Peter Naumchuk v. Her Majesty the Queen (Informal Procedure), [1995] 1 CTC 2781

Bell J.T.C.C.:-The issue in this appeal, heard under the informal procedure rules, is whether the appellant’s share of profit from the sale of four properties in his 1986 taxation year, from the sale of one property in his 1987 taxation year and the sale of two properties in his 1988 taxation year was capital gain or ordinary income.

The first witness for the appellant was Mr. Zenon Koltalo ("Koltalo"), a self-employed insurance agent. He said that he wanted "to build a nest egg" and that he knew that the appellant’s father had lots of real estate and that he asked the appellant whether he was interested in real estate accumulation. Koltalo stated that a Dennis Vytlingam was a realtor who always had properties available. He stated that they had asked Mr. Vytlingam to find properties that would "carry the mortgage".

Exhibit A-2, introduced by appellant’s counsel showing the chronology of acquisitions and dispositions of realty is reproduced as follows:

Chronology

100 Portland

March 4, 1986 (acquired): $132,000

March 27, 1986 (sold): $155,000

1069 Islington

April 4, 1986 (acquired): $116,000

May 23, 1986 (sold): $134,000

2901 Jane

June 3, 1986 (acquired): $54,250

June 27, 1986 (sold): $66,250

56 Seaforth

June 30, 1986 (acquired): $103,000

August 22, 1986 (sold): $135,000

1332-1334 Lakeshore

September 30, 1986 (acquired): $100,000

May 1, 1987 (sold): $152,000

1336-1338 Lake shore

October 1, 1986 (acquired): $100,500

June 10, 1987 (sold): $153,000

Koltalo stated that they were looking at 1069 Islington at the same time as 100 Portland but that the offer was made first on the Islington property. He stated that there was good subway access, that it was across the street from McDonald’s, close to a school, had a rented basement apartment and that the rental income would carry the mortgage. He stated that the appellant and a Mr. Kamla Gopie ("Gopie") were associated with him in making an offer, that they had looked at the property and that the agent had said it was a good deal. His stated reason for sale of same was that the house had a very strong curry odour which was not removed by cleaning and painting the house. He also stated that a neighbour advised him that the basement apartment was illegal and that he would report these new owners to the city if they continued to operate it as a rental property. The witness stated that the gain on this property, after costs, was $10,325 which would have to be divided three ways. This was the first sale in 1986 after being owned for 48 days.

Koltalo stated that they bought 100 Portland which had self- contained units and was apparently legal. He then described a ’’tenant’s rebellion” with demands for various improvements and said that a contractor’s estimate of the cost of same was so high that the property was sold on the advice of their realtor. This sale, after 23 days of ownership, was the second sale in 1986.

Koltalo then testified that they bought 2901 Jane because it looked like a long term investment but that the owner had vacated, there were no tenants at the time, that the place was a mess, that a prospective tenant asked if they would like to sell and that a sale was effected. This was the third sale in 1986 after being owned for 24 days.

He testified further that the agent found 56 Seaforth, that the property was clean, that there was a tenant in a basement suite and that the upper portion was unoccupied. He stated further that on closing day they were advised that the entrance was on city property and that they could be forced to remove it. He then described problems with the basement tenant, with water in the basement and with the tenant threatening to sue. He testified that the agent said he had another property and Seaforth was sold. This was the fourth sale in 1986 after being held for 53 days.

He then described the purchase of two units at Lakeshore and said that there were troubles with same, that the appellant decided to get out of the transaction, that the other owner never appeared and that the units were sold. He stated that the gain on such property was, after a notice of objection was filed, allowed as a capital gain. He then purchased property with another investor.

On cross-examination, Koltalo reviewed the evidence he had given and was unable to add any details respecting the purchase and proposed retention of property.

