|
Citation: 2003TCC20
|
|
Date: 20030205
|
|
Dockets: 2001-2008(GST)G
2001-1718(IT)G
|
|
BETWEEN:
|
|
ROBERT FREER,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
Margeson,
J.T.C.C.
[1] This is an appeal
from a reassessment of the Minister of National Revenue
("Minister"), notice of which was dated June 30, 1999,
with respect to the income tax liability of the Appellant for the
1995 and 1996 taxation years by which the Minister increased the
income tax liability by including in the Appellant's income
the amounts of $17,098 and $17,781 respectively, in respect to
the sale of single family homes on the properties located at 129
Teviot Place and 17 Parkside Drive.
[2] The
Minister's position was that the possibility of resale at a
profit was a motivating factor in the acquisition and
construction of the properties and therefore the Appellant's
profit from the sales were income from a business or
property.
[3] Further, the
Minister reassessed the Appellant under Part IX of the Excise
Tax Act for the period from January 1, 1994 to December 31,
1996, by Notice of Reassessment numbered 01CB0304724 dated
November 29, 1999 with respect to the same two properties for
goods and services tax ("GST") and for penalties and
interest relating thereto for the period from January 1, 1994 to
December 31, 1996 by making the following adjustments:
Increase in GST/HST
collectible
$ 18,200.00
Increase in Input Tax
Credits
($ 10,895.11)
Penalties
$ 1,607.39
Interest
$ 1,137.63
TOTAL
$ 10,049.91
[4] However, in the
Reply to the Notice of Appeal ("Reply") with respect to
the GST assessment, the Minister acknowledged that he had erred
by reassessing the Appellant's net tax liability with respect
to the single unit residential complex located at 129 Teviot
Place in 1995 and should have reassessed the Appellant in 1994
when the Appellant occupied the single unit residential
complex.
[5] Counsel for the
Respondent agreed that the appeal would have to be allowed with
respect to this property and the Minister's assessment
thereto would have to be vacated.
[6] In essence, at
the conclusion of the trial, both parties agreed that the
remaining issues were as follows:
- 1) With respect to
129 Teviot Place, was the gain, if any, realized on the
sale of this property on account of income or was it exempt as
having been realized on the sale of the principal residence
property?
- 2) With respect to
17 Parkside Drive, was the gain, if any, realized on the sale
of this property on account of income or was it exempt as
having resulted from the sale of the principal residence
property?
- 3) Was the
Appellant liable for GST assessed in respect of this property
in the amount of $9,100?
- 4) Was the
Appellant a "builder" of the properties as defined in
the Income Tax Act, ("Act") for the
period under appeal?
- 5) Was the
Appellant properly reassessed additional income tax credits of
$10,895.11?
- 6) Was the
Appellant responsible for the penalties and interest as
assessed?
Evidence
[7] Patricia
O'Halloran was the common law wife of the Appellant and she
was familiar with the factual situation surrounding the purchase
of the properties, the construction of the residential units and
the sale of each of the properties located at 112 Coldstream
Drive; 167 Teviot Place; 129 Teviot Place; 17 Parkside Drive
and 148 Teviot Place. She testified that with respect to
each of these units, they never had any intention of reselling
the properties. These properties were all constructed for the
purposes of living in them as their home.
[8] In each case all
of their belongings were unpacked, they had parties with friends
and relatives, they never listed the properties for sale, they
made additions to the properties for their own personal reasons
and took some of these improvements with them when the properties
were sold. The only reasons the properties were sold was because
real estate agents were imploring them to list the properties for
sale; they were told that other parties were interested in buying
the properties; problems developed with the children next door,
some properties became unsuitable for their use after she became
pregnant; problems developed in the neighborhood with respect to
traffic; the Appellant's job situation became tentative and
they thought they were going to have to move; they discovered a
strong odor from a non-operative fox farm in the area which
caused them considerable concern and traffic increased in the
area and the street became a through street. They decided to stay
in the area because they had established close friendships there,
it was a good neighborhood and close to schools. It was also
close to the highway, which benefited this witness. It was
convenient. They were comfortable in these houses. The properties
were sold due to changes in their circumstances.
[9] In
cross-examination she maintained the same position and her
evidence was not seriously challenged.
