Andrée Gilbert v. Her Majesty the Queen, [1994] 1 CTC 2813, 94 DTC 1286

Lamarre Proulx, T.C.C.J.:—The appellant instituted an appeal from a reassessment of the Minister of National Revenue (the "Minister") for the 1988 taxation year.

The point at issue is whether, at the time of the acquisition by the appellant of a piece of land and an eight-unit residential building, which she had had built by er husband in 1986, one of the determining reasons for the purchase of that property was its resale. The Minister claims that this was the case; the appellant denies it.

The appellant and her husband, Mr. Conrad Gilbert, testified for the appellant. Mr. Delisle, an auditor of the Minister, testified for the respondent.

From 1970 to 1981, Mr. Conrad Gilbert, a carpenter by trade, built singlefamily houses with his three brothers, also carpenters. They built 15 to 30 per year. During 1981 and 1982, they could no longer find customers for the single-family houses. Mr. Gilbert stayed at home for two and a half years. The appellant was forced to return to the labour market to carry on an occupation in which she had worked before her marriage, that of secretary.

In 1983, the spouses sold their family property and Mr. Gilbert withdrew his contribution to a registered retirement savings plan. With his brothers, he built two six-unit residential buildings in Charlesbourg. Those buildings were held until their sale in 1993.

In 1985, Mr. Gilbert built a nine-unit building which was sold in 1991, in order to purchase a 47-unit building.

In 1986, the Gilbert brothers built a real estate complex which bore the name “Place Gilbert". It consisted of 11 eight-unit buildings. Each residential building including the lot up to five feet from the building limit was held in single ownership. The other premises of Place Gilbert were jointly owned. Nine residential buildings were sold to third parties, but Mr. Gilbert's construction company, Les Constructions Gilco Inc. ("Gilco"), of which he was the sole shareholder, purchased a building and the appellant purchased one as well. This was the appellant's first purchase.

On January 15, 1986, the appellant had purchased a Place Gilbert lot from her husband at a cost of $24,000 (Exhibit A-1). The appellant undertook to pay the vendor the price in three annual, equal and consecutive payments of $8,000 each. The husband had purchased the land from Gilco and Roger Gilbert Inc. on the same day, that is on January 15, 1986. A mortgage loan in the amount of $198,000 (Exhibit A-2) was subsequently granted to the appellant. The amount of the mortgage was the amount which the appellant paid to Gilco for construction of the residential building. Gilco sold the appellant the building at the cost price, without including profit or administration expenses.

From the beginning, the appellant had taken care of the bookkeeping and administration of her husband’s businesses and does so even now. The appellant had never been remunerated for her administrative services; the husband therefore considered that he owed it to her to help her in purchasing the building by selling it to her at the cost price. It is he who guaranteed the mortgage loan, but it was the appellant who made the monthly payments. She also made the annual payments in respect of the amount of $24,000 owed to her husband.

At the time of the taking of possession of the building in question, the appellant had already leased all the apartments, and the appellant contended that the building was profitable from the outset and would have become even more so over the long term.

The building owned by the appellant shared a common wall with another building, also with eight apartments, the property of a Mr. Thibodeau. Mr. Thibodeau also owned two other residential buildings in Place Gilbert. According to Mr. and Mrs. Gilbert, Mr. Thibodeau was a very unhappy lessor very early on. He wanted to divest himself of his rental buildings and found, as an interested purchaser, a limited partnership.

When the appellant and her husband discovered that a limited partnership was to purchase the buildings held by Mr. Thibodeau, they decided not to keep the ownership of their own buildings in Place Gilbert. They explained that a limited partnership increases the administration costs for the portions of the property held in common. For example, a snow removal contract would be increased by the administrative cost of the person responsible for administering the limited partnership. Moreover, according to them, when a limited partnership becomes the owner of rental buildings jointly owned in part, it is harder to resell them because there is a danger for the other owners of losing control of administrative expenses. The spouses therefore decided to withdraw in order to invest in another building in which they would be alone.

As to the sale by Gilco of the building which it owned in Place Gilbert, it had reported it as a business gain.

In 1988, the appellant and her husband purchased a lot on Rue des Griffons, in Québec City; Gilco constructed two buildings of 16 apartments each. The appellant purchased one with the proceeds of disposition of the building in question in the instant case. She is still owner of that building.

