Rein R Ennist, Riina Ennist v. Minister of National Revenue, [1985] 2 CTC 2398, 85 DTC 669

Taylor, TCJ:—These are appeals heard on common evidence at Toronto, Ontario on September 23, 1985, against income tax assessments, in which the Minister of National Revenue assessed as taxable income the proceeds from Registered Home Ownership Savings Plans, which proceeds were used by the appellants to acquire a house; and the Minister also disallowed the appellants’ claim that the house (above) was the “principal residence”, taxing the gain on sale arising therefrom on capital account. In view of the unusual nature of this appeal, I will quote liberally from the documentation supplied, without attesting, at this point, to its accuracy.

For the appellants:

Please accept this Notice of Appeal in respect of two separate Appeals, namely Rein R Ennist and Riina Ennist, husband and wife, as the facts and circumstances are identical.

BRIEF SUMMARY OF FACTS

1. On September 17, 1980, Rein R Ennist and Riina Ennist (the appellants) entered into an Agreement of Purchase and Sale (Agreement) with Bramalea Ltd (Bramalea) regarding a condominium apartment municipally known as 33 Elmhurst Ave, Apt 908, Willowdale, Ont (Elmhurst). The Agreement was executed by Bramalea on September 23, 1980. The building was still under construction and was not due for residency until May, 1981. The purchase was to be the appellants’ principal residence, neither of them having owned any property previously and, at that time, living in rented accommodations in the same neighbourhood as the purchase. The agreement was accompanied by a down payment deposit of five thousand ($5,000.00) dollars.

2. On October 8, 1980 the appellants constructed for and paid for upgrading the apartment in the way of kitchen cupboards and carpets for $966.00.

3. On December 3, 1980, Rein R Ennist, a federal public servant, applied for a promotion competition for a position in Ottawa. He was successful and was offered the position on December 12, 1980. Due to an appeal to the competition and operational requirements of his position in Toronto, he was not able to report to his new position in Ottawa until March 18, 1981.

4. According to the Agreement with Bramalea regarding Elmhurst, the appellants were not able to “sell, transfer or assign” the Agreement until they had clear title to the property so rather than forefeit the Agreement and lose their $5,000.00 deposit, the appellants decided to proceed with the purchase.

5. In order to have sufficient funds to be able to close the deal, the appellants each withdrew $8,768.30 from their accumulated Registered Home Ownership Savings Plans (RHOSP).

6. The interim closing for Elmhurst took place on May 29, 1981 but the actual closing did not take place until June 29, 1981 due to delays that Bramalea had in registering the condominium corporation.

7. The appellants had made arrangements to sell Elmhurst and the sale closing took place on July 14, 1981. Due to the inflationary real estate market in Toronto at that time, there had been a substantial increase in the value of Elmhurst and a gain was realized.

8. The appellants did not report a capital gain on their 1981 income tax returns as they considered Elmhurst as their principal residence. They also did not consider the RHOSP withdrawals as taxable as the funds were used to purchase an owner-occupied home.

9. The Minister audited the returns and on April 29, 1983 reassessed both appellants regarding a capital gain on the disposal of Elmhurst as it was his opinion that Elmhurst did not qualify as a principal residence, under subsection 54(g) of the Income Tax Act, as it was not ordinarily inhabited in the year by the appellants. Also, the RHOSP withdrawals were included in income as the Minister was of the opinion that in order to qualify under subsection 146.2(6) ITA, the withdrawals had to be used to acquire an owner-occupied home, which the Minister did not consider Elmhurst to be.

10. The appellants filed Notices of Objection on June 2, 1983 and the Minister confirmed the reassessments on February 24, 1983 for the reasons stated in 9 above.

For the respondent (with respect to Rein R Ennist):

The Respondent denies that the condominium was a principal residence and denies that it was an owner-occupied home, within the meaning of the Income Tax Act.

