Dominic Thivy v. Her Majesty the Queen, [1993] 2 CTC 2277, 93 DTC 919

Bowman, T.C.C.J.:— This is an appeal from an assessment for the appellant's 1986 taxation year. The issue is whether the gain realized by the appellant on the sale of a house at 1 Hannibal Square, Brampton, was a gain on income or capital account. The question, as in virtually all cases of this type, is essentially one of fact.

Both the appellant Mr. Thivy and his wife Mrs. Rose Thivy testified. Mr. Thivy owns and operates a small courier business. He and his wife lived at 30 Brookview Road in Brampton. The property was owned by Mr. Thivy. They had purchased it a number of years previously for about $90,000 and in the rising market that prevailed in 1986 they estimated that it would have a market value in the neighbourhood of $250,000. In July of 1986 Mr. and Mrs. Thivy decided to separate. In July or August 1986 they listed their home on Brookview Road for sale and purchased three properties as follows:

22 Heatherside Court, Brampton for $92,700

7 Holmcrest Court, Bramalea for $94,500

1 Hannibal Square, Brampton for $92,000

The purchases were financed in part by borrowings or mortgages of about $70,000 in each case.

The intention, according to Mrs. Thivy, was that she would live at 22 Heatherside Court, Mr. Thivy would live at 7 Holmcrest Court and that Mr. Thivy would hold 1 Hannibal Square as an investment from which he would derive rental income.

The agreement to purchase 1 Hannibal Square was signed on September 11, 1986 and the transaction closed on October 17,1986. He made arrangements with the vendor to permit him to show the house to prospective tenants even before the transaction closed and accordingly he immediately listed it with a broker for the purpose of finding a tenant.

In October and November of 1986 a number of factors brought about a change in their plans, as follows:

(a) The former matrimonial home on Brookview Road did not sell, contrary to their expectations. It was from the sale of this property that they had expected to finance the purchase of the other three.

(b) Mr. Thivy was unable to rent 1 Hannibal Square.

(c) The real estate agent with whom he had listed 1 Hannibal Square informed him in October that she had a prospective purchaser who was interested in buying that property.

At this time, therefore, the witnesses testified that Mr. Thivy was faced with having to carry four properties, none of which were producing any income. The Brookview property out of which he intended to finance the purchases was not selling and 1 Hannibal Square was still vacant. On November T1, 1986, he entered into an agreement to sell the house on Hannibal Square. The agreement was subject to the purchasers' finding financing so that even after the signing of the agreement of purchase and sale the real estate agent continued to show the house as a rental property until the condition was removed. The sale closed on December 12,1992 at a price of $112,500.

The profit assessed as business income by the Department of National Revenue was $11,080.74 after taking into account expenses such as the real estate commission, legal fees and carrying costs.

Following the sale of the property Mr. and Mrs. Thivy became reconciled. The other two properties were sold subsequently in 1987, as well as the property on Brookview. A new matrimonial home was purchased where they continue to live.

On these bare facts it is hardly surprising that the Minister of National Revevue considered that the sale of 1 Hannibal Square was part of an adventure in the nature of trade. The facts which appeared to point in this direction and to support the Minister's decision are:

(a) The short time the property was held.

(b) The fact that all three properties were heavily mortgaged.

(c) The fact Mr. Thivy plunged headlong into a rising real estate market without being certain that the Brookview would sell.

(d) The fact that not only the property on Hannibal Square was sold but also the other two properties on Heatherside Court and Holmcrest Court.

Has the inference that one could reasonably draw from these facts that Mr. Thivy's rapid sale of 1 Hannibal Square was part of a predetermined profitmaking scheme been rebutted? The basic assumption on which the assessment rests is that at the time of purchase the appellant had in mind the possibility of resale at a profit and that possibility was a motivating factor which induced the purchase of the property to be made.

One other assumption, that the property was listed for sale immediately upon its purchase was established to be wrong. It was listed for rental. The rebuttal of this assumption does not in itself demolish the basis of the assessment. The fact however that this assumption was made does tend to explain why the department officials believed that Mr. Thivy had the intention from the outset to sell the property at a profit.

