Date:
20020913
Docket:
2001-3490-IT-I
BETWEEN:
WINONA A.
FLETCHER,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Miller
J.
[1]
The Appellant, Ms. Winona Fletcher, is appealing the assessments
of the Minister of National Revenue of her 1994 and 1995 taxation
years. In 1994, the Minister included $25,443 in Ms.
Fletcher's income as a result of the sale of a property at
5768 Tern Drive, Vernon, British Columbia ("Property
1"). In 1995, the Minister included $19,551 in Ms.
Fletcher's income as a result of the sale of a property at
5769 Teal Drive in Vernon, British Columbia ("Property
2"). Ms. Fletcher claims both properties were acquired
as her principal residence. The Minister maintains the properties
were purchased as part of a business with the intention of resale
for a profit. I am satisfied that Ms. Fletcher was not in
business and had no such intention.
Facts
[2]
In the mid-1990s, R & N Development was developing a new
subdivision in Vernon. Ms. Fletcher worked for R & N.
Erlendson Construction Ltd., a company owned wholly by Mr.
Erlendson, acquired a lot from R & N for the purpose of
building a spec home, a home intended for sale prior to
completion of construction. The contract of purchase and sale was
dated May 27, 1993. Mr. Erlendson immediately put the
property on the market with a local agent for $166,000. At the
same time in May 1993, Ms. Fletcher, who had an ongoing
relationship with Mr. Erlendson, had Erlendson Construction Ltd.
enter a contract of purchase and sale for a lot in the same
subdivision at a lot price of $54,650. The offer included a
provision allowing Erlendson Construction Ltd. to assign its
interest. This was to be Ms. Fletcher's home - Property 1.
The spec home was Property 2. Contracting through Erlendson
Construction Ltd. allowed Ms. Fletcher more favourable terms due
to the two properties being acquired at the same time. In both
cases, the sale was to be completed on November 19,
1993.
[3]
Ms. Fletcher paid approximately $94,000 for the cost of
construction of her home on Property 1. Construction proceeded
well and she received her occupancy permit in September 1993.
Given her employment with R & N, she was allowed to move in
at that time notwithstanding that the sale was not due for
completion until November 1993. During the month of November, she
finished the basement of her home.
[4]
Mr. Erlendson was having financial problems on the construction
of Property 2, so had the November 19th completion date extended
to April 1994.
[5]
Because Ms. Fletcher's home was finished and Mr.
Erlendson's spec home was not, R & N asked if Ms.
Fletcher would allow her home to be the show home for the
subdivision. She acceded to her employer's request. To gain
maximum exposure, Property 1 was listed on MLS at $177,900, a
price, according to Ms. Fletcher, that was too high to actually
attract a sale. It was not her stated intention to
sell.
[6]
In February 1994, Ms. Fletcher actually received an offer of
$165,000. She attempted to convince the proposed buyer to make an
offer on Mr. Erlendson's spec property, but the buyers
were only interested in Ms. Fletcher's property. She
therefore countered high at $176,000 presuming that would scare
the purchasers off. They accepted her counter.
[7]
Ms. Fletcher proceeded to sell Property 1 for a couple of
reasons. She wanted to help Mr. Erlendson, who was having
financial difficulties and struggling to finish the spec home. If
she sold Property 1, she could buy Property 2 from Mr.
Erlendson at the cost of the lot ($53,900) and the cost of
construction ($83,000), thus helping her boyfriend out of a jam.
She had also overextended herself in finishing the basement of
Property 1 and the high offer would allow her to relieve some of
her debt load. Ms. Fletcher acknowledged it was a difficult
decision to make given her evident fondness for her
home.
[8]
From the proceeds of the sale of Property 1, Ms. Fletcher was
able to pay off a $61,000 loan, retire a $10,000 credit line and
return $8,000 to her RRSP. She paid the lot price of
approximately $54,000 on Property 2 and used the balance of the
proceeds plus a $55,000 loan to pay the construction cost for
Property 2.