— the purchase price of the condominium to the Appellant was $88,800.00, and the purchase transaction closed on June 29, 1981;

— on or about May 1, 1981 the Appellant signed an Agreement of Purchase and Sale to resell the condominium at a price of $126,000.00 and the resale transaction closed on July 14, 1981;

— the Appellant and the Appellant’s spouse incurred a capital gain of $33, 363.00 on the sale thereof;

— at no time did the Appellant and the Appellant’s spouse inhabit the condominium.

The Respondent relies, inter alia, on Sections 3, 38, 39, 40 and paragraph 54(g) and subsections 146.2(1) and (6) of the Income Tax Act, RSC 1952, chapter 148, as amended.

The Respondent respectfully submits that the taxable capital gain was properly included in the Appellant's income pursuant to Sections 3, 38 and 39 and that the amount thereof was properly calculated in accordance with Section 40 of the Act, and specifically that paragraph 40(2)(b) was inapplicable as the property was not a principal residence at any time within the meaning of paragraph 54(g).

The Respondent further and respectfully submits that the proceeds of the RHOSP were properly included in income pursuant to subsection 146.2(6), and specifically that no amount thereof was used to acquire an owner-occupied home within the meaning of paragraph (a) thereof and as defined in paragraph 146.2(1)(f), of the Act.

Mr Ennist, a senior employee with Revenue Canada, entered as an Exhibit, a copy of the Agreement of Purchase and Sale and made particular reference to clause 19 of that Agreement which reads as follows:

CLAUSE 19.

The Purchaser covenants and agrees not to sell, transfer or assign this agreement without the consent of the Vendor, which consent may be arbitrarily withheld, and if the Purchaser should die prior to closing, the Vendor shall, at its option, be entitled to declare this agreement null and void and upon so doing shall return all purchase monies paid hereunder to the personal representatives of the Purchaser.

He stated that he had not sought out specific legal advice regarding the enforceability of that clause; that he was aware (early in 1981) that the condominium unit (when completed) would probably have a value in excess of his obligated purchase price; and that his own interest in the unit, as a personal residence, declined considerably after he was confirmed in his new position which required that he move to Ottawa. His wife, separately employed in The Victorian Order of Nurses, unsuccessful in her attempts to locate new satisfactory employment in Ottawa, remained in Toronto, and continued to live in the same rental apartment which they had both occupied at the start of their effort to acquire the condominium unit. Ultimately (sometime after 1981) Mr Ennist moved back to Toronto, where both he and his wife continued to live and work.

In argument, Mr Ennist covered much of the same points as those made in his notice of appeal and I quote from it:

GROUNDS FOR APPEAL TO THE TAX COURT OF CANADA

It is clear from the above facts that the appellants fully intended for Elmhurst to be their home and residence when the Agreement was signed. The Minister, during discussions at the Notice of Objection stage, has admitted that there is no question regarding original intention.

12. The circumstances regarding one of the appellants’ promotion transfer prevented the appellants from taking up full time residence in Elmhurst in June 1981.

13. The property had to be sold, as had the RHOSP funds to be withdrawn, due to circumstances which became largely beyond the appellants’ control.

14. In an attempt to live up to the letter of the Income Tax Act, the appellants did spend one night at Elmhurst during the time title was registered in their names. Sufficient bedding, clothes, food and sundries were brought in for one 24 hour period during which they also made use of the recreational facilities in the building.

15. The Minister is of the opinion that this does not satisfy the ITA as to “ordinarily inhabited” re principal residence or “owner-occupied home” re RHOSP withdrawals, although neither term is defined in the Act and the Minister has not provided definitions.

16. The appellants relied on the Minister’s own interpretation of the law in Interpretation Bulletin IT 120R2, paragraph 8 “Meaning Of Ordinarily Inhabited”’ in which he states “The question of whether a residence was ordinarily inhabited during a taxation year by a taxpayer . . . must be resolved on the facts in each case. Where the residence has been occupied by such a person for only a short period of time during a taxation year . . . it is the Department’s view that he ordinarily inhabited that residence in the year, provided that the principal reason for owning the property was not for the purpose of gaining or producing income therefrom”. It is the appellants’ view that they clearly fit the Minister’s criteria as per this Interpretation Bulletin.

