes of the Act, the fiscal
period ended immediately before May 17, that is, May 16, 1994:
subsection 99(1) [1]. Mr. Reale does not appear to have made any election
under subsection 99(2) to prevent the cessation of the year
end.
[27] On the facts before me, it is clear
that once the Florida property was sold, Mr. and Mrs. Reale's
venture to make a profit on the construction or renovation of
residential (or other) property in Florida came to an end and
their partnership ceased to exist. The partnership retained no
other property and carried on no other business.
[27] In Ontario, the province in which the
Reales reside, the dissolution of partnerships is governed by
section 32 of the Partnerships Act[2]. The relevant provisions
of the Partnerships Act are common to similar statutes
throughout Canada. Section 32 provides that a partnership is
dissolved, among other reasons, "if entered into for a
simple adventure or undertaking, by the termination of that
adventure or undertaking". The adventure to acquire and sell
the Florida property was, it is clear, a "one-shot"
affair and it ended on the sale of the property. Only if it were
successful, would Mr. Reale have considered other residential
construction projects. In any event, once the property was sold,
Mr. and Mrs. Reale had no intention to continue to
carry on the construction business in common with a view to
profit.[3]
[29] I agree with the respondent: the
partnership ceased to exist on May 17, 1994 and the
year end was May 16, 1994. The Florida property was disposed of
in the partnership's 1994 tax claim and the loss was incurred
in that year, not 1995.
[30] The Crown will have to succeed in the
defence of the assessment. My jurisdiction under the Act
is only to consider the taxation year appealed, no other.
Unfortunately this leaves Mr. Reale in a situation where he has
won the battles that he carried on business in partnership with
his wife and that they incurred a business loss on disposing of
the Florida property but he lost the war: he cannot deduct his
share of the loss in 1995.
[31] To a great extent Mr. Reale is a victim
of his tardiness in filing his tax returns. Strangely enough, the
only return he filed on time was for 1994 and he omitted to claim
the loss on the Florida property. Had he attended to his tax
matters on a timely basis, perhaps he would have been in time to
object to 1994 in order to correct the situation or file a waiver
to permit the Minster to assess beyond the normal assessment
period. However, although there is no requirement for the CCRA to
act on a waiver, a subsequent judgment, like this one, would have
some moral weight in convincing the Minister to reassess
1994.
[32] I am not ordering Mr. Reale to pay
costs; to do so would be rubbing salt into an unfortunate wound
and, on the facts of this appeal, would not be in the interest of
justice.
[33] The appeal for 1995 is dismissed.
Signed
at Ottawa, Canada, this 12th day of January, 2004.
Rip, J.
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