[10] Robert Freer testified
generally to the same effect as the previous witness. They
originally wanted a house of their own so they bought the land
and built at 112 Coldstream Drive. As with the previous
witness he said that they had no intention to sell this property
and had no intention to sell the subsequent properties when they
were constructed. He confirmed that they entertained friends and
family at these properties and enjoyed partying in the
neighborhood. Everything was unpacked. The only reason they sold
was because they were approached by real estate agents to do so
and they left pamphlets at their property. At first these
advances were ignored but ultimately they decided to sell. He
confirmed that with respect to 167 Teviot Place there was a
problem with the electric heat and it was very expensive. Costs
were going up and he found that the property was not economical.
As with the previous witness, he said that the children next door
also caused some problem, so this property was sold.
[11] Again, at
129 Teviot Place they did the landscaping, installed clothes
lines, painted the exterior, put on a special door lamp,
installed shrubs and a vegetable garden and had the front door
personalized with a door knocker, which had to be replaced when
they moved. This was quite a problem. The move from this property
was prompted by the fact that his common-law wife was
pregnant and since the house was an open concept it was not
suitable for raising children. They wanted to have everything on
one level. He confirmed that they had no intention to sell when
they built the property and they thought they were settling in
for a long time.
[12] They took out a
mortgage for three or four years and knew that there was a
penalty on the mortgage if they paid it out. He confirmed the
problem with the traffic when some of the subdivisions opened up
and a shortcut developed to the subdivision and speeding became a
problem. Again, a real estate agent came to see him after hearing
of his wife's pregnancy and asked him to list it. They
consulted with each other about it and it was subsequently
sold.
[13] With respect to 17
Parkside Drive, he put shutters on it, he landscaped, did the
baby's room by personalizing it with wallpaper to match the
bed and the crib. They did not intend to sell this property. It
was in a private area and they wanted to stay there. They
believed that that was it. This property was sold because he was
about to be laid off and they could not afford it. He also said
that there was a stench in the backyard, which whey discovered
once the weather warmed up. The property was only sold after real
estate people approached them. Later the strike was resolved and
their circumstances changed.
[14] He had a contractor
build the property at 148 Teviot Place and he hired the
subcontractors. He sold this because he was transferred to
Halifax in a different department. He was not completely sure
about the profit on the properties but he said that he made no
money on 112 Coldstream Drive; he made $5,000 to $10,000 on 167
Teviot Place and with respect to 129 Teviot Place and
17 Parkside Drive he was not intending to make a profit. He
just wanted to get his money back.
[15] He remembered
receiving a telephone call from an officer at Canada Customs and
Revenue Agency ("CCRA") and being asked questions about
the houses. He believed that it was a prank. At the time he had
had several drinks and he did not know what it was all about. He
was asked if he was selling houses to make a profit and he was
quite upset and might have been quite curt to the
interviewer.
[16] With respect to 112
Coldstream Drive, he could not remember whether he made a profit
on it but then said that perhaps he made $1,000 or $2,000 on it.
Again he sold it because real estate people approached him and
the house was not suitable for their purposes. He was nervous
about selling but he did so. Not only did he not have any
intention of selling these properties but he had no intention of
making profits from them when they were built.
[17] The house at
167 Teviot Place was sold privately. It only took one month
to sell. At this time the subdivision was still developing. They
had not seen any future plans for the subdivision except the area
where the lots were for sale. He did not think about making a
profit in the future and he was not in the business of making a
profit. It never crossed his mind.
[18] When he bought the lot
at 129 Teviot Place, there was a tree barrier there and it
continued. He knew that sometime the street would be connected
but he did not know when. Again, real estate agents approached
him on several occasions to sell. He did make a profit when he
sold this property.
[19] He was prepared to
admit that there was always a possibility of making a profit but
this was not a motivating factor in selling his properties. The
work situation changed quite suddenly and he found his situation
to be quite uncertain. There had been the possibility of lay-off
for some time. When the tree barrier was removed on Teviot Place,
the street became a short cut.
[20] He was one of the
first buyers on Parkside Drive but he never intended to sell it.
He lived there for about seven and a half months. He selected the
design and retained the sub-trades. Again, he was
approached by real estate agents to sell. He confirmed what the
previous witness had said with respect to the changes in their
life that occurred when the first child was expected and the
house became unsuitable for the purposes of raising a child. In
the beginning they did not consider having children and he said,
"we never gave it a thought. We were just living for the day
at that time and had not factored kids into the equation. We were
both professionals".
[21] All of the properties
in question were mortgaged with the Bank of Montreal. All had
similar terms but the rate was different. All mortgages had
penalties as one of their terms and all were paid out before they
matured. He did not have all of the receipts with respect to some
of the deductions that he was claiming and he had paid cash with
respect to some trades but he continued dealing with them because
they were good contractors and they were available. He did not
keep receipts in some cases because of the cash deal that was
involved. These contractors did the work more cheaply. They did
not discuss the GST issue in coming up with the final price.
