Sarchuk,
T.C.J.:—
The
appeals
of
Jason
Rodd
and
Robbin
Rodd
are
from
reassessments
of
income
tax
for
their
respective
1981
taxation
year.
The
appellants,
who
reside
in
the
province
of
British
Columbia,
have
been
reassessed
with
respect
to
the
profits
realized
from
the
sale
of
property
described
as
Lot
2,
Section
14,
Range
8,
Mountain
District,
Plan
18845.
In
so
reassessing
the
respondent
included
business
income
of
$98,967
in
respect
of
the
disposition
of
the
property,
disallowed
an
income-averaging
annuity
contract
premium
deduction
of
$20,000
claimed
by
each
of
the
appellants,
and
applied
a
$42,013
loss
carry
back
from
1982
to
1981
at
the
appellants'
request
pursuant
to
paragraph
111(1)(a)
of
the
Income
Tax
Act
(the
Act).
In
reassessing
the
appellants
the
respondent
relied,
inter
alia,
upon
the
following
assumptions:
(a)
on
June
9,
1980
the
appellants
purchased
the
subject
property
for
a
purchase
price
of
$204,426.00,
held
the
same
for
approximately
14
/2
months
and
on
August
31,
1981
sold
it
in
an
arm's
length
transaction
for
proceeds
of
$425,000.00;
(b)
in
filing
their
returns
of
income
for
the
1981
taxation
year,
the
appellants
each
reported
a
capital
gain
of
$98,967.00
in
respect
of
the
disposition
in
that
year
of
the
subject
property,
and
they
also
claimed
an
income
averaging
annuity
contract
premium
deduction
of
$20,000.00
each,
based
upon
the
income
they
realized
from
the
said
disposition;
(c)
the
appellants
financed
the
purchase
of
the
subject
property
with
$64,426.00
of
their
personal
funds
and
by
means
of
a
short-term
demand
loan
in
the
amount
of
$140,000.00,
bearing
interest
at
the
prime
lending
rate
plus
two
per
cent
from
the
Canadian
Imperial
Bank
of
Commerce;
(d)
during
the
time
the
appellants
owned
the
subject
property,
they
made
no
payments
to
reduce
the
principal
balance
outstanding
on
the
said
demand
loan;
(e)
at
the
time
of
purchase
by
the
appellants
the
subject
property
consisted
of
1.76
acres
of
land
with
an
existing
commercial
building
on
the
front
one-half
of
the
property.
The
back
one-half
of
the
property
was
undeveloped;
(f)
during
their
period
of
ownership
of
the
subject
property
they
received
rental
income
from
a
commercial
tenant,
which
income
was
only
slightly
greater
than
the
property
taxes
and
interest
costs
in
respect
of
the
property
and
the
subject
property
did
not
generate
any
significant
profits;
(g)
during
their
period
of
ownership
they
made
no
attempts
to
improve
the
physical
condition
of
the
subject
property;
(h)
the
sale
of
the
subject
property
in
August
1981,
was
the
result
of
listing
it
for
sale
with
a
real
estate
agent
in
May
1981;
(i)
during
1981
and
1982
the
appellants
operated
as
partners
a
property
development
business
known
as
Rodd
Manor
Homes,
bought
and
sold
five
other
properties,
and
were
in
the
ordinary
business
of
buying
and
selling
real
estate;
(j)
on
July
2,
1980
they
applied
to
the
City
of
Nanaimo
for
permission
to
subdivide
the
subject
property
to
create
five
new
parcels
of
land
for
the
stated
use
of
building
on
and/or
selling,
which
application
was
refused;
(k)
on
September
11,
1980
they
again
applied
to
the
City
of
Nanaimo
for
permission
to
subdivide
the
subject
property,
this
time
for
the
stated
use
of
removing
one-half
of
the
property
from
the
building
and
facilitating
the
sale
of
the
building,
which
application
was
also
refused;
(l)
the
appellants,
in
purchasing
the
subject
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;
(m)
the
appellants
realized
a
net
profit
in
1981
from
the
disposition
of
the
subject
property
of
$98,967.00,
which
was
business
income
earned
by
them
in
their
respective
1981
taxation
year
from
an
adventure
in
the
nature
of
trade;
(n)
in
the
1981
taxation
year
neither
of
the
appellants
earned
income
which
qualified
them
for
a
deduction
in
respect
of
an
income
averaging
annuity
contract
premium;
and
(o)
in
the
1982
year
the
appellants
had
a
$42,013
loss
available
to
be
applied
to
other
years
in
accordance
with
paragraph
111(1)(a)
of
the
Act,
and
they
requested
that
the
said
loss
be
applied
in
the
1981
year.
