Edward H Edwards v. Minister of National Revenue, [1983] CTC 2572, 83 DTC 519

Taylor, TCJ:—This appeal was heard by me in Montréal, Québec, on June 14, 1983 in my capacity as a member of the Tax Review Board but this judgment is being rendered in my present capacity as a judge of the Tax Court of Canada. The appeal relates to income tax assessments for the 1975, 1976 and 1977 years in which the Minister of National Revenue assessed on income, rather than on capital account the gain realized by the appellant from the sale of a certain piece of real estate in 1975, and adjusted his reported income accordingly not only for that year, but for the years 1976 and 1977 to allow for reserves considered appropriate to the assessment situation arising out of that characterization of the gain as on income account. The respondent relied, inter alia, upon sections 3, 9(1), 12(1 )(e), 20(1 )(n) and 248(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

The notice of appeal establishes adequately the position taken by the appellant:

— In 1972, the Appellant purchased the land and building located at 6114-28 Côte St Luc Road, in the City of Côte St Luc, Province of Québec;

— The Appellant acquired the apartment building in order to earn rental income;

— In 1975, the land and building were sold and the Appellant realized a gain in excess of the cost of the land and the undepreciated capital cost of the building;

— The Appellant treated this gain as a gain on the sale of capital property and included one half of the gain in computing his income for the 1975 taxation year;

— The Appellant acquired the land and building for the purpose of earning income from property. The particular building in question was not acquired as an adventure in the nature of trade as is alleged by the Respondent.

— The particular property in question was acquired for investment purposes and was sold because of marital problems . ..

For the respondent, the situation was set out in the reply to notice of appeal:

— During 1975, the Appellant sold the property located at 6114-28 Côte St-Luc Road and derived a profit therefrom of $11,675.00;

— The Respondent allowed a reserve of $3,502.18 for 1975;

— From 1971 to 1977, the Appellant was involved in at least seven (7) real estate transactions;

— The Appellant owned these properties for a very short period of time:

Purchases		Sales Sales
290 Laird	1971	1973
6114Côte St-Luc	1972	20-01-75
5873 Decelles	1973	10-01-74
4615 Van Horne	1974	20-11-75
7211 Fielding	1976	15-01-76
2105 Van Horne	1976	25-10-76
3805 Dupuis	1976	1977

— The prospect of resale at a profit was a motivating reason for the purchases of the said buildings by the Appellant;

— The Appellant purchased the said buildings speculatively and for the purpose of trading and turning the same to account at a profit;

— The Appellant also bought real estate through AE Lepage Westmount Realites Inc under the protection of others: ie Gari Investment Registered represented by HR Kalinowicz and Jack Wooton but the properties are in fact owned jointly by all of the above;

— On August 13, 1974, the Appellant entered into a memorandum of agreement with Gari Investment Registered concerning two properties (4615 Van Horne Avenue and 5510 Monkland) and the said memorandum of agreement provided, inter alia, that:

It is also the desire of both parties to resell the above-mentioned properties when and if a reasonable offer will be obtained both parties will agree the sale of the properties. (Sic)

— Mr Kalinowicz and Mr Wootton are actively involved in companies buying and selling real estate;

— The Respondent considered all transactions involving sale of properties during 1975, 1976 and 1977 as business income and assessed the profit or loss therefrom accordingly;

The Respondent submits that he has correctly included the amount of $11,675.00 for the Appellant’s 1975 taxation year, as income resulting from profits derived from a business within the meaning of sections 9(1) and 248(1) of the Act, and that he has duly assessed the Appellant for 1976 and 1977 pursuant to sections 12(1 )(e) and 20(1 )(n) of the Act.

