Kenneth Innes v. Minister of National Revenue, [1992] 2 CTC 2313, 92 DTC 1755

Beaubier, T.C.C.J.:—The trial in this matter was heard at Kamloops, British Columbia, on April 7 and 8 and at Kelowna, British Columbia, on April 14, 1992.

The following witnesses were called on behalf of the appellant: the appellant; Janine Innes, his wife; Bruce Keeling, C.A. his accountant; Dave Murin, a friend of the appellant from McBride; Evelyn Watters, the appellant's sister-in- law; and the appellants appraiser, Mr. I. Jorgensen from Prince George. The Minister of National Revenue called one witness, Mr. David Wong of White Rock, an appraiser and an employee of the Minister of National Revenue.

At issue is the appellants 1987 taxation year. In that year, the appellant claimed a business loss resulting from the sale of 1020-2nd Avenue, McBride, British Columbia. This was denied. After reassessment Mr. Innes appealed.

The appellant and his wife had owned and operated a farm near Fort St. John, B.C. which they sold. They then moved to Kamloops where they and another couple planned to go into farming together. Once they got to Kamloops they realized that all of the adults in both families would have to work off the farm and on the farm to make ends meet. Farm land in the Kamloops area was more expensive than they had anticipated.

While they were living in Kamloops, Mrs. Innes became a licensed realtor. The Innes’ decided that land was cheaper in the McBride area of British Columbia. In 1981, they moved to McBride where Mrs. Innes continued her occupation as a licensed realtor. Mr. Innes worked in a logging camp near McBride with Mr. Murin and he told Mr. Murin that he intended to buy properties in McBride, then up and sell them so as to get enough money together to acquire a working farm. Mr. Murin also described three farms in the general McBride area which he knows Innes looked at.

Within a few months after arriving in McBride, the Innes' purchased three properties in the McBride area or town site. One was the Westlund property consisting of a house and 14 acres of land just outside of McBride which was purchased in May of 1981 for $76,000. They lived in this house from May 1, 1981 until September of 1984. The second was the Dominion Street property in McBride which they purchased in June of 1981 for $27,000. They renovated it, rented it and later lived in it for a while. The third was a mobile home which was not the subject of further evidence. The evidence is uncontested that the Innes improved the Westlund house at a cost for material alone of $6,000 and did very substantial improvements to the Dominion Street property.

The chronology respecting the Innes's real estate properties in the McBride area is as follows:

1. May 1, 1981: Innes purchased the Westlund property from Huxleys for $76,000 including the assumption of mortgage of $60,925.54 with mortgage payments of approximately $700 per month. They moved into the Westlund house and commenced improvements.

2. July, 1981: Purchased Dominion Street property in McBride.

3. November, 1981: Listed Dominion Street property.

4. July 4, 1982: Listed Westlund property for sale for $104,500 (Exhibit R-3)

5. September 6, 1984: Moved from Westlund property to Dominion Street property and rented Westlund property to a Minister and his family.

6. February, 1985: Mr. Innes obtained a job in Kamloops and Mrs. Innes and the family remained in McBride.

7. June 6, 1985: Mrs. Innes negotiated a sale of the Westlund property at a value of $82,000 in trade for 1020-2nd Avenue, McBride (the subject property) which was valued on sale at $45,000 (Exhibit R-4). The equities in the two properties traded were equal at these values.

8. July, 1985: 1020-2nd Avenue was listed for an asking price of $41,500 and at the same time it was rented.

9. 1985: The family moved to Kamloops.

10. June 1, 1987: 1020-2nd Avenue is sold to Thiel for $26,092 consisting of a commission debt owed to Thiel plus approximately $200 and his assumption of the mortgage against the property. The offer is dated May 1987.

11. Later the Dominion property is sold and subsequently foreclosed by the Bank of Nova Scotia in 1991.

While in McBride the Innes family was subjected to a series of major setbacks. In 1981, the mill where Mr. Innes was working was closed and he lost his job. Mrs. Irnes began suffering from Crohn's disease and was flown to Vancouver for an operation for that disease. Sometime in this period the CNR closed McBride as a rail centre. They also lost their son, one of two children, in a drowning accident while they lived in McBride. Evelyn Watters, the appellant's sister-in-law, testified confirming the Innes family’s interest in farming and the unfortunate happenings in McBride.

With respect to Mr. Innes' purchase of the Westlund property and the family’s residence in that property, it should be noted that at the time of purchase the property consisted of a home and fourteen acres of land outside of McBride. Both Mr. and Mrs. Innes had good jobs which were full time when they purchased the property and during the first few months of residence in the house. The property was near McBride which acted for the benefit of the parents and the children in respect to their jobs and activities. The property was not listed for more than a year after the purchase of the property and only after Mr. Innes lost his job when the mill was closed. It is the finding of the Court that the property was purchased and lived in as a personal principal residence by the Innes family.

David Wong, an appraiser, testified for the Minister of National Revenue. He submitted four comparable properties:

Number two was a mobile home in Valemount, a village over 50 kilometres from McBride, but in“ "superior" condition. Numbers one and four were sales by mortgagors which Mr. Wong admitted in cross-examination would, by its process, reflect the lower end of market value. Number one was also valued by Mr. Innes’ appraiser.