[9]
In April 1994, Ms. Fletcher and Mr. Erlendson moved in together
in Property 2. Mr. Erlendson did not remain long as the
relationship between him and Ms. Fletcher's teenage daughter
was strained. Ms. Fletcher resided in the home from April 1 to
August 1994. She moved in with Mr. Erlendson in
September 1994, while her 19-year old daughter remained
living in the home. She listed Property 2 at this time, but when
it did not sell, she did not renew the listing. In early 1995,
Ms. Fletcher's daughter moved in with her and
Mr. Erlendson in Mr. Erlendson's home. Between January
and June 1995, Ms. Fletcher rented out Property 2. She
reported the rental income in her 1995 tax return.
[10] The
situation between Mr. Erlendson and Ms. Fletcher's daughter
did not improve so Ms. Fletcher moved back into Property 2 in
July 1995 with her daughter. Shortly thereafter, Ms.
Fletcher's daughter got a full-time job and moved out. Ms.
Fletcher and Mr. Erlendson decided it was now possible for them
to live together. They would both put their respective properties
up for rent, and not up for sale as values had softened. It was
decided that whichever property rented first, they would live in
the other property.
[11] A couple
interested in renting Property 2 asked if Ms. Fletcher would
consider selling to them if they could obtain financing, and if
the basement could be finished. Mr. Erlendson agreed to finish
the basement at a cost of $11,000 and Ms. Fletcher consequently
sold Property 2 for $151,000 in September 1995.
[12] In 1996,
Ms. Fletcher and Mr. Erlendson bought a property in the same
subdivision where they have resided together since.
[13] Prior to
the purchase and sale of Property 1 and Property 2, Ms. Fletcher
had owned a property in Lumby for a few months in 1992. It was
sold in the fall of 1992 due to Ms. Fletcher's children's
reluctance to attend school in Lumby.
Analysis
[14] Ms.
Fletcher's position was simple. She never had any intention
to sell Property 1 or Property 2: they were meant to be her
homes. As she put it, life's circumstances led to the
disposition of both properties. It never entered her mind that
the properties would be viewed as either a business or an
adventure in the nature of trade.
[15] The
Respondent views the situation quite differently. The Respondent
argues that Ms. Fletcher was in business. She points to Ms.
Fletcher's property history and the high turnover of real
estate in a short period. At the very least, the real estate
activity constituted an "adventure in the nature of
trade", a term found in the Act's definition of
business. The Respondent relies on the recent Tax Court of Canada
decision in Scenna v. Canada, which
cited at length the Supreme Court of Canada decision of
Friesen v. The Queen for support as
to what constitutes an adventure in the nature of trade
vis-à-vis real property activity. The
Friesen case also refers to Interpretation Bulletin
IT-218R as providing a summary of relative factors in this
determination. Respondent's counsel took me through each of
the following factors:
(a)
the taxpayer's intention with respect to the real estate at
the time of its purchase;
(b)
feasibility of the taxpayer's intention;
(c)
geographical location and zoned use of the real estate
acquired;
(d)
extent to which intention carried out by the taxpayer;
(e)
evidence that the taxpayer's intention changed after purchase
of the real estate;
(f)
the nature of the business, profession, calling or trade of the
taxpayer and associates;
(g)
the extent to which borrowed money was used to finance the real
estate acquisition and the terms of the financing, if any,
arranged;
(h)
the length of time throughout which the real estate was held by
the taxpayer;
(i)
the existence of persons other than the taxpayer who share
interest in the real estate;
(j)
the nature of the occupation of the other persons referred to in
(i) above as well as their stated intentions and courses of
conduct;
(k)
factors which motivated the sale of the real estate;
(l)
evidence that the taxpayer and/or associates had dealt
extensively in real estate.
