Date: 20010515
Docket: 1999-745-IT-G
BETWEEN:
MARK LESTER ISAAKS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bonner, J.T.C.C.
[1] This is an appeal from assessments of income tax for the Appellant's 1994 and 1995 taxation years. On assessment the Minister of National Revenue included in income gains realized by the Appellant on the sale of three dwellings. It was the position of the Minister of National Revenue that each of the gains was income from a business. The Appellant contends that the assessments are in error because the gains arose from the disposition of properties, each of which was his principal residence. In effect the Appellant contends that the properties sold fell within the provisions of paragraph 40(2)(b) of the Income Tax Act. That provision contains a calculation which can reduce to nil capital gains arising on the sale of the taxpayer's principal residence. It applies however only in cases where the gain is on capital account and that is the principal issue. The Appellant also argues and the Crown concedes that if the gains are taxable the Minister has failed to allow the deduction of all proper costs.
[2] The Appellant has worked in the building trades since 1983. From 1983 to 1988 he worked as an installer of siding. Since 1988 he has carried on the business of a finishing contractor under the name Mark's Custom Finishing. As well he has engaged in the purchase and resale of residential real estate. Between December 1998 and sometime late in 1992, the Appellant bought, improved, rented and resold three properties described as "fixer uppers". Further, in the 1993 to 1995 period, the Appellant built and sold four houses and reported the gains from this activity as part of his business income. This activity was carried on under the name Mark's Custom Homes.
[3] In addition to all of this he bought and sold the three properties the gains from which are now in issue.
[4] The first was 12353 Lehman Road in Maple Ridge. The Appellant purchased a vacant lot in April of 1992. He then built a house on the land. The Appellant and his family commenced to occupy this property as a residence starting in August of 1992. The Appellant listed the house for sale in October of 1993. The property was sold in December of 1993 and that sale was completed and possession delivered to the purchaser on January 31, 1994.
[5] The Appellant claims that he sold the property because all houses in the subdivision had basement suites. I gather that the objection to the basement suites was that the occupants added to the population density in the area. The Appellant's house was located on a corner. He found that people were driving on his lawn and that traffic was dangerous to his children. He testified that he therefore decided that he would have to move
[6] The Appellant's testimony regarding problems in the Lehman Road area was corroborated to some extent by the witness, Brian Fox, who lived at 12363 Lehman Place from September, 1992 until 1995. Mr. Fox confirmed that 90% of the houses had basement suites and he stated that parking became a problem. He said further that he moved in 1995 because the area was too crowded.
[7] The second of the properties in issue is 12180-250 A Street, Maple Ridge. The Appellant acquired the lot in September of 1993. He testified that he had obtained a contract to build a custom home and found "a nice lot" right behind it. That nice lot became the site of the second residence in issue. The Appellant explained that there is a benefit in the construction of two houses located close to each other. The evidence regarding the benefit was rather vague but it seems to relate to the delivery of construction materials.
[8] The construction of the house at 250 A Street commenced following the purchase of the lot in September of 1993. The property was listed for sale in October of 1993 and sold in December of 1993 on terms requiring delivery of possession in May of 1994. The Appellant lived with his family in this house for a period of less than four months commencing January 31, 1994.
[9] The Appellant testified regarding the reasons for selling the property. He indicated that he did not want to live beside the developer whose conduct had resulted in the registration of liens for unpaid development costs on all lots in the subdivision. He asserted that the property was listed for sale in October of 1993 because problems resulting from the liens arose just after he started to build the house. The Appellant characterized his decision to sell as "hasty". It certainly was. The possibility of resale was present in the Appellant's mind from the outset. The Appellant, when applying to the Maple Ridge Community Credit Union for a mortgage to finance the venture, requested a refund of a "speculative fee" charged by the lender if the Appellant were to move into the home. This request is reflected in an attachment to the loan application dated September 1, 1993.
[10] The existence of the liens and of problems with municipal services was confirmed by the witness, Dennis Horwood. He indicated that problems with shoddy work by the contractors who installed the municipal services were apparent as early as October of 1992. It is not clear when the first claim for lien was registered. The Appellant complained to the municipality in a letter dated January 6, 1993 [sic] regarding the municipality's refusal to permit him to occupy the house.
[11] The third house, located at 11517-236 B Street, in Maple Ridge, was built on a lot purchased by the Appellant in February of 1994. The lot was located close to a home being built by the Appellant for a client at 11537 - 236 B Street. The Appellant and his family moved into the house in May of 1994 and they lived in it for about 13 months before it was listed for sale in June of 1995. The property was sold in August of 1995 and the sale was completed in October of 1995. The Appellant testified that one year after moving in it became apparent that adjacent land was developed in low-income housing. He complained as well that it was difficult to get up a hill on the road leading to the property and that the school attended by his children was open year round and that this interfered with summer holidays.
