Dave R.C. McMillan v. Minister of National Revenue, [1987] 2 CTC 2038, 87 DTC 358

Brulé, T.C.J.:—These are appeals from reassessments of income tax for the appellant's 1981, 1982 and 1983 taxation years by which the Minister disallowed the following items claimed by the appellant in relation to the purchase and sale of a residence in Maple Ridge, British Columbia.

On October 15, 1980, the appellant entered into an interim agreement for the purchase of a lot in Maple Ridge, British Columbia. This agreement was subject to the purchaser and vendor agreeing upon a contract price prior to November 30, 1980 for the construction of a new house to be built upon the lot. Negotiations for the building contract continued until March 31, 1981 when the contract was signed and the purchase finalized. The appellant testified that the cause of this delay was the necessity of having all design changes approved by the developer and that many of his proposals were rejected and had to be revised.

The appellant's testimony was that at the time he signed the interim agreement he intended to live in the new house but by March 31, 1981 this was no longer the case, primarily due to his dissatisfaction with the design of the house. Despite this fact, he chose to go ahead with the agreement because he thought he would lose his original deposit of $8,400 if he did not proceed. He did seek legal advice on the matter. The appellant testified that the value of the land had increased by $20,000 between the signing of the two agreements and that his intention when signing the final contract on March 31,1981 was to sell the property quickly and make at least a $20,000 profit.

In 1981, the appellant also owned a house where he resided with his family and a town house which was used as rental property. During that year the taxpayer began to experience cash flow problems and decided to place these two properties on the market. The town house was sold in midNovember and the appellant's home was sold in December of 1981 for $14,000 less than the amount owing on the mortgage. The acceptance of such a low offer on his house provides some indication of the serious financial problems the appellant was facing at that time. Following the sale of his home, the appellant and his family moved into the Maple Ridge house and resided there until October 1982, when it was released to the new owners.

The appellant testified that the Maple Ridge property was first listed for sale at a price of $259,900 in late July or early August of 1981, when the house was close to completion, but he was unable to provide any documentation to corroborate this testimony. In January of 1982 the house was listed at a price of $199,900 and was finally sold on September 25,1982 for $131,500.

Appellant's Position

Counsel for the appellant argued that although the appellant had originally intended to build the house for personal use, his intentions had changed by the time he entered into the building contract in March of 1981, and the appellant is therefore entitled to deduct losses incurred as a result of this "speculative venture". He conceded at trial that the house was used for personal use after December 1981 and that any losses incurred after that time were strictly personal and non-deductible.

Minister's Position

Counsel for the Minister maintains the position that the appellant purchased the lot and began construction of the house with the sole intention that it be built as a principal residence for himself and that the possibility of reselling the property at a profit was not a motivating factor in the appellant's mind at the time of purchase. He argued that the appellant's conduct was not consistent with his stated intention to resell the property at a profit and suggested that the real motivation for selling the property was the appellant's cash flow problem in 1981.

During cross-examination, counsel for the Minister noted the many additional features which had been added to the house at the appellant's request. These included, inter alia, appliances costing approximately $9,000 and a marble hearth for the fireplace. The respondent argued that these extras were intended for the personal use of the appellant and evidenced a course of conduct inconsistent with an intention to make a quick profit through resale of the property. The respondent submitted that what the appellant had built was a specialty home, specifically designed for the appellant’s own particular requirements, which restricted its marketability and that this was not characteristic of a speculative investment.

Analysis

The appellant claims that his investment in the Maple Ridge property was a speculative investment but it is impossible to accept this assertion in light of the evidence given at trial. The house was custom built as far as permissible to the specifications of the appellant. In my opinion, the evidence is clear that the appellant purchased this property and built the house for the sole purpose of establishing his principal residence there and for no other reason. On the basis of the evidence I must also conclude that the appellant's decision to sell the house in Maple Ridge was based upon his financial difficulties and was not part of a pre-determined plan to sell the property for a profit.

In the case of Joan O. Paterson v. M.N.R., [1983] C.T.C. 2318; 83 D.T.C. 250, Mr. G. Tremblay (Member of the Tax Review Board, as he then was) stated at page 2323 (D.T.C. 253):

The crux of the matter is whether the purchased property should be considered as a personal-use property. If not so considered, the loss can be allowed as a deduction. If it is so considered, the loss cannot be allowed as a deduction.

In my view the property in question was clearly personal-use property. The lot was purchased for the sole purpose of building a custom home for the appellant and to establish a principal residence. As such he cannot get relief and comes within the provisions of subsection 40(2) of the Income Tax Act. The losses arising from such a transaction are clearly not deductible. The appellant's appeals are therefore dismissed.

Appeals dismissed