Latulippe v. Agence du revenu du Québec, 2019 QCCA 2177

In December 2006, the three individual taxpayers acquired, for $392,130 and in equal co-ownership, a rental building with eight apartments towards their retirement. However, the co-owner who was responsible for managing the property proposed the property’s sale in the summer of 2011 due to increased family responsibilities. They were advised by a real estate broker that they would receive an enhanced price if they sold the property as eight co-ownership units, which was made possible by entering in January 2012 into an “indivision agreement” at a modest cost. The units were sold in 2012 for a total of $1,065,900 to separate purchasers, which was $200,000 or $300,000 more than would have been realized had the property been sold as a single rental property.

They reported capital gains. The ARQ (but not CRA) reassessed on the basis that the gain that arose after the indivision agreement was business income.

In reversing the Court of Quebec, and in finding that the taxpayers realized capital gains, Rochette JCA noted the absence of any connection between the taxpayers’ employment and real estate, their absence of prior dealings in real estate, their initial intention of generating additional income on retirement and the decision to sell being brought on by the birth of a daughter to one, the low cost in dividing into co-ownership units and the low commercial risk associated with this step, and the sale of all the units occurring within the same year. He stated (at para. 64, TaxInterpretations translation):

[T]he simple fact of wishing to obtain a better price on the sale of the immovable is insufficient for concluding that a taxpayer was engaged in an adventure or concern in the nature of trade; a taxpayer engaging in a project carrying risk or having a commercial character is not necessarily carrying on a business … .

Three individuals who had purchased an eight-unit rental property in co-ownership, determined around 4 ½ years later to sell the property due to a change in personal circumstances of one of them. A real estate broker advised that they could achieve a higher price if they instead sold the eight units separately. This was accomplished by entering into an “indivision agreement,” which meant that each purchaser purchased as a co-owner but with rights of exclusive access to a particular unit. As a result of effectively subdividing the property, they increased their aggregate proceeds by around 25%.

They reported capital gains. The ARQ (but not CRA) reassessed on the basis that the gain that arose after the indivision agreement was business income (i.e., on the basis that the property at that time had been converted to inventory).

In finding that the taxpayers realized capital gains, Rochette JCA noted the absence of any connection between the taxpayers’ employment and real estate or of prior dealings in real estate, their initial intention of generating additional income on retirement and the decision to sell being brought on by changed circumstances, the low cost in dividing into co-ownership units and the low commercial risk associated with this step, and the sale of all the units occurring within the same year.