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Docket: 2001-2008(GST)G |
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BETWEEN: |
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ROBERT FREER, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on common evidence with the appeals of
Robert Freer (2001-1718(IT)G) on October 25, 2002 and December 2, 2002,
at Halifax, Nova Scotia.
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Before: The Honourable Judge T.E. Margeson |
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Appearances: |
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Counsel for the Appellant: |
Wyman W. Webb |
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Counsel for the Respondent: |
Marcel Prévost |
_______________________________________________________________
JUDGMENT
The appeal from the reassessment made under Part IX of the Excise Tax Act, notice of which is dated November 29, 1999 and bears number 01CB0304724, is allowed, with costs, and the reassessment is vacated.
Signed at Ottawa, Canada, this 5th day of February 2003.
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J.T.C.C.
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Docket: 2001-1718(IT)G |
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BETWEEN: |
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ROBERT FREER, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
_______________________________________________________________
Appeals heard on common evidence with the appeal of
Robert Freer (2001-2008GST)G) on October 25, 2002 and December 2, 2002,
at Halifax, Nova Scotia.
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Before: The Honourable Judge T.E. Margeson |
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Appearances: |
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Counsel for the Appellant: |
Wyman W. Webb |
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Counsel for the Respondent: |
Marcel Prévost |
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JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1995 and 1996 taxation years are allowed, with costs, and the assessments are vacated.
The penalties are quashed.
Signed at Ottawa, Canada, this 5th day of February 2003.
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"T.E. Margeson" |
J.T.C.C.
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Citation: 2003TCC20 |
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Date: 20030205 |
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Dockets: 2001-2008(GST)G 2001-1718(IT)G |
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BETWEEN: |
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ROBERT FREER, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Margeson, J.T.C.C.
[1] This is an appeal from a reassessment of the Minister of National Revenue ("Minister"), notice of which was dated June 30, 1999, with respect to the income tax liability of the Appellant for the 1995 and 1996 taxation years by which the Minister increased the income tax liability by including in the Appellant's income the amounts of $17,098 and $17,781 respectively, in respect to the sale of single family homes on the properties located at 129 Teviot Place and 17 Parkside Drive.
[2] The Minister's position was that the possibility of resale at a profit was a motivating factor in the acquisition and construction of the properties and therefore the Appellant's profit from the sales were income from a business or property.
[3] Further, the Minister reassessed the Appellant under Part IX of the Excise Tax Act for the period from January 1, 1994 to December 31, 1996, by Notice of Reassessment numbered 01CB0304724 dated November 29, 1999 with respect to the same two properties for goods and services tax ("GST") and for penalties and interest relating thereto for the period from January 1, 1994 to December 31, 1996 by making the following adjustments:
Increase in GST/HST collectible $ 18,200.00
Increase in Input Tax Credits ($ 10,895.11)
Penalties $ 1,607.39
Interest $ 1,137.63
TOTAL $ 10,049.91
[4] However, in the Reply to the Notice of Appeal ("Reply") with respect to the GST assessment, the Minister acknowledged that he had erred by reassessing the Appellant's net tax liability with respect to the single unit residential complex located at 129 Teviot Place in 1995 and should have reassessed the Appellant in 1994 when the Appellant occupied the single unit residential complex.
[5] Counsel for the Respondent agreed that the appeal would have to be allowed with respect to this property and the Minister's assessment thereto would have to be vacated.
[6] In essence, at the conclusion of the trial, both parties agreed that the remaining issues were as follows:
- 1) With respect to 129 Teviot Place, was the gain, if any, realized on the sale of this property on account of income or was it exempt as having been realized on the sale of the principal residence property?
- 2) With respect to 17 Parkside Drive, was the gain, if any, realized on the sale of this property on account of income or was it exempt as having resulted from the sale of the principal residence property?
- 3) Was the Appellant liable for GST assessed in respect of this property in the amount of $9,100?
- 4) Was the Appellant a "builder" of the properties as defined in the Income Tax Act, ("Act") for the period under appeal?
- 5) Was the Appellant properly reassessed additional income tax credits of $10,895.11?
- 6) Was the Appellant responsible for the penalties and interest as assessed?
Evidence
[7] Patricia O'Halloran was the common law wife of the Appellant and she was familiar with the factual situation surrounding the purchase of the properties, the construction of the residential units and the sale of each of the properties located at 112 Coldstream Drive; 167 Teviot Place; 129 Teviot Place; 17 Parkside Drive and 148 Teviot Place. She testified that with respect to each of these units, they never had any intention of reselling the properties. These properties were all constructed for the purposes of living in them as their home.
