Citation: 2011 TCC 155
Date: 20110310
Docket: 2008-3145(IT)G
BETWEEN:
JEAN-PIERRE GILBERT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau, J.
[1]
This is an appeal from
a reassessment made under the Income Tax Act, R.S.C. 1985, c. 1 (5th
Supp.), as amended (the Act), dated January 28, 2008, for the
2006 taxation year, in which the amount of $112,558 was added to the
appellant's income as business income.
[2]
The dispute is about
the tax treatment of a gain realized from the sale of an building located at 181 Beaubien Street in Trois-Rivíères (Pointe-du-Lac area)
(the Beaubien building).
[3]
In making the reassessment
at issue, the Minister of National Revenue (the Minister) relied on the
following assumptions of fact, stated in paragraph 18 of the Reply to the
Notice of Appeal:
[Translation]
a.
The appellant has worked in the construction industry
for several years;
b.
The appellant builds and sells residential buildings
(the buildings);
c.
Between 1996 and 2006, the appellant built and
sold seven buildings;
d.
The lots on which the buildings were built are all located in the same area;
e.
The buildings were all sold to the appellant by two companies, Gestion Del Inc.
and 9056-4998 Québec Inc.;
f.
The appellant built the Beaubien building
himself;
g.
The cost of the Beaubien building was set at $109,442, and it was
sold by the appellant for $222,000.
h.
The appellant's initial intention was to sell
the Beaubien building for
profit;
i.
The appellant never intended to live in the
Beaubien building in the long
term;
j.
Each of the buildings built by the appellant was in his possession for a period of
6 months to 2 years;
k.
The appellant lived in each building before selling it;
l.
The purchase and sale of buildings was a source of funding for the
appellant.
The appellant's position
[4]
According to the
appellant, the Beaubien building was not built and bought back with a view to a
profit from its sale but for the purpose of living in it as a principal
residence throughout the entire period while he owned it. His main goal was to
ensure that his two children, of whom he had legal custody, had a stable home.
He finally resigned himself to selling the house because of the memories that
were associated with it and the strained relationship with his neighbours
following criminal complaints lodged by his former spouse.
Facts in evidence
[5]
Mr. Gilbert
testified at the hearing and provided the following information about the
Beaubien building and some other events that took place at the time:
(a) The land subjacent
to the Beaubien building was purchased through a notarial deed dated
June 2, 2003, by the appellant's former spouse, Annie Jean, for $10,000
in cash. The seller was 9056-4998 Québec Inc., a company belonging to Denis
Beaubien.
(b) Through a deed of building
hypothecary security dated May 30, 2003, Annie Jean took out a
hypothec on the land with the house being built on it with the Caisses
populaires and caisses d'économie Desjardins in order to secure a loan contract
for an initial amount of $72,000 granted on September 23, 2002, to Annie Jean
and Jean-Pierre Gilbert. The annual interest rate on the loan was 25%.
(c) On April 7, 2003, a
building permit to build a family residence was issued by the municipality to
Annie Jean.
(d) The appellant built
the house himself with the help of his former spouse's father and some friends.
The house was occupied by the appellant and his family starting on September 1,
2003.
(e) When the
construction of the Beaubien building was almost finished and it was inhabitable,
on September 22, 2003, the appellant incorporated the company
Constructions et Habitations GB Inc. in order to work in construction. The
appellant was the director, president and first shareholder of the company,
holding 50% of the shares, while 9056‑4998 Québec Inc., belonging to
Denis Beaubien, was the second shareholder holding the other 50% of the shares.
(f) The appellant and
his spouse separated on November 24, 2003, and divorce proceedings were
instituted by Ms. Jean on January 8, 2004. The divorce judgment
was handed down on March 7, 2005. Under the partial agreement on
corollary relief and the schedule to the partial agreement signed by the
parties, the appellant obtained legal custody of the two children of the
marriage between the parties, who were 4 and 5 years old at that
time.