[16] I will
deal firstly with the Respondent's assertion that, even
without having to resort to the adventure in the nature of trade
argument, Ms. Fletcher was in business. The Respondent calls the
Lumby property, Property 1, and Property 2 Ms. Fletcher's
inventory. I would not describe it that way. Just because three
properties are sold in three years does not make the properties
inventory. This ignores the many usual factors in identifying a
business - the badges of commerciality. None of them existed in
this case. No intention to operate a business, no acting in a
businesslike manner, no business cards, accounts, office or
equipment and no business plan. This was a women who happened to
work for a developer and be in love with a contractor. Somehow
these factors have tainted her, in the Respondent's view,
with some aura of commerciality which I find simply does not
exist. She was not operating a business.
[17] I turn now
to the issue of whether she was engaged in an adventure in the
nature of trade and consequently caught in the definition of
business for tax purposes. The Supreme Court of Canada in the
Friesen case indicated:
The first requirement for an adventure in the nature of trade is
that it involve(s) a "scheme for profit-making". The
taxpayer must have a legitimate intention of gaining a profit
from the transaction. ...
The Supreme
Court of Canada goes on to refer to IT-459 and IT-218R for
identification of other relevant factors. It is clear though that
without a legitimate intention of gaining a profit, there is no
adventure in the nature of trade. I am convinced Ms. Fletcher had
no scheme for profit-making. She had no legitimate intention of
gaining a profit from the transaction. She made this assertion
many times in her testimony. I believe her. She was completely
candid in her answers, her evidence was consistent and clear, and
was corroborated by Mr. Erlendson, who was equally
straightforward. Ms. Fletcher was genuinely taken aback by the
government's treatment of what she described as the unfolding
of life's circumstances. The suggestion that she was flipping
property with a profit motive was in her mind ludicrous, though
to her credit she acknowledged how a review of the factors as
cited earlier might cause the government to raise questions. I am
satisfied she has answered any concerns with her totally credible
explanations of the circumstances of the purchase and sale of the
properties.
[18] The
Respondent argues that even if Ms. Fletcher did not have a
primary intention to resell then: (i) she had a secondary
intention to do so; and (ii) at the time of sale her intention
had shifted to selling at a profit.
[19] I do not
find any evidence to support a secondary intention to sell at a
profit. With respect to Property 1, the Respondent suggests Ms.
Fletcher's listing of the property shortly after acquiring it
is sufficient evidence of such an intent. I do not agree. The
property was listed as a favour to her employer, the developer,
who needed a show home to market the subdivision.
[20] She
finished the basement shortly after moving into the property -
not an action designed for a quick flip. She had only one
intention and that was to live on the property as her home. At
the time of acquisition, there was no thought given to what would
happen if the primary intention to live on the property as a
principal residence was thwarted. This possibility was not on Ms.
Fletcher's radar screen in May 1993 when she made the offer,
nor in September 1993 when she moved in, nor in November 1993
when the formal transfer of title took place.
[21] For there
to be a secondary intention, there must be some evidence that the
possibility was considered at the time of acquisition. It is not
sufficient to speculate that had Ms. Fletcher been asked at the
time whether she intended to resell at a profit, if for whatever
reason she could no longer reside in the property as her
principal residence, she might have answered yes. That cannot be
the test or else it would be difficult to find that any real
property purchase is made without a secondary intention. No,
there must be evidence at the time of a secondary intention: it
cannot be imputed in hindsight.
[22] With
respect to Property 2, again I find there is only one intention
at the time the property was acquired. This property was to
replace Property 1 as Ms. Fletcher's home, and indeed
Ms. Fletcher kept the property for a year and a half when family
circumstances resulted in the sale. Again, the Respondent points
to the listing of the property as evidence of a secondary
intention. But Ms. Fletcher has a plausible response. In
August 1994, when she listed Property 2, the relationship between
her daughter and Mr. Erlendson was such that they could not live
under the same roof. Ms. Fletcher moved in with Mr. Erlendson and
put the property up for sale. It did not sell, the listing ran
out, and she did not renew it. This was not a profit-motivated
move; it was a move to deal with the uncertainties of life that
Ms. Fletcher was facing.
