Citation: 2013 TCC 69
Date: 20130226
Docket: 2011-2930(IT)G,
2011-2929(GST)G,
BETWEEN:
PURDEEP SANGHA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2011-2932(IT)G and
2011-2931(GST)G
and
AMANJOTE SEKHON
Appellant,
and
HER MAJESTY THE QUEEN
Respondent.
REASONS FOR JUDGMENT
C. Miller J.
[1]
Mr. Sangha and Mr.
Sekhon described themselves as such good friends they considered themselves
brothers. As young men they ventured into the world of commerce by taking advantage
of a hot Vancouver real estate market, acquiring a vacant lot in 2005 with the
intent to resell it at a profit in the near future. They did not do that, but
instead built a house, claimed to have lived in it for a brief period and sold
the lot and the house in early 2006. The Minister of National Revenue
(the "Minister") assessed Messrs. Sangha and Sekhon under
the Income Tax Act (the "Act") on the ensuing gain as
business income from an adventure in the nature of trade. The Appellants
maintain it was a capital gain exempt from tax due to the application of the
principal residence rules. The Minister also assessed Messrs. Sangha and
Sekhon as a partnership under the Excise Tax Act (the "ETA")
for Goods and Services Tax ("GST") collectible of $35,474 with
allowable Input Tax Credits of $27,302, with a net tax owing of $8,172, on
the basis the Appellants were builders and did not use the house principally as
a place of residence.
[2]
What is required is a
detailed examination of the circumstances surrounding the acquisition of the vacant
lot and the occupancy and ultimate disposition of the lot and the house to
determine who is right.
Facts
[3]
The Appellants were in
their mid-20s in 2005. Mr. Sangha worked with Van City Credit Union. Mr.
Sekhon worked as a corrections officer. Over beers, as Mr. Sangha put it, the
two decided to take advantage of a rising Vancouver real estate market, and
consequently drove around Surrey looking for a vacant lot they could flip
within a few months. That appears to be the extent of their preparation.
[4]
They found a vacant lot
for sale on 65th Avenue in Surrey in a new development and bought it
with $10,000 down ($5,000 each) and a mortgage of approximately $190,000. The
deal was set to close in January 2005 but was delayed until March 15, 2005. An
addendum to the contract of purchase and sale stipulated:
The
buyer is/are agree that after completion of this lot purchaser start
construction the buyer will market the home with Kulwant Bassi and Sutton Group
Medallion Reality. The home shall be listed on the MLS at a mutually agree
price for period of not less than six month from the date of listing.
[5]
Before closing the
Appellants had an appraisal done for the property if it were to have a house on
it. That appraisal came in at $487,000. They also had an architect provide
plans for a house, which Mr. Sangha indicated they modified when they decided
they would live in the home, primarily by providing for larger rooms. They also
obtained a building permit at this time, a step Mr. Sangha suggested was
necessary to assist in the sale of the vacant lot. They contacted a builder, a
connection through Mr. Sekhon’s family, to help with that permit application.
The same builder ultimately constructed the house for them.
[6]
In February 2005, Mr.
Sangha and Mr. Sekhon registered for Goods and Services Tax ("GST")
purposes under the category of construction of houses.
[7]
The circumstances
surrounding the decision to build the house to reside in are somewhat murky. Mr.
Sangha suggested that one factor in backing away from selling a vacant lot was
that winter was slow for selling vacant lots, though possession was not until
mid-March (spring in Vancouver). Indeed, Mr. Sangha and Mr. Sekhon
had already taken steps to start the building process. There was no evidence of
steps taken to sell the lot. There is no bright line moment that the Appellants
identified that they made a business decision to not sell the lot but build a
house to reside in. It appears to have just happened.
[8]
The house was built
over the summer of 2005. Both Mr. Sangha and Mr. Sekhon frequented
the property during construction performing odd jobs and basically observing
the progress. Mr. Sangha and his fiancée moved into the property at the end of
September, although the Home Warranty Certificate of Possession listed October
10, 2005 as ready for occupancy. Mr. Sangha testified that he moved in a bed, a
television, a barbeque, a computer and some clothes.
[9]
Mr. Sekhon and his wife
moved in within a couple of weeks of Mr. Sangha. Mr. Sekhon testified that he
brought a couch, a bedroom suite, a coffee table, a bar‑fridge, a
microwave and some kitchen stuff. There was no regular fridge, no stove and no
dishwasher.
