Josip Jukic v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2630

Taylor, J.T.C.C.:—These are appeals under the informal procedure, heard in Calgary, Alberta, on December 8, 1993, against income tax assessments for the taxation years 1988 and 1989, in which the Minister of National Revenue increased the reported income of the appellant by amounts of $9,055 and $9,000 respectively, allegedly representing unreported business income. The notice of appeal provided the position of the appellant:

A. REASONS FOR THE APPEAL

1. The Minister of National Revenue has erred in including in the appellant's income amounts from the disposition of two properties beneficially owned by the appellant and his wife, Marina Jukic ("wife") municipally described as 3122 Phaneuf Crescent East, Regina, Saskatchewan, legally described as Lot 10, Block 101, Plan 85R61255 and 2210 Assiniboine Avenue East, Regina, Saskatchewan, legally described as Lot 18, Block 7, Plan 86R27624 (collectively "properties") for the 1988 and 1989 taxation years, respectively, pursuant to section 3 and subsection 9(1) of the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

2. The properties owned by the appellant and his wife were principal residences of the appellant and his wife within the meaning of paragraph 54(g) of the Income Tax Act.

3. Any gains from the disposition of the properties are exempt from income tax pursuant to paragraph 40(2)(b) of the Income Tax Act.

4. In the alternative, if all or any portion of the amounts from the disposition of the properties are not exempt pursuant to paragraph 40(2)(b), which is not admitted but expressly denied than these amounts are capital gains to be allocated equally between the appellant and his wife and eligible for the capital gains exemption pursuant to subsection 110.6 of the Income Tax Act.

5. In the further alternative, if any amounts from the disposition of the properties are taxable pursuant to section 3 or subsection 9(1) of the Income Tax Act, which is not admitted but expressly denied, these amounts should be allocated equally between the appellant and his wife.

6. In the further alternative, if the amounts from the disposition of the properties are taxable pursuant to section 3 or subsection 9(1) of the Income Tax Act, which is not admitted but expressly denied, the Minister of National Revenue erred in this calculation of income by not considering all allowable business expenses of the appellant and his wife within the meaning of paragraph 18(1 )(a) of the Income Tax Act.

B. STATEMENT OF RELEVANT FACTS IN SUPPORT OF THE APPEAL

1. The appellant and his wife beneficially owned the properties which were ordinarily inhabited by them in the relevant taxation years as their principal residences within the meaning of paragraph 54(g) of the Income Tax Act.

2. The appellant’s wife contributed valuable consideration, including money, to the acquisition, improvement, maintenance and repair of the properties.

3. The properties were matrimonial homes within the meaning of subsection 2(g) of the Matrimonial Property Act, c. M-6.1, statutes of Saskatchewan, and the wife was entitled to 50 per cent of the proceeds of disposition of the properties pursuant to section 22 of the Matrimonial Property Act.

4. The Minister of National Revenue did not take into account all of the expenses of the appellant and his wife with respect to the properties.

For the respondent, the situation was:

4. In so reassessing the appellant, the Minister made the following assumptions of fact:

(i) the appellant beneficially and legally owned two properties in Regina, Saskatchewan described as Lot 18 Block 7 Plan 86R27624 ("property A") and Lot 10, Block 101, Plan 85R61255 ("property B");

(ii) construction began on property A in July 1986;

(iii) property A was listed for sale in September 1986;

(iv) property A was eventually sold April 20, 1988;

(v) the proceeds of disposition for property A were calculated as follows;

Proceeds	$107,000.00
Cost of Construction		97,945.07
Net Business Income	$	9,054.93
(vi) the appellant bought property B in June 1988;
(vii) the appellant sold property B in October 1989;

(viii) the proceeds of disposition for property B were calculated as follows:

Proceeds	$ 99,000
Cost		90,000
Net Business Income	$	9,000
(ix) the appellant was the registered owner of both property A and B;

(x) in acquiring property A and B, one of the major motivating factors of the appellant was the possibility of turning the said properties to account by means of resale as part of a profit making concern.

B. ISSUES TO BE DECIDED

5. The issues are:

(i) whether the proceeds from the disposition of each of the properties are properly characterized as:

a. business income;

b. capital gains with an offsetting capital gains deduction; or,

c. proceeds from the disposition of a principal residence,

(ii) whether the amounts of $9,055 and $9,000 which have been included in the appellant’s income in the 1988 and 1989 taxation years respectively, have been correctly calculated;

(iii) whether the appellant's spouse had a beneficial interest in the properties.

C. STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT

6. He relies on section 3 and subsection 9(1) of the Income Tax Act (the "Act") as amended for the 1988 and 1989 taxation years.

7. He respectfully submits that the Minister correctly reassessed the appellant for unreported business income of $9,055 and $9,000 for 1988 and 1989 respectively pursuant to section 9 of the Act.

8. He further submits that neither property A nor property B was exempt from income tax pursuant to paragraph 40(2)(b) of the Act as the principal purpose for the acquisition of the two properties was for the purpose of gaining or producing income pursuant to section 9 of the Act.

