Mullin v. R., [1998] 3 CTC 2812, 98 DTC 1731

McArthur T.C.J.:

This appeal is from assessments for the Appellant’s 1991, 1992 and 1993 taxation years.

The Appellant was assessed $14,000 in 1991, $23,000 in 1992 and $16,000 in 1993 being the profit from the sale of houses.

The issue is whether the building and selling of homes by the Appellant is an adventure in the nature of trade and, if so, what was his profit.

The question can only be answered after an examination of the facts and looking at all of the circumstances.

The Appellant and his wife Lisa gave evidence together with Mr. Blanchard, who testified as an expert witness. The Appellant has worked over ten years with a family land development corporation as a heavy equipment operator. Lisa is a hair stylist and operates her own business.

The Appellant built five houses between 1990 and 1994. Each of the three houses at issue was owned by him for less than a year.

House #1

In the fall of 1990, the Appellant, with assistance, constructed a single family home on lot 89-26 in Hampton, New Brunswick (house #1) in which the Appellant and his wife lived approximately six months before selling it in June 1991 at a profit of $14,000. This was Lisa Mullin’s first house and she was delighted with every aspect of it but its location. It was located some 30 kilometres from the Appellant’s new place of employment in Fairvale, and given his failing eyesight and other factors, they decided to move to a location closer to his employment. His place of employment changed locations frequently. In addition to operating earth moving equipment, wherever he was needed, he was a snowplow operator.

House #2

In July 1991, the Appellant purchased lot 18-D (house #2) in Fairvale/Quispamsis where he built a home in which he and his wife lived until it was sold for $115,000 at a profit of $23,000 in October 1992. He sold this house because his work moved back to Hampton where he purchased lot 89-29.

House #3

He purchased lot 89-29 (house #3) in November 1992. This lot contained a partially completed house and was located near to and on the same street as house #1. Upon his completion of this house he and his wife moved in until he constructed a house on lot 89-30 (house #4) where he constructed a fourth residential house. Lisa Mullin, in particular, was not happy with the size and floor plan of house #3 and complained about its inadequacies. The Appellant sold house #3 in May 1993 to construct a home more suitable to their needs.

Houses #4 and #5 have not been assessed.

House #4

In April 1993, he purchased lot 89-30 and constructed a house into which he and his family moved. He sold house #4 in March 1994 because he and his wife found it unsuitable.

House #5

He purchased lot 87-1 in March 1994 whereupon he constructed a residential home in which he and his family presently reside.

The Appellant’s employment with his father’s company was mainly seasonal. The Respondent’s Counsel demonstrated a pattern during the relevant period that when he was laid off he went on unemployment insurance (u.i.), built a house, went back on payroll, was laid off, went back on u.i., built a house, went off u.i. and sold the house. This pattern was repeated.

No records in terms of invoices and cancelled cheques exist because they were not kept or were destroyed in a fire.

Position of the Appellant

The Appellant’s position is that he did not have a primary or secondary intention to embark on an adventure in the nature of trade. All three homes in question were intended to be the Appellant’s principal residence and therefore were exempt from tax upon disposition.

Counsel for the Appellant referred the Court to several cases, including:

(a) The tests set out in Minister of National Revenue v. Taylor (1956), 56 D.T.C. 1125 (Can. Ex. Ct.)

(b) The six criteria identified in Happy Valley Farms Ltd. v. Minister of National Revenue (1986), 86 D.T.C. 6421 (Fed. T.D.)

Counsel argued that there are several factors which indicate that the Appellant’s intention when constructing and selling homes was not to embark on an adventure in the nature of trade. The Appellant’s motives for the sales included his health problems associated with diabetes and the long distance to his places of work.

In the alternative, if it is determined that the Appellant was involved in an adventure in the nature of trade, Counsel urged the Court to consider the estimated costs of construction (as calculated by the expert witness, Mr. Blanchard) and conclude that the sales of the three houses yielded profits in the amounts of approximately $4,560, $1,000 and $5,560.

Position of the Respondent

There are two issues in this appeal: whether the building and selling of homes was an adventure in the nature of trade and if it was, what amount of profit was realized from these sales.

