David Stein v. Her Majesty the Queen, [1996] 3 CTC 2279

Archambault J.T.C.C.: — These are appeals by Mr. David Stein from income tax assessments by the Minister of national Revenue (Minister) for the 1986 and 1987 taxation years. The Minister disallowed the deduction of rental losses incurred in connection with an apartment situated in Miami Beach, Florida. In the Minister’s view, Mr. Stein did not have any reasonable expectation of profit when he acquired this apartment in 1983. The parties have agreed that the appeal with respect to the 1987 taxation year should be allowed at least to the extent of allowing a deduction of $28,284.64.

Facts

Mr. David Stein has been involved in the real estate business for more than 27 years, both in Canada and in the United States. He has bought, sold, built, renovated and leased commercial and residential properties including condos. He also traded in vacant lands which he treated as inventory. He has done so either personally or through corporations, either alone or together with other investors. In 1986 and 1987, he had an interest, although generally a part interest, in land and rental properties, both in Canada and in the United States. In the latter country, Mr. Stein had an interest in at least 10 properties including one where his real estate office was located, one condo unit located at 10175 Collins Avenue, Apt. 402 (Tiffany condo) for his personal use, and the property in respect of which rental losses were disallowed by the Minister, located at 5500 Collins Avenue, Apt. 401, Miami Beach (Tower House condo).

The Tower House condo was acquired by Royal Properties Inc. on December 27, 1983 as a nominee for Mr. David Stein. The purchase price was US$312,500. This condo, a model apartment decorated by one of the top decorators in Miami, was acquired completely furnished. Situated on the 4th floor of the building with an area of 3200 sq. feet, the condo had three bedrooms, 4.5 bathrooms, a separate living room, a dining room and a kitchen overlooking the water. Mr. Stein’s sister had purchased late in 1981 an apartment on the 11th floor of the same building for a sum of US$440,000. The apartment acquired by his sister included some furnishings but, according to Mrs. Stein, it was not as nicely furnished. In his estimate, the Tower House condo, situated in one of the five top buildings in Florida, was a real bargain and his intention was to resell it quickly to make a profit. Here is what Mr. Stein stated at the hearing: [1]

Q. Okay. And why did you buy it?

A. I bought with the anticipation of making a profit.

Q. Okay, how, how would you, how do you think you would have made a profit?

A. I felt that I could sell the unit and make a hundred thousand dollars ($100,000.00) very easily by even selling it for less then my sister had paid for hers and still making a hundred thousand dollar ($100,000.00) profit.

He also gave the following clarification to his attorney: [2]

Q. Okay. When you bought it in nineteen eighty- three (1983), what was your primary intention?

A. My primary intention was to make a profit with it.

Q. Okay. How would you make a profit, how did you think you would make a profit?

A. I thought that I would sell it very quickly.

Q. Okay. Did you try to rent it as well?

A. After, initially, when I saw that I was not able to sell it and that the market had turned, I then put an effort into both selling and leasing.

Q. Okay. When did you give up the idea of making a profit with unit 401 at Tower House?

A. After about four years.

Mr. Stein stated that he contacted several real estate brokers and the Tower House building manager to let them know that the condo was available for sale. He also produced some of the invoices from newspapers for classified adds in 1984 and 1985. An exclusive mandate to sell the property was never given. He always felt he ought to sell it himself. Mr. Stein also indicated that he attempted to lease the condo in order to limit his carrying costs. In 1984, the advertising expenses amounted to $540. In the invoice for the month of August 1994, we find the following two

entries: one for a “Luxury Rental 5500 Collins”, and the other, “Tower House 5500 Collins”. In the 1984 invoice for September, we find seven entries for “Luxury Rental 5500 Collins” and seven for “Tower House 5500 Collins”. In the 1984 invoice for October, we have seven entries for “Tower House 5500”; none for “Luxury Rental 5500”. These entries would be consistent with the statement that the Tower House condo was being offered both for rent and for sale in 1984.

