Dorothy Kazakoff and Fred Kazakoff v. Minister of National Revenue, [1990] 1 CTC 2203, 90 DTC 1073

Sarchuk, T.C.J.: —The taxpayers appeal from reassessments of their respective 1981 taxation year. By consent of all parties the appeals were heard together on common evidence.

The issue arises in the following manner. On January 25, 1981 the appellants purchased 4.62 acres of land in Kaleden, British Columbia for $55,000. On February 26, 1981 they listed the property for sale at a price of $110,000 and on March 23, 1981 sold it for $100,000. In their respective returns of income for the 1981 taxation year each appellant reported a taxable capital gain of $9,677.16 realized on the sale of the property. By notices dated August 10, 1984 the respondent reassessed each appellant and treated each appellant's full gain of $ 19,331.50 from the sale of the property as income earned in that year from an adventure or concern in the nature of trade.

In so reassessing the respondent assumed the following facts:

(a) the appellants purchased the Kaleden property for $55,000 on January 25, 1981, listed it for sale for $110,000 on February 26, 1981, and sold it for $100,000 on March 23,1981 ;

(b) at the time of the purchase of the Kaleden property the appellants were knowledgeable as to land values in the area and were aware that they had made a very advantageous purchase for the purpose of speculative resale;

(c) at the time of the purchase of the Kaleden property, the appellants knew or ought to have known that the property was not fully suitable for development as a hobby farm and that considerable labour and costs would be required to so develop it;

(d) the appellants took no steps to develop the Kaleden property as a hobby farm nor did they make any efforts to sell their principal residence in Penticton, British Columbia, or to otherwise carry out their stated intentions regarding the property;

(e) the appellants’ stated intention to develop the Kaleden property as a hobby farm was not frustrated;

(f) the appellants, in purchasing the Kaleden property, did so with a flexible intention and had in their minds at the time of acquisition the likelihood of resale at a profit as an operating motive for the purchase;

and

(g) the appellants jointly owned the Kaleden property and realized a total net profit on the sale of $38,663, and the appellants earned thereby $19,331.50 which was business income earned in the 1981 taxation year from an adventure in the nature of trade.

The appellants deny that the transaction can be characterized as an adventure in the nature of trade and assert that resale at a profit was neither a primary or secondary intention. Both appellants testified. At the outset I should note that Dorothy Kazakoff's evidence was of limited assistance. The transaction was for the most part carried out by her husband and, for all practical purposes, it is his conduct and his intentions which are of primary relevance in determining how the transaction is to be characterized.

The underlying theme running through the testimony of the appellants is that the property was purchased by them as the site upon which they would construct their dream home. The property was large enough to enable them to dedicate a portion thereof to a garden, according to Dorothy Kazakoff, and to a small grape farm or arbour according to Fred Kazakoff (Kazakoff). This, they asserted, was their sole motivation.

The circumstances leading up to the purchase and disposition can be briefly summarized. The appellants have resided in Penticton for a number of years. Their home, purchased in 1971 or 1972, was free and clear of any encumbrance and was valued by Kazakoff at approximately $85,000. At all relevant times he was employed as a recreational vehicle salesman earning approximately $35,000 per annum. According to Kazakoff early in 1980 he was called out to Kaleden to service a camper belonging to a Mr. Cummings (Cummings). While there he had a general discussion with Cummings in the course of which Cummings stated that he intended to sell his property, the 4.62 acres in issue, at some future point of time. Kazakoff said that he was impressed by the site, particularly the view, and perceived it as the perfect location for his farm. He expressed interest and asked Cummings to call him if and when a decision to sell was made.

Both appellants say that over the course of the next year they went to look at the property on several occasions. Kazakoff denied making any investigation at any time as to property values in the Kaleden area, conceding only that he had seen a "for sale" notice on an adjoining property; had made inquiries and discovered that it consisted of seven acres and was being offered at a price of $65,000.

Kazakoff said that approximately one year after first seeing the property he received a telephone call from Cummings offering it to him at a price of $55,000. Without any further inquiry and without questioning the price, Kazakoff told Cummings he would make all the necessary arrangements with his bank to enable him to purchase the property. On the following day Kazakoff spoke to the loans officer and arranged for a demand loan in the amount of $45,000, bearing interest at one per cent over prime, which at that time stood at 17.75 per cent. The balance of the purchase price was to be paid from the appellants' savings account. With the financing secured Kazakoff called Cummings and they forthwith attended at a solicitor's office and concluded the transaction. The date of closing was January 25, 1981.

On February 6, 1981 Kazakoff placed his Penticton home on the market by posting a "for sale” sign in his front yard. The price he set, $85,000, was based on his personal analysis of the prices of similar homes gleaned from various newspapers and on advice from a real estate agent, Leonard W. Reeve (Reeve). The appellants deliberately chose not to list their home with an agent.

