Oscar a Sandoz v. Minister of National Revenue, [1981] CTC 2116, 81 DTC 181

The Chairman:—This is the appeal of Mr Oscar A Sandoz from an income tax assessment in respect of the 1977 taxation year.

Reassessments:

3. In filing his income tax return for the 1977 taxation year, the appellant declared a capital loss of $5,465.52 on the disposition of the condominium and claimed a deduction of an allowable capital loss of $2,000 under paragraph 3(e) of the Income Tax Act.

4. By notice of reassessment dated November 10, 1978, the Minister of National Revenue disallowed the allowable capital loss of $2,000 on the basis that it represented a loss on depreciable property which was not deductible.

5. By notice of objection dated February 6, 1979, the appellant objected to the said assessment and claimed that a terminal loss of $14,385 should have been claimed rather than a capital loss.

6. By notice of confirmation dated July 23, 1979, the Minister of National Revenue confirmed the assessment on the basis that the condominium was considered to be personal use property for the purposes of paragraph 54(f) of the Income Tax Act and therefore there was no terminal loss on the disposition in accordance with subsection 20(16) of the Income Tax Act.

Notice of Appeal:

The notice of appeal was filed by the firm of Johnson Cross Yandsik, public accountants, on behalf of the appellant and reads as follows:

I have been asked by the above taxpayer to appeal to the Board this reassessment on the following grounds:

— the condominium in question was purchased in 1975 as an investment.

— at the time of purchase the taxpayer was in the process of a marital separation and the purchase of the condominium was an attempt to shelter his capital from legal attack by his wife’s lawyer and also to provide a vehicle for financial improvement which would be required upon his retirement at the end of 1976.

— the condominium was purchased in an area of the city that was particularly stable and consequently it appeared that property values would substantially appreciate.

— the purchase agreement prohibited any rental or resale for a period of one year and consequently upon the expiration of that period, the property was listed with Gale Agencies on June 3, 1976 for an asking price of $48,900.

— The property was subsequently sold in 1977 for $40,000 resulting in a capital loss of $14,385. The supporting calculations appear on the attached schedule.

For the above reasons coupled with the fact that the premises were never used as a principal residence we believe that a capital loss should be recognized by the Department.

Amendment to Notice of Appeal:

At the hearing, the appellant was represented by his solicitor, Mr Anthony H A Keenleyside, who moved to amend the grounds on which the notice of appeal had originally been based. The respondent did not object and the motion was granted. The amendment was to the effect that the loss sustained by the appellant was a loss from a business or property and fully deductible and was not a capital loss arising from the disposition of capital property. The issue therefore now is whether the property disposed of was capital in nature or a trading asset.

Summary of Facts:

The appellant, now a retired civil servant, lived at 2090 Honeywell Avenue in Ottawa and owned a cottage at Shirley’s Bay. In 1975 the appellant obtained a legal separation from his wife as a result of which the appellant’s wife obtained a marital home on Honeywell Avenue and the appellant obtained legal title to the cottage.

It is alleged that the appellant habitually lived more than six months a year at the cottage and, for tax purposes considered the cottage as his principal residence.

Attached to the appellant’s tax returns for 1977, produced as Exhibit A-1, are general notes to which the appellant’s counsel referred in examination in chief.

In his general notes, the appellant states as his intention for acquiring the condominium as follows:

4. I decided shortly after that I would purchase a condominium to:

(a) store personal effects (my share of furniture, my technical books, workshop tools, radio amateur equipment, etc) for which there was not enough space at the cottage, nor would it have been feasible to insure. Very high rates for commercial storage made that possibility unattractive.

(b) provided winter seasonal lodging when it would not be practical to use the cottage.

(c) provide a source of income when I retired, sold cottage and bought a farm (my long-standing plan for retirement). NOTE: the condominium agreement would only permit renting after one year, which fitted my plans.

At the hearing, the appellant added that he purchased the condominium at a cost of $42,500 (Exhibit A-2), to protect his money from the pressures of his estranged wife’s lawyer relative to the legal separation.

The appellant’s evidence is that during the taxation year, he did not live in the condominium in the winter months but lived with a friend. The condominium was used to store the appellant’s personal belongings, but was made to appear as though the appellant lived there: hanging of curtains and drapes, going there after work to read newspapers, speaking with condominium neighbours, parking his car overnight, making snow tracks into garage, placing timers on upper and lower floors of the condominium, etc.

Having been advised prior to purchase that a condominium was a good investment whose value would undoubtedly rise, the appellant alleges that he counted on the profit he would realize from the disposition of the condominium as well as the cottage to realize his life-long dream of acquiring a farm and retiring, planned for the end of 1976.

In the purchase contract, there were restrictive clauses which prevented the appellant from either selling, renting or subletting the condominium for the period of a year after purchase. The appellant did not seek to rent or sublet the apartment, but he listed the condominium and the cottage for sale as soon as he could in June of 1976, (Exhibits A-7 and A-8). The asking price for the condominium was $48,900. The market for the condominium was not what had been expected and after some personal attempts and a further listing, the condominium and the cottage were sold in mid 1977. The appellant sold the condominium for $40,000 and sustained a loss, subject of this appeal on the transaction.