Counsel for the Respondent referred to several decisions, including:

(a) Happy Valley Farms Ltd. v. Minister of National Revenue (1986), 86 D.T.C. 6421 (Fed. T.D.) at page 6423, which lists the criteria used to determine whether a profit is of an income or capital nature:

1. The nature of the property sold. [...]

2. The length of period of ownership. [...]

3. The frequency or number of other similar transactions by the taxpayer. Lu]

4. Work expended on or in connection with the property realized. [...]

5. The circumstances that were responsible for the sale of the property. [...]

6. Motive.

(b) Litvinchuk v. R. (1996), 96 D.T.C. 1315 (T.C.C.) at page 1319, which stands for the following principle:

Inferences flowing from the circumstances, and the conduct and actions of a taxpayer, are better indications of intention than assertions and direct evidence of witnesses. And at page 1321:

To repeat J. Bowman’s statement “It really boils down, I suppose, to a matter of common sense and a matter of looking at all the circumstances...”.

(c) Pierce Investment Corp. v. Minister of National Revenue (1974), 74 D.T.C. 6608 (Fed. T.D.) at page 6612:

I am also of the view, as has been expressed in other cases, that while the evidence of the witnesses is helpful in endeavouring to determine their intentions, their actual conduct and the steps they took to carry out these intentions gives a much better indication of what they actually were. Without intending to cast any aspersions on the credibility of the witnesses in the present case it is nevertheless evident that in any case where a distinction must be made between a transaction which constitutes an adventure in the nature of trade and one which leads to a capital gain, one must expect the witnesses to insist that their intentions were solely to make an investment and that the idea of reselling the property at a profit had never occurred to them even as a secondary intention at the time of making the original investment, but was merely forced on them subsequently by some event beyond their control. If they were not in a position to testify to this effect they would have little or no ground for appealing against the assessment.

(d) Minister of National Revenue v. Taylor (1956), 56 D.T.C. 1125 (Can. Ex. Ct.) at page 1137:

But “trade” is not the same thing as “an adventure in the nature of trade” and a transaction might well be the latter without being the former or constituting its maker a “trader”. And whatever merit the singleness or isolation of a transaction may have in determining whether it was a trading or business transaction it has no place at all in determining whether it was an adventure in the nature of trade. The very word “adventure” implies a single or isolated transaction and it is erroneous to set up its singleness or isolation as an indication that it was not an adventure in the nature of trade. Lord Simonds put the matter explicitly in Edwards v. Bairstow (supra) when he said, at page 54:

The determination that a transaction was not an adventure in the nature of trade because it was an isolated transaction was Clearly wrong in law.

In my opinion, it may now be taken as established that the fact that a person has entered into only one transaction of the kind under consideration has no bearing on the question whether it was an adventure in the nature of trade. It is the nature of the transaction, not its singleness or isolation, that is to be determined.

With respect to the criteria listed in Happy Valley (supra), Counsel argued that the circumstances indicate that the Appellant was involved in an adventure in the nature of trade. The Appellant built five houses between 1990 and 1994. In addition, each of the three houses at issue in this appeal was owned for less than a year.

In reference to the fifth element in Happy Valley (supra), regardless of the Appellant’s contentions, at no time was there a great distance between the various work locations and his home. During the relevant period of this appeal, it was a 15 to 20 minute drive between Hampton and Fairvale/Quispamsis. Counsel also pointed out that it is suspicious that the construction of each house commenced at a time when the Appellant was on, or had just filed for, a claim for unemployment insurance benefits. Furthermore, with respect to the diabetes issue which was raised by the Appellant at trial, Counsel for the Respondent argued that if it was such an impor- tant factor in his decision to sell each home, it would have been mentioned in the Notice of Appeal.

The circumstances also indicate the Appellant’s motive in this matter. He would work for his father’s company, go on unemployment insurance, buy a lot, build a house while receiving unemployment insurance benefits, sell the house, go back to work for his father and repeat the pattern.