[8] In each case all of their belongings were unpacked, they had parties with friends and relatives, they never listed the properties for sale, they made additions to the properties for their own personal reasons and took some of these improvements with them when the properties were sold. The only reasons the properties were sold was because real estate agents were imploring them to list the properties for sale; they were told that other parties were interested in buying the properties; problems developed with the children next door, some properties became unsuitable for their use after she became pregnant; problems developed in the neighborhood with respect to traffic; the Appellant's job situation became tentative and they thought they were going to have to move; they discovered a strong odor from a non-operative fox farm in the area which caused them considerable concern and traffic increased in the area and the street became a through street. They decided to stay in the area because they had established close friendships there, it was a good neighborhood and close to schools. It was also close to the highway, which benefited this witness. It was convenient. They were comfortable in these houses. The properties were sold due to changes in their circumstances.
[9] In cross-examination she maintained the same position and her evidence was not seriously challenged.
[10] Robert Freer testified generally to the same effect as the previous witness. They originally wanted a house of their own so they bought the land and built at 112 Coldstream Drive. As with the previous witness he said that they had no intention to sell this property and had no intention to sell the subsequent properties when they were constructed. He confirmed that they entertained friends and family at these properties and enjoyed partying in the neighborhood. Everything was unpacked. The only reason they sold was because they were approached by real estate agents to do so and they left pamphlets at their property. At first these advances were ignored but ultimately they decided to sell. He confirmed that with respect to 167 Teviot Place there was a problem with the electric heat and it was very expensive. Costs were going up and he found that the property was not economical. As with the previous witness, he said that the children next door also caused some problem, so this property was sold.
[11] Again, at 129 Teviot Place they did the landscaping, installed clothes lines, painted the exterior, put on a special door lamp, installed shrubs and a vegetable garden and had the front door personalized with a door knocker, which had to be replaced when they moved. This was quite a problem. The move from this property was prompted by the fact that his common-law wife was pregnant and since the house was an open concept it was not suitable for raising children. They wanted to have everything on one level. He confirmed that they had no intention to sell when they built the property and they thought they were settling in for a long time.
[12] They took out a mortgage for three or four years and knew that there was a penalty on the mortgage if they paid it out. He confirmed the problem with the traffic when some of the subdivisions opened up and a shortcut developed to the subdivision and speeding became a problem. Again, a real estate agent came to see him after hearing of his wife's pregnancy and asked him to list it. They consulted with each other about it and it was subsequently sold.
[13] With respect to 17 Parkside Drive, he put shutters on it, he landscaped, did the baby's room by personalizing it with wallpaper to match the bed and the crib. They did not intend to sell this property. It was in a private area and they wanted to stay there. They believed that that was it. This property was sold because he was about to be laid off and they could not afford it. He also said that there was a stench in the backyard, which whey discovered once the weather warmed up. The property was only sold after real estate people approached them. Later the strike was resolved and their circumstances changed.
[14] He had a contractor build the property at 148 Teviot Place and he hired the subcontractors. He sold this because he was transferred to Halifax in a different department. He was not completely sure about the profit on the properties but he said that he made no money on 112 Coldstream Drive; he made $5,000 to $10,000 on 167 Teviot Place and with respect to 129 Teviot Place and 17 Parkside Drive he was not intending to make a profit. He just wanted to get his money back.
[15] He remembered receiving a telephone call from an officer at Canada Customs and Revenue Agency ("CCRA") and being asked questions about the houses. He believed that it was a prank. At the time he had had several drinks and he did not know what it was all about. He was asked if he was selling houses to make a profit and he was quite upset and might have been quite curt to the interviewer.
[16] With respect to 112 Coldstream Drive, he could not remember whether he made a profit on it but then said that perhaps he made $1,000 or $2,000 on it. Again he sold it because real estate people approached him and the house was not suitable for their purposes. He was nervous about selling but he did so. Not only did he not have any intention of selling these properties but he had no intention of making profits from them when they were built.
[17] The house at 167 Teviot Place was sold privately. It only took one month to sell. At this time the subdivision was still developing. They had not seen any future plans for the subdivision except the area where the lots were for sale. He did not think about making a profit in the future and he was not in the business of making a profit. It never crossed his mind.
[18] When he bought the lot at 129 Teviot Place, there was a tree barrier there and it continued. He knew that sometime the street would be connected but he did not know when. Again, real estate agents approached him on several occasions to sell. He did make a profit when he sold this property.
