Timothy C. Morris v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2607

Rip, J.T.C.C. (orally):—The facts are not an issue, your credibility is not questioned by the Minister of National Revenue. The facts are that you were employed as a tax accountant in 1989 with the Royal Bank of Canada. You resided in Brossard and your wife worked as a real estate agent in the surrounding area of Brossard.

In October 1989, you and your wife entered into agreements with a numbered company, 109722 Canada Inc., to purchase three lots on Rougemont Street in Brossard, which you described as the last area in that town which was wooded or forest.

Notwithstanding the purchase price in that area was $12 a square foot, you negotiated a price at $11.50 a square foot. In addition to the purchase price you would also have to pay an amount for services which have been determined by the city subsequent to the time you entered into the agreement.

The agreements were entered into on or about October 9, 1989. You paid $15,000 with the offer and the balance to be paid on closing was $110,447.75.

Between October 1989 and the date originally set for closing, that is June 30, 1990, the economy deteriorated. It is your evidence, uncontradicted, that in October 1989 the economy was booming, land sales were active. But six months later, the economy was not at all what one could consider as good. Interest rates had increased, you also indicated that high interest rates exacerbated the economic situation with respect to property values and that by June 1990 vacant residential lots and residential properties as such had fallen in value since October.

You subsequently negotiated an extension for the closing of the transaction of the property in issue from June 30, 1990 to June 30, 1991. In the meantime, you and your wife acquired the two other properties. Your wife has since sold her property, the other property you own is still for sale.

Sometime in 1991 you made a decision that it would not be cost effective to continue with this transaction. In addition to the $11.50 per square foot you paid, you would have to pay on closing the goods and services tax on the acquisition of the property plus the service costs of the Town of Brossard. Now the property you agreed to acquire, which is in issue, has an area of 10,900 square feet. And it is your evidence that the service charges are approximately a dollar a square foot.

You indicated that you could have borrowed the money to close the transaction from your employer, the Royal Bank of Canada, but your employer would require that you make monthly payments on account of interest and capital and you preferred not to have the burden of monthly payments. You preferred that, if possible, the vendor finance the transactions, and it is on this basis that you and your wife purchased the other two properties.

You also stated in your evidence that it was your reading of the vendor that he would not have agreed to let you out of both transactions and therefore you negotiated with him to get out of the agreement in issue, and this was accomplished by giving up your rights to the $15,000 you gave on making the offer and nim giving you complete release.

Now, the issue is whether this loss of $15,000 was on account of capital or income. Now, as I have indicated to counsel for the Minister, Me Levasseur, in my view, a real estate transaction commences at approximately at the time when the agreement of purchase and sale is entered into and is completed when the transaction itself closes, that is, when the purchaser becomes the beneficial owner of the property.

Me Levasseur submitted to me that the reasons for judgment of the Tax Appeal Board per Mr. Fordham, in Broderick v. M.N.R., [1969] Tax A.B.C. 676, 69 D.T.C. 495, are on point and I agree with him. They are. . .the facts in both appeals are very similar. I shall read the D.T.C. headnote in the Broderick case:

The appellant solicitor entered into a partnership which was formed for the purpose of acquiring land for use as a trailer camp. The partners intended to dispose of any surplus land not required for the proposed camp site. An agreement to purchase the land was executed and under its terms a deposit was payable by the partners, the appellant's share, which he duly paid, being $1,500. When only the partner with experience in operating tourist camps withdrew from the partnership without raising the substantial amount of money required to complete the purchase, the remaining partners abandoned the transaction thereby forfeiting their shares of the deposit. The appellant sought to deduct the $1,500 as a business loss in his 1966 income tax return. He contended that the partnership was formed with a view to embarking on a profit making venture, (i.e., the operation of the trailer camp and speculation) and added that had the land been acquired and sold on a speculative basis, the profit would have been taxed. The Minister disallowed the deduction of the loss on the ground that it was an outlay of capital . . . Mr. Fordham dismissed the appeal stating that. . . . The alleged loss was an outlay of capital. . . . In Mr. Fordham's view. . . . In the circumstances, there was no income earning process discernible. Furthermore, the outlay had nothing to do with the appellant's profession. The appellant had "embarked on what only bid fair to be an adventure in the nature of trade, out it never materialized", because the purchase of the land was not completed.

With respect, I cannot agree with the conclusion of Mr. Fordham. In my view, a transaction commences at the latest when a prospective purchaser obtains the means to acquire the property, that is by the agreement of purchase of sale.

Once the agreement is executed, the person has a right to acquire the property. He, that person, has the right in Quebec, as in provinces of the Common Law, to transfer the agreement. And in the circumstances, if Mr. Morris had transferred the agreement to purchase and sale at a profit, this would have been a venture in the nature of trade and the profit would have been taxable as income from a business.

Mr. Morris testified, that he acquired the property in issue, as well as the other property, solely for the purpose of turning it over at a profit as quickly as he was able to do so. His primary intention was to turn the property over at a profit. Because of the circumstances, he did not acquire the property. He got out of his commitment to purchase the property at a cost of $15,000. In my view, the transaction from the outset was a venture in the nature of trade and the $15,000 was incurred in the venture in the nature of trade, that is, in a business. Accordingly, the appeal will be allowed.

Appeal allowed.