Harjit Mangat v. Her Majesty the Queen, [1993] 1 CTC 2378, 93 DTC 442

Christie, A.C.J.T.C.:—There are two issues to be determined. First, was the profit of $13,300 on the disposition in 1986 of 153 Mooregate Crescent, Kitchener, Ontario, ("the Mooregate property”) a capital gain or business income. The second issue is the same respecting the profit of $25,665 on the disposition in 1988 of 38 Toynbee Crescent, Kitchener, Ontario ("the Toynbee property”).

The only witness at trial was the appellant. What follows is the essential testimony given in the course of examination-in-chief. He is 44 years old and is a real estate broker. His involvement with real estate commenced in August 1975 as an agent in Kitchener for United Trust, now called Royal LePage. After three years he secured employment, also as an agent in Kitchener with Du- brick Realty. Each firm employed 25 to 30 agents. In 1978 or 1979 he secured a broker's licence and in 1981 ne managed his own brokerage firm under the name Mangat Real Estate, which was later incorporated under the name TransCities Commercial Realty Inc. At the time of the hearing he was employed in Kitchener at International Realty.

Besides buying and selling real estate for clients the appellant was and is involved in property management and investments. The property management is related to rental properties in which he had an interest and similar properties owned by others. In 1987, after completing the prescribed course of studies, he received the designation Certified Commercial Investment Member. The subjects on the curriculum included income tax law and marketing.

On October 29, 1985, the appellant signed an agreement of purchase and sale regarding the Mooregate property. The completion date was December 27,1985. The purchase price was $65,000. Between 70 per cent and 75 per cent ($45,500-$48,750) was financed. This debt was secured by a first and second mortgage. The vendors were Baljinder and Simero Sangha. By agreement of purchase and sale signed on November 6, 1986, with a completion date of December 1, 1986, the appellant sold the Mooregate property to Gurdev S. Sangha, the brother of Baljinder Sangha for $79,500. The appellant said that this property was purchased: "to hold it for future cash flows." He added that it was his intention to retain it as "a long-term investment producing property.” He also mentioned that being self-employed he had no pension for the future. At the time of acquisition the Mooregate property was rented for $420 plus utilities. This rent did not produce a positive cash flow but the appellant regarded the Mooregate rental value of the property to be between $700-$750 plus utilities.

According to the appellant the thing that precipitated the sale was the advent of the Residential Rent Regulation Act 1986 of Ontario. This legislation received first reading on June 5, 1986; second reading on July 7, 1986; third reading on December 3, 1986 and royal assent on December 4, 1986.

The appellant said that when he acquired the Mooregate property it was a single family home and not subject to rent controls. He could have raised the rent to any levels he wished but this posed a difficulty. He said: “Well that is where the problem was. There was an older couple living there for a number of years, actually they are still my tenants in another building and I just didn't feel right, because I bought the property I should jack up the rent. [1] They indicated like, as soon as they find another place they would be moving to a different property, they were going to move, which they decided to do in May or June I think they gave me notice and moved out in September, after six or seven months I knew they were moving for sure.” He spoke of three year delays under the legislation:

Well, that Act covered each and every unit in the Province of Ontario. So that means, like when the tenants were moving and I was looking at these rent controls and being familiar with the system the way it was working, I just couldn't see myself applying for a rent increase and wait two or three years because they had a backlog of three years almost.

Later this was added:

Q. So when the Act changed, what changed your intention about this property?

A. I just couldn't see. I couldn't see like ever getting a positive cash flow. I couldn't afford to subsidize a negative cash flow until I get a judgment so the best way out was if I could sell it. I could have sold it before that too but I decided to sell it at that time.

There is also in evidence a document entitled Agreement to Terminate a Tenancy dated September 1, 1986, signed by the appellant and the tenant, William Korell, regarding the Mooregate property whereby it is agreed that the tenancy shall terminate on November 1, 1986, and vacant possession and occupation of the premises shall be delivered on or before that date. It will be noted that the appellant acquired the Mooregate property five months before the Residential Rent Regulation Act received first reading and it was disposed of prior to royal assent being given.

