Joseph Friedman v. Minister of National Revenue, [1977] CTC 2611, 78 DTC 1020

The Chairman:—This is the appeal of Joseph Friedman from income tax assessments in respect of the 1971, 1972 and 1973 taxation years by which the respondent added to the appellant’s income amounts of $15,241.84, $4,578.25 and $604.50 respectively as income received from a business or from an adventure in the nature of trade, the issue being whether these amounts are income or whether they are capital gains as claimed by the appellant.

At the commencement of the hearing, counsel for the respondent moved to file two amendments to the reply to the notice of appeal. The first was to add, between subparagraphs (c) and (d) of paragraph 10 of the reply, the following words:

Each profit was made by the appellant in its operation of business in carrying out a scheme for profit making.

The second amendment proposed by the respondent was to add as subparagraph (h) of paragraph 10 of the reply, the following:

The appellant also realized a profit of $36,513.00 in disposing of a property located at 360 Victoria Avenue, Montreal, during the 1974 taxation year.

Dealing first with the second amendment, counsel for the appellant objected to its being accepted on the grounds that the appellant’s 1974 transaction referred to in the amendment took place after the 1971, 1972 and 1973 taxation years. Counsel contends that for the Board to decide the appeals now before it on the basis of the 1974 transaction would not only be deciding the issue before it on a retrospective basis, but the decision of the Board would be prejudging the 1974 transaction which has not yet been assessed by the respondent and he concludes the 1974 transaction is not pertinent to the appeals before the Board and that the amendment to the reply should not be allowed.

Counsel for the respondent submitted that the respondent’s assumptions were that the appellant was engaged in the business of acquiring and disposing of properties and that in his attempt to establish the appellant’s course of conduct the 1974 transaction was pertinent. Counsel for the respondent referred to several decisions which supported the proposition that the Minister can rely on subsequent events to establish a course of conduct of the taxpayer.

The Board sustained the appellant’s objection and ruled that the 1974 transaction should not be introduced as an amendment to the respondent’s reply. The Board well recognized that the course of conduct of an appellant is an important factor to be considered and that the Minister can refer to subsequent events in order to establish the appellant’s course of conduct over a period of years in trading cases. However, the question is whether in order to present to the Board valid evidence of the appellant’s course of conduct subsequent to the taxation years under appeal, it is necessary to amend the Minister’s reply. Such evidence has been allowed during the course of a hearing and considered by the Board in rendering its decision without an amendment to the reply. Though evidence pertaining to the appellant’s course of conduct including a period subsequent to 1973 will be considered, the Board feels that an amendment to the reply iS unnecessary and needlessly confusing.

Counsel for the appellant objected to the first motion made by the respondent above referred to on the grounds that in the Minister’s assumptions he first claims that the appellant was a trader in real estate and as an alternative submission the Minister assumes that the appellant is not a trader but is engaged in an adventure in the nature of trade. Counsel contends that these assumptions, which the appellant has to meet, place him in the impossible position of proving that both the Minister’s contradictory assumptions are wrong and suggests that the burden of proof should be shifted back from the applicant to the respondent in the alternate assumption.

In support of his contention, counsel for the appellant cited the case of Nathaniel C Brewster v The Queen, [1976] CTC 107 at 111; 76 DTC 6046 at 6049, where Mr Justice Gibson stated:

Pleading assumptions in the alternate is novel in view of the state of the law. In law the onus is on the taxpayer to destroy some or all of the assumptions. But it is open to the defendant to plead other facts not relied in making the assessments or reassessments, but in that event, the onus is on the Minister of National Revenue to prove such other facts.

Counsel for the respondent, in rebuttal, suggests that the facts in the instant appeal are somewhat different from those in the Brewster case (supra). In the appeal presently before the Board, the Minister’s first assumption is that the appellant is a trader and in the alternate assumption he suggests that the appellant engaged in an adventure in the nature of trade. Counsel contends that since the definition of “business” in subsection 248(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended, includes an adventure in the nature of trade as well as a profession, calling or trade, there is no contradiction in the Minister’s assumptions because in either case the underlying principle of law involved is that the transactions were not capital in nature but income.

There is, in my mind, no doubt that in assuming, on the one hand, that the appellant is a trader and alternatively assuming that he is not a trader but engaged in an adventure in the nature of trade, there is a contradiction in fact, even though in law both assumptions could give rise to taxable income. The principle enunciated by Mr Justice Gibson in the Brewster case (supra) in shifting the burden of proof from the appellant back to the respondent when he has made alternative assumptions in his reply, appears to me to be a necessary and indeed an equitable procedural counterbalance when the Minister presents contradictory assumptions. In the circumstances of the instant appeal, even though its application is almost academic, the principle, in my view, is important enough to restate it here.

