John W Welton v. Minister of National Revenue, [1978] CTC 3153, [1978] DTC 1848

Roland St-Onge (orally October 20, 1978):—The appeal of Mr John W Welton came before me on October 20, 1978, at the City of Toronto, Ontario, and the issue is whether the sale of property constitutes an adventure in the nature of trade in the 1972 taxation year.

Since 1959 Mr John W Welton has been engaged in the construction business through related companies whose business has primarily been the construction and sale of residential properties and the construction of rental properties for investment. In the seventeen-year period, between 1959 and 1976, the appellant lived with his children in six residences, five being bought and sold and their current residence being leased. The appellant, with his family, lived on the property at 2200 Shardown Mews, hereinafter referred to as “the property’’, for two and a half years and sold it, realizing a profit of some $66,155. The Board considered as being proven in its entirety the following subparagraphs of paragraph 6 of the Reply to the Notice of Appeal:

a) the Appellant is a land developer who through companies and partnerships in which he and his brother and their respective wives hold interests has been involved in the business of construction and sale of residential properties;

b) the Appellant and his brother David Welton, each have a 50% interest in the following companies;

Welton Limited;

Welglen Limited;

Rivergate Limited;

the Appellant was president of Welton Limited;

c) Joan Welton, the wife of the Appellant is the beneficial owner of all of the shares of Zebulon Limited; Iva Welton, the wife of the Appellant’s brother, David is the beneficial owner of all of the shares of Roton Limited; Zebulon and Roton have formed a corporate partnership under the name of Zebro Estates which is a land owning company;

d) by Deed dated June 14, 1966 the- Appellant through his wife acquired a parcel of land in a subdivision development in Mississauga for $5,000 from Rogerswood Estates a corporate partnership in which the wives of the Appellant and his brother were partners; Welton Limited constructed a house on the property for the Appellant at the cost price to Welton Limited; the Appellant and his wife and family lived there for approximately two years;

e) by Deed dated October 24, 1968 and registered November 5, 1968 the Appellant sold this property in an arm’s length transaction for $55,250; the Appellant treated the gain made on the sale as a Capital gain;

f) by Deed dated October 29, 1968, the Appellant through his wife acquired from Welton Limited another piece of land in Mississauga on which a house had been constructed by Welton Limited. The purchase price was $6,525 the cost to Welton of constructing the house, and the assumption of an existing mortgage in the amount of $32,000;

g) by Deed dated November 27, 1969 and registered December 5, 1969 the Appellant through his wife sold this house in an arm’s length transaction for $57,000. The profit of $16,275 on the sale was treated as income by the Minister.

h) by Deed dated December 2, 1969, the Appellant through his wife purchased one acre of land in Mississauga, the property referred to in paragraph 3 of this Reply which forms the subject matter of this assessment in an arm’s length transaction for $30,000. Welton Limited constructed a house on the property for the Appellant. The contract price was $42,495, the cost to Welton Limited of building the house;

i) the property was acquired by the Appellant through his wife . . .

j) on October 4, 1972 the Appellant through his. wife sold the property in an arm’s length transaction for $147,500 and realized a gain of $66,155 after paying commission of $8,500 and related expenses;

k) the Appellant subsequently moved into a house constructed by Welton Limited, on land owned by Zebro Estates in Mississauga which he arranged to lease from Zebro Estates for $6,000 per annum, until such time as the land could be subdivided by Zebro.

Before going into details of the sale of the five residences, I would like to mention the Appellant’s holdings, either through companies or his wife. First, Welglen Limited constructed and still owned 105 La Rose Street which is a 180-unit apartment; 151 La Rose Street apartment, which is a 110-suite apartment. As to the other, Rivergate, this company owned three apartments, one of 191 suites, another of 128 and a third one of 138.

In a period from 1958 to 1960, the first company of the appellant built and sold at profit two buildings of some 55 suites each. The said appellant’s buildings were sold to obtain working capital. As already admitted in the proceedings, the appellant lived in five residences that he later sold. Heard as a witness, he explained each transaction as follows. The first residence was a three-bedroom home. He had two children. He stayed in the said house five years and sold it in 1964 because there were no more building lots in the area and he had to move ten miles to operate his business.

