David H. Deacon v. Her Majesty the Queen, [1995] 1 CTC 2476, 95 DTC 793

Brulé J.T.C.C.:-These two appeals involve the same appellant but were commenced at a time when the provisions of the Tax Court of Canada Act were changed, hence two separate designations. The appeals were heard on common evidence and involve the taxability of certain pieces of property either on account of capital or as adventures in the nature of a trade. The 89-21700 appeal is in respect of the 1985 and 1986 taxation years while 93-481G is for the 1987 and 1988 taxation years.

Facts acts

The appellant sought a waterfront property near the city of Halifax to build a house. The best arrangement he could make was to purchase 5.02 acres of land at Shad Bay, Nova Scotia for $120,000. This piece of land was greater than required for a residence so the appellant had the property subdivided into four lots with the intention of selling two lots, numbers 1 and 4 because these were superfluous to his needs and he needed to make the sales as without doing so he was financially unable to proceed to the construction of the house after arranging for the purchase of the acquired large property.

Subdivision of the property was carried out in September 1985 and the end lots of the property (1 and 4) were sold in October 1985, each for $35,000 thus realizing a profit from the cost price. There was no dispute as to the profit, it being agreed that on lot 1 such was $7,041.30 while on lot 4 it was $7,027.30.

The appellant commenced construction of his home on lot 2 in the fall of 1985. By 1986, in the summer, the appellant realized he was short of funds for the house and because the footings were close to the boundary of lots 2 and 3 it became necessary to redivide these two lots into lots 2A and 3A, enlarging lot 2 slightly and reducing lot 3. Once this was approved, lot 3A was sold in an arm’s length transaction for $40,000 and showed a net profit of $9,563.19.

In October 1986, the appellant decided to sell the uncompleted house and such was listed for sale. No buyer came forth and when an occupancy permit was obtained in December 1986, the appellant moved into the house. More money was spent on the premises and finally in July 1988 the house and lot 2A were sold for $180,000. This resulted in a net loss on disposition of $52,822.82.

In addition to the above, the appellant claimed certain expenses in his 1988 taxation year alleging such were necessary to his earning commissions as a salesman for a stock brokerage company.

Issues

There are three issues presented in these appeals: I. Should the sales of lots 1, 3A and 4 be on account of capital? II. How should the appellant’s loss on the sale of lot 2A be treated? III. Should the expenses claimed in 1988 be allowed?

Appellant's position

Dealing with issue I counsel for the appellant stated that the evidence showed that his client was looking for a property on which to build a house. The only property available was too large with the result, after subdivision, he wanted to sell part to offset the costs of the purchase so that the house could be built.

In support of his argument that the sales should not be classified on income account seven cases were referred to as follows:

1. Rudolph P. Cohen, Liquidator of G.M.G. Building Corporation Ltd. (in voluntary liquidation) v. M.N.R., [1970] C.T.C. 386, 70 D.T.C. 6244 (Ex. Ct.);

2. Jean-Marc Champoux v. M.N.R., [1970] C.T.C. 603, 71 D.T.C. 5001 (Ex. Ct.);

3. Jarvie Holdings Ltd. v. The Queen, [1980] C.T.C. 525, 80 D.T.C. 6395 (F.C.T.D.);

4. H. Fine and Sons Ltd. v. The Queen, (F.C.-unreported) [1984] F.C.J. 816;

5. Snell Farms Ltd. v. The Queen, [1991] 1 C.T.C. 5, 90 D.T.C. 6693 (F.C.T.D.);

6. Crystal Glass Canada Ltd. v. The Queen, [1989] 1 C.T.C. 330, 89 D.T.C. 5143 (F.C.A.);

7. Ratna Arya v. The Queen, [1994] 1 C.T.C. 2911, 94 D.T.C. 1526 (T.C.C.).

Reference is made below to these cases in relation to the present appeals.

Issue II involves the treatment of the loss suffered by the appellant when selling lot 2A on which the home was constructed. Counsel suggested that the respondent should treat all the sales in the same manner and cannot say some were on capital account, such as the house and lot 2A, while others such as the sale of lots 1, 2 and 3 A were on income account. It is the position of the appellant that the house property should be treated as part of his inventory after October 1, 1986 when the appellant determined to sell the property. Costs incurred after that date should be treated as an addition to the appellant’s inventory. The Court was referred to the case of Ivan Glavanovic v. M.N.R., [1986] 1 C.T.C. 2150, 86 D.T.C. 1082 (T.C.C.), in support of the appellant’s position.

As to issue III automobile expenses claimed by the appellant should be allowed as they were incurred by him as a commission salesman. While Form T2200 was not filed by the appellant when filing his tax return for 1988 counsel indicated that such was not necessary. He quoted from Black’s Dictionary as to the word "with" which in the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the ’’Act") requires the filing of the form with the tax return. Further, counsel indicated that filing of the Form T2200 with the Minister of National Revenue ("Minister") as was done here at a later date was the same as filing such with Revenue Canada. Reliance was placed on the case of Charles Stokes v. The Queen, [1993] 1 C.T.C. 2066, 93 D.T.C. 201 (T.C.C.), wherein a later filing of a Form T2200 was accepted by the Court.

