Watson v. R., [1998] 3 CTC 2370, 98 DTC 1680

McArthur T.C.J. .

This appeal was heard in Fredericton, New Brunswick, concerning the Appellant’s 1992 taxation year. The issue is whether the gain on the sales of two houses by the Appellant in 1992 is on account of income or were they tax exempt principal places of residence.

The determination of the issue depends on the facts of this case and the interpretation given to them. The Appellant and his wife, Katherine, gave evidence on the Appellant’s behalf and Mr. Dawe of Revenue Canada for the Respondent.

During a period of less than five years, between 1989 and 1993, Jeff Watson built, lived in with his wife and two children, and sold four single family homes, all within a radius of approximately one mile.

The Minister of National Revenue has assessed the Appellant for two of those houses, both sold in 1992, known as 127 Marianne Drive and 23 Queensbury Drive.

The Appellant was an employee of a family company which is in the business of constructing the foundations for homes and other structures. The Appellant had a general knowledge of the construction industry and can be described as a carpenter.

House #1

In the fall and winter of 1988 and 1989, he constructed a house on a lot at 80 Quispamsis Road which he and his wife had purchased in August 1988. They moved in March 1989 and sold the house by agreement in January of 1990 for $82,900 realising a profit of approximately $20,000. The sale was completed in March 1990.

They testified that they moved for the safety of their two children ages 1 and 3. The lot was fronting on a busy street with fast moving traffic and the back of the lot slopped severely into a gully. The back deck was 16 feet above ground level creating a hazard for the children should they fall from it.

House #2 and one of the two assessed houses

In January 1990, Jeff and Katherine Watson purchased a building lot in a subdivision at 127 Marianne Drive for $10,000 upon which the Appellant built a home. The Watson family moved in about April 1990. An agreement to sell the house for $103,500 was entered in December 1991. This transaction was completed in February 1992 at a profit, calculated by the Respondent, of $26,290.

Jeff and Katherine Watson stated that there was a sudden or blind curve in front of their home on Marianne Drive that was too dangerous for their children. This was demonstrated by the fact that their family dog was run over by a car in front of their home shortly before they placed a “House For Sale” sign on their front lawn. Upon moving out of Marianne Drive in February 1992, they rented a house for two months awaiting Jeff”s completion of the house #3. The rental house was on a highway and adjacent to a parking area for trucks and heavy equipment. This temporary location was more dangerous for their children than 127 Marianne Drive.

The Appellant noted that they had added some personalised features to the property including a tree house for the children.

House #3 (the 2nd house subject to this appeal)

In January 1992, Jeff and Katherine Watson purchased a lot at 23 Queensbury Drive, in the same subdivision as house #2, for $20,000. During the next three months, he constructed a larger home from plans Katherine Watson had chosen. This house contained personalised features including navy blue broadloom and a whirlpool bath in the master bedroom. Cost overruns caused them to place the house on the market shortly after moving in. A sale was completed in November 1992 and they made a profit according to the Respondent, of $28,022. The Appellant’s evidence was that they had to sell because they could not afford the house. The Appellant’s father was constantly after him to pay back money borrowed from the company and to pay the building material supplier from whom the Appellant had purchased supplies on the company’s account. In November 1992, the Watson family moved for four months into a house at 21 Queensbury Drive owned and occupied by the Appellant’s mother.

House #4 (not assessed by Revenue Canada)

Jeff and Katherine Watson purchased a lot at 20 Queensbury Drive for $22,000 in January 1993 upon which Jeff built a home into which the family moved in April 1993. This home contained a basement level family room where the children spent much of their time. The Appellant concluded that one or both of his children contracted allergies from the moisture in the basement, a problem which he could not correct. As a result, this house was sold by agreement dated November 1993 which transaction was completed in February 1994.

House #5 (not assessed by Revenue Canada)

In January 1994, Jeff and Katherine Watson purchased a lot at 18 Queensbury Drive upon which Jeff built a home in which he and his family continue to reside. This house was constructed on a slab without a basement to prevent the moisture related allergy problems.

The Respondent provided the following chart that appears to accurately reflect the income of Jeff and Katherine Watson over a five-year period.

The methodology used by the tax auditors to arrive at the profits realized by the Appellant is not without fault, but they did what they could with the information available to them. The Appellant kept very few records of the construction expenditures incurred for any of the houses.

Position of the Appellant

The Appellant’s position is that he did not have the intention to sell the houses at a profit, which is an essential element to conclude that there was an adventure in the nature of trade.

Counsel referred the Court to several cases including:

(a) The criteria set out in Happy Valley Farms Ltd. v. Minister of National Revenue (1986), 86 D.T.C. 6421 (Fed. T.D.)

(b) Breakell v. R. (1991), 91 D.T.C. 5419 (Fed. T.D.) (with respect to primary intent)

(c) Power v. R. (1975), 75 D.T.C. 5388 (Fed. T.D.) at page 5391 (concerning evidentiary requirements)

(d) Racine v. Minister of National Revenue (1965), 65 D.T.C. 5098 (Can. Ex. Ct.), at page 5103 (with respect to secondary intention)

Counsel argued that the Appellant provided acceptable explanations for all the sales and there was no secondary motivation. All transactions were principal residence use oriented.

Position of the Respondent

The issue is whether the gain on the sale of the houses in the amounts of $26,290 and $28,022 was income from business or property or an adventure in the nature of trade or from a profit-making undertaking or course.

Subsection 9(1) of the Income Tax Act reads:

(1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year.