17. Furthermore, the Minister defines “owner-occupied home” of a taxpayer in Information Circular 75-18R5 entitled “Registered Home Ownership Savings Plans”, paragraph 25(b)(i) as “a housing unit owned in the year . . . if the housing unit was situated in Canada and was inhabited by the taxpayer at any time in the year”. It is the appellants’ position that they clearly fit the criteria as per this Information Circular.

18. Furthermore, it cannot be the intent of the Minister to levy punitive taxes on situations such as the appellants found themselves in. It must be the intent of the relevant sections for the Income Tax Act to tax those capital gains made in purchases of properties which are not intended to be principal residences and to tax RHOSP withdrawals of funds not used for purchases of property not intended for use as Owner-occupied homes.

19. Based on the above, the appellants respectfully request that the Minister’s reassessment be vacated.

Counsel for the Minister dismissed the "24-hour” stay in the condominium as only an obvious attempt by the taxpayers to get around any restriction in the Act; and relied largely on interpreting the words “ordinarily inhabited” (paragraph 54(g)) and "owner-occupied” (paragraph 146.2(6)(a) ) so that they did not cover the conduct of the appellants in this matter both as to the sale of the unit, and the gain therefrom; and the receipt of funds from the RHOSP. Counsel referenced considerable jurisprudence which in my view dealt largely with the term “ordinarily”, as it might be applied to “ordinarily resident” etc — which arises in sections of the Act other than those specifically under review in this appeal. Counsel dealt with the two points at issue as (1) the “ordinarily inhabited” point; and (2) as the "owner-occupied” point, in that order. Both parties agreed this appeal represented narrow and difficult issues with little in the way of guidelines or judicial illumination.

I should make two comments before proceeding. First, I think counsel for the respondent dealt with the two critical points in the reverse order — if nothing else can be applied, then chronologically the receipt from the RHOSP occurred long before the actual purchase (as owners) of the condominium unit, alleged by the parties to be their “principal residence”, and the sale occurred even later. Second, no basis for the assessment as it was struck — the gain on the sale of the condominium unit being on capital account — was provided to the Court. There was no testimony or evidence that the appellants ever did, or even thought of using the condominium unit as a Capital asset for the earning of income, such as rent. Their contention is that it was acquired as a “principal residence”, (paragraph 54(g)) or as they further assert the “owner-occupied home” (paragraph 146.2(6) (a) ). The Minister’s tax treatment of this situation points out that he rejected the appellants’ interpretation of the events, and it might well be suggested that the Minister's only viable option then was to treat the gain as on revenue, not capital account. I would think the only conclusion one could reach after reading the assessment notice and the documentation provided by the Minister (reply to notice of appeal) is that the Minister is implicitly stating that the appellants proceeded with their plans to purchase the house — after Mr Ennist's employment situation changed — with the obvious purpose of selling the unit and making a profit, — a purpose and course of action vigorously denied by the appellants.

In order to arrive at some logical perception of the events and circumstances impinging on these appeals, one must look at the only three reasons (all advanced and agreed to as possible by Mr Ennist) for which the appellants would have continued (after December 1980) to consummate their plan to purchase the condominium unit:

(1) Fear of the loss of their $5,000.

(2) Principal residence.

(3) Purchase and sell for profit.

With regard to (1) and (2) above there would have been no realistic basis for the appellants to purchase any course other than to continue their plans until at least March 18, 1981, the date at which the new employment in Ottawa for Mr Ennist was confirmed. On any scale of one to ten, (3) above could only have been a very minor role, up to that point in time. Therefore the appellants’ conduct before that time cannot be impugned and castigated. The RHOSP funds were received in January 1981, and their receipt cannot be subordinated to the “principal residence” question, nor coloured by circumstances and situations arising subsequent to that time. The appellants acted completely normally and properly in collapsing the RHOSP in January 1981 — even though there existed a distinct prospect that Mr Ennist might go to Ottawa — and they used the funds as part of their down payment. I do not believe anything truly significant hinges on the term “owner-occupied home” (paragraph 146.2(6)(a)). In my view it is merely to distinguish it from the only other regular alternative as “tenant-occupied home”, a prospect clearly eliminated by the testimony noted earlier. At the date of collapse of the RHOSP, and its use for part of the down payment on the house, there was no other logical course to follow for these appellants. They believed they stood to risk the $5,000 deposit, and there was no absolute certainty that they would not use it as their “principal residence”. Even though the point was not raised by the respondent, I have considered the words “to acquire” from paragraph 146.2(6)(a) and while it might be argued that making the down payment did not “acquire’’, in the sense of completing the purchase of the home, I believe that particular transaction (making the down payment out of the RHOSP funds) should be viewed as following along the continuum “to acquire” the home. As I see it, the Minister is in error in taxing the receipt of the RHOSP funds as income in their hands. That part of the appeal will be allowed to both parties.