[10]
Mr. Sekhon had a friend
from work, Mr. Kalirai, also a Sikh, come to bless the house. Mr. Kalirai
testified that when he did so he saw no furniture and simply an area rug in the
living room.
[11]
On September 22, 2005,
Mr. Sangha paid $222 for listing the house for sale on the website
Usellahome.com. This would be just prior to when he suggests he in fact moved in.
Mr. Sekhon explained that Usellahome.com provided a 360 degree online feature
of the property, which their families in Kelowna could access to see the
property. In September and October, Mr. Sangha also bought House for Sale signs, which he claimed were really for a neighbour whose property was around the
corner. Mr. Sangha suggests that although the signs were put on his and Mr. Sekhon’s
property they had an arrow pointing to the neighbour’s property.
[12]
Mr. Sangha’s and
Mr. Sekhon’s property was listed on MLS on October 27, 2005, though Mr.
Sekhon suggested they did not really want to sell but were helping a realtor
friend who needed a listing. Mr. Sekhon suggested they were also simply testing
the market.
[13]
Mr. Sangha and
Mr. Sekhon both testified that shortly after moving in together with their
respective significant others, things began to fall apart. Mr. Sekhon’s
wife and Mr. Sangha’s fiancée were bickering to the point that Mr. Sekhon
and Mr. Sangha were concerned it would impact on their friendship. The source
of discord was that Mr. Sangha’s fiancée was evidently having an affair with
Mr. Sekhon’s cousin. Mr. Sangha and his fiancée moved out in November followed
shortly by Mr. Sekhon and his wife in early December.
[14]
Mr. Mernagh, the
ultimate purchaser of the property from Mr. Sangha and Mr. Sekhon,
first saw the property around November 19, 2005. He arranged to view it in late
December, though made several visits to the property throughout November and
December, walking around the outside and peering in the windows. He never saw
any sign of activity and described the property as an empty new home. There was
nothing in the home when he got inside. It was in new condition, with stickers
still on windows, no appliances, no window coverings, no fences etc. He
described the condition of the flooring as brand new, with no evidence of
furniture ever having left any marks. He bought the house for $506,000 in
February 2006. From the proceeds, a mortgage of $334,674 was paid out, as were
miscellaneous expenses, leaving a balance due to Mr. Sangha and
Mr. Sekhon of $152,097. Mr. Sangha suggested the mortgage was
transferred over to a new property acquired by Mr. Sekhon. Mr. Sekhon, however,
testified that he acquired no new property but moved in with his in-laws. Mr.
Sangha, when he moved out, had returned to the basement suite that he was
living in prior to acquiring the property.
[15]
The Minister assessed
Mr. Sangha and Mr. Sekhon under the Act for having earned,
after expenses, business income on the sale of the property of $46,864 each.
The Minister also assessed Mr. Sangha and Mr. Sekhon under the ETA
for net tax of $8,172 each from the supply of property.
Issue
[16]
The Parties approached
the income tax issue from different perspectives. The Respondent argued that
the issue was, first, whether the gain on the disposition of the property was
on income or capital account and, only if the latter, whether the principal
residence rules come into play to exempt the gain. The Appellants’ counsel went
directly to the principal residence issue arguing that was the only issue ‑ was
the property the Appellants’ principal residence? I prefer the two-step
approach of the Respondent.
[17]
With respect to GST,
the Appellants position was simply if they won on the income tax matter, they
would win on the GST matters and conversely if they lost on one, they would
lose on the other. The Respondent’s position was that the issue was whether the
Appellants were builders and could only be relieved of GST responsibility if
they could prove they used the house primarily as a place of residence.
Analysis – Income Tax Act
[18]
The case of Happy
Valley Farms Ltd. v. Minister of National Revenue is often
cited for setting out the test for distinguishing income from a capital gain:
14 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.
15 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.
16 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 Nolan v. Minister of National
Revenue, [1965] C.T.C. 150, 65 D.T.C.
5098 (Ex. Ct.) , Noel, J. provided the following summary of the
secondary intention test at 159 (D.T.C. 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.