For 1985, we have seven monthly invoices. The January invoice shows eight entries for “Tower house 5500 Collins”. The May statement shows four entries for “Tower House”: two appear as “Tower House sale by owner” and the other two just as “Tower House”. In the June, July, August, November and December invoices, we find a total of 21 entries for “Tower House sale by owner”.

Mr. Stein did not introduce any documentary evidence of his efforts to rent or sell the Tower House condo in 1986 and 1987. The net rental income statement for 1986 shows under the heading “repairs and advertising” only the sum of $250. Nothing appears in the 1987 net rental income statement. After bringing to Mr. Stein’s attention the fact that the ads had stopped in 1985, counsel for the Crown asked the following questions: [3]

Q. But you didn’t renew, did you?

A. I have no idea.

Q. You have no idea if you renewed or not?

A. No. No.

Q. And there’s no evidence for eighty-six (’86), eighty-seven (’87)?

A. I don’t know if there is or if there isn’t.

I intervened in the examination and commented that we did not know whether the ads were renewed in 1986 or 1987. Mr. Stein provided the following answers: [4]

Correct. But during this time, your Honour, I always was in contact with realty offices, agents, the manager of the building, the concierge of the building, I even promised the concierge five thousand dollars ($5,000.00) of commission if he sold the unit for me.

Q. Yes.

A. So, there was constantly an effort during the ..

Q. When, when’?

A. I’m sorry?

Q. In what period?

A. From eighty-four (’84) to eighty-eight (’88).

Q. You are saying from what period to what period?

A. From the beginning of nineteen eighty- four (1984) till the end of nineteen eighty-eight (1988) I made every possible effort.

Q. Until you finally occupied the premises?

A. Correct, correct.

After four years, Mr. Stein gave up on trying to sell the Tower House condo at a profit. At the end of 1988, Mr. Stein decided to let his father use the condo. In 1989, he charged him approximately $30,000 in rent and claimed a rental loss of US$12,086. No capital cost allowance was claimed. Mr. Stein stated that he never used the Tower House condo for personal purposes. He explained that he was unable to sell it at a profit or even to rent it due to the recession in the U.S. real estate market in 1984 and thereafter. In his cross-examination by counsel for the Crown, Mr. Stein provided the following answers: [5]

Q. Do you know why it was not possible to rent it, like you had other properties you rented in Florida?

A. But we also had other properties that we didn’t rent, and unfortunately at that time in early eighty-four (’84) there was a downturn, as I told you before, in the American real estate market, it was a mini recession, and it was virtually impossible to do it.

Q. Hadn’t the recession already started in eighty- three (’83)?

A. I wouldn’t have bought it if it was the recession. I was building, at that time, a thirty-million dollar ($30,000,000.00) condo, if I would have thought that there was a recession, I don’t think, as an astute businessman, I would have started the construction in nineteen, late seventy-nine (1979), early eighty (’80) of the construction, and in nineteen eighty- three (1983), we were still selling, that’s when we sold out the building because I was one of the first ones to move into it, and you can see from the bills that I gave you, for my own personal unit, it was late eighty- three (’83) when I purchased the things and sent my personal belongings to Miami.

A. Yes. And if it were bad times, we were selling units very quickly, Your Honour, at very good prices, and that’s why I felt that I had made a good buy on this.

The condo was sold at a loss in 1990 to a corporation controlled by Mr. Stein’s sister due to estate planning considerations. Mr. Stein claimed a capital loss of US$12,500 on proceeds of disposition of $300,000. He still feels that he was right in buying the property to resell it at a profit; in 1995, this condo, in his estimation, was worth more than $500,000.

