Date: 20000814
Docket: T-3141-91
Ottawa, Ontario, August 14, 2000
Before: Pinard J.
IN RE: Income Tax Act
Between:
DIANE DE CHANTAL, businesswoman,
domiciled and residing at 16 chemin Senneville,
Senneville, Quebec H9X 1B6
Plaintiff
- and -
HER MAJESTY THE QUEEN
Defendant
JUDGMENT
The plaintiff's action is allowed in part and the matter referred back to the Minister of National Revenue for reconsideration and reassessment as follows:
| -- the earnings from the sale of the commercial property on Rue Ste-Anne in Ste-Anne-de-Bellevue constitute a capital gain, and |
| -- the earnings from other sales, involving the rental properties at Verdun, Westmount and Île Perrot, constitute business income from the purchase and resale of immovable property. |
The Minister should further take into account the admissions made on his behalf in paragraphs 33 and 34 of the defence herein.
In view of the plaintiff's limited success, no costs will be awarded.
| YVON PINARD JUDGE |
Certified true translation
Suzanne M. Gauthier, LL.L. Trad. a.
Date: 20000814
Docket: T-3141-91
IN RE: Income Tax Act
Between:
DIANE DE CHANTAL, businesswoman,
domiciled and residing at 16 chemin Senneville,
Senneville, Quebec H9X 1B6
Plaintiff
- and -
HER MAJESTY THE QUEEN
Defendant
REASONS FOR JUDGMENT
PINARD J.
[1] This is an appeal by action from a decision of the Tax Court of Canada on September 10, 1991 which allowed in part the appellant's appeals from the income tax assessments of the Minister of National Revenue ("the Minister") for her 1984, 1985 and 1986 taxation years.
[2] The point at issue is whether the profits from the sale of the following immovable property constituted a capital gain or business income:
| -- sale on December 31, 1984 of a commercial duplex in Ste-Anne-de-Bellevue, purchased in December 1979 by the plaintiff, a friend, Annette Lavigne, and the latter's son; |
| -- sale on July 18, 1984 of an apartment building located in Westmount, purchased on September 6, 1983 by the plaintiff and her friend Annette Lavigne; |
| -- sale spread over several months, between September 1984 and April 1985, of sixteen immovable properties located in Verdun, containing six apartments each, purchased by the plaintiff earlier, between March 1982 and August 1983; |
| -- sale on January 28, 1986 of a building with 24 new apartments located on Place Datura in Île Perrot, purchased by the plaintiff previously on June 6, 1985; around mid-January 1986 the plaintiff's husband had acquired a joint 50 per cent interest in this property. |
[3] Although the Income Tax Act does not clearly distinguish between a capital gain and business income, the decisions of the courts have been very useful in this regard. The guidelines laid down by the courts were well summarized by my brother Rouleau J. in Happy Valley Farms Ltd. v. Her Majesty The Queen, [1986] 2 C.T.C. 259, at 263:
| Several tests, many of them similar to those pronounced by the Court in the Taylor case [[1956] C.T.C. 189; 56 D.T.C. 1125 (Ex. Ct.)], have been used by the courts in determining whether a gain is of an income or capital nature. These include: |
| 1. The nature of the property sold. Although virtually any form of property may be acquired to be dealt in, those forms of property, such as manufactured articles, which are generally the subject of trading only are rarely the subject of investment. Property which does not yield to its owner an income or personal enjoyment simply by virtue of its ownership is more likely to have been acquired for the purpose of sale than property that does. |
| 2. The length of period of ownership. Generally, property meant to be dealt in is realized within a short time after acquisition. Nevertheless, there are many exceptions to this general rule. |
| 3. The frequency or number of other similar transactions by the taxpayer. If the same sort of property has been sold in succession over a period of years or there are several sales at about the same date, a presumption arises that there has been dealing in respect of the property. |
| 4. Work expended on or in connection with the property realized. If effort is put into bringing the property into a more marketable condition during the ownership of the taxpayer or if special efforts are made to find or attract purchasers (such as the opening of an office or advertising) there is some evidence of dealing in the property. |
| 5. The circumstances that were responsible for the sale of the property. There may exist some explanation, such as a sudden emergency or an opportunity calling for ready money, that will preclude a finding that the plan of dealing in the property was what caused the original purchase. |
| 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. |
[4] The principle of secondary intent defined by the Exchequer Court of Canada in Racine, Demers and Nolin v. Minister of National Revenue, 65 D.T.C. 5098, at 5111 and 5112, is also relevant:
| 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 [sic] 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. |
| When a man purchases a large expanse of land for the avowed purpose of building on it, for example, a shopping centre and of renting stores to yield an income from rent, but at the moment of purchase he does not make any arrangement at all to obtain the permanent financing of a considerable amount of money that he must invest or which will be required for the purposes of his project, or any arrangement at all to obtain tenants, and he has obtained any information at all concerning the question of learning if the site in question possesses the characteristics necessary and adequate for such a project, or when this plot of land is situated in a sector which is adjacent to another sector which is growing and which is in full expansion on the periphery and where the value of these lands has already begun to rise or where the purchaser possesses experience in the realm of real estate which allows him to anticipate the changes which may arise in real estate values, there arises an almost irresistible inference that this man had the idea when he made the purchase that if he did not succeed in making the necessary arrangements to establish a shopping centre, he would indubitably be able to resell this land at a profit. |
[5] Considering the evidence in the case at bar in light of these principles, only the first sale, that of the commercial duplex located in Ste-Anne-de-Bellevue, seems to have resulted in the making of a capital gain. I am not persuaded on a balance of probabilities that the profits resulting from all the other sales were capital in nature rather than income.
