Madeline Bourgeois and Robert Bourgeois v. Minister of National Revenue, [1991] 2 CTC 2717

Lamarre Proulx T.C.J. [Orally]:—The appellant is appealing from assessments by the respondent, the Minister of National Revenue, for the years 1982 and 1983.

The issue is whether the appellant's income from the sales of three properties is to be treated as capital or income.

The facts on which the respondent relied in assessing the appellant are described in paragraph 4 of the reply to the notice of appeal, and are as follows:

[Translation]

4. In assessing the appellant for the 1982 and 1983 taxation years, the respondent, the Minister of National Revenue relied inter alia on the following presumptions of fact:

(a) on January 16, 1976 the appellant purchased a site located in the parish of Ste-Marcelline, known and designated as a part of lot No. 474 of St-Ambroise parish;

(b) during the summer of 1976 the appellant subdivided and sold nine lots of the land which he had just acquired on January 16, 1976;

(c) the appellant also sold two other lots from the same land during 1978;

(d) since purchasing this land the appellant had subdivided it into lots and during 1980 built a road which he christened “Chemin Bourgeois";

(e) on April 14 and June 19, 1981, the appellant sold two other lots from the land which he bought in 1976;

(f) on November 17, 1978 the appellant obtained a building permit for a house located at 20 rue Bourgeois;

(g) on October 15, 1979 the appellant obtained a building permit to build a

house located at 30 rue Bourgeois, and this was sold on July 15, 1983;

(h) on November 13, 1980 the appellant obtained a building permit for a house

located at 40 rue Bourgeois, and this house was sold on November 15, 1982;

(i) on October 20, 1980 the appellant bought a house located at 321 Valois which he renovated and sold on November 24, 1983;

(j) the appelant had advertised his houses for sale in the Joliette newspaper,

but the house located at 40 rue Bourgeois was sold through a broker;

(k) during the 1983 taxation year the appellant built another house located at 35 rue Bourgeois and sold it in 1984;

(l) the appellant hired an employee to build the houses;

(m) the building of the houses was financed by mortgage loans obtained from the “Caisse Populaire de Ste-Marcelline de Kildare" and the “Caisse d'Établissement de Lanaudière" at a high interest rate;

(n) the appellant granted mortgage loans of $25,000, $6,000 and $11,000 respectively when he sold the houses located at 40 rue Bourgeois, 30 rue Bourgeois and 321 Valois;

(o) the appellant went into the building of houses or the purchase and renovation of houses to resell them at a profit or, at least, one of the important factors in building or buying and renovating a house was to resell them at a profit;

(p) during the 1982 and 1983 taxation years, the respondent included in the

calculation of the appellant's income the following additional income:

Profits made on	1982	1983
property located at 40 rue Bourgeois	$17,550
property located at 30 rue Bourgeois		$28,000
property located at 321 Valois		$ 7,500
	$17,550	$35,500
less amounts reported by the appellant	$ 8,775	$17,750
	$ 8,775	$17,750

In 1976 the appellant bought a fifteen-acre wood lot located opposite his farm property for $500. The appellant, who is a farmer by occupation, contends that he made this purchase for firewood and to build income-producing properties on it. However, he sold nine lots during that year. In 1978 he sold two lots and in 1981 two more lots. He submits that these were unsolicited offers. That is possible, but there is no evidence in this regard.

In January 1981 a subdivision plan was drawn up by a surveyor. In 1978 the appellant built a house at 20 rue Bourgeois, leased it for $160 a month to a young couple for some years and then leased it to his son. The amount of the rental is not mentioned.

In 1979 the appellant built another house at 30 rue Bourgeois. He leased it for $225 a month. In 1983 the tenant was six months behind on his payments. The appellant then sold the house. In any case, the rental did not cover the monthly mortgage payments.

In 1980, another house was built at 40 rue Bourgeois. Due to rent collection problems once again, the house was resold within less than two years. In 1980, another house was also purchased at 321 rue Valois which the appellant renovated and resold in November 1983. The monthly mortgage payments were $449 and the rent was $300 a month. In 1983, the appellant built another house at 35 rue Bourgeois and resold it in 1984.

The appellant gives as his reasons for these resales the fact that the tenants did not pay the rent on time. Even setting aside the collection difficulties, the fact remains that the rental was not profitable. The amount of the rent was always well below the mortgage payments. Further, in 1983 the mortgage rate was 11 A per cent, and despite this lower rate the appellant sold two properties. The appellant made no analysis of the profitability of his proposed rental activities. Further, it is well known that a single-family house is not the type of income-producing property to build when what the builder has in mind is rental income.

