Gary Hollo. v. Minister of National Revenue, [1978] CTC 2617, [1978] DTC 1450

Delmer E Taylor:—This is an appeal against an income tax assessment in which the Minister of National Revenue increased the taxable income of the appellant for the year 1974 as follows: “Add net profit earned on the sale of 452 Mount Albion Road, Hamilton—$14,263.96”. The appellant relied upon section 3, paragraph 40(2)(b) and subsections 9(1) and 248(1) of the Income Tax Act; and the respondent relied, inter alia, upon sections 3 and 38, subsections 9(1), 39(1), 248(1) and paragraphs 54(f) and (g) of the Income Tax Act, RSC 1952, chapter 148 as amended in particular by SC 1970-71-72, chapter 63. Facts

The appellant is a school teacher who, at all material times, was solely employed in teaching. The subject matter of this appeal, 452 Mount Albion Road, Hamilton, Ontario (the property) was conveyed to the appellant on May 15, 1974. The property was listed for sale in August 1974 and was subsequently sold in October of 1974.

Contentions

It was the position of the appellant that:

—he intended to obtain a teaching position in Hamilton and live on the property which was next to his parents’ home;

—after purchase, he took physical possession of the property, moved his furnishings and personal belongings there, and made certain improvements thereto;

—during the summer of 1974, he commuted to Toronto to teach summer school;

—during August of 1974 it became absolutely clear that he would not be able to find employment in the Hamilton area, and the property was listed for sale;

—the gain on the sale of the property was a gain from the disposition of a principal residence and not Subject.to tax.

The respondent contended that:

—the appellant had always been a resident in the Mississauga area;

—on June 30, 1974 the appellant moved his furnishings from an apartment to a townhouse in Mississauga;

—the appellant did not ordinarily inhabit the property;

—at all material times, the appellant acquired the property with the intention of turning the same to account at a profit.

—the profit of $14,263.96 received by the appellant on the sale of the subject property was income received from a business or an adventure in the nature of trade; or, in the alternative, the amount of $7,131.98 was a taxable capital gain on the sale of the subject property.

Evidence

By agreement between counsel, a folder to be identified as Exhibit A-1 containing several documents considered relevant to the appeal was submitted. The index therefrom is as follows:

Also identified and submitted through witnesses—by counsel for the appellant:

Exhibit A-2 — Real Estate Listing Agreement for the property dated August

26, 1974 (Asking Price $62,900).

Exhibit A-3 — Price Quotation for extras in the contract for the home

(dated April 23, 1974) signed by the appellant.

Exhibit A-4 — Same as above, dated April 22, 1974 signed by the appellant.

Exhibit A-5 — Bank Statement—August 1974.

Exhibit A-6 &) Cancelled cheques signed by the appellant to Helen Hollo

A-7 ) (the appellant’s mother).

Exhibit A-8 — Cancelled cheque signed by the appellant to The Royal Bank

of Canada.

Exhibit A-9 — Package of correspondence between the appellant and York

University, Toronto, Ontario.

Submitted by counsel for the respondent:

Exhibit R-1 — Salesman’s working copy of property listing agreement

(Exhibit A-2) with photograph.

Exhibit R-2 — Chequing account record of E S Hollo (father of the

appellant).

Exhibit R-3 — Union Gas Limited account for $6.39—October 1974.

Exhibit R-4 — Same as above for $1.02—September 1974.

The appellant's evidence in summary was that he had lived in Etobicoke, Ontario (near Toronto) from September 1972 to June 1973 while he was attending University in Toronto. He had worked in Hamilton during the summer of 1973, and lived at home. Unable to obtain a teaching position in Hamilton, he had obtained an appointment in a school in Mississauga, and signed a lease on June 7, 1973 for an apartment there, the lease running from July 1, 1973 to June 30, 1974 (Exhibit A1-B1). Since there were two other young men also living in the apartment, the fact that he intended to live at home until the end of the summer was no problem. On June 4, 1973, his father had signed agreements to purchase two lots (houses to be built on them at a cost of $36,250 each) in a new subdivision being developed on Mount Albion Road by Fennell Developments Limited (Exhibit A1- A1 & 2).

