Stefan Jachimowicz v. Minister of National Revenue, [1976] CTC 2309

Roland St-Onge (orally: July 13, 1976):—The appeal of Stefan Jachimowicz was heard on July 12, 1976 at the City of Halifax, Province of Nova Scotia, and it involves a real estate transaction on which the Minister imposed a tax in the appellant’s 1972 taxation year.

In his Reply to the Notice of Appeal, the respondent admitted the following:

1, The Appellant is President of S Jachimowicz Limited (the “Company”), a company with head office in Dartmouth, Nova Scotia, which is in the construction and real estate business. The Appellant also has interests in some other private companies that are involved in construction or the holding of real estate.

2. After leaving the Navy in 1956, the Appellant carried on the contracting Dusiness as a sole proprietor until 1958, when he incorporated the Company.

4. Before the incorporation of the Company, the Appellant built, or had built for him, six or seven houses in Dartmouth, including two that were used for his personal residence.

7. In 1971-72 the Nova Scotia Housing Commission expropriated a large area of Cole Harbour, near Dartmouth, which included approximately 81 acres owned by the Appellant personally and also two parcels of land, of approximately 55 acres and 38 acres respectively, owned by the Company, The expropriation was effective on November 10, 1971, and compensation was settled in respect of the land owned by the Appellant personally and by the Company in April, 1972. The Company declared the gain made by it on the expropriation of both its properties as being a gain from its business, consistently with the manner in which it had treated dispositions of land for tax purposes in the past. The Minister of National Revenue assessed the Appellant on the basis that the gain made by him from the expropriation of the land owned by him personally was a gain from carrying on a business or an adventure in the nature of trade and was not a capital gain on the disposition of an investment.

9, From the time that the Company obtained an agreement to acquire its land, it began planning to subdivide that land and carried out detailed negotiations with the County of Halifax Planning Board. In 1970 the Company acquired the second parcel of land, adjacent to the first. In 1971 the Company obtained approval for the construction of 90 units, but the expropriation prevented the development from proceeding.

It is also in evidence that the appellant was knowledgeable and skilled in trading, and otherwise dealing, in real estate; that from the time of incorporation of the company, the appellant decided the company would build houses for sale and develop real estate; that, since its incorporation, the company has consistently paid taxes on the basis that it is a trader in real estate.

The respondent contends that the gain to the appellant arising from expropriation of his property, which is the subject matter of this appeal, constituted income of the appellant from his business, as defined, including an adventure or concern im the nature of trade, and that the appellant acquired the property with a view to turning it to account at a profit, including by means of resale at a profit.

The appellant was also reassessed for his 1972 taxation year on an amount of $4,752.58 of interest received from the Nova Scotia Housing Commission, together with a penalty under subsection 163(2) of the Income Tax Act for failing to declare the interest revenue. The interest was described as such in a letter received from a law firm in April 1972, transmitting to the appellant the proceeds of the expropriation.

The appellant’s intention as well as his course of conduct are well explained in his paragraphs 10, 11 and 12 of his Notice of Appeal which read as follows:

10. The Appellant's intention, at the time he acquired his parcel of land in Cole Harbour and throughout the time he held it, was to retain it until such time as municipal services were available and then to erect low- density housing units upon it to hold for rental income. While he expected that those services would be available by the time he planned to develop the property, he was not dependent upon them, since he had the alternative of proceeding with wells and septic tanks. He looked upon this property as a means by which he could establish a retirement income for himself, so that he would be able to dispose of his contracting business and retire with adequate investment income. The expropriation in 1971 frustrated his plans for the Cole Harbour property.

11. The Appellant paid the vendor $20,000 for the Cole Harbour property; $5,000 was paid as a down payment, and a further $5,000 per year was paid, without interest, for the 3 succeeding years. These payments were made from the Appellant’s personal funds. The agreement between the vendor and the Appellant permitted the vendor to remain on the land in his farm house. It was understood that when the Appellant wished to build on the land, the vendor would move his farm house to a corner of the land that would not interfere with the development of the main part of the property. The vendor’s interest in the property was recognized at the time of expropriation by the payment to him on behalf of the Nova Scotia Housing Commission of $2,888.73 from the expropriation price.

