Walker v. R., [1999] 2 CTC 2824, 99 DTC 686

Sarchuk 7.C.J.:

Glee Walker has appealed from assessments of tax with respect to the 1987 and 1989 taxation years. In computing her income, she reported the gains realized from the 1987 sale of property at Bruce Street, Cambridge, Ontario and from the sale in 1989 of a portion of a farm known as the Garnham property on capital account. In both instances, the Minister of Na- tional Revenue (the “Minister”) treated the gains realized from the sale as on income account.

The Appellant is a high school teacher and was employed full-time in that capacity during the taxation years in issue. She appears to have had little or no business experience but she has an abiding interest in older homes and was personally involved in refurbishing and decorating several properties. Also, from 1982 onward, the Appellant was involved in a number of real estate ventures in both the Cambridge area and in Detroit. I will not be making any further reference to the Detroit acquisitions other than to say they all appear to have been rather speculative and indeed, it is fair to describe some of the activities in those years as speculative.

In 1980, the Appellant’s spouse, Bruce White (White), was a shareholder and an employee of a gravel company. I make reference to White’s activities because one of the issues in what are commonly referred to as trading case is the intention of the taxpayer. While I accept the Appellant’s testimony that decisions with respect to both Bruce Street and the Garnham property followed discussions and were made by consensus, I am equally satisfied that White’s experience was more substantial and that his input with respect to the acquisition or disposition of a property, its financing, etc. strongly influenced the decision-making process. Furthermore, it is quite evident that he was very actively involved in the transactions, dealing with contractors, financial institutions, city officials and other authorities as and when required. His background and his other land dealings in those years are relevant facts to be considered in determining the Appellant’s intention with respect to the two properties in issue. That is particularly so in the Garnham transaction where White’s numbered company was a co-owner.

I propose to deal with the Bruce Street property first. As a result of persistent flooding, a number of homes in the flood-plain area in Cambridge were Slated for demolition. The Appellant was familiar with one such residence situated at 102 Water Street, considered it to be worth saving and brought it to White’s attention. As well a vacant lot on nearby Bruce Street was apparently available. White investigated the cost of moving and a decision was taken to purchase the demolition-slated house and move it to the vacant lot. The purchase price of the house was $1,000 and the Bruce lot was acquired in January 1985 for $14,000 (Exhibit R-10). According to the Appellant, the foundation put in on the Bruce lot was designed to enable her to create a basement suite if permitted. The house was moved to the Bruce lot in April 1985.

The stated intention of the Appellant with respect to this acquisition was to convert it into a three-unit rental operation. She testified that their analysis convinced them that the cost of moving and refurbishing could be done within the range of financing available and that projected rentals would be adequate to maintain the property. The Appellant expressed another motivating reason which was to ultimately provide a residence for their younger son who was 18 or 19 at the time. I view this, as the Appellant herself conceded, to be wishful thinking rather than an operative intention.

The relevant zoning by-law permitted a single-family dwelling or up to a six-unit apartment on the Bruce lot provided that all regulations, especially lot square footage and area were met (Exhibit R-3). At some point in time prior to May 22, 1985, the Appellant sought a zoning variation to allow the site to be used as a triplex. Their request was deferred by the Committee of Adjustment but apparently there is no dispute that the duplex proposal was permissible. According to the Appellant, their plans were frustrated because of unexpected costs related to the move; higher renovation costs and difficulties with the Planning Department. White placed all of the blame on the intransigence of the Planning Department staff. A further major problem was the failure on the part of one lender to follow through on a commitment for a first mortgage which forced the Appellant to refinance at higher costs.

The property was listed for sale on February 3, 1986 (Exhibit R-11). Exhibits R-12 and R-13 indicate that offers were received by the Appellant in December 1986 for $60,000 and in March 1987 for $55,000. The property was finally sold in November 1987 for $71,600 (Exhibit R-11). There was no rental income during the period of ownership.