Although an exchange of one lot was made with the developer, one of these agreements deals with the property which is the subject of this appeal. His father had made the down payment and assured him that he would assist him financially in purchasing this house and loi. Although the agreement called for completion of the house and possession in the fall of 1973, the appellant stated it was agreed with the contractor that this could be extended. In fact, the property was not ready for occupancy until about June of 1974. In early 1974 he purchased, again with financing accommodation from his father, a townhouse in Mississauga, which townhouse was under construction and would be ready for occupancy later that year (Exhibit A1-C1). His efforts to obtain a teaching position in Hamilton continued but he accepted a summer teaching position in Mississauga. His fiancée moved into the townhouse in June 1974, sharing the expenses, and he moved some of his furniture and belongings there too. He commuted to Hamilton during the summer months of 1974, staying at the Subject property about 50% of the time and in his Mississauga townhouse the other 50% of the time. He proceeded to make some improvements to the property during the summer but being still unsuccessful in his efforts to obtain a teaching position in Hamilton, and his fiancee being adamant about remaining in the Toronto area, he decided to sell the property.

Mr Ernest Hollo gave evidence that he had always assisted his son financially when needed, that he had wanted his son to live in Hamilton and had acted for him in the purchase of the property. Further, he had advised him against selling the house and was reluctant to see him move to Toronto. The witness was questioned about the significance of documents AS and A6 from Exhibit A-1 which are herein reproduced:

AS February 25, 1974

Mr John Holmes, QC,

Barrister & Solicitor,

25 Hughson Street South,

Hamilton 20, Ontario.

Dear Sir:

Re: Hollo purchase from Fennell

Developments Limited—

Lots 53 and 54, Mount Albion Road.

We acknowledge receipt of your letter of January 22nd and would advise you that the purchaser will take title to Lot 53, as

ERNEST HOLLO and HELEN HOLLO, his wife, both of the City of Hamilton, in the Regional Municipality of Hamilton- Wentworth,

as joint tenants and not as tenants in common,

and to Lot 54, as

GARY HOLLO, of the City of Hamilton, in the Regional Municipality of Hamilton-Wentworth, to uses.

Yours very truly,

COOPER AND COOPER

Per:

WGC/dr

A6

TO: FENNELL DEVELOPMENTS LIMITED

RE: SALE TO HOLLO

Lot 54, Plan 1421,

Hamilton, Ontario.

DIRECTION

Let this be your full and sufficient authority and direction to draw the Deed herein in favour of Gary Hollo, to Uses.

DATED at Hamilton, this 12th day of March 1974.

(Sgd) Ernest Hollo

Ernest Hollo

Mr Hollo was unable to provide any particular reason for the direction being given on the above date, long in advance of the completion of either house, and understood that the term “to uses” referred only to barring any rights of dower since the appellant was single at the time.

Mr Edwin Oswald, purchaser of the property from the appellant, indicated that there was some furniture in the house when he had first inspected it in September 1974, and it appeared someone could live there although there was no refrigerator or regular stove, and only a cot or sofa of some kind for sleeping.

Argument

The main thrust of the argument of counsel for the appellant was that the appellant’s acquisition of the property dated from June 1973, at the same time that his father had purchased the property next door. His father had acted as his agent, and there was nothing unreasonable in the contention that the father had been willing to provide financial accommodation. Both the apartment and the townhouse transactions in Toronto had developed out of the necessity of the appellant to have living accommodation, and these were the most reasonable arrangements he could make at the respective times involved. His intention had always been to live in Hamilton beside his father, and he had pursued a constant course to accomplish that until forced to accept the fact that it could not develop from two perspectives—that he couldn’t locate employment in Hamilton, and his fiancée, facing the same difficulty, wanted to stay in Toronto. The evidence also showed that he inhabited the property during the summer of 1974 to a degréé sufficient that he could claim it as his principal residence.

In addition to several key cases dealing with the question of capital or income, counsel referred to Samuel T Ravida v MNR, [1977] CTC 2598; 78 DTC 1030, in particular the following quotation from pages 2602 and 1032 respectively:

I find little in the evidence to support the appellant’s contention that he seriously intended to sell his Dundas home, that he took active steps to engage in farming, or that he was even prepared to do so. In the matter of Elmer D Bassani v MNR, [1977] CTC 2311; 77 DTC 208, I pointed out the general criteria which I felt provided guidelines for a determination of an issue such as this one, and I quote from pages 215 and 2321 respectively:

In riiy opinion, to determine a question of the kind posed at this hearing, particularly dealing with the purchase and sale of land and considered against the background just described, requires the following:

(a) An examination of the appellants’ personal and business circumstances at the time of acquisition, as such circumstances conflicted with, or complemented the probable fulfillment of their stated intention.

(b) A review of the efforts made and the progress demonstrated toward such stated intention as an objective.

(c) A critical consideration of the reasons advanced for the eventual abandonment or the frustration of the stated intention.

The superimposition of these criteria in the instant case shows the factual evidence to be in sharp contrast to the protestations of the appellant.

