Louis Bratanek, Jr v. Minister of National Revenue, [1978] CTC 2379, [1978] DTC 1275

Delmer E Taylor:—This is an appeal against income tax assessments for the years 1971 to 1974 inclusive arising from the fact that the Minister of National Revenue included in the income of the appellant amounts of $9,909.91, $14,310.73 and $69,428.21 from real estate transactions occurring in the years 1971, 1972 and 1974 respectively. The respondent relied, inter alia, upon sections 3, 4 and paragraph 139(1)(e) of the Income Tax Act, RSC 1952, chapter 148, as amended, as it applied to the 1971 taxation year and sections 3, 9 and subsection 248(1) of the Income Tax Act, SC 1970-71-72, chapter 63, as amended, as it applied to the 1972, 1973 and 1974 taxation years.

Facts

The appellant was born in 1948, raised on a farm near Sarnia, Ontario, and during the times material was engaged only in the transactions which produced the gains in question. These were:

Contentions

It was the position of the appellant that the transactions involved concerned the sale of rental properties, the gain from which he should be entitled to consider on account of capital.

The respondent asserted that the said amounts were income from a business.

Evidence

No physical evidence was provided to the Board since there appeared to be no dispute between the parties with respect to the facts. The appellant explained the circumstances under which he started at about age 21, with no personal capital, to engage in the transactions in question. His grandfather owned 7 apartments in a building in Sarnia, and he helped his grandfather during his late high-school years in repairing and maintaining the apartments, as well as renting them. An uncle also separately owned a building having 22 apartments (F on earlier list). His father, at approximately the same time, was in the process of selling the 450-acre family farm some 30 miles from Sarnia, and purchasing several smaller parcels of property closer to Sarnia. Item D—Kathleen St—had been the appellant’s first purchase because his grandfather had originally suggested that it be purchased between them (the appellant and the grandfather), but after the small deposit was put down, the grandfather changed his mind and the appellant borrowed the necessary funds from his father and proceeded alone. The purchase had been proposed by his grandfather because it appeared to be a fairly good rental property, and his grandfather intended to sell his own smaller and older building to finance his portion of the purchase. A, B and C properties were in a generally poor area of the city and each was purchased with a very small down-payment. These buildings as well as D building required constant attention and maintenance, much of it done personally by the appellant. He did renovate and repair, but only to the degree necessary to keep the buildings as fully occupied as possible. Property E had been purchased because it appeared to present rental opportunity, and G as a personal residence for the appellant. To acquire F from his uncle, the appellant had been forced to realize on his investments in A, B and C—in his view he was trading his equity in these for another rental equity. He was not unhappy about ridding himself of the problems in A, B and C and attempted to also sell D but was unsuccessful for a long time because of its own physical and operational disadvantages. His intention in consolidating his holdings (and it must not be forgotten his debt) in D was that hopefully he could then have a superintendent operate the building (22 units) and get on to other endeavours. He was rapidly tiring of the rental business but found himself with about only one option—to consolidate into one viable business—block F. Difficulties with this building also arose during 1972 and 1973 and he determined to get out of the rental business altogether.

The appellant had not listed property F for sale but he had been prepared to sell. The offer he received was unsolicited and it was accepted because it seemed like a good price “compared to what the building had cost”. His intention originally in all purchases had been to keep them until the mortgages were fully paid out of the rental receipts, and then to retain them as good revenue-producing assets.

Under cross-examination the appellant provided information regarding several purchases in the years subsequent to those under review, through a company he incorporated. Those properties, which the company still owns, are being held “for investment purposes”— awaiting zoning or development, and he asserted that these were quite different to the contentions he was making regarding his earlier acquisitions. Further, there were several of the other properties purchased with the funds received from his father’s farm and these prop erties are held in his name personally. Originally he had some intention of farming them or of renting them to derive some '‘rental income from farming”. While these transactions provide additional background, they do not appear to enter into the appeal itself, in the opinion of the Board.