I will address the above factors.
i)
Nature of property
[19]
A house is not in and
of itself indicative of capital or inventory. It simply depends on the other
circumstances.
ii) Length of period of ownership
[20]
The Appellants did not
live in the property for very long, if at all – a few weeks at most. This
suggests a quick turnaround rather than a long term capital holding. The
Appellants’ counsel pointed out that for purposes of determining principal
residence, the courts (see the case of Solange Palardy v. Her Majesty the
Queen)
have held even if a person occupies a building for a short time, it can be
considered his or her principal residence. This principle though is in the
context of the principal residence issue, the second step in the analysis. For
purposes of determining whether the gain was on capital or income account, this
short holding smacks of income. The Appellants suggest there were reasons for
this, which I will turn to shortly.
iii) Frequency or number of other
transactions
[21]
This was an isolated
transaction and not part of any series of similar transactions. This suggests
capital and not business income though, given the Act’s definition of
business includes an adventure in the nature of trade, there is nothing to
preclude an isolated transaction from being an adventure.
iv) Work expended on or in
connection with the property
[22]
Little work was
expended on the property directly by the Appellants. They made some minor
modifications to the plans and observed the construction process. This factor
is not determinative.
v) Circumstances responsible for
the sale of the property
[23]
The Appellants claim
that the circumstances that led to the sale of property was the falling apart
of the relationship between the two young couples. I weigh this evidence against
the listing of the property on the internet in September, the purchase of For Sale
signs, the lack of furnishings and appliances, and what I will next determine
to be a motive for a quick sale and, I find on balance that the growing
friction in the household was not what triggered a sale. There may have been
tension in the relationship, though I am not entirely satisfied on that point
especially given that Mr. Sangha evidently went on to marry the alleged
unfaithful fiancée, but I am satisfied that Mr. Sangha and Mr. Sekhon had
always intended to make a quick sale, the factor that is key to this matter,
and to which I now turn.
vi)
Motive
[24]
Mr. Sangha and Mr.
Sekhon maintain that yes they intended a quick flip, but only with respect to
the vacant lot. I do not accept this testimony for the following reasons:
- they gave virtually
no testimony other than a weak winter market for such a change in direction.
There was no evidence that the Vancouver market slumped in the winter and they
were beyond the winter period in any event.
- there was no
corroborating evidence from any other family or friends to purport there was a
change of direction by Mr. Sangha and Mr. Sekhon from a quick flip of a
lot to residing in a home.
- they obtained at the
outset an appraisal suggesting they could make significantly more if the lot
was sold with a house on it.
- the contract for
acquiring the property stipulated they were to build.
- they got a building
permit on the acquisition of the property.
- they registered for
GST for constructing a house before acquiring the property.
- their actions after
the acquisition of the property confirmed their ongoing intent to build and
sell quickly:
- they listed the
property for sale before they even stepped foot into it.
-
they acquired For Sale
signs upon possession.
- they never fully moved in (more on
that later)
[25]
I do not have to rely
on any principle of secondary intention to sell at a profit to find the
Appellants were engaged in an adventure in the nature of trade. I conclude
that the Appellants may have first planned on selling the lot at a profit but
almost immediately switched to a plan of selling the lot and a house at a
profit. There is simply too much evidence to suggest otherwise. What started as
a commercial venture remained so.
[26]
The Appellants had
answers for some of the concerns. First, the early internet listing was just to
show their parents in Kelowna the property. In this day and age of iPhones,
iPads and any sort of electronic device for sending photos, I do not accept
that Mr. Sangha and Mr. Sekhon would spend $222 to send parents a video when
the result was their house was listed on the internet as being for sale. The
Appellants’ counsel said the men were short of cash; it therefore makes even
less sense. It is simply not credible.
[27]
Second, the Appellants
say the For Sale signs on their lawn, with an arrow was for the benefit of an
unnamed neighbour. There was no corroborating evidence on this point. On
balance, I am convinced that the signs on their lawn were there to advertise
their own property.
[28]
Third, they argued the
provision in the purchase and sale addendum that they were to build was simply
a standard clause. Well, it would have to be a standard meaningless clause to
accept the Appellants’ interpretation. They were buying in a new development
which clearly required construction of a house.
[29]
Fourth, I do not accept
their argument that their GST categorization was inaccurate. At the time they
registered for GST it appears they were already contemplating building a house.
Even if they registered before they decided to build, I do not accept that they
had no choice but to indicate house construction on their application.