At about the same time the appellants spoke to a building contractor, Fred Hoffman (Hoffman). This gentleman, who subsequently testified, was in fact a salesman for Engineered Homes, a company which sold prepackaged homes and made arrangements for their construction. According to Kazakoff they obtained a home plan from Hoffman together with an estimated price of $65,000 to $75,000 for construction. No agreement was struck during these discussions.

The appellants allege that within a few days of posting the “for sale” sign on their Penticton property they became extremely concerned that it had not sold. Kazakoff said that his long standing heart condition became a concern; that he became tense, that he could not sleep and that he began to worry about his bank loan. When asked in cross-examination why he did not seek the assistance of a real estate agent to dispose of his Penticton home, particularly given these concerns, he responded that he did not wish to incur Commission expenses.

At some point of time in February Kazakoff met Reeve who, in the course of a conversation, asked him about his house. According to Kazakoff, once apprised of the situation, Reeve suggested that the Kaleden property be listed, specifically telling him that he thought he had a potential purchaser. Kazakoff agreed and on February 26, 1981 the Kaleden property was listed for sale at a price of $110,000 by L. Reeve Agencies Ltd. (Exhibit R-3). The listing agreement did not expire until December 31, 1981.

Kazakoff was cross-examined regarding the increase in value:

Mr. McAuley:

Q. You must have been surprised, Mr. Kazakoff, when approximately one month later a real estate agent had told you that the price for your property was going to be virtually double of what you had purchased it for?

A. Well, when he told me when we listed the property what are we going to list it for, he said well, let's list it for $110,000. But I wanted to get rid of it because I was Sick.

Q. No, no, that’s not the question. I said are you—were you surprised that the property was worth that much money?

A. I really don't know how would I answer that question to you, because when I wasn't feeling good I was ready to—I didn't really—it didn't matter to me. I wanted just to get out of it and that's all.

Q. But didn't you say, I only bought it a month ago and why is it worth twice as much now? I know I would have said that.

A. I just told Mr. Reeve, I said whatever you do, sell it. I said, I'm just—we're sick, I said, I’m just sick, my nerves are gone and I don't sleep nights. I just, my house did not sell in Penticton, I says, we have to do something.

Q. Yes.

A. My life was more important than the money at that time. My nerves were gone and I was sick, just sick owing so much money.

With respect to his arrangement as to the listing of the Kaleden property, Kazakoff said that he never discussed which property should be sold first with Reeve. He maintained that his house had been put up for sale on February 6, 1981 but when they listed the Kaleden property for sale on February 26, 1981, the appellants removed the “for sale" sign. No further steps were taken to market their home and on March 23, 1981 the Kaleden property was sold.

Reeve testified that he had known the Kazakoffs since the early 19605. He had owned a tire shop at one stage and Kazakoff had been employed by him. According to Reeve they were social friends (in this context contradicting Kazakoff who described their relationship as “Well I knew him only, you know, just to say hello . . . not that we were friends.”). The families saw each other four to five times throughout the year, visiting at each other's houses and so forth. As well, Reeve acted as agent when the Kazakoffs purchased their home. When the Kaleden property was purchased he viewed it with Kazakoff but alleges that he did not ask him how much he paid nor did Kazakoff volunteer the information. Furthermore, he says that he drew no conclusions as to its value and cannot recall making any observations in that regard. He was most unresponsive to counsel's questions in cross- examination as to his opinion regarding the attractiveness of the Kaleden area and the property in issue.

Reeve further testified that he may have discussed listing the Penticton house with the appellants. He was aware that Kazakoff was trying to sell it because Kazakoff had told him so. Although he visited the Kazakoff home, Reeve did not recall seeing any “for sale” sign. He believed that it was during the course of a social visit at the Kazakoff's home that the discussion turned to the Kaleden property. Reeve says that he raised the subject and solicited the listing. Reeve also said that at the time he obtained the listing he did not have a purchaser in mind and did not, as was asserted by both appellants, tell them that. In fact he said the property was sold by another sales person, albeit employed by Reeve.

Both appellants and Reeve testified they had an informal agreement whereby if the appellants managed to sell their Penticton property first, then Reeve would cancel the listing agreement. Reeve's evidence on this issue was equivocal and less than satisfactory. He ultimately stated that he probably would have told them that if another agent brought in a deal they would have to take it.

Two documents and the appellants' comments with respect thereto should be noted. In cross-examination counsel for the respondent produced a letter dated June 4, 1984 from R.D. Morrison, the commercial banking manager of the Bank of Montreal to Kazakoff (Exhibit R-2). This letter, which had been solicited by the appellants’ agent, summarizes Morrison's review of the bank’s records which he conducted for the purpose of ascertaining the circumstances prevailing at the time the loan was granted. With reference to these records Morrison writes:

While they indicate that it was our impression that the property was being acquired for speculative purposes, the file memorandum was, however, prepared at the time of your initial inquiry and consequently prior to your formally executing any purchase agreement. It is entirely possible that you may have changed your mind prior to actually completing the transaction.