In makng my ruling, therefore, although the appellant has the onus of proving that the Minister’s first assumption is wrong, I hold that the onus of proof in respect of the alternative assumption will rest on the respondent.

Evidence

I do not believe it necessary to review here all the evidence adduced, but the pertinent facts appear to me to be as follows.

The appellant was in the business of custom tailoring since 1936. In 1971, 1972 and 1973 the appellant’s income from his tailoring business had substantially decreased.

1. In September of 1967, the appellant acquired a rental property Situated at 506, 508 Grosvenor Street for $38,607.70 which was sold in 1971 for $38,000 sustaining a loss of $607.70.

2. In March of 1970, the appellant purchased a property at 4919, 4921 Sherbrooke Street for $78,358.16 and sold it in January 1971 for $93,600, realizing a profit of $15,241.84.

3. In June of 1970, the appellant acquired a property at 537, 539 Grosvenor Street for $33,421.75 which he sold in May 1971 for $38,000 making a profit of $4,578.25.

4. In June 1972, the appellant purchased a property at 367, 371 Clarke Avenue for $24,395.50 which he sold in May 1973 for $25,000 making a profit of $604.50.

5. In May of 1972, the taxpayer purchased a property at 4297 Sherbrooke Street East for $42,200 which he sold in May of 1973 for $49,000 making a profit of $6,800.

6. In 1972, the appellant’s wife purchased a property at 385 Lansdowne Avenue for $24,000 which the appellant claims was paid by his wife. As I understand it, the appellant forced his wife to sell the property for the purchase of a property at 360 Victoria Avenue in 1974 and paid his wife back from the proceeds of the sale of the 360 Victoria Avenue property from the disposition of which he realized a profit of $36,513.

Although the evidence on the point is not clear, the appellant stated that his wife and his brother-in-law forced him to purchase a property at 4545 8th Avenue, Chomedy, in September 1971, where he lived for six months and sold the house.

Mr Miklos Kosa was called as a witness and testified that the property at 4297 Sherbrooke Street East was purchased on his behalf by the appellant for some $42,000 and although he had offered to repay the appellant $51,000, the appellant accepted but $49,000. The purpose the acquisition of this property had was described by the appellant as being humanitarian. Mr Kosa had a daughter who required an operation and the appellant wished to help Mr Kosa.

In cases where the Board is to decide whether profits realized from the acquisition and disposition of properties are income or capital gain, the facts are the determining factor. The appellant’s declared intention of purchasing the properties as an investment in rental properties must, of course, be considered by the Board. However, the appellant’s course of conduct over a period of time substantiated by the facts will or will not corroborate the appellant’s declared intentions. In establishing these facts, the reasons given by the appellant for the acquisition and the disposition of the properties must be reasonable and credible. I have found and indeed noted that the appellant’s credibility left much to be desired.

Even though one might accept the appellant’s reason for acquiring and disposing of the property at 4297 Sherbrooke Street East because of humanitarian considerations in respect of Mr Kosa and his daughter, the appellant nevertheless made a profit on the transaction. The absence of a reasonable explanation as to the source of the appellant’s wife’s money in the purchase of the Lansdowne Avenue property, the sale of the property, the borrowing of money by the appellant from his wife and the repayment to her from the proceeds of the sale of the Victoria Avenue property does not convince me that the appellant’s intention was to invest in rental-producing properties even if the evidence given could be considered as being credible.

Although the appellant was not a real estate broker and even though he may have, to a greater or lesser degree, exercised the profession of custom tailoring, the preponderance of the evidence and the course of conduct of the appellant for the period from 1967 to 1974 forces me to conclude that in 1971, 1972 and 1973, the appellant was engaged in trading in real estate as a scheme of profit-making. In my opinion, the facts do not support the appellant’s declared intention of investing in rental income properties.

I hold, therefore, that the appellant did not succeed in establishing to the satisfaction of the Board that the appellant was not in the business of trading in real estate within the meaning of subsection 248(1) of the Income Tax Act, and that the respondent did satisfy the onus of establishing that the appellant was at least engaged in an adventure in the nature of trade in acquiring and selling the subject properties in 1971, 1972 and 1973.

For these reasons the appeal is dismissed.

Appeal dismissed.