[6] As regards the sale of the commercial duplex in Ste-Anne-de-Bellevue, this was leased to an individual who converted it into a French restaurant. On the expiry of a five-year lease, the plaintiff and her co-owners agreed to sell the property to the restaurateur-lessee, who otherwise was threatening to leave the premises. The sale, for $95,000, generated an overall profit of $70,222. In view of the five years that elapsed between the purchase and sale, the long-term lease and the threat of losing a good tenant for the property, I consider the transaction in question to be of a capital nature. Moreover, after the hearing counsel for the defendant wrote the Administrator of this Court to confirm that the Minister now acknowledged that the profit made on the sale of the property in question should be regarded as a capital gain.
[7] The other transactions differ in that their circumstances tend instead to show that the plaintiff wished to purchase rental property in order if possible to resell at a profit at the first good opportunity. The plaintiff is a businesswoman who worked as a real estate agent from 1978 to 1982. She married a notary, Michel Bélanger, on December 24, 1984 and worked in his office on the South Shore of Montréal, performing important administrative and para-legal duties. In late 1986 the plaintiff incorporated her own company, "Les investissements Diane de Chantal Inc.", working in the field of real property administration and sale. At the relevant time, the plaintiff had no real experience managing rental property.
[8] The plaintiff explained that the immovable property in Westmount was purchased to enable her husband to set up a second notary's office there, as he had many clients in Outremont and Montréal. The plaintiff said that when she realized a few months later that a zoning by-law prohibited such a practice, she was obliged to sell the property. This explanation seems to me to be somewhat improbable. First, I find very strange the idea of buying immovable property with fourteen to sixteen apartments simply so that one of them could be used by her husband without having to pay rent. Further, the plaintiff admitted that the zoning was not checked before the immovable property was purchased and that, apart from the cost of printing new professional stationery, only [TRANSLATION] "minor adjustments" had to be made to make the office operational. No serious study of profitability was entered in evidence. After keeping the immovable property for barely ten months, the plaintiff sold it for $331,000, making a profit of $34,440.
[9] As to the sixteen properties with six apartments each located in Verdun, the plaintiff maintained that she bought these so she could eventually live on the rental income from them, which
she said she indicated to her chartered accountant, J.M. Bourassa, before buying them. She said she misjudged a group of tenants who, as most were on social assistance, paid the rent late or did not pay it at all, and the repeated negative intervention of the Régie du logement led her to quickly dispose of these properties. Here again, the excuse is not very convincing. I find it hard to understand how an experienced businesswoman like the plaintiff could have spent nearly a million dollars to purchase these apartment buildings without previously studying the value of the leases carefully. No specific evidence was presented that rent was not paid. The properties were purchased over a period of eight months between December 23, 1982 and August 22, 1983, and were all sold by April 12, 1985 at the latest. Despite the problems alleged by the plaintiff, she made a total profit of $269,350, without even making the improvements suggested by her real estate agent Mario Besner to some of the apartments in question.
[10] Finally, with regard to the building with 24 new apartments (Place Datura) and the adjacent land on Île Perrot, the plaintiff said she also purchased this so she could eventually live on the rental income. She simply explained the rapid sale of the property by an unsolicited purchase offer that was too attractive to refuse. Here again, the circumstances do not allow the Court to conclude that the plaintiff intended first to receive stable and progressive rental income. The building and the adjacent land, purchased in June 1985 for $575,000 and subject to a first mortgage of $430,000, were resold less than seven months later, in January 1986, making an overall profit of $129,775. This profit was also divided equally between the plaintiff and her husband, as the latter had acquired a 50 per cent joint interest in the property some two weeks before its sale. Here again, no serious study of profitability, in terms of rental income and administration costs, was entered in evidence.
[11] I also find the following facts to be indicative of the plaintiff's intent at the time she purchased each of the apartment buildings in question:
| -- the fact that the plaintiff worked in her husband's law firm full time, performing administrative and para-legal duties; |
| -- the fact that the plaintiff had no experience in managing rental properties; and |
| -- the fact that all these large purchases were made within a relatively short period of time, between March 1982 and January 1986. |
[12] In short, in view of all these circumstances the plaintiff was unable to establish that she intended to make an investment in the nature of a capital gain [sic]. The facts in evidence rather suggest that the profits which she made were actually business income.
[13] The plaintiff's action is accordingly allowed in part and the matter referred back to the Minister for reconsideration and reassessment as follows:
| -- the earnings from the sale of the commercial property on Rue Ste-Anne in Ste-Anne-de-Bellevue constitutes a capital gain, and |
| -- the earnings from other sales, involving the rental properties at Verdun, Westmount and Île Perrot, constitute business income from the purchase and resale of immovable property. |
[14] The Minister should further take into account the admissions made on his behalf in paragraphs 33 and 34 of the defence herein. In view of the plaintiff's limited success, no costs will be awarded.
| YVON PINARD JUDGE |
OTTAWA, ONTARIO
August 14, 2000
Certified true translation
Suzanne M. Gauthier, LL.L. Trad. a.
FEDERAL COURT OF CANADA
TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
| COURT No.: T-3141-91 |
| STYLE OF CAUSE: DIANE DE CHANTAL v. HER MAJESTY THE QUEEN |
| PLACE OF HEARING: Montréal, Quebec |
| DATE OF HEARING: June 13, 2000 |
| REASONS FOR JUDGMENT BY: PINARD J. |
| DATED: August 14, 2000 |
APPEARANCES:
| Diane de Chantal FOR THE HERSELF |
| Johanne Boudreau FOR THE DEFENDANT |
SOLICITORS OF RECORD:
| No one FOR THE PLAINTIFF |
| Morris Rosenberg FOR THE DEFENDANT |
Deputy Attorney General of Canada