(g) Through a judgment
on taking the building in payment handed down by the Trois‑Rivières
district Superior Court on August 10, 2004, the creditor Caisses
populaires et caisses d’économie Desjardins became the owner of the Beaubien building.
An advance notice for the exercise of a hypothecary right was served on the
appellant and his spouse on March 29, 2004, for failure to pay a debt
of $70,354.37.
(h) Despite the judgment
of taking in payment registered on September 21, 2004, the creditor
Caisses populaires et caisses d’économie Desjardins de Trois-Rivières
authorized the appellant to continue living in the Beaubien building on a
temporary basis for $500 per month in rent.
(i) Under a deed of
purchase dated December 22, 2004, the appellant purchased the
Beaubien building for $83,000, while the basis of imposition transfer duties
was $167,300 (no signed copies of that deed of purchase were filed in
evidence).
(j) Under a deed of
release dated November 10, 2005, the Garantie des Bâtiments Résidentiels Neufs
de l’APCHQ Inc. struck from the registration of hypothecary rights, the notice
of legal hypothec resulting from a judgment dated July 13, 2005,
concerning the Beaubien building.
(k) On January 17, 2006,
the appellant sold the Beaubien building for $222,000. The new owner’s date of
occupancy was set for March 1, 2006.
[6]
In cross-examination,
Mr. Gilbert acknowledged having performed the following transactions
involving buildings:
(a) On October 26,
1995, the appellant and his spouse purchased from Gestion Del Inc. a vacant lot
(lots 196‑76 and 197‑98) located in the paroisse de la
Visitation de la Pointe‑du‑Lac for $5,000. They built a house on
it, where they moved in at the end of December 1996. That house, located at 6170 6th Avenue, Place Dubois, Pointe-du-Lac, was sold on April 22,
1997, for $76,500.
(b) On April 23, 1997,
the appellant and his spouse purchased from Gestion Del Inc. a vacant lot
(lot 199‑98) located in the paroisse de la Visitation de la
Pointe-du-Lac at the cost of $5,900. They built a house on it, where they moved
in about June 15, 1997. That house, located at 7070 7th Avenue, Place Dubois, Pointe-du-Lac, was sold on
June 16, 1998, for $80,000.
(c) On May 25, 1998, the
appellant and his spouse purchased from Gestion Del Inc. a vacant lot
(lot 196‑93) located in the paroisse de la Visitation de la Pointe‑du‑Lac
at the cost of $8,625. Constructions J.P. Gilbert Inc. built a house at 7181 7th Avenue, Place Dubois, Pointe‑du‑Lac,
which was sold to the appellant and his spouse on July 17, 1998, for
$67,979. The appellant and his spouse resold that house on
November 30, 2000, for $110,000.
(d) On December 1, 2000,
Gestion Del Inc. sold to Constructions J.P. Gilbert Inc. a lot
(lots 197‑138 and 196‑92) located in the paroisse de la
Visitation de la Pointe-du-Lac for $7,000. On December 7, 2000,
Constructions J.P. Gilbert Inc. sold to the appellant and his spouse a
model home located at 7171 7th Avenue, Place Dubois, Pointe‑du‑Lac,
for $68,496.25 (the model home had been built before the lot was purchased).
The model home was sold on May 18, 2001, for $85,000.
(e) On May 30, 2001,
9056-4998 Québec Inc. sold to the appellant and his spouse a lot
(lots 1797844 and 2401900) located at 668 Sainte‑Marguerite Drive, Pointe‑du‑Lac, for
$13,531.84. The house was built before the lot had been purchased and was
occupied starting in June 2001. Through a deed of real‑estate
hypothecary security dated May 29, 2001, the appellant and his spouse
took out a hypothec on the land with the house being built on it with the
Caisses populaires et caisses d’économie Desjardins for the amount of $119,050.34
to secure the repayment of amounts owed under two loan contracts granted
on July 16, 1998, and April 21, 1999, at the rate of 25%.
