Date: 20020913
Docket: 2001-3490-IT-I
BETWEEN:
WINONA A. FLETCHER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Miller J.
[1] The Appellant, Ms. Winona Fletcher, is appealing the assessments of the Minister of National Revenue of her 1994 and 1995 taxation years. In 1994, the Minister included $25,443 in Ms. Fletcher's income as a result of the sale of a property at 5768 Tern Drive, Vernon, British Columbia ("Property 1"). In 1995, the Minister included $19,551 in Ms. Fletcher's income as a result of the sale of a property at 5769 Teal Drive in Vernon, British Columbia ("Property 2"). Ms. Fletcher claims both properties were acquired as her principal residence. The Minister maintains the properties were purchased as part of a business with the intention of resale for a profit. I am satisfied that Ms. Fletcher was not in business and had no such intention.
Facts
[2] In the mid-1990s, R & N Development was developing a new subdivision in Vernon. Ms. Fletcher worked for R & N. Erlendson Construction Ltd., a company owned wholly by Mr. Erlendson, acquired a lot from R & N for the purpose of building a spec home, a home intended for sale prior to completion of construction. The contract of purchase and sale was dated May 27, 1993. Mr. Erlendson immediately put the property on the market with a local agent for $166,000. At the same time in May 1993, Ms. Fletcher, who had an ongoing relationship with Mr. Erlendson, had Erlendson Construction Ltd. enter a contract of purchase and sale for a lot in the same subdivision at a lot price of $54,650. The offer included a provision allowing Erlendson Construction Ltd. to assign its interest. This was to be Ms. Fletcher's home - Property 1. The spec home was Property 2. Contracting through Erlendson Construction Ltd. allowed Ms. Fletcher more favourable terms due to the two properties being acquired at the same time. In both cases, the sale was to be completed on November 19, 1993.
[3] Ms. Fletcher paid approximately $94,000 for the cost of construction of her home on Property 1. Construction proceeded well and she received her occupancy permit in September 1993. Given her employment with R & N, she was allowed to move in at that time notwithstanding that the sale was not due for completion until November 1993. During the month of November, she finished the basement of her home.
[4] Mr. Erlendson was having financial problems on the construction of Property 2, so had the November 19th completion date extended to April 1994.
[5] Because Ms. Fletcher's home was finished and Mr. Erlendson's spec home was not, R & N asked if Ms. Fletcher would allow her home to be the show home for the subdivision. She acceded to her employer's request. To gain maximum exposure, Property 1 was listed on MLS at $177,900, a price, according to Ms. Fletcher, that was too high to actually attract a sale. It was not her stated intention to sell.
[6] In February 1994, Ms. Fletcher actually received an offer of $165,000. She attempted to convince the proposed buyer to make an offer on Mr. Erlendson's spec property, but the buyers were only interested in Ms. Fletcher's property. She therefore countered high at $176,000 presuming that would scare the purchasers off. They accepted her counter.
[7] Ms. Fletcher proceeded to sell Property 1 for a couple of reasons. She wanted to help Mr. Erlendson, who was having financial difficulties and struggling to finish the spec home. If she sold Property 1, she could buy Property 2 from Mr. Erlendson at the cost of the lot ($53,900) and the cost of construction ($83,000), thus helping her boyfriend out of a jam. She had also overextended herself in finishing the basement of Property 1 and the high offer would allow her to relieve some of her debt load. Ms. Fletcher acknowledged it was a difficult decision to make given her evident fondness for her home.
[8] From the proceeds of the sale of Property 1, Ms. Fletcher was able to pay off a $61,000 loan, retire a $10,000 credit line and return $8,000 to her RRSP. She paid the lot price of approximately $54,000 on Property 2 and used the balance of the proceeds plus a $55,000 loan to pay the construction cost for Property 2.
[9] In April 1994, Ms. Fletcher and Mr. Erlendson moved in together in Property 2. Mr. Erlendson did not remain long as the relationship between him and Ms. Fletcher's teenage daughter was strained. Ms. Fletcher resided in the home from April 1 to August 1994. She moved in with Mr. Erlendson in September 1994, while her 19-year old daughter remained living in the home. She listed Property 2 at this time, but when it did not sell, she did not renew the listing. In early 1995, Ms. Fletcher's daughter moved in with her and Mr. Erlendson in Mr. Erlendson's home. Between January and June 1995, Ms. Fletcher rented out Property 2. She reported the rental income in her 1995 tax return.
[10] The situation between Mr. Erlendson and Ms. Fletcher's daughter did not improve so Ms. Fletcher moved back into Property 2 in July 1995 with her daughter. Shortly thereafter, Ms. Fletcher's daughter got a full-time job and moved out. Ms. Fletcher and Mr. Erlendson decided it was now possible for them to live together. They would both put their respective properties up for rent, and not up for sale as values had softened. It was decided that whichever property rented first, they would live in the other property.
