Voykin v. The Queen, 2004 TCC 658 (Informal Procedure)

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Appeal heard on common evidence with the appeal of Millie Voykin,

(2004-2120(IT)I) on August 20, 2004

at Nelson, British Columbia

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JUDGMENT

The appeal from the reassessment made under the Income Tax Act for the 1999 taxation year is allowed, with costs, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 28h day of September, 2004.

Sheridan, J.

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Appeal heard on common evidence with the appeal of Bernard Voykin,

(2004-2119(IT)I) on August 20, 2004

at Nelson, British Columbia

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JUDGMENT

The appeal from the reassessment made under the Income Tax Act for the 1999 taxation year is allowed, with costs, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 28th day of September, 2004.

Sheridan, J.

REASONS FOR JUDGMENT

Sheridan, J.

[1]      The Appellants, Bernard and Millie Voykin, are appealing their reassessments made by the Minister of National Revenue for the 1999 taxation year. In that year, the Voykins sold their Christina Lake property which, the Minister determined, gave rise to a taxable capital gain. The issue in these appeals is whether the Christina Lake transaction was a capital disposition or an adventure in the nature of trade; if the latter, also in issue are the business expense deductions disallowed by the Minister in his assessment. Only the Voykins were called as witnesses and their appeals were heard together on common evidence.

[2]      Mr. and Mrs. Voykin live and work in Grand Forks, British Columbia. Mr. Voykin is an electrician by trade. About 30 minutes' drive from their home is a mountain resort called Christina Lake. In September 1993, having heard stories of the great profits to be made from the purchase of land for improvement and resale as vacation property, the Voykins bought a 2.5 acre lot at Christina Lake for approximately $37,000.00. The entire purchase price was paid with borrowed funds, being a portion of the proceeds of a $70,000.00 mortgage taken against their residence in Grand Forks. It being late in the year when they took possession of the property, it was not possible to begin working on the lot until the following spring, which in the mountains, meant April or May 1994. This was when the major tasks were tackled: trees had to be cleared, an access road constructed and gravel hauled in for landscaping. Some of the heavy work had to be hired out but the rest was done by the Voykins in an effort to minimize their financial outlay. Mr. Voykin spent much of his time returning to usable condition a damaged trailer that he had moved onto the lot; Mrs. Voykin applied herself to landscaping, a hobby in which she has some expertise. As both Voykins had regular employment in Grand Forks, they were able to work on the property only on weekends and holidays making progress slower than they would have liked. While working at the lot, they let it be known to neighbours and passersby that the property was for sale for $110,000.00. These word-of-mouth efforts, however, generated no offers. The following year, the Voykins listed the property with a real estate agent for approximately $95,000.00. Although most of the lot development was completed, hoping to enhance the possibility of a sale, they continued to make improvements to the property. The listing remained in effect (though at steadily decreasing prices) until sometime in 1998 when the Voykins decided to try to sell the Christina Lake lot themselves. Finally, in 1999, the property was sold for $74,000.00.

[3]      In support of the Respondent's position that this was a capital disposition, counsel referred the Court to Burnet v. Canada[1], a decision of Bowman, A.C.J. in which he cited the traditional tests for determining whether a particular transaction was an adventure in the nature of trade: The Minister of National Revenue v. Taylor[2] and Happy Valley Farms Ltd. v. The Queen[3]. According to these decisions, the Court must be guided in its consideration by the following factors:

1.      The nature of the property sold. - The property sold, the lot with improvements at Christina Lake, is equally capable of being either capital or the subject of trade.

2.      The length of period of ownership. - The Voykins held the property from 1993 to 1999, a period of time which counsel for the Respondent argued, points to the conclusion that the property was acquired for the purpose of long-term investment. In my view, however, the length of time the property was held is more indicative of the Voykins' unrealistic expectations as to how quickly they could "flip" the property for profit than any desire on their part to hold the lot to grow their investment.