During the 1992 taxation year, business was defined in subsection 248(1) as follows:

“business” — ‘business’ includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2 and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment;

Counsel referred the Court to several cases including:

(a) Happy Valley Farms Ltd. v. Minister of National Revenue (1986), 86 D.T.C. 6421 (Fed. T.D.) for the tests set out therein.

(b) Racine v. Minister of National Revenue (1965), 65 D.T.C. 5098 (Can. Ex. Ct.), at page 5103 for the following quotation:

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition, that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

The Respondent’s Counsel submitted that there is a clear inference to be concluded from the facts. The Appellant built five houses in five years. He obtained a benefit from the company by using its forms and obtaining materials at a favourable rate. The Appellant is a carpenter and house builder. He worked for the family construction company in the summer months and built houses during the winter while drawing unemployment insurance. His yearly income was approximately $25,000 annually yet he built houses of a value in excess of $100,000. The Respondent concluded that the only way he could afford such a house was to sell it quickly at a profit. The Appellant provided no proof of expenses. House #2 (127 Marianne Drive) was on a relatively quiet street. They immediately moved to a much more dangerous area for two months. House #3 (23 Queensbury Drive) was the third house he built. He should have known how to calculate the cost of construction. He testified that he knew he would have to sell before the house was completed. Counsel urged the Court to draw an inference from the facts to find a secondary intention.

Analysis

Cases dealing with whether a profit was a gain on account of income or capital are numerous. The Court must refer to the facts and draw inferences using common sense while looking at all of the circumstances.

In isolation, Mr. & Mrs. Watson had reasons for the sale of each of four houses that could be accepted as being reasonable. House #1 was too close to fast moving traffic and the contour of the land was dangerous, yet these conditions existed when they inspected the lot prior to purchase. The deck, 16 feet from the ground, was their own doing.

While they stated house #2 was sold because the street in front was also too dangerous, they immediately moved into a more dangerous location for two months.

With the prior experience the Appellant had, it is difficult to conceive that he would conclude prior to completion that house #3 would have to be sold because it was too expensive.

The Appellant was in the business of building basements yet states that he had to sell house #4 because the basement was too humid. There was no corroborating evidence to support this tenuous position. The Appellant apparently did not attempt to remedy the situation with equipment such as a dehumidifier although he did testify that an air exchanger did not help the situation.

In Racine (supra), at page 5103, the Court concluded that in order for a transaction to have a capital nature and an adventure in the nature of trade at the same time, the taxpayer must have had in mind the possibility of reselling at a profit from the outset. Inferences flowing from all the circumstances surrounding the transaction must be taken into account in deciding whether such a motivation exists. I must agree with the Respondent’s position and I adopt it as set out herein as part of the reasons of this judgment.

Considering all of the circumstances leads me to conclude that the Appellant was quite prepared at all times to sell the two houses in question at a profit shortly after construction and he, in fact, did so.

I find that the Appellant had at least a secondary or alternative intention of selling the houses at a profit. I am not saying I do not believe Mr. & Mrs. Watson when they say they acquired the houses to live in, but all the surrounding circumstances clearly lead to the conclusion that the gains realized were on income account. The inferences flowing from the facts are too numerous to ignore or to be overshadowed by the Appellant’s explanations.

Applying the tests set out in Happy Valley Farms Ltd.(supra) to the present facts I find:

1. The nature of the property sold. The Appellant was a carpenter and obviously had a talent for building single family homes which is the nature or the properties sold.

2. The length of period of ownership. The two houses at issue were both sold in the same year.

3. The frequency or number of other similar transactions by the taxpayer. If the same sort of property has been sold in succession over a period of years or there are several sales at about the same date, a presumption arises that there has been dealing in respect of the property. The Appellant sold four houses in 4 years surely giving rise to a presumption that he was in the business of building and selling houses.

4. Work expended on or in connection with the property realized. If effort is put into bringing the property into a more marketable condition during the ownership of the taxpayer or if special efforts are made to find or attract purchasers (such as advertising) there is some evidence of dealing in the property. The Appellant constructed the houses with the assistance of friends and trades in marketable areas and advertised them for sale.

5. The circumstances that were responsible for the sale of the property. The circumstances of sale have been previously dealt with.

6. Motive. The motive of the taxpayer is never irrelevant in any of these cases. The intention at the time of acquiring an asset as inferred from surrounding circumstances and direct evidence is one of the most important elements in determining whether a gain is of a capital or income nature. This criteria has been considered earlier in this judgment and favours the Respondent’s position.

There were two further matters that warrant brief comment. First, the question of joint tenancy was not made an issue although the title to the properties at issue were held as follows:

JEFFREY WATSON, of the Town of Quispamsis, in the County of Kings, and Province of New Brunswick, Foreman, and KATHERINE WATSON, his wife, of the same place, Business Woman the “grantee”

The grantor conveys in fee simple to the grantee as joint tenants the parcel described in Schedule “A” attached hereto.

While they held title as joint tenants, without it having been pleaded or argued it is not a matter to be dealt with. I am not in a position to entertain the division of profits between the two joint tenants.

Secondly, with respect to the quantum of the profit, the Appellant had the burden of proof to establish that the amounts were incorrect and have not satisfied that onus. General statements to the effect that the Respondent’s figures are incorrect are not good enough. While one may understand why they kept no records of expenditures, the Court requires concrete and corroborating evidence to establish the actual cost of construction.

For these reasons, the appeal is dismissed with costs.

Appeal dismissed.