Silvio Venchiarutti v. Minister of National Revenue, [1989] 2 CTC 2461, 89 DTC 676

Christie, A.CJ.T.C.: —It is alleged in the notice of appeal and admitted in the reply thereto that by an assessment dated July 9, 1985, the respondent disallowed a claimed business loss deduction of $206,132 regarding the appellant's 1984 income and assessed on the basis that this loss was an allowable capital loss and that the Minister disallowed related claimed noncapital losses carried forwarded to the appellant’s 1985 and 1986 taxation years. Also there is no dispute about these facts that are alleged in the notice of appeal:

8. In 1976, the Appellant moved to California and formed a joint venture called Glen Arbor Developments. The members were Venchiarutti Investment Corporation, a corporation controlled by the Appellant, and Glenside Investors Corporation, a corporation controlled by one Ken Bond.

9. In early 1977, Glen Arbor Developments purchased a one-half interest in an approximately 132 acre parcel of land in Morgan Hill, California. It was intended that Glen Arbor Developments and Rockwood Ranch as joint venturers would subdivide the property into a 57 lot subdivision to be known as "Rockwood Estates".

10. At the same time, the Appellant and his spouse, Edda Venchiarutti, each purchased a 50% interest in a 2.5 or so acre parcel which was adjacent to the 132 acre parcel and was previously severed from it. . . .The California Property was constructed in 1978.

11. By an agreement dated the 26th day of February 1981, the Appellant and Edda Venchiarutti agreed to sell the California Property to Robert and Judith Profeta (the "Purchasers"). The sale closed in late August 1981. A portion of the purchase price was paid by way of a Promissory Note and Deed of Trust executed by the Purchasers in favour of the vendors in the principal amount of (U.S.) $287,500 (the "Note").

12. On July 19, 1983, an order of the California Superior Court rescinded the 1981 sale, declared the Note void and, inter alia, ordered the Appellant and Edda Venchiarutti to return all monies paid to the Purchasers on closing.

13. The Purchasers were also granted a lien on the California property for the value of their judgment. The California Property was then sold pursuant to a Sheriff's Sale Order in November 1984 in which all of the sale proceeds were distributed to the Purchasers and in which the Sheriff returned the writ/warrant "fully satisfied".

The only witness at the hearing was the appellant. His evidence is that for a period in excess of 30 years he has been in the business of building houses and developing and selling land primarily in Mississauga, Oakville, Metropolitan Toronto and California. This included industrial and commercial real estate. Corporations controlled by the appellant or members of his immediate family were involved. Particulars of the appellant’s involvement in the acquisition, development and sale of real estate commencing in the late 1950s or early 1960s are in evidence. It is unnecessary to recite the details. Suffice it to say that his involvement was substantial.

In 1970 the appellant's business affairs were at a low ebb and because of this and a family rift, consideration was given by the appellant and his wife to emigrating, but unspecified events led to this notion being placed in abeyance. Australia had been considered and, in addition, a friend and former employee of the appellant's who was residing in California, Mr. Ken Bond, urged him to move there. The matter arose again, the family home was sold and in August 1976 the appellant moved to California. Factors that favoured this move over the Australian option was that it gave easier access to friends and family in Canada and, should the change be regarded as a mistake, reestablishing in Canada would be easier. The appellant's wife and four children accompanied him. The children ranged in age from 4 to 14 years. Another home was purchased on Black Prince Court, Morgan Hill, California, and the family took up residence there.

As indicated in the notice of appeal, the appellant became involved in a joint venture in California called Glen Arbor Developments, the members of which were Venchiarutti Investment Corporation that was controlled by the appellant and Glen Side Investment Corporation controlled by Ken Bond. Early in 1977 Glen Arbor Developments acquired a 50 per cent interest in a 132-acre parcel of land in Morgan Hill, which is south of San José in Santa Clara county, California. The area was sparsely developed being basically farming country devoted to grazing and the cultivation of fruit. The other 50 per cent was with another joint venture called Rockwood Ranch. The only individual identified in the evidence with Rockwood Ranch is Mr. Edward J. Lazzarini. The intention was to subdivide the 132 acres into building lots and develop it. It was known as "Rockwood Estates".