[22] The auditor disallowed
some of the expenses due to the fact that he had no receipts. He
had one or two discussions with Wenda Taylor. He did not recall
discussing GST rebates or mortgages. He only remembered the
telephone conversation, which took place at 8:00 or 9:00 p.m. He
had had a couple of drinks. She identified herself and was
talking about the properties. He was angry. He did not know if it
was a hoax or not and did not expect to get a call from CCRA at
that time of night.
[23] He believed that he
called her at work afterwards. He then received a letter. He did
not remember what he talked about but he believed he was at work.
There was never a "for sale" sign on the property at
112 Coldstream Drive but the real estate had approached him about
it. There was no real estate agent involved at 167 Teviot Place
as this was a private sale. Even though he made a profit of
$5,000 to $7,000 he did not believe there would be a profit if
they had had a real estate agent involved, as they would have
sought a commission.
[24] George Freer was an
industrial mechanic and was the father of the Appellant. He
confirmed that he had made a civic sign as a special project for
the property at 129 Teviot Place and a lamppost. This was unique
and special. It involved a number of hours of work by him. He
installed both on the property. They never even thought of the
Appellant selling the property. These articles were very
special.
[25] With respect to 17
Parkside Drive he made a unique civic number sign for that
property. He designed it himself and it contained an old fashion
scroll. He considered this to be something special. He would not
have put this labour into the project if he had thought that they
were going to move. He confirmed that there was an odor in the
air with respect to this property and that it was "pretty
bad inside and out". He was told about the source from his
son and his wife.
[26] The Respondent called
Wenda Taylor who was an auditor with CCRA. She audited businesses
and did other assignments given to her by her supervisor such as
the one in this case. She called the Appellant in December of
1997. She talked to him from her hotel room in Truro,
Nova Scotia. She was attempting to determine whether
proceeds from the sale of these properties were on account of
income. She referred to her notes found in Exhibit R-1 at
Tab 9. She also sent the letter at Tab 10 to the
Appellant. She explained how she had decided to disallow certain
of the expenses claimed. She had concluded that the sale of the
properties was on account of income.
[27] There was a shortage
of receipts with respect to some of the claimed items but she
allowed some further expenses, which seemed to be reasonable. She
gave the Appellant an extra 30 days to supply additional receipts
before she made her decision. She also reviewed the additional
receipts found in Exhibit R-3. She was questioned about her notes
and she said that she made them after her return to Truro. She
took into account the telephone calls that she made to the
Appellant. When she sent her report at Tab 12,
Exhibit R-1, she had concluded that the proceeds of the
sales were on account of income.
[28] In cross-examination
she admitted that she had never met with the Appellant in person
but spoke to him only on the telephone. She visited the area
where the properties were located in Truro and visited the houses
except the 112 Coldstream Drive property. Her reports are
based upon two telephone calls that she made. The Appellant
answered her questions and they had a discussion. She did not
believe that she would have suggested to the Appellant that his
intention was to build and sell houses until they had the house
that they wanted with as small a mortgage as possible. This was
contained in her report and attributed to the Appellant.
[29] This witness was
examined and cross-examined with respect to this matter and
she did not think that she would have suggested this to the
Appellant but she could not say if she did or did not. She
admitted that the words that she used in her report were not in
her notes. The terms of the mortgage would have been one of the
factors that she considered in making her decision.
[30] She never attempted to
consider the effect of the self-supply rules on whether or not
the Appellant was entitled to a credit. She was referred to the
figure of $220 that she had allowed as a plumbing expense and she
agreed that this was not reasonable for plumbing but she did not
allow any other amount because the amounts claimed were not
supported by receipts. When concluding whether or not proceeds of
sale are on account of income, one should consider how many sales
there were, the type of occupation, the intention of the
taxpayer, how long they lived in the property and the reasons for
moving. She sent a letter
setting out what factors would be considered.
She did not know whether the birth of a child would be a
sufficient reason for a person to move. However, the loss of a
job should be considered.
[31] In re-direct she
admitted that she did not have Exhibit A-19, as disclosed in her
statement dated November 16, 1994, in her possession for audit
purposes. This had not been provided. She did not have Exhibit
A-5 as this was not provided. Other items that she disallowed in
Exhibit R-2 at Tab 1, Schedule II might have been because she did
not know what they were for.
