Joseph Kobialko v. Minister of National Revenue, [1981] CTC 2224

John B Goetz:—These are appeals involving the appellant’s 1975 and 1976 taxation years. The appellant described himself as “an independent realtor’’ and also a landscaping contractor, which business of landscaping he started in 1970 and continued on for several years. As a result, he learned a great deal about the development of the City of Regina where he resided. On August 12, 1975 he received his licence as a real estate agent and acted exclusively as a realtor for two years and still carried on landscaping through employees, as a sideline. He decided to quit real estate and go into revenue properties and revenue houses as a business.

His first home was acquired at 1436 Lindsay Street, Regina, in the year 1972, which he used as his personal residence. He also purchased 1435 Lindsay Street in 1974 which he rented out. He stated that in 1980 he owned 20 rental houses which he would remodel, fix up and resell. During the 1970’s he says he acquired a total of 35 houses. He resided in his first residence at 1436 Lindsay Street for two years and subsequently sold it at a $2,500 profit which he declared as a capital gain. In 1973 he moved to 1969 Osler Street where he lived for one year. In 1975 he purchased 2536 Broder Street which he then sold. He lived at these premises for a period of two years. As a reason for purchasing the residence at 1012 Rae Street, he stated that he needed a larger home. He said that this home (1012 Rae Street) was flooded by rain at a time which he acknowledged was the heaviest rainfall in history of the City of Regina at which time a very large number of the basements were flooded with water. He therefore sold this home.

In paragraph 2 of the reply to notice of appeal, the Minister alleges as follows:

2. In filing his income tax returns for the 1975 and 1976 taxation years, the appellant reported the following real estate transactions:

	Date of	Date of	Gain	Gain
Address	Purchase	Sale Sale	Reported
1457 Edgar St	Jan/74	Aug/75	$ 1,563.40
2134 Lome St	June/74	Sept/75		5,695.26
2021 Embury St	Nov/75	Jan/75		1,925.60
1012 Rae St	July/75	Oct/76		19,300.00
1340 Broder St	May/76	Dec/76		464.50

The appellant declared the profits made on the sale of those properties as capital gain but he was reassessed as gains on income by the respondent.

In 1976 he built a home at 11 Mina Drive Cr because he said he wanted a new home in a new area. He lived there for a year until he was divorced. This house sold at a loss of $8,000.

Facts

The appellant sold his property at 1457 Edgar Street in 1975 which he had been renting. He also sold 2134 Lome Street which he held for rent for a period of 15 months. The property at 2021 Embury was held for three months and was subsequently sold at a good profit. He sold 1012 Rae Street because his wife wanted a new home and lived at this residence for 13 months. The following are interesting figures: 1457 Edgar Street was purchased for $25,000 with a mortgage of $4,350; 2134 Lome Street was purchased for $25,000 with a mortgage of $18,000; 1012 Rae Street was purchased for $15,000 with a mortgage of $11,000; 1340 Broder was pur chased for $14,000 with a mortgage of $10,000. Obviously he was underfinanced and this certainly leads me to the view that the properties were acquired as he says: “to be upgraded to sell at a profit’’, because he always saw the potential.

Findings

I would allow him a capital gain on his original residence at 1436 Lindsay Street. All the balance of the properties having regard to the series of transactions in which he was involved, I feel were acquired in the course of his business as an independent realtor. The property at 1012 Rae Street where he resided for 13 months was rented and all the income therefrom was declared by him in his own income tax return. He says that he acquired over 70 properties since 1970 and disposed of them “for various reasons’’. He maintains they were not acquired for speculative purposes. Other than the Original house which he acquired in 1972, I find that all the subsequent homes which he declared to be his residences do not qualify other than as income to the appellant. See Ewald Rode v MNR, [1977] CTC 2365; 77 DTC 208.

We have here a classic case of a realtor dealing in rental properties which he would remodel, renovate and then sell at a profit. I quote directly from Jarvie Holdings Ltd v MNR, [1979] CTC 2520; 79 DTC 521, a decision of my learned colleague Guy Tremblay, Esq, CGA, at 2525 and 524 respectively, where he states:

4.3 Comments

4.3.1 The major factors established by jurisprudence to determine a business income and a Capital receipt are the following:

1. Intention;

2. The relation of the transaction to the taxpayer’s regular business;

3. The nature of the transaction and the type of asset being disposed of;

4. The number and frequency of the transactions;

5. The declared objects of the corporation.

Evidently, it is not necessary that all the factors be met to have a business income or a Capital gain.

That case clearly sets out that the appellant sold a number of homes at a profit and that they were acquired with the intention of being sold at a profit.

Other than Mr Kobialko’s original home, the other homes being declared as his personal residences is a sheer sham. See also John W Welton v MNR, [1978] CTC 3153; 78 DTC 1848, which is very similar in facts to the case before me, whereby the appellant considered not reporting gain as income because he was under the impression that the sale of a residence was not taxable. In that particular case, five residences were involved.

I am of the firm view that the appellant’s course of conduct forces me to believe that the properties in question were acquired with the intention of turning them to account at a profit at the first opportunity. The number of transactions carried out in the same fashion over a period of ten years bears this out. See also Peter Unruh Construction Co Ltd v MNR, [1971] Tax ABC 765; 71 DTC 519, and William G Tilson v MNR, [1979] CTC 2147; 79 DTC 171.

The properties referred to in the reply to notice of appeal were all heavily financed; this was a factor for their quick sale on the part of the appellant, in a market that was rising and of which the appellant was fully aware as he was knowledgeable in real estate matters. See Normae Investments Limited v MNR, [1969] CTC 468; 69 DTC 5326. I do not accept the evidence of the appellant that his sole intention in acquiring all the various properties was solely for the purpose of renting the properties. The rental of the properties was an interim method of financing his mortgages whereby, on sale, he was able to make a profit. It was a method by which sales of the properties were made within a comparatively short time of purchase or acquisition with a clear view of making a profit from the sale. MNR v Edgeley Farms Limited, [1969] CTC 313; 69 DTC 5228; Coronation Holdings Limited v MNR, [1968] Tax ABC 513; 68 DTC 419, and Rokosh Engineering & Construction Ltd v Her Majesty the Queen, [1974] CTC 536; 74 DTC 6375. The appellant was clearly in the business of acquiring, improving, renting and selling properties in the course of an operation of a business for profit. All of the numerous transactions in the same line of business excluded the possibility that the transactions under review were a realization of an investment and therefore the Board rules that the profits derived therefrom are taxable.

For the above reasons, the appeal is dismissed.

Appeal dismissed.