By agreement of purchase and sale signed on October 31, 1985, with a completion date of December 27, 1985, the appellant purchased the Toynbee property from Jatinder K. Sangha [2] for $112,000. By agreement of purchase and sale signed on May 8, 1988, with a completion date of May 20, 1988, the appellant sold the Toynbee property to Jack McCall for $140,000.

These questions were asked of the appellant by his counsel and these answers given about this acquisition:

Q. And why did you purchase this property?

A. For that one I had two reasons. For investment as well as, I think I had something in mind because my parents were coming over and maybe if we needed a bigger house I could move in there.

Q. So the possibility of it being your principal residence.

A. That's right.

Q. You testified you had an intention for investment purposes as well?

A. Yes. Well, okay. After I purchased it, a few months later, I think fairly quickly we decided not to move there because of the kids we wanted to stay in the same area where Settler’s Drive was and this Countryside Crescent where I still live it is just a block away from the same street, so we are still in the same area.

Q. Was Toynbee Mr. Sangha's principal residence?

A. Yes it was.

Q. Was it rented when you purchased it?

A. No.

In the notice of appeal this is said about the Toynbee property.

By the end of 1985 as our family was growing up and we needed more space and room and we were also expecting our parents from back home to come to Canada and live with us. We started to look for a bigger home with four bedrooms for our family.

When asked by his counsel why he sold the property, this exchange followed:

I had a brother who was living in, he was living in Buffalo, New York and he wanted to come to Canada.

Q. Yes.

A. Like, he is a U.S. citizen but to get Canadian immigration at that time the government had a program, an investors program or entrepreneur investors program, two of them. So he came as an investor, he invested, I sold him a motel in Guelph, where my wife was part owner. We purchased the motel and we had an appraisal done but the appraisal came away lower than the purchase price. So we were really short of cash so that is one reason I sold it to make up for the downturn.

Q. So in fact the profit made from this was reinvested in another?

A. That's right.

Q. Real estate property?

A. Yes.

Q. How long did you own your interest in the motel?

A. Until 1991.

Q. What happened in 1991?

A. That property was bought by Non-Profit Housing, City of Guelph.

The appellant testified about other real estate with which he was involved. Unless otherwise indicated, the real estate referred to is located in Kitchener. Concisely put this evidence is that his first purchase was of a home at 38 Bingeham Street in 1975 where he resided until 1981. It was then rented until 1985 when it was sold. The sale was to a group of German investors who were assembling an entire block and were very much in need of 38 Bingeham Street. In 1981 the appellant acquired as his principal residence a single family home at 27 Settlers Drive. The debt secured by a mortgage on the Settlers Drive property was paid with proceeds from the disposition of 38 Bingeham Street. In 1985 when the Mooregate and Toynbee properties were acquired the appellant borrowed funds to assist in payment of the purchase price of these properties. This debt was secured by a new mortgage on 27 Settlers Drive. In 1987 he sold this property and moved to 151 Countryside Crescent which became and still is his principal residence. In 1983 he acquired a ten per cent share of a 20-unit townhouse complex at 138 Blackhorne Drive which he retains to this day. The remainder of the interest in the property is held by two physicians. An 11-unit townhouse at 179-193 Taylor Avenue was acquired in 1984 by Akal Amrit Investment Corporation and that continues to be owned by the corporation. The appellant acquired "almost 25 per cent" of the issued shares of Akal Amrit which he still holds. In 1988 he and his wife purchased the previously mentioned motel in Guelph. It was sold to the Guelph Non-Profit Housing Corporation at its solicitation in 1991 as a site for non-profit housing. In 1986 the appellant and another each purchased a 50 per cent interest in 218-220 Herbert Street, Waterloo, Ontario. Later the appellant became the owner of 218, and 220 is owned by that other person. Two eighteen Herbert is still owned as a rental property by the appellant. In the same year he and Anina Novotny each acquired a 50 per cent interest in a single family townhouse at 287 Linden Drive, Cambridge, Ontario. It is also a rental property and in 1990 the appellant acquired Novotny's share. He still owns this real estate. In January 1989 he purchased a 30-unit apartment building at 264 Fairview Road, North, which he still owns. The corporation received offers to purchase the Taylor Avenue townhouse but they were not accepted. No offer was received for the Fairview Road apartment. No attempt has been made to sell any of the properties referred to in this paragraph that have not been sold.