It should be noted that Mr. Wong also examined the property known as 981-5th Avenue, McBride, which sold in July 1985 for $42,000. He decided not to include this in his appraisal as to him it represented a sale in excess of market value. Mr. Wong also did a cost approach based upon the Marshall and Swift guide which confirmed his ultimate valuation and allowed him to extract the value for land alone. However, he prefers the comparison approach respecting the properties listed in the preceding paragraph to arrive at the values in McBride.

The result was that his estimated values of 1020-2nd Avenue, McBride, B.C. including both land and building were:

The advantage of his costing approach is that it did serve to extract the land values for the dates in question. Mr. Jorgensen, the appraiser instructed by the appellant, did not give any estimate of bare land values. The result is that the only evidence before the Court, and which evidence is accepted by the Court, is Mr. Wong's which is as follows:

for the land alone situated at 1020-2nd Avenue, McBride, at the dates above described.

The appellants appraiser, Mr. I. Jorgensen of Prince George, B.C., included four property sales in McBride as his comparables. One of these (#1) was the subject property situated at 1020-2nd Avenue, McBride. However, Mr. Jorgensen admitted in cross-examination that he was not aware that the Innes had isted 1020-2nd Avenue, McBride for $41,500 approximately one month after they had acquired it.

His remaining comparables are described as follows:

It should be noted that the only property referred to by both appraisers is the property known as 909-5th Avenue, McBride, sold in July, 1985 for $32,500 which is the #4 comparable of Mr. Jorgensen and the #1 comparable of Mr. Wong.

When Mr. Innes’ transactions, circumstances and family arrangement are examined from the time the Innes family moved to McBride until they finally terminated all property interest in McBride, the Court finds that:

1. The Westlund property was purchased as a principal residence in 1981. It was an acreage; it was lived in for three years; it was not listed for sale for more than a year, during which period many of the family's circumstances changed; and it was only traded after Mr. Innes had moved to a job in Kamloops. It was purchased with a large mortgage on it, however by doing this the family managed to keep some capital available for the purpose of dealing in the other properties it purchased, namely, the Dominion Street property and the mobile home.

2. The Dominion Street property was purchased to improve and flip by way of a transaction in the nature of trade, but the market in McBride dropped and Innes was caught in a falling market.

3. There is no evidence in respect to the mobile home.

4. The Westlund property, as a principal residence, was traded on 1020-2nd Avenue, McBride, in order to obtain a more saleable property and reduce the Innes' costs of servicing the $700 per month charges of the mortgage to a mortgage at 1020-2nd Avenue, McBride, which cost approximately $400 per month. At this time, their income was very limited and the family overhead was relatively high. Mr. Innes was working in Kamloops and their properties in McBride were not selling at the prices they were asking. The result of the foregoing findings of the Court is that 1020-2nd Avenue, represented a way out and not an intention to profit. 102O-2nd Avenue, McBride, was not acquired by Mr. Innes or sold by him with an intention to profit. This is particularly evidenced by the fact that it was listed for $41,500 within a month of its acquisition even though, for the purpose of the trade, its value was struck at $45,000.

5. Any loss which may be determined in respect to the sale of 1020-2nd Avenue, McBride, is not a business loss since it does not represent a transaction made in the nature of trade.

Even though Mr. Innes listed the 1020-2nd Avenue, McBride for $41,500 he did not receive an offer in respect to it until the trade in question approx imately two years after the date of listing. In the interim, other properties in McBride were selling as is evidenced in the appraisal reports.

Of the valuations determined by the appraisers, the Court finds that sale number 3 contained in Mr. Wong’s appraisal report is the most comparable to the subject property. In his appraisal, Mr. Wong adjusted the value of this to the subject property and determined that the value of the subject property as of June 10, 1985 was $37,000. Mr. Jorgensen estimated the subject property to have a market value of $43,500 as of June 15, 1985. The unfortunate fact is that Mr. Innes did not tell Mr. Jorgensen that he had listed the property within one month of June 15, 1985 for the sum of $41,500 and did not receive an offer on it for two years. The result is the sales numbers 2 and 3 contained in his appraisal simply do not relate to the subject property on the evidence before the Court. Mr. Jorgensen himself discounted sale number 4 as being of too low a value and the Court accepts this statement by Mr. Jorgensen, and notes that is reflected in the adjusted valuation of the same property by Mr. Wong.

In the foregoing circumstances the Court determines the value of the subject property as of June, 1985 to be $37,000, in the event that such determination is necessary for the purposes of the parties. The Court further determines that the value of the subject property at the time of its sale by Mr. Innes is, in fact, the valuation that Mr. Innes and Mr. Thiel put on that property in 1987 namely $26,092. This was a transaction between strangers and represents a disposal of the property after waiting for two years without an offer.

It is the judgment of this Court that the appellant's claim to a business loss respecting the acquisition and sale of 1020-2nd Avenue, McBride, British Columbia, was properly disallowed by the Minister of National Revenue as it was not a business transaction, nor is it a permissible deduction by way of an adventure in the nature of trade.

The appeal is therefore dismissed.

Appeal dismissed.