Mario D’angelo v. Minister of National Revenue, [1983] CTC 2685, 83 DTC 627

Taylor, TCJ:—These appeals, heard in London, Ontario, on August 31, 1983, relate to income tax assessments for the years 1978, 1979 and 1980 in which the Minister of National Revenue assessed as on income account rather than on capital account the gains realized on the sale in 1978 of a house and lot at 410 Maple Street, Windsor, Ontario, and in 1979 and 1980 on two adjacent parcels of vacant land on Michigan Avenue in Windsor, Ontario. At the commencement of the hearing, counsel for the appellant withdrew the appeal as it related to the 1978 taxation year. The substance of this hearing therefore is the gain on the Michigan land sale, an amount of $13,282 in 1979 and of $7,635 in 1980.

The appellant’s position was that the land had been acquired for a principal residence, while the Minister contended that its purchase and sale was in the course of the appellant’s business. Mr D’Angelo was, by the taxation years in question, an acknowledged real estate trader — buying property, constructing houses thereon and selling them. He had started this activity several years before, while still a university student. His 1977 income tax return showed a gain on the sale of one such parcel of real estate as a capital gain — noting that it was his “principal residence”. His wife worked, and they diligently saved any excess available funds, either from her wages, or from the profit he made on his real estate transactions. They lived with either his or her parents for lengthy periods of time, enabling them to save as much money as possible. By the taxation years in question, he was in the construction business on a full-time basis and was always looking for opportunities to continue or expand that operation, even though it was conducted individually, and generally he was involved with only one housing unit at a time. With this background, the appellant is faced with a difficult task to sustain a proposition that any of his real estate dealings should be excluded from his business operation. Reference is made to the case of Robert Percival MacMillan and Danilo Danzo v MNR, [1983] CTC 2171; 83 DTC 171 (presently under appeal).

The Court heard from several witnesses on behalf of the appellant, all excluded from the trial and heard individually: Mr D’Angelo himself, his sister-in-law Mrs Soanes from whom he purchased the vacant land, his wife, his own sister Miss Linda D’Angelo, the real estate agent who had sold the property Mr DiMarco and, as noted below, a Mr Parete. The appellant’s sister-in-law and the real estate agent both testified that they understood from both Mr and Mrs D’Angelo that the property was for a principal residence. The property was located near relatives and had therefore an added sentimental family value, particularly to the appellant’s wife. The appellant had only been persuaded to sell the property after considerable effort by the real estate agent — again because Mr D’Angelo allegedly wanted it for his principal residence. The property was easily divided into two separate building lots, one a corner lot. It was acquired in April 1979 and sold (two parcels) in June 1979 and August 1979. Mr D’Angelo’s fiscal year ended on July

31. I point out that in this particular case, I attach no particular significance to the short holding period, or that the property was taken in the appellant’s name alone, if all other relevant assertions are supported.

Two very critical pieces of physical evidence presented were — first, a letter dated January 8, 1982 addressed to Revenue Canada and signed by the appellant; and second, a memorandum addressed to herself by Linda D’Angelo, the appellant’s sister, dated July 22,1982.1 quote them as follows:

Re: Vermont and Michigan Avenue, Sandwich West (Plan 845, lots 51-54 and 55- 59)

Jan 8/82

In 1979, I had completed my university, and I began building homes for a living. While building a house on Vermont St I had an opportunity to purchase the above mentioned lots and did so. When I purchased these lots I had arranged long term financing on them with the vendor and my sole intention was to build homes on these lots in 1984, 1985 when development was expected. However, shortly after my purchase a developer made me an offer on the property (which was never listed or put for sale) which I could not turn down due to the offer being a good one.

(Sgd) Mario D’Angelo

Linda D’Angelo July 22/82 500 Texas Rd

Amherstburg, Ont

N9V 2R7

To Whom It May Concern:

I can verify that the Jan 8/82 letter which is attached, and has been examined by me, has been taken out of context. In early January (either Jan 2, 3, or 4) I stayed over at my brother’s (Mario) house and I was there when he called the Income Tax Office in regards to a letter he received. I recall vividly, him asking what he was supposed to write in his letter back to the Income Tax Dept. I heard him explain to the person on the other end about his principle [sic] residence that he had intended to build. He also mentioned that he built homes for a living and probably would be building his own home and possibly one for his daughter. He also spoke of development being very unpredictable in Sandwich West and that he speculated that area would be developed in 1984, 85 but he also added that it might very well never be developed. He then told me to get a pencil and paper, which I did, and he asked me to write the following: “my sole intention was to build homes on these lots in 1984, 85, when development was expected”, which he was dictating from the other end of the phone to me. After hanging up the phone, he quickly completed writing the letter, including what I had just wrote down, (mentioned above). He put it (the letter) in an envelope and asked me to mail it on my way home which I did. I remember him saying how brief the letter was, but that it was OK because he had just spoke to the woman from the Income Tax Dept, on the phone, and he had explained the entire situation to her, and she dictated over the phone what he should write. My address is listed above, and if any further information is required please write.