[19] He was prepared to admit that there was always a possibility of making a profit but this was not a motivating factor in selling his properties. The work situation changed quite suddenly and he found his situation to be quite uncertain. There had been the possibility of lay-off for some time. When the tree barrier was removed on Teviot Place, the street became a short cut.
[20] He was one of the first buyers on Parkside Drive but he never intended to sell it. He lived there for about seven and a half months. He selected the design and retained the sub-trades. Again, he was approached by real estate agents to sell. He confirmed what the previous witness had said with respect to the changes in their life that occurred when the first child was expected and the house became unsuitable for the purposes of raising a child. In the beginning they did not consider having children and he said, "we never gave it a thought. We were just living for the day at that time and had not factored kids into the equation. We were both professionals".
[21] All of the properties in question were mortgaged with the Bank of Montreal. All had similar terms but the rate was different. All mortgages had penalties as one of their terms and all were paid out before they matured. He did not have all of the receipts with respect to some of the deductions that he was claiming and he had paid cash with respect to some trades but he continued dealing with them because they were good contractors and they were available. He did not keep receipts in some cases because of the cash deal that was involved. These contractors did the work more cheaply. They did not discuss the GST issue in coming up with the final price.
[22] The auditor disallowed some of the expenses due to the fact that he had no receipts. He had one or two discussions with Wenda Taylor. He did not recall discussing GST rebates or mortgages. He only remembered the telephone conversation, which took place at 8:00 or 9:00 p.m. He had had a couple of drinks. She identified herself and was talking about the properties. He was angry. He did not know if it was a hoax or not and did not expect to get a call from CCRA at that time of night.
[23] He believed that he called her at work afterwards. He then received a letter. He did not remember what he talked about but he believed he was at work. There was never a "for sale" sign on the property at 112 Coldstream Drive but the real estate had approached him about it. There was no real estate agent involved at 167 Teviot Place as this was a private sale. Even though he made a profit of $5,000 to $7,000 he did not believe there would be a profit if they had had a real estate agent involved, as they would have sought a commission.
[24] George Freer was an industrial mechanic and was the father of the Appellant. He confirmed that he had made a civic sign as a special project for the property at 129 Teviot Place and a lamppost. This was unique and special. It involved a number of hours of work by him. He installed both on the property. They never even thought of the Appellant selling the property. These articles were very special.
[25] With respect to 17 Parkside Drive he made a unique civic number sign for that property. He designed it himself and it contained an old fashion scroll. He considered this to be something special. He would not have put this labour into the project if he had thought that they were going to move. He confirmed that there was an odor in the air with respect to this property and that it was "pretty bad inside and out". He was told about the source from his son and his wife.
[26] The Respondent called Wenda Taylor who was an auditor with CCRA. She audited businesses and did other assignments given to her by her supervisor such as the one in this case. She called the Appellant in December of 1997. She talked to him from her hotel room in Truro, Nova Scotia. She was attempting to determine whether proceeds from the sale of these properties were on account of income. She referred to her notes found in Exhibit R-1 at Tab 9. She also sent the letter at Tab 10 to the Appellant. She explained how she had decided to disallow certain of the expenses claimed. She had concluded that the sale of the properties was on account of income.
[27] There was a shortage of receipts with respect to some of the claimed items but she allowed some further expenses, which seemed to be reasonable. She gave the Appellant an extra 30 days to supply additional receipts before she made her decision. She also reviewed the additional receipts found in Exhibit R-3. She was questioned about her notes and she said that she made them after her return to Truro. She took into account the telephone calls that she made to the Appellant. When she sent her report at Tab 12, Exhibit R-1, she had concluded that the proceeds of the sales were on account of income.
[28] In cross-examination she admitted that she had never met with the Appellant in person but spoke to him only on the telephone. She visited the area where the properties were located in Truro and visited the houses except the 112 Coldstream Drive property. Her reports are based upon two telephone calls that she made. The Appellant answered her questions and they had a discussion. She did not believe that she would have suggested to the Appellant that his intention was to build and sell houses until they had the house that they wanted with as small a mortgage as possible. This was contained in her report and attributed to the Appellant.
[29] This witness was examined and cross-examined with respect to this matter and she did not think that she would have suggested this to the Appellant but she could not say if she did or did not. She admitted that the words that she used in her report were not in her notes. The terms of the mortgage would have been one of the factors that she considered in making her decision.