[23] With
respect to the issue of an intention that changed over time, the
Respondent relies on the following comment in Interpretation
Bulletin 459:
...
Further, a taxpayer's intentions are not limited to the
purposes for acquiring the property but extend to the time at
which the disposition was made. A taxpayer's intention, if
any, at the time of acquisition of the property may change at any
time during ownership and up to disposition because the taxpayer
may form an intention or otherwise change or abandon the primary,
dominant or secondary intention with respect to the
property.
I take this
to mean that at the time of sale, the motivation to sell at a
profit must have become the primary intention. This bulletin may
be going too far in suggesting an intention at the time of sale
as opposed to at the time of acquisition, is sufficient to meet
the requisite intent required by the Supreme Court of Canada, as
expressed in Friesen, for purposes of finding an adventure
in the nature of trade. However, even if I accept the
bulletin's premise, I do not find that at the time of the
sale of the Property 1, Ms. Fletcher had a primary intention of
profiting. Her primary intention was helping Mr. Erlendson out of
a financial crisis. The result of the sale was that she could
retire some debt, but that was not the prime motivating
factor.
[24] With
respect to Property 2, Ms. Fletcher was only looking to rent the
property, as she and Mr. Erlendson had determined they could now
happily live together, as Ms. Fletcher's daughter had moved
out on her own. The property values were not high, and although
some gain was realized, it was not the best time to sell. Under
these circumstances, I do not find that even at the time of sale
of Property 2, Ms. Fletcher's primary intention had changed
to profit maximization.
[25] Referring
back to the list presented by the Respondent from IT-218R, I
believe I have dealt with all the factors connected with the
concept of intent, being factors (a), (b), (d), (e) and (k). I
have concluded that no requisite intention (primary, secondary or
changed at time of disposition) exists in this case. That is
sufficient to find that Ms. Fletcher was not engaged in an
adventure in the nature of trade. It is unnecessary to review the
other factors.
[26] I allow
the appeals and refer the matter back to the Minister for
reconsideration and reassessment on the basis that Ms. Fletcher
did not purchase the properties as part of a business, but
purchased them as her principal residences. Given the requirement
for two appearances in Kelowna from her home in Vernon and an
ongoing communication with Revenue Canada over a lengthy period
of time, I award Ms. Fletcher costs of $200 to cover her
incidental expenditures in attending to this matter.
Signed at
Ottawa, Canada, this 13th day of September, 2002.
J.T.C.C.
COURT FILE
NO.:
2001-3490(IT)I
STYLE OF
CAUSE:
Winona A. Fletcher and
Her Majesty the Queen
PLACE OF
HEARING:
Kelowna, British Columbia
DATE OF
HEARING:
September 5, 2002
REASONS FOR
JUDGMENT BY: The Honourable Judge
Campbell J. Miller
DATE OF
JUDGMENT:
September 13, 2002
APPEARANCES:
For the
Appellant:
The Appellant herself
Counsel for
the
Respondent:
Nadine Taylor
COUNSEL OF
RECORD:
For the
Appellant:
Name:
N/A
Firm:
N/A
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-3490(IT)I
BETWEEN:
WINONA A.
FLETCHER,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeals
heard on September 5, 2002, at Kelowna, British Columbia,
by
the
Honourable Judge Campbell J. Miller
Appearances
For the
Appellant:
The Appellant herself
Counsel for
the
Respondent:
Nadine Taylor
JUDGMENT
The appeals from assessments of tax made under the Income Tax
Act for the 1994 and 1995 taxation years are allowed, with costs in the amount of
$200, and the assessments are referred back to the Minister of
National Revenue for reconsideration and reassessment on the
basis that the Appellant did not purchase 5768 Tern Drive and
5769 Teal Drive, Vernon, British Columbia as part of a business,
but purchased them as her principal residences.
Signed at
Ottawa. Canada, this 13th day of September, 2002.
J.T.C.C.
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