Ferguson v. R., [1998] 1 CTC 2963

Beaubier T.C.J.:

These appeals pursuant to the Informal Procedure were heard together on common evidence by consent of the parties at Penticton, British Columbia on October 9, 1997. Mr. Ferguson was the only witness.

The Appellants have appealed assessments for their 1993 taxation year which assessed their gains from the sale of 219, 1028 Lakeshore Drive, Penticton, British Columbia, as income.

In 1989 the Appellants moved from Grand Prairie, Alberta to Penticton. Mr. Ferguson’s mother, Joyce Geering, had remarried and was a real estate agent employed by NRS Block Bros. Realty Ltd. in Penticton. Her husband and Joyce owned a corporation, Charrloam Investments Ltd. (“Charrloam”), which owned the Golden Sands Motel (“Golden Sands”) at 1028 Lakeshore Drive in Penticton. The Geerings were in the process of stratifying the motel’s title in order to sell the motel units.

The Appellants loaned Charrloam the money to build a convenience store at the front of the Golden Sands. Charrloam hired the Appellants to manage it. On either February 15 or March 15, 1989, the Appellants and Charrloam agreed that for $10,000 the Appellants would buy the space above the store so that the Appellants could build a residence there. The Appellants paid for the construction of suites 204 and 205, a total of 1,500 square feet, which they connected with a doorway. They took up residence in the suites. In 1990 they took over management of the convenience store.

On June 5, 1992, Charrloam obtained strata titles to the Golden Sands. The Appellants received their titles from Charrloam. Then they sold 204 and 205 to Charrloam for $65,000 each, a total of $130,000 (Exhibit R-4) on June 15, 1992 and July 17, 1992. They treated those sales as sales of a principal residence. Based upon Exhibit R-3, the Appellants had the equity in the suites from 1989 onwards, they resided in 204 and 205 and they were their principal residence when they sold 204 and 205 on June 15, 1992.

In consideration for 204 and 205, Charrloam transferred to the Appellants:

(i) Unit 206 in the Golden Sands,

(ii) Unit 219 in the Golden Sands, and

(iii) land for eight suites in Phase 2 of the “Golden Sands Resort”

as the total value of $130,000.

On July 8, 1992, the Appellants executed a declaration of trust that they were trustees for RMF Enterprises (1992) Ltd. (“RMF ’92”) respecting 206 (Exhibit R-6). Mr. Ferguson testified that he told the auditor that Exhibit R- 6 is invalid. However, no renunciation of the trust is in evidence.

On July 15, 1992 the Appellants listed 219 for sale with Mr. Ferguson’s mother (Exhibit R-7). The Appellants renovated 219. Mr. Ferguson testified that the strata title to 219 was valued on the sale at $32,500 and that construction costs amounted to $93,231.79 (Exhibit A-1). However, cross- examination revealed that the $93,231.79 included a number of secondhand appliances which the Appellants moved into 219 from 204 and 205.

The listing in Exhibit A-l includes an allocation “land” totalling $37,500. No appraiser testified respecting this value. Exhibit A-l included both cheques and bills. There are also items such as “survey fee”, various payments to the Royal Bank which were not reviewed in Mr. Ferguson’s testimony, and billing to “Computer Source Ltd.” for $2,118 which required explanation. Exhibit A-1 also included bills to “Golden Sands”, Charrloam, and R.M.F. Enterprises Ltd., rather than the Appellants. Mr. Ferguson’s testimiony did not reconcile the hodge podge of documents in Exhibit A-1. Exhibit A-l is not accepted on its face as evidence of disbursements on account of 219 by the Appellants. At the very least, there appears to be a possibility of duplication between the cheques and the bills.

When Mr. Ferguson was cross-examined respecting Exhibit A-1, he admitted that his estimate of costs of renovations to the auditor of $17,554.18 was verified by cheques (Exhibit A-12). On the basis of the foregoing review of Exhibit A-1 and Mr. Ferguson’s testimony, the figure of $17,554.18, which he submitted to the auditor for Revenue Canada, is accepted as the truth. It is not refuted by Exhibit A-1 or Mr. Ferguson’s very limited testimony concerning Exhibit A-1.