A number of factors lead me to conclude that the motivation for the Bruce Street acquisition was to realize an accretion of the purchase price by resale at an opportune moment. In no particular order of importance, some of these factors are:

I. White testified that real estate values were rising rapidly at the time. There is no reason to doubt that the Appellant was unaware of that fact.

2. No capital was invested. The total projected costs, that is the purchase price of the house and lot, moving costs, construction of the basement, refurbishing if triplexing were permitted, were to be financed. I note that one of the lenders was Waydam Incorporated, a company with whom White often dealt and which also appears to have financed the Richardson acquisition, which I will discuss later. The Appellant testified she had never heard of this company.

3. The property was listed for sale on February 3, 1986, within ten months of placing the house on the Bruce Street lot. Concurrent with this transaction, White became involved in several other real estate transactions in the same area of Cambridge.

4. In October 1984, White’s numbered company made an offer to purchase a property on Walnut Street on which two vacant houses were located. (Exhibits R-22 and R-23). The purchase was completed on December 24, 1984.

5. On March 17, 1985, the numbered company purchased a vacant lot on Richardson Street (Exhibit R-21). Title to Bruce was taken on March 15, 1985. According to White, consideration was being given (and cost estimates made (Exhibit A-15)) to moving one of the Walnut houses to Richardson or perhaps to Bruce because he could raise more money by putting the Walnut houses on separate lots. As it turned out, White sold Richardson in March 1987 at a profit as vacant land.

6. A further demonstration of the mindset of White at this time is that although he professed to have acquired the Walnut houses as rental units, they were demolished because, he said, the property had more salability as vacant land. The Walnut Street property was sold in the latter part of 1987 or January/February 1988. These transactions, and in particular, the financing involved, appear to have been intertwined with the Bruce transaction and their existence cannot be disregarded.

7. It is questionable whether the delay in receiving the zoning variations which were said to be necessary to enable the Bruce project to be completed were as White suggested someone else’s fault. At least one letter from the Planning Committee suggests they were waiting for some action from the applicants.

8. Although financing problems existed, I have serious reservations regarding the testimony given that the sale was precipitated by this factor. According to the Appellant, the duplex portion was ready for occupancy before the end of 1985. Little real effort appears to have been made to find suitable tenants, and it remained vacant until the sale.

On balance, the Appellant has failed to demonstrate that the 1987 assessment by the Minister was wrong. That being my conclusion I need not consider the applicability of subsection 110.6(6) of the Income Tax Act.

I turn next to the Garnham property. This is a 19-acre parcel of land with a stone “century house” located on the southeast corner. It sits on one side of the Lakeview Gravel Pits, while White Oaks is on the other. There are apparently gravel deposits on the farm (Exhibit A-10). The property was listed for sale in 1982. It was purchased in 1983 by Clifford McEwen, in trust, for the numbered company and the Appellant. Title was transferred to them in 1985. For ease of reference, I will refer to the corporate co-owner as White. If I failed to mention it previously, White was the sole shareholder of the corporation.

The intentions of the Appellant and White were asserted to be two-fold, first, primarily to acquire the property in order to renovate the rundown residence and to convert it into rental units. Their projections, they said, indicated that with three units the property would be financially self-sufficient. Second, it allowed them to provide their older son with the opportunity of acquiring the property as his residence in the reasonably foreseeable future. According to the Appellant, he had indicated some serious interest in that direction.

Reference was made by counsel for the Appellant to two other farm properties owned by the Appellant as confirming her intentions and consistent conduct with respect to this type of property. The first was White Oaks Farm, a property owned by White since 1965, on which there was a large old stone farmhouse where the Appellant and White lived from 1975 to 1992. In that period, they developed a small rental apartment in the house and later added two more. All are rented or available for rent. As well, she says another unit is currently under development.