On September 23, 2002, the appellant and his spouse obtained a
$72,000 loan at a fixed rate of 15% from the Caisses populaires et caisses
d’économie Desjardins and took out a hypothec on the house to guarantee
repayment of that loan. The house was sold on May 30, 2003, for
$190,000.
(f) Following the sale
of the Beaubien building, the appellant purchased on May 15, 2006,
from 9056-4998 Québec Inc a vacant lot within the Beaubien property, located at
9663 Sainte‑Marguerite Street in Trois-Rivières (Pointe‑du‑Lac
area) for $10,000. The appellant applied for a permit to build a single-family
home in March 2006, and, having built it, put it up for sale in
June 2007 at the price of $310,000.
[7]
The Canada Revenue
Agency auditor, Stéphanie Leclerc, testified at the hearing. She stated that,
first, she had searched for the appellant's intention at the time of building
the Beaubien building. According to her, the appellant had, as a determining
reason for buying the building, at least an ulterior intention of selling it
for profit. Then, she considered other criteria, namely, the appellant's
previous activities, his operating method, the frequency and financing of his
transactions, the length of time he owned the buildings, his reported income
and his other sources of income.
[8]
The auditor noted that,
from 1998 to 2001, the appellant had operated his own construction company, namely,
Constructions J.P. Gilbert Inc., and that, on
September 22, 2003, he incorporated the company Constructions et
Habitations GB Inc. in which he held 50% of the shares.
[9]
The auditor indicated
that, from 1996 to 2006, the appellant had performed seven transactions
involving buildings, all of them in the same area, namely, Pointe‑du‑Lac.
All of the vacant lots had been sold to the appellant by the same entities,
Gestion Del Inc. and 9056-4998 Québec Inc.
[10]
The auditor also noted
that the appellant owned the houses and lived in them for a short time, that
is, from 6 to 30 months, which corresponds to the time usually needed
to finish building each house. The 25% interest rate required by the Caisses
populaires et caisses d’économie Desjardins to finance the appellant's
transactions did not correspond to the usual interest rate that someone buying
a new house long term would be willing to pay to purchase it.
[11]
The auditor also noted
that, from 1996 to 2006, the appellant had reported no business income
following the sale of the single-family homes. For 2001 and 2002, the appellant
reported only interest income of $90 and $48 respectively. For 2003, the
appellant reported an interest income of $13, an employment income of $11,025,
from his work as a car salesman at a Honda dealership. He was dismissed in
November 2003.
[12]
Finally, the auditor
explained that the cost of the Beaubien building had been determined on the
basis of the amount reported for tax refunds, which was $109,442.
Analysis and conclusion
[13]
As I indicated in Ayala
v. The Queen, 2010 TTC 206, at paragraphs 9, 10 and 11, the
following principles apply when an building is sold:
[9] . . . the Act does not have a criterion that
allows for a distinction to be made between capital gain and business income (including
income from an adventure in the nature of trade), requiring the Court to refer
to the criteria developed in the case law. However, there is no criterion to
determine with certainty whether a transaction leads to a capital gain or
business income. Each situation is a specific case to be analyzed in light of
the facts.
[10] Among the criteria developed by the case law, the
following are of note:
i. The nature of the property sold;
ii. The length of time the taxpayer
was in possession as owner of the property;
iii.
The frequency and number of operations carried out by the
taxpayer;
iv. The improvements made by the
taxpayer to the property;
v. The circumstances surrounding the
sale of the property; and
vi. The taxpayer's intention at the
time the property was acquired, as indicated by the taxpayer's actions.
[11] In addition to these criteria, Canadian courts have
developed the "secondary intention" criterion that may apply even
when the taxpayer's main intention has been established as making a long-term
investment. This criterion applies if, at the time the property was acquired,
the taxpayer had considered the possibility of selling the property for a
profit if the long-term investment project could not be achieved for whatever
reason.
