Kathleen P Stevens Zwicker v. Minister of National Revenue, [1981] CTC 2909, 81 DTC 822

John B Goetz:—These are appeals with respect to the appellant’s income tax liability for her 1973 and 1975 taxation years.

Issue

The issue in these appeals is whether the sale of certain properties in 1973 and 1975 by the appellant were trading transactions as opposed to disposition of capital assets.

Facts

Although considerable evidence was adduced and a large number of Exhibits filed, the basic facts can be fairly well reduced as follows:

In 1955 John S Stevens incorporated John S Stevens Limited of which he was the president and major shareholder. The company was engaged in the buying, renting and selling of real estate and the appellant worked with her husband virtually as a partner and had full knowledge and expertise in the real estate field. The modus operandi of the company as well as the appellant and her husband in their own right, was to acquire property with a minimal down payment, usually approximately $1,000, a 66% mortgage plus the balance of the purchase price being taken up by the vendor with a second mortgage. These were used as rental properties and extensive renova tions were made to the residences purchased by them throughout the years. The appellant’s husband died in 1972 and she subsequently married Mr Zwicker. She says at that time the banks continued to assert pressure on her personally and the company, of which she had become president and carried on as it had been carried on before.

From the 1960’s to 1971, the appellant, her husband and the company acquired over 60 pieces of property, most of them being residential. As a matter of fact, between 1960 and 1972, the appellant acquired, in her own name, 51 residential properties, in cross-examination she was presented with an affidavit to which was attached a probate schedule of real estate showing that John S Stevens, as of December 1973, had, in his own name, only six pieces of property. In a depreciation schedule filed with his tax return in 1971, John S Stevens declared that he was the owner of at least 30 to 34 pieces of property. When this fact was pointed out to the appellant, she stated that the accountant split the properties between husband and wife, regardless of actual ownership, “for income tax purposes”.

She admitted that in her 1972 Income tax return she reported four sales of residences as being income, stating that they had been dressed up for resale. I am sure that this procedure was employed throughout the years in dealing with their real estate holdings. When the appellant was presented with a document, attached to an income tax return, entitled “Income Statement — Period January 1, 1974-December 31, 1974”, showing income from sales of houses, she said that this was an error on the part of the accountant, although her company had dealt with a reputable chartered accountant firm for years. After the death of the appellant’s husband in 1972, she said that she and her accountant worked on the books together.

The appellant gives as a reason for selling the properties in 1973 and 1975 and claiming them as capital gains, that she was forced to sell because of pressure being applied by the banks. From the evidence that I heard, I am sure the banks exerted pressure on them throughout the years of their joint real estate operations. She says that another reason for the sales of the properties in question was that the business was not faring too well. She filed financial statements for 1972, 1974 and 1975, indeed showing that the earning picture was not good although the financial statements indicated substantial real estate holdings, most of which were secured by mortgages and loans from the banks and on the basis of personal guarantees. When her husband passed away, her son Randolph Zwicker became involved in the business with her. He had accounting experience and became actively involved in the business on a part-time basis when he was 21. In 1973 he became fully involved, and became a branch manager. The company had one main branch and six sub-branches, indicating the rather substantial real estate operation. It was his view, based on mere assumptions, that all the properties sold were investment properties, but on being pressed he could not say what property had been originally acquired for the purpose of resale. Their overall profits were not very rosy until 1977 and onwards.

As at December 31, 1972, the appellant was the owner in her own right, of 61 properties and the respondent, in his reply to notice of appeal, alleges that:

(d) The appellant sold properties as follows:

	Number of
	Properties	Total	Total	Total	Total	To tai
Year	Sold Sold	Proceeds		Costs Costs		Gains Gains
1970	2		$ 26,200	$ 22,302		$ 3,898
1971	3		57,280		45,558	11,722
1972	4		74,560		62,134	12,516
1973	4		111,338		91,381	19,957
1974	1		26,500		15,500	11,000
1975	7		242,485		129,006	113,479

In all the years, excepting for the years in question, mainly 1973 and 1975, the appellant reported the profits from the sale of properties as income.

Findings

Having regard to the minimal equity invested in the various purchases of property, the appellant virtually had no personal equity in the properties involved in the appeal. The property at 3 Braeburn Road was acquired July 16, 1970 for $15,789 with minimal equity, and sold on July 6, 1973 for $24,338. The property at 3537 Leaman Street was acquired in November 1969 for $19,600 and was sold November 10, 1975 for $35,000. The property at 2465 Barrington Street was acquired in July 1959 and was expropriated on May 1st, 1975 for $13,800. The appellant borrowed extensively against this property, obviously to finance the acquisitions, improvements and renovations of other properties. The property at 2714 Oxford Street was acquired in July 1966 for $19,682. It was in the 1960’s when land was appreciating rapidly in value, and that is why so much land was acquired by the appellant between 1960 and 1972. This property was sold in 1975 for $46,500.

In spite of the appellant’s assertion that the land was acquired for income producing purposes and an enduring asset, I feel that the initial and primary and always present intention of the appellant and her husband in the acquisition of property, was to eventually turn it to account.

Admittedly, real estate agents, depending on the circumstances, may make a profit in the nature of a capital gain. But those circumstances do not obtain in this case. To find for the appellant, I must conclude that even though she was an experienced trader in real estate (which in itself does not preclude her from holding property as an asset of a capital nature), the acquisition of virtually all the properties acquired by the appellant was not coloured with an abiding purpose of resale at a profit.

A very telling factor against the appellant is the minimal personal equity invested in the purchases of the numerous pieces of property acquired by her.

The following cases were cited to me by the learned counsel for the appellant:

Everlease (Ontario) Limited v MNR, [1968] Tax ABC 162; 68 DTC 180;

Hiwako Investments Limited v The Queen, [1978] CTC 378; 78 DTC 6281;

S & S Properties Ltd v The Queen, [1978] CTC 412; 78 DTC 6294,

Regner Blok-Andersen v MNR, [1972] CTC 338; 72 DTC 6309.

The following cases were cited by counsel for the respondent:

James J Horvath v The Queen, [1980] CTC 467; 80 DTC 6350; Antoine Hulmann v The Queen, [1975] CTC 297; 75 DTC 5193;

William G Tilson v MNR, [1979] CTC 2147; 79 DTC 171;

Roberto Ceglia v MNR, [1978] CTC 2054; 78 DTC 1038.

I have perused all the above cases and they have been of some assistance to me.

From all the facts before me, I have concluded that the appellant acquired a large number of properties over a short period of time when the real estate market was on the rise, with minimal personal equity involved, large loans involving first and second mortgages. The renovations and improvements thereon were either to increase the rent to meet her heavy financial obligations or, alternatively, to make them more attractive for resale. This has been amply shown by the evidence as being the course of conduct of the appellant and her husband from the time of the inception of their real estate business.

For the above reasons, I dismiss the appeals.

Appeals dismissed.