At the commencement of the hearing it became evident that the primary point at issue was whether the two properties were "principal residences" of the appellant, and it was agreed that the evidence and testimony directly related to that particular point was to be led, and if possible a determination provided before information more applicable to the other questions raised by the appellant would be pursued.

In summary, the evidence showed that the appellant came to Canada in the late 1970s, lived either with or near his brother in Regina, Saskatchewan where he pursued his trade as a painter. His brother was in the construction business on a part-time basis, but was not the major employer of the appellant. In 1985, he married in Yugoslavia, and his wife came to Canada in October of that year. With the help of his brother, he built the first house he owned in 1985 at 3106 Ahrens Road, and sold it at a profit in 1986. A significant point is that he was reassessed to tax on that gain involved as on income account. Very little detail was provided to the Court about that set of transactions, other than Mr. Jukic indicated that his original treatment of that profit (before reassessment) as arising from a “principal residence", had been according to the income tax advice he had at the time. He then proceeded to the purchase or construction of the two subsequent houses which are the subject of these appeals. The degree of involvement by his brother and the assistance and advice each one provided to the other was not very clear from the testimony. However it is clear that the major thrust of the respondent's contentions and assumptions (above) was supported in the appellant's conduct and actions, and there had been little if any change in the process Mr. Jukic used to build his first home in 1985-86, the only difference being now he was married and his wife (and later family) living with him in the reference houses. It may have been the case that Mr. Jukic continued to receive bad advice regarding his income tax situation during these years but in any event the Court finally decided during the hearing that his pattern of conduct regarding the acquisition and disposition of properties had left him with business assets, not personal residences during this time. The respondent's contention that a major motivation was the possibility of turning a profit on the transaction was upheld. Despite the fact that he had "inhabited" the properties in question, the Court was not convinced that it could be said he had "ordinarily inhabited" them as would be required for the classification of "principal residence". His occupation of the properties appeared to be on an interim basis while promoting and awaiting a sale. The determination — that the properties in question were not “principal residences” eliminated any need to consider the gains as even on “capital account" — they were business assets as inventory for sale. The profit from the sales was an income account.

Before proceeding to the balance of the points at issue, I would note that the total record of contact to Mr. Jukic from the respondent is not a very pretty picture. Some of the correspondence speaks for itself and is unnecessarily immoderate and confrontational in tone, in my view, even allowing for the fact that the appellant's comprehension of the intricacies of the income tax system, and his acceptance of questionable advice probably did not aid Revenue Canada a great deal in its review of his affairs. To complicate matters even more, he was required to locate bills, invoices etc. for the construction of the houses — which accounts he probably did not keep in any great detail on the assumption he was building a "principal residence". In 1989 he moved from Regina to Calgary, which entailed selling the Regina house. At least the argument could be made that he might not have sold the house — and therefore designated it as his "principal residence" without such a move. A settlement proposal to that effect was even considered by the respondent shortly before the Court date — but it was apparently rejected by the appellant. All in all, not the most exemplary treatment of a relatively small independent contractor with limited resources and income.

The rejection of the "principal residence" contention left two questions outstanding from the notice of appeal, supra:

The properties were matrimonial homes within the meaning of subsection 2(g) of the Matrimonial Property Act, c. M-6.1, statutes of Saskatchewan, and the wife was entitled to 50 per cent of the proceeds of disposition of the properties pursuant to section 22 of the Matrimonial Property Act.

The Minister of National Revenue did not take into account all of the expenses of the appellant and his wife with respect to the properties.

Mrs. Jukic detailed for the Court the marriage — in Yugoslavia — and that instead of presents, their friends gave them money, since they knew the Jukics were coming to Canada. Her recollection was that it totalled about $15,000, which she contributed to Mr. Jukic's bank account and it was used for the construction of the house at 3122 Phaneuf Avenue (see above). When that property was sold, her original $15,000 plus any gain on the sale went to the acquisition of the property at 2210 Assiniboine Avenue East. Both properties — when the Jukic's moved in — required substantial finishing and improvements — basements, landscaping, fencing, drapes, rugs, etc. She had some part-time employment, and contributed to these expenditures as much as she could, in addition to her own physical labour. She agreed she was not shown as an owner with Mr. Jukic on either property.

Mr. Jukic presented to the Court some documents, indicating that there were expenses incurred in the construction of the two homes for which he had not been given credit, and further he elaborated on the approximate cost of some of the improvements and upgrading that had been done by the Jukics during occupation, before sale. The Court requested the parties to review these additional costs which were contended and provide the Court before January 31, 1994 with any further agreements or any concessions which might develop.

As a result, the respondent has agreed to allow the appellant additional amounts of expenses as follows:

Finally, the evidence provided does not support the contention that there was a business partnership between the appellant and his wife during the times material.

The appeals are allowed in order that amounts of $1,386 and $2,058.80 be considered as additional expenses for the years 1988 and 1989 respectively. In all other respects the appeals are dismissed.

Appeals allowed in part.