Jake Martens v. Minister of National Revenue, [1988] 1 CTC 2013, 87 DTC 669

Tremblay, T.C.J.:—This appeal was heard on November 28, 1986 at the City of Vancouver, British Columbia.

1. The Point at Issue

Pursuant to the notice of appeal and the reply to notice of appeal, the point at issue is whether the appellant is correct in the computation of his income for the 1980 taxation year:

(a) to consider as capital gain the profit of $17,187 from the sale of a duplex purchased in December 1978; and

(b) to deduct the maximum RRSP deduction.

The respondent, in his reply, agrees to allocate the maximum RRSP deduction but maintains that the said profit of $17,187 is an income gain on the main basis that the duplex was acquired with the intention of resale. Indeed, purchased in December 1978 for $35,000, the property was listed for sale in November 1979 and sold in January 1980 for $56,000 after the appellant had completed the appropriate repairs to the duplex.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent's reassessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his reassessment are also deemed to be correct. In the present case, the assumed facts are described in paragraphs 6(a) to (g) of the reply to notice of appeal. The appellant admitted or denied the said assumed facts as follows in parentheses after each paragraph:

6. In so assessing the Appellant for his 1980 taxation year the Respondent relied upon, inter alia, the following assumptions:

(a) on or about December 21, 1978 the Appellant purchased a duplex located at

3011-13 271st Street, Aldergrove, British Columbia for $35,000.00; (admitted)

(b) the aforesaid duplex was rented when purchased; (partially admitted)

(c) the purchase price was fully financed; (admitted)

(d) the Appellant renovated the aforesaid duplex with a cost of renovation in 1978 at $6,635.88; (admitted)

(e) the Appellant listed the aforesaid property for sale in November 1979 and during the month of January 1980 disposed of the property for $56,000.00; (admitted);

(f) outlays and expenses of the disposition amounted to $3,813.00 yielding a profit of $17,187.00; (admitted)

(g) the Appellant acquired the aforesaid duplex with the intention of turning it to account by means of resale whenever it came profitable to do so. (not admitted)

3. The Facts

3.01 The appellant, who, in 1986, was 53 years old, was the sole witness. 3.02 He said that when he purchased the duplex, both apartments were in poor condition. Only one was rented for approximately $275.

3.03 In direct examination, he said that the duplex was fully financed by the Credit Union for $35,000. It was a 20-year mortgage with monthly payments of approximately $375 including capital, interest at 8'/2 per cent and taxes.

In cross-examination, however, he admitted that the mortgage in favour of the Credit Union was $25,000 (Exhibit R-3). He also borrowed $10,000 from his brother.

3.04 Concerning his intention for buying the duplex, he said:

My purpose for buying it was at that time the price was good. I was working for B.C. Hydro at the time. My intention was to rent the duplex out so there would be additional income. My work at Hydro was just temporary. It would give me additional income with both sides rented out. It carried itself. I didn't have to add any money to it. It supported itself. (TS, p. 6, lines 7 to 13)

3.05 In his 1980 return, he declared that his occupation was as supervisor for B.C. Hydro. In fact, he was supervisor in construction.

In 1972, he built his own residence. It is located about one mile from the duplex purchased in 1978. He then had no mortgage on the residence. He wanted to keep the duplex ”. . . because it was close to where I lived. It would give me extra income when the day came that I retired. It was close enough so I could look after it all the time.” (TS, p. 8)

3.06 He is supposed to retire at 65 years of age, namely in 1998. However, his employment with B.C. Hydro is only temporary, working 6 months in the summertime on construction, coming back home maybe twice a month. He is unemployed for the rest of the year. Before working for Hydro, he was a carpenter. He used to take framing jobs.

3.07 Explaining the reasons for selling the duplex, he said:

But every time I came home I would have to go, I had elderly people living in the duplex. I would have to go spend all weekend repairing and doing different things. That's the only reason I sold it. It was just too much.

The one tenant I had was 99 years old and all my weekends when I came home they were just occupied looking after this thing. It was either get rid of the duplex or give up my employment.

It was the first year, and then my employer had promised me that I would not have to go out of town again. So the next year as soon as they gave me notice I would have to go out of town again I put the duplex up for sale. But never having had a rental property before I didn't know what it all entailed. But that is the first time I ever had a second piece of property and I've never had a second piece of property since. It was only a one try deal and it didn't work out. (TS, pp. 9, 10)

3.08 In cross-examination, the appellant explained that when he purchased the duplex the only tenant was a 55-year old lady. After he had repaired the other apartment, the lady was moved into the said apartment. He then repaired the first apartment and when the lady was moved back into her original apartment, the rent was increased to approximately $275.

3.09 During the cross-examination, the following documents were filed as exhibits:

3.10 The appellant said that one of the incentives to purchase was the low price: $35,000 for “almost half an acre of land with the duplex right in town". (TS, p. 25)

What I had in the back of my mind was to fix the duplex up and let it pay for itself and then in the future if I could ever afford it I would build some more rental units on it. But you know it had good long term potential. (TS, p. 25)

3.11 The purchase of the duplex took place on December 21, 1978, the first mortgage payment of $280 was on January 17, 1979.

In the rental expenses sheet for 1978 (Exhibit R-4), one can see $2,440.57 interest. However, he said that this amount could include interest on the mortgage of his residence, or another personal loan.

Exhibit R-4 reads as follows:

The appellant could give no explanation for either $450 (auto expenses) or for $97.87 (advertising and promotion). He said that the respondent's employees had checked all these expenses with documents and they found that there was $158 that he could have claimed that he had not claimed. (TS, p. 31)

3.12 For the year 1979, he explained that the $3,800 in revenue for the property came from the two apartments of the duplex, the former tenant lady with $250 per month and an old couple, the husband (99 years old) and his wife (79 years old). They both died during the year.

