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Citation: 2004TCC248
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Date: 20040415
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Docket: 2003-3637(IT)I
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BETWEEN:
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ROBERT DELANEY,
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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
Angers, J.
[1] This is an appeal from an
assessment by the Minister of National Revenue (Minister) of the
Appellant's 1997 taxation year. The Minister has assessed the
appellant's profit from the sale of certain lots namely,
$44,360 as business income instead of a capital gain.
[2] The appellant operates a building
maintenance business. Although most of his income in 1997 and in
subsequent years was from repairing apartments and condos, he
also had income from three rental properties he owned during
those years. He also owned rental properties some 15 years prior
to 1997 and apparently has sold three of the properties in the
last 20 years, including one house and lot adjacent to the lots
in issue in this appeal.
[3] On December 7, 1984, the
appellant, together with a Mr. and Mrs. McBurnie, acquired
what was known at the time as lot No. 9 of civic address
1226 160th Street (the property) in Surrey, B.C. The
McBurnies and the appellant each held a fifty percent interest in
the property. Mr. McBurnie was himself a realtor. A house sat on
that property but given the size of the lot, it was possible to
make a subdivision and thus create another lot. The house was
rented and, on March 28 of the following year, the owners
submitted to the District of Surrey a proposed subdivision plan
of the property in the form of a rough sketch drawn by Mr.
McBurnie. An inter office memo dated May 13, 1985, from the
Assistant Municipal Engineer to the Director of Planning for the
district provided a list of requirements to be fulfilled in order
to approve the proposed subdivision. In a letter dated May 30,
1985, from the Director of Planning to the owners, the conditions
for approval of the subdivision were laid down and they were
quite extensive. It is not necessary to reproduce the
requirements other than to mention that the preliminary layout
was valid for 180 days with final approval to be obtained within
that time period. The preliminary layout shows a lane and a road
that had to be built along the adjoining lots for access and this
required the neighbours' involvement. The owners did not
pursue the matter further at that time and the conditional
approval lapsed.
[4] In September 1986, the McBurnies
sold their fifty percent interest in the property to the
appellant's father. The appellant's father was a tugboat
captain and the property was to provide him with additional
income upon retirement. In 1991, the property was mortgaged and
part of the funds was used to pay back a first mortgage that had
been given at the time of purchase. In 1995, the neighbours
became interested in having the lot subdivided and approached the
appellant and his father with that purpose in mind. An
application to subdivide the property and adjoining lots No. 7
and 8 was submitted for approval to the municipal authorities.
Another mortgage was given by the appellant and his father in the
amount of $85,000 in order to finance the cost of the
subdivision, which was eventually completed in 1997. Upon
completion, the property became known as civic address 1226 160th
Street for lot No. 1 that included the house and civic address
1235 160th "A" street for lot No. 2, which was vacant.
The final subdivision plan is very similar to the original layout
submitted on the first attempt to obtain approval.
[5] The actual work needed to be done
to comply with all the subdivision requirements imposed by the
municipal authorities was very costly and very demanding on the
applicants. In the course of this process, the appellant and his
father acquired an option to purchase the adjoining lot known as
civic address 1245 160th "A" Street, in
order to protect their investment in the subdivision. This was
necessary because the owner of that lot, who had initiated the
project, was having financial difficulties and his ability to pay
his share of the costs was impaired. The option was eventually
exercised by the appellant and his father and immediately
thereafter both vacant lots were sold to a purchaser on April 14,
1997, for $160,000 through a real estate agent. The actual cost
to have the lots subdivided was around $90,000. This amount
covered the engineering fees and the cost for the construction of
streets, sidewalks, sewers and other incidentals. It is the
actual profit from the sale of those two vacant lots that is in
issue. Should it be characterized as income from a business or as
a capital gain? This question is known to be one of mixed law and
fact, which must be resolved on the basis of each particular
case.
[6] Several tests have been developed
by the courts over the years to assist in the determination of
that question. The Federal Court in Happy Valley Farms Ltd. v.
Her Majesty the Queen, 86 DTC 6421 reproduced these tests and
summarized them as follows:
Since income tax was introduced in Canada, a considerable
amount of jurisprudence has arisen from the use of the phrase
"adventure or concern in the nature of trade" used in
the extended definition of business in subsection 248(1) of the
Income Tax Act. This legislative provision states the
"business" includes a profession, calling, trade,
manufacture or undertaking of any kind whatever and includes
"an adventure or concern in the nature of trade but does not
include an office or employment." The most comprehensive
analysis of the meaning of "adventure in the nature of
trade" is found in Minister of National Revenue v.
Taylor, 56 DTC
1125, [1956]
C.T.C. 189 (Ex. Ct.) where the Court set out a number of
tests to be applied to determine when a transaction, which is not
itself a trade or business, can be held to be "an adventure
or concern in the nature of trade". The decision makes it
clear that the question to be answered, in cases of this nature
is, was the asset acquired by the taxpayer as an investment or
was it not. If not, then any gain realized by the taxpayer upon
the sale of the asset is taxable as income. Whether an asset was
acquired as an investment is to be determined by all the facts of
a particular case including, the course of conduct of the
taxpayer, the nature of the subject property, the probability of
the asset producing income without the need to be turned over and
the similarity of the transaction in question to a trading
transaction.