[30] She never attempted to consider the effect of the self-supply rules on whether or not the Appellant was entitled to a credit. She was referred to the figure of $220 that she had allowed as a plumbing expense and she agreed that this was not reasonable for plumbing but she did not allow any other amount because the amounts claimed were not supported by receipts. When concluding whether or not proceeds of sale are on account of income, one should consider how many sales there were, the type of occupation, the intention of the taxpayer, how long they lived in the property and the reasons for moving. She sent a letter
setting out what factors would be considered. She did not know whether the birth of a child would be a sufficient reason for a person to move. However, the loss of a job should be considered.
[31] In re-direct she admitted that she did not have Exhibit A-19, as disclosed in her statement dated November 16, 1994, in her possession for audit purposes. This had not been provided. She did not have Exhibit A-5 as this was not provided. Other items that she disallowed in Exhibit R-2 at Tab 1, Schedule II might have been because she did not know what they were for.
Argument on behalf of the Appellant
[32] Counsel took the position that in the case of each of the properties in issue, the lots were purchased and the Appellant constructed the houses upon them for the sole purpose of using them as his principal residence. It was his position, in general, that the Appellant moved from one place to the other as a result of new intervening circumstances, which resulted in the existing properties, which were occupied as principal residences, to be unsuitable. There were a number of incidents, which happened in this regard which made it not only practical but reasonable for the Appellant and his wife to seek new accommodation. However, the fact remains that at no time did they ever have the intention of selling the properties either as a primary intention or a secondary intention at the time the properties were constructed.
[33] He referred to the case of Happy Valley Farms Ltd. v. M.N.R., 1986 CarswellNat 375, [1986] 2 C.T.C. 259, 86 DTC 6421, in respect to the tests that one should consider in making this determination, such as: (1) the nature of the properties sold; (2) the length of the period of ownership; (3) the frequency or number of other similar transactions by the taxpayer; (4) the work expended on or in connection with the property realized; (5) the circumstances that were responsible for the sale of the property; and (6) motive. He went through what he considered to be the relevant portions of the evidence and said that at the end of the day the Appellant had reasonable explanations as to why the properties were sold. When one considers these six factors in relation to the evidence, one must conclude that at no time did the Appellant ever have the sale of the properties for a profit as a primary or secondary condition when he purchased the lots and built the houses upon these lots.
[34] Some of the factors he referred to included special decor instituted in the baby's room at 17 Parkside Drive; the personalized door knocker; the painting that they did and the decorating which was done to suit them. The reason they sold 129 Teviot Place was because they had had a child, which was unexpected, and this property was not suitable for raising a child, as they did not consider it was safe for such purposes.
[35] Further, with respect to 17 Parkside Drive, the Appellant was concerned about his job and his wife was on maternity leave. She was collecting employment insurance. He was also on employment insurance and was not eligible at that time to keep his position by forcing someone else out. He received temporary work during this period and would not have known the outcome of the strike, which was pending. Further, with respect to the question of motive regarding 129 Teviot Place one only need look at the statement of disclosure. The term of the mortgage was four years and seven months. Why would he pick such a long term for the mortgage if he intended to sell it?
[36] The evidence indicates that the Appellant could have had limited or open pre-payment privileges. He chose a limited pre-payment privilege. He indicated that he had been subject to penalties before. Why would he pick this type of arrangement if he intended to sell?
[37] Again, with respect to 17 Parkside Drive, the term was three years and ten months and again he had the limited pre-payment privileges. Why would he make curtains to suit the household and take them with him if they had originally intended to sell the property? Why would they drill holes in the front door and install a personalized doorknocker? Why would they decorate the baby's room with personalized bed sheets and wallpaper?
[38] He argued that the evidence indicated that by the time this property was sold the mortgage had only been reduced by a small amount. Therefore, it would have been difficult for them to make money. Consequently, they could not have had the intention of selling when they instituted the mortgage. Further, both properties were of the same value and a sale would not increase their wealth by any amount.
[39] With respect to the alleged statement made to the auditors regarding the matter of intention, counsel argued that very little weight should be given to this. This information was received as a result of a Monday night telephone call according to the Appellant at 9:30 in the evening. He had been drinking. The statement that he made went only to his intention to have as low a mortgage as possible and how could he be faulted for this?
[40] As indicated by Bowman, J.T.C.C. in Diceccav. R., 1993 CarswellNat 1225, [1994] 1 C.T.C. 2087, the Court should consider all of these circumstances in making its decision. In the case at bar the Appellant and his wife picked all of their own belongings to put in to the houses, many items were personalized and they did extensive work for their own purposes. The other events, which occurred causing them to decide to move, were beyond their control. The evidence shows clearly that there was no primary or secondary intention to sell when the properties were built.
