Anilkant Mody, Kumud Mody v. Minister of National Revenue, [1980] CTC 2932, 80 DTC 1832

The Chairman:—The appeals of Mr Anilkant Mody and Mrs Kumud Mody were heard on common evidence. The issue is whether the amount of profits realized by the appellants in the disposition of certain properties in the taxation years 1974 and 1975 are on account of capital, or whether it is income from a business. As it was stated earlier, this is what is commonly called a trading case and the determination of these cases are largely on the basis of the facts, on the basis of the Board’s appreciation of the facts, on the credibility of the witnesses or the witness and also, I would think, on the reasonableness of the case made by the appellant.

The facts in this case are not all that complex. We are dealing with new Canadians whose sense of thrift can be very different from our own and who in 1973 purchased a home in Ottawa, Ontario and realized that the market value of the homes in Ottawa at that time was rising rapidly.

Both of the appellants were employed and earning salaries. They opened- up a joint bank account. After some inquiry on the part of the appellant, Mr Anilkant Mody, who took the trouble to inquire from real estate people and having sufficient technical knowledge alleges that he had devised an investment program in order to earn income at a later period of time. To do so, in the period of 1974, 1975 and 1976, he purchased 72 /2 properties. The appellant purchased many more properties, but in 1976 he owned 72 /2 properties, all of which were single home dwellings or townhouses. In that period of time he also sold some houses: one and a half in 1974,11 in 1975 and 12 in 1976 out of a total of the properties purchased.

The respondent seems to think that is was unusual for the appellant to purchase single housing rather than duplexes or other forms of housing. The appellant, on the other hand, made it quite clear that what he had in mind was a minimum of upkeep, most of the repairs being done by the tenants. There was no janitorial services to provide and, in fact, he felt that the ownership of single residential housing would mean less expenses than if it were apartment buildings. I do not see anything wrong in that kind of reasoning nor do I see anything wrong in making an investment merely out of single residential homes, so in general, the program that the appellant had in his mind at the time cannot be said to be unreasonable.

The respondent pointed out also that nobody who was interested in investing in homes would purchase a home without taking the pictures off the walls to see whether there were holes in it or not. I have bought homes, as most people have, and I think I can take judicial notice that sometimes you buy a home and are very much interested in having a good home and there nevertheless are defects in it which are known only after you have lived in the home for some time. The existence of defects in homes is not unusual, but what is unusual is the fact that, in the period of some three years, so many homes were purchased and out of them, relatively few were defective. The appellant was quite honest to say he did in fact get rid of those that were defective.

It is the respondent’s view that it was the appellant’s intention right from the beginning to acquire these homes in order to dispose of them at a profit and pointed out the several sales made of these homes.

It appears to me that anyone who wanted to go into the business of selling homes would not in fact go about selling the home in a manner in which all of these homes were in fact sold by taking a third mortgage and that kind of a process. It is not the ordinary procedure of a trader who is dealing in the purchase and sale of homes to act in such a way. Such a procedure is much more in keeping, as I understand it, with the general view of investing in property for the purposes of acquiring rent and getting rid of these houses which are not suitable or too costly to maintain, either in time or in money.

It is true and it is in the reply to the notice of appeal that, in general, in all of the relevant years, there has been a loss in the rents derived as compared to the expenditures required to maintain these homes.

On the other hand, there has been some progress made in the amounts of rental income received and a reduction in the amount of expenses incurred before capital cost allowance. It is also true that the only profits made were from the sale of the properties that were defective.

However, in my view, reasonable explanations were given for the miscalculation of the rental income or the potential rental income to be derived from the appellant’s investment. I think I can take judicial notice that in 1973 or 1974 very few people knew just how high the interest rates would go, and I do not believe that the appellant is the only owner of homes who found it difficult to maintain the higher mortgage interest payments on some of the homes, as well as, the rising costs that go into maintaining these homes. Even though there appear to be considerable losses and on paper they look bad, it is not in my view sufficiently strong evidence to be able to claim, on the basis of those figures, that the intention of the appellant at the time of acquiring the properties was for resale. Those two points do not, in my opinion, justify that conclusion.

I admit that sometimes I feel, with all due respect, that the Department of National Revenue sometimes becomes mesmerized principally on the basis of the amount of the figures that are involved. In this case I think they should have taken a good look at all the facts, not merely on the quantum of the figures. I cannot come to the conclusion that the intention of the appellant in acquiring the properties was for resale. I agreed that the intention of a person must be supported or the declared intention of a person must be supported by the facts and, in my view, the appellant has in fact, either in direct examination or in cross-examination, established to the satisfaction of the Board that his intention was in fact to invest in housing for rental purposes. Whether or not in 1981 or 1982 the appellant will be successful in making a profit or not has no bearing on the intention that he may have had at the time of purchase. In my opinion he did have at the time of acquisition a reasonable expectation of earning profitable income from the rents.

The manner in which the appellant sold the defective houses leaves me to believe that he did not have a secondary intention of resale at the time he purchased the properties. Whether or not it is an unusual investment or whether he could or could not have brought examples of other people who are doing the same thing does not, in my opinion, make any difference to the merit of the appellant’s plan, nor does it make it unbelievable. As a matter of fact, I think it is a good idea and certainly not something which could be said to make no sense and on that basis conclude that what he had in mind was to sell the properties.

The other aspect of the respondent’s argument was that the appellant knew there was an appreciation of property and that the value of those properties was rising, and that in time he would make a profit of their sale. That may well be, but that still does not alter the fact that an increase in the value of properties triggers a corresponding increase in the rentals from which he could in time have realized a profitable rental income. Rises in interest rates were problems which I do not believe the appellant could have foreseen and which undoubtedly have distorted his projected figures.

I do not feel that I would be wrong and, of course, I am not responding to all of the points that have been raised in the argument by learned counsel for the respondent, but I am, in my own mind, and on the basis of the evidence that was given by Mr Mody and in the answers to the very capable questions of counsel for the respondent, convinced that the only intention that the appellant had in acquiring all the properties was for investment as rental income and that the properties disposed of were properties which had been acquired for long-term rental investment purposes but proved to be defective and costly to maintain. The sales were made in such a way that the said properties could not possibly, in my view, have been purchased for the simple purpose of re-selling them.

For these reasons I allow the appeals and refer the matter back to the Minister for reassessment accordingly.

Appeals allowed.