Argument

Counsel for the appellant made reference to three cases which related to the actions of the appellant: Her Majesty the Queen v Eino Sipila, [1977] CTC 280; 77 DTC 5179; Hope Hardware & Building Supply Co Ltd v MNR, [1967] CTC 120; 67 DTC 5085; Roland Nadeau v MNR, [1970] Tax ABC 571 ; 70 DTC 1368.

He particularly quoted from Sipila (supra) at page 282 [5180]:

The defendant had by now made up his mind to sell. He was turned off the property by the mortgage companies’ assessments of its location. The return was not as good as originally planned because of the interest rate. The caretaker was not doing a good job and trouble had developed with some tenants. He was working days at. his carpentry and found he was working nights too at the apartment. He was not comfortable in debt and Kendall was putting pressure on him. In summary, he was tired of the whole thing.

Counsel for the respondent while making some reference to MNR v James A Taylor, [1956] CTC 189; 56 DTC 1125, and Ernest A Rosenblatt v MNR, [1969] Tax ABC 445; 69 DTC 337, pointed out that the credibility of the appellant himself must be challenged since he had denied that in any of the transactions even the possibility of resale at a profit had ever entered his mind at the time of acquisition and such a possibility appeared very unlikely to counsel for the respondent. He distinguished the Sipila case (supra) on the basis that it dealt with ‘‘secondary intention” and that ‘‘was not the issue here”. Hope Hardware (supra) and Roland Nadeau (supra) were also distinguished on grounds that were not too clear to the Board.

Findings

Turning first to the comments made by counsel for the respondent comparing the instant case and the case of Sipila (supra), if the Board is to accept the respondent’s position that the case before the Board does not deal with “secondary intention” (however that may be defined), then the alternative is that the single motivating factor in the appellant’s mind at the time of acquisition of each property was to turn it to account at a profit. I would have grave difficulty concluding that the appellant at no time considered the rental income producing potential from his acquisitions and related only to their potential resale prospects. While the explanations proposed by the appellant require serious examination, they cannot be dismissed by the respondent that simply. I am satisfied the appellant gave some thought at some time to the rental possibilities. There is no reason in itself that the appellant, denying seven times that the possibility of resale at a profit ever entered his mind, should place his credibility at risk. He appeared to be a Straightforward and direct witness, and the matter should be decided on some grounds other than a subjective judgment of credibility—or lack of it. Referring to the cases presented for reference by counsel for the respondent, I doubt that Taylor (supra) has great relevance to this matter, and Rosenblatt (supra) is different on one very material point at least—the appellant “was well experienced in financial and mortgage matters”. -

Turning to the appellant, while he may gain some comfort from the decision in Sipila (supra), an important distinction to be made is that the matter at issue in that case consisted of one relevant transaction. While even one transaction can be an adventure in the nature of trade, it is soméwhat more difficult, in my view, to class it as a “business”. In the Sipila matter, the learned judge did not consider the transaction involved to be even a venture in the nature of trade, as per his reasons at page 283 [5181]:

Taken by itself, the sale in question was the sale of a revenue-producing asset for cogent reasons not related to the realization of a profit.” [1]

The reasons for sale given in Sipila and quoted earlier have substantial similarity in this case if we are to accept the only evidence available—that of the appellant. The respondent here has chosen to consider together, as if on one continuum, the several transactions in this appeal, culminating finally in the success of the appellant in “trading up” until he had either in a personal or a corporate way, a substantial real estate portfolio. The appellant distinguishes his transactions by referring to the years under appeal as the “rental period”, while subsequently he admittedly entered the “real estate investment period”. Neither the respondent’s “continuum” rationale nor the time frame “separation” of the appellant, in my opinion adequately account for all the facts.