In his tax returns for 1986 and 1987, Mr. Stein treated the Tower House condo as a capital property in respect of which he claimed capital cost allowance. On its disposition in 1990, he claimed a capital loss. In his initial pleadings, Mr. Stein alleged that he had acquired the condo only for the purpose of earning income from property. In his Amended Notice of Appeal dated February 2, 1995, he stated that the property was acquired “pour la revente ou pour les fins de produire un revenu de location” . Counsel for the Minister consented to the filing of this Amended Notice of Appeal. Mr. Stein declared at the hearing that he had not reviewed the initial Notice of Appeal before it was filed by his counsel. As to the tax returns, they were prepared by his accountant and he relied on him with regard to the treatment of the Tower House condo as a capital property.

In 1984, the total expenses incurred for the Tower House condo were $42,301. In addition, Mr. Stein claimed capital cost allowance of $14,342 in respect of this property. For the 1986 and 1987 taxation years, Mr. Stein incurred carrying costs of US$36,078 (CAN$49,415) and US$39,299 (CAN$51,874) respectively:

1987

1986

In addition to these carrying costs, Mr. Stein claimed capital cost allowances of US$13,625 in 1986 and US$12,944 in 1987. All these expenses appeared in a statement entitled “Schedule of net rental income, U.S. Properties”. The amounts of net rental losses on U.S. properties appeared on the rental income line (line 126) on his 1986 and 1987 tax returns and not as a business loss on line 135. On this latter line, Mr. Stein showed a business income of $70,010 in 1986 and a business loss of $19,423.70 in 1987. The business activities related in part to land transactions.

Analysis

These appeals raise several ancillary issues in addition to the one whether Mr. Stein had a reasonable expectation of profit when he acquired the Tower House condo. The first of these issues is the onus of proof. I think it is useful to review the leading tax cases that have shaped this area of the law. First, there is the 1925 decision of the Supreme Court of Canada in R. v. Anderson Logging Co. (sub nom. Anderson Logging Co. v. The King), [1925] S.C.R. 45, 25 D.T.C. 1209; affirmed [1926] A.C. 140, 52 D.T.C. 1215 (Canada P.C.), at page 50 (D.T.C. 1211):

But, as concerns the inquiry into the facts, the appellant is in the same position as any other appellant. He must shew that the impeached assessment is an assessment which ought not to have been made; that is to say, he must establish facts upon which it can be affirmatively asserted that the assessment was not authorized by the taxing statute, or which bring the matter into such a state of doubt that, on the principles alluded to, the liability of the appellant must be negatived. The true facts may be established, of course, by direct evidence or by probable inference.

[Emphasis added. I

Then there is the very often quoted decision of the Supreme Court of Canada in Johnston v. Minister of National Revenue, [1948] C.T.C. 195, 3 D.T.C. 1182 in which Mr. Justice Rand stated, at page 202 (D.T.C. 1183):

Notwithstanding that it is spoken of in section 63(2) as an action ready for trial or hearing, the proceeding is an appeal from the taxation; and since the taxation is on the basis of certain facts and certain provisions of law either those facts or the application of the law is challenged. Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant. If the taxpayer here intended to contest the fact that he supported his wife within the meaning of the Rules mentioned he should have raised that issue in his pleading, and the burden would have rested on him as on any appellant to show that the conclusion below was not warranted. For that purpose he might bring evidence before the Court notwithstanding that it had not been placed before the assessor or the Minister, but the onus was his to demolish the basic fact on which the taxation rested.

[Emphasis added.]

In Minister of National Revenue v. Pillsbury Holdings Ltd., [1964] C.T.C. 294, 64 D.T.C. 5184, at page 302 (D.T.C. 5188), Cattanach J. of the Exchequer Court of Canada explained how a taxpayer could successfully challenge a tax assessment:

The respondent could have met the Minister’s pleading that, in assessing the respondent, he assumed the facts set out in paragraph 6 of the Notice of Appeal by:

(a) challenging the Minister’s allegation that he did assume those facts,

(b) assuming the onus of showing that one or more of the assumptions was wrong, or

(c) contending that, even if the assumptions were justified, they do not of themselves support the assessment.

(The Minister could, of course, as an alternative to relying on the facts he found or assumed in assessing the respondent, have alleged by his Notice of Appeal further or other facts that would support or help in supporting the assessment. If he had alleged such further or other facts, the onus would presumably have been on him to establish them....)

