Date: 19991112
Dockets: 98-802-IT-G; 98-948-GST-I
BETWEEN:
BRUCE T. MARTINUZZI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.T.C.C.
[1] Bruce Martinuzzi has filed two appeals with this Court,
one appeal (General) is from an income tax assessment for 1995
and the second appeal (Informal) is from an assessment issued
under Part IX of the Excise Tax Act
("ETA"). Both assessments arise from the same
transaction.
[2] Mr. Martinuzzi purchased land in May 1994 and built a
residence on the property. He and his wife moved into the
residence in October 1994 and sold the property in June 1995. In
preparing his 1995 income tax return Mr. Martinuzzi claimed that
the profit from the sale of the property was exempt from tax
since the residence on the property was his principal residence:
paragraph 40(2)(b) of the Income Tax Act
("ITA"). He also applied for a new housing
rebate pursuant to subsection 256(6) of the ETA with
respect to his residence.
[3] The Minister of National Revenue ("Minister")
assessed Mr. Martinuzzi under the provisions of the ITA
for 1995 on the basis that he was in the business of selling
houses and the profit from the sale of the property was on income
account. For a similar reason, he was denied the new housing
rebate by the Minister. The ETA assessment included tax,
interest and penalty with respect to the sale of the residence
since the sale was not exempt from the Goods and Services Tax
("GST"); the Minister did allow Mr. Martinuzzi an input
tax credit with respect to the transaction.
[4] Prior to and during 1995 Mr. Martinuzzi worked for a
supplier of truss systems for commercial buildings and through
his work he got to know Mr. Frank Silvestri. He was also a
tenant of Mr. Silvestri. One of Mr. Silvestri's corporations,
897551 Ontario Ltd., had subdivided land in the Port Arthur area
of Thunder Bay, Ontario and in 1994 started to market the lots.
Mr. Silvestri testified that he "painted a beautiful
picture" of the area to convince Mr. Martinuzzi to
purchase a lot. Mr. Silvestri said he gave the appellant "a
sales pitch" that everything was "rosy". Mr.
Silvestri knew Mr. Martinuzzi was about to be married and
convinced him to purchase a lot for a small down payment.
Apparently no lots had yet been sold. Mr. Silvestri stated that
he showed Mr. Martinuzzi plans of the subdivision and hoped
"things would be done on time and according to
plans".
[5] When Mr. Martinuzzi first spoke to Mr. Silvestri
concerning the purchase of the lot, he was engaged to be married
at the end of September 1994. He and his fiancée looked at
the plans of the subdivision and agreed to purchase one of the
longer, pie shaped lots located on Vintage Crescent
("Vintage Crescent property"), for $60,000.
Mr. Martinuzzi paid $5,500 in cash and the balance of the
purchase price, $54,000, was secured by a mortgage back to the
vendor. The transaction closed on May 3, 1994.
[6] A Mr. Michael Cupello acted as solicitor for both Mr.
Martinuzzi and the vendor. Apparently Mr. Cuppello did not inform
the appellant of any potential problems, legal or otherwise,
concerning the Vintage Crescent property.
[7] When he purchased the lot Mr. Martinuzzi realized that the
"subdivision had to be cleared" by municipal
authorities but he did not realize that he could not start
construction of the house immediately. However he "knew
people" at City Hall and got in touch with them.
Construction of the house began in June 1994 and was completed at
the end of September 1994. Mr. Martinuzzi moved into the house a
day after his wedding, on October 1, 1994. The interior of the
house was painted by then and he and his fiancée had moved
the furniture and appliances into the house.
[8] Mr. Martinuzzi built the house with relatives and friends,
in particular with the assistance of Mr. John Michelli, who is a
contractor, and Mr. Michelli's son. (The appellant said he
acted mainly as a "go for"). The appellant did not pay
Mr. Michelli for his services. He said Mr. Michelli was a friend
of the family, knew he was getting married and wanted to
help.
[9] Mr. and Mrs. Martinuzzi lived on Vintage Crescent until
August 2, 1995 when they sold the property for $187,500. The
property was first listed for sale (by multiple listing) in
January 1995. Mr. Martinuzzi entered into an agreement of
purchase and sale for another property on June 23, 1995.