12. From time to time while the Appellant held the Cole Harbour property, he received inquiries concerning whether the land might be for sale. He consistently indicated that it was not. He never listed the land for sale nor otherwise attempted to sell it, so long as he held it. Throughout this period he recognized that this was his personal land and not that of the Company, just as he had mainained a careful distinction between the two kinds of land holding in the past, and that he was going to hold it as an investment.

At the hearing, the appellant corroborated the main allegations of his Notice of Appeal and further explained the following:

He has resided in Nova Scotia for 24 years. After he left the Navy in 1956, he hired a contractor to build a duplex but, due to difficulties, he had to finish this duplex all by himself. Following this experience, he decided to enter into the contracting business and went to see a lawyer in order to organize his business to the best of his interest. Because he was 40 years old, his intention was also to organize his course of conduct in order to provide for his retirement. Consequently, a company was incorporated to acquire land and build properties thereon for the purpose of selling them. At the beginning, this was a one-man enterprise but later he hired an executive assistant to help him in his transactions and execution of the work. The appellant acquired other interest in other companies such as Precision Homes and Component Company, Atlantic Construction for the Cape Breton region and All Apartments Ltd.

From the beginning, he retained six units for himself, including his own home. Except for his home, the other properties were earning rental income. In 1972 the appellant was receiving a gross rental income of some $58,000.

The appellant lived off his rental income and never drew any salary from his company except on two occasions when he received director’s fees. He also erected some offices on 34 of an acre of land which building was transferred to his own company.

In 1965 the appellant acquired three parcels of land:

Settle property — 55 acres

Turner property — 38 acres

Bisset property — 81 acres

Because he wanted to have some land in his own name, the Settle and Turner properties were purchased in the name of the company whereas the Bisset property was to remain in his own name.

Some plans were prepared to develop the Settle property and he received the authorization to erect some 90 single-family units thereon.

At that time, he could not develop the entire property because the Hospital Treatment Plan had to be used and each contractor was allowed so many units.

After the expropriation, the Commission sold back to the appellant 18 acres in order to build the 90 units already approved.

The appellant’s intention was to continue to build in the same manner on the Turner property because the Municipality had promised to install a water and sewer system, but the expropriation put an end to his plans.

As to the Bisset property held by the appellant personally, his intention was to build 150 duplexes for rental purposes on 30 acres and keep the balance of the land for horse riding and walking. Each lessee would be allowed %4 of an acre for gardening. There were a brook and a fall and his intention was to build a pond for swimming and prepare a nice environment for retired people.

He stated under oath that, with respect to the Bisset property, his intention has always been the same, that it has never changed and that he had no other intention; that all the carrying charges with respect to this property were capitalized and that only the expropriation put an end to his purposes.

As to the penalties, he stated that his returns have always been prepared very carefully by himself and that he used to put ali the relevant information into a special envelope in order to declare al! his income.

He also admitted that he had read the letter received from the lawyer indicating that an amount of $4,700 was paid as interest for some six months; that he knew at that time that this amount was taxable but because the said letter was received eleven months before preparing his return and because he had not received a T5 form for it, he forgot to report the same as income.

Upon cross-examination, he further stated that he never asked Mr Robe to prepare a plan for the three parcels of land he had acquired: that the latter had prepared such plan to convince the owner to develop the same; that he was frustrated by the expropriation and that, with the proceeds of the expropriation, he purchased more land in order to pursue his original purposes.

He also stated that the land he purchased was very attractive for Speculation as it increased in value but that the Settle and Turner properties were purchased by the company for trading whereas the Bisset property was acquired to erect thereon duplexes for rental income.

In his Notice of Appeal, counsel for the appellant argued the following:

1. It is respectfully submitted that the foregoing history clearly establishes a areful separation between the purposes of the Appellant and the purposes of the Company in respect of the acquiring and holding of real estate and a consistent investment pattern with respect to the personal acquisitions of land by the Appellant. The Appellant’s intentions in acquiring the Cole Harbour property, while frustrated by the expropriation, were indicated by the manner in which he held the property and by his failure, in contrast with the action of the Company, to take any steps toward the development of his land during the period between 1965 and 1971. His personal holding in Cole Harbour was not acquired for resale and would not have been sold had it not been for the expropriation.