[12] The Appellant's complaints regarding the nature of development in the area were supported to some extent by the evidence of John Robert Graham, a person who owned and occupied a house in the area from 1993 to 1997. He indicated that he had been led to believe that the area was "upper end".
[13] The central issue in this case is, as already noted, whether the profits realized on the sale of the three homes are, as the Respondent contends, income from a business or, as the Appellant contends, gains on capital account. The word "business" is defined in subsection 248(1) of the Income Tax Act to include adventures in the nature of trade.
[14] The courts have consistently emphasized that in determining whether a transaction was intended as an adventure in the nature of trade, regard must be had to the surrounding circumstances: Happy Valley Farms Ltd. v. The Queen, 86 DTC 6421 at 6424. The significance of intention as one of the factors to be considered was emphasized by the Supreme Court of Canada in Friesen v. Canada, [1995] 3 S.C.R. 103. In that case Major J. summarized certain important factors to be considered in determining whether a transaction in real estate is an adventure in the nature of trade. He listed the following at paragraph 17:
"(i) The taxpayer's intention with respect to the real estate at the time of purchase and the feasibility of that intention and the extent to which it was carried out. An intention to sell the property for a profit will make it more likely to be characterized as an adventure in the nature of trade.
(ii) The nature of the business, profession, calling or trade of the taxpayer and associates. The more closely a taxpayer's business or occupation is related to real estate transactions, the more likely it is that the income will be considered business income rather than capital gain.
(iii) The nature of the property and the use made of it by the taxpayer.
(iv) The extent to which borrowed money was used to finance the transaction and the length of time that the real estate was held by the taxpayer. Transactions involving borrowed money and rapid resale are more likely to be adventures in the nature of trade."
[15] The role of intention in cases of this sort cannot be properly understood without reference to the following passage from Racine, Demers and Nolin v. Minister of National Revenue, 65 DTC 5098 at 5103:
"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."
[16] I do not believe that the various problems which the Appellant said induced him to sell the three houses were circumstances which frustrated an exclusive intention existing at the time the Appellant bought the lots to occupy the properties as residences for an indeterminate period. First, I should note that I formed the impression that the Appellant in giving his testimony had a tendency to overstate the problems which he encountered with the three houses. In the case of the first property the evidence did not persuade me that the development and occupation of basement suites and any population and traffic density resulting therefrom was a disadvantage that became apparent for the first time after the Appellant built the house and moved in. In the case of the second property, the mortgage appears to have been arranged from the outset in contemplation of at least the possibility if not the probability of a resale. The lien problem was apparently cleared up early in 1994. It is difficult to imagine that the lien problem so poisoned the relationship between the Appellant and the developer that the Appellant was unable to continue to live in the neighbourhood. In the case of the third property, the suggestion that difficulties in winter access due to the hill constituted a reason for resale struck me as improbable and cast a doubt on the other excuses. The Appellant was obviously familiar with Maple Ridge and its climate and topography and must have been aware of any such problems in advance of the purchase. Furthermore, I am not convinced on the evidence that townhouse development in the area created a serious problem which led to the sale of the third property. The Appellant's whole course of conduct must be considered. The speed with which the Appellant acquired land, built three houses and resold the same, coupled with the rather flimsy excuses given for the sales, supports an inference that the three transactions in issue were simple extensions of the Appellant's ordinary carpentry and house building businesses.
[17] I turn next to the quantum of the inclusions in income.
[18] The Appellant, who was not represented by a lawyer at the hearing of his appeal, raised for the first time at the hearing the issue of the quantum of the gains. He produced a jumble of receipts which he said established costs which had not been taken into account in the computation of the profits which were taxed. Following a brief consultation between the Appellant and counsel for the Respondent, the latter conceded that certain additional costs ought to have been allowed. Those additional costs in respect of the first property total $7,957.80. In respect of the second property they total $1,302.55. In respect of the third property they total $23,580.75. There is insufficient material before me to establish what the assessor did or did not allow in the computation of the profits under appeal and for that reason it is far from clear that the Appellant's other claims for additional costs do not include duplication. Furthermore, the other claims include amounts said to have been paid in cash and vouchered amounts which cannot be clearly tied to the erection of the three dwellings which the Appellant sold. The material therefore falls short of establishing that the Appellant is entitled to deduct any costs in addition to those conceded by counsel for the Crown. The appeals will therefore be allowed and the assessments will be referred back to the Minister of National Revenue for reassessment on the basis that gains or losses must be revised to reflect the additional costs conceded. Success was divided. This is not a case in which an award of costs would be appropriate.
Signed at Ottawa, Canada this 15th day of May 2001.
"Michael J. Bonner"
J.T.C.C.