The
appellants
say
that
any
profit
realized
from
the
disposition
of
the
subject
property
was
the
fortuitous
realization
of
a
capital
gain.
Both
appellants
maintain
that
at
all
relevant
times
their
sole
intention
was
to
utilize
the
property
as
an
income
producing
long-term
investment
and
that
all
steps
that
were
taken
by
them
were
for
the
purpose
of
implementing
that
intention.
Each
of
the
taxpayers
asserted
that
they
did
not
have
in
their
minds,
at
the
moment
of
the
purchase,
any
possibility
of
reselling,
nor
did
they
have
in
mind
that
given
a
certain
set
of
circumstances
arising,
they
had
hopes
of
being
able
to
resell
all
or
part
of
it
at
a
profit
instead
of
using
the
property
solely
for
the
purposes
of
capital.
The
facts
before
me
can
be
briefly
summarized
as
follows.
In
1980
the
appellants
moved
to
Nanaimo
from
Alberta.
Prior
to
the
move
Jason
Rodd
had
worked
for
the
same
company
for
some
ten
years
and
in
moving
to
the
Nanaimo
area
he
gave
up
certain
side
benefits,
including
the
security
of
long
time
employment,
pension
rights
and
so
forth.
In
Nanaimo
he
worked
as
an
electrician
on
construction
projects
for
most
of
1980.
He
said
that
this
work
was
project
oriented,
was
not
always
steady
and
with
the
then
current
atmosphere
of
labour
unrest
there
was
a
degree
of
job
insecurity.
As
well,
he
and
his
wife
had
funds
available
for
investment.
These
factors
led
the
appellants
to
seek
out
property
which
might
provide
them
with
some
income,
carry
itself,
and
which
had
prospects
of
greater
returns
in
the
future.
They
approached
a
real
estate
broker,
Nanaimo
Realty
Limited,
and
spoke
to
one
of
its
realtors,
Mr.
W.W.
Gant.
With
his
assistance
they
ultimately
purchased
an
industrial
property
on
the
outskirts
of
Nanaimo.
It
consisted
of
1.7
acres
with
a
building
designed
for
light
industrial
purposes
located
on
the
front
half
thereof.
At
the
time
the
whole
of
the
property
was
under
lease
to
a
company
involved
in
the
steel
fabricating
business.
The
tenant
was
on
a
month-to-month
lease
and
was
not
prepared
to
enter
into
a
longer
agreement
on
the
terms
suggested
by
the
appellants.
To
provide
a
safety
net
for
the
appellants
the
vendor
agreed,
in
the
words
of
Jason
Rodd
"to
take
back
a
two-year
head
lease”,
the
terms
of
which
were
identical
to
those
given
to
the
prime
tenant.
It
should
be
noted
that
the
vendor,
Mr.
R.A.
Robson,
was
an
associate
of
Mr.
Gant
at
Nanaimo
Realty
Limited.
The
appellants
paid
the
sum
of
$63,000
in
cash
and
financed
the
balance
of
the
purchase
price
by
way
of
a
demand
loan
with
a
collateral
mortgage
in
favour
of
the
Canadian
Imperial
Bank
of
Commerce
(the
Bank).
