Joseph Raczkovi v. Her Majesty the Queen, [1993] 2 CTC 2746, 93 DTC 1074

Brulé, T.C.C.l.:—This is an appeal under the general procedure of the Tax Court involving the taxation years of 1986 and 1987 wherein the appellant was assessed on income account for the sale of two properties. In his income tax returns the appellant had claimed profits from the sales as capital gains.

Facts

The appellant was an immigrant to Canada in 1957. He undertook various jobs until two accidents curtailed any activity in the work place.

In 1979, after his first accident the appellant began dealing in real property. This was done by him personally and also through a corporation in which he was the sole shareholder. After the second accident in 1982 the appellant's endeavours were restricted to his dealings in real property.

A chart submitted to the Court shows that 12 properties were purchased at different times, two of which involved in one case the appellant's son and his spouse in the other.

The properties in this appeal are the ones located at 71-73 Broadway Ave. in St. Catharines and a house at 7087 Centennial Drive in Niagara Falls. The former property was purchased in the fall of 1982 for $80,000 and sold on August 28, 1986 for $240,000. The appellant reported a capital gain of $107,055.75. The Centennial Drive property was purchased on August 29, 1986 for $65,000 and after some repairs were made, was sold on August 25, 1987 for $85,500 with a reported capital gain of $845.56. The Minister increased this figure to $3,459.

The other properties in which the appellant owned all or in part were either sold or retained for investment, but are not the subject of this appeal.

Apellant's position

The appellant claimed that after his accidents he decided to invest in real estate with $30,000 in savings. His intention was to develop a rental portfolio for retirement.

As to the two properties in dispute, he claimed that he purchased the Broadway Property to develop a garage. The property was purchased with a mortgage of $60,000. When the appellant discovered that a zoning by-law prevented him from developing the property as a garage since the land had been subdivided into 25 single family home lots and one of 16 or 17 unit apartment building lots, he decided to dispose of it.

The appellant stated that he purchased the Centennial Drive Property with the intention of making it the family home and, with this in mind, he spent $20,000 fixing it up. However, his wife disliked the property and refused to move in so he put it up for sale through a real estate broker.

The appellant believed that the gains realized upon the disposition of the two properties should properly be characterized as capital gains. The appellant underlined that he has no training in real estate, although both his sons, aged 29 and 27 are real estate agents. He noted that he intends to hold on to the properties he presently owns and that he sold some of the properties to upgrade his position in the other properties. When buying property, he does not prepare a budget nor does anyone else on his behalf.

The appellant's counsel claimed in the Notice of Appeal that pursuant to sections 3 and 39 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63) (the "Act"), the profit realized on the sale of the two properties was a capital gain.

Respondent's position

The respondent asserted that at all material times the appellant operated a real estate business personally and through the above-mentioned company of which he was the sole shareholder. In purchasing the Broadway Property, the appellant was aware of the particular zoning of the property and was also aware of the ongoing construction activity in the area. Furthermore, the appellant financed the acquisition of the Broadway Property with borrowed funds. The Minister alleged that in acquiring title to the property the appellant had the intention of dealing in or trading in property and that at the moment of purchase, the appellant had in mind the possibility of reselling as an operating motive for the acquisition.

As to the Centennial Drive Property, the Minister noted that the appellant never derived any revenue from the property, and that in acquiring the prop erty the appellant had the intention of dealing or trading in property and that at the moment of purchase, the appellant had in mind the possibility of reselling as an operating motive for the acquisition.

The Minister stressed the appellant's history of buying and selling real estate, as well as the fact that both sons of the appellant are real estate agents who probably assisted their father with respect to his dealings.

The respondent relied upon sections 3, 4 and 9, and subsection 248(1) of the Act, and the case of First Investors Corp. v. The Queen, [1987] 1 C.T.C. 285, 87 D.T.C. 5176 (F.C.A.).

Issue

The sole issue to be decided is whether the profit realized on the purchase and sale of the Broadway Property and the Centennial Property is properly characterized on account of capital or on account of income.

Analysis

At the outset the Court recognizes that it is possible to be both a trader and an investor at the same time with different properties (see Veltri & Son Ltd. v. M.N.R., [1991] 1 C.T.C. 2691, 91 D.T.C. 862 (T.C.C.)).

Certain principles in making a determination as to profit being capital or income in cases such as found here were set out in Leonard Reeves Inc. v. M.N.R., [1985] 2 C.T.C. 2054, 85 D.T.C. 419 (T.C.C.) and also in the First Investors case, supra. These cases are only two of the many dealt with by the courts as well as by text book and periodical writers.

In the First Investors case, supra, the tests considered appropriate to make a determination were those found in the text by Scace and Ewens being The Income Tax Law of Canada, Fifth Edition, 1983.