More recently, the Federal Court of Appeal in Pollock v. R. (sub nom. Pollock v. Canada), [1994] 1 C.T.C. 3, 94 D.T.C. 6050 described the onus of the Minister in defending his assessment when some of his assumptions have been successfully rebutted by a taxpayer. Hugessen, J.A. stated at page 8 (D.T.C. 6053):

Where, however, the Minister has pleaded no assumptions, or where some or all of the pleaded assumptions have been successfully rebutted, it remains open to the Minister, as defendant, to establish the correctness of his assessment if he can. In undertaking this task, the Minister bears the ordinary burden of any party to a lawsuit, namely to prove the facts which support his position unless those facts have already been put in evidence by his opponent.

In my view, the reverse is equally true. If a taxpayer cannot successfully rebut some of the key assumptions of fact which support the assessment by the Minister, he is generally free to advance a new factual basis to support his contention that the assessment is ill- founded. See for example Couch v. Minister of National Revenue, [1979] C.T.C. 2531, 79 D.T.C. 525. Another example would be the case of a taxpayer who files his tax return on the basis that he held real estate for the purpose of renting it (the “renting position”) but, before the Court, advances a completely new position (the “trading position”), i.e. that the real estate was acquired for the purpose of reselling at a profit in the course of carrying on a trading business or in the course of an adventure in the nature of trade. However, as is the case for the Minister when he supports his assessment on an alternative factual basis, the onus of proof is on the taxpayer. [6]

At the outset of these reasons, I find it important to recognize the differences in the tax treatment of both of these positions. If real estate is acquired by a taxpayer for the purpose of deriving rental income therefrom, such taxpayer would be entitled to deduct his operating expenses, such as maintenance, property taxes, electricity and insurance, pursuant to section 9 of the Income Tax Act (Act), and interest pursuant to 20(1 )(c) of the Act. In addition, he may also claim capital cost allowance pursuant to 20(1 )(a) of the Act and the Income Tax Regulations (Regulations) thereunder.

If the property is acquired for the speculative purpose of reselling it at a profit, it would constitute inventory and no capital cost allowance [7] could be claimed whether the property was acquired as part of an ongoing real estate trading business or in the course of an adventure in the nature of trade. In the recent decision of Friesen v. R. (sub nom. Friesen v. Canada), [1995] 3 S.C.R. 103, [1995] 2 C.T.C. 369, 95 D.T.C. 5551, the Supreme Court of Canada confirmed that a single property acquired in the course of an adventure in the nature of trade was inventory subject to the application of subsection 10(1) of the Act. At pages 384-85 (D.T.C. 5559), Major J. stated:

In summary, I conclude that the valuation method in section 10(1) is available for inventory held as part of an adventure in the nature of trade. The valuation method becomes relevant in any particular taxation year through the calculation of business income. Business income is calculated according to well-accepted commercial and accounting principles. According to these principles the value of inventory is relevant to the computation of income in years prior to sale since it comprises part of the cost of sale. According to the same principles inventory is to be valued at the lower of cost or market value, a specific exception to the general principle of realization.

Major J. also described the rules governing the computation of income for a business trading in real estate. At pages 381-82 (D.T.C. 5558) he stated:

The computation of business income is rooted in section 9 of the Income Tax Act. Section 9 provides that the income from a business for a year is the profit and that loss is to be calculated by applying the same provisions mutatis mutandis:

9(1) [Income from business or property] Subject to this Part, a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year.

(2) [Loss from a business or property] Subject to section 31, a taxpayer’s loss for a taxation year from a business or property is the amount of his loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source mutatis mutandis.