As in most cases of this type the determination is essentially one of fact, based upon all of the surrounding circumstances. It seldom happens that one single factor predominates. The taxpayer's own statement of his or her intentions in acquiring the property is of course relevant but it is not necessarily determinative and must be viewed in the context of all of the surrounding circumstances. I doubt that any useful purpose would be served by a review of the extensive jurisprudence in this area of tax law. The principles have been conveniently summarized by Rouleau, J. in Happy Valley Farms Ltd. v. The Queen, [1986] 2 C.T.C. 259, 86 D.T.C. 6421 (F.C.T.D.). The same tests were listed by Mr. Justice Heald in a dissenting judgment in the Federal Court of Appeal in First Investors Corp. et al v. The Queen, [1987] 1 C.T.C. 285, 87 D.T.C. 5176. His summary of the criteria was adopted by the majority of the Court.

I shall set out each of these criteria as listed by Mr. Justice Rouleau in the Happy Valley case (at page 263 (D.T.C. 6423-24)), and endeavour to apply them to the facts of this case.

1. The nature of the property sold. Although virtually any form of property may be acquired to be dealt in, those forms of property, such as manufactured articles, Which are generally the subject of trading only are rarely the subject of investment. Property which does not yield to its owner an income or personal enjoyment simply by virtue of its ownership is more likely to have been acquired for the purpose of sale than property that does.

The house on Hannibal Square was capable of yielding income to the appellant and was, according to the appellant’s testimony, purchased for that purpose.

2. The length of period of ownership. Generally, property meant to be dealt in is realized within a short time after acquisition. Nevertheless, there are many exceptions to this general rule.

The holding period was short and this could give rise to an inference that the appellant's intention from the outset was to sell it at a profit. I do not however think that the short period of ownership can outweigh all of the other factors. The somewhat unusual combination of events here, including the marital difficulties, appear to bring it within the exceptions" to which Rouleau, J. referred.

3. The frequency or number of other similar transactions by the taxpayer. If the same sort of property has been sold in succession over a period of years or there are several sales at about the same date, a presumption arises that there has been dealing in respect of the property.

The respondent placed some reliance on the fact that 22 Heatherside Court and 7 Holmcrest Court were sold the following year. The circumstances of the sale of these properties were that the appellant and Mrs. Thivy had resolved their marital problems and decided to live together in a anew matrimonial home and therefore these two properties, in which they had lived separately, were not necessary. Accordingly the sale of these houses is consistent with a resolution of their matrimonial situation and not with trading in real estate. There was no suggestion or evidence that the separation and subsequent reconciliation was anything more than what it purported to be, or that the separation was some type of elaborate charade used to camouflage a series of speculations in a rising real estate market.

4. Work expended on or in connection with the property realized. If effort is put into bringing the property into a more marketable condition during the ownership of the taxpayer or if special efforts are made to find or attract purchasers (such as the opening of an office or advertising) there is some evidence of dealing in the property.

Nothing was done to make the property on Hannibal Square more saleable. It was cleaned up in an attempt to rent it. Mr. Thivy stated that the property was in good condition when he bought it.

5. The circumstances that were responsible for the sale of the property. There may exist some explanation, such as a sudden emergency or an opportunity calling for ready money, that will preclude a finding that the plan of dealing in the property was what caused the original purchase.

The appellant and his wife testified that the property was sold for basically two reasons: the appellant was unable to rent it and he was unable to sell his house on Brookview Road. Accordingly he was faced with the cost of maintaining four properties, none of which was yielding income. He did not advertise it for sale, but agreed to sell it when his agent approached him with a potential buyer.

6. Motive. The motive of the taxpayer is never irrelevant in any of these cases. The intention at the time of acquiring an asset as inferred from surrounding circumstances and direct evidence is one of the most important elements in determining whether a gain is of a capital or income nature.

I found both the taxpayer and his wife credible witnesses. Both stated that the property was bought to hold for the purpose of renting it. He admitted in argument that he expected some day to sell the property, but not in the short term. This has a ring of truth to it that protestations that the taxpayer intended never to sell a property do not have. I accept that he bought it with the intention of renting it and with the expectation that it could be financed out of the sale of his house on Brookview Road.

The case is somewhat close to the line, given the short period of ownership and the rather precipitate way the appellant plunged into and then out of the market, but taking into account all of the factors surrounding the transaction and my own observation of the witnesses, I think the appellant has met the onus of establishing that on a balance of probabilities the gain was on capital account.

The appeal is therefore allowed and the assessment referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the gain realized by the appellant on the disposition of 1 Hannibal Square, Brampton, was a gain on capital account.

The appellant is entitled to his costs, if he incurred any.

Appeal allowed.