The appellant gave evidence to the effect that he had been in the auto industry for 12 years, that his father had accumulated substantial real estate holdings, that he was young, planning a family and wanted something for his children, that he had been in the airline limo business and then a restaurant business and went bankrupt in the latter. He obtained a real estate license but never used it and finally "let it go” in 1992. He then stated that he had known Koltalo for some time and that they had decided to purchase some rental properties together. Through him, Exhibit A-5 was introduced showing the chronology of acquisitions and disposals. It is reproduced herein as follows:

Chronology

100 Portland

March 4, 1986 (acquired): $132,000

March 27, 1986 (sold): $155,000

1069 Islington

April 4, 1986 (acquired): $116,000

May 23, 1986 (sold): $134,000

2901 Jane

June 3, 1986 (acquired): $54,250

June 27, 1986 (sold): $66,250

56 Seaforth

June 30, 1986 (acquired): $103,000

August 22, 1986 (sold): $135,000

September 30, 1986 - 1332-1334 Lakeshore (acquired): $100,000 October 1, 1986- 1336-1338 Lakeshore (acquired): $100,500

April 6, 1987 — 1646 Dupont (acquired): $120,000

May 1, 1987 - 200 Lotherton #1012 (acquired): $65,000

May 4, 1987 — 200 Lotherton #1212 (acquired): $65,000

May 1, 1987 — 1332 Lakeshore (sold): $152,000

June 10, 1987 — 1336-1338 Lakeshore (sold): $153,000

June 12, 1987 — 1646 Dupont (sold): $151,500

May 31, 1988 — 200 Lotherton #1012 (sold): $75,000

August 2, 1988 — 200 Lotherton #1212 (sold): $77,000

He testified that he and Koltalo could not finance these properties alone and that Gopie was introduced by their agent. His evidence, not unlike that of Koltalo, described the various problems they had with respect to the Portland property, the Islington property, the Jane property and the Seaforth property. He then described property on Lakeshore, and how they planned to change it to commercial property, there being land adjacent to the building which seemed to have development potential. He also described the decrepit state of the building, learned through consultation with a friend that commercial zoning would never be allowed and described other difficulties resulting in a decision to sell.

He described the Dupont property and the fact that it was purchased by him and a co-worker, Mr. Frank Dicecca ("Dicecca") and Gopie. He stated that it was purchased for $120,000 on April 6, 1987 and sold for $151,500 on June 12, 1987. He described a number of problems with respect to that property and said he had concluded that he did not want to be in the rooming house business.

He then stated that he, Dicecca and Gopie purchased two units at 200 Lotherton. He described the problems that they had with respect to maintenance fees, foundation cracking, repairs and needed, rental collection difficulties, and undesirable location, resulting in the sale of this property.

The appellant ultimately stated that with his accumulated funds he bought a house in a nice community south of Barrie, Ontario and that this was a good investment. On cross-examination, the appellant insisted that he had always wanted an investment and restated the above reasons for the sale of the properties.

The next witness was Mr. Dennis Vytlingam who had been a realtor for several years. He spoke of the appellant and his associate wanting property that "carried itself", that they were office types and not too handy, etc.

Instead of commencing with argument, as arranged on the second day of the hearing. appellant’s counsel, stated that he had agreement with respondent’s counsel to produce Dicecca as a witness. His purpose appeared to be to adduce evidence about Exhibit R-2 respecting the alleged sale of the Dupont property. With respect to that property Dicecca said that he and the appellant did not have a large mortgage, that he didn’t inspect the property as he should have done, that he had a list of tenants and of rent paid but that he never met the tenants until after closing. He stated that they had difficulty collecting rents and had problems with tenants, garbage build-up, neighbours’ complaints about noise and house traffic and an allegation that it was an illegal rooming house. He further stated that they could not obtain the desired mortgage because the property was not zoned as a rooming house, that they had trouble finding tenants, that it was much more work than they felt necessary, that improvements would have been expensive and that the property was sold.