He even had an agreement with the other tenant (the lady) that he would never rent to people that she did not approve of. In fact, the old couple's apartment was empty when the appellant listed the house for sale in November 1979. (TS, p. 34)

3.13 Concerning the reasons for sale, counsel for the respondent asked the following question:

Q. When did you take the decision to sell it?

A. Well, the idea struck me when I was having all my weekends occupied, you know fixing this blasted thing up all the time. Making repairs when I came home. Elderly people, it is either too hot or too cold or they get a draft. And the property wasn't such that you could hire somebody and say well go to it. (TS, p. 37)

3.14 In October 1979, he came back in town from Hydro supervision. Within one month, despite the Hydro promise, he had his “program booked for the next year". He then decided to list the property for sale. He would not have listed it, he said, if he had stayed around there. (TS, p. 39)

4. Law - Precedents - Analysis

4.01 Law

The general provisions of the Income Tax Act (the Act) involved in this appeal are sections 3 and 4, subsection 9(1) and the definition of "business" in subsection 248(1). They shall be quoted in the analysis if required.

4.02 Precedents

The precedents referred to by counsel for the respondent are as follows:

1. Californian Copper Syndicate v. Harris (1904), 5 T.C. 159;

2. M.N.R. v. James Taylor, [1956] C.T.C. 189; 56 D.T.C. 1125;

3. Racine et al v. M.N.R., [1965] C.T.C. 150; 65 D.T.C. 5098;

4. Zen v. The Queen, [1985] 2 C.T.C. 313; 85 D.T.C. 5531, (F.C.T.D.);

5. Happy Valley Farms v. The Queen, [1986] 2 C.T.C. 259; 86 D.T.C. 6421, (F.C.T.D.);

6. Giannakos v. The Queen, [1986] 1 C.T.C. 325; 86 D.T.C. 6145, (F.C.T.D.);

7. Haber v. The Queen, [1982] C.T.C. 405; 82 D.T.C. 1001, (F.C.T.D.).

4.03 Analysis

4.03.1 Criteria

As stressed many times by the Courts, the main criterion to determine whether or not a profit in a transaction is a capital gain or an income profit, is the intention of the taxpayer at the time of the purchase of the property. All the other criteria: the short holding of the property, the general conduct of the appellant, the number of similar transactions, etc., are only factors to help in determining the taxpayer's intention.

4.03.2 In the instant case, the respondent's contention is that the short holding of the property purchased in December 1978, listed in November 1979 and sold in January 1980, is the most significant criterion to determine that the primary intention of the appellant was to resell the property at the first opportunity.

Moreover, according to the respondent, the expenses made by the appellant to repair the property were for the purpose of bringing it into a more marketable condition and, therefore, to attract purchasers.

Counsel for the respondent also underlined the fact that the financial situation of the property shows that the operation had no real chance to realize any profit unless it was sold.

4.03.3 Concerning the credibility of the appellant, counsel for the respondent underlined the contradiction and lack of memory during the appellant's testimony: the amount of the mortgage, monthly payments, the amount of the rents, rate of interest, etc. (paras. 3.03, 3.10, 3.11, 3.12).

Concerning this latter point, the Court also stated those contradictions. However, I find that it is a little bit normal that after 8 years a person cannot remember anything that happened in a transaction, and any details concer- ning the expenses claimed for 1978 and 1979. Those expenses were all documented and employees of the respondent checked everything (par. 3.11 at the end). In substance, it is not significant and this cannot affect the appellant's credibility.

As the appellant said, the point is not concerning expenses, etc., but "the only issue is whether I am a real estate flipper or not". (TS, p. 57)

4.03.4 At first glance, the respondent's argument that seems to deny the appellant's thesis is that the operation had no real chance to realize any profit. However, if one completely understands the evidence, after the repairs, there were two rents of $275 (i.e. $6,600 of gross income). The monthly mortgage payment (capital, interest, taxes) of $280, totalling $3,360 per year, was easy to meet. With the balance of $3,240, it was enough to let profit after paying current repairs.

This did not occur during the year 1979 because it was the year of substantial repairs and, therefore, tenants could not occupy the two apartments during 12 months. Moreover, the last spouse of the old couple died in October.

Really the Court cannot retain the conclusion of counsel for the respondent that there was no chance to realize any profit unless the property was sold.

Moreover, one must not ignore that the appellant, being a carpenter, was the appropriate person to succeed in making a profit in such an operation.

4.03.5 The argument that seems to confirm the respondent's thesis is why the appellant sold the property as all the repairs were completed and it remained only to find a new tenant and collect the rents?

If the appellant does not have good reasons, this will confirm that his intention at the time of the purchase of the property was to sell it after having repaired it.

The decision to list the duplex for sale, as explained by the appellant in paragraphs 3.07, 3.13, 3.14, was maybe taken too rapidly, and at first blush seems not serious.

However, the fact that in October 1979 he finally hoped to work in the future not far from Aldergrove pursuant to the promise of Hydro, and the fact that he was disappointed because of Hydro's decision to book him again to work far from his home during the next year, may humanly and easily explain his decision, without affecting his primary intention described in paragraph 3.04.

In my view, the fact that he is a carpenter, working at a part-time job, easily explains such an intention to buy a property for rent, despite the repairs required on such a property.

Moreover, it is the first and last time that the appellant bought a property apart from his residence (para. 3.07).

In my opinion, the preponderance of the evidence favours the appellant's thesis.

5. Conclusion

For these reasons, the appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment.

Appeal allowed.