The Act does not define “profit” nor does it provide any specific rules for the computation of profit. Tax jurisprudence has established that the determination of profit under section 9(1) is a question of law to be determined according to the business test of “well-accepted principles of business (or accounting) practice” or “well-accepted principles of commercial trading” except where these are inconsistent with the specific provi

sions of the Income Tax Act: see Gresham Life Assurance Society v. Styles, [1892] A.C. 309 (H.L.); Neonex International Ltd. v. R., 78 D.T.C. 6339 (F.C.A.); Symes v. Canada, [1993] 4 S.C.R. 695, at page 723; Materials on Canadian Income Tax, at page 291; and R. Huot, Understanding Income Tax for Practitioners (1994-95 edition), at page 299.

In calculating profit under section 9 of the Income Tax Act, a business calculates its gross profit and then subtracts allowable operating and nonoperating expenses. Under well-accepted principles of business and accounting practice gross profit for a business involved in sale is calculated according to the following formula:

Gross Profit Proceeds of Sale - Cost of Sale and:

Cost of Sale=(Value of Inventory at beginning of year + Cost of Inventory acquisitions) - Value of Inventory at end of year.

Major, J. referred to the Canadian Institute of Public Real Estate Companies Handbook (September of 1990) for an expression of the well- accepted business and accounting principles (WABAP) applicable to real estate held out as inventory. He referred, at page 384 (D.T.C. 5559), to sections 301 and 302 of this Handbook:

301. INTRODUCTION

301.1 Real estate property in [sic] normally carried at the lower of cost and net realizable value if it is held as inventory and at cost if it [is] held for investment purposes.

302. PROPERTY HELD AS INVENTORY

302.1 Property held as inventory should be stated at the lower of cost and net realizable value.

302.2 Land held for sale currently and land held for future development and sale is inventory and generally accepted accounting principles require that it be stated at the lower of cost and net realizable value.

In the same Handbook, we find a description of what constitutes costs for purposes of computing inventory. In addition to property acquisition costs, they include carrying costs. A definition of the latter is found in section 205.1:

205.1 Carrying costs on properties held for future development and under development include costs directly attributable to the project, such as [sic] interest, realty taxes and the net revenue or expense related to incidental operations of the project, prior to the project reaching its accounting comple- tion date? [8]

Here are the most relevant portions of section 205 describing the principles governing the capitalization of carrying costs:

205.4. The objectives of capitalizing carrying costs are: (a) to obtain a measure of cost that reflects the entity’s total investment in the asset; and (b) to charge a cost that relates to the acquisition of a resource that will benefit future periods against the revenues of the periods benefited.

205.6 The date carrying costs cease to be capitalized depends on the nature and circumstances of the project. For an inventory project, carrying costs would be capitalized through to the date revenue is recognized from the property including

all units or lots, as appropriate. For property held for investment, practice has been to capitalize carrying costs until its accounting completion date, which is frequently beyond the date of physical completion of construction.

205.7. In Canada, carrying costs are capitalized during holding periods on the assumption that costs are better matched with revenues. Presumably, an entity would only purchase land for future development if it expected to be able to sell or lease the property in the future and recover its costs including carrying costs to the date of sale or lease. Projects are frequently developed assuming there will be a holding period between the date the property is ready for sale and the date revenue is recognized or ready for lease and the earlier of the date tenants take occupancy or the leases come into force. The carrying costs incurred during this period are a result of the project and should be accounted for as a part of its cost rather than accounted for as a period expense.

[Emphasis added. I

In my view, these principles should apply to the computation of the income for tax purposes of a real estate trading business. Capitalizing the carrying costs, including interest, property taxes and upkeep expenses, ensures that these expenses are deducted against the revenue produced by the sale of the inventory. This is in conformity with the matching principle which was stated by Stone J.A. in Canderel Ltd. v. R. (sub nom. The Queen v. Canderel Ltd.), [1995] 2 C.T.C. 22, 95 D.T.C. 5101 (F.C.A.), [9] at page 24 (D.T.C. 5102) to have been elevated to the status of a legal principle.