The Court also notes that item (iii) transferred by Charrloam to the Appellants for 204 and 205 consists of strata titles which constituted eight units. At a value of $32,500 per unit, this would constitute a value of $340,000.206 was sold on June 1, 1994 for a net of $101,686.91 by the Appellants. All of these were included in the ostensible sale figure of $130,000 respecting 204 and 205. Mr. Ferguson testified that income taxes were paid in full on the sale of 206. This indicates that for the sale of 204 and 205, the Appellants received 206 and 219 (two strata units) plus eight strata units in Phase 2. RMF ’92 constructed the units in Phase 2. Without any record of the figures or an acceptable appraisal of 206, 219 or the eight titles in Phase 2, the Court can only average the number and arrive at a figure of $13,000 each for the ten strata units received by the Appellants for 204.

On this basis the cost of 219 is calculated at:

The Appellants accepted an offer to purchase 219 on September 2, 1992 (Exhibit R-8). It closed on February 27, 1993 for a gross price of $109,000 and a net price of $101,068.88. On this basis, the Court calculates the Appellants’ gains as follows:

$ 70,514.40

2

On this basis, each Appellant gained $30,257.20. The auditor’s figures for the land cost of 219 appeared to exceed those arrived at by the Court.

Mr. Ferguson testified that they sold 219 because, upon moving from the 1,500 square feet of 204 and 205 to the 850 square feet of 219, they (and in particular, Mrs. Ferguson) realized how small it was. In addition, they had tired of the constant coming and going of living in the motel complex.

Mr. Ferguson also testified that he was not a contractor and that he does not pound nails. However, the Court notes that the Appellants had constructed 204 and 205. They renovated 219 and 206. Mr. Ferguson incorporated RMF ’92 and it built the eight units. It also built the home that they moved into at Vancouver Place in 1993. Such records as are before the Court indicate in Exhibit A-l that Mr. Ferguson acted as a general contractor in 1992.

The Court does not accept Mr. Ferguson’s testimony that Mrs. Ferguson was surprised by the reduction in size that 219 constituted. 219 was there for her to see and she could compare it with the 1,500 square feet in 204 and 205. Mr. Ferguson’s testimony of the reduced size being a cause of the sale of 219 is not accepted. His testimony that they were tired of the motel complex is believed. However, that may have occurred much earlier, since they had lived on the premises and operated the convenience store for long hours since 1989.

In Happy Valley Farms Ltd. v. Minister of National Revenue (1986), 86 D.T.C. 6421 (Fed. T.D.), at 6423, Rouleau J. listed a set of tests for use in determining whether a sale is of an income or capital nature. Using those tests, the Court finds.

1. Nature of property sold. It was a condominium unit which the Respondent assumed that the Appellants were living in, in 1992.

2. Length of period of ownership. At the time of listing, the Appellant had owned 219 for no more than a month. The offer to purchase was accepted within 90 days of the acquisition of title.

3. Frequency of similar transactions. 206 was sold on June 1, 1994. There were no similar transactions before this. However, the Appellants constructed 204 and 205 and were dealing in future or existing strata titles at 1028 Lakeshore Drive on a scale approaching sophistication by the time they acquired 219. Afterwards, RMF ’92 constructed and sold the eight units received by the Fergusons as part of the proceeds of 204 and 205.

4. Work expended. On the basis of the Court’s calculations, the work expended was approximately equal to the value acquired.

5. Circumstances responsible for sale. The explanation that the Appellants realized that the unit was too small after they moved in is not accepted. The size was fully apparent beforehand and they had the experience to assess the size. Their desire to leave the motel was not sudden either. The obvious explanation for their move into and work on 219 is that they could foresee using it as a principal residence for a tax free capital gain. They did that and did not report it respecting 204 and 205. They did not report the gain on 219 either.

6. Motive. On the evidence, the Court finds that the Appellants acquired 219 with the primary motive or intent of selling it at a gain as their principal residence. The sales of 204 and 205 to Charrloam for 206, 219 and the eight strata units is a trading mechanism. The trust declaration for RMF ’92 respecting 206 (whether or not it was used) is sophisticated. By 1992 they were not novices at construction, since they had built 204 and 205.

Thus, the Court finds that the Appellants acquired 219 with the primary intention of selling it at a profit. Living in it to qualify 219 as a principal residence was a secondary intention to the motive of selling at a profit. Their method of acquisition; their renovations; the size, nature and location of the unit for a young couple; their contracting experience and the length of ownership before listing, all lead the Court to find that the purchase and sale was done as an adventure in the nature of trade by both Appellants. Their profits were income.

The appeals are dismissed.

Dated at Ottawa, Canada, this 27th day of October, 1997.

Appeal dismissed.