[14]
In this case, the
appellant is an independent builder, who has experience in that field as well
as a business background. Between 1996 and 2006 inclusively, the appellant
built seven single‑family homes, in which he lived before selling
them. From 1998 to 2001, he had his own construction company,
Construction J.P. Gilbert Inc., and, since 2004, he has held 50% of the
shares in Constructions et Habitations GB Inc., which also builds single‑family
homes in the Pointe‑du‑Lac area.
[15]
On the basis of the
evidence, the appellant's operating method was to buy one vacant lot at a
time, build a single‑family home on it, live there for several months and
then sell it for profit. Sometimes, the appellant started building the house
before he had even officially purchased the vacant lot. The houses built by the
appellant were all located in the Pointe-du-Lac area, on the same street or on
adjacent streets. The vacant lots were all bought from the same two companies,
namely, Gestion Del Inc. before 2000 and 9056-4998 Québec Inc. after 2000.
[16]
The length of time the
appellant owned the houses varied between 6 and 24 months. The house
located at 9663 Sainte‑Marguerite Street was put up for sale 6 months before
its construction was completed. The house at 181 Beaubien Street was owned for a total of about 30 months. During
that time, the appellant had family problems and the hypothecary creditor had
to reclaim ownership of the house following the couple's separation. The
judgment for taking the house in payment was registered on September 21, 2004,
but the appellant continued to live there on a temporary basis, paying $500 per
month in rent. On
December 22, 2004, the appellant purchased the house for $83,000,
although the basis of imposition for transfer duties was $167,300. Having obtained on November 10, 2005,
a release of the legal hypothec registered by the Garantie des Bâtiments
Résidentiels Neufs de l’APCHQ, the appellant sold the house for $222,000 on
January 17, 2006. Under these circumstances, the family and legal problems that
the appellant had to overcome seem to explain the extended period between the
construction of the house and its sale.
[17]
When the land subjacent
to the Beaubien building was purchased and the house built, the appellant had
at least a secondary intention, if not primary intention, to sell it for
profit. The appellant was unable to demonstrate, in the light of the
circumstances surrounding the purchase of the Beaubien building, that he had
intended to live there in the long term.
[18]
When the Beaubien building
was purchased, a hypothec was registered to it to secure a loan of $72,000 with
a 25% interest rate. This interest rate is considered to be very high and was
no doubt required by the lending institution on the basis of the risk it was
assuming. That hypothecary security in itself is a factor tending to show that
the appellant's intention was not to make a long‑term investment. It
should be noted that the appellant used his former spouse as a nominee or prête-nom to perform certain transactions because APCHQ had taken legal
action against him for problems related to ferrous rock.
[19]
A review of the
applicable criteria leads to the conclusion that it is much more plausible that
the appellant purchased the Beaubien building to resell it for profit rather
than considering it a long-term investment. In fact, the appellant sold that
house when his legal problems resulting from his divorce and APCHQ legal action
had been resolved.
[20]
The appellant's
argument that he wanted to ensure a stable environment for his
two children is not really plausible because changing houses was part of
their lifestyle. The appellant's first child was born on
December 13, 1999, and had lived in four houses before moving to
the one at issue. In any case, since the houses built by the appellant were all
located in the same area, his children were able to see the same friends, go to
the same school and use the same sports equipment.
[21]
The other argument
presented by the appellant to the effect that he had resigned himself to
selling the Beaubien building because of the memories associated with it and
the strained relationships with his neighbours are also without merit because
the appellant built himself a new house in the same area after selling the
Beaubien building.
[22]
In conclusion, I would
like to add that the appellant should be happy that the Minister concluded that
the cost of the Beaubien building was $109,442, because, from a purely
technical and legal point of view, the cost should have been $83,000, that is,
the price that the appellant had paid when purchasing the building under the
deed of purchase dated December 22, 2004.
[23]
For these reasons, the
appeal is dismissed, with costs.
Signed at Ottawa, Canada, this
10th day of March 2011.
"Réal Favreau"
on this 9th day of May 2011
François Brunet, Revisor
Email this Content