To determine whether a taxpayer's intention was long-term investment or to resell at the right moment, the Court can consider certain questions.

(1) The taxpayer's conduct: here, despite the problems encountered in collecting rent, the appellant continued building houses and did so without changing the single-family design of his houses, which indicates a parallel purpose of resale, or in other words, that the rental objective was not the only one the appellant had in mind.

(2) Can the purpose alleged by the taxpayer be the real purpose? It must be determined whether there was a reasonable expectation of profit, or in other words, is the purpose plausible? In the instant case, it is difficult to believe that the purpose was plausible in view of the type of house built and the amount of rental compared with the mortgage payments.

(3) For a business to be classified as a business it does not have to be incorporated nor does it have to be the taxpayer's profession or principal occupation, especially when that business becomes a sizeable operation.

In Happy Valley Farms Ltd. v. M.N.R., [1986] 2 C.T.C. 259; 86 D.T.C. 6421, Rouleau, J. suggested certain tests to aid in determining the reason or reasons for purchase:

(1) the nature of the property sold: is it really income-producing property? — in the circumstances of the instant appeal, the houses in question could hardly be classified as true income-producing properties;

(2) the length of period of ownership: this is not conclusive, but it becomes more so when the next test is positive;

(3) the number of transactions: in the instant case, they are numerous;

(4) work done on the properties: in the instant case, this test is not so applicable;

(5) the circumstances that were responsible for the sales: the reasons given here are the difficulty in collecting rent, which is doubtful as the appellant went on building and buying other houses.

Looking at the reasons for the purchase, attention must also be paid to the theory of secondary intention, which may be described as follows: it exists if, on the facts, the taxpayer would not have made the purchases unless there was a possibility of resale. Where this possibility of resale has been one of the deciding reasons for the purchase, the courts have held that the earnings resulting from the sale must be treated as income.

This theory was best expressed by Noël, J. in Racine, Demers and Nolin v. M.N.R., [1965] 2 Ex. C.R. 348; [1965] C.T.C. 150; 65 D.T.C. 5098:

[Translation]

In considering this question of whether at the time of the purchase the appellants had what has sometimes been called a “secondary intention” of reselling this commercial enterprise if the circumstances were right, it is important to consider what that idea involves. It is not sufficient simply to find that if a purchaser had thought about it at the time of the purchase he would have been obliged to admit that, if an attractive offer were made to him following his purchase, he would resell, for anyone buying a house for his family, a painting for his house, machinery for his business or a building for his factory would be forced to admit, if the person were honest and the transaction not exclusively based on sentiment, that if offered a sufficiently high price at any time after the purchase he would resell.

It thus appears that the mere fact that a person who buys a property for the purpose of using it on capital account may be induced to resell it if a sufficiently high price is offered to him is not sufficient to change a capital acquisition into a commercial-type undertaking.

That is not what is meant by a "secondary intention”, to use this phraseology.

To give a transaction involving a capital purchase the twofold nature of being a commercial-type undertaking as well, a purchaser must at the time of making the purchase have in mind the possibility of reselling as one reason prompting him to make the purchase; this means that he must have in mind the idea that if certain circumstances occur he hopes to be able to resell it at a profit instead of using the thing purchased on capital account.

In general, a decision that such motivation exists should be based on inferences from the circumstances surrounding the transaction rather than from direct evidence of what the purchaser had in mind.

When a man buys a large area of land for the avowed purpose of building on it, for example, a shopping centre and leasing stores so as to obtain rental income, but at the time of purchase makes no arrangement to obtain permanent financing of a large sum of money that he will have to invest or that will be required for the purpose of his project, or no arrangement to obtain tenants, and has obtained no information on whether the site in question has enough of the features needed for such a project, or when the land is located in a sector adjacent to another sector which is growing and is rapidly expanding on the periphery, and where the value of the land has already begun increasing, and the purchaser has experience in the real estate field which enables him to anticipate changes that may occur in real estate values, it almost necessarily follows that the man has in his mind when he buys the land the idea that if he is unable to make the necessary arrangements to create a shopping centre, he will undoubtedly be able to resell the land at a profit.

From all the foregoing I conclude that the appellant necessarily had a secondary intention to resell the real estate in question because the evidence clearly showed that there was no possibility of making a profit in the appellant's rental business and that this aspect does not seem to have concerned him, since not even a cursory profitability study was made and the appellant continued to build and to purchase properties. Anyone whose only real objective is long-term rental income makes at least a brief comparison of his income and expenditure. Nothing of this kind was done.

The appeal is accordingly dismissed.

Appeal dismissed.