Samuel Y S Lee and Myra M W Lee v. Minister of National Revenue, [1978] CTC 2192, 78 DTC 1152

A W Prociuk:—The appellants, husband and wife, respectively appeal from the respondent’s reassessment of their incomes for the taxation years 1973 and 1974 wherein the net profit from the sale of certain realty was treated as income in each case and taxed accordingly. The appellants’ ground of appeal is that it was a capital gain. It was agreed that both appeals be heard on common evidence. Samuel Y S Lee testified in support of both appeals.

The respondent based his reassessments on the following assumptions of fact:

(a) between the years 1969 and 1974 inclusive the appellant purchased 12 real properties and sold 9 real properties;

(b) some of the real properties purchased and sold by the appellant were held for less than 6 months;

(c) the male appellant is an economist who is familiar with profit opportunities in the real estate market;

(d) the appellant was in the business of buying and selling real properties.

Mr and Mrs Lee emigrated to Canada from the Far East some 17 years ago. At the material time Mr Lee was employed as an analysteconomist with Statistics Canada and his wife, except for periods when she was hospitalized, was employed as a librarian at the University of Ottawa. Mr Lee stated that his work was of a Statistical nature in that he analyzed national accounts in industry products such as agriculture, forestry, fishing, etc. He emphatically stated that he and his wife were not traders in real estate; that he was not knowledgeable in real estate dealings; but that both decided to invest in real estate for rental income as their joint investment portfolio for the future.

They made some mistakes in purchasing certain properties which proved uneconomical or difficult to manage tenantwise and/or they disagreed between themselves as to the advisability of retaining those properties. They finally resold them and invested the proceeds thereof in other rental properties. Schedule A, reproduced hereunder, which the appellants prepared and filed, is a synopsis of their dealings in real estate from August 1968 to August 1974. They have at present four of the properties, one of which, being 58 Lismer Crescent, is their residence, and the remaining three generate rental income. Two other properties, as indicated, were their former principal residences.

Schedule A reads as follows:

The appellants were living in 5 Carr Crescent, Kanata when they bought the bungalow 70 Pellan Way, principally because Mr Lee liked it very much and it was their initial intention to move there later on. In the meantime they rented it to the Raynor family on a 2-year lease. They then decided to seek a residence in Ottawa, closer to their place of work and rented a townhouse, 1149 Shillington Street, on a 2-year lease and rented out 5 Carr Crescent. The townhouse, apparently newly and hurriedly constructed, soon brought on many serious problems. Mrs Lee was dissatisfied with the move. 33 Borduas Court, very similar in construction and layout to 70 Pellan Way, was up for sale. The Lees decided to buy it and moved in, living there till 1974 when they sold it and moved to their present residence. Raynor approached the appellants with a proposition to buy 70 Pellan Way and after some negotiations, he bought it from them (see Exhibit A-1). They bought 27 Rutherford Way and rented it out. In 1971 Mrs Lee became ill and was hospitalized. They had domestic marital problems and Mr Lee was persuaded by Mrs Lee and his mother-in-law to sell out their holdings and move out of Ottawa to make a fresh start. Exhibit A-2 is the hospital record of Mrs Lee’s hospitalization in 1971, 1972 and 1974 and 1975. I do not think that there can be any doubt that Mr Lee was under pressure to do whatever he could to assist in the alleviation of his wife’s psychiatric condition. 27 Rutherford and 5 Carr Crescent were sold in 1971 but much against Mr Lee’s inner will. Mrs Lee was released from hospital early in 1972 and started working again. She regretted her insistence on the sale of the two properties mentioned above and was glad that they were unable to sell their residence as well as 2640 Regina Street, the latter being a revenue unit.

In the summer of 1972 they used their money to purchase 100 Doane Street, a rental duplex. Without consulting his wife, Mr Lee bought another rental duplex in February of 1973, being 908 Watson Street. Mrs Lee opposed this as a proper long-term investment because in her view it was in a low rental area and a poor neighbourhood. Good rental prospects were dim. This duplex was then put up for sale and sold later that spring. They noticed seven garden homes, Canterbury and Halifax, were up for sale. This appealed to both of them and with the mother-in-law’s assistance (she loaned them $35,000 for this purpose) they were able to purchase it. They still have it with good rental revenue therefrom. They transferred 100 Doane Street to the mother-in-law by way of settling the loan and she has owned it till now.

There were many upper and lower duplex tenant conflicts in 2640 Regina Street. After managing it for some 4 years, they sold it and looked for better units. 69 Penfield, a rental semi-detached house was purchased in February of 1973 with closing date in July of that year when the incumbent tenant’s lease was to expire. The appellants were unable to rent the place because the tenant would not permit the appellants to show the place to any prospective tenants. The Lees, upset and disgusted, offered it for sale and were fortunate in selling it within a month without taking a loss. Also in March 1973 they bought two single houses, 1309 Chattaway Avenue and 3015 Richmond Rd, and rented same to very good tenants on 3 and 2-year leases respectively. Richmond Rd was till then an embassy residence. It was spacious and well landscaped. The Lees considered that this would be their family residence at some future date. After one year the tenant, a doctor who set up her office there, told the appellants that they would have to effect extensive repairs on that residence or alternately sell it to her (see Exhibit A-3). After some negotiations and after effecting some repairs, this was sold to the doctor. The money was reinvested in a condominium, 300 Driveway, which they rented right away. Mrs Lee was not well again in 1974. It was felt desirable to move into an apartment for a while and they then rented their residence, 33 Borduas Court. Later their new residence, 58 Lismer Crescent, was purchased, being more suitable, schoolwise, than the previous and 33 Borduas was sold.

I am of the opinion that the conduct of the appellants throughout substantiated their claim that their goal was a rental investment portfolio which they now have. Nowhere is there evidence that any unit was purchased for any other purpose than rental income. It is true that some were sold within a short space of time but it is also true that there were, as stated earlier, good and valid reasons for doing so. The intention was not to turn the units to a profitable account at the earliest opportunity. There is also the factor of Mrs Lee’s condition, which contributed to the precipitation of at least two sales. The overall objective was to acquire better rental property. As Mr Justice Collier stated in Her Majesty the Queen v Grant Kyllo, [1976] CTC 409 at 414; 76 DTC 6235 at 6238:

The defendant’s actions in endeavouring to create an upward progression in the apartment interests he acquired were, to my mind, much more consistent with an overall investment purpose than a mere trading purpose.

Here, also, the appellants’ actions were consistent in acquiring an investment portfolio, albeit interlaced with some unavoidable interruptions which necessitated changes.

I would accordingly allow the appeals and refer the matter in each case to the respondent for reassessment on that basis.

Appeals allowed.