Leah Aryeh v. Minister of National Revenue, [1979] CTC 2215

M J Bonner:— The issues are the same in each of these appeals. They are whether revenues from the sale by the appellant of certain oriental rugs were revenues from a business or were receipts on capital account.

The respondent assessed tax for the appellant’s 1972 taxation year by adding to declared income “Unreported Sales (Net)—$8,029’’, and that happens to be a quote from the T7W attached to the notice of assessment. He assessed tax for the appellant’s 1973 taxation year by adding to declared income the sum of $68,632.18.

The respondent pleaded that he assessed on the basis of an assumption that the rugs in question were “sold as part of the appellant’s business assets and as such the receipts therefrom are liable to taxation’’.

Although the assumption pleaded may be read as involving the conclusion that the revenues from the sale of the rugs were business revenues because of the manner in which the rugs were sold, both parties have approached the case on the basis that the issue was whether the rugs sold were inventory of the business or were capital assets, the manner of sale apparently being irrelevant.

The appellant’s position was that the rugs were personal family property, that is to say, capital assets. They were alleged to be rugs given to the appellant and members of her family and brought by the appellant to Canada when she moved here from New York in 1969.

The appellant’s father-in-law was at one time a very wealthy resident of Iran. He was a collector, on a large scale, of fine oriental rugs. The type collected were, by reason of the quality of the fibres used and dyes used and the uniqueness of pattern, of very great value.

The father-in-law moved from Iran to New York in 1947 bringing with him a large collection of such rugs, which I will hereafter sometimes call “quality rugs’’ to distinguish them from the commercial variety.

The appellant married her husband in New York in 1957. The couple lived in New York from 1957 to 1969. On numerous occasions the appellant’s father-in-law presented her and her family with gifts of quality rugs. The rugs were used as adornments in the appellant’s home.

In October of 1969 the appellant and her children moved to Toronto. A short time later the appellant’s husband joined her with the intention of taking up residence in Toronto. Subsequently he changed his mind and he now resides in New York.

The quality rugs thus given to the appellant and her family were, it was alleged, brought to Toronto in a moving van with the rest of the appellant’s household furnishings. Upon arrival in Toronto the appellant stayed initially with her children in her parents’ home, a small three-bedroom house.

The appellant commenced in 1969 to carry on, as the sole proprietor, the business of the sale of carpets and broadloom at 522 Bloor Street West, Toronto. The appellant’s husband, Mr Aryeh, testified the business did not involve the sale of quality carpets; only oriental rugs of substantially lesser quality and ordinary broadloom were sold.

On December 1, 1969, Corporal Rawluk of the RCMP visited the Bloor Street premises. He was then involved in the enforcement of the Customs Act. Mr and Mrs Aryeh were present in the store premises at the time.

Mr Aryeh identified for Corporal Rawluk forty-five rugs as having been imported as settlers’ effects. The forty-five were seized by Corporal Rawluk. A listing of the forty-five rugs giving size, description, and in some cases identification numbers, was entered in evidence as Exhibit R-1.

The appellant’s business was unsuccessful and suffered losses. The appellant was not prepared to declare bankruptcy.

Mr Aryeh was acquainted with a Dr Kuhl who wished to buy quality rugs. The appellant agreed (reluctantly, according to her husband) to sell to Dr Kuhl some of the quality rugs from the family’s personal collection in order to raise money necessary to satisfy her creditors. It is the profits from the sale to Dr Kuhl which the respondent seeks to tax as income.

The respondent’s position is that on all of the evidence there is doubt as to two things: first, what rugs were brought into Canada by the appellant as settlers’ effects, and, secondly, what rugs were sold to Dr Kuhl, and that the appellant has failed to meet the onus.

Before examining some of the areas of doubt and conflict I will note that I have no reason not to accept the evidence that during the period between 1957 and 1969 the appellant and her family amassed a substantial number of quality rugs. An estimate of more than forty rugs was given by Rachel Shalem, a friend of the appellant who had visited the appellant’s New York home and seen rugs on display.

Evidence was also given by Shammay Ogden, a Toronto dealer and consultant in antiquities. He knew and had dealt as a consultant with Dr Kuhl. He testified that he had visited Dr Kuhl’s apartment and had seen there oriental rugs which were rarities and antiquities selected with knowledge and discrimination.

I observe that Dr Kuhl was not called to give evidence. The appellant’s counsel explained that Dr Kuhl was out of Canada and his attendance could therefore not have been procured by subpoena.

The respondent relies in part on Exhibit A-8, the customs declaration Signed by the appellant in October of 1969 at the time of the clearance of the moving van containing household effects brought to Toronto from New York. It showed goods to a total value of $20,000, including eleven rugs.

The form presented for completion, the second page of Exhibit A-8, was not such as to permit much amplification. Mrs Aryeh had in her possession and tendered to Customs’ officials a handwritten list prepared by her in New York of goods shipped. The list showed inter alia eleven bundles of oriental rugs.

Judged by hindsight the appellant might well have been more precise as to the quantity and value of such rugs. She might, however, on the occasion of that visit to the Customs’ office, have been more of a housewife who was tortured by the problems of moving than a person able to predict the possible consequences of imprecision in completing the form. The possible significance of complete accuracy in listing might not have weighed very heavily in her mind because settlers’ effects were not liable to duty.