With respect to the cost of construction issue, Counsel for the Respondent argued that the Appellant did not provide the necessary documentation to overcome the Minister of National Revenue’s (the “Minister”) assumptions of fact and therefore the amounts assessed as profit should stand.

Analysis

House #1 was built when Edward and Lisa were recently married. Mr. and Mrs. Mullin liked everything about the house but agreed to sell for several reasons, the most dominant one being that the Appellant’s place of employment changed from Hampton to Fairvale/Quispamsis about 30 kilometers away. Mrs. Mullin did not want her husband driving that distance to and from work because his eyesight was deteriorating from a diabetic condition, along with other factors. While the Respondent’s Counsel in cross- examination left some doubt as to the Appellant’s motivation for selling house #1, I am prepared to accept the Appellant’s reasoning that it should not form part of the three homes under appeal. It was their first home as newlyweds. It sold privately. A mortgage prepayment had to be paid. It had been built with their specific needs in mind. Mrs. Mullin was concerned with the safety of her husband while driving to and from work. While the Appellant’s deteriorating eyesight was not pleaded nor mentioned in discovery, the explanation of Mrs. Mullin to the effect that, the Appellant actively avoids mentioning his health problems, is accepted.

With respect to houses #2 and 3,1 accept the position of the Respondent. As stated by Bowman, J.T.C.C. in Dicecca v. R. (1993), [1994] 1 C.T.C. 2087 (T.C.C.) at 2088:

Cases in this area (trading) are legion, and very little purpose would be served by my referring to the numerous tests that have been enunciated by the courts over the years. It really boils down, I suppose, to a matter of common sense and a matter of looking at all of the circumstances ...

Looking at all of the circumstances and attempting to apply common sense, I find the following.

The Appellant built five houses between 1990 and 1994. These were similar transactions. Each property, with the exception of house #5 was built in subdivisions owned by the Appellant’s father’s company.

The Appellant knew the market in the areas where he built. He had construction skills and valuable contacts to assist him in the construction. He and his wife purchased vacant lots but house #3, purchased from his father’s company, required considerable work to complete.

He constructed the houses, primarily during the winter months while laid off from his employer. The stated circumstances that were responsible for the sales are shallow. The inferences from all the circumstances are better indications of intention than the assertions and direct evidence of the Appellant and his wife (Pierce Investment Corp.(supra)).

The Appellant did the landscaping and put in new appliances in the homes because it made them easier to sell. The Appellant installed the kitchen cabinets, the drywall, framing (with assistance) and the finishing work. Upon the sale of house #3 they moved three doors down the street. He purchased materials cheaper through his father’s company, again approaching the construction as a business. He obviously had the skills to construct single family homes. The Appellant had the burden of proving the Minister’s conclusion that there was an adventure in the nature of trade was incorrect. He has failed to do so. The inferences flowing from the circumstances are overwhelmingly in favour of the Respondent’s position for houses #2 and #3.

It does not serve a useful purpose to review in any detail the evidence with respect to the cost of construction. Mr. Blanchard is no doubt qualified to give expert evidence with respect to the cost of construction of single family homes in the St. John, New Brunswick area. He is a close friend of the Appellant and helped in the construction, of at least one home, apparently without charge. I agree with the Respondent’s Counsel that he was biased in his evidence. Even in accepting his evidence, I am not persuaded that the Respondent’s calculations are incorrect. No documents were submitted to substantiate the Appellant’s position. The burden was on the Appellant to demonstrate that the Minister’s assessments were incorrect and he has not done so.

Finally, the Appellant raised in the Notice of Appeal that should the Court find there was an adventure in the nature of trade, half of any profit on the sale of the homes should be attributed to Mrs. Mullin’s income. The Appellant’s Counsel did not refer to this in his closing argument giving the inference that it was not a serious contention. There is insufficient evidence to conclude that Mrs. Mullin was a business partner. In answer to the Appellant’s Counsel’s question about her involvement, she stated that she “picked out things and helped make decisions”. This does not give a basis to divide the income.

In conclusion, the appeal is allowed for house #1 being lot 89-26. In all other respects, the appeal is dismissed.

The Respondent being substantially successful, costs are awarded to the Respondent.

Appeal allowed in part.