Argument on behalf of the
Appellant
[32] Counsel took the
position that in the case of each of the properties in issue, the
lots were purchased and the Appellant constructed the houses upon
them for the sole purpose of using them as his principal
residence. It was his position, in general, that the Appellant
moved from one place to the other as a result of new intervening
circumstances, which resulted in the existing properties, which
were occupied as principal residences, to be unsuitable. There
were a number of incidents, which happened in this regard which
made it not only practical but reasonable for the Appellant and
his wife to seek new accommodation. However, the fact remains
that at no time did they ever have the intention of selling the
properties either as a primary intention or a secondary intention
at the time the properties were constructed.
[33] He referred to the
case of Happy Valley Farms Ltd. v. M.N.R., 1986
CarswellNat 375, [1986] 2 C.T.C. 259, 86 DTC 6421, in respect to
the tests that one should consider in making this determination,
such as: (1) the nature of the properties sold; (2) the length of
the period of ownership; (3) the frequency or number of other
similar transactions by the taxpayer; (4) the work expended on or
in connection with the property realized; (5) the circumstances
that were responsible for the sale of the property; and (6)
motive. He went through what he considered to be the relevant
portions of the evidence and said that at the end of the day the
Appellant had reasonable explanations as to why the properties
were sold. When one considers these six factors in relation to
the evidence, one must conclude that at no time did the Appellant
ever have the sale of the properties for a profit as a primary or
secondary condition when he purchased the lots and built the
houses upon these lots.
[34] Some of the factors he
referred to included special decor instituted in the baby's
room at 17 Parkside Drive; the personalized door knocker; the
painting that they did and the decorating which was done to suit
them. The reason they sold 129 Teviot Place was because they had
had a child, which was unexpected, and this property was not
suitable for raising a child, as they did not consider it was
safe for such purposes.
[35] Further, with respect
to 17 Parkside Drive, the Appellant was concerned about his
job and his wife was on maternity leave. She was collecting
employment insurance. He was also on employment insurance and was
not eligible at that time to keep his position by forcing someone
else out. He received temporary work during this period and would
not have known the outcome of the strike, which was pending.
Further, with respect to the question of motive regarding
129 Teviot Place one only need look at the statement of
disclosure. The term of the mortgage was four years and seven
months. Why would he pick such a long term for the mortgage if he
intended to sell it?
[36] The evidence indicates
that the Appellant could have had limited or open pre-payment
privileges. He chose a limited pre-payment privilege. He
indicated that he had been subject to penalties before. Why would
he pick this type of arrangement if he intended to sell?
[37] Again, with respect to
17 Parkside Drive, the term was three years and ten months and
again he had the limited pre-payment privileges. Why would he
make curtains to suit the household and take them with him if
they had originally intended to sell the property? Why would they
drill holes in the front door and install a personalized
doorknocker? Why would they decorate the baby's room with
personalized bed sheets and wallpaper?
[38] He argued that the
evidence indicated that by the time this property was sold the
mortgage had only been reduced by a small amount. Therefore, it
would have been difficult for them to make money. Consequently,
they could not have had the intention of selling when they
instituted the mortgage. Further, both properties were of the
same value and a sale would not increase their wealth by any
amount.
[39] With respect to the
alleged statement made to the auditors regarding the matter of
intention, counsel argued that very little weight should be given
to this. This information was received as a result of a Monday
night telephone call according to the Appellant at 9:30 in the
evening. He had been drinking. The statement that he made went
only to his intention to have as low a mortgage as possible and
how could he be faulted for this?
[40] As indicated by
Bowman, J.T.C.C. in Diceccav. R., 1993 CarswellNat
1225, [1994] 1 C.T.C. 2087, the Court should consider all of
these circumstances in making its decision. In the case at bar
the Appellant and his wife picked all of their own belongings to
put in to the houses, many items were personalized and they did
extensive work for their own purposes. The other events, which
occurred causing them to decide to move, were beyond their
control. The evidence shows clearly that there was no primary or
secondary intention to sell when the properties were built.
[41] In the alternative,
counsel disagreed with the amounts that were indicated as the
amount by which the proceeds exceeded the cost of each house. He
submitted that additional expenses were incurred that were
disallowed by CCRA and in particular the GST assessed against the
Appellant as a result of the application of the self-supply rules
under the Excise Tax Act should also be deductible in
determining the gain made on the sale of each property. The
penalties imposed under the Excise Tax Act would be
deductible based upon the decision of the Supreme Court of Canada
in the case of 65302 British Columbia Ltd. v. R., [2000] 1
C.T.C. 57, 248 N.R. 216, [1999] 3 S.C.R. 804.