[30]
No, I find too many
convenient answers. I conclude Mr. Sangha and Mr. Sekhon intended to sell
the lot and the house for a profit, and that moving in was a feeble attempt to
rely on the principal residence exemption. They were clearly engaged in an
adventure in the nature of trade from the outset. At the time they closed the
deal for the acquisition of the lot, I find they had it in mind to build a
house and sell at a profit.
[31]
This would be
sufficient to dismiss the Appeals but I wish to address the principal residence
issue, had I found the proceeds were on capital and not income account.
[32]
To qualify as a
principal residence the definition in the Act requires that the house
was ordinarily inhabited by the taxpayers. In this regard, I have the
purchaser, Mr. Mernagh’s, testimony that from mid-November on he visited the
property on several occasions and saw no signs of inhabitants. When he did get
inside he had the impression of a brand new home that had never been occupied.
[33]
The Appellants claimed
they lived in the house for a few weeks but had brought limited furnishings
with them. Even Mr. Kalirai, who went to bless the house, testified that all he
saw was a rug. Even if I accept that the two young couples did spend some time
in the house, I find they did not ordinarily inhabit it. They had no
appliances. They did not even take stickers off the windows. I conclude
that if they did move in, it was simply an attempt to take advantage of the
principal residence exemption without fully intending to ever be the two
couples’ principal residence. Indeed, when they moved out, Mr. Sekhon and his
wife conveniently returned to her parents and Mr. Sangha returned to the
basement suite he was living in previously.
Analysis – Excise Tax Act
[34]
The definition of
builder in the ETA is as follows:
"builder"
of a residential complex or of an addition to a multiple unit residential
complex means a person who
(a) at a time when the person has an interest in the real
property on which the complex is situated, carries on or engages another person
to carry on for the person
…
(iii) in any other case, the construction or substantial
renovation of the complex,
…
but does not include
(f) an individual described in paragraph (a), (b) or (d) who
(i) carries on the construction or substantial
renovation,
(ii) engages another person to carry on the construction or
substantial renovation for the individual, or
(iii) acquires the complex or interest in it,
otherwise
than in the course of a business or an adventure or concern in the nature of
trade,
[35]
Having found the
Appellants were engaged in an adventure in the nature of trade, I conclude they
fall under the definition of builder and are subject to collect and remit tax
on the sale of the property. However, section 3 of Part I of Schedule V identifying
exempt supplies reads:
3. A
supply by way of sale of a residential complex or an interest therein made by
an individual who is a builder of the complex or, where the complex is a
multiple unit residential complex, an addition thereto, if
(a) at
any time after the construction or substantial renovation of the complex or
addition is substantially completed, the complex is used primarily as a place
of residence of the individual, an individual related to the individual or a
former spouse or common-law partner of the individual, and
(b) the
complex is not used primarily for any other purpose after the construction or
substantial renovation is substantially completed and before that time,
unless the individual
claimed an input tax credit in respect of the last acquisition by the
individual of the real property included in the complex or in respect of an
improvement to the real property acquired, imported or brought into a
participating province by the individual after the real property was last
acquired by the individual.
[36]
The Respondent argues
that the house was never used by Mr. Sangha and Mr. Sekhon primarily as their
place of residence and, therefore, the supply is not exempt. Further, if it was
never so used, it is unnecessary to get into the self‑supply rules. I
agree. The Appellants have not proven that the property was used primarily as a
place of residence.
[37]
The GST aspect of this
case was not extensively argued; indeed, Appellants’ counsel effectively
conceded that if I found the property was not a principal residence to Mr.
Sangha and Mr. Sekhon under the auspices of the Act, then they would
also be unsuccessful on the GST front. Is there a difference between principal
residence requiring a property to be ordinarily inhabited for the Act
purposes and the property "used primarily as a place of residence"
for GST purposes? This was not raised. I do not see, however, even if there was
a difference that it may have helped the Appellants. While the requirement of a
property to be used primarily as a place of residence may not require exactly
the same elements constituting a principal residence for the Act
purposes, it still implies, I would suggest, a level of intention to reside,
not just pass through.
[38]
I find the Appellants
always intended to simply sell the property, their presence was temporary, they
had other places they could live and they effectively treated the house as a
hotel not a place of residence as contemplated by the ETA.
[39]
The Appeals under both
the Act and the ETA are dismissed with costs to the Respondent.
Signed at Ottawa, Canada, this 26th day of February 2013.
"Campbell J. Miller"
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