Christopher J Haber v. Minister of National Revenue, [1981] CTC 3073, 82 DTC 1001

M J Bonner:—Two issues are raised by this appeal from an assessment of income tax for the appellant’s 1974 taxation year. The first issue is whether a gain realized by the appellant on the sale of a house at 2277 Lakeshore Road in the City of Burlington was a taxable capital gain or whether it was a gain realized on the sale of the appellant’s principal residence.

The appellant is a lawyer. He and his wife lived in Toronto in a rented apartment until October of 1973. The appellant was a student in the Bar Admission Course ending in March of 1973, when he was called to the Bar. The appellant then commenced to practise law in Burlington. He commuted from his Toronto apartment residence to Burlington for a period. In May of 1973 He signed an offer to purchase a home at 2277 Lakeshore Road, Burlington. It was just across the street from 2278 Lakeshore Road, the home in which the appellant grew up and in which his parents still lived at that time. After signing the agreement to purchase, the appellant and his wife departed for a seven-week vacation in Europe. Upon their return from vacation the appellant and his wife became disenchanted with the house they had purchased. When they moved from their rented Toronto apartment they, because of that disenchantment, moved into it in January of 1974. He therefore listed the 2277 Lakeshore Road property for sale in March or April of 1974 and sold it in May of that year. In short, neither the appellant nor his wife lived in the house at 2277 Lakeshore Road at any time between the purchase and the sale thereof.

The words “principal residence” are defined by paragraph 54(g) of the Income Tax Act. Because 2277 Lakeshore Road was never inhabited by either the appellant or by his spouse, it does not fall within the definition of subparagraph 54(g)(i).

The appellant argued, however, that he was assisted by subparagraph 54(g)(ii). This argument cannot succeed. Subsection 45(2) requires that an election pursuant to that provision be made by the taxpayer in his return of income for the year. This the appellant, by his own admission, did not do. Apart from this technical problem there is a further obstacle to the appellant’s success, an obstacle of substance. All that subsection 45(2) on which the appellant relied does, in so far as is relevant here, is to deem a taxpayer not to have commenced to use the property for the purpose of gaining or producing an income, but does not deem to have occurred that which did not in fact occur. That is to say, it does not deem the house to have been ordinarily inhabited by the appellant.

The second issue is whether the profit realized by the appellant on the sale in 1974 of 939 King Road in Burlington is, as the appellant contends, a gain on capital account or, as the respondent found on assessing, income from a “business” within the extended meaning given to that word by the Income Tax Act.

The appellant was advised by a friend, Rich Shaeffer, that the property was available. He inspected it. The property consisted of a house containing, I believe it was four apartments. There was also a barn and a greenhouse which I gather was not in first class shape. The property was well located, close to the centre of Burlington, to shopping and to major roads. The appellant felt he could rent the greenhouse to a florist and that he could rent the apartments. He did not recall how many of the apartments were rented at the time that he signed the offer to purchase, but he had determined that the vancancy rate in Burlington was rather low and had some reason for optimism.

The appellant consulted Tarcisio Nella, a lawyer whom he had met during the Bar Admission Course and who had experience in real estate matters, both personally and in relation to family interests. Mr Nella inspected the property and found it to be a good property for renting and for resale.

The appellant also consulted his brother, a medical doctor, who inspected the property and concluded it was a good income-producing property and who offered to assist the appellant financially in the purchase.

Having arranged to borrow the downpayment from his family, the appellant had a final meeting with Mr Shaeffer, the real estate agent. They went over the figures in a rough way and decided to buy. The appellant did not give evidence of any details as to the results of this review of the figures.

The agreement of purchase and sale was formed in January or February of 1974. There are several dates opposite the appellant’s signature on it. It called for the purchase of the property for a price of $192,000 with $70,000 payable in cash and the balance secured by a mortgage back to the vendor bearing interest at eight percent per annum for a term of ten years, the payments being amortized over a twenty-five term. The agreement contained two conditions precedent to the obligation of the appellant to complete. They were as follows:

The Purchaser is to be allowed nine months from the date of acceptance hereof to make financial arrangements satisfactory to himself and the Purchaser is to be allowed nine months from the date of acceptance hereof to obtain the removal of Transitional T from the present T-RL7 designation of the lands pursuant to the zoning by-law of the City of Burlington.

Under the agreement closing was scheduled to take place on October Q, 1974. The appellant explained he wanted these conditions in case he wanted to get out of the deal if he changed his mind. In short he had what was, for practical purposes, at least from his viewpoint, an option to purchase.

The agreement contained two other provisions which I regard as relevant. They are paragraphs (5) and (7) to be found on Schedule A, the second page of the agreement, Exhibit R-2. Paragraph (5) reads:

The vendor agrees to grant partial discharges of the mortgage for any and all parcels of land requested by the Purchaser upon payment of an amount equal to the pro-rated value of the land for which the discharge is sought in contiguous strips of even width throughout for the full depth of the property and commencing at either boundary.

Any strip including building, $50,000 additional shall be paid.

Paragraph (7) reads:

The vendor agrees to permit the demolition of any building or structure or fences on the said lands or any excavation thereon without thereby deeming it an act of waste under the mortgage and such demolition or excavation shall not cause the Mortgagor to be in default.

The appellant argued that these provisions were inserted tomake the mortgage as favourable as possible to him. I have concluded that these clauses, in their practical application, would be more favourable to a purchaser mortgagor whose interest lay in dealing with the land that to one whose interest lay in investing with a view to the production of income from the land with its then existing improvements. This conclusion is reinforced by a further provision, Clause 4 on Schedule A of the agreement which reads:

The Vendor agrees to make adjustment to the purchase price at the rate of $87,272.73 per acre for any acreage more or less than the 2.2 acres assumed to be the subject lands.

The appellant did not suggest in evidence or argument that he had any intention of erecting further structures which might require provisions such as these.

Approximately nine or ten days after the formation of the agreement the appellant was presented with an offer to purchase that was, according to the appellant, “fantastic” in terms of profit. The appellant accepted it, thus ultimately giving rise to the gain in issue. The purchaser, Knight Construction, Or someone acting on behalf of that organization, had been involved in the development of higher density uses on property which abutted the appellant’s property at the rear. Knight was, unknown to the appellant, looking at 939 King Road at the same time that the appellant was.

In short, the appellant, having obtained an agreement that was, for practical purposes, virtually an option on the property, proceeded without any evidence of hesitation to sell the property at the first opportunity. The agreement to purchase contained terms that were wholly unnecessary to a person whose intentions were those asserted by the appellant. Those terms were of a type likely to be beneficial to a purchaser whose interest lay in redeveloping or selling. The appellant, at the time, held one house which he had never occupied and had just purchased another. The purchase of 939 King Road was to be made largely on credit. There was no evidence that the King Road property could be expected to carry itself or that the appellant had the means to meet a reveenue shortfall. I have therefore concluded that in purchasing the 939 King Road property the appellant engaged in a speculative adventure in the nature of trade, the profit from which was income.

The appeal will therefore be dismissed.

Appeal dismissed.