Appellant’s counsel then presented Exhibit R-2, Agreement of Purchase and Sale respecting 1646 Dupont Street. This document shows Olga Singh and Lilowtie Norman as purchasers and Dicecca as vendor. It appears that appellant’s counsel, by producing this document, sought to refute the inference that the property had been sold by Dicecca in March, 1987, it having been shown in Exhibit A as not having been purchased until April 6, 1987. Dicecca stated that the signature above his name typed on the second page of Exhibit R-2 was not his signature. It appears from examining the signature of the witness to the signatures of both the purchasers and whoever signed Dicecca’s name, that the same person witnessed all three signatures. If the witness to a signature purporting to be that of Dicecca, was a member of the law firm described on that page as purchaser’s solicitor (as seems to be the case), and if that person knew Dicecca, it appears that two serious acts have been committed. In response to my question as to whether he had ever given authority to someone to sign these documents, Dicecca said that he may have done so and then said it would probably have been done verbally. When I put the same question to him again he said that he may have given authority and in response to a later similar question said that he could not recall having given such authority. Finally, in answer to a question by me as to whether he had ever given anyone authority to sign his name on a document, he said "No".

Another document, relating to a mortgage of land and appearing to bear a certificate of receipt dated March 4, 1988 ostensibly signed by the Assistant Deputy Land Registrar L.T. Metro Toronto No. 66 purports to be signed by Dicecca. However, Dicecca testified that it was not his signature. Dicecca was very offhand about the fact that someone had written his name on these documents and especially so in the face of his evidence that he had not authorized anyone so to do. The evidence presented by Dicecca was of no assistance whatever to the Court in resolving the issue in this case. One wonders, having regard to the seriousness of what seems to have taken place, why he was called to testify. Indeed, his evasive manner of responding to questions characterizes him, in my assessment, as a witness whose evidence is not credible. His cavalier manner of responding to questions about two documents, ostensibly signed, but stated by him not to be signed, by him, when such documents were to be relied upon by other parties, is astonishing.

Appellant’s counsel commenced his argument by stating that the issue was whether there was, at the time of acquisition, a secondary intention on the part of the appellant to sell the properties in question. In referring to Racine, Demers and Nolin v. M.N.R., [1965] C.T.C. 150, 65 D.T.C. 5098 (Exch.) at page 159 (D.T.C. 5103) he quoted Mr. Justice Noel as saying that the taxpayer must,

have in his mind, at the moment of purchase, the possibility of reselling as an operating motivation for the acquisition...

He stated that the appellant’s family had a history of long-term rental income, that the appellant’s intention was feasible in that he proceeded on a step by step basis with partners, that all the properties were for a rental use, that no raw land was involved, that the appellant was a novice in the real estate business, that the market was changing rapidly and that the first three or four properties were "a nightmare", that the investors used their own funds, that in most cases they were trying to improve the property, that they continued to reinvest the funds arising out of profits, that the profits were fortuitous and that the appellant’s intention was eventually realized, appellant’s counsel also sought to shore up his case by referring to the fact that the Minister of National Revenue had agreed that the profits on Lakeshore properties were capital gains.

Respondent’s counsel referred to a summary in Happy Valley Farms Ltd. v. The Queen, [1986] 2 C.T.C. 259, 86 D.T.C. 6421 (F.C.T.D.) of the indicia of trading transactions set out in M.N.R. v. Taylor, [1956] C.T.C. 189, 56 D.T.C. 1125 (Exch.). He stated that the nature of the property sold, realty, in a volatile real estate market, the short period of ownership, the number of transactions and the general circumstances including lack of inspection of property etc. indicated that the appellant had conducted a business as defined in section 248 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

Respecting the appellant’s argument that the issue was whether the appellant had a secondary intention (as described above) and his effort to establish that the absence of same should result in success for the appellant, it is my view that such position presupposes the inability of this Court to find against the appellant without considering the secondary intention doctrine. I do not feel so limited. I accept the respondent’s position. In spite of repeated statements by witnesses that the properties giving rise to the profits assessed as income were acquired for investment purposes, I find little evidence to enable me to come to that conclusion. The properties in question were held for a very short time, were purchased without normal and prudent inspection practice and were generally treated as commodities of trade. I seems basic that someone who sought to acquire properties to hold as investment would perform more extensive examination thereof than was done for the properties in question. I am not persuaded that the allowance by the Minister of National Revenue of gain in respect of the Lakeshore properties as a capital gain is of any assistance to the appellant. I find, based on my examination and understanding of all the evidence, that the appellant was carrying on business within the meaning of the term "business” as defined in section 248 of the Act.

Accordingly, the appeals are dismissed.

Appeals dismissed.