Date: 19971010
Docket: 95-1739-IT-G; 95-1740-IT-G
BETWEEN:
MEERA LAL, ALLAN LAL,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1] These appeals were heard on common evidence at Vancouver, British Columbia on September 2, 1997 pursuant to the General Procedure of this Court. Testimony was given by Allan Lal on behalf of himself and his wife, Meera Lal, by a Mr. Devani, the accountant, up to April 1990, for both Appellants and for Lal Construction Ltd. ("Corporation"), by a Mr. Surendra, a realtor and long time friend of the Appellants and by a Mr. Dutt, a painter who painted various homes constructed by the Corporation.
Issue
[2] The issue in these appeals is whether the Appellants in the 1991 taxation year had an income or a capital gain on the disposition in that year of two properties in Burnaby, British Columbia.
Facts
[3] 1. At all material times, Allan Lal and Meera Lal were spouses and both were real estate agents based in Burnaby, B.C.
[4] 2. At all material times, Allan Lal was a 100% shareholder of the Corporation. The Corporation had no separate office or place of business from the home of Allan Lal.
[5] 3. At all material times, Allan Lal was the President and part-owner of Seasons Realty Limited ("Seasons"), a real estate agency which employed both Appellants.
[6] 4. On July 15, 1986, the Corporation bought a lot with a small house thereon at 7584 Imperial Street, Burnaby, B.C. (the "Property") for $72,000.00 which it held as inventory. The existing tenant vacated the Property at the end of 1986.
[7] 5. On November 5, 1986, the Corporation applied to the municipal authorities for re-zoning of the Property, intending to subdivide it into two lots, construct two homes and sell.
[8] 6. In September of 1988, Allan Lal and Meera Lal bought 5388 Oakland Street in Burnaby for $122,937.00. The Corporation, after demolishing the existing home, built thereon a home of approximately 4,500 square feet. The Appellants have occupied that home from April, 1990 to the present time. Their son and daughter, aged 21 and 12 respectively in 1990, also occupied this home in 1991. The Appellants testified that the Oakland Street property was originally acquired for development and resale and that they intended to move later into one of the homes on Imperial Street and that their son was to move into the adjacent home. Allan Lal, as well as Mr. Devani and Mr. Surendra, stated such an arrangement, i.e., to live side by side with an adult child was part of their Fijian culture and tradition and was the Appellants' operating motive in acquiring the Property. Allan Lal explained this became impossible because his son advised him in late 1990 that he was not going to go through with it. The son had developed a relationship with a woman from Fiji and believed he would marry her. He decided that he wanted to eventually live with her away from his parents. The Appellants were unable to convince their son to live beside them as they had originally planned and so they decided to sell the side by side homes on Imperial Street and remain in the Oakland Street home. The testimony also established that the son had limited financial resources. In answering a questionnaire of Revenue Canada, Allan Lal, on March 3, 1993, stated his reasons for the sale of the two houses were "Found a better location to build a personal home and problem with growing son".
[9] 7. On February 20, 1989, an agreement was entered into whereby the Corporation agreed to sell the Property to Allan Lal and Meera Lal for $118,000.00 "subject to final approval of subdivision into 2 small lots by municipality of Burnaby", with a completion date of April 26, 1990.
[10] 8. On July 27, 1989, a demolition permit was issued and the small house on the Property was demolished.
[11] 9. On January 9, 1990, subdivision of the Property into two lots (7582 and 7588 Imperial Street) was approved, after Allan Lal had succeeded in overcoming several difficulties with the municipality.
[12] 10. In March of 1990, the Bank of Montreal approved a short-term demand loan of $272,000.00 to Allan Lal for construction of the two houses on the two lots at 7582 and 7588 Imperial Street.
[13] 11. On April 26, 1990, the lot at 7582 Imperial Street ("Lot 2") was transferred to Allan Lal and the lot at 7588 Imperial Street ("Lot 1") was transferred to Allan Lal and Meera Lal as joint tenants.
[14] 12. On May 1, 1990, building permits were issued for 7582 and 7588 Imperial Street.
[15] 13. The Corporation constructed the two houses at 7582 and 7588 Imperial Street, each containing approximately 2,630 square feet, at a cost of $136,500.00 each.
[16] 14. On December 4, 1990, Allan Lal listed 7582 and 7588 Imperial Street for sale through the agency of Seasons, and acted as the listing sales representative.
[17] 15. In January of 1991, the Bank of Montreal authorized a further loan of $30,000.00 to Allan Lal for completion of the two houses.
[18] 16. On January 31, 1991, occupancy permits were issued for 7582 and 7588 Imperial Street.