[42] With respect to the
appeal under the Excise Tax Act, he disagreed with the
amounts calculated as the input tax credits available to the
Appellant and calculated that the net tax payable with respect to
17 Parkside Drive, should be $1,485.
[43] Further, he argued
that the Appellant was not the "builder" of the house
at 17 Parkside Drive and subsection 191(1) of the Excise Tax
Act does not apply to the Appellant in respect to this
property because it only applies if the Appellant is a builder as
defined in section 123 of the Excise Tax Act.
[44] The house was built by
the Appellant to be used and occupied as a principal residence
for himself and his family and not for the purpose of resale.
Therefore, the houses were not built in the course of a business
or a venture or concern in the nature of trade.
[45] If the Appellant was
the builder then the provisions of subsection 191(5) of the
Excise Tax Act would be applicable to the Appellant and
since the Appellant used this house primarily as a place of
residence for himself and his family, it was not used for any
other purpose and since the Appellant did not claim an input tax
credit in respect of the construction of other houses, the
provisions of subsection 191(1) do not apply to the
Appellant.
[46] In the alternative, if
the Appellant was the builder of this residence and the
provisions of subsection 191(5) of the Excise Tax Act are
not applicable then the net tax payable should be the amount as
stated above.
Argument on behalf of the
Respondent
[47] Counsel for the
Respondent also took some solace in the decision in Happy
Valley Farms Ltd., supra. He said that the Court has to
consider the nature of the properties sold. Between 1991 and 1997
five different houses were sold. The Appellant had a primary
intention to sell. He was engaged in an adventure in the nature
of trade. Look at the length of time that the Appellant lived in
the properties in question. All of these were for a short period
of time.
[48] The argument that the
nature of work that the Appellant put into the various properties
indicates that he did not have a primary or secondary intention
to sell should not be accepted. These factors were not
significant. The fact is that a new buyer might not have any
problem at all with the type of paint or wallpaper that was
already found in the residence. Such changes might very well have
enhanced the possibility of resale. These are things that one
does when one goes into a property, whether you intend to sell it
or not. This does not indicate that you do not have the secondary
intention of selling.
[49] The evidence disclosed
that the Appellant said that he had no intention of selling the
first property. He was there for life. There were no problems
with it except that he needed a new bathroom. Why could he not
have put in the bathroom even if it were in the basement? It
could have been done even though it may have been more
difficult.
[50] With respect to 167
Teviot Place he made a profit of $6,000 to $7,000. By this time
he had knowledge of the subdivision and the market. The
subdivision was developing fast. He knew that the tree barrier
was removed. He had a motive for selling as in Happy Valley
Farms Ltd., supra. The Appellant had no problem in selling
the properties. He knew that if he lived in them for a period of
time that he could sell them. Houses were moving in the area.
Real estate agents were knocking on his door. There was no way
that he could say that he did not have a secondary intention to
sell if the opportunity arose.
[51] The Court must look at
all the facts. When it does, then the Court must conclude that
there was a secondary intention to sell.
[52] When the Appellant was
asked about the matter of profit, he seemed to waiver in
answering these questions. He sold one of the properties on his
own. This was after he owned it for a short period of time. That
indicates how well houses were moving.
[53] The matter of the
first child was not significant. They must have considered that
they would have children if they were going to stay there for the
rest of their lives. These were not houses which were already
constructed. They could have made changes.
[54] With respect to the
effect of the strike or the labour problems of the Appellant, as
far back as November of 1995, the Appellant was aware of some of
these problems and the possibility of lay-off or strike. As far
back as the early 90s there was a possibility of a strike or
lay-off. What better could they do than to build in the same area
where there was a good chance to sell? The Appellant knew this
during that period of time.
[55] There was no more than
a kilometer distance between any of the houses. The Appellant
continued to build new homes. He did not buy an existing one. Why
would he go through all of the problems of construction if he did
not think that one day, at the end of the road, it would pay off?
This is evidence of secondary intention.
[56] With respect to the
long terms on the mortgages and the matter of penalties thereon,
the Appellant had penalties for all houses. He was aware of them
and this fact did not discourage him from building new houses or
taking out new mortgages with these terms. The fact that the
mortgage terms were open or limited with respect to repayment
does not get you any farther.
[57] The Appellant did not
know when he might lose his job. These are factors that must be
considered. After the Appellant sold the first house he got the
itch to sell others realizing that he might make a profit from
them. The Happy Valley Farms Ltd. case, supra, sets
us in the right direction even though most of the cases are fact
specific.