The second residence was on a much better lot with a much larger house thereon. He now had three children. He stayed there some two years and sold because

1) he was in the midst of a small group of houses;

2) he was concerned about the status of education for his children;

3) he needed a larger home because his wife needed help to raise her three children and

4) business-wise he had to move another ten miles to get building lots.

The third residence—the appellant wanted to build a house for himself. He used Welton Limited to pay the bills and his brother helped him. It was a two-car garage home with extra space. He sold it because

1) it was in the midst of sixty other houses;

2) the neighbours who bought the houses from the company were always asking for something or complaining about the houses;

3) they were considered as second-class citizens and his wife could not stand that anymore.

The fourth residence—he bought that house from his company because someone was interested in buying his house on Greenoaks Street, which was a very special type (siding, no bricks). As he said, “Our business depends on sales. I felt that I had to accept that deal’’. He had another house in his inventory which had not been sold for over a year, sO;he bought it as a temporary residence and sold it at profit. He did not report the gain as income because he was under the impression that the sale of a residence was not taxable.

The fifth residence—prior to 1968, the appellant was interested in acquiring a single lot for $30,000 to design his permanent residence. Before he could buy that lot, he met his friend Dr Don Robison who offered him a nice site on a ten-acre lot that he had acquired. The price was the same and the sight was as beautiful, if not more so, near the river and a golf course. He acquired the lot from the doctor for $30,000, obtained a loan of $40,000 and built the house by using his company in the same fashion as he did before. According to him, this house was specifically built to accommodate the particular family requirements:

1) had a high basement without any partitions;

2) an electronic air ventilation because the appellant and his children have allergy problems;

3) the doorways were “above normal’’ because of his and his children’s size;

4) the house had five bedrooms, a large kitchen and family room. The extra room was needed for household help;

5) a garage attached to the house with a side door to go downstairs;

6) fireplace from a French chateau;

7) plaster walls instead of dry walls.

He sold this property because he had to lease a house from his company for the benefit of the said company.

The past course of conduct of the appellant is so convincing that it forces me to believe that the property in question was acquired through his wife with the intention of turning it into account for a profit at the first opportunity. The number of transactions which were carried out in the same fashion over a period of seventeen years cannot be put aside to rule the reverse. There is no evidence to prove that the property in question was designed specifically to accommodate the appellant’s family. As a matter of fact, there is nothing unusual about that residence and most of the houses sold for that price of $147,000 do have steel beams, electronic air ventilation, large doorways, five bedrooms, garage attached to the house, plaster walls, etc. Furthermore, the short period of holding is an indication that this property was acquired as stock in trade and the fact that he received that property at cost from the company and was able to personally realize a profit is another indication that this residence was stock in trade.

There are also many statements made by the appellant such as “It was our business to sell houses; my impression was that the profit of the sale of a residence was not taxable; with respect to the property in question, I got the sale”. These statements show that his intention was to sell the property under discussion at profit at the best opportunity.

According to the evidence, the sale of the property took place in the ordinary course of the appellant’s business and was a transfer of property made pursuant to the direction of the appellant for his benefit. Also, most of the reasons given by the appellant for selling his five residences are related to the fact that he is in a business of selling houses and the same reasons were always re-occurring. All these five residences were sold for the advancement of his business—that of selling houses. After buying five residences, the appellant was not very persistent in trying to keep this last one, which was more adequate to his family needs than the one he leased from his company. For a man of his means, it is difficult to conceive that he would leave the property in question to live in a rented house, which was much less comfortable. The only explanation would be that the property was acquired as a residence under the impression that in case of sale, the profit would not be taxable.

In the case at bar, the appellant did not act as an owner of a residence, but as a trader in selling houses. The appellant did not discharge the onus of proving that with respect to this property, he did not act as a trader.

For these reasons, the appeal is dismissed for the 1972 and 1973 taxation years.

Appeal dismissed.