Arlene Fay McGinn v. Minister of National Revenue, [1977] CTC 2222, [1977] DTC 158

The Chairman:—The appeal of Arlene Fay McGinn from an income tax assessment in respect of the 1973 taxation year was heard in Calgary on May 11, 1977.

The issue in this appeal is whether the profits realized by the appellant in the purchase and sale of a property situated at 424—11th Avenue NE in Calgary in 1973 was a capital gain or income from a business or from a venture in the nature of trade.

Summary of Facts

The appellant, who is actively engaged in the profession of teaching, arrived in Calgary with her husband from Moose Jaw in 1968. The appellant continued teaching and is presently Director of St Mary’s School in Calgary.

The appellant’s husband, on arrival in Calgary, became an employee of P J Toole & Cote Real Estate Company and worked there for a period of three years.

In 1971 the appellant’s husband incorporated a real estate firm known as McGinn Properties Limited. The appellant’s husband was and is the sole owner of the firm. One share is held by the appellant so as to comply with the Province of Alberta’s company law. The appellant, who held the title of secretary-treasurer of the firm, received no salary or dividends and she did not attend meetings nor take part in any company decisions. There can be no doubt that McGinn Properties Limited was in the business of trading in real estate.

The appellant, as a teacher in Moose Jaw, had contributed into a pension fund for a period of some nine years; however, it proved to be impossible to roll over the pension returns which she received as a lump sum payment in the amount of $5,000, upon leaving Moose Jaw, into the Alberta teacher’s pension fund.

The appellant, who was à credible and open witness, stated that in order to arrange for a retirement income she decided to invest her $5,000 pension payment in rental income properties. In putting her plan into effect; other than the residence which the appellant and her husband purchased in joint title on arrival in Calgary and where they still reside; the appellant, either with her husband or with Mr Kevin Murphy (her brother-in-law and her husband’s solicitor), purchased seven properties between the years 1970 to 1975, three of which were sold in that period of time.

The properties purchased were mostly small family homes, eg bungalows which the appellant and her partner repaired and maintained themselves, and which they rented.

One of the first properties to be purchased by the appellant and Mr Murphy in 1970 was the one which is the subject matter of this appeal, and which is situated at 424—11th Avenue NE in Calgary. The property, which was purchased by the appellant for $15,500, consisted of a stucco-covered bungalow on a 50’ x 175' lot. As I understand it, it was the appellant’s intention in purchasing the property to develop it into a four-suite apartment or a duplex by using the two finished bedrooms in the basement and completing the rough plumbing so as to provide the necessary facilities, or alternatively to have a single dwelling on the first floor and a one-bedroom suite in the basement. No firm plans, however, were made of the various possibilities, although the evidence is that the appellant was aware that the land was zoned R-3 which per- mitted the construction of multiple dwellings and she was also aware of the estimated cost of a four-unit building. No major alterations, however, were made to the property. It was alleged that the heating system, which consisted of a large grill coming up from the furnace and situated in the centre of the house only, would have to be changed at considerable cost before alterations to the building could be considered. The property was then rented to three successive tenants and the rent charged was from $150 to $180 a month.

In the spring of 1973 the appellant decided to sell the subject property and listed it with McGinn Properties Limited for a selling price of $23,000 to $24,000. The appellant accepted the first offer made of $20,500, thereby realizing a gain of $5,000, less expenses incurred of $433. The question, of course, is whether the appellant’s share of the gain ($2,391.75) is taxable income, or whether the transaction was Capital in nature and the appellant’s share of the gain was subject only to a capital gains tax of $141.75. There was an agreement between the parties that the fair market value of the property on December 31, 1971, was $19,500 should the transaction be considered in the nature of capital.

Also in 1970 the appellant, with her husband, purchased a duplex at 1238-1240—14th Avenue SW in Calgary (Belt-Line District) for $20,000. The appellant’s contribution from her savings to that purchase was $3,000 and full title to that property was transferred to the appellant in December 1972. The appellant still owns the property; is receiving good rent from it; and has refused three offers to sell the property.

Again in 1970 the appellant and Mr Murphy purchased a corner lot property at 1712—15th Street NW for $15,000, on which a small bungalow was situated. The property was considered by the appellant as a good site for a townhouse. The appellant still owns the property and, although she sustains a loss of some $500 to $600 a year on renting the bungalow, preliminary plans for the townhouse have been drawn and submitted to the municipality for approval. The appellant estimated the cost of the 4-unit townhouse to be between $150,000 and $180,000. It is planned that the existing bungalow would be demolished and that the value of the land would be $40,000. Finances for the project have not yet been arranged because approval has not yet been obtained from the municipality. Although the property does not have sufficient standard square footage for the construction of a 4-unit townhouse, the appellant is confident that approval will be given for the construction of the projected townhouse since there are, in the immediate area of the appellant’s land, two 4-unit townhouses on the same size lots (Exhibit A-1).

In 1971 the appellant purchased a property at 2415—1st Street SE in Calgary for $14,500 towards the purchase of which the appellant made a downpayment of $3,500. However, in order to obtain the mortgage, the appellant’s husband had to co-sign the deed. The property was situated in Lindsay Park on the Elbow River and was purchased with a view to building the appellant’s residence there. Expenses were incurred in repairing the property and it was rented at a good price. Having found another river site on which to build a home, the appellant listed the property for sale for a period of two to three months at a selling price of some $35,000, but took it off the market.