First, there is no evidence to dispute the fact that the appellant’s first interest was. in parcel D, and that the original intention had been to own a rental property jointly with his grandfather. Parcel D was to obtain for the senior man a better rental property and also put the new young man in the same business. I find nothing to support a conclusion that potential sale at a profit entered into that consideration or decision at all. Further, even with some difficulty, the appellant kept this 14-unit property for almost four years, finally disposing of it at a very modest profit. Concurrently (in 1969 and 1970); he was also acquiring three other properties A, B and C, all in a generally poor condition, and not comparable to parcel D.. While the appellant’s stated evidence is that he intended to buy these, fix them up, rent them, pay off the mortgages and keep them, may have been one possibility, their generally poor condition would lead one to speculate that by the time they were “paid off”, they might be of little value as. buildings. I am satisfied that by this point in time this enterprising young businessman was beginning to appreciate a wider range of potential from property acquisitions, but he sold no properties at all until May of 1971. In the earliest acquisitions—D and A according to his evidence—he had been guided almost exclusively by his grandfather; but in B (some five months later than A), he was the initiator and motivator and, to some degree, against the advice of his grandfather. Admittedly the appellant lived at home, or with his uncle, and his personal expenses were small, but even these could not long be supported out of the minimal amounts available from his rentals when all his properties required continued upkeep and expenditure, and their maintenance costs increased as the properties grew older. It is with some difficulty that I accept the appellant’s view that the acquisitions A, B and C should be looked at in the same light as his original acquisition of parcel D but in view of the point stated earlier that he had not as yet experienced the sale of any properties I shall do so.

For parcels E and G, the explanations when taken in conjunction with the short period of time they were held, do not eliminate the prospects of serious consideration of resale at a profit as a motivation since he had already sold other properties.

Turning now to the major acquisition (F), the explanation given is that he had to sell A, B and C to finance its purchase from his uncle. I accept that to have been the case but it is also evident that by this time (December 1971), he had been involved in the purchase of five properties, sold three of them (each at a profit) and the other two he held were probably known to be increasing in value. It would be naïve to think that in over two years of devoting all his time to the real estate field, the appellant had learned nothing about the real estate market as separate but related to the property rental business. I am prepared to accept that the appellant hoped and probably intended that parcel F could finally carry itself and it would be “paid off’’ out of revenue. It was apparently the good building he sought, it had good tenants, he was not pressed for capital, and it more than paid its way. He did however, now at acquisition of F, understand the property rental business and was fully aware of his experience—rentals produced problems and relatively small revenue, but there was profit to be made on resale of small poor properties, and probably greater gains on better properties. It is not significant to me that he did not advertise or list the property publicly since, by June 1974, in Sarnia, his interest both as a buyer and a seller—some 13 transactions (seven bought, six sold) would have been reasonably well known—and the evidence also shows he was engaged similarly and concurrently, in conjunction with his father on several other real estate purchases. The development and progress of the “continuum’’ of purchases and sales resulting in the profits at issue, giving the appellant all the benefit of the evidence, can still be clearly seen commencing with the appellant’s acquisition of the Devine Street property—parcel E.

One other matter should be noted—counsel for the appellant brought to the attention of the Board that there was some question about the manner in which a terminal loss on some Class 8 assets had been treated by the Minister in the dispositions, and requested consideration of an adjustment. Counsel for the respondent objected to this procedure since no reference was made about this matter in the pleadings provided to the Board. After reviewing the information available, the Board is of the opinion that, in view of the very minimal description provided by the appellant in his notice of appeal regarding the basis of the appeal and the substantial detail provided by the reply to notice of appeal, the responsibility for enlarging the parameters of the appeal before the hearing rested with the appellant if a valid point had been overlooked by the Minister. Further, from the limited information which could not be defined as evidence provided at the hearing regarding this “terminal loss”, the Board is unconvinced there is even a point at issue. Therefore, the Board does not deal in any way with this part of the proposal made on behalf of the appellant but would leave that matter, to whatever degree it represents a point of mathematics or interpretation, up to the appellant to raise separately with the respondent.

Decision

The appeal is allowed in part so that the amount of $19,200.62 realized by the appellant as profit on the sale of real estate described herein as parcels A, B, C and D in the Town of Sarnia should be treated as on account of capital, not income. The matter is referred back to the respondent for reassessment accordingly. In all other respects the appeal is dismissed.

Appeal allowed in part.