Gavrilovic v. R., [1997] 1 CTC 2096, 97 DTC 142

Sobier J.T.C.C.: — By agreement, these appeals were heard on common evidence. The Appellants appeal from the assessments of the Minister of National Revenue (the “Minister”) for their 1989 and 1990 taxation years, whereby the Minister disallowed certain expenses in those years and added $204,126.28 to each of the Appellants’ income for their 1990 taxation year and denied each of them the benefit of the principal residence exemption in their 1990 taxation years.

The appeals as to the expenses were conceded by counsel for the Respondent, and therefore are allowed.

The issue before the Court is whether the property located at 3608 East 45th Avenue, Vancouver, British Columbia, was their principal residence.

The Appellant Dusan Gavrilovic is a home builder and real estate salesman and Slavinka Gavrilovic is his spouse and also his partner in real estate transactions. From 1986 to 1994, each of the Appellants owned or had ownership interests in the following residential properties:

The sales of properties numbered 1 to 6 inclusive and 8 to 11 inclusive were reported as on account of income in the appropriate years. The sales of the properties numbered 7, 12 and 13 were unreported by the Appellants. It is their claim that the properties numbered 7, 12 and 13 were their principal residences and therefore exempt from taxation.

On August 23, 1988, the Appellants sold their home and principal residence at 3572 East 45th Avenue, Vancouver, British Columbia (“3572”) and leased it back and remained there for a period of time.

On September 6, 1988, the Appellants entered into an agreement of purchase and sale for the purchase of the property then municipally known as 3604 East 45th Avenue, Vancouver, British Columbia (“3604”). This purchase was closed on November 1, 1988.

3604 was situated on a large lot and after the existing building was demolished, it was subdivided into two lots. Since it was possible that homes to be built on the two lots might be sold to Chinese purchasers and since some Chinese had an aversion to addresses ending in the number “4”, they successfully applied to have the lots renumbered 3606 East 45th Avenue (“3606”) and 3608 East 45th Avenue (“3608”).

3606 had a frontage of 40 feet and 3608 had a frontage of 60 feet. Mr. Gavrilovic built houses on each lot. The house on 3606 was said to be of standard construction and was approximately 4,000 square feet in area. The other built on 3608 was said to have been of superior construction and had an area of approximately 6,000 square feet.

On August 23, 1989, the two houses were listed for sale. On the same day, 3606 was sold with a closing on September 28, 1989.

In his evidence, Mr. Gavrilovic claimed to have listed both houses for sale, and whichever was not sold first would be their principal residence. After the sale of 3606, 3608 remained listed for sale, notwithstanding Mr. Gavrilovic’s claim that it was their principal residence. In addition to keeping the listing, the Appellants raised the asking price of 3608 from an original asking price of $858,000 to about $898,000.

An agreement of purchase and sale was entered into for 3608 on March 25, 1990, for a price of $878,000. The sale was closed on July 30, 1990.

In the meantime, that is to say on November 16, 1989, the Appellants entered into an agreement of purchase and sale to purchase 3174 East 45th Avenue, Vancouver, British Columbia (“3174”). 3174 was stated by the Appellants to be their next principal residence.

The Appellants claim to have remained in 3572 until about July or August 1989, when they claim to have moved to 3608. In July 1989, their parish priest performed a ceremony blessing 3608, which Mr. Gavrilovic maintains is indicative of it being their permanent residence. It is clear from the evidence that when they moved to 3608, it was not finished. For example, no permanent railing and banisters were installed leading to the second floor. Bathrooms were not finished, tiles was not completed as was the wet bar. While Mr. Gavrilovic claims only a few items remained to be completed, numerous invoices from suppliers show a great deal more had to be done after July 1990.

It is of some significance that many invoices for items required to complete 3608 showed that, although the items were to be delivered to or installed at 3608, the invoices were addressed to the Appellants or their nominee corporation at 3572.

The insurance policy on 3608 was a construction policy and was originally to expire on August 15, 1989, but was extended to September 15, 1989, still as a construction policy, even though the Appellants claim to be living there as early as July 1989. The Appellants were billed by BC Tel on October 18, 1989 for a moving charge which was stated to have taken place on September 30, 1989.

No occupancy permit was issued by the City of Vancouver permitting occupancy of 3608 until July 20, 1990, just prior to the closing of the sale.

I have great difficulty in accepting the evidence of the Appellants when faced with documentary evidence which contradict their testimony. In my opinion, the credibility of the Appellants is in doubt. Their explanations of obvious discrepancies between their viva voce evidence and documents which contradicted that evidence were weak.

Paragraph 54(g) of the Income Tax Act (the “Act”) as it was in 1990, reads as follows:

(g) “principal residence” of a taxpayer for a taxation year means a housing unit, a leasehold interest therein, or a share of the capital stock of a co-operative housing corporation, owned, whether jointly with another person or otherwise, in the year by the taxpayer, if the housing unit was, or if the share was acquired for the sole purpose of acquiring the right to inhabit a housing unit owned by the corporation that was,

(i) ordinarily inhabited in the year by the taxpayer, by the taxpayer’s spouse or former spouse or by a child of the taxpayer, or ...

When they built 3606 and 3608, they had formed no intention to make either their principal residence. Before they moved into 3608, it had been listed for sale and remained listed for sale during the time they occupied it. It was not finished until before the closing of the sale. Even before they sold 3608, they had acquired 3174 for the stated purpose of having it as their principal residence.

Their stated intention is one matter, but also important is their course of conduct. The Appellants had a history of building houses for resale. They had three principal residences in approximately eight years, with two in one year. In any event, after March 30, 1990, when they agreed to sell 3608, it ceased to be principal residence. In addition, they intended that 3174 would be their principal residence when it was purchased prior to the sale of 3608. Although they may have occupied 3608, they did not ordinarily inhabit it. Resale of 3608 was envisioned as early as August 1989. Leaving it listed after 3606 was sold does nothing to advance their argument that it was a principal residence. By raising the asking price, the Appellants claimed that they were discouraging buyers. Taking it off the market would have been the proper way of discouraging buyers. The fact that they not only kept listed but raised the original asking price shows intention to deal. When 3608 was sold, it was sold for more than the original asking price.

The course of conduct taken by the Appellants is more indicative of them remaining at 3608 until it could be sold and then moving on to

3174, in order to make it their principal residence. The Appellants’ lack of credibility in dealing with when they moved to 3608 tends to taint their evidence on other matters, such as their intention to have 3608 as their principal residence. This coupled with the fact that they are in the business of building and selling houses, leads one to believe that the sales were on account of income.

In Schlamp v. R. (sub nom. Schlamp v. The Queen), [1982] C.T.C. 304, 82 D.T.C. 6274 (F.C.T.D.), the Court said at pages 310-11 (D.T.C. 6279) that the onus is on a builder and contractor to prove the profits from the sale in question should not be treated as income. In that case as in this, the Appellants have not discharged this onus.

The short holding period also points to an income transaction rather than holding as a principal residence. They had no occupancy permit to occupy the premises prior to July 1990. That is after they had agreed to sell 3608.

For these reasons, 3608 was not the Appellants’ principal residence and therefore the appeals are dismissed with costs.

Appeal dismissed.