[41] In the alternative, counsel disagreed with the amounts that were indicated as the amount by which the proceeds exceeded the cost of each house. He submitted that additional expenses were incurred that were disallowed by CCRA and in particular the GST assessed against the Appellant as a result of the application of the self-supply rules under the Excise Tax Act should also be deductible in determining the gain made on the sale of each property. The penalties imposed under the Excise Tax Act would be deductible based upon the decision of the Supreme Court of Canada in the case of 65302 British Columbia Ltd. v. R., [2000] 1 C.T.C. 57, 248 N.R. 216, [1999] 3 S.C.R. 804.
[42] With respect to the appeal under the Excise Tax Act, he disagreed with the amounts calculated as the input tax credits available to the Appellant and calculated that the net tax payable with respect to 17 Parkside Drive, should be $1,485.
[43] Further, he argued that the Appellant was not the "builder" of the house at 17 Parkside Drive and subsection 191(1) of the Excise Tax Act does not apply to the Appellant in respect to this property because it only applies if the Appellant is a builder as defined in section 123 of the Excise Tax Act.
[44] The house was built by the Appellant to be used and occupied as a principal residence for himself and his family and not for the purpose of resale. Therefore, the houses were not built in the course of a business or a venture or concern in the nature of trade.
[45] If the Appellant was the builder then the provisions of subsection 191(5) of the Excise Tax Act would be applicable to the Appellant and since the Appellant used this house primarily as a place of residence for himself and his family, it was not used for any other purpose and since the Appellant did not claim an input tax credit in respect of the construction of other houses, the provisions of subsection 191(1) do not apply to the Appellant.
[46] In the alternative, if the Appellant was the builder of this residence and the provisions of subsection 191(5) of the Excise Tax Act are not applicable then the net tax payable should be the amount as stated above.
Argument on behalf of the Respondent
[47] Counsel for the Respondent also took some solace in the decision in Happy Valley Farms Ltd., supra. He said that the Court has to consider the nature of the properties sold. Between 1991 and 1997 five different houses were sold. The Appellant had a primary intention to sell. He was engaged in an adventure in the nature of trade. Look at the length of time that the Appellant lived in the properties in question. All of these were for a short period of time.
[48] The argument that the nature of work that the Appellant put into the various properties indicates that he did not have a primary or secondary intention to sell should not be accepted. These factors were not significant. The fact is that a new buyer might not have any problem at all with the type of paint or wallpaper that was already found in the residence. Such changes might very well have enhanced the possibility of resale. These are things that one does when one goes into a property, whether you intend to sell it or not. This does not indicate that you do not have the secondary intention of selling.
[49] The evidence disclosed that the Appellant said that he had no intention of selling the first property. He was there for life. There were no problems with it except that he needed a new bathroom. Why could he not have put in the bathroom even if it were in the basement? It could have been done even though it may have been more difficult.
[50] With respect to 167 Teviot Place he made a profit of $6,000 to $7,000. By this time he had knowledge of the subdivision and the market. The subdivision was developing fast. He knew that the tree barrier was removed. He had a motive for selling as in Happy Valley Farms Ltd., supra. The Appellant had no problem in selling the properties. He knew that if he lived in them for a period of time that he could sell them. Houses were moving in the area. Real estate agents were knocking on his door. There was no way that he could say that he did not have a secondary intention to sell if the opportunity arose.
[51] The Court must look at all the facts. When it does, then the Court must conclude that there was a secondary intention to sell.
[52] When the Appellant was asked about the matter of profit, he seemed to waiver in answering these questions. He sold one of the properties on his own. This was after he owned it for a short period of time. That indicates how well houses were moving.
[53] The matter of the first child was not significant. They must have considered that they would have children if they were going to stay there for the rest of their lives. These were not houses which were already constructed. They could have made changes.
[54] With respect to the effect of the strike or the labour problems of the Appellant, as far back as November of 1995, the Appellant was aware of some of these problems and the possibility of lay-off or strike. As far back as the early 90s there was a possibility of a strike or lay-off. What better could they do than to build in the same area where there was a good chance to sell? The Appellant knew this during that period of time.
[55] There was no more than a kilometer distance between any of the houses. The Appellant continued to build new homes. He did not buy an existing one. Why would he go through all of the problems of construction if he did not think that one day, at the end of the road, it would pay off? This is evidence of secondary intention.
[56] With respect to the long terms on the mortgages and the matter of penalties thereon, the Appellant had penalties for all houses. He was aware of them and this fact did not discourage him from building new houses or taking out new mortgages with these terms. The fact that the mortgage terms were open or limited with respect to repayment does not get you any farther.