Several tests, many of them similar to those pronounced by the
Court in the Taylor case, have been used by the courts in
determining whether a gain is of an income or capital nature.
These include:
1. The nature
of the property sold. Although virtually any form of property may
be acquired to be dealt in, those forms of property, such as
manufactured articles, which are generally the subject of trading
only are rarely the subject of investment. Property which does
not yield to its owner an income or personal enjoyment simply by
virtue of its ownership is more likely to have been acquired for
the purpose of sale than property that does.
2. The length
of period of ownership. Generally, property meant to be dealt in
is realized within a short time after acquisition. Nevertheless,
there are many exceptions to this general rule.
3. The
frequency or number of other similar transactions by the
taxpayer. If the same sort of property has been sold in
succession over a period of years or there are several sales at
about the same date, a presumption arises that there has been
dealing in respect of the property.
4. Work
expended on or in connection with the property realized. If
effort is put into bringing the property into a more marketable
condition during the ownership of the taxpayer or if special
efforts are made to find or attract purchasers (such as the
opening of an office or advertising) there is some evidence of
dealing in the property.
5. The
circumstances that were responsible for the sale of the property.
There may exist some explanation, such as a sudden emergency or
an opportunity calling for ready money, that will preclude a
finding that the plan of dealing in the property was what caused
the original purchase.
6. Motive. The
motive of the taxpayer is never irrelevant in any of these cases.
The intention at the time of acquiring an asset as inferred from
surrounding circumstances and direct evidence is one of the most
important elements in determining whether a gain is of a capital
or income nature.
While all of the above factors have been considered by the
Courts, it is the last one, the question of motive or intention
which has been most developed. That, in addition to consideration
of the taxpayer's whole course of conduct while in possession
of the asset, is what in the end generally influences the finding
of the Court.
This test has been carried one step further by Canadian Courts
into what has generally been referred to as the 'secondary
intention' test. This has meant, in some cases, that even
where it could be established that a taxpayer's main
intention was investment, a gain on the sale of the asset would
be held taxable as income if the court believed that,
at the time of acquisition, the taxpayer had in mind the
possibility of selling the asset if his investment project did
not, for whatever reason, materialize. In Racine, Demers and
Nolin v. Minister of National Revenue, 65 DTC
5098 (Ex. Ct.), Noël J. provided the following summary
of the secondary intention test at p. 5103:
. . . the fact alone that a person buying a property with the
aim of using it as capital could be induced to resell it if a
sufficiently high price were offered to him, is not sufficient to
change an 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 this
term.
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 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.
[7] The same court is now referring to
those tests as factors to be considered in such a determination.
They are reproduced in Rivermede Developments Ltd. v. R.
[1993] F.C.J. No. 778 and have found their way in Interpretation
Bulletins. As stated by Justice Teitelbaum in Rivermede (above),
none of the factors taken alone is conclusive.
[8] The appellant, in the present
case, is not a stranger to real estate acquisitions and sales.
The evidence shows that apart from his building maintenance
business, he has acquired rental properties and has sold some of
these properties over the years. In the purchase of the property
at issue, he worked in partnership with a realtor. Although the
evidence did not provide details of his partner's involvement
in the real estate business, being a realtor is in itself an
indication that the individual has knowledge of that particular
activity. Although the appellant's intention in buying that
property was to generate rental income, one cannot ignore the
potential, given the size and shape of the lot, to subdivide it,
create a new lot and sell it. In fact, the appellant and his
partner explored that possibility almost immediately after their
purchase by submitting an application for subdivision. The
neighbours' involvement and the numerous conditions imposed
by the District of Surrey hindered their project and caused it to
be put on hold for quite some time. When the neighbours were
finally ready to share in the costs involved in a subdivision
project, the appellant with his new partner became participants.
Even though the final subdivision plan may have differed from the
original one submitted, the intention to subdivide and sell the
vacant lot remained. In this case, I do not believe that the
length of ownership is a factor favouring the position that the
property was purchased as an investment, thereby giving rise to
capital gain. In the present case, it was a question of getting
the owners of the adjoining land to cooperate in order to share
the costs and therefore yield more profit.
[9] The appellant may not have
initiated the actual subdivision that led to the sale of these
lots but his conduct at the time of the purchase in 1985 or
immediately thereafter clearly demonstrates that he and his
partner had subdivision on their minds with the intention of
making a profit from the sale of those lots. The evidence does
not indicate that the project of subdividing and selling was the
result of unforeseen events. It was rather the culmination of
what had been intended. The property was finally put into a
marketable condition through a concerted effort by all those with
an interest in such a venture. The buyout of some of the
co-subdividors and the immediate sale of the lot is also an
indication of risks that are taken in a business venture. I find
that the appellant's conduct is consistent with a business
activity. The initial inquiry about a possible subdivision, the
actual subdivision, the costs involved in subdividing, the
construction of roads and sidewalks and the purchase and sale of
an adjoining lot to save the project all indicate circumstances
within the control of the appellant despite his statement that he
bought the entire lot as an investment. These activities are, in
my opinion, inconsistent with holding property simply as an
investment.
[10] I therefore find that the sale of the
property was a business or an adventure in the nature of trade
and was therefore properly assessed. The appeal is dismissed.
Signed at Ottawa, Canada, this 15th day of April 2004.
Angers, J.
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