On February 7, 1977, the appellant and his wife entered into an agreement with Lazzarini to purchase a three-acre [1] parcel of land described as Parcel C, Oak Glen Avenue, Santa Clara County (which is the parcel referred to as "the California property" in the passages cited from the notice of appeal) for $40,000 U.S. This parcel was adjacent to the 132 acres and had been previously severed from it. Parcel D was sold to Ken Bond. It is said that $40,000 was about $20,000 below market value. The consideration for this special price was that the appellant and his wife would construct a somewhat sumptuous residence on Parcel C that would be used in establishing the appellant's reputation in the Morgan Hill area as a constructor of quality homes and as a model in the promotion of sales in Rockwood Estates. The construction was completed in 1978 at a cost of about $307,000. It consisted of 4,850 square feet of living space and included five bedrooms, three bathrooms, powder room, games room, TV room, den, large pool, tennis court, etc. An expensive solar heating system was installed. The appellant and his family moved there from Black Prince Court. The appellant said that in the normal course he would not have built his residence there because of the remoteness of the area. Also, apart from the promotional purposes, he would not have installed the solar system because of the expense. When asked what he and his wife intended to do with the California property if the subdivision had been completed he replied: “1 think enough time would have gone by after that that we would sell it and certainly have gotten our money out of it.” He was then asked why he would sell rather than remain. This answer was given: "It was expensive. We were young enough that we could move and get into something different. It was certainly the type of home that was probably too large for our means at the time.”

Difficulties were encountered with respect to the development of Rockwood Estates, the most serious of which was that government authorities in Santa Clara County imposed a moratorium on development that included Rockwood Estates because of concern about water supplies. There were problems with septic tank systems at the time. This, combined with a desire on the part of the appellant's family to return to Canada and good business prospects in Toronto precipitated the decision to leave California. On February 12, 1981, the California property was listed for sale by the appellant and his wife. The address given in the listing form is 17285 Chesbro Lake Drive. As previously stated, the address given in the agreement of February 7, 1977, to purchase the California property is Oak Glen Avenue. Nothing was said at the trial about this difference, but there is a clear inference in the pleadings of both parties that they accept both addresses as relating to the same parcel of real estate and I am treating them as such. I note that maps placed in evidence show Oak Glen Avenue as being a continuation of Chesbro Lake Drive.

Negotiations with Robert G. Profeta and his wife Judith followed and they purchased the California property for $619,125, a good deal of which was financed. The closing date was August 31, 1981, and about this time the appellant and his family returned to Canada. In the subsequent litigation regarding the California property that is referred to in paragraphs 12 and 13 of the notice of appeal, supra, the Profetas prevailed throughout. While there are a number of documents in evidence about this litigation — most pertaining to the forced sale consequent upon the judgment — none state the basis of the claims made by the Profetas. The appellant simply said that they had found problems with the home. At the time of the sale to the Profetas it appeared that the appellant and his wife would realize a significant profit. When asked if he regarded it as ordinary income, he said that he did not think about it at the time. This, notwithstanding the nature of his commercial background.

It is settled that in disputes of the kind before the Court on this appeal the onus is on the appellant to establish that the respondent's assessment is in error. This onus can be discharged on an evidentiary balance of probabilities.

I accept that at the time relevant to this appeal the appellant had a long history as a trader in real estate in Canada. This continued in California and that history included dwelling houses. This does not, however, of itself establish that a loss on the acquisition and sale of a residence could be claimed as a business loss deduction in computing income any more than, for example, does the fact that a trader realizes a profit on the acquisition and sale of a parcel of real estate necessarily mean that the profit is business income. Depending on the facts of a particular case, it could be a capital gain.

In my opinion the whole of the evidence does not show that the respondent erred in his assessments of the appellant's liability to tax. While, when he went to the United States there existed the possibility of his returning, there is nothing unique about this. That possibility often exists when individuals or families emigrate from Canada and it is not uncommon for some to return. When he and his family moved to California the basic intention was to make that their new permanent home. The first home acquired there was on Black Prince Court. When the California property was ready for occupancy the family moved there.

That the land was acquired at a discount because it was intended that when a residence was built thereon it would be used in promoting the development of Rockwood Estates taken together with the fact that this intended use was realized is not incompatible with the California property having been acquired with the intention that it would be the permanent home of the Venchiarutti family. Further, what evidence there is in this regard indicates that this is the use to which the property was put until it was sold to the Profetas. A taxpayer's permanent residence does not cease to have that characteristic simply because he makes use of it part of the time for a commercial as opposed to a domestic purpose or uses part of it for a business function such as office space.

It follows from what has been said in these reasons that the appeal cannot succeed and a judgment shall issue dismissing it.

Appeal dismissed.