Sobier T.C.J.:
1 These appeals were heard on common evidence under the Informal Procedure of this Court.
2 The Appellants appeal from the assessments by the Minister of National Revenue (the “Minister”) for their 1988 taxation years, whereby the Minister assessed the gain derived from the sale of an 11-unit apartment building, municipally known as “2 Charles Street, Brampton, Ontario” (the “Property”), on account of income, the Appellants having reported the gain as a capital gain.
3 The Appellants, or at least Mr. Grewal through Ravinder Singh (“Mrs. Singh”) as trustee, purchased the Property with Mrs. Singh, pursuant to an Agreement of Purchase and Sale dated the 24th day of February 1987. The purchase price was $490,000, satisfied by placing a first mortgage thereon of $300,000 in favour of London Trust and Savings, a vendor take back second mortgage in the amount of $67,500, and the balance by way of cash.
4 There is some confusion as to the make-up of the partnership acquiring the Property. There was no agreement showing who were the partners. The conveyencing documents, both at the time of purchase and at the time of sale of the Property, show only that Mrs. Singh and Mr. Grewal were the owners. The Memorandum of Facts and Reasons for Objection attached to the Notice of Objection filed by the Appellants show that they and Mrs. Singh's husband, Kuldip Singh, were the owners and not Mrs. Singh. However, Mr. Grewal's evidence was that he and his wife were two of the partners each owning a 25 percent interest, and that the remaining 50 percent was owned either by Mrs. Singh alone or perhaps with Mr. Singh. At the hearing of the tax appeal of Mrs. Singh, held in March 1996, Mr. Grewal testified as to the make-up of the partnership, but did not mention that his wife was a partner.
5 It was Mr. Grewal's evidence that it was never his or his wife's intention to sell the Property in the short term. It was to be an investment property producing rental income.
6 The Property was listed for sale in August 1987 and an offer accepted on December 2, 1987. This was the first offer. The purchase price was $590,000, generating a total profit of $67,932, of which each of the Appellants realized $15,483.
7 At issue is whether the gain was one on account of income, as maintained by the Minister, or a capital gain, according to the Appellants.
8 While Mrs. Singh's appeal to the Tax Court of Canada in respect of her part in this matter was unsuccessful, as was her application for judicial review of the decision under section 28 of the Federal Court Act, it is not determinative of the issues in these appeals, and I must examine evidence presented.
9 The Income Tax Act (the “Act”) is silent as to what is a capital gain other than a gain on disposition of capital property. The question to be determined is whether the Appellants purchased the property that gave rise to the gain as a capital property or whether they purchased it with the intent of engaging in business or in an adventure in the nature of trade. That is, were they investing or trading in the Property?
10 In Happy Valley Farms Ltd. v. Minister of National Revenue (1986), 86 D.T.C. 6421 (Fed. T.D.)several tests are set forth at page 6423. These may be briefly set out as follows:
(1) the nature of the property sold;
(2) the length of ownership;
(3) the frequency of other similar transactions;
(4) work expended in connection with the property;
(5) the circumstances that were responsible for the sale of the property;
(6) motive, i.e. the intention of the purchasers at the time of the acquisition of the property.
11 While it is sometimes of assistance to be able to take a checklist such as the foregoing and go through it, and after adding the check marks pro and con coming to a decision, I do not believe that this is the only or even the proper approach. One must look at the facts in their totality, using the tests as aids, giving more weight to some and less to others. One might determine that one test may be applicable and another may not, and the fact that a test is not applicable should not necessarily determine the question. On the other hand, I believe that one of the most important tests is the last one which deals with the intention of the taxpayer at the time of the acquisition of the property in question was made.
12 In determining a taxpayer's intention, one must be very careful in solely accepting the viva voce evidence of the taxpayer. See Cragg v. Minister of National Revenue (1951), 52 D.T.C. 1004 (Can. Ex. Ct.). In dealing with the ascertaining of intention, the Court in Cragg said at page 1007:
...Nor can it rest on statements of intention on the part of the taxpayer. The question in each case is what is the proper deduction to be drawn from the taxpayer's whole course of conduct viewed in the light of all the circumstances. The conclusion in each case must be one of fact.
13 This statement has been cited with approval since 1952 and remains as important a statement today as it was then.
14 The Property was a rental property and as such was capable of earning income. Yet, was this factor one on which the Appellants placed great weight when they acquired the Property? Prior to the purchasing of the Property, Mr. Grewal made no feasibility or cash flow studies or projections as to the profitability of the rental operations. Mr. Grewal and Mrs. Singh did not produce a budget or forecast. They had a fully tenanted building and while they were given the figures on certain expenses, they did not take into account the largest expense - interest. The Property was subject to mortgages amounting to some $367,000, yet nothing was shown in their calculation for interest expense.