[57] The Appellant did not know when he might lose his job. These are factors that must be considered. After the Appellant sold the first house he got the itch to sell others realizing that he might make a profit from them. The Happy Valley Farms Ltd. case, supra, sets us in the right direction even though most of the cases are fact specific.
[58] He rejected the alternative argument of the Appellant under subsection 191(5) of the Excise Tax Act. He concluded that he was a builder and therefore the exception did not apply. He did not intend to have the house as a personal residence but he intended to sell it. Further, the alternate expenses claimed by the Appellant should not be allowed. If the amount of $9,100 were not expended for the purpose of gaining or producing income it could not be deducted. The Appellant is deemed to have sold the property to himself and was deemed to have collected the tax under section 91 of the Excise Tax Act.
[59] With respect to the deduction of the penalties this argument is rejected. The case of 65302 British Columbia Ltd., supra, is not applicable to the facts in this case. That case provides that penalties may be deducted but that case is different than the case at bar because there penalties were imposed because of over-production and the taxpayers made a business decision to over-produce in order to keep their customers.
[60] In the end, the appeal should be allowed with respect to 129 Teviot Place in 1995 in accordance with paragraph 11 of the Reply. Otherwise, the appeal should be dismissed and the Minister's assessment should be reconfirmed.
[61] Counsel was prepared to agree that if the Court should find that the Appellant had neither a primary or secondary motive to sell the properties when they were built, then that is the end of the case and the appeal will have to be allowed and the Minister's assessment vacated. However, if the Court should find that the Appellant had a primary or secondary intention to sell the properties then the Court must consider the argument of the Appellant with respect to second and third alternatives. In that regard, these arguments should not be accepted and the appeal should be otherwise dismissed.
[62] In rebuttal, counsel for the Appellant said that if he were to make the changes in the basement to have a bathroom as counsel for the Respondent suggested, they would have to jack hammer the basement. Further, with respect to the profit at 167 Teviot Place, it was only $7,000 and if a real estate agent had been involved there would have been no profit.
[63] The Appellant was not always in danger of losing his job. The matter of the pregnancy was a very important and unexpected occurrence. Why did they stay in the area? Their friends were there. With respect to subsection 191(5) of the Excise Tax Act, this only applies if you are a builder and the Appellant was not.
[64] With respect to the $9,100 that the Appellant claimed as a reduction, this was not received as income under the self-supply rules because this was imposed upon the Appellant. He was out of pocket that amount.
Analysis and Decision
[65] As argued by both counsel the Court is satisfied that the issues in this case are two-fold. One, did the Appellant, at the moment of the purchase of these properties, have in mind the possibility of reselling, as an operating motivation for their purchase? Two, if this operating motivation existed at the time of purchase, were the properties sold at a profit and what was the proper calculation of that profit? Those questions are relevant with respect to both properties regarding the income tax matter but apply in relation to 17 Parkside Drive only with respect to the assessment under the Excise Tax Act. In that event, the Court would have to determine whether or not the Appellant was properly reassessed additional GST/HST with respect to 17 Parkside Drive only.
[66] Both parties have referred to the case of Happy Valley Farms Ltd., supra, which is a leading case on the fundamental question before this Court. There, at page 5 the learned trial judge set forward six tests, which the Court should consider in answering the appropriate question. They were: (1) the nature of the property sold; (2) the length of the period of ownership; (3) the frequency or number of other similar transactions by the taxpayer; (4) the work expended on or in connection with the property realized; (5) the circumstances that were responsible for the sale of the property; and (6) motive.
[67] In that case the question of motive or intention was considered to have been the factor most developed. As stated at page 6, test 6, 'motive':
The motive of the taxpayer is never irrelevant in any of these cases. The intention at the time of acquiring an asset as inferred from surrounding circumstances and direct evidence is one of the most important elements in determining whether a gain is of a capital or income nature.
While all of the above factors have been considered by the courts, it is the last one, the question of motive or intention which has been most developed. That, in addition to consideration of the taxpayer's whole course of conduct while in possession of the asset, is what in the end generally influences the finding of the court.
This test has been carried one step further by Canadian courts into what has generally been referred to as the "secondary intention" test. This has meant, in some cases, that even where it could be established that a taxpayer's main intention was investment, a gain on the sale of the asset would be held taxable as income if the court believed that, at the time of acquisition, the taxpayer had in mind the possibility of selling the asset if his investment project did not, for whatever reason, materialize.