The appellant testified that he had been a real estate investment salesman in the Montreal area for more than 30 years. As a result of obligations arising out of both monthly payments commencing in 1973 and ultimately a lump-sum settlement of $116,000 to be paid to his wife, determined by the Court in February 1978, he had been required to sell the various properties indicated in the Minister’s reply since his earnings from real estate commissions had been too small to suffice. He was unable to reconcile for the Board the apparent conflict.which existed between this need for funds and his entry into new real estate acquisitions during the same years, particularly that of a separate property brought to the Board’s attention (4855-65 Harvard Ave, Montréal, Québec) acquired in March 1978 and sold during the same year. He did bring out in testimony that he was one partner (for 40% interest) in another four-unit rental property at 1255 St-Marc St, Montreal, purchased in 1965 and sold in 1978. The direct examination and cross- examination also showed that he had acquired in 1965 a house on Dobie Avenue, Montréal, which he still owned, and which he had rented since purchase; and that, in addition, he had acquired a property at 7455 Sherbrooke St, Montréal, which was sold in 1978; and that in addition to 290 Laird (see reply to notice of appeal (supra)), he had held a 50% interest in 300 Laird purchased in 1971 and sold in 1978, and the same percentage interest in 260 and 280 Laird (all individual town houses), also purchased in 1971 and sold in 1980. There was no challenge brought by the appellant against the assumption made by the Minister in the reply to notice of appeal (supra) regarding business partners and, accordingly, counsel for the Minister did not present any testimony or evidence in support of these assumptions.

The basic argument proposed by counsel for the appellant was that Mr Edwards had for many years (going back at least to 1965) pursued the activity of investing in real estate and deriving income therefrom (ie Dobie, St- Marc and Laird (supra). Counsel did accept that both the evidence presented and the fact that this appeal had only been launched against the single transaction, that of 6114 Côte St-Luc (the subject property), pointed to a conclusion that the appellant had concurrently engaged in the business of buying and selling the other properties. Counsel was not prepared to accept that the evidence clearly showed that in 1972 (the year of acquisition of the subject property), the appellant had been so engaged as a “trader”, but even if that were held to be the case, nothing prevented Mr Edwards from maintaining the rental business he claimed — and dealing with the sale of any of those assets (particularly the subject property) as on capital, not income account, if the opportunity arose. Essentially, counsel rested his argument on the fact that there was no evidence that “the possibility of re-sale at a profit was one of the motivating considerations that entered into the decision to acquire the property in question” (see Hans Reicher v The Queen, [1975] CTC 659; 76 DTC 6001 at 661.

Counsel for the Minister took the position that (a) as a single, even isolated transaction, the subject sale should be regarded as a venture in the nature of trade; or (b) as part of the total pattern of trading, it could not be regarded as different and distinct by the taxpayer. The appellant’s reasons for sale — to provide needed cash because of marital difficulties — had not been supported when challenged factually by the Minister. In counsel’s view, the Board had not been provided with any reason to consider separately and uniquely this subject transaction when, even a purchase (as one partner) of 290 Laird (supra) in 1971 had resulted in a sale in 1973. The testimony of the appellant (which, according to counsel, was all that was available to the Board in the appellant’s favour) was simply not sufficient to overturn the Minister’s assessment.

In my view, the problem is not quite as simple as it is portrayed by either party. There is no question that during the taxation years 1975, 1976 and 1977, the appellant was a trader in real estate. Since the offending sale was made in 1975, the Minister therefore takes the position (logical on the surface), that the gain on that transaction is caught in the same net. As I see it, that hypothesis ignores the fact that the property was retained and rented for a period of about three years — during which time the appellant also owned and rented at least two other properties (Dobie and St-Marc (above)). The acquistions in 1965 can hardly be regarded as anything other than investments — at least to the degree the limited information available to the Board can shed any light on them.