[11] A couple interested in renting Property 2 asked if Ms. Fletcher would consider selling to them if they could obtain financing, and if the basement could be finished. Mr. Erlendson agreed to finish the basement at a cost of $11,000 and Ms. Fletcher consequently sold Property 2 for $151,000 in September 1995.
[12] In 1996, Ms. Fletcher and Mr. Erlendson bought a property in the same subdivision where they have resided together since.
[13] Prior to the purchase and sale of Property 1 and Property 2, Ms. Fletcher had owned a property in Lumby for a few months in 1992. It was sold in the fall of 1992 due to Ms. Fletcher's children's reluctance to attend school in Lumby.
Analysis
[14] Ms. Fletcher's position was simple. She never had any intention to sell Property 1 or Property 2: they were meant to be her homes. As she put it, life's circumstances led to the disposition of both properties. It never entered her mind that the properties would be viewed as either a business or an adventure in the nature of trade.
[15] The Respondent views the situation quite differently. The Respondent argues that Ms. Fletcher was in business. She points to Ms. Fletcher's property history and the high turnover of real estate in a short period. At the very least, the real estate activity constituted an "adventure in the nature of trade", a term found in the Act's definition of business. The Respondent relies on the recent Tax Court of Canada decision in Scenna v. Canada,[1] which cited at length the Supreme Court of Canada decision of Friesen v. The Queen[2] for support as to what constitutes an adventure in the nature of trade vis-à-vis real property activity. The Friesen case also refers to Interpretation Bulletin IT-218R as providing a summary of relative factors in this determination. Respondent's counsel took me through each of the following factors:
(a) the taxpayer's intention with respect to the real estate at the time of its purchase;
(b) feasibility of the taxpayer's intention;
(c) geographical location and zoned use of the real estate acquired;
(d) extent to which intention carried out by the taxpayer;
(e) evidence that the taxpayer's intention changed after purchase of the real estate;
(f) the nature of the business, profession, calling or trade of the taxpayer and associates;
(g) the extent to which borrowed money was used to finance the real estate acquisition and the terms of the financing, if any, arranged;
(h) the length of time throughout which the real estate was held by the taxpayer;
(i) the existence of persons other than the taxpayer who share interest in the real estate;
(j) the nature of the occupation of the other persons referred to in (i) above as well as their stated intentions and courses of conduct;
(k) factors which motivated the sale of the real estate;
(l) evidence that the taxpayer and/or associates had dealt extensively in real estate.
[16] I will deal firstly with the Respondent's assertion that, even without having to resort to the adventure in the nature of trade argument, Ms. Fletcher was in business. The Respondent calls the Lumby property, Property 1, and Property 2 Ms. Fletcher's inventory. I would not describe it that way. Just because three properties are sold in three years does not make the properties inventory. This ignores the many usual factors in identifying a business - the badges of commerciality. None of them existed in this case. No intention to operate a business, no acting in a businesslike manner, no business cards, accounts, office or equipment and no business plan. This was a women who happened to work for a developer and be in love with a contractor. Somehow these factors have tainted her, in the Respondent's view, with some aura of commerciality which I find simply does not exist. She was not operating a business.
[17] I turn now to the issue of whether she was engaged in an adventure in the nature of trade and consequently caught in the definition of business for tax purposes. The Supreme Court of Canada in the Friesen case indicated:
The first requirement for an adventure in the nature of trade is that it involve(s) a "scheme for profit-making". The taxpayer must have a legitimate intention of gaining a profit from the transaction. ...
The Supreme Court of Canada goes on to refer to IT-459 and IT-218R for identification of other relevant factors. It is clear though that without a legitimate intention of gaining a profit, there is no adventure in the nature of trade. I am convinced Ms. Fletcher had no scheme for profit-making. She had no legitimate intention of gaining a profit from the transaction. She made this assertion many times in her testimony. I believe her. She was completely candid in her answers, her evidence was consistent and clear, and was corroborated by Mr. Erlendson, who was equally straightforward. Ms. Fletcher was genuinely taken aback by the government's treatment of what she described as the unfolding of life's circumstances. The suggestion that she was flipping property with a profit motive was in her mind ludicrous, though to her credit she acknowledged how a review of the factors as cited earlier might cause the government to raise questions. I am satisfied she has answered any concerns with her totally credible explanations of the circumstances of the purchase and sale of the properties.
[18] The Respondent argues that even if Ms. Fletcher did not have a primary intention to resell then: (i) she had a secondary intention to do so; and (ii) at the time of sale her intention had shifted to selling at a profit.
[19] I do not find any evidence to support a secondary intention to sell at a profit. With respect to Property 1, the Respondent suggests Ms. Fletcher's listing of the property shortly after acquiring it is sufficient evidence of such an intent. I do not agree. The property was listed as a favour to her employer, the developer, who needed a show home to market the subdivision.