Turning to the second point (although it was the first point, as stressed by counsel for the respondent) — the “principal residence” — we have quite a different problem. Leaving aside the thorny question of whether the gain should be on “revenue” or “capital” account (referenced above), and dealing only with whether the appellants have succeeded in placing themselves under the ambit of paragraph 54(g) of the Act — (on an assumption that the home was a capital asset) — the critical words certainly are “ordinarily inhabited” (subparagraph 54(g)(i)). For record purposes only it should be noted that the appellants did not complete “in prescribed form and manner” the designation of the condominium unit as a principal residence (subparagraph 54(g)(iii)) but that was not pursued by the Minister’s counsel in this appeal.

One of the cases cited by counsel for the respondent was that of Ernest Neufeld v MNR, [1981] CTC 2010; 81 DTC 18, in which the word “ordinarily” was examined. Therein the phrase “in most cases, usually, or commonly” seemed to suit as a definition in large measure. I have grave doubts that spending 24 hours in the condominium unit, in the circumstances of this appeal, would fulfil this condition and indeed the Minister's assessment could well be supported on that basis. Mr Ennist called upon the recent case of Stubart Investments Ltd v The Queen, [1984] CTC 294; 84 DTC 6305, as support for that which he readily admitted was an attempt in the “24- hour stay” to fulfil the “technical” wording of the Act, in that — (according to Mr Ennist) — if the purpose of the 24-hour stay was only to escape tax (his interpretation of Stubart (supra)), that should not be used to deny him the deduction. I refrain from any comment on the accuracy or adequacy of Mr Ennist's interpretation of the Stubart (supra) judgment. I do not feel required to examine Stubart (supra) to question the “ordinary” part of “ordinarily inhabited”, since I am not viewing that question based on a legal technicality, but I am examining it simply on a definition of the word. Further, if the lack of fulfulment of “ordinary” were not enough, these appellants face a greater challenge in the word “inhabit”. I am not certain that one can view the word “inhabit” as totally synonymous with “visit” or even “occupy”. In a definition of “inhabit” from the Oxford English Dictionary one finds — “to dwell in, occupy as an abode, to live permanently in . . .” [Emphasis mine]. And for the word occupy: — “to take possession of, take for one's own use, seize . ..”. I would be reluctant to reject the appellants’ claim on this part of the appeal based solely on a very fine distinction one might see between the word “occupy” and “inhabit” — but I would suggest that whatever variation may exist, in terms of stability or continuity, the edge must go to “inhabit”. However, when one combines the two critical words in the phrase “ordinarily inhabited”, and puts forward as a definition the expression “in most cases, usually or commonly occupied as an abode” (a combination of the definitions provided above), I am quite prepared to say that the “24-hour stay” did not fill that requirement. There was no other occasion on which the appellants lived in “the condominium unit”, and clearly Mrs Ennist did not retain ownership to it, and move into it when Mr Ennist moved to Ottawa — a situation which might have provided the appellants with a more supportable position. The condominium unit does not qualify under the terms of paragraph 54(g) as a “principal residence”.

In summary therefore, the appeals are to be allowed in part and the matter referred back to the respondent for reconsideration and reassessment on the basis that the proceeds from the RHOSP are not taxable in the year in question. In all other respects the appeals are dismissed. The parties are entitled to one set of party and party costs based upon their partial success.

Appeals allowed in part.