Initially
the
appellants
had
received
tentative
approval
from
a
trust
company
for
a
conventional
mortgage.
However
upon
inspection
the
trust
company
decided
that
as
a
result
it
was
not
prepared
to
proceed
with
the
loan.
They
discussed
the
situation
with
Robson
and/or
Gant
and
were
advised
that
there
were
other
offers
for
the
property.
Gant
suggested
that
the
Bank
be
approached
for
interim
financing
and
he
arranged
the
meeting.
The
appellants
accordingly
went
to
the
Bank,
discussed
the
situation
with
the
then
manager,
Mr.
Birch,
and
made
an
application
for
a
loan.
Time
was
short
and
the
appellants
agreed
to
proceed
on
the
basis
of
a
short-term
demand
loan
bearing
interest
at
the
prime
lending
rate
plus
two
per
cent.
They
allege
that
it
was
their
intention
to
obtain
conventional
mortgage
financing
after
acquiring
the
property.
The
appellants
assert
that
following
their
acquisition
of
the
property
several
events
occurred
which
ultimately
led
them
to
list
the
property
for
sale.
In
the
first
instance
interest
rates
began
to
go
up
and
since
they
had
very
little
profit
margin
they
considered
applying
for
a
conventional
mortgage.
Mr.
Rodd's
recollection
was
that
he
received
advice
from
several
sources,
including
Gant,
to
wait
until
the
spring
of
1981.
He
did
so
but
the
interest
rates
continued
to
rise.
Jason
Rodd
also
testified
that
the
tenant
was
extremely
difficult
to
deal
with.
The
property
was
in
a
state
of
disrepair
and
neither
the
appellants
nor
Robson
were
successful
in
obtaining
the
tenant's
co-operation
to
put
the
property
into
good
shape.
At
some
point
of
time,
either
late
in
1980
or
early
in
1981,
the
appellants
took
steps
to
increase
the
rent.
At
about
the
same
time
another
manufacturing
company
was
attempting
to
purchase
the
tenant's
business
and
had
reached
a
tentative
agreement
to
do
so.
Both
companies
then
approached
the
appellants
and
demanded
a
three-year
lease
with
an
option
to
buy
the
property
as
a
pre-condition
to
the
transaction.
The
appellants
were
presented
with
a
draft
lease
in
which
the
rent
stipulated
was
only
marginally
greater
than
the
current
rent.
According
to
Rodd
the
offered
lease
was
of
absolutely
no
benefit
to
them
since
the
increasing
interest
rates
had
virtually
eaten
up
their
margin
of
profit
as
it
was.
The
proposed
lease
was
rejected
and
the
tenant
and
its
purchaser
then
threatened
that
they
would
vacate
the
property.
The
appellants
assert
that
the
refusal
of
the
parties
to
increase
the
rent
coupled
with
this
threat
gave
them
cause
for
concern
as
a
result
of
which
they
discussed
the
matter
with
their
realtor
and
then
listed
it
for
sale.
The
price
sought
was,
to
the
best
of
Rodd's
recollection,
slightly
in
excess
of
$350,000.
Shortly
after
listing,
on
May
15,
1981,
they
received
an
offer
to
purchase
from
a
manufacturing
company
that
wished
to
relocate.
This
offer,
in
the
amount
of
$350,000,
was
accepted
but
the
purchasers
were
not
able
to
complete
the
transaction
by
July
30,
being
the
closing
date.
The
appellants
were
advised
by
their
counsel
to
either
sue
for
completion
or
to
put
the
property
back
on
the
market,
which
they
decided
to
do.
However
they
also
began
renegotiations
with
the
same
purchaser
but
at
a
new
selling
price
which
the
appellants
set
themselves.
On
August
8,
1981
they
received
and
accepted
an
offer
to
sell
the
property
at
a
price
of
$425,000.