Regarding the rental activities, the appellant said that she looked after that and did not experience any particular difficulties. In the evidence adduced there was no mention of any subject of complaint in respect of the tenants.

Mr. Delisle, the auditor of the Minister, said that he had assessed on the basis of an adventure in the nature of trade, because of the very brief period of possession, a mortgage loan for the entire cost of the building and also on the basis of the reasons given by the appellant in a telephone call which he had made to her: she had allegedly asked why she would not be entitled to make profits when the others were doing so and said that the building had been sold because she had found a good opportunity to do so and wanted to purchase a 16-unit building.

Counsel for the appellant referred to the following cases:

Snell Farms Ltd. v. Canada, [1991] 1 C.T.C. 5, 90 D.T.C. 6693 (F.C.T.D.);

Racine, Demers and Nolin v. M.N.R., [1965] C.T.C. 150, 65 D.T.C. 5098 (Ex.

Ct.);

Hiwako Investments Ltd. v. The Queen, [1978] C.T.C. 378, 78 D.T.C. 6281

(F.C.A.);

Joly v. M.N.R., [1992] 2 C.T.C. 2036, 92 D.T.C. 1512 (T.C.C.);

McGinn v. M.N.R., [1977] C.T.C. 2222, 77 D.T.C. 158 (T.R.B.);

Grouchy v. Canada, [1990] 1 C.T.C. 375, 90 D.T.C. 6267 (F.C.T.D.);

The Queen v. Jachimowicz, [1977] C.T.C. 162, 77 D.T.C. 5148 (F.C.T.D.);

Power v. The Queen, [1975] C.T.C. 580, 75 D.T.C. 5388 (F.C.T.D.);

Smith v. M.N.R., [1987] 2 C.T.C. 2296, 87 D.T.C. 595 (T.C.C.).

It is well known in a trading case that the taxpayer’s intention must be interpreted at the time the asset is purchased. That intention is interpreted on the basis of the nature and quantity of the asset and also on the basis of the taxpayer's conduct.

As regards the nature and quantity of the asset, the appellant adduced evidence that the building was profitable, and there was no evidence to the contrary. It is correct that the building was entirely financed by a mortgage loan, but it should be noted that that loan was for the construction cost alone.

It must also be borne in mind that Gilco or Mr. Gilbert had owned two six-unit buildings in Charlesbourg since 1983 and it was mainly the appellant who leased those buildings. Those buildings were held until 1991 or 1993.

The appellant therefore had experience in rental activities and she was comfortable in that activity. It is plausible that had it not been for the purchase by the limited partnership of the building which shared a common wall with her building and of two other buildings in the same real estate complex, the appellant would not have considered selling the building which she had purchased in 1986.

Mr. Thibodeau did not come to testify, but the appellant and her husband both testified under oath that it was Mr. Thibodeau who had first wanted to sell the buildings which he owned and that, in the circumstances, the spouses, he through Gilco, had not wanted to remain owners of buildings in that complex. Gilco had computed the gain from this sale as a business sale on the accountant's advice. Whatever the reasons that moved Gilco to characterize the income from the sale of that building in that way, I must consider the circumstances surrounding the purchase of the building by the appellant for the purposes of the instant case.

Counsel for the respondent argued that the appellant had not mentioned to the auditor the reason that she now gave for divesting herself of the property, that is the negative effect of a limited partnership. This conversation took place over the phone and surprise may have played a role. What the appellant spoke of was not the reasons for the purchase or those for the sale, but her dissatisfaction with the tax treatment proposed by the auditor.

When the appellant sold the building, she wanted to sell it. No one forced her — that is clear — but what counts is the intention at the time of the purchase, and I am of the view that, at the time of the purchase, the appellant had no speculative intention but rather a long-term investment intention. To come to this conclusion, I have taken into account the appellant's ability in the rental field, the fact that the building in question was profitable and would have become even more so over the long term, the fact that she did not resell the 16-unit residential building which she purchased after the building in question in the instant case and that it is plausible that the building in question was sold for the reasons given by the appellant and her husband.

For these reasons, the appeal is allowed with costs.

Appeal allowed.