Among the factors providing indicia in analyzing the question of a taxpayer's intention are the following:

1. The frequency engaged in similar transactions by the appellant.

2. The nature of the particular asset.

3. The question of whether or not any particular transaction is a part of the taxpayer's normal activity.

4, How the taxpayer deals with the particular property. Was he treating the property as a trader or an investor?

5. How long was the property held?

6. Was there a secondary intention at the time of purchase?

The above does not comprise an exhaustive list and all factors, if involved, do not bear equal weight.

Considering the above in relation to the two properties involved in this appeal, the Court believes the sales were on income account.

Before reviewing the two impugned transactions, some preliminary comments are in order. The appellant's company purchased four apartment blocks and one house between 1979 and 1988. Three of the apartments have been sold. If one looks at the rental history of these properties, it appears that the expenses exceeded the revenues in all cases. However, each of the properties disposed of was done so at a profit.

Personally, the appellant purchased three houses, a triplex from which he derived some rental income and a vacant piece of land. The appellant derived some rental income from one of the houses but his expenses exceeded his revenues in the four years the house was held. The other two houses produced no rental income for the appellant.

The appellant also purchased a house with his son. In the four years the house was owned, rental revenues only exceeded expenses in one year. He also purchased a house with his spouse. The property was held for four years and income from rent exceeded expenses in two of the years.

If one looks at the number of transactions that the taxpayer engaged in personally and through his company and one also considers the fact that he appears to have made no analysis of the profitability of his rental activities since most of his properties did not generate enough rental revenues to offset expenses, these factors tend to indicate that the profit realized on the disposition of the properties is on income account.

The appellant worked at various blue collar jobs until the two serious accidents forced him to cease such occupation. He has no background in real estate. This factor supports his contention that the profit on the sale of the two properties was on the capital account. However, his two sons are real estate agents and undoubtedly advised the appellant with respect to some of the transactions.

The various properties were held for periods of less than one year and up to nine years. The longer a property is held the stronger the presumption that it is being held as an investment. The appellant claims to have disposed of the various properties over the years to consolidate and upgrade his position in the other properties. Financial difficulties allegedly motivated some of the sales.

As to the two properties involved I shall deal with each individually.

Broadway Avenue, St. Catharines

This property, a vacant piece of land, subdivided into 25 single family home lots and one of 16 or 17 unit apartment building lots, was purchased by the appellant with a $60,000 mortgage in the Fall of 1982. The appellant sold the property some four years after its acquisition when he couldn't develop it as desired. There is a strong presumption that raw land is a trading rather than an investment asset. Furthermore, in hearing the evidence presented, the appellant does not seem to have made much effort to obtain a zoning change. Therefore it seems more difficult to maintain that his development plans were frustrated. There is no evidence that the appellant made any efforts prior to acquiring the property to determine whether he could develop the property in the desired way. It is not entirely clear whether the zoning difficulties were the actual reason the property was sold. With the assistance of his sons the appellant surely was aware of the situation and the potential for the property.

Based on the various factors surrounding the acquisition of this property and the reasons of sale, I am of the view, without the benefit of any corroboration of the appellant's evidence that the profit realized is on account of income.

Centennial Drive, Niagara Falls

The Centennial Drive Property was purchased on August 29, 1986 and sold on August 25, 1987. The appellant claimed that he purchased the Property with the intention of making it the family dwelling, and with this in mind he spent approximately $20,000 making repairs to the property. He said that his wife refused to move in so he decided to dispose of it. The fact that the appellant spent $20,000 repairing the property may also be indicative of an intention to resell the improved property at a profit.

It appears strange to me that the appellant would purchase and repair a property as a family abode in a different city without consulting his wife. Certainly some corroborating evidence could have been introduced to verify the facts claimed by the appellant.

The appellant had previous experience in selling properties and from this it may be concluded that at the time of purchase he probably realized that after some amelioration to the premises if his wife did not want to occupy the house, assuming this to be true, then there was a secondary intention that the house could be sold at a profit.

In general the situation, similar to here, is well summed up by Walsh, J. in the case of Pierce Investment Corp. v. M.N.R., [1974] C.T.C. 825, 74 D.T.C. 6608 (F.C.T.D.), wherein he stated at page 831 (D.T.C. 6612):

I am also of the view, as has been expressed in other cases, that while the evidence of the witnesses is helpful in endeavouring to determine their intentions, their actual conduct and the steps they took to carry out these intentions gives a much better indication of what they actually were. Without intending to cast any aspersions on the credibility of the witnesses in the present case it is nevertheless evident that in any case where a distinction must be made between a transaction which constitutes an adventure in the nature of trade and one which leads to a capital gain, one must expect the witnesses to invest that their intentions were solely to make an investment and that the idea of reselling the property at a profit had never occurred to them even as a secondary intention at the time of making the original investment, but was merely forced on them subsequently by some event beyond their control. If they were not in a position to testify to this effect they would have little or no ground for appealing against the assessment.

The result is that the appeal is dismissed with costs to the respondent.

Appeal dismissed.