[10] During the first three months he lived in the
subdivision, Mr. Martinuzzi said, he began to notice
"things" happening that Mr. Silvestri told him would
not happen. He was "disappointed" with the subdivision;
it was not what Mr. Silvestri had represented to him. The
curbs and lighting, for example, were not installed at the date
that Mr. Silvestri represented they would. He thought it
would be a "fancier" subdivision. The homes on some of
the other lots were not "upscale". The lots were
"rough" and in disorder. The houses being built on
other lots were smaller than his was. They were "box
types", square and "hideous". The appellant's
home was approximately 1,500 square feet; the neighbouring homes
were about 1,200 square feet. Mr. Silvestri had told him the
average size of the homes would be about 1,400 square feet. The
subdivision "looked like a dump". One of Mr.
Silvestri's employees built a house on one of the lots and
kept old cars along side of the house. Mr. Martinuzzi was not
happy.
[11] The zoning for the subdivision, according to the
appellant, was for single family residential homes. However
sometime after Mr. Martinuzzi purchased the property, Mr.
Silvestri informed him of the possibility of low income housing
being built on a section of the subdivision.
[12] Mr. Silvestri acknowledged that when the appellant
acquired the property much work remained to be done on the
subdivision which still required final municipal approval. This
included road paving and installation of curbs and street
lights.
[13] The subdivision was Mr. Silvestri's first subdivision
and "in the first couple of years lots of things didn't
work out". Appellant's counsel asked Mr. Silvestri,
what part of the "rosy picture" he was describing to
the appellant was true and what part was not true. Mr. Silvestri
replied that he believed all would be "rosy", but the
appellant "fell into the part that didn't come
true". "Eventually", he said, the work was done,
but not according to his original schedule.
[14] Mr. Silvestri said that he thought that he would convert
part of the subdivision into a "condo system" for low
rental housing or government supported dwellings. He anticipated
that 25 percent of the subdivision would be devoted to affordable
housing. This would require approval by the City of Thunder Bay.
Mr. Silvestri realized that it would be difficult to sell lots
for $160,000 homes if subsidized housing was a block away.
"People move if they are not happy". He said that the
appellant did not ask - and he did not volunteer the information
- if there would be any subsidized housing in the
subdivision.
[15] In cross-examination Mr. Martinuzzi denied that the
Vintage Crescent property was for sale before the first snowfall
of autumn 1994. He did confirm that during construction of the
Vintage Crescent house, he put a "For Sale" sign on the
property. He explained that he had been trying to sell a truck
but as construction of the house progressed and Mr.
Silvestri's promises were not being fulfilled he got angry
and installed on the property the "For Sale" sign meant
for the truck. The sign was on the property for several weeks.
Once his anger subsided, he said, he took the sign away. The
sign, he insisted, was a "joke".
[16] Mr. Martinuzzi stated he never showed the Vintage
Crescent house for sale purposes during construction. People
asked to look at it while it was being built and he let them. At
first he was proud of the house, then he became annoyed because
so many people were asking to look at it. Before the windows and
doors were installed people were free to come and go as they
pleased. He said he never gave permission to any real estate
agent or anyone else to show the house for sale.
[17] The appellant first informed Ms. Diane Lee, an appeals
officer with Revenue Canada, of the "For Sale" sign on
the Vintage Crescent property in November 1997. Ms. Lee testified
that the appellant told her that he originally wanted to list the
property for $192,000, but the actual listing price was
$189,900.
[18] In his notice of objection, the appellant represented
that "we even dropped our price a couple of times just so we
could get out of there as fast as possible". In fact, Mr.
Martinuzzi never "dropped" the asking price but did
make counter offers to several offers to purchase presented to
him by Mr. Belluz, his agent.
[19] Once the appellant and his wife sold the Vintage Crescent
property they rented a smaller house "across town". On
June 23, 1995 the appellant had agreed to purchase a lot on
Falconcrest Drive in the Fort William area of Thunder Bay for
$45,000; the vendor was to give back a mortgage for $39,999.
Construction of the house started at the end of September 1995
and the appellant and his wife moved into the house in January
1996. Mr. Martinuzzi stated that this lot was in a nicer
subdivision that was mostly built-up. He "knew what we were
getting into".