[68] Of equal significance is a statement of Noël, J. in Racine, Demers and Nolin v. M.N.R., [1965] CTC 150, 65 DTC 5098 (Ex. Ct.), where he said:
. . . . .
...the fact alone that a person buying a property with the aim of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade. In fact, this is not what must be understood by a "secondary intent" if one wants to utilize this term.
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.
[69] These quotations could never have more applicability than in the present case. The difficulty is always in determining what the intention of the purchaser was at the time he gained the property. This Court had to deal with a situation quite similar to that found in the case at bar in Doodyv. R., 2000 DTC 2086, where this Court also considered Happy Valley Farms Ltd., supra, and other cases on the issue. The Doody case did present a somewhat different factual situation than that found in the case at bar because there, both the taxpayer and his wife were realtors in the years 1993, 1994 and 1995. The Appellant became a realtor in 1992 and his wife was involved in real estate between 1989 and 1999.
[70] Further, the Court looked upon the evidence of the Appellant with great skepticism and found that the evidence of the wife was of very little use, since she merely accepted the bulk of what her husband had to say in spite of the fact that the husband's evidence given at the time of discovery was inconsistent with much of the evidence he gave in Court. The Court also found that some of her evidence was inconsistent with the evidence that she gave in discovery.
[71] As the Court found in that case, the statement of the parties alone as to their avowed intention at the time of purchase of the properties is at best tenuous without further corroboration. In the case at bar the question of credibility loons large. This Court does not place the Appellant and his wife in the same category as the Appellant and his wife in Doody as they had a history of dealing with properties of that nature, had made many transactions over a relatively short period of time, had a special knowledge and interest in the real estate market and would be expected to know when and where a profit might be made.
[72] This Court is satisfied that these conditions do not apply to the Appellant and his wife here and it agrees with the statement by counsel for the Respondent that even though Happy Valley Farms Ltd. points us in the right direction, each case is "fact specific" and the decision in the end must be made on the basis of those facts.
[73] The Court must first deal with the question of credibility of the Appellant and his common-law spouse. The Court finds that the evidence of the common-law spouse was very credible and that her evidence can be accepted. At no time during her testimony was there ever any issue raised, which she could not answer. She was quite straightforward in what she said. She appeared to have had a good memory of most events and was able to cite with specificity, various reasons why properties were purchased and why they were sold. The reasons that she gave for the conduct of herself and her common-law husband were neither unreasonable nor did they appear in any way to be concocted. The Court finds no discrepancies in her evidence, which would cause it to have any serious question about her veracity. She answered the questions asked of her with ease, with frankness and completely.
[74] When the Appellant testified, at first blush his evidence was straightforward, apparently complete and the answers he gave appeared to be in complete response to the questions asked, although he was somewhat more nervous than his spouse. Where there was any question of wavering, or hesitancy in the giving of his evidence, the Court puts that down to his nervousness.
[75] This witness, as well, gave cogent, compelling and reasonable explanations as to why the various properties were purchased and why they were sold at the end of the day. However, before this witnesses' testimony ended, he was asked some pertinent questions with respect to his dealings with some of the contractors that he retained in order to complete the work on the houses that he built. These answers were not forthright, complete and at the end of the day were somewhat misleading and tended to take away from the credibility that he exhibited in his earlier testimony.
[76] However, when cautioned by the Court with respect to the requirement to be completely forthright, open and clear with respect to his evidence he appeared to understand this admonition and went on to give evidence about the nature of the transactions with the contractors that he had not given before and his evidence after that point appeared to be forthright.
[77] If the Court had only to consider the evidence of these two witnesses it would have been an easy job to conclude what the intention of the Appellant was at the time that he purchased the properties in question. However, the evidence of Wenda Taylor, in some respects, tended to bring into question the evidence of the Appellant. If the Court had accepted as factual, some of the statements that were found in her report, then the Appellant would have had considerable difficulty in meeting the burden upon him in this case. But, the Court is satisfied that her report, to a considerable extent, was composed of conclusions that she had come to rather than a recitation of statements that the Appellant had made to her when she was interviewing him on the telephone. Some of these conclusions, if supported by the evidence, would have been most damaging to the Appellant's position and indeed completely contrary to the Appellant's avowed intention when he purchased and sold the properties in question.
[78] The Court is not satisfied that these conclusions were based upon statements made by the Appellant because of the manner in which this witness interviewed the Appellant. There can be no doubt that the interview was conducted on the telephone, it may very well have been at an odd hour as far as the Appellant was concerned; the Appellant may very well have been drinking at the time and may not have been well aware of what was being asked of him and the importance of it.
