Marc Guermoudi and Tula Guermoudi v. Her Majesty the Queen, [1993] 2 CTC 2654, 93 DTC 980

Bowman, T.C.C.J.:—These appeals were heard together on common evidence under the general procedure of this Court. The issue is whether gains realized by the appellants on the disposition of five properties in 1988 were gains on revenue or capital account. Both Mr. and Mrs. Guermoudi gave evidence, although Mrs. Guermoudi's evidence was brief and confirmed that of her husband whom I consider to be the prime mover in respect of the transactions. All the properties in question were held jointly by Mr. and Mrs. Guermoudi.

Mr. Guermoudi and his wife immigrated to Canada in 1981 from Sweden. He worked until 1985 for Hertz Rent-a-Car when he lost his job. He and his wife decided to start a private school in which they would tutor in French and mathematics. They sold their house in Brampton and in 1986 they commenced a series of purchases which culminated in the sales in 1988 giving rise to the assessments in question.

The first purchase was in December 1986 at 217 Owen Sound Street, Shelburne, Ontario. This property consisted of three apartments and had nonconforming use status. Mr. Guermoudi testified that they and their four children intended to live in two of the apartments and use the third as a school. They moved into the two apartments and applied to the municipality for a change in zoning to permit the establishment of a school. Matters did not proceed with the despatch that Mr. Guermoudi had hoped for and in April he and his family moved to 111 Toronto Street, Markdale, Ontario, about 55 kilometres from Owen Sound. They continued to rent the Shelburne property until July 8, 1988 at which time he sold it, having listed it on January 25, 1968. The property at Shelburne had been purchased for $92,500 and sold for $180,800. The Minister of National Revenue, on assessing, included as income from a business or adventure in the nature of trade the sum of $22,423.41, on the basis that A of the property was the appellants’ principal residence up to the point at which the two apartments which they occupied were converted to rental use.

The appellants installed a new furnace at 111 Toronto Street, Markdale, repaired the roof and put in insulation, for a total cost of between $10,000 and $15,000. They lived in that property until September 1987 at which time they moved to Owen Sound and upon vacating 111 Toronto Street, Markdale, they converted it to two rental units at a cost of about $5,000. This property was sold on May 26, 1989 for $84,000. There is no evidence as to the manner in which the gain was treated by the Minister and I make no finding on this point as it took place in subsequent taxation years that is not before the Court.

The next purchase was of a cottage property at 575 Mary Street in Wiarton on November 27,1987 for $32,000. The appellant testified that he and his wife intended to use the property as a cottage and that he subsequently decided to rent it out during the winter. They sold the property on September 30, 1988 for $62,000. The appellant testified that he sold this property in order to buy a more desirable cottage property at 535 George Street, Wiarton, which the appellants still own.

The next purchase was at 361 Waterloo Street, Mount Forest on May 29, 1987, for $25,500. The agreement of purchase and sale was signed in February 1987 where the appellants were living in Shelburne and the transaction closed on May 29, 1987, when they had moved to Markdale. The property was listed for sale on August 17,1987 and was sold on May 9, 1988 for $45,000. The property was rented during the period in which it was held. Mr. Guermoudi testified that by the time the transaction closed they had moved to Markdale and the property was too distant to enable them to manage it easily.

On July 31, 1987 the appellants bought 570-4th Avenue East, Owen Sound, for $65,000. On September 14,1987 the property was listed for sale and was sold for $85,000 on April 4, 1988. Mr. Guermoudi testified that this property was a three family dwelling and that he and his family intended to use two apartments and to rent out the third apartment. He stated that it was sold because a more desirable property at 393-15th Street in Owen Sound was located and purchased. The property at 393-15th Street, Owen Sound was in fact also sold in 1989.

On September 30, 1987 the appellants purchased 137 Mark Street, Markdale for $33,000. On June 30, 1988 it was sold for $58,000. Mr. Guermoudi was unable to say why this property was sold.

In February 1988 the appellants acquired 401-5th Street East, Owen Sound for $66,000 and sold it in June 1989 for $104,900. Also, in October 1989 the appellants acquired property at 1787-5th Avenue West, Owen Sound for $41,000 and sold it on February 15, 1989 for $60,900. These two properties were sold in 1989 and the treatment of the gain is not before the court. They do, however, indicate the degree of activity of Mr. Guermoudi and his wife in real estate in those years.

At the present time Mr. Guermoudi, who is a licensed real estate broker, and his wife own a substantial portfolio of rental properties. Mr. Guermoudi argued that the gains realized by him and his wife (they never sustained a loss) were simply a case of disposing of one rental property in order to purchase another one. I daresay this is substantially true. I do not however think that this is determinative of the matter. The appellants have acquired their substantial portfolio of rental properties as the result of astutely recognizing and taking advantage of the rising, indeed overheated, real estate market that prevailed in 1987, 1988 and 1989. It is true that the nature of the properties is consistent with their being capital investments in the appellants’ hands but the manner in which they were treated, the relatively short time during which they were held and the frequency of the transactions lead me, with one exception, to conclude that the appellants were engaged in a business which involved both holding rental properties and selling them when an appropriate opportunity arose. In some cases the appellants improved the properties and in some cases they did not. In no case were the appellants under any particular compulsion to dispose of the properties, other then a desire to take advantage of the rising market in order to trade up. I cannot accept the appellants’ definition of a capital gain as a gain realized on the disposition of a property in a rising market where the taxpayer has done nothing to increase the value of the property or to create the market. That definition may have some application in the case of an isolated purchase and sale but I do not think it can apply where there is a series of rapid purchases and sales as part of what appears to me to be a concerted money-making operation. I need not repeat the tests enunciated in such cases as Happy Valley Farms Ltd. v. The Queen, [1986] 2 C.T.C. 259, 86 D.T.C. 6421 (F.C.T.D.) and First Investors Corp. v. The Queen, [1987] 1 C.T.C. 285, 87 D.T.C. 5176 (F.C.A.). I think the application of these tests indicate that the appellants were engaged in "an operation of business in carrying out a scheme for profit-making”, and were not making a gain by a“ "mere enhancement of value by realizing a security" (Californian Copper Syndicate v. Harris (1904), 5 T.C. 159 at page 165).

I have no difficulty in accepting Mr. Guermoudi's evidence as far as it goes. He was a perfectly credible witness. I do not, however, on all of the evidence, think that it has been established that in selling the properties the appellants were merely disposing of capital investments.

The one exception to this conclusion is the property at 217 Owen Sound Street, Shelburne. It was the first property purchased and it was held for 16 months before being listed. It was rented during the entire period that it was not occupied by the appellants and their family. I think that this property was at all times a capital asset in the appellants’ hands, and that the Minister erred in concluding that it was converted to inventory when the appellants moved out of the two apartments. At no time was any portion of this property a trading asset in the appellants’ hands.

A number of factors appear to me to justify this conclusion. The sale of this property took place after the appellants had moved to Owen Sound and the property was geographically distant and difficult to manage. The appellants' desire to start a school and to live at the property was frustrated by the failure to obtain a zoning change. Moreover Mrs. Guermoudi testified that the family wished to move from Shelburne to Owen Sound because there was no French immersion course for their children in Shelburne. This is understandable given that Mr. Guermoudi's first language is French. In the circumstances I think the appellants have met the onus of establishing, on a balance of probabilities, that the portion of the gain on 217 Owen Sound Street, Shelburne that was not attributable to the sale of the appellants’ principal residence was not a trading gain.

The appeals are therefore allowed and the reassessment referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons. In the circumstances I make no order as to costs.

Appeal allowed.