[20] The appellant built a house on the Falconcrest Drive lot
"the way we wanted". The house was more upscale and
consisted of 2,000 square feet with a garage. The house was again
built by Mr. Martinuzzi's family and friends.
Mr. Michelli came around the house "a few
times".
[21] On April 10, 1996 the appellant listed the Falconcrest
Drive property ("Falconcrest Drive property") for sale
for $234,900. The final building inspection of the house had not
yet taken place. Mr. Martinuzzi explained that during
construction "lots of realtors were passing by" asking
to have the house listed with them. "A lot of people were
bothering me". He got in touch with the realtor, Mr.
Anthony Belluz, who had sold the Vintage Crescent property.
The appellant and Mr. Belluz have known each other since school.
Mr. Belluz told Mr. Martinuzzi that it was common for
realtors to try to hunt down a listing to get a commission.
Mr. Martinuzzi agreed to have the property listed with
Mr. Belluz on April 16, 1996. They both testified that a
listing would reduce chances of other realtors bothering the
appellant. If any other realtor came along Mr. Martinuzzi
would simply tell that person that the property was already
listed. The listing with Mr. Belluz was an exclusive
listing. In Mr. Martinuzzi's view, an exclusive listing
meant that he was not serious about selling and simply wanted to
be left alone. The appellant testified that Mr. Belluz
"never showed the house to anyone" since it was not
listed for sale.
[22] Mr. Belluz declared that Mr. Martinuzzi told him that
"if I have to sell [the Falconcrest Drive property], I want
you to sell it for me". According to Mr. Belluz
"we were fishing the market" and he and the appellant
wanted to see if there were some serious offers.
[23] When the appellant acquired the Falconcrest Drive
property, he said, he also looked for another property in the
same subdivision for his father. He and his father agreed that
once the appellant's home was built, a home would be built
for his father. The reason he wanted his house built first was
because he and his wife were renting at the time. The
appellant's father agreed to wait. Mr. Martinuzzi told
the developer of the subdivision of his father's interest and
their plans. According to the appellant, the principal of the
developer agreed not to sell the lot the appellant's father
had his eye on until the elder Martinuzzi was ready to buy. The
second lot was never purchased since the appellant's father
died in October 1996. The lot was released for sale when the
developer was informed of the death of the senior Mr. Martinuzzi,
said the appellant.
[24] Nothing was ever put into writing that the father or the
appellant, for that matter, had an option or a right to acquire
the second lot. According to the appellant there was simply a
verbal agreement between the principal of the developer and the
appellant.
[25] Mr. Martinuzzi acknowledged that Mr. Belluz placed
advertisements in the local newspaper showing a photograph of the
Falconcrest Drive property. Mr. Martinuzzi stated that Mr.
Belluz was not interested in selling the property but used the
picture as a selling tool for a similar house being built by
Mr. Martinuzzi in the subdivision.
[26] Mr. Martinuzzi stated that he received various
unsolicited offers for the Falconcrest Drive property, including
one for $234,000. He refused all offers. He told Ms. Lee that if
he could get "a gazillion dollars" for the property he
would sell it. The offers, he said, "piqued my
curiosity". The house was listed with Mr. Belluz for
$234,900.
[27] Once he heard from a Ms. Carol Voth, an auditor for
Revenue Canada, informing him that Revenue Canada was reviewing
his income tax return for 1995, the appellant took the
Falconcrest Drive property off the market. He "didn't
pursue the matter". Ms. Voth testified she met Mr.
Martinuzzi on May 27, 1996 and again on April 9, 1997. At
their last meeting Mr. Martinuzzi told her that the "For
Sale" sign on the property was a "joke".
[28] At the time of his father's death,
Mr. Martinuzzi and his wife had moved into the Falconcrest
Drive property. In April 1996 he started clearing the lot
anticipated for his father. By the time his father died the lot
had been cleared to "a reasonable point".
[29] During the construction of the Vintage Crescent property,
Mr. Silvestri showed the property to at least one other couple.