At the hearing considerable evidence was adduced by the appellant concerning discussions he allegedly had with officials of the Department of National Revenue as to the nature of the profits that would be realized from an eventual sale of the condominium. It is the appellant’s submission that the advice received by him from National Revenue was legally wrong and that the Board should be expected to be sympathetic to the appellant since he was neither a lawyer nor an accountant.

I need not, I am sure, spend anytime in explaining that the Board cannot decide the issue on the basis of equity, nor can it take into account any discussions or advice good or bad that the appellant may have had with or received from officials of the Department of National Revenue. The Board can only decide the issue on the basis of the pertinent facts presented to It.

Whatever confusion that may have existed in the pleadings prior to the hearing is no longer an issue before the Board. The issue now to be determined is simply whether the subject loss was from a business or property, or was a loss on capital account. That question is one of fact and the onus of establishing that the loss was from an adventure in nature of trade is definitely on the appellant.

I have not difficulty in accepting as factual the pertinent evidence given by the appellant. In my view, however, much of the evidence and a considerable part of the appellant’s argument is immaterial to the issue.

It is the appellant’s contention that if he had realized a gain instead of a loss under the same conditions, the Department of National Revenue would have taxed the profit as income from an adventure in the nature of trade; that may or may not be true, but it certainly is not the basis on which the Board must decide the instant issue.

I can accept that the appellant’s investment was short term; that it was heavily financed; that no attempt was made to derive income from the property; that the sale of the property had been planned and the property listed for sale only one year after its purchase. There can be no doubt that these circumstances are criteria to be considered in deciding whether in transaction is one of trade or of capital.

I do not believe however that these criteria are exhaustive or are sufficient by themselves to justify the conclusion that the transaction was in fact an adventure in the nature of trade. There are other essential factors which must be considered. In this appeal, the appellant’s intention or intentions in acquiring the property is very pertinent as is the use to which the appellant actually put the property.

The appellant’s declared intentions in acquiring the condominium were to protect his money from his estranged wife and to make a profit on the resale of the property. From the appellant’s own evidence, he was at the time under considerable pressure from his estranged wife’s lawyer. It appears clear to me that the appellant’s primary motive, at the time he acquired the condominium, was to protect his money by investing it in a capital asset. Although his intention of reselling the property at a profit in order to purchase a retirement farm may perhaps have existed at the time of acquisition, it could have been at best under the circumstances but a secondary intention. Moreover it cannot be seriously suggested that a simple declared intention of making a profit can by itself determine whether a transaction is in the nature of trade or on capital account. The purchase of a condominium for the purpose of protecting his money is in my opinion a capital transaction. Such a motive is surely not that of a trader.

The use to which the appellant put the condominium for the period he owned it was by any standards for his own personal benefit. He stored the maximum of his personal belongings there, the cottage being too small to store his amateur radio, equipment, tools, etc. He had curtains and drapes put up, the furniture was in place, he had lived in the condominium occasionally in the period of almost two years and had entertained a friend there on one occasion. For the employer’s records, the appellant used the condominium address as his residence. The appellant stated in evidence that it was to his advantage that his wife believe that he lived in the condominium and took considerable measures and precautions to create the impression that he lived there. In my opinion, whether the appellant chose to reside there or not, the condominium was purchased for his own personal use and advantage.

I referred earlier to the confusion in the pleadings, written and oral. As I pointed out by counsel for the respondent, in the notice of appeal and in the appellant’s evidence, it was the appellant’s contention that the condominium was a capital property, according to advice received from officials of the Department of National Revenue. A gain from the disposition of such a property would therefore result in a capital gain. It is unclear from the evidence whether the appellant was informed that a loss arising from the disposition of the property would result in a capital loss.

As explained by the respondent, the appellant appears to have failed to appreciate the difference which the Income Tax Act makes between depreciable properties, ie properties held to earn income and personal properties eg home owned by occupant, both of which are capital properties. Neither one nor the other of these capital properties can give rise to an allowable capital loss. Subparagraph 40(2)(g)(iii) and paragraph 39(1)(b) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

The evidence is clear that the appellant’s condominium was not used by him to earn income and was not therefore depreciable property. As the appellant in his notice of appeal claimed that the property was capital property (still being of that opinion at the hearing), it could only be personal property from the disposition of which no capital loss can be allowed.

The lack of clarity in the Minister’s first reassessments and the possible confusion caused by his use of the term “personal property” in his confirmation, as well as the radical change in the appellant’s contentions do not together constitute an exemplary model for pleadings. I am however satisfied that no prejudice has been caused to either party to the appeal.

The appellant’s counsel submitted in his amended notice of appeal that the condominium was a trading asset and not capital property.

For the reasons I have already set out, I find that the appellant’s condominium was not acquired and sold as part of a business or an adventure in the nature of trade, but was acquired as a personal capital asset and, as such, none of the losses sustained as the result of its disposition are deductible.

The appeal is therefore dismissed.

Appeal dismissed.