In November 1989, the Appellant and the numbered company purchased a nearby property, the Taylor farm, consisting of 100-odd acres with a lake and a 4,500 square foot stone century house. The residence was divided into three units, one occupied by the Appellant and her spouse and the other two are rented. As of 1992, the Appellant has been the sole owner of this property. In similar fashion, after the Garnham property was acquired in 1983, the Appellant and White proceeded to make renovations and by 1985 two apartments had been completed. The Appellant projected rental revenues of $1,100 per month which she said would provide sufficient cash flow to account for mortgage, taxes, interest and other similar expenses. She referred to a 1985 appraisal (Exhibit A-10) which suggests an effective gross income of $12,800 per annum and to a second appraisal in 1987 (Exhibit A- 11) which refers to the existence of three units and makes the comment “recently rented” at a rental of $1,175 monthly.

The Appellant had always been aware of the existence of the Carolinian Canada Project which is a conservation project, and the fact that a small portion of the Garnham property was of relevance to that project. At some point of time, White began discussions with the Grand River Conservation Authority with respect to a portion of a wood lot situated in the northeast corner of the Garnham property. These discussions culminated on October 11, 1988 in an offer made by White to the Chairman of the Authority (Exhibit R-34) as follows:

I have found it advantageous at this time that I convey a portion of my wood lot at the southern bog to the Authority. In further consultation with staff of the Authority this past summer I have concluded that the Carolinian Canada Project would benefit from the transaction. I propose to convey for $1.00 approximately 10 acres of my 30-acre wood lot and an access route to the forest and bog for a combination of Deed of Property and easement to the Authority.

Attached to this letter were the details of the proposal which was being made. The offer was accepted by the Authority and the 10 acres and roadway were conveyed to it in late 1988 or early 1989. As a consequence of this conveyance, 1.4 acres of the Garnham property on which the house was located were severed from the balance of the acreage. This severance occurred without the necessity of Municipal Planning approval.

In April 1984, the 1.4 acres and house were sold for $184,000. It is the Minister’s position that at the time of acquisition, the Appellant and White intended to obtain a severance for that portion of the property on which the residence was located and was the object of ultimate resale. The Minister relies, inter alia, on Exhibits A-8 and A-9 which were exchanges between the vendor Gamham and Clifford McEwen, a close friend of White’s, and the purchaser of the Garnham property, as Trustee for the Appellant and the numbered company in 1983. Each refers to the severance of two acres. Exhibit A-8 specifically refers to the replacement of mortgages and the following comment is made:

The same to be provided by you as soon as the severance mentioned in paragraph 1(a) of that agreement has been finalized.

Exhibit A-9 refers to an undertaking to separate the two mortgages described in the Agreement of Purchase and Sale when the severance of the two-acre and the 88-acre portions is finalized. The Agreement of Purchase and Sale, I believe, is before the Court. The Appellant and White both say that these undertakings were not related to severances and possible sale but reflected financial considerations and requirements.

At first blush, there is an element of persuasiveness in the Appellant’s position that the acquisition of the Garnham property was not motivated by resale. Although that may be true with respect to the bulk of the acreage, a closer look at the transaction discloses an intention on the part of White and the Appellant to sever the approximately two acres on which the house sat for purposes of resale. In reaching this conclusion, I have reviewed the documents filed as exhibits and the testimony of the Appellant and White in light of other proven facts and have considered such matters as, inter alia, the time-frame involved and White’s financial condition. In my view, the only logical inference which can be drawn therefrom is acquisition for resale. I cite the following facts and again in no particular order of importance.

1. An attempt had been made to sever the portion in issue close to the time of acquisition. As noted, references were also made to severance in the two undertakings. In this context I do not place much stock in the Appellant’s contention that severance was only being considered as a result of preferences expressed by lending institutions which they said would permit a borrower to maximize the amount of mortgage proceeds by severing the house and an acre or two from the balance of the property.

2. The Appellant while unable to be precise, conceded in cross-examination that the property had been listed for sale, perhaps as early as 1985. From the context of the questions and responses, I understood this to be a reference to the house.

3. The other real estate ventures embarked upon by White during the same period of time, most of which I have earlier noted, are hallmarks of trading.

