Fowlie Nicholson Realty LTD v. Minister of National Revenue, [1978] CTC 2953, [1978] DTC 1687

Delmer E Taylor:—These appeals relate to income tax assessments in which the Minister of National Revenue disallowed certain travelling expenses claimed by Fowlie Nicholson Realty Ltd (hereinafter referred to as “the Company’’) for the taxation years 1973 and 1974. The Minister had also assessed as income rather than capital the gain on the sale in 1974 of a certain parcel of real estate situated in Kamloops, British Columbia and disallowed expenses claimed in 1974 on a mobile home property situated in Palm Springs, California, USA. During the hearing, counsel for the appellant withdrew the portion of the appeal dealing with travelling expenses and the appeal for 1973 is therefore dismissed, as is also that portion of the 1974 appeal dealing with this issue. On the other two issues, the respondent relied, inter alia, upon sections 3, 9, 18, 20 and 67, and upon Regulations 1100 and 1102(1) of the Income Tax Act, SC 1970-71-72, c 63 as amended.

Facts

The appellant corporation operates in the real estate field in Kamloops, BC, and is owned and controlled by Mr W V Nicholson (hereinafter referred to as “Nicholson”) who occupies the position of President. Although there were changes and modifications in the business format used, Nicholson had been involved in the real estate market in that area for some time before the relevant years. The fiscal year end of the Company is February 28th. In November 1970, Nicholson purchased the subject property at 430 St Paul Street, Kamloops, BC. In 1972 the property was transferred to the appellant, and in May 1973 it was sold and a profit realized. In 1972 the appellant purchased a parcel of land, and in 1973 placed thereon a mobile home in Palm Springs, California, USA.

Contentions

The appellant contended that the Kamloops property had been purchased by Nicholson as a result of difficulties he was having with a business partner, and that he had anticipated locating his own business office there. Subsequent resolution of the business difficulties, and municipal zoning restrictions on the property, made it unnecessary and impractical for him to relocate his business, and the property was sold. With. respect to Palm Springs, that property served as a focal point for the appellant’s business dealings in the southwestern USA, and also was a facility the Company could provide to clients or staff for vacation purposes.

The position of the respondent was that:

—the appellant acquired the St Paul Street property with the intention of turning the property to account for a profit whenever it became possible to do so;

—the Palm Springs property and mobile home and furnishings were not acquired by the appellant for the primary purpose of gaining or producing income.

Evidence

In reaffirming his stated original intention for the use of the Kamloops property, and the alleged purpose for the Palm Springs property, the appellant submitted several documents for the Board’s consideration. It was also determined that Nicholson and his family had used the Palm Springs property cn occasion. The evidence of a chartered accountant, Mr Butalia, was largely to provide clarification of the records, financial statements and income tax returns related to the matter.

Argument

Counsel for the appellant, dealing with the Kamloops property, submitted that the original intention of the appellant had been a capital one, and could not now be treated as income by the Minister merely because Nicholson’s difficulties with his business partner had been resolved, and zoning regulations had prevented him from using the property for his own office. Counsel made reference to Glomin Farms Ltd v MNR, [1977] CTC 2567; 77 DTC 404. In connection with the Palm Springs situation, counsel took the position that the purpose of the acquisition was for business, and this should not be diluted merely because the taxpayer used the facility for short periods personally

—it was available for business clients, staff, etc. , at all times. Substantial Reliance was placed upon Income Tax Regulation 1102 and Interpretation Bulletin IT-148(R). In summary, counsel stated as follows at the hearing:

The evidence is clear that he has used the premises for the purpose of entertaining clients. I would submit to you that that has been proved.

Now, the evidence of Mr Butalia has indicated that people who have used the premises have subsequently done business with Mr Nicholson’s company, and as a result of that. Mr Nicholson’s company has earned a commission.

The interesting portion of paragraph 7 of the Bulletin, Mr Chairman, has to do with apportionment of capital cost, so you may find that while there are twelve months in the year, you may also find that Mr Nicholson Used it for a twelfth, or some portion of it, only for personal business.

The main question, naturally, before you is whether or not you’re satisfied that he did use those premises in order to earn income for the company.

Counsel for the respondent in dealing with the Kamloops property cited the appellant’s obvious involvement with the real estate field, his lack of attention to the zoning regulations before purchase, and the short time the property was held, as all pointing to a trading purpose, not a capital investment. Turning to Palm Springs, counsel summarized the Minister’s position:

.. . . there’s only been a vague attempt here to identify that mobile home with a business. The accountant says he didn't classify it as a business, if anything it was rental property. I submit it wasn't even rental property, it was personal use property that was used from time to time by friends, associates and employees, and that it just has no identity, either as a business or as a rental property.

Findings

The physical evidence presented by the appellant is of only superficial value at best, and the Board is essentially faced with consideration of the testimony of the taxpayer on both issues. For Kamloops, this verbal evidence is slim indeed. I am not impressed with the assertion of the taxpayer that he (as a real estate agent) was not sufficiently familiar with the zoning regulations or municipal use before purchase. While it is not impossible that the appellant, not being a wealthy man, would have regarded as a first requirement to start his own business (his claim of business difficulties with his partner) that he own the office building from which he would operate, in my view this is improbable. The Minister has based the assessment on the assumptions that a real estate agent familiar with property in the area purchased the subject property, held it and sold it at a profit some time later on. Something more than merely the appellant’s statement that this subject property should be excluded from his regular business dealings on the grounds he has indicated would be required to cast serious doubts on the more logical position of the Minister.

On the Palm Springs property, it seems to me that counsel for the appellant has placed the cart before the horse. The assertion that some relatively minor business dealings may have been conducted in, near, from or in relation to the mobile home, by or for the appellant, does not dedicate that total asset to business purposes, nor even a portion of it solely for income-earning activities. There is no evidence that the prime purpose for its purchase was that alleged by the appellant, nor even that it could be considered a rental asset of any substance. I am satisfied that this was a recreational property in the same vein that many taxpayers have similar assets—cottages, boats, lodges, hobby farms, resort condominiums, etc—and that any commercial use which developed was incidental, and more a matter of convenience than a function of the purpose of the property. The taxpayer did not claim certain (limited) expenses which might be directly related to the rental income or to specific business use made of the property as an office while he was in residence there. The Board’s position on such a more modest approach need not be determined here, and the Board simply rejects the very ambitious total deductibility proposal alleged by the taxpayer for the Palm Springs mobile home. The Board further declines the suggestion of counsel that it should apportion or allocate the expenses indicated for the property between business and personal.

Decision

The appeals for both the taxation years 1973 and 1974 are dismissed.

Appeal dismissed.