In my view, the matching principle of accounting has, at least in this Court, been elevated to the status of a legal principle. The principle was best expressed by MacGuigan, J.A. in West Kootenay Power & Light Co. v. R. (1991), 92 D.T.C. 6023, at page 6028:

The approved principle is that whichever method presents the “truer picture” of a taxpayer’s revenue, which more fairly and accurately portrays income, and which “matches” revenue and expenditure, if one method does, is the one that must be followed.

Allowing the deduction of such expenses when no sale occurs in the year would create a distortion and not present a true picture of the income position of a taxpayer. The truer picture is achieved by the capitalization of the carrying costs? [10]

Is it possible that a taxpayer could claim some of his carrying costs pursuant to a specific statutory provision of the Act such as, for instance, subsection 20(1 )(c) in the case of interest expenses? In other words, are there any specific provisions in the Act inconsistent with WABAP? The Federal Court of appeal provided the answer to this question in Qualico Developments Ltd. v. R. (sub nom. Qualico Developments Ltd. v. The Queen (No. 1)), [1984] C.T.C. 122, 84 D.T.C. 6119 (F.C.A.), in which it was held that costs that must be capitalized in the cost of inventory cannot benefit from a deduction under subsection 20(1) of the Act. The reasons were outlined by Thurlow C.J., at page 128 (D.T.C. 6124):

The question thus arises squarely whether paragraph 20(1 )(aa), when properly interpreted having regard to its context in the Act, applies to and authorizes the deduction of landscaping costs incurred in respect of property included in an inventory. For the reasons which follow I do not think it does.

There is first the fact that if the paragraph does authorize such a deduction it goes further than the provisions which surround it, and which provide deductions in respect of items not otherwise deductible, whether because of accepted accounting principles or because of statutory provisions prohibiting or dealing with them. The canon expressed by the maxim noscitur a sociis seems to me to apply to restrict the scope of paragraph 20(1 )(aa) to items of a like nature.

Next, there is the fact that the opening wording of subsection 20(1) while overriding paragraphs 18(a), (b) and (h) does not purport to override the provisions of section 10 relating to inventories.

It appears to me, as well, that to interpret the wording of paragraph 20(1 )(aa) as applying to landscaping costs incurred in respect of property included in inventory produces, without any reasons for doing so being apparent, distortion and inconsistency in the system and scheme established by the provisions of the Act which I have mentioned.

Finally, there is the consideration that to permit the deductions as claimed tends to distort the computation of the appellant’s income for the years in question, a result which I do not think the language used should be presumed to intend and which should be avoided if the statute can be so interpreted.

In conclusion, carrying costs of real property held as inventory must be capitalized and cannot, for tax purposes, be deducted as running expenses in the year that they are incurred.

I shall now apply these rules to the facts of this case. Mr. Stein filed his tax returns for 1986 and 1987 claiming net rental losses in connection with the Tower House condo. He treated this condo as a capital property held for the purpose of earning income from property and his rental losses included capital cost allowance. Mr. Stein also declared a business profit for the 1986 taxation year and a business loss for the 1987 taxation year. These business activities related, at least in part, to trading in real estate. The Minister reviewed these two tax returns, looked at the facts as they were presented by Mr. Stein in these returns and concluded that he could not claim the rental losses attributable to the Tower House condo as he did not have any reasonable expectation of profit.

The first factual issue to be determined is whether Mr. Stein had such an expectation of profit from the rental of Tower House condo when he acquired this property. This issue boils down to the existence of a source of income. That same issue was raised and discussed in the well-known decision of the Supreme Court of Canada in Moldowan v. R. (sub nom. Moldowan v. The Queen), [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, at page 313 (D.T.C. 5215), in which Dickson, J. defined the concept of “source of income” as follows:

Although originally disputed, it is now accepted that in order to have a “source of income” the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v. Minister of National Revenue, [1972] C.T.C. 151, 72 D.T.C. 6131.

In my view, the Minister acted properly in disallowing the rental losses. The evidence has established clearly that Mr. Stein did not acquire the condo for the purpose of earning rental income. At the time of acquisition of the condo, Mr. Stein never intended to rent it and to make a profit from such activity.