4. I add in this instance that White’s imprimatur is found all over the Garnham property transaction. He structured it, he carried it out and he actively promoted the conservation gifting. One need only refer to his letters to the Authority (Exhibits A-34 and A-35) and to the appraiser’s reports for confirmation thereof.

5. On the facts, it is a reasonable inference that at all times, White and by extension, the Appellant, intended to and made every effort to sever the house and adjacent portion of acreage. That intention is evident from the comments of the appraisers. I quote first from the 1985 report under the heading “Special Remarks” where the appraiser notes:

Apparently there are gravel deposits on the farm located in a scenic part of the country with hills, woods and a lake close by. The house plus small acreage is not yet severed from the farm. If that is the final intention there are farms in the immediate vicinity plus a gravel pit close by.

The 1987 appraisal report has the following comment under “special remarks”:

Vendor wishes to sever house and two to three acres...

I also observe that in each case, the applicant named in the document is White. I am satisfied that the information incorporated into those reports by two separate appraisers could only have come from the Appellant or from White. In my view, it is not merely a coincidence that a year later White wrote to the Authority stating that he found it advantageous to convey a portion of the property to the Conservation Authority.

With respect to the purpose underlying the discussions with the Conservation Authority, reference should be made to the December I, 1988 letter to White from the Director of Planning of the Regional Municipality of Waterloo. He confirms discussions involving White, and representatives of the Conservation Authority and the Regional Development. Reference is made by the Planning Director to a sketch which outlined White’s proposal in which he indicated a combination of outright conveyances of easements with respect to access, in respect of which he wrote:

In our view there should be a decision made as to whether a full conveyance or access from the roadway to the wood lot is required by the Authority or whether an easement along the length of the proposed access route will suffice...

He then goes on to make a cryptic remark at the bottom of the first page with respect to the Conservation Authority’s right to acquire such an alignment under the Planning Act, and says:

However the conditions for so doing are quite specific and this office would monitor the exercise of this function quite closely to see it is not abused and does not result in consequences adverse to our planning objectives.

This somewhat enigmatic comment appears to reflect a concern regarding the consequential effect of the conveyance of the roadway.

White’s comment to this letter is of interest. He said that the determination had already been made by the Conservation Authority and that the Authority had already determined that the conveyance was best. It is equally significant that White and the Appellant were quite aware of the consequential and beneficial result of the steps they took in this regard. Indeed, in my view, it is a fair inference to find that the proposal itself originated with White with this consequence in mind.

I do not propose to enumerate all of the facts I relied upon, but two others should be mentioned. The Garnham purchase, as were many of the other purchases made by White, including the Bruce property, was fully financed by a vendor take-back mortgage of $60,000 at 12%, a second mortgage for $25,000 at 16*/2%, and a loan from the school board for $15,000 (interest rate unknown). Second, the property was only sporadically rented in the years following completion of the units in 1985. However, even if fully rented at the rates shown in the proposal, a break-even point likely would not have been reached.

Third, there is surprisingly no record of any rentals although I accept that some took place. There is also no record of income and expenses, again, quite surprisingly, since the Appellant says that she reported a 50% share in her returns. However, Exhibits R-1, R-2 and R-3 which are her 1987, 1988 and 1989 returns show no such entries. White for his part, was equivocal and was unable to explain why the corporation’s financial statement failed to show any rental income. I do not suggest that there were no rentals, but rather that it is possible that the failure to report income may reflect nothing more than how little actual income had been earned. At the very least, it certainly puts in question the testimony of both the Appellant and White.

To restate my conclusion: the Garnham property was acquired for several reasons, one of which was the resale, the possibility of resale of the specific portion in issue. It is a fact that the intentions with respect to the balance were different and included, at some point in time, plans to build their own home on an existing barn foundation. Subsequently, I might add, it was used for that purpose by their son to whom a portion of the land was sold in 1993. However, the issue before me is solely with respect to the house and 1.4 acres. Since the intention, in my view, from the beginning with respect to that portion was to hold it for resale the transaction can only be characterized as a venture in the nature of trade. Accordingly, the appeals are dismissed.

Appeal dismissed.