On the other side of the coin, the position of counsel for the appellant — that the lack of evidence demonstrating “the possibility of re-sale at a profit was one of the motivating considerations” should assure by itself the success of the appellant — is not one with which I concur. The Reicher case (Supra) was not one in which the Court was dealing with a real estate agent already having some 30 years’ experience in the field, nor was it one in which the conduct of the appellant confirmed the view of the Minister that during the taxation year(s) in question, the appellant was a trader in real estate. The very words of the oft-quoted comment from Reicher (supra) should put an acknowledged expert in the real estate field on guard. It is difficult for me to visualize a situation in which a taxpayer, an active real estate investment agent, would not have in his mind the possibility of resale at a profit in any real estate transaction upon which he embarked. I would think that such purity of thought and singleness of purpose would be a formidable task for an individual such as this appellant to prove. In isolated situations it can come about, and I would make reference to Valleypark Apartments Ltd v MNR, [1981] CTC 2277; 81 DTC 245.

Nevertheless, I am faced with the fact that, up until the year 1971, there is little if any evidence of trading on the part of the appellant. On that ground I must reject the contention of counsel for the respondent that the subject transaction should be considered as simply one item in an entire pattern of trading — which trading apparently extended through the taxation years in question up until at least the year 1978. As a matter of record, I also reject the reason advanced by the appellant for the sale of the subject property — that it was forced upon him because of marital breakdown obligations. The appellant’s own testimony on that point is just too contradictory and conflicting. As I see it, even if he sold the subject property in 1975 for a profit (which he did) and did so only because he saw in the sale some net realizable equity permitting him to use the funds to more advantage (whatever that might be), the subject sale in itself would not identify the transaction as on income account, if it were demonstrated that the appellant had acquired the property with an investment intention and dealt with it in that manner (as an investment property) during tenure (see Bassani et al v MNR, [1977] CTC 2311; 77 DTC 208.

With regard to tenure, it was common ground between the parties that Mr Edwards had maintained and rented the property and reported the income on it regularly and properly. For acquisition, if one leaves aside for the moment the 50% partnership interest he obtained in about 1971 in the four (4) town houses (260, 280, 290 and 300 Laird (supra), this subject property would present as much entitlement to consideration as enlarging his existing investment portfolio of the Dobie and St-March properties as it would to be suddenly characterized — at acquisition — as the first act in a course of conduct designed to bring him into the real estate trading field. Again, leaving aside the effect, if any, arising out of the four Laird aquisitions in 1971 (supra), I would find on the balance of probabilities that the Minister could not successfully characterize this purchase and sale as a venture in the nature of trade by the appellant. The Minister’s assessment, therefore, stands or falls on the effect (if any) which arises out of the four Laird acquisitions in 1971. The evidence on that point is virtually non-existent, and I was not led to believe by counsel for the respondent that the Board was to adopt the “real estate trading partners” contention of the Minister — (re Mr Kalinowicz and Mr Wooton (supra) to be a reflection on the Laird transactions even though these gentlemen may have impacted on some of the other real estate transactions. It is my understanding of this matter that the Minister did not deal with the nature of the 290 Laird sale or the 300 Laird sale because, in both cases, the dates of sale were outside of the taxation years at issue.

A similar situation obtained for 260 and 280 Laird, which were apparently held by the appellant (and his partner) until 1980. One might argue that the acquisition of 290 Laird in 1971, and its sale in 1973 after only a short holding period, could show a trading tendency, but one would be faced in a converse way with the fact that 300 Laird was held for seven (7) years, and 260 and 280 Laird for some nine (9) years — and at all times they were maintained and rented as investment properties by the appellant. I have considerable difficulty in attributing to the appellant’s acquisition in the year 1971 a character that would clearly identify these activities as trading as opposed to an investment nature. Accordingly, since in my view the characterization of the subject transaction as on income account cannot be shown as commencing the “trading” operations of the appellant, and the 1971 real estate purchases (the Laird transactions) do not clearly demonstrate that any trading activity commenced in that year, the Court concludes that the appellant has overturned the main thrust of the Minister’s assessment regarding 6114 Côte St-Luc (the subject property) that “all sale of properties during 1975 . .should be assessed as business income.

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment in accordance with the foregoing reasons for judgment.

Appeal allowed.