[79] Further, the interviewer did not write down exactly what was said. She made no notes of exactly what was said, she did not have a question and answer type of format for conducting the interview and it was not done in person. Again, whatever statements were allegedly made were not reduced to writing and there can be no doubt from the evidence of this witness that she could not say for sure if some of the statements, which she might have originally attributed to the Appellant were actually made by him.
[80] At the end of the day, the Court does not accept the statement in the report (attributed to the Appellant), which concluded that his intention was to build and sell houses until they had the house that they wanted with as small a mortgage as possible. This was the conclusion that was reached by the interviewer after considering all of the information that she had but this Court cannot conclude that this was a statement made by the Appellant.
[81] Further, some of the statements that she made in the report are corroborative of the evidence given by the Appellant and his common-law spouse. Other alleged statements were not put to the Appellant when he was on the stand and he was not given the opportunity to rebut them. If they were going to be used to contest the credibility of the Appellant that he had no intention of selling these houses when he built them, then this should have been put to him when he was on the stand.
[82] At the end of the day, the Court is satisfied that the evidence of Wanda Taylor does not destroy the evidence of the Appellant with respect to the matter of his motive or intention.
[83] It is true that the length of ownership of some of these properties by the Appellant was not over a long period of time. The shortest period of time was seven and a half months and the longest period of time was two years and two months. There were five different properties. In light of the explanations given by the Appellant and his spouse, the Court is satisfied that the length of the period of ownership does not mitigate against a conclusion favorable to the Appellant.
[84] On the factor of the nature of the properties sold, the Court is satisfied that the Appellant obtained considerable enjoyment in the ownership of the properties in question by virtue of the ownership thereof and they were more likely to have been acquired for the purposes of personal use rather than for sale. The various properties that the Appellant purchased and sold were not of the same sort. They were all different and the evidence indicated that there were a considerable number of personal factors instituted in the construction of the properties, which may not have been there had the Appellant intended from the outset to sell them. Consequently, the frequency or number of other similar transactions by the taxpayer does not take away anything from the Appellant's avowed intention as he indicated in his evidence.
[85] Likewise, the work and effort expended by the taxpayer was an attempt to make the properties suitable for their own uses rather than bringing them into a more marketable condition during their ownership. This would tend to militate against a finding that they intended to sell them.
[86] The evidence that the Court believes indicates that circumstances brought about the sales of the properties and they were not of the Appellant's own making. These were circumstances beyond his control and did not exist at the time that the houses were built and the properties purchased.
[87] Consequently, on the question of motive, the avowed intention of the taxpayer at the time of acquiring the asset, as inferred from the surrounding circumstances and direct evidence, allows the Court to conclude that the gains in question, were not on account of income. All of these properties were purchased with the intention of living in them as principal residence properties and they were not acquired for the purpose of resale. Therefore, any gain acquired on the properties is not taxable.
[88] As both counsel indicated at the conclusion of this hearing, in the event that the Court would find as it has, then the subsequent questions would become irrelevant and the Court need not deal with the alternative submissions made by counsel for the Appellant. These alternative arguments, although forcibly made, certainly did not have the merit of the first argument and to some extent, the calculations made by counsel for the Appellant would depend upon the nature of the documentary evidence that he presented with respect to the claim for deductions and it is obvious that the Appellant's record keeping in this regard was somewhat questionable.
[89] However, at the end of the day, the appeals are allowed, the assessments vacated and the penalties quashed.
[90] The Appellant will have his costs of these appeals, to be taxed.
Signed at Ottawa, Canada, this 5th day of February 2003.
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"T.E. Margeson" |
J.T.C.C.
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CITATION: |
2003TCC20 |
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COURT FILE NO.: |
2001-2008(GST)G |
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2001-1718(IT)G |
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STYLE OF CAUSE: |
Robert Freer and Her Majesty the Queen |
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PLACE OF HEARING |
Halifax, Nova Scotia |
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DATE OF HEARING |
October 25, 2002 and December 2, 2002 |
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REASONS FOR JUDGMENT BY: |
the Honourable T.E. Margeson |
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DATE OF JUDGMENT |
February 5, 2003 |
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APPEARANCES: |
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Counsel for the Appellant: |
Wyman W. Webb |
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Counsel for the Respondent: |
Marcel Prévost |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: Firm: |
Wyman W. Webb Patterson Palmer Hunt Murphy Barrister & Solicitor Bank of Montreal Tower 1600-5151 George Street P.O. Box 247 Halifax, Nova Scotia B3J 2N9 |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |