Frank Dicecca v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2087

Bowman, J.T.C.C. (orally):—This is an appeal by Mr. Frank Dicecca from an assessment of his 1987 taxation year, and by that assessment the Minister of National Revenue included in Mr. Dicecca's income a gain of profit that he realized upon the sale, on June 15, 1987, of property located at 1646 Dupont Street, Toronto. It was a semi-detached property and was used as a rooming house with nine tenants and it generated income, gross income, of $18,960 per year. The Minister in assessing assumed that it was producing a net profit of some $300 per month, and Mr. Dicecca agreed that that figure is roughly accurate.

He bought the property and held the property for 72 days. It turns out that the property was not zoned as a rooming-house and it did not conform to many of the safety and other municipal requirements, such as fire extinguishers, fire escapes from the second floor, and there was a lot of garbage around and the tenants were noisy. A neighbour threatened to call in the authorities and shortly afterwards, or within a month or so of this problem, Mr. Dicecca spoke to his real estate agent and told him that he was not happy with this investment and that it was causing him troubles. As a result, he was approached by a lady who had another rooming operation somewhere in the city and he was offered $151,500 for the property, a profit of roughly $31,000.

Since he owned the property under an oral arrangement jointly with a colleague, a Mr. Naumchuk, his profit was roughly $15,000, and the Minister treated this as income from an adventure in the nature of trade or a business and Mr. Dicecca contends that the profit was a gain on capital account.

Cases in this area are legion, and very little purpose would be served by my referring to the numerous tests that have been enunciated by the courts over the years. It really boils down, I suppose, to a matter of common sense and a matter of looking at all of the circumstances. Mr. Dicecca testified that it was his intention when he acquired the property to hold it as a long-term investment. He recognized that if the mortgage were paid down, the property would yield quite a substantial profit. He indeed did put down about $35,000 as his share of the downpayment, leaving a mortgage of roughly $60,000. Now, he puts the case on three bases. He says "First of all I paid a lot down, which is inconsistent with an intention of selling the property quickly. Secondly, it was my intention to hold the property for a long term as a capital investment, and it was not a bad investment. Thirdly, I received an unsolicited offer at more than I really would have expected, and at a time when it turned out that the investment was not as good as all that and so because of all the problems I was having with the municipality and the tenants and that sort of thing.”

I tend to accept that it was his intention, or his intention was to hold the property as an investment. However, that is not the complete answer. A taxpayer's stated intention, even if accepted by the Court, is not necessarily determinative of the issue. As I have said in other cases, one has to look at all of the circumstances; the circumstances under which he buys the property and the circumstances under which he holds it and the manner in which he sells it. First of all is the length of time. The property was held for 72 days. Now, it's true, as in the case of Warnford Court (Canada) Ltd. v. M.N.R., [1964] C.T.C. 175, 64 D.T.C. 5103 (Ex. Ct.), the property was held for a fairly short period of time and the then-President of the Exchequer Court, Mr. Justice Jackett, held that the taxpayer had sufficiently explained away and put in sufficient evidence to counterbalance the inference one might naturally draw for such a short holding period. I do not think that one can dispel so easily the inference in this case.

First of all, Mr. Dicecca seems to have had a history of falling into very profitable arrangements in some cases. His first real estate venture was a purchase along with a group of other people of a property on 12th Street, along the lakeshore. They converted the property and then had it rented; the upstairs part was going to bring in $500 per month and the lower one was rented to the former owner for $400, but the former owner became deficient in his payments, and later they sold it. It doesn't appear from the evidence that they made any profit, and there was a rather messy situation involving a lawyer who was not perhaps as competent as he might have been.

When he bought the property on Dupont, his inspection of it was casual, to say the least. There were nine tenants and their rooms were evidently locked and so he looked at the halls and the kitchens and bought it, based solely, as I understand it, on the income that was being produced. He evidently made no inspection of the zoning. He did not know whether the municipal bylaws relating to fire and so forth were complied with. It was a very quick and casual sort of investigation that he made. He does not appear to have got the usual reporting letter from the lawyer and he had a casual relationship, never reduced to writing with Mr. Naumchuk.

Now, is this consistent with an intention to hold the property in the long term? I think not. I think that at least it gives rise to the inference that he would have been prepared to sell the property if necessary, although he might on the other hand have been prepared to hold it for a long time too, but I should have thought that if you buy a long-term investment, you investigate a little bit more the problems that you might have. Mr. Dicecca is obviously a highly intelligent person. He holds a senior position with a large automobile dealership. He must have been aware that people who would buy rooming houses are going to have problems, and yet it was those problems, plus the unexpected offer that came along, that prompted him to abandon his original intention.

He must also have known that he was in a rising market. We have also the fact that immediately, or shortly after that time he engaged in the purchase and rapid resale of a condominium and a subsequent further purchase of a part interest in a condominium, both of which were sold at a profit. He could not have been oblivious to the fact that in 1987 we were in a rising market.

As I said, there are many factors which one takes into account and I think he certainly had an intention to hold this as an investment on the one hand, but all of the circumstances would lead me to believe that he was quite prepared to sell at a profit within a reasonable period of time, and indeed he did. He has been fortunate in his real estate ventures, but I think in all the circumstances it has not been established that the gain which he realized was a gain on capital account. I think he would have had at least a secondary or alternative intention of selling the property at a profit if the opportunity arose. This is not to say that I don't believe him when he says he bought it as an investment, but I simply say that all of the surrounding circumstances lead to the conclusion that the gain realized was a gain on income account.

Accordingly the appeal is dismissed.

Appeal dismissed.