2. It is further submitted that the arrangement that the Appellant made with the vendor of the land in question was a significant indication of his intention with respect to the property. The arrangement did not contemplate what would happen to the vendor if the Appellant sold the property, and indeed the vendor’s interests in the Property had to be recognized at the time when it was expropriated. The arrangement with the vendor contemplated only that the Appellant would develop the property for purposes of yielding rental revenue and that he would be entitled to continue to remain on the land, but on a part of it that would not interfere with the Appellant’s plan.

3. The Appellant relies, inter alia, MNR v Va/c/air Investment Company Limited [[1964] CTC 22] 64 DTC 5014 (Exchequer Court), and The Queen v Stanfold Investment Corporation [[1974] CTC 19] 74 DTC 6035 (Federal Court, Trial Division). It is submitted that there was here no evidence of a “secondary intention” to dispose of the property at a profit. Throughout the time in question the Appellant had the personal means to carry through with his project, and it was only a question of time before he would have done So. He was not under any financial pressures to sell before he was ready to proceed with his plans.

4. In the circumstances, it it is submitted that the land expropriated from the Appellant personally was capital property and not trading property in his hands and consequently that the gain made by him personally on the ex- propriation was capital gain.

5. It is is further submitted that the Appellant’s failure to realize that the amount of $4,752.58 in question was interest revenue that should have been reported as such and was not merely a portion of the proceeds of dis- position of the property did not amount to a knowing or grossly negligent omission of interest revenue from his 1972 income tax return. It is submitted that the pattern of compliance displayed by the Appellant in this and other taxation years indicated that the term “gross negligence” could not properly be used to describe his attitude toward his obligations to prepare accurate tax returns. It is submitted that this is particularly the case having regard to the burden of proof that now rests upon the Minister of National Revenue, under subsection 163(3) of the Act, of establishing gross negligence on his part. The Appellant relies, inter alia, upon Decore v The Queen, [[1974] CTC 791] 74 DTC 6695 (Federal Court of Appeal).

At the hearing he further argued that the cases cited by the respondent such as The Queen v D L Anderson et al, [1973] CTC 606: 73 DTC 5445; Varennes Holdings Corporation v The Queen, [1975] CTC 230; 75 DTC 5165; and R E Anderson et al v The Queen, [1975] CTC 85; 75 DTC 6644, should not apply to the appellant because the tatter had a definite intention in holding the Bisset property which was to erect thereon duplexes for rental income whereas, in the other cases, the land was held as investment until it increased in value. He also stated that the character of the object of the transaction was not for trading since the appellant never wanted to sell it and that his passive action in that respect proved his contention.

He argued that the Board must give more weight to the appellant’s testimony, as the Federal Court had done in recent decisions, especially when one deals with intentions, and that the appellant’s course of conduct corroborated the same.

He also argued that what the appellant said about his intentions must be believed, since he was of age to retire, he had no insurance plan, he could not find anyone to manage his trading company, and the Cole Harbour property could produce sufficient income to permit him to retire.

As to the penalty, Miss Hamilton argued that the appellant should not be penalized because

(1) he did not receive any T5 slip;

(2) he did not receive two separate cheques;

(3) he was so concerned with a substantial amount of some $206,000 that he forgot the interest;

(4) he was too preoccupied to manage his trading company.

She also argued that the appellant had always prepared his returns carefully and that he had a viable system to collect information to prepare his returns.

Counsel for the respondent argued that the appellant had a trading company and was knowledgeable in construction and, because of this situation, the land he acquired personally was purchased, if not with the primary intention, at least with the secondary intention, of selling it at profit; that the appellant and the company were the same and that the income from the land was so negligible that it could not be regarded as an investment.