Subsequently, in 1975, the appellant received a letter from Mr J H Ferguson, who offered to purchase the property and to develop it as a park along the river (Exhibit A-2). In that year the property was sold for $42,000 as the result of an unsolicited offer, and the gain realized on the disposition of the sale was some $28,000.

In 1973 the appellant and Mr Murphy purchased a cottage at Can- more, Alberta, for $9,500. The appellant and her children, who were interested in skiing competitions, occupied the cottage in the winter months, and Mr Murphy and his 12 children also made use of the recreational property. This arrangement did not work out and the property was sold in 1974.

In 1975 the appellant and Mr Murphy purchased, for $15,500, a property at 1417—1st Street NW consisting of a bungalow on a 50' lot which was situated in a good rental area and which is still owned by the appellant and rented at $180 a month.

Also in 1975 the appellant purchased a property at 1002—4th Avenue NW for $16,500. As I understand it, the appellant’s husband had purchased the property originally as an office for McGinn Properties Limited; however, because of zoning regulations, he was unable to use it as an office, and sold the property to the appellant who still owns it and rents it at $200 a month.

In summary, of the seven property transactions made by the appellant since 1970, four are still in her possession and rented out, and three were sold. Of the sales, one was a recreational cottage to be shared with Mr Murphy’s family which didn’t work out; the second was the unsolicited sale of a river property for the purpose of developing a park; and the third is the subject property which was sold after being rented for three years when it was found to be too costly to convert it into a multiple dwelling, as originally intended. Plans have been drawn and submitted to the City of Calgary for the approval of the construction of a 4-unit townhouse on one of the four properties still in the appellant’s possession.

In argument, counsel for the respondent pointed out, and rightly so, that the appellant’s intention of organizing for herself a retirement income, which is not contested, does not necessarily make the gains realized in the above transactions capital in nature. It is the facts surrounding the appellant’s transaction which determine whether the gains are income or capital in nature.

In order to establish that the appellant was in the business of trading in real estate, or that she had at least a secondary intention of disposing of the property as soon as it became profitable to do so, counsel for the respondent contends that she was associated with acknowledged traders. There is evidence, of course, that the appellant’s husband was a trader in realty. However, there is no evidence that Mr Murphy, a lawyer, was himself a trader. The evidence is clear and uncontradicted that the appellant, though nominally secretarytreasurer of McGinn Properties Limited, did not play any part in the operations of her husband’s business. The appellant admitted frankly that she sought the advice of her husband on the transactions she made, and acknowledged that her husband received commission on almost all of the transactions in which she was involved. In the circumstances the contrary would not have been credible to me. Any prudent person would seek the best advice available before investing in rental property, and what advice could be more reliable for the appellant than that of her husband? A commission would have had to be paid to someone on the appellant’s transactions, so why should the appellant seek out another realtor when her husband is in the realty business? In my opinion, these circumstances üc noi automatically make of the appellant a trader in properties. The nature of the appellant’s transactions can best be determined by the appellant’s intention in the purchase of each of the properties previously mentioned, and the reason for the sale of the said properties. It is clear from the evidence that the appellant’s plan was to realize her retirement income from rental properties. There is nothing in the evidence that can support the contention that the appellant was in the business of trading in properties or that she was engaged in a venture in the nature of trade. Nor is there any evidence, or even a slight indication, that the appellant, at the time of purchase of any of the properties, had the intention of turning the properties to account at the first opportune moment.

Counsel for the respondent contends that the appellant, at the time of purchase of the subject property at 424—11th Avenue NE, must have been aware of the inadequate heating system and the plumbing system of that property, and assumes therefore that the property must have been purchased for resale. I do not believe that the assumption is warranted. As a result of the cross-examination of the appellant, it seemed clear to me that she had given considerable thought as to how the property could be developed into a multiple dwelling, and even had an estimate of cost of various plans. The estimate of cost of developing such a property, which in my view can best be done after purchase, was too high, and the property, after being rented, was sold. However, in 1970, the same year during which the subject property was purchased, a duplex was also purchased by the appellant which she still owns and from which she receives an adequate rental income. Again in 1970, the appellant purchased a property at 1712—15 Street NW, which she still owns and rents out, and on the site of which a 4-unit townhouse is presently being planned. In the light of these facts, I have no difficulty whatever in accepting the appellant’s statement that her intention in purchasing the property at 424—11th Avenue NE was to develop it into a multiple dwelling and to derive rental income from it.

In order to show that the appellant’s intention was to trade in properties, counsel for the respondent produced Exhibit R-1, a schedule of rental income at December 31, 1975, which shows a loss in rental income of $236, as compared to the net gain of $36,000 on the disposition of the three properties which were sold. It is my understanding that that schedule does not reflect an accurate rental income since at least two of the properties were purchased during the course of 1975. However, be that as it may, such a comparison is not sufficient evidence to negate the testimony of a credible witness to the effect that her intention was to invest in rental properties, which statement is supported by the facts.

The appellant freely admitted that she earned good rental income from some properties; from others she broke even; and, from some she lost. However, the greatest loss in rental income is from the property that is earmarked for demolition and development into a 4-unit townhouse.

For these reasons, I conclude that the profit derived from the disposition of a property at 424—11th Avenue NE is capital in nature, and that the appellant’s share of that profit is subject to a capital gains tax to be calculated on the base of a fair market value at December 31, 1971, of $19,933.

The appeal is therefore allowed and the matter referred back to the respondent for reconsideration and reassessment accordingly.

Appeal allowed.