15 One of the major factors in purchasing the Property according to Mr. Grewal, was the belief that two additional floors could be added to the building, thereby increasing income. Yet, Mr. Grewal did nothing to assure himself that the building was capable of having two stories added to it or if the local zoning and building by-laws would permit such an addition. It was only after closing that he made inquiries as to the zoning but still did nothing to see whether the additional two floors was feasible. Although he stated that this was his long term objective, he did nothing to ensure that such a long term objective was realistic.
16 Prior to closing, he did very little to determine the state of repair and structural integrity of the Property. He had no engineer or expert examine it. He stated that they had someone go to the building and casually look at it, and this person said that the building was “all right”. This was all the assurance he received. He never inquired as to the age of the building. It was after closing that he learned that it was some 30 years old.
17 Happy Valley (supra) has as one of its tests the length of time the property was held. From the time the offer to purchase was originally made until the property was listed for sale, only six months had lapsed, and this period was only four months if taken from the time of the closing of the purchase.
18 Dealing with the reasons the Property was sold, Mr. Grewal stated that rent collecting was “tedious” and the he was “harassed” by the tenants who were sometime slow in paying rent and that there was the constant need for repairs and maintenance, which required a great deal of his time and that of Mrs. Singh's husband, Kuldip Singh.
19 The evidence concerning repair and maintenance shows that this amounted to clearing up debris surrounding the building, repairing some windows, evening a walkway and repairing a fence. All of these were requirements of the City of Brampton. In all, they were not as significant and time consuming as claimed by Mr. Grewal.
20 While the foregoing were reasons for not wanting to keep the Property, Mr. Grewal stated that there were two main reasons for disposing of it. The first being his wife's health and the second, the deterioration of the friendly relationship between the Grewals and Mr. and Mrs. Singh. He stated that his relationship with them was becoming strained because of the requirement of managing the building as well as holding full time jobs. Mr. Grewal was employed as a technician and Mr. Singh was a taxi driver/owner.
21 A letter from Mrs. Grewal's physician was introduced evidencing her health history. This history of rheumatoid arthritis began in 1980 and has continued. At the time of the purchase of the Property, her condition was being controlled by medication and she was able to return to work. However, at the same time, she had continuing pain and was having difficulty functioning because of accumulating foot deformities. This problem was known to the Appellants at the time of the purchase and should have been taken into account then. Except for the statement that matters were strained with the Singhs, no other concrete evidence was given in this connection.
22 As stated above, the intention of the Appellants at the time of the acquisition of the Property is a paramount factor, albeit only one of them. This intention was communicated to the Court by the testimony of Mr. Grewal when he repeatedly stated that it was his intention to make a long term investment and as evidence of this, he points to the fact that he had a five-year closed first mortgage and a five-year open second mortgage. This he claims shows his long term intention. However, the conduct of the Appellants at the time of the acquisition, including their apparent disinterest in the age of the Property and its structural condition, the lack of financial forecasting, the fact that nothing was done concerning the ability to add additional floors to the building which was a stated long term goal, point exactly in the opposite direction. Mr. Grewal pointed to the fact that the building was difficult to manage, however as to this point, the only steps he had taken to see if he could handle this end of the business was to ask the vendor about management and being told by the vendor that it was easy to manage.
23 Mr. Grewal is apparently an intelligent person. He is familiar with mortgages and cash flow. He owned at least one other rental property at 526 Turnbridge Road, Mississauga, Ontario. He is not naive. Of concern was the vagueness of some of the evidence given by Mr. Grewal. On those points, which were unfavourable to him, he had difficulty remembering or was evasive. In other cases, he contradicted the evidence given by him at the tax appeal hearing of Mrs. Singh.
24 Of the tests set forth in Happy Valley (supra), the one concerning the nature of the property is positive. However, the length the property was held before listing was short. The third, fourth and fifth tests were at best neutral. A $490,000 expenditure for a long term investment is a great deal of money. However, if such an expenditure is made so that an addition may be added later it is suspect when one makes no investigation to determine whether the addition would be possible. The circumstances surrounding the purchase lead me to conclude that this was a transaction on account of income and not capital, therefore the assessments were correct.
25 Accordingly, the appeals are dismissed.
Email this Content