Laliberté v. R., [1999] 2 CTC 2472

Tardif T.C.J.:

The appellant, J. Adory Laliberté, instituted an appeal for 1990, 1991, 1992 and 1993; as for appellant Georgette Otis Laliberté, the appeals are for the 1990, 1991 and 1992 taxation years. The appellants asked that their respective appeals be heard under the informal procedure.

Since the facts giving rise to the notices of assessment being appealed from are related, the parties agreed to proceed on common evidence.

The appellant Georgette Otis Laliberté represented herself and her husband who admitted that he had full confidence in her with respect to the mandate of representation which he confirmed at the hearing. Georgette Otis Laliberté did a brilliant job of arguing her appeal and that of her husband, J. Adory Laliberté.

She was very well prepared and fully cognisant of the two files; she testified in an orderly and precise manner. She had in her possession all of the documents referred to during her testimony.

The points at issue in the file of Georgette Otis Laliberté are as follows: Was she entitled to deduct 50 per cent of the carrying and interest charges incurred in 1990, 1991 and 1992 from her income? Secondly, was the profit earned in the sale of the property of which she was co-owner business income or a capital gain? As to J. Adory Laliberté, the only point at issue relates to the 1990, 1991, 1992 and 1993 taxation years and concerns whether the carrying and interest charges of $2,956, $2,657, $2,876 and $979 were eligible for deduction from his income in the taxation years in question.

Ms. Laliberté had compiled and prepared notes on the history of the two files. The appellant stressed the importance of an agreement which the Department allegedly did not take into consideration in its review of their file. This agreement was a transfer of ownership under a voluntary giving in payment between the appellants on February 29, 1988. The appellant seemed to believe that a review of the content of this agreement would largely validate their position.

The evidence has shown that the appellant’s husband had a serious accident and that, subsequently, she and her spouse experienced a very difficult period in which they had neither the time nor the energy to straighten out their affairs and exercise their rights with respect to Revenue Canada. The appellant’s testimony focused mainly on the question of whether the profit earned was business income or capital gain; to this effect, she explained that she and her daughter-in-law, Gisèle Perron, purchased a piece of land of approximately 20 acres, zoned non agricultural, on March 9, 1984, paying $45,000, including $10,000 in cash.

She clearly stated and defined the reasons for purchasing this property. She and her daughter-in-law planned to develop the land for the definite and unequivocal purpose of subdividing it and selling off the lots to any interested party for an attractive profit.

The enclosed nature of the location, combined with the strict regulations governing the property acquired with her daughter-in-law significantly reduced the anticipated profit and dulled their initial enthusiasm; in most instances, they were forced to transfer the lots to the owners of the adjacent properties, thereby limiting the number of interested parties and, consequently, the speculative value.

A transaction is not qualified as business income or capital gain based on the size of the profit earned, poor prospects for finding a buyer, or the limitations or restrictions created by the regulations applicable to the property one wishes to sell; the qualification derives essentially from the intention of the taxpayer at the time of acquisition.

In most instances, the identification of that intention is a difficult process and it is often difficult to define, identify or know the intention of the person who makes the transaction. Over the years, case law has set out several criteria the use of which makes it easier to identify the intention.

In the instant case, it is my opinion that this intention is very clear and is easily identifiable from the testimony of Ms. Laliberté herself, who spontaneously admitted hoping and wanting to earn the maximum profit or yield from her investment. Although the results were less lucrative than hoped, there was never any interruption in her original plan. In fact, there is no evidence that Ms. Laliberté and her daughter-in-law changed, altered or modified their initial intention following the various pitfalls encountered.

In fact, they always held to their plan of selling the property and earning as much profit as possible. Of course, there was some friction with her daughter-in-law, co-owner of the property, but that was related mainly to the strategy and the timeliness for the sale of the lots. The balance of probabilities clearly shows that this was a business from the outset. There was never any wavering or secondary purpose to cloud the clearly identified initial reality of maximizing the investment by selling the property.

In these circumstances, the income from the sale of the property definitely constituted business income and not a capital gain.

As for the question of whether the carrying and interest charges could be deducted from the appellants’ income for the 1990, 1991, 1992, 1993 and 1994 taxation years, the evidence presented was vague, complicated and very confusing.

Ms. Laliberté, whose testimony was confirmed by her spouse, testified at length explaining the series of loans obtained during the years at issue. Each of the loans was obtained for a number of reasons ranging from the payment of old debts to current expenses to the payment of legal fees incurred for liability suits initiated against physicians. Part of these loans was definitely used to cover interest and to pay down a debt incurred in 1979 by the appellant so that he could invest in a saw mill which went bankrupt in 1982.

When the loan was taken out to invest in the saw mill, the appellant mortgaged an income property which he owned. When he was unable to meet his obligations following the failure of the saw mill, Ms Laliberté stepped in and granted him a loan.

He never paid interest or capital to Ms. Laliberté during the term of the loan guaranteed by a third mortgage, which became a second mortgage after a successful suit again the insurers of the loan guaranteed by the first mortgage. Ms. Laliberté became the owner of said property as a result of a voluntary giving in payment on February 29, 1988. This is the previously mentioned agreement to which Ms. Laliberté attached a great deal of importance, believing that it was an instrument capable of establishing the validity of their claims.

It also appears from the evidence that some of the money borrowed was used to acquire the lots. What was the amount and what was the term thereof are two questions which received answers so ambiguous that, in my opinion, it is impossible to determine clearly and precisely the relevant amounts and the purposes thereof.

During the audit, Sylvain Gadner obviously encountered the same ambiguity. He therefore arbitrarily set the amount that could be deducted from Ms. Laliberté’s income. He explained that he took into consideration the purchase price of the property at $45,000, which he posted as $22,500 for each of the purchasers, one of whom was Ms. Laliberté. He thus allowed 35 per cent of the interest charges she had paid.

In my view, Mr. Gadner’s process and assessment are reasonable and realistic in the circumstances and accordingly, there is no need to intervene. The appellants could have shown, through a clear accounting, that the amounts allocated were not adequate; unfortunately, the burden of proof was on them and they did not succeed in discharging it, even though they testified with the best of intentions possible under the circumstances.

As for the interest paid by Mr. Laliberté, it could not be deducted from his income. In this regard, the case law cited by the respondent is highly relevant and clearly set out that interest deductibility disappears when the source of anticipated income disappears. In other words, all of the interest paid on the loan used to invest in the saw mill venture was no longer deductible after the bankruptcy in 1982, even though considerable interest charges were paid after that date.

For these reasons, the appeals are dismissed, the whole without costs.

Appeal dismissed.