Rand v. R., [1996] 2 CTC 2410, 97 DTC 435

Beaubier J.T.C.C.: — These matters were heard together on common evidence by consent of the parties on February 1 and 2, 1996 at Vancouver, British Columbia. Both Appellants testified. The Appellants called an expert psychiatrist, Dr. Kerr.

Mr. White claimed a capital gain on the sale of 1132-1142 Powell Street, Vancouver. Mr. White and Ms. Rand treated the sale of 2458 West 7th Avenue, Vancouver, as their principal residence and of 2460 West 7th Avenue as a sale of a capital asset. They were both reassessed on the basis that the purchases and sales of all of these properties were adventures in the nature of trade resulting in business income. They appealed. The Appellants are a married couple.

Ms. Rand is a lawyer in Vancouver who was admitted to the bar in 1981. She has not practised in real estate and she has limited knowledge about the field of real estate. Mr. White is a business man. He has two years of college and two years of university. He became a licensed realtor in 1980 and sold property in the Vancouver area until 1984 when he acquired his first property.

Assumptions 8(b) to (m) inclusive in the Reply to Mr. White’s Notice of Appeal read:

(b) at the time of acquisition of the property located at 1132 Powell Street (“1132 Powell”), Vancouver, B.C., which subsequently became 1132-1142 Powell Street, the Appellant had in mind the possibility of resale at a profit and that possibility was a operating motivation for the acquisition of 1132 Powell;

(c) at the time of acquisition of the property located at 2456 West 7th Avenue (“West 7th Avenue properties”), Vancouver, B.C., which subsequently became 2458 and 2460 West 7th Avenue, the Appellant had in mind the possibility of resale at a profit and that possibility was an operating motivation for the acquisition of the West 7th Avenue properties;

(d) the Appellant and his spouse each held a 50 per cent interest in the West 7th Avenue properties;

(e) the Appellant’s conduct in acquiring, developing and selling 1132 Powell and the West 7th Avenue properties was that of a developer or trader in properties;

(f) the Appellant’s involvement with 1132 Powell was an adventure in the nature of trade;

(g) the Appellant’s involvement with the West 7th Avenue properties was an adventure in the nature of trade;

(h) at the time of its disposition, 1132 Powell was a trading asset and not a capital property of the Appellant;

(i) at the time of their disposition, the West 7th Avenue properties were trading assets and not capital properties of the Appellant and his spouse;

(j) the Appellant was not in a financial position to hold 1132 Powell and 2460 West 7th Avenue as rental properties, and reside in 2458 West 7th Avenue; (k) the Appellant’s profit from the sale of 1132 Powell and his share of the profits from the West 7th Avenue properties was on income account;

(l) prior to his involvement with 1132 Powell and the West 7th Avenue properties, the Appellant had worked as a real estate agent involved in both residential sales and commercial leasing;

(m) from 1984 through 1992, the Appellant was involved either directly, or indirectly through a wholly owned corporation, in the purchase, development and sale of a number of properties both before and after his involvement with 1132 Powell and the West 7th Avenue properties.

Assumptions 7(b) to (h) inclusive in the Reply to Ms. Rand’s appeal read:

(b) at the time of the acquisition of the property located at 2456 West 7th Avenue (“West 7th Avenue properties”), which subsequently became 2458 and 2460 West 7th Avenue, the Appellant had in mind the possibility of resale at a profit and that possibility was an operating motivation for the acquisition of the West 7th Avenue properties;

(c) The Appellant and her spouse each held a 50 per cent interest in the West 7th Avenue properties;

(d) the Appellant’s spouse was the active person involved in the transactions with the West 7th Avenue properties;

(e) the actions and intentions of the Appellant’s spouse are imputed to be those of the Appellant;

(f) the Appellant’s involvement with the West 7th Avenue properties was an adventure in the nature of trade;

(g) the Appellant’s share of the profits from the sale of the West 7th Avenue properties was on account of income;

(h) at the time of their disposition, the West 7th Avenue properties were trading assets and not capital properties of the Appellant and her spouse;

The Appellants’ involvement in properties germane to these appeals is described in Exhibit A-3 which reads:

Properties Purchased by John White

	Closing Date of Purchase or
Property Address	First Offer	Agmt. for Sale	Closing Date of Sale
1225 Brunette Ave.
Coquitlam	(Owned by Parents)	August 1984	September 1985
930 Sherwood Avenue
Coquitlam	September 1985	December 3, 1985	December 19, 1986
333 Clarke Drive
Vancouver	August 8. 1986	December 17, 1986	December 1. 1987
1132 Powell Street
		June 1, 1987	March 31, 1988
Vancouver	January 24, 1987

Properties Purchased by Dellis Rand and John White

Property Address First Offer Closing Date of Purchase Closing Date of Sale

2456 W. 7th Avenue

Vancouver September 11, 1987 January 15, 1988

became

2458 W. 7th Avenue

Vancouver May I. 1989

and

2460 W. 7th Avenue

Vancouver May 31, 1989

Properties Purchased by John White

Closing Date of Purchase or

Property Address First Offer Agmt. for Sale Closing Date of Sale

1271 Homer Street

Vancouver

(100% Field Ownership) March 31, 1988	May 8, 1988	May 2, 1989
1250 Hamilton Street
Vancouver
20% John White and 80%
Field Ownership	April 1989	January 1992
		(45% interest in property
		sold	to	L intall
		Development & Financial
		Corp. resulting in Field
		owning the other 55% and
		John White owning no
		part.)

