Brigitte Gratl v. Her Majesty the Queen, [1993] 2 CTC 2035

Hamlyn, T.C.C.J.:—This is an appeal from a reassessment for the 1988 taxation year. The appeal was filed and heard under the informal procedure of the Tax Court of Canada Rules.

In computing income for the 1988 taxation year, the appellant reported the profit from the sale of property known municipally as 31 Willow Street, Water- loo, Ontario. The Minister of National Revenue (the"Minister") reassessed the appellant's profit from the sale as on capital account.

Appellant’s position

The appellant's position is as cited in the notice of appeal:

The decision of the Minister for the taxation year 1988 is hereby appealed for the following reasons:

(a) the decision is prejudicial;

(b) the review of the objection was superficial;

(c) the profit from the sale of a property located at 31 Willow Street in Waterloo is to be treated as a capital gain, as the original intention at acquisition was to keep this property for many years to come. Due to unforeseen circumstances, the property had to be sold; the tax department made no attempt at understanding the situation.

Minister's position

The Minister’s position is as cited in the reply to notice of appeal:

4. . . .

(h) at the time of the acquisition of the property, the appellant had in mind the possibility of resale at a profit and that possibility was an operating motivation for the acquisition of the property;

(i) the appellant's profit from the sale of the property was on income account.

Issue

The issue is whether the appellant's profit from the sale of the property was on capital or income account.

Facts

The Minister made the following assumptions of fact that were accepted by the appellant:

4, . . .

(a) the appellant purchased the property on December 1, 1987, for $95,500;

(c) the property was listed for sale on January 25, 1988;

(d) the property was sold on May 1, 1988, for $118,000;

(e) the property was held for a period of five months;

(f) during the time the property was held, the appellant incurred expenditures of $6,268.

At trial, the appellant stated the following:

. . . I purchased a house located at 88 Willow Street in Waterloo with the intention of keeping this property for a long-term period to secure an old age security in the absence of any income which would be forthcoming to my husband and me at the time of retirement.

I purchased the subject property at full market price after it had been on the market for some two months, under the following financial conditions:

Purchase Price:	$95,500
Cash on Closing:	$35,500
Mortgage by Royal Bank:	$60,000

On the date of closing, I was informed that the property had a mutual drive, an issue that had not come up before and was not mentioned on the listing. . . .

In addition to the problems encountered with the mutual drive, another issue arose which was unexpected: it appeared that recently, someone had successfully sued a landlord for renting accommodation with ureaformaldehyde insulation. . . . I had no proof of the nonexistence of the insulation.

The goal of securing a future income was my full and only intention in the purchase of 88 Willow Street, and only through the combination of continual frustration and the sudden availability of a replacement property was that course altered. By replacing the deficient property with a better, more suitable property, my goal has been achieved.

The taxpayer's stated intention was to keep the purchased house for “a long-term period to secure an old age security in the absence of any income".

The taxpayer felt that the premises could be rented because of its close proximity to a university. The taxpayer submitted she attempted to rent the house in mid-December of 1987, however, because she was unable to tell prospective student tenants that she had a declaration from the vendors as to the "non-existence of ureaformaldehyde insulation” she was unable to rent the house. Moreover, because the property had a mutual drive with an adjoining property she concluded "that a disgruntled neighbour would never lend his cooperation in terms of parking". For these reasons she stated she changed her intention in relation to this property and thereupon bought another to carry out the original intention. The subject property of these proceedings was shortly thereafter sold.

Indeed, the time period for this whole transaction (acquisition to disposition) was extremely short. The purchase of the property by the taxpayer was completed on December 1, 1987.The property was listed for resale on January 25, 1988 and was sold. The sale transaction was completed May 1, 1988.

The purchase cost for the property was $95,500. The proceeds from the sale of property was $118,000.

The taxpayer's profession at that time was that of a real estate salesperson. She had previously acquired and sold another property that was assessed for the 1987 taxation year on income account which she successfully appealed to the Tax Court of Canada where that transaction was found to be “a sale of a capital asset and not a sale on income account”.

Analysis

The determination of whether a particular profit is on capital account or income account requires an analysis of facts and stated intentions.

The stated intention of the taxpayer as to the purpose of the acquisition is an important element, and is to be weighed in consideration of the conduct of the taxpayer with respect to the acquisition, the disposition, the related business activity of the taxpayer and the property transaction history of the taxpayer.

The explanation that the house could not be leased because of the failure to obtain a declaration that ureaformaldehyde insulation was not present is difficult in the face of Exhibit R-1 (the agreement to purchase the property in question) where the clause in relation to the non-use of ureaformaldehyde was crossed out and endorsed by both parties. The taxpayer being a real estate salesperson and also being involved in other leasing activities (see statement of real estate rentals filed with the appellant's 1988 tax return) would have some knowledge about the leasing of properties including factors that affect the tenant market. Moreover, the explanation about the frustrations of a mutual drive is of limited value when considered against the short period of time the taxpayer apparently offered the property for rent. From the evidence pre- sented, I cannot conclude it was impossible for the taxpayer to lease out the property in question, that is, her original intention was not totally frustrated. Moreover, other significant factors that diminish the stated intention of the taxpayer include the terms of the acquisition as found on the statement of the solicitor received by the appellant on the purchase closing. This statement indicates a short-term mortgage (six months) at 9'/2 per cent and a fire insurance policy on the property whose term was unclear but may have been very short. This was not clarified by the appellant although she was asked on cross- examination to do so.

In this case, other crucial factors include the short period the property was held, and as well, the taxpayer being a real estate salesperson was engaged ina transaction that was closely related to her occupational activity. Moreover, this transaction was not the taxpayer's sole history in the buying and selling of real property. Indeed, she had previously purchased and sold another property that was found eventually to be as on capital account.

It is difficult to conclude this property was acquired on capital account when all these factors are weighed together in the light of the stated intention. The stated intention is not supported by these other factors. The conclusion is that this transaction was speculative in nature and was dealt with by the appellant as a trader in real property.

Decision

The appeal is dismissed.

Appeal dismissed.