He said that he showed the house not to sell, but to permit a
couple to compare the appellant's house to another similar
house that was also under construction. He denied telling the
couple that the house could be painted colours of their choice or
that a space could be substituted for an existing wall. Mr.
Silvestri stated that he himself never built houses for resale.
He assembles land, subdivides and sells vacant lots.
[30] Cheryl Yamashita, the lady who was part of the couple to
whom Mr. Silvestri showed the Vintage Crescent property,
testified she saw the Vintage Crescent property in June 1995
while it was under construction. She stated that she and her
common-law husband met Mr. Silvestri at a coffee shop. Her
husband and Mr. Silvestri knew each other.
Mr. Silvestri told them about the subdivision and a house
that was being built and volunteered to show them the house. This
was the house the appellant was building. Ms. Yamashita said she
understood that Mr. Silvestri was "selling" the
house. There were things she did not like about the house and Mr.
Silvestri said he could accommodate her wishes to make various
changes. At trial, she did not know whether Mr. Silvestri was
discussing the house he was showing her or some other house.
Eventually, Ms. Yamashita and her husband purchased another
house on Vintage Crescent that is similar to the Martinuzzi
house.
[31] In cross-examination Mr. Silvestri denied ever
putting up a sign in the subdivision stating that the sales of
lots were not subject to the GST. However, he stated that he
volunteered to pay the GST on the sale of a lot.
Ms. Yamashita testified that he told her and her husband
they would not have to pay GST on any house they purchased. Since
the house had been occupied no GST was exigible, he explained.
Her understanding was that Mr. Silvestri would obtain an
occupancy permit for the house. In other words, he would claim
that someone was living in the house before the sale took place
and no GST would be payable. Ms. Yamashita could not say with any
certainty that the house that would be occupied and then sold,
was the appellant's house or another house under construction
at the time.
[32] Ms. Yamashita and her husband eventually acquired a
fully completed house at 105 Vintage Crescent. This house was
similar to the Vintage Crescent property. Ms. Yamashita believes
she saw the vendor of the house on one occasion, he was working
as a tradesman at one of the houses under construction in the
subdivision. She also stated that Mr. Silvestri took them to
see approximately four houses in the subdivision before they
agreed to purchase their home.
[33] No GST was paid by Ms. Yamashita or her husband when
they purchased the house at 105 Vintage Crescent. She said the
man who built the house "supposedly, but not really, lived
in the house".
[34] In Ms. Yamashita's view, the Vintage Crescent
property was located in a "nice neighbourhood". The
area was quiet and the people were nice. She said that the house
that she acquired was about the same size as other houses in the
area, but she did admit that she is not a good judge of size.
Ms. Yamashita described the subdivision as clean, but still
undeveloped. She also acknowledged that construction material was
strewn in various parts of the neighbourhood.
[35] Mr. Silvestri stated that he was trying to create
activity in the subdivision because "business was
dead". He did not intend to sell the appellant's house
when he was showing it to Ms. Yamashita.
[36] Mr. Belluz said that he was asked by the appellant to
sell the Vintage Crescent property because the appellant and his
wife were newly married and Mrs. Martinuzzi did not like the Port
Arthur side of the City of Thunder Bay. She preferred to live in
the Fort William area. Mrs. Martinuzzi, he said, worked late
hours and there were neither lights, sidewalks or curbs to help
her walk safely on the street when she arrived home from
work.
[37] The Vintage Crescent property was listed for sale only
three months after the house was completed. The house was for
sale during construction and that history repeated itself on
acquisition of the Falconcrest Drive property: the property was
listed for sale three months after the house was completed and,
the appellant had an interest in a second lot in the subdivision.
Ms. Voth acknowledged the appellant did not have a prior history
of buying and selling property and that he did not personally
show the Vintage Crescent property.
[38] Mr. Martinuzzi's counsel very ably argued that his
client's proceeds from the sale of the Vintage Crescent
property was a sale of Mr. Martinuzzi's principal residence
and therefore is free from income tax. On acquiring the house
built on the property, Mr. Martinuzzi was entitled to a new
housing rebate pursuant to the ETA, counsel added.