Prior
to
this
transaction
the
appellants
had
no
experience
in
real
estate
other
than
their
ownership
of
a
personal
residence
in
Alberta.
However
shortly
thereafter,
as
a
separate
venture,
the
appellant
Jason
Rodd
decided
to
become
a
building
contractor.
In
January
1981
he
proceeded
to
buy
a
lot
then
went
to
the
bank
to
obtain
a
line
of
credit
on
a
demand
note
basis.
The
house
was
built
with
the
bank
financing
all
of
the
costs
of
construction.
This
house
was
sold
in
June
1981
at
a
profit.
With
some
of
the
profits
the
appellants
purchased
two
other
lots
and
commenced
to
build
a
house
on
one
of
them.
According
to
Mr.
Rodd
the
market
flattened
out
and
these
properties
were
eventually
traded
for
another
lot
which
was
ultimately
sold
in
September
1981
with
little
or
no
profit.
Throughout
their
evidence
both
appellants
maintained
that
they
acquired
the
property
in
issue
as
an
investment
and
that
it
was
the
combination
of
the
increased
interest
rates
which
reduced
their
profitability;
the
failure
to
increase
the
tenant's
rent
and
the
threats
received
from
the
tenant
to
vacate
the
property
that
led
them
to
consider
listing
the
property
for
sale.
I
have
considered
all
of
the
evidence,
both
testamentary
and
documentary,
and
have
concluded
that
the
appeals
cannot
succeed.
There
is
little
doubt
that
one
of
the
motivating
factors
in
the
appellants’
acquisition
of
the
property
was
a
desire
to
acquire
rental
property
as
an
investment.
However
I
am
also
satisfied
that
the
appellants,
in
addition
to
this
primary
intention,
had
a
secondary
intention
which
was
a
strong
factor
in
convincing
them
to
acquire
the
property.
This
secondary
intention
was
to
sell
the
property
at
a
profit
should
the
primary
purpose
be
unsuccessful
or
should
the
appropriate
opportunity
to
make
a
profit
by
resale
present
itself.
I
have
reached
this
conclusion
for
a
number
of
reasons.
The
subject
property
was
purchased
by
the
appellants
on
June
9,
1980.
On
July
2,
1980
the
appellants
applied
to
the
City
of
Nanaimo
for
preliminary
subdivision
approval
(Exhibit
A-3).
The
proposed
subdivision
involved
the
creation
of
five
new
parcels
in
respect
of
which
the
appellants
stated
intended
use
was
"to
build
on
and/or
sell".
The
appellant
Jason
Rodd
testified
that
at
all
times
they
were
aware
of
the
fact
that
the
property
was
not
serviced
for
water
and
sewer
and
therefore
it
was
likely
that
the
City
of
Nanaimo
would
not
permit
any
subdivision.
Notwithstanding
that
fact
Jason
Rodd
drew
up
the
proposed
plan
of
subdivision
and
submitted
it
to
the
city.
He
said
he
wanted
to
maximize
the
potential
value
of
the
property
in
order
to
refinance
their
loan.
He
explained
his
rationale
this
way:
If
I
could
show
the
mortgage
companies
that
the
property
is
subdivided
they
might
be
prepared
to
give
us
a
conventional
loan
notwithstanding
the
fact
that
the
building
is
in
bad
shape.
Their
application
was
rejected.
On
September
11,
1980
the
appellants
again
applied
to
the
City
of
Nanaimo
for
subdivision
approval.
In
this
instance
the
subdivision
involved
”.
.
.
removing
/2
of
the
subject
property
from
the
building
to
facilitate
the
sale
of
the
building
at
a
reasonable
market
value.
Intended
use
of
the
new
parcel—to
retain
as
holding
property."
With
respect
to
this
application
Jason
Rodd
testified
that
following
the
first
rejection
he
discussed
the
matter
with
another
realtor
who
advised
him
that
an
application
to
"cut
the
property
in
half
might
be
effective”.