Mr. White says the reasons he sold the Powell Street property in 1988 were:

1. He and Ms. Rand were designing the West 7th Avenue houses.

2. Management problems of all the tenants of Powell Street were becoming too much for him.

3. The Powell Street tenants were complaining because of the lack of parking.

4. The stress of the problems was aggravating his migraine headaches. Ms. Rand testified that in 1988-89 Mr. White’s migraine headaches were occurring weekly.

However, Mr. White testified that one of the reasons that he sold the Sherwood Avenue property in December 1986 was the migraine headaches which he was having as the result of tenant concerns respecting that property.

The Brunette property in Coquitlam was acquired by Mr. White and its suites were enhanced by him whereupon he sold it. The Sherwood property in Coquitlam was bare land upon which he built small bay warehouses. He rented them and then sold it. He did the same thing with the Clarke Drive property in Vancouver. The Powell Street property in Vancouver had existing buildings which he added to, bayed and enhanced. He rented the bays to a number of small commercial tenants.

The Brunette property was purchased from Mr. White’s parents with nothing down. After Brunette, the purchase or construction of each property required the sale of the preceding property and a large mortgage or mortgages. The “long-term” mortgages were for a term of one to three years. Most leases that are in evidence were for one year. Powell Street had, at best, marginal positive income on a cash flow basis. There is no evidence as to the other properties’ income or cash flow. There is no evidence that Mr. White had any other source of income and the properties’ rents did not yield sufficient surplus income to provide him with much of a personal income. He states that the purpose of acquiring these properties was to develop a rental income stream for himself. However, the pattern is that the source of any net income or expectation of income was from the sale of the properties themselves.

Mr. White stated that the Powell Street property was sold due to stress and the consequent migraine headaches that he suffered. His counsel elicited expert evidence respecting this from Dr. Kerr. Dr. Kerr’s report echoed what Mr. White told him in an interview shortly before the hearing. Dr. Kerr never treated Mr. White. The facts in evidence temper Mr. White and Dr. Kerr’s allegations that Mr. White’s migraine headaches were a cause of the sale of the Powell Street property. Mr. White also testified that he had suffered migraine headaches due to tenant concerns at the time that he sold the Sherwood property. Migraine headaches have been a continuing malady of Mr. White since his childhood. From August 1989 until the date of trial he has developed property through corporate operations. The evidence is that the financing and development of all the properties has been done on a very close margin. Tenant or development problems are part of the business. The only way to avoid that kind of stress is to get out of it. But Mr. White never did. The Court does not believe Mr. White when he states that migraine headaches were a cause of the sale of the Powell Street property. It should be noted that Mr. White now takes medication which alleviates this medical problem.

All of the indicia relating to Powell Street are those of an adventure in the nature of trade: a previous pattern of similar deals, the purchase of bare property or property with marginal improvements followed by construction, large financing, rapid filling of the property with doubtful tenants, short term leases, marginal cash flow from the rent at full occupancy, listing of the property or originating of the sale by Mr. White and tenant problems as the result of marginal property, marginal tenants or marginal location. The Powell Street purchase and sale was an adventure in the nature of trade. Its indicia are almost classic, and they are coupled with the fact that there is no satisfactory evidence respecting a source of income upon which Mr. White supported himself. Mr. White’s counsel proposed to the Court that Mr. White’s transactions until the Powell Street sale was completed were done to improve his rental portfolio in order to provide him with an income stream. However the Court accepts the Respondent’s suggestion that the only possible income stream Mr. White obtained from the properties was from their sales rather than the rent.

Mr. White’s appeal of the assessment of the proceeds from the sale of the Powell Street property as income is dismissed.

The Appellants are both in their mid-40’s. They were married on October 3, 1987. They first met on June 1, 1987. By July 1, they decided to get married and began living together at Ms. Rand’s rented house at 2436 West 7th Avenue, Vancouver. They married at the earliest date they could arrange a place to be married.

The West 7th Avenue property had different characteristics from Mr. White’s other deals. It was just down West 7th Avenue from where Ms. Rand had lived for five years in a residential neighbourhood in the Kitsilano area of Vancouver. The Appellants were engaged and out walking when Ms. Rand told Mr. White that 2456 West 7th Avenue was a house in the neighbourhood that she liked the most. He could see the possibility of buying the property, renovating the house, building an infill house on the large lot, living in one and renting the other. Mr. White said, “Why don’t we see if we can get it?” He decided on a price to offer and she accepted his decision based on what they thought they could afford. They bought it for $210,000. Ms. Rand cashed in all of her RRSP’s, a gross sum of $38,000, to help buy it. Mr. White put in the rest of the total of between $53,000 and $60,000 cash. He borrowed $60,000 against the Powell Street property and they got a $310,000 construction loan. They acquired 2456 West 7th Avenue, strata titled it, built an approximately 1,600 square foot house on Lot A of the strata title and moved into it in June, 1988. Lot A was readdressed to become 2458 West 7th Avenue. They finished a modest renovation of the existing house, renumbered it 2460 West 7th Avenue and advertised it for rent in September. Ms. Rand reviewed the tenants herself, and rejected many as unsuitable, until they found the right tenants and leased 2460 West 7th Avenue.

