Tajdeen a Valani v. Minister of National Revenue, [1980] CTC 2218, 80 DTC 1206

M J Bonner:—I will now give the reasons for my decision in the Valani appeals.

The appellant appeals from assessments of income tax for the 1975 and 1976 taxation years. In each of the two years the respondent disallowed part of the deductions claimed by the appellant in respect of the cost of maintaining an office in his home.

In 1975 the respondent included in the computation of the appellant’s income the gain realized on the sale of property at 825 Dundalk Drive in London.

The appellant contended that the gain was on capital account and alleged that he purchased the property, a three bedroom condominium, as a principal residence.

In 1976 the respondent included in the computation of the appellant’s income the gain realized upon the sale of an apartment building at 44 Jackson Street in St Thomas, Ontario. The appellant argued that the property was purchased as an investment.

I will deal first with the deductibility of the cost of maintaining an office. The appellant was, during the relevant years, employed as a real estate salesman by Gary Wilde Real Estate Company. The appellant was paid by commission only. His employer did not remunerate him for any expenses incurred in the line of duty.

In the main the appellant worked out of his own house where he maintained an office, the cost of which is in issue. The appellant specialized in the sale of apartment buildings and large commercial properties. Usually they were not formally listed for sale. The work was of a somewhat confidential nature. The appellant possessed detailed material, including the financial results of properties he was trying to sell for his clients.

Wilde provided an office for common use by all sales persons. It was obviously not suitable for work on or the storage of confidential information.

The quantum of the expenses is not in dispute. The appellant, on cross- examination, admitted that the Wilde firm did not require that he maintain an office in his home and that he chose to work out of his own home.

The position of the respondent was that the appellant was not required, by the contract of employment, to maintain an office in his home and it could not be said that, under the contract of employment, the appellant was required to pay his own expenses relating to such an office. Thus, so it was argued, the deduction was not admissible by reason of failure to meet the requirements of subparagraph 8(1)(f)(i).

The respondent’s position, in my view, is wrong. Although the contract of employment may not have specifically required the maintenance of an office in the appellant’s home, it must have been implicit that the appellant was required to do that which was necessary to sell real estate.

Given the nature of the real estate which the appellant was engaged in selling and the requirements of the appellant’s clients, the maintenance of the home office was, I think, an implicit term of the contract of employment.

The appellant had to have the office and bear the cost of the office and he was not entitled to be reimbursed. The appellant is therefore entitled to succeed on this issue for each taxation year.

I turn now to the real estate gains. The appellant said that he bought the Dundalk Drive property, a condominium, intending to make it his principal residence. The surrounding circumstances lead me to believe that the explanation offered is, if not untrue, at least incomplete. If speculation was not the primary motive for the purchase it was at least a secondary motive. The appellant never moved in. He let the property to tenants for about a year and then sold it in connection with the acquisition of another property, a rental property.

The appellant was married and had two sons. He did not consult his wife prior to the purchase of the condominium. He said he intended to surprise her. However, she objected to the property because the kitchen and dining room were too small and the bedrooms were only nine feet by eight feet.

The second reason advanced for not moving in was that one of the appellant’s sons who was 16 years old had, before the purchase, threatened to leave home. The condominium was not large enough to accommodate the whole family when, after the purchase, the son changed his mind.

The appellant stated that he did not look for another home for more than a year following the decision not to move into the condominium.

It is possible, although somewhat unusual, for a person to purchase an intended residence without consulting his spouse. Where, however, as happened here, that person fails to inspect the interior of the supposed intended dwelling before committing himself to the agreement of purchase and sale it is difficult to escape the conclusion that no serious intent to occupy ever existed.

The appellant’s subsequent actions in renting the property for a short term and reselling it when a profitable opportunity to do so arose are stronger indications of intention from the outset than the improbable evidence of subjective intent.

The appellant’s counsel suggested that if secondary intent existed it was to rent, that being demonstrated by the appellant’s action in in fact renting. The appellant’s evidence was that he decided to rent the condominium only after he decided not to move in. The suggestion is also negatived by the short period of rental. The appeal fails in this point.

I turn next to the property at 44 Jackson Street. It was a 23 unit apartment building. The appellant testified that he bought the property as an investment with a view to earning rental income. The property was bought in May of 1976 and sold in December of 1976. The sale was said to be a result of financial problems and apprehended structural problems. The purchase was 10% financed, that is to say, the appellant borrowed part of the purchase price payable in cash and the remainder was financed by mortgages.

The carrying charges were such that the appellant, shortly after purchase, faced a cash flow problem. The appellant stated that when he bought an application to the Rent Review Board for a rental increase had been initiated by the vendor. The application was rejected by a decision made after the purchase, and thus the financial relief which the appellant had expected in the way of a rental increase did not materialize. It is difficult to see how this appellant could have failed to anticipate the possibility of rejection of an application for an increase. Such applications are not invariably granted. The appellant, with his knowledge and expertise developed in the course of his work in relation to properties such as this, must have foreseen that a rejection of the application to the Rent Review Board was possible.

Another financial factor which is said to have had a bearing on the decision to sell was a leaky roof in another apartment building owned by the appellant. He said he thought he would have to spend $6,000 to $7,000 for a new roof. As it turned out, the roof was retarred at a cost of $2,000. If the appellant had a genuine intention to keep the apartment building, but was frightened by the cost of expected roof repairs to another property, I should have thought that he would have sought a firm price before deciding to sell as he did. No evidence of any careful investigation of the cost of the repairs to the roof of the other building was given.

Turning to the fears as to structural stability as a reason for sale, the appellant said that when he bought he noticed the grass was rolled back at the rear of the building. The vendor told the appellant that the reason was a broken buried gas main which had been repaired.

The appellant said that after the purchase the superintendent told him there was a problem with the structure. As I understand it, the building was located close to a cliff and I gather that the appellant may have feared some subsiding of the soil had taken place, thus endangering the structure.

The appellant said that he did not investigate because he was afraid he might find something serious. Instead he sold. The decision to sell was made, according to the appellant’s evidence, three months after the purchase.

A sale made seven months after the purchase gives rise to an inference that it could have been intended from the outset. This inference can be made unless there is some credible evidence that the sale was the result of some unforeseen factor arising after the purchase.

Two reasons for the sale were advanced. I have concluded that both are ex post facto rationalizations.

Although the second reason is believable, and I might have been able to accept it had it been advanced as the sole reason, I cannot overlook other aspects of the appellant’s evidence.

The first is that the financial reason advanced is highly improbable, as outlined earlier. The second is that the evidence given by the appellant as to the circumstances surrounding the purchase and resale of the condominium mentioned earlier are improbable. It should not be forgotten that the activities in connection with both properties are closely associated with the appellant’s ordinary occupation as a real estate salesman.

I have concluded that the purchase and sale of each property was a wholly speculative adventure in the nature of trade and in this respect the assessments have not been shown to be wrong. The appeals will therefore be allowed and the assessments referred back to the respondent for reconsideration and reassessment on the basis that the appellant is entitled to deduct the entire amounts claimed as the expenses of maintaining an office in his home. The appellant is, however, entitled to no furthur relief.

Appeal allowed in part.