Respondent's position

Counsel took the position that in issue I, the appellant not only wanted to sell lots 1 and 4 immediately after purchase but took steps to sell and make a profit. This is indicative of a trading intention. The following cases in support of this argument were presented:

M.N.R. v. James A. Taylor, [1956] C.T.C. 189, 56 D.T.C. 1125 (Ex. Ct.);

Andrew S. McKinney v. M.N.R., [1970] Tax A.B.C. 866, 70 D.T.C. 1551;

Gordon Papley and Kenneth Papley v. M.N.R., [1984] C.T.C. 2676, 84 D.T.C. 1562 (T.C.C.).

As to lot 3 which became 3A, the appellant held this for sale, which became necessary to build his house, and consequently the profit made should be on income account.

Respecting issue II, counsel indicated that the house being built eventually became the appellant’s principal residence. Even though it was put out for sale while the appellant was living in it, there was no change by the appellant and hence when sold it was deemed to be the principal residence of the appellant. As a result no loss could be claimed by him in accordance with the provisions of the Act.

As to the expenses sought to be deductible in issue III, the respondent merely claimed that the appellant had not followed the proper procedure respecting the filing of Form T2200 with his tax return and so was not entitled to any deductions. Reference was made to John Meeuse v. The Queen, [1994] F.C.J. No. 1439.

Analysis

These appeals involve the buying and selling of land, and such are usually referred to as trading cases. Essentially each is determined on its facts and is not a question of law, but the latter assists in making a determination whether or not sales of such land should be on account of capital or income.

In these appeals several cases, supra, were advanced by the appellant’s counsel in support of issue I. The Court believes these can be distinguished from the facts in the present case. In Cohen there was a necessity to buy more land than needed, as here. The surplus was not sold for some three years after the purchase when circumstances dictated a sale. The Champoux case did not indicate the land was bought with any intention of making a profit on the sale of the surplus. The appellant did nothing to promote the sale and so was not considered a trader. In issue there was an unsolicited offer. The Fine case indicated that originally the property was purchased as an investment. The Snell case involved an option to buy and the Court indicated such was the relevant time, not when the option was exercised. Such time determined the motivation of the purchaser. The Federal Court of Appeal held in Crystal Glass that there was no secondary intention at the time of purchase and hence the gain on the sale was on capital account. In Ary a a sale took place some three years after purchase and the Court in analyzing the appellants’ actions found no reason to doubt them and hence were allowed a profit on capital account.

While the cases, supra, cited by the respondent all have merit in making a determination it is sufficient to refer to the case of Normac Investments Ltd. v. M.N.R., [1969] C.T.C. 468, 69 D.T.C. 5326, subsequently confirmed by the Supreme Court of Canada, [1970] C.T.C. 325, 70 D.T.C. 6234. In the trial division, Kerr J., at page 477 (D.T.C. 5332), said to escape taxation as income on a profit it was necessary for the appellant to show that the purchase was made as an investment. This case advanced the proposition that where at the time of acquisition a resale is envisaged the profits are taxable as income.

Hence the profits made on the sale of lots 1, 4 and 3A are on income account.

The question in issue II is whether or not the house and lot 2 were turned into a business. This does not seem to be the case. As soon as the appellant could get a occupancy permit he resided in the house. In the Glavanovic case, supra, cited by the appellant the house was rented and thus became inventory and quite different from the facts in this case. After the house and lot 2 were put up for sale the appellant continued to live there. This confirmed his original intention to live in the property and have it as his principal residence. When there was a turn of thinking the appellant continued to live there until the property was sold. There is no loss allowed on a principal residence. The loss incurred cannot be deducted.

Issue III is more of a technical situation in that the appellant did not conform to the provisions of the Act. Deductions were claimed for automobile expenses as well as other items. It is clear from the amounts claimed that the appellant did not understand the requirements. Paragraph 8(1)(f) of the Act deals with salesman’s expenses, and has to be read in conjunction with subsection 8(10). The latter subsection reads as follows:

An amount otherwise deductible for a taxation year under paragraph 1(f) or (h) or subparagraph l(i)(ii) or (iii) by a taxpayer shall not be deducted unless the taxpayer files with his return of income for the year a prescribed form signed by his employer certifying that the conditions set out in such provision were met in the year in respect of the taxpayer.

Counsel for the appellant suggested that the word "with” referring to the return in this subsection did not necessarily mean "at the same time” Black’s Dictionary was cited to show “with” was a word denoting a rela- tion of proximity, contiguity, or association. In Words & Phrases the word ’’with" is described as being "at the same time". This is the intention of the Act, and the fact that the Form T2200 was filed with the Minister and not with Revenue Canada is not helpful to the appellant’s case. While the case of Stokes, supra, would seem to assist the appellant one must realize that in the Stokes case the facts were quite different. A pattern for the type of salesman involved had been established and in exception to a late filing of a Form T2200 was made. This is quite different in the present case wherein the appellant failed to carry out the statutory requirement and therefore is not entitled to his expenses.

The appeals are hereby dismissed with costs to the respondent.

Appeals dismissed.