He also argued that the appellant had the badges of trade to be qualified as a trader with respect to his personal land because

(1) it was vacant land unable to produce income;

(2) the location of land favoured an increase in value;

(3) the land was acquired at a very reasonable price;

(4) he had to have a secondary intention.

As to the penalty, he stated that the appellant has always prepared his returns very carefully, and if he put the letter in the wrong envelope when he received it, this was a convenient way to forget about the interest; that the appellant knew that he had to pay income tax on this interest, and if he did not, it was because he did not take the means to remember it; that the amount of interest he omitted was half his total net income declared and greater than the total interest he had reported as income; and that the appellant forgot to report this amount of interest because he did not want to attract the attention of the Minister to his substantial $206,000 gain.

All the elements of proof adduced in this case show that the appellant's sole intention with respect to his Cole Harbour property was to erect low-density housing units upon it to be held for rental iacome.

The fact that the appellant kept that land in his name at the time of acquisition (1965) indicates that his intention, at that time, was not to consider this land as stock-in-trade in his company but as a personal investment.

Furthermore, the usual badges of trade are not present in the case at bar. The appellant never listed the land for sale nor otherwise attempted to sell it; he held this property for some six years and did not sell it but was deprived thereof by expropriation; he did not deduct but capitalized all the carrying charges during the said period of six years.

It is well known in jurisprudence that even a trader in land can hold property for investment. The appellant herein has indicated this intention from the beginning by establishing a careful separation between his properties and those of his company and his course of conduct during the holding period did not betray his original intention. On the contrary, he always refused to sell, and when he was expropriated, he used the proceeds of expropriation to acquire more land to pursue his purposes.

The appellant’s case is totally different from the Anderson case because Mr Anderson’s intention was to realize an accretion to the purchase price by sale at a time when the increase in price obtainable made it expedient to sell, and that such intentions existed from the beginning, whereas, in the case at bar, the appellant’s intention from beginning to end was to keep the Cole Harbour property in his name and not include it in his company’s assets.

It cannot be said that the appellant is taxable on this transaction by virtue of the principle known as “guilt by association” because the appellant was not associated with anyone and, consequently, cannot be compared to the various taxpayers mentioned in the cases cited by the respondent.

Furthermore, the appellant’s course of conduct corroborated his sworn testimony as to his real intention and the respondent did not succeed in contradicting it.

After having given careful attention to all the evidence, the preponderance of that evidence points to the conclusion that the appellant acquired the Cole Harbour property with the intention of erecting thereon low-density housing units to be held for rental income and that he had no secondary intention to sell it at profit.

The other question at issue is whether the appellant was grossly negligent in omitting to report an amount of some $4,700 paid to him as interest.

On April 28, 1972, a firm of lawyers sent the appellant a letter showing that such a sum of money was paid to him as interest for the period from November 10, 1971 to April 28, 1972.

According to the evidence, the appellant was very careful in reporting his income in the years prior to that under appeal and his habit was to put in a special envelope all the information he needed to prepare his returns.

When he received the document, the appellant read it but neglected to put it in his special envelope.

It is difficult to conceive that the appellant, who was usually so careful in preparing his income tax returns and who was able and prudent enough to separate his Cole Harbour property from his company assets, would forget to include as income so substantial an amount of interest as $4,700 in relation to his total declared income of some $9,000.

There is no doubt in my mind that the appellant was grossly negligent when he neglected to put the letter he received on April 28, 1972 in the special envelope he kept for this purpose. The appellant’s course of conduct shows that he has been very clever in all other circumstances and the Board is wondering why the appellant’s conduct was so clumsy when he received that letter. He read the letter, he knew at that time that the interest was income, and his main duty was to put this information in his special envelope.

The fact that the appellant did not put the letter in his special envelope and therefore, by the same token, was in a position to forget to declare the interest as income, constitutes in my view gross negligence within the meaning of subsection 163(2) of the Income Tax Act.

Therefore, the appeal is allowed in part inasmuch as the amount of $176,185.91 is to be taxed as a capital gain, and the matter is referred back to the respondent for reassessment in accordance with the above reasons for judgment. In respect of the penalty levied, the appeal is dismissed.

Appeal allowed in part.