Counsel distinguished the above criteria with respect to this appellant by pointing out that in Ravida (supra): (a) the appellant was a trader; (b) he had not listed his own home for sale; and (c) there was no good reason advanced for selling his subject property, and no indication of frustration; all of which do not apply to Mr Hollo.

Counsel for the respondent argued that the important date for purposes of this appeal was the date of acquisition of the property by the appellant, and that. intentions or actions before that date, whether by the appellant or his father, were not significant to this appeal. The earliest date at which one could possibly show any involvement on the part of the appellant was February 25, 1974, evidenced by Exhibit A1-A5 (the direction from the solicitors of Mr Ernest Hollo to the solicitors for the developer to put the property in the name of Gary Hollo). Subsequent to that date, the appellant’s actions had not demonstrated that he intended to live in the property and indeed were quite to the opposite effect. Further, there had been no frustration of this intention, if in fact it had ever been his intention. Counsel in refuting the arguments put forward for the appellant asserted that the criteria detailed in Bassani (supra), when applied to the instant case, determined conclusively that the contentions of the appellant regarding the reason for purchase could not be sustained.

On the matter of the principal residence—counsel urged that all the evidence showed the appellant had lived in Mississauga, not Hamilton, and that any period spent at the subject property had been for convenience in getting it ready for sale. Further, with his parents’ home immediately adjacent, having all usual conveniences, it was not reasonable to think of the appellant “ordinarily inhabiting” the subject property with the minimum of furnishings and no appliances.

Findings

Counsel for the appellant proposed that the significant point in time was in June 1973, the date an agreement to purchase the property was entered into by the appellant’s father. It was contended that the “initial decision” to own the property was taken by his client at that time. However, it is evident to me that the critical time is the acquisition of the property by the appellant, not any date at which there might have been the intention to so acquire the property. Any “initial decision” to which reference is made in Bassani (supra) or in other similar judgments is in respect to such a demonstrable purchase by the appellant.

Counsel for the respondent put forth that no acquisition by the appellant could have taken place before February 1974 and while I am disposed to accept his point on that, I have serious reservations that the acquisition could have taken place even then—a more likely date would have been May 15 according to the substantive evidence. A draft deed, unsigned and unregistered but dated February 26, 1974, was presented to the Board as part of the documents under Exhibit A-1. However, it is not considered of value in this matter, not only because of its construction defects, but also because the balance of the evidence supports a much later date for actual acquisition, and the questioning of witnesses indicated the purpose of the draft deed may have been as credit support for the purchase of the Mississauga townhouse.

During the period from February to June 1974, the appellant was bound by a rental lease on an apartment in Mississauga; owned a townhouse under construction in Mississauga; and worked in Mississauga. His fiancée lived and worked in the Toronto area. From June 27, 1974, his fiancee lived in his townhouse in Mississauga, and he moved some of his own belongings to that townhouse, and some to the subject property in Hamilton. He continued to work in Mississauga for the balance of the summer of 1974.

It is against this background that the Board is asked to find that the intention of the appellant at the time of acquisition (not earlier than February and probably in May 1974) was that the subject property be his personal residence, and further that he used it later as his principal residence.

Using the criteria set out in Bassani (supra), there is little evidence to support an opinion that the appellant’s personal circumstances were indicative of the alleged intent to use the subject property as a personal residence; that his efforts to further that assertion were more than minimal; or that there was any external or unforeseen cause of frustration or abandonment of that objective in the period from May to August 1974. It is also difficult to imagine that the estimated increase in value of $26,650 ($62,900—$36,250) occurred in that same two or three-month period. Rather, the potential for a profitable turnover would have been obvious to the appellant by June 1974, and probably even by February of that same year. Under usual circumstances, one of three possible objectives is the motivation for the acquisition of a residential property—to use it as a personal residence, to rent it, or to hold it for resale. In effect, the Minister in this case has determined that the appellant’s intention at acquisition was the last one, and has characterized it thereby as a venture in the nature of trade. To avoid this conclusion, it was incumbent on the appellant to show that one of the other two possible objectives was indeed that which the facts and his conduct demonstrate to have been if not the sale, at least the primary intention. It is this responsibility to which reference is made in Bassani (supra) at pages 215 and 2321 respectively:

Bearing in mind the retrospectivity of this “review” process, it is inadequate for the appellant merely to establish that the stated intention is of such a character that it merely could have or should have occupied the central role in the initial decisions taken. It must be shown to have conspicuously done so.

This the appellant has failed to do, and therefore to that extent the Minister’s assessment is undamaged.

It would seem to me that it would be academic to examine the evidence put forward in support of the appellant’s claim to the property as a principal residence, in view of the conclusion reached above.

Decision

The appeal is dismissed.

Appeal dismissed.