John H.D. Falk and Valorie Falk v. Minister of National Revenue, [1991] 2 CTC 2665, 91 DTC 1445

Kempo, T.C.J. [Orally]: —I am delivering these reasons for judgment orally, however I expressly reserve the right to edit and expand upon them subsequently if need be.

The appeals of John Falk and Valorie Falk were joined, on consent application, for hearing on common evidence.

The appeals relate to the appellants’ 1985 taxation year. The respondent assessed the gain on the sale of the home in which they and their children had resided for almost three years as on account of income. The thrust of the respondent's assessing position was expressed in paragraph 8(g) of his reply to notice of appeal thusly:

8 (g) the motivating factor of the appellant at the time of the construction and acquisition of the aforesaid property was the resale at a profit and the property was acquired with a view to dealing in, trading in, or otherwise turning the same to account for profit.

The appellants deny the above and assert that the subject home was and remained solely and exclusively their own principal residence at all material times. In the alternative, and only in the event the Court finds the respondent's characterization to be the correct one, then it was alleged that the costs thereof have been understated with a consequential overstatement of the gain.

Viva voce evidence was heard from both appellants and from the respondent's auditor. I will not go into detail about the testimony as it is fresh in mind.

The following factors, being general nature, are salient:

—neither appellants have or have had any experience in the real estate business or industry either directly or indirectly;

—the appellants have been married since January 1979; Mr. Falk is now aged 42 years and Mrs. Falk is 36; three children were born of the marriage during the period 1979 to 1983.

—the subject property* was second in a series of three residential homes acquired and disposed of over an eight-year period, 1980 to 1988, namely:

261 Dadson Row occupied October 1980 and sold July 15, 1983

* 262 Dadson Row occupied late October 1983 and sold in 1985

259 Dadson Row occupied November 1985 and sold in 1988

—both appellants were involved in their own company which had no dealings whatever in real estate trading and which was in some financial difficulty throughout.

It was during the course of an audit being conducted on the company that the matter of the house sales arose. The auditor acted on a statement allegedly made by Mr. Falk in June of 1988 that his plan was to acquire, build and sell four houses so that the fifth could be had debt-free. Mr. Falk denies having said this. These particulars were not recorded in the auditor's notes. I believe the auditor responded, not necessarily without some justification I might add, to his own impression, understanding and conclusion that the house transactions, objectively, did portray a trading activity. Having said this, however, his conclusions must nonetheless be viewed and analyzed alongside his failure to record in detail such a damaging admission together with his failure to make detailed inquiries of both appellants respecting their particular reasons, if any existed, for the acquisition and sale of each of the three properties.

On striking the assessment in question the auditor assumed that the appellants had the intention to sell the subject property at a profit at the earliest possible time (which he believed was said by Mr. Falk to be after three years of occupation) and that that was the operative motivation underlying its acquisition at the very outset.

In my view the appellants have disproved this assumption on the balance of probabilities for the following five reasons:

—Neither appellants were sophisticated individuals with experience in the real estate industry, directly or indirectly;

—family needs and occupation was a primary operative motivation throughout;

—261 Dadson Row was too small and full of their own construction errors which made it undesirable for the young family;

—262 Dadson Row was a more desirable family home both as to situs and size; many personal custom features and colours were incorporated; an offer to buy during construction was refused; no record of costs were kept except those turned over to the Royal Bank for loan draw-downs; financing was not abnormal; sale effort was not aggressive or businesslike and was necessitated by external factors;

—259 Dadson Row was smaller and cheaper, and was sold because of external factors.

A succinct compilation of the above leads to the conclusion that these series of transactions were principal residence use orientated, with acceptable explanations being given for all the sales and that no secondary motivations were at play.

Accordingly the appeals are to be allowed, with costs.

Appeals allowed.