John Andronis v. Minister of National Revenue, [1977] CTC 2193, 77 DTC 134

Delmer E Taylor:—This is an appeal from an income tax reassessment dated February 16, 1976, by which, among other adjustments, the Minister of National Revenue increased the taxable income of the appellant by an amount of $1,771 for the year 1973, and by $10,364.59 for the year 1974. To the calculation of additional income tax thereon, penalties of $134.57 for 1973 and $103.28 for 1974, were added. The amounts added to taxable income for the respective years resulted from a net rental income of $1,771 in 1973 unreported by the taxpayer; and mortgage interest of $415.87, $10,976 representing 50% of a taxable capital gain, less a rental loss of $1,027.28 for the year 1974. The respondent relied, inter alia, upon sections 3, 9, 13, paragraphs 54(a) and (g), subsections 74(1) and (2), 152(4), 163(2) and section 248 of the Income Tax Act, SC 1970-71-72, chapter 63, with amendments thereto, and subsections 20(1), and 26.1(1) and 26(3) of the Income Tax Application Rules, 1971, and Part XXIII of the Income Tax Regulations.

Facts

During the years in question the appellant had a proprietory interest in a property at 34 Ranstone Gardens, in the City of Toronto. Title to the property showed the appellant and the appellant’s wife, Mrs Dora Andronis, each holding a 50% interest in the said real estate, consisting of one small house on a regular city building lot, in a recognized residential area. The appellant and his wife had accepted title to the property in 1972. Prior to that time, from 1968, the appellant, together with one Elias Drakos, had owned the property but the appellant’s wife had not been a party to it. Neither Drakos, the appellant, nor his wife, had ever lived in the house at 34 Ranstone Gardens, the property having been rented before, during and after 1972. In 1974 the property was sold by the appellant and his wife for an amount of $56,700. The Original purchase price in 1968 had been $21,900, and it was agreed between the parties to this appeal that the value of the property on Valuation Day, December 22, 1971 was $28,000. The sale after fees and other costs, in the view of the Minister, had produced a gain of some $21,952, one half of which resulted in the basis of the addition to taxable income of $10,976 in the year of the sale (1974).

Mrs Dora Andronis, in addition to the above, also held a one-half interest in a second property at 260 Indian Road Crescent, in the City of Toronto, from 1966 until 1972. The other one-half interest in that property was held by one Mrs Georgina Mihilidis, in trust for the same Elias Drakos, to which reference has been made earlier. In 1972, concurrent with the assumption of ownership of the Ranstone address property by the appellant and Mrs Andronis, the Indian Road property was taken over by Drakos and his wife.

The appellant did not contest the calculation of the amounts involved in the reassessments, nor the principle of the penalties to which reference has been made.

Contentions

The appellant claimed the property at 34 Ranstone Gardens was his principal residence for income tax purposes, and therefore not subject to income tax with respect to gain on sale; and that in the alternative, the property was jointly owned by himself and his wife, Mrs Andronis having made a substantial contribution to the purchase of the property at 260 Indian Road Crescent, and since her equity in that property was equal to that of Drakos (50% each), therefore that equity was simply exchanged for a continuing but new equity of 50% in the Ranstone property in which he (the appellant) already owned a 50% interest in 1972. The intention of both the Drakos family and the Andronis family had always been to own one home each, and that at no time had there been any intention or desire to make money from the rental of either property.

The respondent asserted that:

(a) the rental revenue in the amount of $1,771 in the 1973 taxation year, and the $10,976 taxable capital gain on the sale of the property, and the mortgage interest payment of $415.87 both being income in the 1974 taxation year, were income of the appellant and not of his spouse, Dora Andronis;

(b) the rental loss in the amount of $1,027.28 in the 1974 taxation year was the loss of the appellant and not of his spouse, Dora Andronis;

(c) at all material times, the property at 34 Ranstone Gardens was not ordinarily inhabited by the appellant or his spouse;

(d) the appellant was the actual owner of the property at 34 Ranstone Gardens during the years in question, no contribution to its acquisition having been made by his wife;

(e) accordingly, following (d) above, the gain realized on the sale should be attributed only to the appellant.

Evidence

The appellant gave evidence which, in summary, was that Elias Drakos was his brother-in-law; that Mrs Andronis had come to Canada in 1966, nine months before his own arrival; that she had contributed her own money to the purchase of the Indian Road property from funds she had earned working; that it had been purchased two or three months after his arrival in Canada, and that he had no money when he arrived in Canada; that it had only been the intention of the two brothers-in-law (the appellant and Drakos) to finally own a home for each separate family, and to this end they had purchased the Indian Road property in 1966, both families had lived there until 1972 and that only the illness of his son, requiring constant medical attention at a downtown hospital, had prevented him from occupying the home to which he and his wife eventually gained ownership in 1972—the subject property at 34 Ranstone Gardens. Further, he stated that the long delay (1968 to 1972) in determining ownership had been occasioned because it had been Drakos who originally intended to occupy the Ranstone property, and he intended to stay at the Indian Road property, finally reluctantly agreeing to accept the Ranstone property to settle the matter.

Argument

The agent for the appellant put forward that the evidence all showed that the intention of the appellant had been to occupy the Ranstone Gardens property after he and his wife acquired full title to it in 1972, and that it had only been rented during the years in question while he waited for an improvement in the health of his son. Further, he stated that the contribution to the original purchase at Indian Road had been made by the appellant’s wife and could not have been made by the appellant in 1966 and therefore, to whatever degree this was significant, the subject property at 34 Ranstone Gardens should be regarded as the title deed indicated—jointly owned by the appellant and his wife.

