Matt’s Apartments Ltd. v. Minister of National Revenue, [1989] 2 CTC 2199, 89 DTC 441

Lamarre Proulx, T.C.J.:—This is an appeal from the respondent's reassessments with respect to the appellant's 1981 and 1982 taxation years.

The question in issue is whether the gains derived from the aquisition and disposition of two properties should be included in the appellant's income as capital gains or as gains from a business or an adventure in the nature of trade.

The Facts

The appellant is a company, the two shareholders of which are Mr. and Mrs. Rodosevic. He is the president and she is the secretary. In 1967, Mr. & Mrs. Rodosevic started buying and selling apartment buildings. Some time later, the appellant was incorporated and from 1973 to 1980 participated in some 15 transactions of purchase and resale. Except in one or two cases, the properties were kept only for periods of a few months.

This appeal concerns two properties, one located at 1139 Barclay Street, Vancouver, and the other at 1445 West 72nd Avenue, Vancouver. They will be referred to as the “Barclay” property and the "Marpole" Property.

Mr. and Mrs. Rodosevic wanted to build up their assets so that they would not be dependent on Mr. Rodosevic's first trade, that is commercial fisherman, as they had been made aware that Mr. Rodosevic had a serious problem with his back. They decided that they would acquire apartment buildings. The first one was acquired in 1967. They moved in the basement, fixed it up and resold it. The pattern of buying, fixing and reselling the properties has been kept throughout the years. The intent, in their words, was to "upgrade themselves" and, according to Mrs. Rodosevic, they were always looking for the ultimate dream of an apartment building. She thought she had found it with the Marpole property purchased March 18, 1980 but then it was not, it was to be with the Barclay property, the interim agreement of which is dated July 31, 1980 that is, four months later.

When purchasing and reselling properties, the appellant had always used the services of a Mr. Jake Ardichuk who was carrying on business under the name of Uptown Realty Ltd. It was the practice of this real estate agent to "double end" his real estate deals. He would sell the property and at the same time obtain a listing for the resale of the same property.

The deed for the Marpole property was signed in the same circumstances. Mr. Rodosevic said that he did not have the choice. Mrs. Rodosevic however wanted to keep this apartment building. It was in a good location, had an elevator, an older clientele, and 23 suites. Her husband's uncle came to look after the property. Uptown Realty acting on its listing brought two offers to the appellant who refused them and had to defend an action in Court concerning the lost commission. The appellant won. Needless to say that the relationship with Uptown Realty ceased.

I find strange however that if Mr. and Mrs. Rodosevic wanted to keep the Marpole property as an investment in rental property, as they contend, that the Barclay property be brought to their attention by another real estate company. That surely indicates that, in fact, they never stopped looking for other apartment buildings. The other fact that the taxes were left unpaid on the Marpole property also appears an indication that there was no intent of keeping it for a long time.

The clientele was an older one which was good in one sense but bad in another. It was more difficult to obtain the authorization of a rental increase fee from the provincial board dealing in these matters. No documentary evidence of financial projections as to the rental income was presented to the Court and it seemed evident from the testimony that no thorough investigation had been made in this respect.

When the appellant bought the Barclay property, that was supposed to be the ultimate dream; it was a high rise of 25 suites, the purchase price of $1,300,000 was below replacement value, the maintenance costs were low. However, at about the same time in August 1980, the appellant bought another property on Sussex Avenue for $685,000.

The Marpole property was sold in June 1982 and the Barclay property on January 1981. The reasons for the sale of the Marpole property are that the appellant was presented with the Barclay property which represented more what the appellant was looking for and for financing reasons. In the case of the Barclay property, the cause of the resale is financing problems.

In addition to the real estate transactions, the appellant had in the year 1981 also purchased four oil and gas units for $220,000 as a tax shelter. In that same year, Mr. and Mrs. Rodosevic had also bought a residential home, situated on Westhill in the amount of $625,000. It was transferred to the appellant in the Spring of 1982.

Counsel for the appellant referred me to the following cases:

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

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

Hiwako Investments Limited v. The Queen, [1978] C.T.C. 378; 78 D.T.C.

6281 (F.C.A.)

S. & S. Properties Ltd v. The Queen, [1978] C.T.C. 412; 78 D.T.C. 6294 (F.C.T.D.)

Eugene Van Der Haegen v. M.N.R., [1987] 1. C.T.C. 2193; 87 D.T.C. 126

(T.C.C.).

Counsel for the appellant put forward the propositions that though the appellant was involved in a substantial number of trading transactions it was entitled to have real estate that was in the nature of investment. It is true. But the evidence must be to the effect that the prospect of sale was not an operating motivation in the acquisition of the capital property. See Crystal Glass Ltd. v. Canada, [1989] 1 C.T.C. 330; 89 D.T.C. 5143 (F.C.A.).

Counsel for the appellant says that the size of the downpayments, the fact that there was no borrowed money and the rejection of the offers for the Marpole property are indicia of an investment purpose. The unforeseen circumstances of the high interest rates, the failure of the tax shelter, the difficulty in selling the Sussex property were the elements that frustrated the appellant's sole purpose of investment.

However, no projections of rental income and no financial plans have been adduced in evidence. Moreover, purchase and resale of properties continued as usual if not increased. There was an evident financial over- extension. These are not circumstances that can lead me to find that the appellant had only one intent that is to make a long-term investment in rental properties. I cannot but find that the appellant did have in the acquisition of the two properties in question as an operating motivation the prospect of resale of these properties. I was asked by Counsel for the appellant, in the event of a negative finding, to make the finding that for the taxation years in question, there were carry-back losses to be included in the calculation of income. This was agreed to by Counsel for the respondent. To this extent, the appeal will be allowed, without costs, and the assessment will be referred back to the respondent, to reassess accordingly.

Appeal allowed in part.