Once
again
the
stated
reason
was
to
enable
the
appellants
to
obtain
a
conventional
mortgage,
or
in
the
alternative,
to
convince
the
existing
tenant
to
reduce
his
lease
to
one-half
of
the
property
(including
the
building)
which
would
permit
the
appellants
to
find
another
tenant
for
the
balance
of
the
property.
Under
cross-examination
Jason
Rodd
insisted
that
it
had
never
been
the
appellants'
intention
to
sell
the
properties
upon
subdivision
and
that
the
inclusion
of
such
assertions
in
both
applications
did
not
reflect
their
true
intentions
but
were
meant
solely
to
dress
up
the
application
in
the
hopes
of
convincing
the
City
of
Nanaimo
to
grant
approval.
A
further
inconsistency
between
the
appellants'
assertions
and
the
documents
is
found
in
their
application
for
an
interim
loan,
in
which
certain
information
was
provided
by
the
appellants
to
the
bank.
The
application
for
personal
credit
(Exhibit
R-2)
which
was
prepared
by
Mr.
R.W.
Birch,
the
branch
manager,
contains
several
comments
of
interest.
With
respect
to
the
purpose
of
the
loan
the
following
is
recorded:
To
purchase
commercial
property
for
subdivision
and
sale
or
development.
Under
the
heading
Repayment
and
Conditions
Mr.
Birch
wrote:
Interest
only
for
6
months
then
sale
of
subdivided
lots.
If
further
development
is
undertaken,
proposal
will
be
reviewed
at
that
time.
and
under
Remarks
and
Recommendations:
The
subjects
wish
to
purchase
commercial
property
and
subdivide
'/2
of
the
property
into
two
further
commercial
lots.
One
of
these
lots
will
be
listed
for
sale
with
sale
proceeds
being
applied
as
a
permanent
reduction
in
loans.
Preliminary
subdivision
costs
are
estimated
at
a
maximum
of
$40,000
and
the
subjects
have
these
funds
available.
.
.
.
On
January
28,
1981,
when
the
appellants
became
involved
in
the
construction
of
houses
for
resale,
another
application
was
made
to
the
bank
for
additional
personal
credit.
In
this
application
the
"purpose
of
the
loan”
with
respect
to
the
property
in
issue
was
restated
and
the
following
was
added:
The
subdivision
of
the
subjects
commercial
property
will
be
delayed
until
the
City
provides
additional
water
to
the
site
which
is
expected
in
mid
of
1981.
Recent
real
estate
valuations
of
the
property
show
a
value
of
$300/325,000
and
the
subjects
are
considering
selling
or
remortgaging
the
property
and
subdivide
A
lots
once
City
approval
is
available.
The
property
is
rented
for
$2,400
p.m.
which
has
been
sufficient
to
carry
monthly
interest
payments.
With
respect
to
all
of
the
information
provided
to
the
bank
Jason
Rodd
testified
that
there
was
some
urgency
in
obtaining
immediate
approval
and
he
was
made
aware
by
Mr.
Birch
that
such
approval
would
have
to
come
from
Vancouver.
Birch
is
alleged
to
have
told
the
appellants
that
to
expedite
matters
it
was
preferable
if
they
stated
on
their
application
that
the
property
was
to
be
sold
shortly
after
acquisition.
Such
a
statement
regarding
sale
would
facilitate
loan
approval,
was
inserted
only
for
that
purpose
and
did
not
reflect
an
intention
to
sell.
Both
in
his
testimony
and
in
earlier
representations
to
officers
of
Revenue
Canada,
Jason
Rodd
maintained
that
this
was
done
on
the
advice
of
Birch.
He
also
said
that
they
were
advised
by
Birch
to
defer
application
for
a
conventional
mortgage
until
1981
when
interest
rates
would
be
lower
and
to
apply
for
subdivision
approval
in
order
to
increase
value
of
the
property.