3.      The frequency or number of other similar transactions by the taxpayer. - The Christina Lake transaction was the first of its kind for the Voykins and, given the difficulties it has created for them, possibly their last. In light of the findings under the other headings, I am not of the view that its unique nature makes it an investment property.

4.      The work expended on or in connection with the property realized. - The Voykins put a lot of their own labour into the property. The question is whether it was geared at enhancing their personal enjoyment of the lot or its marketability. I am satisfied on the evidence presented that their efforts were directed at resale. Entered as evidence and further described in their testimony were photographs of the Voykins' residence in Grand Forks, a property they also developed themselves. In their careful attention to the design and decor of the home, as well as the park-like landscaping is shown the sort of results the Voykins produce when their goal is to suit their personal tastes and needs. In stark contrast is the Christina Lake property: a clearing with a small, refitted trailer unsuitable to house the Voykins and their three teenaged children with an outhouse and no electrical or water services. Some efforts were made to make the property appealing to a buyer, but not enough to suit their personal use. Roughing it, they testified was not their idea of a holiday: throughout this period, they had not only their own very pleasant residence in Grand Forks, but also a camper trailer which permitted them to travel to more welcoming sites than the vacant lot, as well as access to Mr. Voykin's brother's lakefront cottage at Christina Lake. None of this leads to the conclusion that they bought the lot for their personal use. On the other hand, if they bought the lot intending, not to use it themselves, but to hold it as an investment while its value increased, why would they have made any improvements on it at all? I am satisfied that their efforts were aimed at bringing about a quick sale by providing access to, and showcasing the potential of the site for future development by the new owner.

5.      The circumstances that were responsible for the sale of the property.- At the time the Voykins purchased the lot, they were feeling the pressure of financial problems. Unable to see a way out of the crisis using only their employment incomes, they began looking around for other ways to make, as they frequently referred to it in their testimony, "a quick buck". It was with this in mind that they decided to try their hand at land development and sale. With no savings to invest in this venture, they had to borrow the entire purchase price by mortgaging their residence. Mrs. Voykin's evidence was that they could not afford to make the mortgage payments indefinitely on a second property - their sole purpose in acquiring the lot had been as a solution to their financial problems through its quick and profitable resale. Though it turned out to be much less quick and much less profitable than the inexperienced Voykins had anticipated, this does not render less credible their stated reasons for selling the lot.

6.      The motive or intention of the taxpayer at the time of acquiring the asset. -In addition to the taxpayer's direct evidence of his intentions when he acquired the property, the Court may also draw inferences from the surrounding circumstances[4] including, as stated in Happy Valley, the taxpayer's "whole course of conduct while in possession of the asset"[5]. Much of what I have said above is equally applicable under this heading and it is not my intention to restate it. The Voykins' direct evidence is that they always intended to sell the Christina Lake lot: they had no reason to keep it as a vacation property for their own use; they were without the financial means to hold it as a long-term investment. Although it took them over five years to sell the property, I am satisfied that throughout this period their every effort was directed at enhancing the property and searching for a buyer. Accordingly, I find that the Christina Lake transaction was "an adventure in the nature of trade" which gave rise to business income in 1999.

[4]      The next question is what expenses, if any may be deducted from the business income. The taxpayer has an obligation under the Income Tax Act to keep accurate records by which he can substantiate the information provided in his annual return. In this regard, the Voykins were not as diligent as they ought to have been with the result that the amounts claimed for automobile and travel, materials, supplies and telephone must be disallowed. In addition to the amounts allowed by the Minister for trailer improvements ($2,125.00); cat, backhoe, logger ($545.70); outhouse materials ($1,100.00), deductions should be allowed for property taxes ($2,541.97); insurance ($420.00); and mortgage interest calculated in accordance with the ratio of the amount of total mortgage proceeds allocated to the purchase price over the total mortgage proceeds.

[5]      The appeals are allowed, with costs, and referred back to the Minister for reconsideration and reassessment in accordance with these Reasons for Judgment.

Signed at Ottawa, Canada, this 28th day of September, 2004.

Sheridan, J.