Glen E Wood v. Minister of National Revenue, [1977] CTC 2303, 78 DTC 1352

A W Prociuk (orally: January 25, 1977):—The appellant, Glen E Wood of London, Ontario, appeals from the respondent’s reassessment of his income for the taxation years 1972, 1973 and 1974 wherein the respondent treated the net profits from the sale of some ten real estate properties as business income within the meaning of subsection 248(1) of the Income Tax Act.

The appellant, in filing his return for the said years, declared and treated the said profits as taxable capital gains. The issue before the Board is the categorization of the said profits. The amounts involved are as follows: $26,880.39 in the taxation year 1972; $8,317.76 in the taxation year 1973 and $34,603.33 in the taxation year 1974. The quantum in each taxation year is not in issue.

The appellant testified on his own behalf and he impressed me as a very capable and knowledgeable young man. In mid-1960’s he was employed by Simpsons as an interior decorator. Realizing that there were greater income and investment possibilities in real estate, he purchased a triplex building in 1966 and a fourplex in 1967 for investment purposes. He still has these properties which yield rental income and, apparently, is satisfied with that investment. In 1969 he decided to go into business for himself and started a business in the downtown area as a gift and furniture store as well as an interior decorating business under the name and style of Trade Winds Interiors Ltd. In 1970, in addition to the store business he was developing, he was engaged in purchasing, repairing or restoring older residences and selling same at a profit. The net profits therefrom he reported as business income.

In 1972 he sold four properties, as follows, and I quote from the evidence that I recorded. Property known as 101 King Street, purchased in May of 1971 and sold in June of 1972; property known as 791 Richmond, purchased in August of 1970 and sold in July of 1972; property known as 856 Helmuth, purchased in March of 1971 and sold in November of 1972; property known as 61 Elwood Avenue, purchased in November 1969 and sold in December of 1972; thus yielding the net profit in 1972 which I have stated earlier. All of these properties he had purchased and repaired or restored at the time of the purchase and rented them out until the date of sale. He states that the principal reason for the sale was to raise money for his business enterprise, that is, Trade Winds Interiors Ltd, where the cash flow was inadequate at the time. He further states that he took into account the advice given him by his accountant and his bank manager to sell as he had over-extended himself in real estate without sufficient cash flow to carry on.

In 1973 he sold two properties as follows: 18 Thornton which he purchased in June of 1971 and sold in March of 1973; 968 Colborne which he had purchased in April of 1970 and sold in June of 1973. He used the net proceeds from the sale of the said two properties to purchase two other properties in a more desirable area of the city. The said two properties were also restored and repaired following their purchase by the appellant and rented out until sold.

In 1974 he sold four properties, as follows: 637 Dufferin, purchased by the appellant in November of 1973 and sold in February of 1974; 11 Leslie, purchased in November of 1971 and sold in May of 1974; 17 Thornton, purchased in May of 1971 and sold in July of 1974; 4 St George, purchased in May of 1968 and sold in October of 1974. The properties sold were held by the appellant for relatively short periods of time.

In all cases, they were repaired as soon as purchased and rented out. In the 3-year period the appellant’s rental income as declared by him in his returns produced a loss of some $1,100 taking into account capital cost allowance.

In cross-examination, the appellant stated that at the time of the purchase he was aware of the fact that property would appreciate in value. His intention was to enlarge his investment portfolio in real estate. At no time, he states, did he intend to resell at the first opportune time. The decision to sell came later when he discovered that these small old units required further extensive repairs; that they were located in less desirable areas; and he encountered the tenant problems one usually encounters in such areas. He reinvested the proceeds of sale, that is, the net proceeds of the sale, in other real estate units mostly of brick construction and located in a good residential area of approximately five city blocks.

Exhibit A-1 filed on behalf of the appellant is a list of his real estate holdings at the present time, numbering some 17 properties including a hotel and his business, Trade Winds Interiors Ltd. Counsel for the respondent argued that the fact that many of these properties sold the appellant purchased with a low down-payment, and the fact that the appellant knew that the property would appreciate in value influenced his decision to buy. It was not his intention to hold the properties as a long-term investment. The rental income in each case was not significant. He urged that there was at least a secondary intention in each case to turn the properties to account as soon as the first Opportunity arose.

Counsel for the appellant, on the other hand, agrees that the rental income did not meet his initial expectations. As the appellant became more experienced in this field, he realized he had to rid himself of Small, unproductive units which, in most cases, required extensive repairs and to reinvest the proceeds in better rental properties in more attractive areas, which he did. His investment portfolio, generating rental income at the present time as shown in Exhibit A-1, is substantial and impressive.

Viewing the total circumstances of this matter and the acquisition of each unit and eventual sale thereof in particular, I conclude that the appellant acted prudently and in accordance with good business management practice. The question is, did these activities in the three years under appeal place him in a category as a trader in real estate inventory or was it a prudently progressive enlargement of his investment portfolio on capital account? The appellant unequivocally denies that he initially intended to turn the ten properties to account at the first opportune time. Subsequent circumstances, as stated earlier, forced him into selling. Intention, primary or secondary—and this is trite law—I suggest, can only be inferred from the activities and conduct of the appellant and the established evidence before the Board.

The appellant, in my view, has established at least by preponderance of evidence that the properties he acquired and later sold were on capital account. His intention to build an investment portfolio of good real estate that would yield rental income commenced as early as 1966 and continued on to the present, as evidenced by Exhibit A-1. In my humble opinion, the respondent erred in treating the sales as business income. Accordingly, I would allow the appeal and refer the matter back to the respondent for reassessment.

Appeal allowed.