This portion of Morrison's letter was put to Kazakoff in cross-examination. He responded ”. . . that's what they put down" but asserted that he did not recall telling the bank manager that he was going to purchase the Kaleden property for resale.

The second document is a letter written on May 29, 1984 to Revenue Canada, Taxation by J.H. Donahue, a public accountant and the appellants' agent (Exhibit R-4). Counsel for the respondent brought the following representation to Kazakoff's attention, and asked him if it was true: "The vendors were unaware as to the value of their land whereas Kazakoff definitely knew that he had a good deal.” Kazakoff agreed that he had seen the letter. With respect to this statement his testimony was:

Mr. McAuley:

Q. Are you saying that letter is inaccurate?

A. No, I would say that maybe is right.

Q. Is Mr. Donahue's statement in that letter correct?

A. You know—

Q. Just yes or no; is it correct?

A. Well I, let's say yes.

With respect to the appellants' assertions regarding the construction of their dream home, Kazakoff admitted that the appellants sought no assistance to determine whether the site was suitable for construction or whether, given its topography, it presented any particular problems which might increase the cost of construction. Regarding his health condition Kazakoff said that he had been on medication for a heart ailment since 1959. However it does not appear to have been a factor, nor even considered by him at the time of purchase. The Kaleden property had at one time been an orchard but by the time of purchase had been cleared excepting a few cherry trees and an apricot tree. He agreed that if it were to be put into production as an orchard or a grape arbour it would have required a great deal of work and admitted that he had been warned by his physicians not to engage in strenuous work. He denied that the purchase of a farm in this condition should have been a concern to him, stating “I try not to think about it, light work is good for you.”

Counsel for the appellants submitted that there was no evidence at all to suggest that the purchase of the Kaleden property was intended for any other purpose than the erection of a personal residence for Mr. and Mrs. Kazakoff. He submitted that the whole course of conduct of the taxpayers in this transaction; the nature of the property purchased; the absence of any similar transactions by the appellants and the absence of any relationship between this transaction and their ordinary business or employment as well as the absence of any evidence of activity or organization normally associated with trade or trading of property establishes that this was not an adventure in the nature of trade and that the income in issue was capital and not business income.

Notwithstanding counsel's able submissions I have concluded that the appeals cannot succeed. I am satisfied that the conduct of the appellants during the course of this transaction is inconsistent with their asserted intentions for the property. I listened carefully to the testimony of Kazakoff. He is an intelligent man; he has been a salesman himself for many years; and he is not naive in the ways of the commercial world, as he on occasion implied. On the whole I found his evidence unsatisfactory. He was at times unresponsive; he equivocated; while at other times when he wished to make a point he was able to remember minutiae such as the date of the alleged posting of the "for sale” sign and the specific date of the meeting with Reeve at which the listing of the Kaleden property was discussed. On other occasions his responses were simply not plausible, particularly as they related to his knowledge or alleged lack thereof as to the value of the Kaleden property at the time of purchase.

I am conscious of the fact that my discretion in choosing to accept or reject testimonial evidence is not completely untrammelled. However where the statements of a witness, in this case, Kazakoff, relating to the key issue of knowledge and intent are in themselves unreasonable and improbable, and when they are to some degree inconsistent with other evidence, I am entitled, at the very least to conclude that the evidence adduced falls short of meeting the evidentiary onus on the appellants.

I have referred to the unsatisfactory nature of the testimony. The transaction in its totality bears every hallmark of an adventure in the nature of trade. The property was known by the appellants to be undervalued by the vendor. Not only did Kazakoff reluctantly concede that point but it is corroborated by the fact that there was absolutely no bargaining by him. The purchase was highly financed by way of a demand loan at a high rate of interest. No real effort was made by the appellants to sell their home. In fact the “for sale” sign was not posted until two weeks after the Kaleden property was purchased. I found Kazakoff's evidence as to the posting of the “for sale” sign, as well as the fact of its retention to this date and the recent taking of photographs, questionable. The failure to list the residence with an agent is absolutely inconsistent with the appellants’ stated intentions with respect to the Kaleden property. The reason advanced for that failure, being a desire to save the cost of commissions, is in my view spurious.

I do not accept Kazakoff's testimony that the decision to sell the Kaleden property resulted from the onset of sudden panic regarding the loan, nor do I accept the assertions of severe tension and sleepless nights. Both appellants were aware of the market conditions when they bought Kaleden. Mrs. Kazakoff was quite candid with respect to her knowledge thereof and while Kazakoff once again chose to equivocate I am satisfied that he had, at the very least, informed himself of current prices and trends. I have also previously expressed my view as to Fred Kazakoff's responses regarding the letter from the bank (Exhibit A-2).

On balance the appellants have not satisfied the onus upon them. Their assertions that no other motivation existed save the desire for a farm and their flat rejection of any consideration of any potential for resale of the property is not tenable. Having regard to the appellants’ course of conduct and their testimony I have concluded that the assessment was properly made.

The appeals are dismissed.

Appeals dismissed.