Instead, he acquired the property for the speculative purpose of resell ing it quickly at a profit. At first, that is what he attempted to do. When this failed, he tried to either sell or rent the property. Clearly the intention to rent was only ancillary to the overall business objective pursued by Mr. Stein of selling the condo at a profit. The rental income would only mitigate his carrying charges while he held on to the property until its disposition.

I find as a fact that the intention of renting the property did not play any role in his decision to acquire the condo at the end of 1983. I conclude that the taxpayer never had any expectation of profit from the renting of the condo. To this extent, Mr. Stein failed to discharge his onus of proving that the Minister’s assessment was ill- founded.

However, this is not the end of the matter. Mr. Stein attempted to establish that the assessment of the Minister was ill-founded by advancing an alternative factual basis for his appeals: the trading position. In his Amended Notice of Appeal, Mr. Stein stated that he was entitled to claim his expenses as business losses because he acquired the Tower House condo for the purpose of reselling at a profit and he had a reasonable expectation of realizing such profit.

At first, counsel for the Minister objected to any evidence that would support the trading position. She stated that Mr. Stein had made a judicial admission in his initial Notice of Appeal that he acquired the condo only for the purposes of earning rental income. Section 132 of the Tax Court of Canada Rules (General Procedure) provides as follows:

A party may withdraw an admission made in response to a request to admit, a deemed admission or an admission in the party’s pleading on consent or with leave of the Court.

When Mr. Stein filed his Amended Notice of Appeal, he substituted for paragraph 8 of the initial Notice of Appeal which read: “Cet immeuble rsidentiel a t acquis pour les seules fins de produire un revenu de location,” the new paragraph 8 which reads: “Cet immeuble résidentiel a été acquis pour la revente ou pour les fins de produire un revenu de location.”

In my view, the filing of the Amended Notice of Appeal had the effect of withdrawing the admission. By consenting to the filing of an Amended Notice of Appeal, counsel for the Minister consented to the withdrawal. I do not think therefore that counsel for the Minister’s objection is well- founded. In any event, evidence was introduced by Mr. Stein that he did not give any mandate to his lawyer to make this specific statement. He did not remember reviewing it before it was filed. Finally, I note that this Notice of Appeal was drafted in French and that Mr. Stein stated that he did not read French very well. So, even if the withdrawal had not been consented to by counsel, I would have allowed withdrawal had a formal request been made to withdraw the admission.

Mr. Stein’s evidence has convinced me that he had a reasonable expectation of profit on a subsequent sale when he acquired the Tower House condo late in 1983. The condo was an attractive apartment situated in one of the top condo apartment buildings in Miami. Furthermore, the acquisition price was more than $100,000 less than the price paid by his sister two years earlier. Mr. Stein had substantial experience in the real estate market, including the Florida real estate market. He stated that the condo units of the Tiffany complex were selling well in 1983. I believed Mr. Stein when he stated that the property appeared to him to be a bargain and that he expected to resell it quickly at a profit. The reason why he was unsuccessful in this endeavour was the recession and the adverse conditions existing in the real estate market in the period following the acquisition. Mr. Stein acted in conformity with his plan. He attempted to sell the apartment in 1984 and 1985. The evidence has established that Mr. Stein, his sister and his parents owned their own personal condos. There is no evidence of the Tower House condo ever having been used for personal purposes. The transaction in question has all the indicia of an adventure in the nature of trade and I conclude that the condo constituted inventory of Mr. Stein.

