Degroat (R.M.) v. M.N.R., [1992] 1 CTC 2258, [1992] DTC 1256

Sobier, T.C.CJ.:—The appellant appeals from the reassessment by the respondent for his 1986 taxation year whereby, in respect of the disposition of certain real property, the respondent recorded the amount of $47,826.90 as business income, whereas the appellant had reported one-half of that amount as a Capital gain.

The appellant is a lawyer practising in Calgary, Alberta. He became a partner in his firm in 1984. Having become a partner, his taxation year for his professional income would be the firm's fiscal year which resulted in a short taxation year as an employee of the firm, i.e., the month of January 1984. Accordingly, the appellant would have little income for the 1984 taxation year and since his quarterly instalments for the 1985 taxation year were based on 1984, he would not be required to make large quarterly instalments for the 1985 taxation year and therefore he would have excess cash.

It was the appellant's evidence that rather than spend the cash generated by becoming a partner, he decided to invest in real estate.

It was his evidence that the investment would be for two purposes:first, to provide a capital asset which could be used in order to pay income taxes on his retirement or upon leaving the firm when the original tax deferral would catch up and secondly, to provide income and perhaps retirement income.

He first purchased an apartment property known as Royal Terrace (” Royal”). The purchase was carried out under an agreement of purchase and sale dated June 22, 1985 with a closing on August 29, 1985.

The total purchase price was $237,000, of which 25 per cent was by way of cash and 75 per cent by way of a mortgage from the Royal Trust Company. It was the appellant's evidence that the cash portion came from his own funds.

In addition to the purchase of Royal, the appellant and two others purchased an apartment property known as Mission Terrace ("Mission") the appellant, owning a one-third interest. The purchase price for Mission was approximately $303,000, again 25 per cent was paid in cash and 75 per cent by way of mortgage. The appellant was required to put up approximately $25,000 cash for his interest. According to the appellant, he borrowed the funds from his mother. However since his mother, for her own investment reasons, did not wish to lend only $25,000, he borrowed $60,000 from her and gave back a mortgage on the Royal property since this was the property in which he held a 100 per cent interest. The agreement of purchase and sale for the mission property was dated July 17, 1985 and was closed on September 1, 1985.

By borrowing $60,000 from his mother, it could be said that the appellant borrowed the cash portions for both purchases. However, having paid the $25,000 prior to entering into the agreement of purchase and sale for the Mission property, the Court finds that each purchase was separate.

The appellant stated that these purchases were to have been only the first of other investments in real estate which he had planned to make. He stated it was never his intention to purchase the properties for the view to a quick sale.

Although he seemed to have researched the problems of being a landlord, he stated that he experienced difficulty with the tenants which he had not expected. However, from the evidence these difficulties did not appear to be serious or recurring.

In January of 1986, oil prices fell dramatically resulting in a serious drop in the value of petroleum and natural gas investments. According to the appellant, this drop in oil prices affected the Calgary economy as a whole and was not limited to the oil and gas industry. The appellant feared that the value of his real estate investments would decline since he believed the malaise in the Calgary economy would likely continue. He therefore considered liquidating his investment at an early date before the drop was too severe.

The appellant stated that it was also at the strong urging of his wife that the decision to sell was made. According to his evidence, his wife was quite adamant that the investment be sold. Since his mother's money was at risk, he also felt that it would be wise to leave the real estate investment field before the losses manifested themselves. In addition, the appellant had taken a loss of some $20,000 on petroleum and gas related securities.

Therefore, on February 23, 1986, the Royal property was listed for sale. The property was eventually sold for $300,000 closing on June 3, 1986. This resulted in a capital gain one-half of which was reported in the appellant's return of income for the 1986 taxation year.

With respect to the Mission property, the sale of the property was closed on April 30, 1988 under an agreement of purchase and sale made January 25, 1988.

There was also a gain on the Mission sale. However, since the Mission sale was in 1988, that issue is not before the Court. The appeal is with respect to the sale of the Royal property in 1986.

The issue is whether the gain on the sale of the Royal property should be taxed on income account or as a capital gain. In his written argument, counsel for the appellant has set the issue out quite succinctly. He states that" to be the former, the Court must first conclude that Mr. DeGroat was either carrying on the business of buying and selling apartment buildings, or that the purchase and sale of Royal property constituted an adventure in the nature of trade. If it is neither of these then the Court must conclude that the transaction was capital in nature.”

The definition of "business" contained in section 248 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") includes an adventure or concern in the nature of trade. [1] In order to be a business, a taxpayer need not carry on business.

From the evidence, it is clear that the appellant was not in the business of buying and selling apartment buildings. Therefore, if he can establish that the transactions were not adventures in the nature of trade, the appellant should succeed.

If the appellant is to be believed, he was not entering into a series of isolated transactions for the purpose of reselling the subject matter of the purchase and thereby taking his gain.

On the analysis of the case law, [2] the Court is left to determine whether an asset was acquired as an investment. In answering that question, the Court must look at all of the facts and must weigh not only the taxpayer's viva voce evidence but also his conduct.

From his viva voce evidence at the hearing, and also from his actions, the Court concludes that it was the appellant's intention to have an investment which would produce income and appreciate in value. It cannot be said that his intention to hold these properties for possible future sale transformed the transactions into ones on account of income. Because one wishes to sell an investment at a later date does not taint the investment intended at the time it was made. [3]

The reasons for the appellant's sale of the properties in 1986 are found to be connected with the state of the Alberta economy, the fear for his mother's investment and the strong urging from his wife to sell the property. On the evidence, I would conclude that the third reason was as strong a reason as the others. Having regard to this, I find that there was no secondary intention on the part of the appellant to purchase the Royal property with a view to its resale.

For the above reasons, the appeal is allowed with costs and the matter referred back to the respondent for reconsideration and reassessment on the basis that the amount of $47,826.90, one-half of which was included into the appellant's income, was a taxable capital gain.

Appeal allowed.