Sincerely,

(Sgd) Linda D’Angelo

It was the appellant’s testimony that he had sent the January 8 letter as a result of it being virtually dictated over the phone to him by a Mrs Foglia of Revenue Canada on that date. His sister had made notes for him of the conversation as he instructed her to make them, while he was actually engaged on the telephone with Mrs Foglia.

Aside from the obvious contrasts and contradictions between the two letters noted above, the respective testimonies of Mr D’Angelo and Miss D’Angelo relative to these letters were replete with additional conflict. Mrs Fo- glia’s testimony gave no indication of any such assistance or instruction to the appellant. I am not aware of the real reason for the letter of January 8, 1982 (which was in fact received by Revenue Canada on January 19, 1982), and it is not important to me for what reason Mr D’Angelo felt compelled to send it. I am satisfied that the Court would be in order to reject any interpretation or significance he places on it, or the subsequent memorandum. I am further satisfied that if indeed “principal residence” and only principal residence had been the purpose for the acquisition of the subject property, that is what the January 8 letter would have said. Mr D’Angelo was completely aware (since 1977 — see above) of the tax value of a “principal residence” and he would not have hesitated to insulate this property by such a designation if it had not also held other prospects for him. It is difficult to see in which manner the testimony of either the appellant or his sister made any positive contribution regarding his assertions in these appeals. On the other hand, the testimony of Mrs Foglia was straightforward and comprehensible. Nevertheless, I am prepared to accept that the prospect of using the property as the home of the appellant’s family was seriously considered at the date of acquisition. The factors which lead me to accept this proposition are: Mrs D’Angelo was consulted at length and over a considerable period of time regarding the purchase, use and finally sale — according to her testimony; accumulated savings from both the appellant and his wife were used in the purchase; the purchase was from his wife’s sister who lived in the general area and had acquired a large tract of family land, including the subject property, through an inheritance; Mrs D’Angelo wanted to live and raise her family near her sister; and finally, at the date of the first sale, the appellant had not yet legally registered the purchase of the land. From this last point I am prepared to assume that if the purchase had been primarily for business purposes, the appellant’s sister-in-law might not have been quite so pleased at the prospect of the appellant’s quick and easy gain. I note also the general corroboration of Mrs D’Angelo’s testimony provided by Mrs Soanes, Mr DiMarco and Mr Parete.

Mr Mario Parete, a chartered accountant who had prepared the appellant’s 1979 and 1980 income tax returns was a witness on behalf of the appellant. In the 1979 return Mr Parete had shown the two subject property sales (later correctly divided into two taxation years by Revenue Canada) as on capital account. Mr Parete gave as his reason for this tax treatment his understanding from Mr D’Angelo that the property had been acquired by the appellant as vacant land for the site for his principal residence. I am impressed with Mr Parete’s testimony, and he may well have been of that opinion at the time of preparation of the tax return. There is, however, no indication on the return that the “principal residence” prospect was the basis for that tax treatment. The fact that this property was bought and sold as ‘vacant land” was a slight departure from Mr D’Angelo’s usual construction business modus operand! and it may have influenced Mr D’Angelo’s view that the transaction was “capital”. Emphasis was placed on that “vacant land” aspect of the matter in some of the pleadings and even in argument by counsel for the appellant, and I quote:

He dealt with properties and I guess my reply to that is of course he did, but not with vacant land. Never with vacant land. His modus operandi had always been when he is engaged in business, he does his financing through the bank and he sells a completed home or a residence.

I am not aware of jurisprudence which would support a “capital” as opposed to “income” distinction based only on the above fact. While I say without hesitation that Mr Parete’s testimony was direct and professional and I am satisfied he believed there was some appropriate reason for the tax treatment he accorded the transaction at issue, I am far from certain that he would have been so inclined had he been more informed of all the circumstances surrounding the affairs of Mr D’Angelo.,

There is certainly no bar to Mr D’Angelo acquiring a principal residence property even if the potential use for that property was some time in the future, provided all the circumstances support a conclusion that such was the reason — and virtually the only reason — for its acquisition. However, I do not accept that the appellant ever had, as the primary and sole intention, the intention of building his principal residence on the entire parcel of property. The evidence and testimony would indicate that he was fully aware of the potential, at least for resale, of the first parcel sold — it was so easily separated from the other parcel, the real corner lot. He did sell the property in two parcels but, by all indications, the second parcel was sold very reluctantly.

The purchase and sale of the one parcel of property — the corner parcel disposed of in the second sale and assessed to tax in the year 1980 in the amount of $7,635 — will be considered as resulting from the acquisition of land for the purpose of constructing a principal residence, and will be on capital account. The gain on the purchase and sale of the parcel of property disposed of in the 1979 sale in the amount of $13,282 will be on income account. The appeal with respect to the 1978 taxation year is dismissed.

The appeal is allowed for the taxation year 1980 and the matter referred back to the respondent for reconsideration and reassessment in order that the amount of $7,635 be taxed on capital account in the year 1980. In all other respects the appeals are dismissed.

Appeal allowed in part.