Counsel for the Minister argued that if Mr. Stein had acquired the condo for the purpose of selling it at a profit and had a reasonable expectation of profit from 1983 to 1985, he had abandoned this intention sometime in 1986. I do not agree with this position. Although with some doubts, [11] I believe that Mr. Stein has succeeded on the balance of probabilities in establishing that, during the two relevant years, he still held this property for the purpose of selling it at a profit and that he had a reasonable expectation of profit until he started to rent it to his father late in 1989. Furthermore, once it is accepted that a taxpayer acquired a property for sale at a profit and that a reasonable expectation of profit existed at the time of acquisition, a reasonable period must be afforded to such taxpayer to carry out his business objective, especially in view of the adverse economic conditions that existed after the acquisition. See for instance McNeill v. R. (sub nom. McNeil] v. Canada), [1989] 2 C.T.C. 310, 89 D.T.C. 5516 (F.C.T.D.) and McGovern v. Minister of National Revenue, [1994] 2 C.T.C. 231, (sub nom. McGovern v. R.), 94 D.T.C. 6527 (F.C.T.D.).

As stated above, the computation of income from a real estate trading business is not the same as the computation of income from a rental property. The Tower House condo having been characterized as inventory, Mr. Stein cannot claim any carrying costs as running expenses in computing his income in 1986 and 1987. These costs must be capitalized.

An amount could have been deducted pursuant to sections 9 and 10 of the Act as cost of sale. Unfortunately, Mr. Stein did not introduce any evidence to establish what the fair market value of the Tower House condo was in 1986 and in 1987. There is no evidence enabling me to determine to what extent, if any, the cost of the condo exceeded its fair market value. Mr. Stein’s counsel argued that Mr. Stein did not have the onus of establishing the fair market value of the property. I cannot share this view. Because he is advancing a factual basis different from the one he presented to the Minister in his tax returns, Mr. Stein must prove the facts that support his new position and he must establish that he was entitled to the losses that he claimed. [12]

Not having any evidence as to the fair market value and incomplete evidence as to the costs relating to the Tower House condo in 1986 and 1987, I cannot determine if Mr. Stein was entitled to a deduction in computing his income in addition to those allowed by the Minister and I cannot conclude that the assessments were ill- founded.

It should be noted that the decision of the Supreme Court of Canada in Friesen was issued after these appeals had been argued. Furthermore, I had stated at the end of argument that I would grant Mr. Stein’s counsel more time to argue the issue of the timing for the deduction of the disallowed expenses. For these two reasons, I decided to reopen argument.

One of the issues that I raised was the possibility of referring the assessment back to the Minister for her to consider the application of section 10. Both counsel sent written representations to the Court on this issue. Counsel for the Crown’s notes were received on December 31, 1995 and the notes from Mr. Stein’s counsel were received on January 11, 1996. After having considered them, I have decided that the success of these appeals should be decided only on the basis of the evidence introduced before me at the hearing. I do not think that it would be appropriate in these circumstances to allow the reopening of the evidence or to refer the assessment back to the Minister so that she can reconsider the valuation of the Tower House Condo and the application of section 10 to the facts of this case.

The first reason is the fact that Mr. Stein did not introduce any evidence and did not present any specific arguments explaining the basis on which his expenses should be allowed as a deduction in computing his income in 1986 and 1987. At the time of the hearing, it was recognized in the case law [13] and by at least one author [14] that the deduction of expenses that are part of the cost of inventory is to be deferred until the time of sale of such property. So this was not a new issue.

Furthermore, I do not think that it would be in the interest of justice to allow the reopening of this case given that the tax returns showing the rental losses were filed by Mr. Stein in respect of a property which, in my view, was clearly inventory. Mr. Stein has been in the real estate business for over 27 years and he appeared to me as a sophisticated man. I cannot imagine that he did not understand the distinction between capital property and inventory. I do not think that it is appropriate for Mr. Stein to state that he relied on his accountant for the proper reporting of his tax position in this case.

In conclusion, Mr. Stein has not succeeded in discharging his onus of showing that the assessments for 1986 and 1987 were ill- founded.

For these reasons, the appeal for the 1986 taxation year is dismissed. The appeal for the 1987 taxation year is allowed and the assessment is referred back to the Minister on the basis that Mr. Stein is entitled to a deduction of $28,284.64. Costs are awarded to the Respondent for both appeals.

Appeal allowed in part.