Fournier v. R., [1998] 2 C.T.C. 2001

Tardif T.C.J.:

1 The two appeals were heard on common evidence. These are appeals brought from assessments made by the respondent on October 19, 1993 and confirmed on June 9, 1995. The respondent relied on sections 3, 9, 10, 38, 39, 40 and 54 and subsection 248(1) of the Income Tax Act (the “Act”).

2 The point at issue is whether the real property, co-owned by the appellants and sold during the 1991 taxation year, was a principle residence or part of a commercial transaction, the profit realized from its sale then being business income.

3 The appellant Dany Fleury was very well prepared and testified at length about the details of the economic side of their married life and, more specifically, their shared interest in the real estate field.

4 Gaétan Fournier, the appellant's spouse and an appellant himself, testified briefly essentially to confirm his spouse's testimony.

5 The appellant, who is trained as an accountant, presented well-ordered evidence, along with well-prepared and very clear tables; she was clearly very familiar with her case.

6 She explained that she and her husband had become interested in home building at the start of their relationship when they built their first home. They decided to form a company which would build relatively modest homes that would sell for reasonable prices. These homes were built using subcontractors. The appellants were not directly involved in the construction; they simply coordinated the work of the subcontractors after selecting them and awarding them contracts with an obligation of result. They supervised, planned and controlled the work performed by the subcontractors while the homes were being built.

7 According to the appellant, this work required only a few hours per week; in this regard, I believe that the appellant considerably under-estimated the time required for the administration and management of the projects. I understand that, according to her testimony, building homes was not their primary occupation; however, I strongly doubt that they devoted so little time to a business which requires careful attention and constant monitoring.

8 At the same time the construction work was being carried out as part of the commercial activities of the company in which they were co-shareholders, the appellants themselves contracted for the construction of their private residence which was generally more luxurious than the houses built under the auspices of the company they had formed.

9 Between 1983 and 1991, they thus built five houses in which they lived. The appellant prepared the following table illustrating this situation (Exhibit A-2):

[TRANSLATION]

Dany Fleury & Gaétan Fournier

Land purchase	Purchase offer	Sale
555 Laurte	Construction 1983	07-85
79 Pratte	08-85	02-88	06-88
55 Pratte	02-88	10-89	04-90
455 Pilon	11-89		07-91
5685 Laflamme	07-91	current residence

10 The instant case involves the residence located at 455 Pilon which was sold in July 1991. It seems that the appellants indicated their intent to sell their residence when they took possession of it. In addition, the house sales operations of the company they controlled sometimes helped to identify potential buyers for the residence in which they lived.

11 In response to my questions to determine whether the appellants had made expenditures which would indicate any intent to make permanent use of the property in which they lived, no evidence was adduced showing that the residence had been customized in any special way. The answers given essentially showed that this was a more luxurious and more expensive house, without any special features such as a pool, interlock brick, distinctive landscaping or other enhancement indicating a particular intent with respect to its use.

12 The fact that the appellants lived in the residence obviously leads to some sort of presumption that it was their principal residence thus enabling them, at the time of the sale, to receive a tax benefit. This tax benefit on the sale of the principal residence is not absolute however; it can be subject to assessment if the facts and circumstances warrant or show that the sale is a business transaction.

13 To characterize the transaction as a business transaction, it is important to verify the intent of the taxpayer at the time the property giving rise to a profit was purchased and to analyse the facts and circumstances surrounding the transaction in order to determine the true intent. However, it is not sufficient to verify the primary intent; it is also important to determine whether there was a secondary intent at the time of the purchase. Consequently, if at the time he acquired the property the purchaser entertained the possibility of reselling it at a profit as an operating motivation for the acquisition, then the transaction will be considered to be a business transaction.

• — the nature of the property

• — the purpose of the disposition

• — the frequency of dispositions

• — the destination of the property during the period of possession

• — the reasons for and nature of the sale

• — the relationship with the taxpayer's usual business

• — the taxpayer's true intent.