Counsel for the respondent asserted that there was no basis to consider the subject property the principal residence of the appellant since this, by definition, required him to be “ordinarily resident” therein, and he had not done so. Further, he contended that although certain statements had been made by the appellant in support of it, there was no evidence that the contribution to the Indian Road property had been made by the appellant’s wife, that she had not taken the witness stand to give evidence on behalf of the appellant and that even if such a contribution had been made, it could not be considered as sufficient support for her to claim a 50% interest in the Ranstone Gardens property even by way of transfer. Counsel referred to several cases and submitted the following:

George Edwin Beament v MNR, [1952] CTC 327; 52 DTC 1183;

Percy Walker Thomson v MNR, [1945] CTC 63; 2 DTC 684 (Exch); [1946] CTC 51; 2 DTC 812 (SCC);

Joseph B Dunkelman v MNR, [1959] CTC 375; 59 DTC 1242;

Estate of David Fasken v MNR, [1948] CTC 265; 4 DTC 491 ;

St Aubyn and Others v Attorney-General, [1952] AC 15.

Findings

The matter of a principal residence is specific and not general, implied or assumed—it requires that the taxpayer be “ordinarily resident” in the property. For whatever reason, and the Board accepts that there may have been difficulties associated with the son’s illness, the appellant did not at any time reside in the subject property but rather, from the time of its purchase, either with a partner (Drakos) or with his wife, kept the property rented almost continuously until it was sold. Reviewing the claim of the appellant regarding his “intention”, it is difficult for the Board to accept that the appellant’s family would continue to reside over a four-year period (1968 to 1972) with the Drakos family in one home (260 Indian Road) merely because they could not agree on which family should own and occupy which home, while having another comfortable home (the subject property) available. There would have been many options and avenues open to them to resolve that question over four years, had the determination to do so been overpowering. Rather, they chose to rent the subject property during this period. Neither can the Board accept that the son’s illness, which we recognize was a serious and constant problem, provides sufficient basis for a claim of frustration after the house was unquestionably available to the Andronis family in 1972.

There are also two other points which are persuasive to the Board, but not in favour of the appellant. First, the appellant stated that the subject property was intended to be the home for Drakos, not for himself, and the Board has been given no evidence as to why he would have changed his wishes and decided to reside there when it had not been considered as his choice in the first instance. Second, on his own tax returns, the appellant for both years had shown his “‘principal residence’’ (the exact words used in the Ontario Tax Credit portion of the returns) to be 123A Medland Street, Toronto, certainly not the address of the subject property.

Turning to the question of the real ownership of the subject property, the Board faces some difficulty since there is nothing in the way of documentary evidence to support the case of the appellant. The Board was informed by the agent for the appellant that efforts had been made to provide bank records and that Mr Drakos had been prevented by other business from testifying on behalf of the appellant. Without doubt, some of the responses of the appellant, both in direct examination and in cross-examination, shed considerable light on parts of the assumptions made by the Minister in the reassessment and, to his credit, these clarifications were noted and appreciated by counsel for the respondent. It is the Board’s view that Mrs Dora Andronis owned in her own right and not in trust for the appellant a one-half interest in the Indian Road property, and that this property was never used for Outside rental purposes, serving only as the residence of the two families—Drakos and Andronis. The limited evidence made available to the Board supports a conclusion that she could have saved enough money during her residence in Canada or brought enough money with her to pay for the interest she acquired. There is no evidence that the appellant at any time had an interest in the property at Indian Road. For Mrs Andronis to have exchanged her interest there, for Drakos’ interest at 34 Ranstone Gardens appears to the Board to be eminently reasonable, given all the circumstances. There is no evidence to support a conclusion that such an exchange should be considered in any way a transfer of ownership rights from the appellant to his wife, thereby creating only the appearance, but not the reality, of her equal ownership. The Board finds that at all times material to this appeal the Subject property was owned jointly by the appellant and his wife.

There is one further point which warrants comment. The agent for the appellant on several occasions made reference to his understanding that had the appellant been aware of the rules relating to “residence”, he (the appellant) would have moved into the subject property, even for a short time in order to qualify thereby. To deny the appellant the allowances under the Act, merely because of this technicality of not living (even for a token period of time) in the house, would not be equitable in his view. It is suggested by the Board that neither the appellant nor his agent should take continued comfort in this thought. The Board does not accept that such a token residence could automatically change the appropriate perspective on an appeal of this type. Without coming to any final conclusion on this point, the Board would put forward the view that to comply with the term “ordinarily resident’’ would necessitate an occupancy of some more obvious permanence and duration than that implied by merely taking up temporary residence for the express purpose of proposing that this transitory act should, in itself, fulfil the requirements and qualifications under the Income Tax Act for a “principal residence’’.

Decision

The appeal is allowed in part to permit rental income or rental loss, mortgage interest and capital gain on the subject property to be treated as attributable equally to the appellant and his wife, as contended by the appellant, rather than all attributable to him. The matter of the claim by the appellant that the subject property should be regarded as the “principal residence’’ for purposes of income tax liability is dismissed. Penalties assessed against the appellant should remain, but only to the extent required considering the changes in the apportionment of taxable income between the appellant and his wife, indicated in this decision. The appeal is therefore referred back to the Minister of National Revenue for reconsideration and reassessment on this basis.

Appeal allowed in part.