In August, 1988, Mr. White was having trouble developing a property at 1271 Homer Avenue, Vancouver. He could only get a permit for a one-storey building and he had applied for and projected a three- storey building and arranged for tenants in order that he could have a viable development. At the same time Ms. Rand’s law firm was facing a reduced income flow to commence in the next few months which materialized. (At one point her income, normally approximately $4,000 per month, was down to $2,000 per month.) There is no evidence that Mr. White had an income flow. Their mortgage on the two houses on West 7th Avenue had a monthly principal and interest payment of $3,037.24.

Mr. White stated that they had to sell one of the West 7th Avenue properties. Ms. Rand testified about this, “I wasn’t too pleased to have to sell my home. But if he’s not happy, I’m not happy.”

On August 23, 1988 they listed 2458 West 7th Avenue for $279,000. On September 28, 1988 they listed 2460 West 7th Avenue for $249,000, and they took it off the listing when it rented. On September 28, 1988 they amended the 2458 listing and reduced it to $264,000. On January 10, 1989 they listed 2458 with another realtor for a price of $279,000 for a three- month listing. They both sold in May 1989.

In January 1989 the Appellants learned of the Hamilton Street property which Mr. White and his corporation acquired in May 1989 on a 20 per cent - 80 per cent ownership basis. They decided that the corporation would build a condominium. They would live in the top floor condominium and the corporation would rent the other floors. It was with this expectation that they sold 2458 and 2460 West 7th Avenue in May 1989. Ms. Rand’s shares of the proceeds were taken by Mr. White and put into the Hamilton Street property. Hamilton Street got into financial trouble and 45 per cent, including all of Mr. White’s share, was sold to a third party. Eventually the entire project was sold without the Appellants ever living in it. Mr. White’s corporation placed the proceeds of that deal into another property near Steveston, which it has not yet developed.

Ms. Rand’s testimony about the West 7th Avenue property was credible in its entirety and it is accepted in its entirety. Assumptions 7(d) and 7(e) in the Reply to her appeal are rebutted by her testimony. Insofar as they or similar assumptions in the Reply to Mr. White’s appeal respecting West 7th Avenue exist, they are also rebutted by the complete acceptance of Ms. Rand’s testimony respecting West 7th Avenue.

In the Court’s view Mr. White wanted Ms. Rand to have her favourite property as their home. They both intended to build their home and have a rental property on the purchased land to assist in the mortgage payment. The evidence is that they are the only houses that Mr. White ever developed. It is the only property of which there is evidence that Ms. Rand ever owned. As it turned out, it is the only home they have owned since their marriage. The Court has no doubt that 2458 was their principal residence and that 2460 was a capital property whose income was intended to help pay for their home.

Ms. Rand’s testimony that when they purchased 2456 West 7th Avenue, they intended to live there and to rent a second residence on the property is credible. It is exactly what a couple in their mid- 30’s would plan to do if they were starting a family and lacked the full means to acquire a home in Vancouver. Mr. White’s experience made the project feasible. She wanted a home in her neighbourhood for their family and he would have been anxious to please her. Rather than Mr. White influencing Ms. Rand in this acquisition, it is the Court’s view that Ms. Rand influenced Mr. White.

It appears to the Court that by August 1988 Mr. White’s marginal operations had caught up to him. There was no testimony as to why he did not sell Homer Street as bare land with a one-storey permit. Nor is there any evidence that Ms. Rand put this option to him. She testified that she accepted his statement that one of the West 7th Avenue properties would have to go. Her actions in personally reviewing the prospective tenants for 2460 in September 1988 indicate to the Court that she still considered 2458 as her home in September. The listings and subsequent sales in May 1989 merely confirm the financial pressures that both of them were under and the testimony that they expected to reside in their own condominium on the Hamilton Street property which was acquired in April 1989.

Thus, the Court accepts the evidence of the Appellants respecting West 7th Avenue. It was acquired to make into a home and to rent one house so as to help pay off the mortgage. There is no evidence of any secondary intention at the time of its acquisition. The possible collapse of both of their sources of income made the disposition of the West 7th Avenue property necessary and frustrated their original plan. It was capital property and 2458 West 7th Avenue was their principal residence.

The appeals of both of the Appellants are allowed respecting the assessments of the West 7th Avenue sales.

The trials were held jointly on common evidence by consent of the parties. Ms. Rand is awarded party and party costs respecting her appeal. Mr. White’s success is divided. No costs are awarded respecting Mr. White’s appeal.

Appeals allowed in part.