[58] He rejected the
alternative argument of the Appellant under
subsection 191(5) of the Excise Tax Act. He concluded
that he was a builder and therefore the exception did not apply.
He did not intend to have the house as a personal residence but
he intended to sell it. Further, the alternate expenses claimed
by the Appellant should not be allowed. If the amount of $9,100
were not expended for the purpose of gaining or producing income
it could not be deducted. The Appellant is deemed to have sold
the property to himself and was deemed to have collected the tax
under section 91 of the Excise Tax Act.
[59] With respect to the
deduction of the penalties this argument is rejected. The case of
65302 British Columbia Ltd., supra, is not applicable to
the facts in this case. That case provides that penalties may be
deducted but that case is different than the case at bar because
there penalties were imposed because of over-production and
the taxpayers made a business decision to over-produce in
order to keep their customers.
[60] In the end, the appeal
should be allowed with respect to 129 Teviot Place in 1995 in
accordance with paragraph 11 of the Reply. Otherwise, the appeal
should be dismissed and the Minister's assessment should be
reconfirmed.
[61] Counsel was prepared
to agree that if the Court should find that the Appellant had
neither a primary or secondary motive to sell the properties when
they were built, then that is the end of the case and the appeal
will have to be allowed and the Minister's assessment
vacated. However, if the Court should find that the Appellant had
a primary or secondary intention to sell the properties then the
Court must consider the argument of the Appellant with respect to
second and third alternatives. In that regard, these arguments
should not be accepted and the appeal should be otherwise
dismissed.
[62] In rebuttal, counsel
for the Appellant said that if he were to make the changes in the
basement to have a bathroom as counsel for the Respondent
suggested, they would have to jack hammer the basement. Further,
with respect to the profit at 167 Teviot Place, it was only
$7,000 and if a real estate agent had been involved there would
have been no profit.
[63] The Appellant was not
always in danger of losing his job. The matter of the pregnancy
was a very important and unexpected occurrence. Why did they stay
in the area? Their friends were there. With respect to subsection
191(5) of the Excise Tax Act, this only applies if you are
a builder and the Appellant was not.
[64] With respect to the
$9,100 that the Appellant claimed as a reduction, this was not
received as income under the self-supply rules because this was
imposed upon the Appellant. He was out of pocket that amount.
Analysis and Decision
[65] As argued by both
counsel the Court is satisfied that the issues in this case are
two-fold. One, did the Appellant, at the moment of the purchase
of these properties, have in mind the possibility of reselling,
as an operating motivation for their purchase? Two, if this
operating motivation existed at the time of purchase, were the
properties sold at a profit and what was the proper calculation
of that profit? Those questions are relevant with respect to both
properties regarding the income tax matter but apply in relation
to 17 Parkside Drive only with respect to the assessment under
the Excise Tax Act. In that event, the Court would have to
determine whether or not the Appellant was properly reassessed
additional GST/HST with respect to 17 Parkside Drive only.
[66] Both parties have
referred to the case of Happy Valley Farms Ltd., supra,
which is a leading case on the fundamental question before this
Court. There, at page 5 the learned trial judge set forward six
tests, which the Court should consider in answering the
appropriate question. They were: (1) the nature of the property
sold; (2) the length of the period of ownership; (3) the
frequency or number of other similar transactions by the
taxpayer; (4) the work expended on or in connection with the
property realized; (5) the circumstances that were responsible
for the sale of the property; and (6) motive.
[67] In that case the
question of motive or intention was considered to have been the
factor most developed. As stated at page 6, test 6,
'motive':
The motive of the taxpayer is
never irrelevant in any of these cases. The intention at the time
of acquiring an asset as inferred from surrounding circumstances
and direct evidence is one of the most important elements in
determining whether a gain is of a capital or income nature.
While all of the above factors
have been considered by the courts, it is the last one, the
question of motive or intention which has been most developed.
That, in addition to consideration of the taxpayer's whole
course of conduct while in possession of the asset, is what in
the end generally influences the finding of the court.
This test has been carried one
step further by Canadian courts into what has generally been
referred to as the "secondary intention" test. This has
meant, in some cases, that even where it could be established
that a taxpayer's main intention was investment, a gain on
the sale of the asset would be held taxable as income if
the court believed that, at the time of acquisition, the taxpayer
had in mind the possibility of selling the asset if his
investment project did not, for whatever reason, materialize.
[68] Of equal significance
is a statement of Noël, J. in Racine, Demers and Nolin v.
M.N.R., [1965] CTC 150, 65 DTC 5098 (Ex. Ct.), where he
said:
. . . . .