The appellant explained that one aspect of his business was on occasion to give clients seeking to sell real estate a guaranteed price. Although no such properties were mentioned in oral evidence-in-chief, the notice of appeal States:

In 1987 I had bought and sold two properties, 138 The Country Way Drive, Kitchener and 20 Culpepper Drive, Waterloo. Both of these properties were bought to help the client by giving them guaranteed prices to enable them to make a move or to purchase another property. Both of these properties were held for a few months and then sold. They were part of my business transactions and were not bought for investment purposes.

The appellant was thoroughly cross-examined.

It was suggested to him that Mr. Korell was employed by McDonald West- burne, a substantial firm in Kitchener engaged in selling electrical equipment to contractors, and he answered: Probably is.” It was further put to him that at the time Korell was the tenant of the Mooregate property he was "a gentleman in his early 50s” to which he replied: “Could be, yes." After stating that he never listed the Mooregate property for sale the appellant, upon being confronted with a multiple listing regarding 153 Mooregate, Kitchener, said it had been listed about October 10, 1986. The Mooregate property was renovated early in November 1986. In a written statement to Revenue Canada when he was negotiating with officials there about the reassessments under appeal he said:

There is no reason to assess this property as business income. We had all the intentions to hold on to the property. The existing tenants were excellent tenants. Since tenants decided to move out at their own, after living there for a number of years, the property needed complete painting and decorating and some repairs, while we were renovating this property to be rerented. At about the same time we received an excellent offer to purchase this property and decided to sell, rather than apply for a higher rent increase to the Rent Review office based on increased costs. Since it takes a long time to receive decisions from Rent Review office, selling of the property was the best alternative we had.

While included in the documents entered in evidence by the appellant is evidence of advertising with reference to other property in the Kitchener- Waterloo Record, he admitted to not having advertised for a tenant for the Mooregate property. It was also established that the acquisition of the Mooregate property was 90 per cent financed, not 70-75 per cent as said in earlier testimony.

The entire purchase price of the Toynbee property, $112,000, was financed. This included a first mortgage of $82,500. The interest adjustment date was February 1, 1987, and the last payment date was February 1, 1988.

The appellant stated that after the closing date on the acquisition of this property, i.e., December 27, 1985, he and his wife decided not to occupy it as their residence and in the first week of January 1986 he began to advertise for a tenant. It was established from an invoice of the Kitchener-Waterloo Record that 38 Toynbee was advertised on December 27, 28, 29, 30, 1985, indicating that the decision had been taken prior to the completion date for the acquisition of the Toynbee property. As for the appellant's parents, they visited him during the summer of 1987 for four months. Included in the appellant's return of income for 1986 is a statement of rental income and expenses for the period ended December 31, 1986 regarding the Toynbee property. The property was rented for 10.5 months at $800 per month for a total of $8,400. Interest and taxes alone for all of 1986 were $11,028 plus $1,477 for a total of $12,505.