Thus, her failure to do more than double, on Exhibit A-8, the $10,000 total value figure supplied originally to the customs by the truck driver does not lead me to doubt her evidence that eleven bundles were imported. I therefore accept the evidence that there were eleven bundles of rugs imported as personal effects.

The presence at the appellant’s Bloor Street store on December 1, 1969, of the forty-five rugs identified to Corporal Rawluk is also reasonably explained by the fact that the appellant and her husband and, I believe, six children were staying, at that time, at the home of the appellant’s parents. It was a three-bedroom home. Storage of the rugs there would have been virtually impossible. The appellant only later purchased a home of her own in Toronto.

Storage of a personal collection of rugs in business premises does not lead to an inference that they always were or had at some time become inventory.

Although there were a large number of rugs listed on Exhibit R-1,1 cannot conclude that the rugs imported as personal effects did not form a forty-five rug collection wrapped in eleven bundles, some containing large rugs wrapped individually and some containing a number of rugs wrapped together for convenience. There was no evidence as to how large the bundles were.

Mr Aryeh’s evidence was that the personal collection of quality rugs was packed in New York by family members and workers in New York. He gave evidence too that some of the commercial grade rugs forming part of the inventory of his wife’s business might have come from a company called Trans-Continental.

Although Mr Aryeh did not say so, the workers to which he referred as assistants in wrapping the rugs might conceivably have come from Trans- Continental Trading Company Incorporated. Mr Aryeh told Corporal Rawluk that Trans-Continental was his company.

The use for packing purposes, or wrapping purposes, of Trans- Continental workers might explain the presence on one of the forty-five rugs which Mr Aryeh identified to Corporal Rawluk as personal of a Trans- Continental tag. I am not prepared to infer, merely from the presence of the tag on one of the rugs identified as personal, that all of the forty-five rugs identified as personal were inventory.

Mr Aryeh was definite in his evidence that when Corporal Rawluk visited the Bloor Street store the rugs forming part of the personal collection were, as to some marked “Not for Sale”, located at the rear of the main floor and, as to the rest, in the basement.

Corporal Rawluk testified with the assistance of notes made by him while the events were fresh in his mind. He stated that the forty-five rugs identified by Mr Aryeh as personal were not segregated from trade goods and that none bore “Not for Sale” markings.

In this regard I am inclined to accept the evidence of Corporal Rawluk. He gave his evidence carefully and dispassionately. He had nothing to gain from shading his evidence one way or another.

It should be remembered that the central issue in this appeal is whether the goods sold to Dr Kuhl were the inventory of a business.

Even if the appellant and her husband were willing to sell some of their personal collection of quality rugs and had therefore mingled them with the inventory of the business, the revenues from the sale of such rugs would not be included in computing income as long as those goods were, in fact, part of a personal collection.

The point is, however, that Mr Aryeh testified that the question of sale of the personal collection did not arise until a few years later after the business got into financial difficulties.

Mr Aryeh testified that the rugs sold to Dr Kuhl all came from the personal collection of quality rugs. He stated that the oriental rugs in which the appellant did deal were substantially lesser quality than the rugs forming the personal collection.

Surprisingly, no questions were directed to the numbers and description of the rugs sold to Dr Kuhl.

Corporal Rawluk was able to produce a list, Exhibit R-1, complete with identification numbers in many cases, and reasonably complete descriptions.

Invoices 65980 and 65981, forming part of Exhibit R-6 and regarding part of the sales to Dr Kuhl, or companies which he controlled, are vague. They read “Delivered rugs from personal stock” without further identification. Invoice 65982 reads “Delivered rugs of different sizes”. The amount invoiced on 65982 included an amount in respect of the supply and installation of carpet in the ordinary course of the Appellant’s business.

I cannot understand why a sale of personal carpets and a sale in the course of the business would be mingled on one invoice.

To sum up, I face firstly the evidence of Corporal Rawluk, which as noted above I accept, that in 1969 at least part of a forty-five rug collection identified by Mr Aryeh as personal were displayed in circumstances leading to the inference that they were inventory for sale in the store; secondly, the contradictory evidence of Mr Aryeh that the collection of personal rugs was in 1969 not so displayed for sale, the sales in 1972 and 1973 having been occasioned by business setbacks; thirdly, the sale to Dr Kuhl of at least part of the alleged personal collection intermingled on one invoice with the inventory of the business; and fourthly, the failure of the appellant to attempt to identify the rugs sold to Dr Kuhl as being rugs listed on Exhibit R-1 as personal.

On all of the evidence, and not without very considerable hesitation, I have concluded that the appellant has failed to establish on the balance of probabilities that the rugs sold to Dr Kuhl were, as asserted, all from the personal collection. The fact that some or all of the forty-five rugs listed on Exhibit R-1 were for sale in 1969—or at least displayed for sale at that time—and the mingling on the invoice are the two principal factors which lead me to doubt the assertion that the sales to Dr Kuhl were all sales from a previously separate personal collection.

The appeals therefore succeed only in part, the parties having agreed that the respondent failed to take sufficient cost into account, and having agreed on cost figures.

Appeal allowed in part.