[20] She finished the basement shortly after moving into the property - not an action designed for a quick flip. She had only one intention and that was to live on the property as her home. At the time of acquisition, there was no thought given to what would happen if the primary intention to live on the property as a principal residence was thwarted. This possibility was not on Ms. Fletcher's radar screen in May 1993 when she made the offer, nor in September 1993 when she moved in, nor in November 1993 when the formal transfer of title took place.
[21] For there to be a secondary intention, there must be some evidence that the possibility was considered at the time of acquisition. It is not sufficient to speculate that had Ms. Fletcher been asked at the time whether she intended to resell at a profit, if for whatever reason she could no longer reside in the property as her principal residence, she might have answered yes. That cannot be the test or else it would be difficult to find that any real property purchase is made without a secondary intention. No, there must be evidence at the time of a secondary intention: it cannot be imputed in hindsight.
[22] With respect to Property 2, again I find there is only one intention at the time the property was acquired. This property was to replace Property 1 as Ms. Fletcher's home, and indeed Ms. Fletcher kept the property for a year and a half when family circumstances resulted in the sale. Again, the Respondent points to the listing of the property as evidence of a secondary intention. But Ms. Fletcher has a plausible response. In August 1994, when she listed Property 2, the relationship between her daughter and Mr. Erlendson was such that they could not live under the same roof. Ms. Fletcher moved in with Mr. Erlendson and put the property up for sale. It did not sell, the listing ran out, and she did not renew it. This was not a profit-motivated move; it was a move to deal with the uncertainties of life that Ms. Fletcher was facing.
[23] With respect to the issue of an intention that changed over time, the Respondent relies on the following comment in Interpretation Bulletin 459:
... Further, a taxpayer's intentions are not limited to the purposes for acquiring the property but extend to the time at which the disposition was made. A taxpayer's intention, if any, at the time of acquisition of the property may change at any time during ownership and up to disposition because the taxpayer may form an intention or otherwise change or abandon the primary, dominant or secondary intention with respect to the property.
I take this to mean that at the time of sale, the motivation to sell at a profit must have become the primary intention. This bulletin may be going too far in suggesting an intention at the time of sale as opposed to at the time of acquisition, is sufficient to meet the requisite intent required by the Supreme Court of Canada, as expressed in Friesen, for purposes of finding an adventure in the nature of trade. However, even if I accept the bulletin's premise, I do not find that at the time of the sale of the Property 1, Ms. Fletcher had a primary intention of profiting. Her primary intention was helping Mr. Erlendson out of a financial crisis. The result of the sale was that she could retire some debt, but that was not the prime motivating factor.
[24] With respect to Property 2, Ms. Fletcher was only looking to rent the property, as she and Mr. Erlendson had determined they could now happily live together, as Ms. Fletcher's daughter had moved out on her own. The property values were not high, and although some gain was realized, it was not the best time to sell. Under these circumstances, I do not find that even at the time of sale of Property 2, Ms. Fletcher's primary intention had changed to profit maximization.
[25] Referring back to the list presented by the Respondent from IT-218R, I believe I have dealt with all the factors connected with the concept of intent, being factors (a), (b), (d), (e) and (k). I have concluded that no requisite intention (primary, secondary or changed at time of disposition) exists in this case. That is sufficient to find that Ms. Fletcher was not engaged in an adventure in the nature of trade. It is unnecessary to review the other factors.
[26] I allow the appeals and refer the matter back to the Minister for reconsideration and reassessment on the basis that Ms. Fletcher did not purchase the properties as part of a business, but purchased them as her principal residences. Given the requirement for two appearances in Kelowna from her home in Vernon and an ongoing communication with Revenue Canada over a lengthy period of time, I award Ms. Fletcher costs of $200 to cover her incidental expenditures in attending to this matter.
Signed at Ottawa, Canada, this 13th day of September, 2002.
|
"Campbell J. Miller" |
J.T.C.C.
COURT FILE NO.: 2001-3490(IT)I
STYLE OF CAUSE: Winona A. Fletcher and
Her Majesty the Queen
PLACE OF HEARING: Kelowna, British Columbia
DATE OF HEARING: September 5, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge Campbell J. Miller
DATE OF JUDGMENT: September 13, 2002
APPEARANCES:
For the Appellant: The Appellant herself
Counsel for the Respondent: Nadine Taylor
COUNSEL OF RECORD:
For the Appellant:
Name: N/A
Firm: N/A
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-3490(IT)I
BETWEEN:
WINONA A. FLETCHER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on September 5, 2002, at Kelowna, British Columbia, by
the Honourable Judge Campbell J. Miller
Appearances
For the Appellant: The Appellant herself
Counsel for the Respondent: Nadine Taylor
JUDGMENT
The appeals from assessments of tax made under the Income Tax Act for the 1994 and 1995 taxation years are allowed, with costs in the amount of $200, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant did not purchase 5768 Tern Drive and 5769 Teal Drive, Vernon, British Columbia as part of a business, but purchased them as her principal residences.
Signed at Ottawa. Canada, this 13th day of September, 2002.
|
"Campbell J. Miller" |
J.T.C.C.