In notice of appeal the appellant said with reference to the rental income for this property: “This rental income was sufficient to give us a positive cash flow in the second and third years. Sufficient rental income in future years." Included in his return of income for 1987 is a statement of rental income and expenses regarding the Toynbee property. It shows income of $840 x 12 =

$10,080. Interest and taxes alone were $9,138 + $1,603 = $10,741. Included in his return of income for 1988 is a statement of rental income and expenses regarding the Toynbee property for the period January 1 to May 20, 1988. Income is $800 x 4 $3,200. Interest and taxes alone were $4,350 + $610 =

$4,960.

The appellant was asked if he had bought and sold any properties that had not been previously referred to at the hearing. The answer was no. Counsel for the respondent mentioned 50 Ruttle Street and the appellant admitted purchasing that property from Ina and Anthony Anvockni on September 17, 1990 for $135,000 and selling it some five weeks later for $151,000.

With respect to the purchase of the motel in Guelph the appellant reiterated that: "The property was bought to facilitate my brother's immigration to Canada as an investor in an Investor Category Program.” There is no mention of his brother Parmjit Mangat in the notice of appeal. There, this is said:

In January, 1988 we purchased another investment property, a Motel with a closing date of May 27, 1988. We realize that we will need more down payment on the Motel then we anticipated. We were forced to sell 38 Toynbee Crescent. The proceeds from the sale of this property were applied toward the purchase of the Motel. We are still holding the Motel as an investment property.

The appellant testified that his brother agreed to manage the motel for as long as he could and did in fact do so for two or three years. This was reduced to: “At least a year and a half or so." He added: He (his brother) was there 24 hours.” This exchange followed:

Q. He was there 24 hours? Sir, isn't it true that your brother Parmjit Mangat was allowed to come into this country on the basis that he would run this motel and that subsequently, as a result of an immigration hearing, he was given a departure notice because he was not following the terms by which he had been allowed to enter that in fact he was pursuing another business?

A. That is true.

Q. That is true? Can you tell me then how he could have been running the motel on a 24-hour a day basis and at the same time be operating an immigration consultancy in Toronto?

Blatantly evasive answers were the response to this and other related questions.

The appellant further testified, in contradiction to what he had said earlier, that the motel was sold to the City of Guelph in August 1990. He was pressed about this because March 14, 1991, is the day the notice of appeal is dated and was filed. After some probing it was ascertained that about two months after the motel was purchased in May 1988 the appellant was approached by Mr. Jack Dearing, a realtor who was acting for the Guelph Non-Profit Housing Corporation, about the sale of the motel. Lengthy negotiations with offers and counteroffers followed. An agreement for purchase and sale was entered into by the Housing Corporation and 773478 Ontario Inc. It was executed by the former on February 6, 1991, and by the latter on February 7, 1991. The closing date was April 30, 1991. This agreement was amended on March 31, 1991, to provide a closing date of June 3, 1991. The purchase price was $836,000.

The motel was owned by 773478 Ontario Inc. The appellant's wife owned 60 per cent of the shares of that company and the other 40 per cent were owned by Parmjit Mangat. At the time of incorporation the appellant was president and his wife secretary. On the closing date of the acquisition of the motel, Parmjit Mangat was president. The appellant's evidence about this is:

Q. You are in fact the president, or were or are, is this company still in existence?

A. Yes.

Q. Are you president of that company?

A. Under the immigration laws where my brother, before he could apply we have to have, we have to establish a company where he could, you know, that was done legally but as soon as he got the immigration the shares were transferred to mine.

Q. I am not asking about the shares, sir, I am asking who was the president of the company?

A. I am not any more, he is.

Q. Who was at the time the motel was bought?

A. I think on the closing date I think my brother became the president and my wife was secretary.

Q. You had no involvement at this point?

A. No.

HIS HONOUR: You had never been an officer of that company?

THE WITNESS: Just when the company was formed Your Honour but once the property was purchased then I was out of it.

HIS HONOUR: What were you when the company was formed, what office did you hold?

THE WITNESS: Myself and my wife was the sole president and secretary.

HIS HONOUR: You were the president and she was the secretary?

THE WITNESS: Yes.