15 In their treatise entitled “Les principes de l'imposition au Canada”, the authors Guy Lord, Jacques Sasseville and Diane Bruneau state the following at page 202:

[TRADUCTION]

Lastly, the most important factor is the intent of the taxpayer. The factors mentioned earlier are generally considered as raising a presumption as to the taxpayer's intent. Was the intent speculative or was it to hold the property in order to earn income? The problem is to determine ex post facto whether the original intent to invest was accompanied by a secondary intent to speculate, that is, to resell. If this second intent to resell existed at the time of the purchase and the primary intent is not achieved, the courts could consider the profit to be of a commercial nature and taxable as income.

When several people purchase a property together through a partnership, the active or passive members of that partnership are all deemed to have the same intent as that which is dominant among the active members. The intent of the partnership has precedence over individual intents.

In another case, the Federal Court of Appeal recently clarified this test of secondary intent. In effect, the secondary intent, emphasizes Mahoney J., requires not only that the taxpayer had the intent of reselling at a profit at the time of the purchase, but that the prospect of reselling was one of the determining reasons for the purchase of the property.

16 In Racine v. Minister of National Revenue (1965), 65 D.T.C. 5098 (Can. Ex. Ct.), Noël J. comments as follows:

[TRADUCTION]

In examining this question whether the appellants had, at the time of the purchase, what has sometimes been called a “secondary intention” of reselling the business if warranted by circumstances, it is important to consider what this idea involves. It is not in fact sufficient to find merely that if a purchaser had taken a moment to think about it at the time of the purchase, he would be obliged to admit that if following the purchase an attractive offer were made to him he would resell the property, for every person buying a house for his family, a painting for his house, machinery for his business or a building for his factory would be obliged to admit, if this person were honest and if the transaction were not based exclusively on a sentimental attachment, that if he were offered a sufficiently high price at any given time after the purchase, he would resell. Thus, it appears that the fact alone that a person buying a property for the purpose of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade. In fact, this is not what must be understood by a “secondary intention” if one wants to utilize this term.

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in mind, at the time of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is, he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists should be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

17 In order to describe the character of the transaction in issue it is essential to verify what the intent of the appellants was at the time they purchased the building at 455 Pilon. It is also necessary to analyse the facts and circumstances surrounding the transaction in order to determine the true intent.

18 I believe that the whole of the evidence makes it possible to determine quite clearly the appellants' intent. After selling their family residence, they built another one to replace it. There was nothing special or specific in their actions. They were simply repeating a pattern which no doubt was attractive from an economic standpoint. They definitely lived in the residence they described as their principal residence; however, there was absolutely nothing in the evidence that shows any intent of making the residence at issue a non-commercial residence. The appellants were perhaps more independent, more demanding and less like sellers but, basically, they were constantly looking for a possible buyer willing to pay a price that would enable them to earn an attractive profit.

19 It would have been more difficult to identify the intent of the appellants if this had been the first or second time they had sold their own residence or if the evidence had shown that it was a home that had been highly customized. Upon the sale of the previous residence, they might have had reasons or motivation to rebuild a new property that was unique to them in terms of its structure, architecture, size, quality of the materials, decor, layout, landscaping or other qualities which would show a clear intent on their part to acquire a home which, without being definitive, they would keep for a long time. The reason for the sale might also have been relevant in showing that the sale was the result of developments that were not desired nor encouraged.

20 The evidence has shown that this was a more luxurious and therefore a more expensive residence than those built and sold by the company of which the appellants were the co-shareholders. Basically, the house on Pilon Street was different from the company's houses solely in that it was their personal property, it was more luxurious and the appellants lived in it.

21 I do not think that that is sufficient reason to reject this sale as a business transaction. It is true that the transaction was disguised to some degree by the fact that the residence was more luxurious and that they lived in it, but there is no doubt in my mind that the appellants' primary intent was to sell the said property. Furthermore, I believe that living in the better quality home was an outstanding tactic likely to increase significantly the interest of potential buyers.

22 Based on the evidence and the whole of the facts and circumstances, the appellants definitely had the intent of providing accommodation for their family, but also the clear and definitive intent of reselling at a profit as soon as the occasion arose. Any interested party might believe that, because the house was being lived in by the contractors, it was a truly exceptional house since the contractors would certainly not have overlooked anything and would have used the best materials because it was their personal residence. Furthermore, they made every effort to bring about the sale.

23 For these reasons, the appeals are dismissed.