...the fact alone that a person buying a
property with the aim of using it as capital could be induced to
resell it if a sufficiently high price were offered to him, is
not sufficient to change an acquisition of capital into an
adventure in the nature of trade. In fact, this is not what must
be understood by a "secondary intent" if one wants to
utilize this term.
To give to a transaction which involves the
acquisition of capital the double character of also being at the
same time an adventure in the nature of trade, the purchaser must
have in his mind, at the moment of the purchase, the possibility
of reselling as an operating motivation for the acquisition; that
is to say that he must have had in mind that upon a certain type
of circumstances arising he had hopes of being able to resell it
at a profit instead of using the thing purchased for purposes of
capital. Generally speaking, a decision that such a motivation
exists will have to be based on inferences flowing from
circumstances surrounding the transaction rather than on direct
evidence of what the purchaser had in mind.
[69] These quotations could
never have more applicability than in the present case. The
difficulty is always in determining what the intention of the
purchaser was at the time he gained the property. This Court had
to deal with a situation quite similar to that found in the case
at bar in Doodyv. R., 2000 DTC 2086, where this
Court also considered Happy Valley Farms Ltd., supra, and
other cases on the issue. The Doody case did present a
somewhat different factual situation than that found in the case
at bar because there, both the taxpayer and his wife were
realtors in the years 1993, 1994 and 1995. The Appellant became a
realtor in 1992 and his wife was involved in real estate between
1989 and 1999.
[70] Further, the Court
looked upon the evidence of the Appellant with great skepticism
and found that the evidence of the wife was of very little use,
since she merely accepted the bulk of what her husband had to say
in spite of the fact that the husband's evidence given at the
time of discovery was inconsistent with much of the evidence he
gave in Court. The Court also found that some of her evidence was
inconsistent with the evidence that she gave in discovery.
[71] As the Court found in
that case, the statement of the parties alone as to their avowed
intention at the time of purchase of the properties is at best
tenuous without further corroboration. In the case at bar the
question of credibility loons large. This Court does not place
the Appellant and his wife in the same category as the Appellant
and his wife in Doody as they had a history of dealing
with properties of that nature, had made many transactions over a
relatively short period of time, had a special knowledge and
interest in the real estate market and would be expected to know
when and where a profit might be made.
[72] This Court is
satisfied that these conditions do not apply to the Appellant and
his wife here and it agrees with the statement by counsel for the
Respondent that even though Happy Valley Farms Ltd. points
us in the right direction, each case is "fact specific"
and the decision in the end must be made on the basis of those
facts.
[73] The Court must first
deal with the question of credibility of the Appellant and his
common-law spouse. The Court finds that the evidence of the
common-law spouse was very credible and that her evidence
can be accepted. At no time during her testimony was there ever
any issue raised, which she could not answer. She was quite
straightforward in what she said. She appeared to have had a good
memory of most events and was able to cite with specificity,
various reasons why properties were purchased and why they were
sold. The reasons that she gave for the conduct of herself and
her common-law husband were neither unreasonable nor did they
appear in any way to be concocted. The Court finds no
discrepancies in her evidence, which would cause it to have any
serious question about her veracity. She answered the questions
asked of her with ease, with frankness and completely.
[74] When the Appellant
testified, at first blush his evidence was straightforward,
apparently complete and the answers he gave appeared to be in
complete response to the questions asked, although he was
somewhat more nervous than his spouse. Where there was any
question of wavering, or hesitancy in the giving of his evidence,
the Court puts that down to his nervousness.
[75] This witness, as well,
gave cogent, compelling and reasonable explanations as to why the
various properties were purchased and why they were sold at the
end of the day. However, before this witnesses' testimony
ended, he was asked some pertinent questions with respect to his
dealings with some of the contractors that he retained in order
to complete the work on the houses that he built. These answers
were not forthright, complete and at the end of the day were
somewhat misleading and tended to take away from the credibility
that he exhibited in his earlier testimony.
[76] However, when
cautioned by the Court with respect to the requirement to be
completely forthright, open and clear with respect to his
evidence he appeared to understand this admonition and went on to
give evidence about the nature of the transactions with the
contractors that he had not given before and his evidence after
that point appeared to be forthright.
[77] If the Court had only
to consider the evidence of these two witnesses it would have
been an easy job to conclude what the intention of the Appellant
was at the time that he purchased the properties in question.
However, the evidence of Wenda Taylor, in some respects, tended
to bring into question the evidence of the Appellant. If the
Court had accepted as factual, some of the statements that were
found in her report, then the Appellant would have had
considerable difficulty in meeting the burden upon him in this
case. But, the Court is satisfied that her report, to a
considerable extent, was composed of conclusions that she had
come to rather than a recitation of statements that the Appellant
had made to her when she was interviewing him on the telephone.