HIS HONOUR: And later on did your brother become president?

THE WITNESS: Yes.

After the motel was acquired application was made for a severance of the property and a building permit. A copy of the application for severance addressed to the Guelph Committee of Adjustment was placed in evidence by the respondent. It is dated June 8, 1988. The name of the owner of the property is stated to be "773478 Ontario Inc. per Harjit Mangat, president." The application is signed by Harjit Mangat as president of 773478 Ontario Inc. At the foot of the application is a statutory declaration that“ all the statements contained in this application are true."

In Pierce Investment Corp. v. M.N.R., [1974] C.T.C. 825, 74 D.T.C. 6608 (F.C.T.D.) Mr. Justice Walsh said at page 831 (D.T.C. 6612):

I am also of the view, as has been expressed in other cases, that while the evidence of the witnesses is helpful in endeavouring to determine their intentions, their actual conduct and the steps they took to carry out these intentions gives a much better indication of what they actually were. Without intending to cast any aspersions on the credibility of the witnesses in the present case it is nevertheless evident that in any case where a distinction must be made between a transaction which constitutes an adventure in the nature of trade and one which leads to a capital gain, one must expect the witnesses to insist that their intentions were solely to make an investment and that the idea of reselling the property at a profit had never occurred to them even as a secondary intention at the time of making the original investment, but was merely forced on them subsequently by some event beyond their control. If they were not in a position to testify to this effect they would have little or no ground for appealing against the assessment.

This passage was cited with approval by Mr. Justice Dubé in Rudelier Ranches & Livestock Co. v. Canada, [1989] 1 C.T.C. 417, 89 D.T.C. 5180 (F.C.T.D.) at page 420 (D.T.C. 5182). In Youngman v. The Queen, [1990] 2 C.T.C. 10, 90 D.T.C. 6322 (F.C.A.) Mr. Justice Pratte, who delivered the reasons for judgment of the Court, said at pages 13-14 (D.T.C. 6325):

I will deal first with the question of onus of proof. The rule is well known. When the Minister has, in his pleadings, disclosed the assumptions of facts on which the assessment was made, and when, as is the case here, it is not contested that the assessment was in fact based on those assumptions, the taxpayer has the onus of disproving the Minister's assumptions.

When the fact that in trading cases a taxpayer, if he is an individual, is almost necessarily required to testify about his intentions at the time the property giving rise to the gain was acquired is combined with the rule that the onus is on the appellant to disprove the assumptions of fact upon which the assessment was made, the credibility of the appellant can be crucial to the success of his appeal. The same applies where the appellant is a corporation with respect to the individual whose intentions at the time of acquisition are attributable to it. Indeed if the Court concludes that the appellant or the corporate witness is not credible dismissal of the appeal follows in the absence of persuasive evidence about intentions that is not dependent on the credibility of such witnesses for its veracity.

The assumptions of fact relied on by the Minister of National Revenue in reassessing the appellants liability to tax are set out in paragraph 21 of the reply to the notice of appeal. The principal assumption is that: “At the time of acquisition of each of the above noted properties (the Mooregate and Toynbee properties), the appellant had present in his mind the possibility of resale at a profit and that possibility was a motivating factor which induced each of the purchases to be made." That the reassessments were in fact based on those assumptions was not challenged. It follows that the onus is on the appellant to establish on a balance of probability that the reassessments are in error. This leads to consideration of the appellant's credibility.

Based on what transpired at trial and a subsequent careful review of the transcript, I am led to the conclusion that he is not a credible person in the context of these appeals. My judgment that his testimony, to the extent that it bears in any significant way on the disposition of these appeals, is not worthy of belief rests on an overall analysis of it in relation to his demeanour, evasiveness and contradictiveness. There being no other evidence on which it can be concluded that the onus of proof referred to has been discharged, these appeals cannot succeed.

The appeals are dismissed.

Appeals dismissed.