He
maintained
that
Birch
was
concerned
that
approval
would
not
be
given
if
Vancouver
was
aware
that
conventional
mortgage
financing
had
been
rejected
and
that
their
application
for
credit
was
structured
in
such
a
way
as
to
reasonably
assure
quick
approval.
The
Court
heard
the
evidence
of
R.W.
Birch
who
was
the
branch
manager
for
the
bank
in
Nanaimo
at
the
relevant
time.
Birch
was
transferred
to
Nanaimo
in
approximately
April
1980.
He
first
met
the
appellants
by
way
of
a
reference
from
Nanaimo
Realty
Limited
but
he
was
not
able
to
remember
the
name
of
the
individual
who
called.
Birch
testified
that
he
was
new
to
Nanaimo,
that
he
did
not
know
the
vendor,
Robson,
nor
W.
Gant.
It
was
his
testimony
that
he
did
not
recall
discussing
the
transaction
with
either
Robson
or
Gant
and
that
all
of
the
information
contained
in
the
application
for
personal
credit
(Exhibit
R-2)
came
from
the
appellant
Jason
Rodd.
He
conceded
that
the
choice
of
language
in
the
application
,
particularly
under
the
heading
Remarks
and
Recommendations,
was
his,
but
that
in
all
instances
the
source
of
his
information
was
Jason
Rodd.
The
assertions
of
the
appellants
that
the
acquisition
of
the
subject
property
was
motivated
solely
by
desire
to
acquire
a
rental
property
that
would
carry
itself
and,
in
due
course,
provide
a
source
of
income
in
addition
to
that
earned
by
Mr.
Rodd
from
employment,
must
be
assessed
in
the
context
of
all
of
the
other
available
evidence.
In
this
case
the
statements
made
by
the
appellants
in
their
quest
for
subdivision
approval
and
the
information
provided
by
them
to
the
bank,
quite
clearly
negate
an
exclusive
investment
purpose.
In
this
context
I
must
note
that
where
there
is
a
variance
between
the
testimony
of
the
appellants
and
that
of
Mr.
Birch
I
accept
the
latter.
I
should
add
that
even
if
one
were
to
give
some
credence
to
the
appellants'
explanations
regarding
the
inclusion
of
these
comments
in
the
various
applications,
one
is
left
with
the
uncomfortable
knowledge
that
the
appellants
were
prepared
to
be
less
than
candid
in
order
to
achieve
their
objectives.
There
are
several
other
factors
which
are
inconsistent
with
the
appellants’
position.
The
appellants'
offer
to
purchase
the
property
on
May
15,
1980
was
made
with
the
expectation
that
Canada
Trust
would
approve
their
mortgage
application.
When
this
was
rejected
they
approached
the
bank
for
interim
financing.
Jason
Rodd
said
that
notwithstanding
their
inability
to
obtain
a
conventional
loan
he
never
considered
abandoning
his
efforts
to
acquire
the
property,
principally
because
he
was
aware
of
two
“back-up
offers"
which
were
in
place.
These
offers
reassured
the
appellants
that
they
had
found
a
good
property
and
reaffirmed
their
intention
to
buy
it.
Furthermore,
although
the
appellants'
acquisition
of
the
subject
property
preceded
their
involvement
in
house
building,
it
did
so
by
a
mere
matter
of
months.
While
it
cannot
be
disputed
that
the
appellants
were
in
the
ordinary
business
of
buying
and
selling
real
estate
during
1981
and
1982,
I
am
not
prepared
to
attach
the
weight
to
that
activity
sought
for
by
counsel
for
the
respondent.
On
the
other
hand
their
concurrent
involvement
in
the
building
trade
certainly
does
little
to
support
their
position
that
they
were
naive
investors
with
no
experience
in
the
real
estate
market.
All
of
these
factors
are,
when
viewed
in
the
total
context,
inconsistent
with
an
exclusive
investment
intention.
For
these
reasons
the
appeals
are
dismissed.
Appeals
dismissed.
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