Some of these conclusions, if supported by the evidence, would
have been most damaging to the Appellant's position and
indeed completely contrary to the Appellant's avowed
intention when he purchased and sold the properties in
question.
[78] The Court is not
satisfied that these conclusions were based upon statements made
by the Appellant because of the manner in which this witness
interviewed the Appellant. There can be no doubt that the
interview was conducted on the telephone, it may very well have
been at an odd hour as far as the Appellant was concerned; the
Appellant may very well have been drinking at the time and may
not have been well aware of what was being asked of him and the
importance of it.
[79] Further, the
interviewer did not write down exactly what was said. She made no
notes of exactly what was said, she did not have a question and
answer type of format for conducting the interview and it was not
done in person. Again, whatever statements were allegedly made
were not reduced to writing and there can be no doubt from the
evidence of this witness that she could not say for sure if some
of the statements, which she might have originally attributed to
the Appellant were actually made by him.
[80] At the end of the day,
the Court does not accept the statement in the report (attributed
to the Appellant), which concluded that his intention was to
build and sell houses until they had the house that they wanted
with as small a mortgage as possible. This was the conclusion
that was reached by the interviewer after considering all of the
information that she had but this Court cannot conclude that this
was a statement made by the Appellant.
[81] Further, some of the
statements that she made in the report are corroborative of the
evidence given by the Appellant and his common-law spouse.
Other alleged statements were not put to the Appellant when he
was on the stand and he was not given the opportunity to rebut
them. If they were going to be used to contest the credibility of
the Appellant that he had no intention of selling these houses
when he built them, then this should have been put to him when he
was on the stand.
[82] At the end of the day,
the Court is satisfied that the evidence of Wanda Taylor
does not destroy the evidence of the Appellant with respect to
the matter of his motive or intention.
[83] It is true that the
length of ownership of some of these properties by the Appellant
was not over a long period of time. The shortest period of time
was seven and a half months and the longest period of time was
two years and two months. There were five different properties.
In light of the explanations given by the Appellant and his
spouse, the Court is satisfied that the length of the period of
ownership does not mitigate against a conclusion favorable to the
Appellant.
[84] On the factor of the
nature of the properties sold, the Court is satisfied that the
Appellant obtained considerable enjoyment in the ownership of the
properties in question by virtue of the ownership thereof and
they were more likely to have been acquired for the purposes of
personal use rather than for sale. The various properties that
the Appellant purchased and sold were not of the same sort. They
were all different and the evidence indicated that there were a
considerable number of personal factors instituted in the
construction of the properties, which may not have been there had
the Appellant intended from the outset to sell them.
Consequently, the frequency or number of other similar
transactions by the taxpayer does not take away anything from the
Appellant's avowed intention as he indicated in his
evidence.
[85] Likewise, the work and
effort expended by the taxpayer was an attempt to make the
properties suitable for their own uses rather than bringing them
into a more marketable condition during their ownership. This
would tend to militate against a finding that they intended to
sell them.
[86] The evidence that the
Court believes indicates that circumstances brought about the
sales of the properties and they were not of the Appellant's
own making. These were circumstances beyond his control and did
not exist at the time that the houses were built and the
properties purchased.
[87] Consequently, on the
question of motive, the avowed intention of the taxpayer at the
time of acquiring the asset, as inferred from the surrounding
circumstances and direct evidence, allows the Court to conclude
that the gains in question, were not on account of income. All of
these properties were purchased with the intention of living in
them as principal residence properties and they were not acquired
for the purpose of resale. Therefore, any gain acquired on the
properties is not taxable.
[88] As both counsel
indicated at the conclusion of this hearing, in the event that
the Court would find as it has, then the subsequent questions
would become irrelevant and the Court need not deal with the
alternative submissions made by counsel for the Appellant. These
alternative arguments, although forcibly made, certainly did not
have the merit of the first argument and to some extent, the
calculations made by counsel for the Appellant would depend upon
the nature of the documentary evidence that he presented with
respect to the claim for deductions and it is obvious that the
Appellant's record keeping in this regard was somewhat
questionable.
[89] However, at the end of
the day, the appeals are allowed, the assessments vacated and the
penalties quashed.
[90] The Appellant will
have his costs of these appeals, to be taxed.
Signed at Ottawa, Canada, this 5th day of
February 2003.
J.T.C.C.
Email this Content