[39] I cannot agree with counsel. Firstly, the appellant's
testimony troubled me. There were certain things he stated at
trial or that he wrote in his notice of objection that, if taken
alone, perhaps, could be rationalized in his favour, but taken
together, cause me to doubt his evidence. I do not believe that
the installation of a "For Sale" sign on the property
during construction was a "joke". Who was the appellant
trying to kid? In his notice of objection he wrote that he
"dropped our price a couple of times" but in fact he
never did; he only made counter offers to certain offers to
purchase he received from his agent.
[40] I also do not believe that Mr. Martinuzzi thought for a
moment that the construction of a house, first in a new
development and later in a mature development, would not attract
the curious. As he testified, the house under construction on the
Vintage Crescent property, at least, was superior to the other
houses in the subdivision and this would normally cause potential
purchasers of subdivision lots to view houses under construction.
Neither do I sympathize with the appellant when he says he put
the Falconcrest Drive property for sale because he was being
harassed by people wanting to see the house.
[41] Mr. Martinuzzi testified that at the time of closing of
the Vintage Crescent property he was not aware he could not yet
start construction of the house nor was he aware of any potential
problem related to the property. Mr. Michael Cupello acted as his
solicitor on the purchase of the property; Mr. Cupello also acted
as the vendor's solicitor. Later on, when Mr. Martinuzzi
acquired the Falconcrest Drive property, Mr. Cupello again acted
on his behalf. Did Mr. Cupello not advise him of possible
problems? To accept Mr. Martinuzzi's evidence I would have to
conclude that Mr. Cupello did not advise Mr. Martinuzzi of
any problem with the Vintage Crescent property when, according to
the appellant, there was at least one major problem; he could not
yet build his home. Even after he expressed difficulties with the
Vintage Crescent property he retained Mr. Cupello to act for him
on the subsequent purchase. Mr. Cupello did not testify at the
trial.
[42] On the evidence before me Mr. Martinuzzi had in his mind,
at the time he acquired the Vintage Crescent property, the
possibility of reselling as an operating motivation for its
acquisition.[1] It
may well be that he and his wife intended to reside on the
property and in fact the residence on the property was their only
residence during the time they resided there.
Mr. Martinuzzi's cost of construction was relatively low
and the lot was highly mortgaged; it was ripe for resale and he
realized the sale potential when he undertook the venture. I
cannot satisfy myself that Mr. Martinuzzi acquired the
property solely with the intention or operating motivation of
building a residence for himself and his wife.
[43] In my view the profit from the disposition of the Vintage
Crescent property arose from an adventure or concern in the
nature of trade: the purchase of a vacant lot, the construction
of a residential building on the lot and the sale of the property
were all contemplated a the time of the acquisition of the
property by the appellant. The Vintage Crescent property was not
capital property to the appellant.
[44] The profit from the sale of the Vintage Crescent property
is therefore to be included in the appellant's income for
1995 in accordance with section 3 and subsection 9(1) of the
ITA.
[45] A "builder", for purposes of the ETA, is
defined in paragraph 123(1):
"builder" of a residential complex ... does not
include
(f) an individual described by paragraph (a) ... who
(i) carries on the construction ...
otherwise than in the course of a business or an adventure in
the nature of trade ...
[46] The fact that the appellant's secondary intention
only was to build a house to sell at a profit and that his
primary intention was to live on the property does not remove the
appellant from the definition of "builder". The
appellant was engaged in the course of a business or an adventure
or concern in the nature of trade. The appellant's operating
motivation in acquiring the Vintage Crescent property and to
construct a house on the property was the prospect of its sale at
a profit. The appellant was a builder as defined by paragraph
123(1)(f) of the ETA.[2]
[47] That Mr. Martinuzzi's main purpose was to live in
that house he built on Vintage Crescent does not mean that he
built that house for use as the "primary place of
residence" of him and his wife so as to entitle him to a
housing rebate under the provisions of subsection 256(2) of the
ETA. Where the house is for sale as well as for use as a
residence, it is not for use as a primary place as residence.[3]
[48] The appeals are dismissed. The respondent shall be
entitled to her costs in the appellant's appeal from the
income tax assessment.
Signed at Ottawa, Canada, this 12th day of November 1999.
"Gerald J. Rip"
J.T.C.C.