[19] 17. Allan Lal and Meera Lal sold 7588 Imperial Street to Raymond Lee and Shelly Lee for $295,000.00, with completion date of February 18, 1991 and Allan Lal and Meera Lal sold 7582 Imperial Street to Benny Wong and Miu Yee Wong for $295,000.00, with completion date of March 11, 1991. Both sales were conditional upon the Lals' undertaking to purchase the homes of the purchasers. Both those latter homes were also sold shortly after.
[20] 18. Shortly after the sale of 7582 and 7588 Imperial Street, Allan Lal repaid the construction loans to the Bank of Montreal.
[21] 19. Neither Allan Lal, Meera Lal, nor any of their family ever lived at either 7582 or 7588 Imperial Street.
[22] 20. The gain on the sale of the property located at 7588 Imperial Street, amounted to $98,586.72, being the excess of the sale proceeds of $295,000.00 over the sum of the cost of $195,500.00 and the disposition outlays and expenses of $913.28.
[23] 21. The gain on the sale of the property located at 7582 Imperial Street, amounted to $98,921.10, being the excess of the sale proceeds of $295,000.00 over the sum of the cost of $195,500.00 and the disposition outlays and expenses of $578.90.
[24] 22. The Lals reported these gains as capital gains on their respective 1991 returns, 75% of which was reported as taxable capital gains. They made an error by declaring the wrong lots on their respective returns but the difference in the gains is insignificant.
[25] 23. Homes occupied by the Appellants up to 1990 were:
a. Beresford Street, Burnaby from 1975 to 1977;
b. a second property on Beresford Street from 1977 to 1980;
c. 6706 Walker Ave., Burnaby from 1980 to February, 1989 (acquired in 1980 for approximately $48,000 and sold in 1989 for $343,000)
d. 5685 Clinton Street from February, 1989 to April, 1990 (acquired for $156,000 and sold for $259,000);
e. 5388 Oakland Street from April, 1990 to present -
[26] 24. The gains on the homes described in c. and d. above were advanced to the Corporation by way of shareholder loans.
[27] 25. The Corporation developed and sold one other property on Imperial Street near 7582 and 7588.
[28] 26. Mr. Dutt testified that he was a painting contractor and had done business with Allan Lal and the Corporation. He said he gave Allan Lal a discount when he painted the side by side homes for him because Allan Lal had intended to live in one and have his son live in one. He also testified that Allan Lal and his son did some of the painting themselves. Further, he testified that he did not give Mr. Lal a discount to paint the Oakland Street property because Allan Lal had represented to him that his plan was to sell that house when the Imperial Street houses were finished.
[29] 27. Mr. Devani and Mr. Surendra testified that they were aware of the Appellants' family problems with their son and his relationship with the woman from Fiji as far back as November, 1990.
[30] 28. The Appellants' son had a history of personal problems. Allan Lal's testimony was that his son is now separated, has lost his matrimonial home and has not contacted his parents for months.
Submissions of the Appellants
[31] Counsel for the Appellants submitted that in acquiring the Property, the Appellants did not have either a primary or a secondary intention of resale; that the Property was acquired to enable the Appellants to live in one home and their son in the other home and that that was their only intention. This intention, based on Fijian culture and tradition, became impossible to carry out because of the son's refusal after the Appellants had purchased the Property.
Submissions of the Respondent
[32] Counsel for the Respondent points to the considerable real estate connections of the Appellants, the Corporation and Seasons and the various sales and purchases described above. The Corporation was in the business of buying properties, redeveloping them and selling homes. Counsel refers further to the fact of the Appellants' continuing to live in the large Oakland Street home with their son and concludes that the intention, primary or secondary, of the Appellants in acquiring the Property from the Corporation was to similarly develop and sell at a profit. Counsel adds that had the Corporation continued to own the Property and redevelop same, any profit would have been on account of income rather than capital.
Analysis and Decision
[33] Considering the following, I have concluded that the gains realized on the sales by the Appellants of the Property were on income account and not capital gains:
1. The Appellants were experienced real estate agents with a good knowledge of market conditions;
2. The Corporation (100% owned by Allan Lal) was in the business of redeveloping properties and selling at a profit;
3. Seasons, owned partly by Allan Lal, completes the picture, demonstrating considerable involvement in real estate transactions.
4. I find it difficult to accept that the son was to live in one of the two identical and small homes and the Appellants and their daughter in the other. The testimony of Mr. Dutt as to giving a discount on the painting of the two homes and not on the large home the Lals lived in is far from establishing that the Lals intended to move into one of the small homes. Mr. Dutt wanted the business of Allan Lal and the Corporation but surely he could have achieved this by discounts on the painting of any home, whether or not to be lived in by the Lals.
5. The son did not have the financial means to meet the carrying expenses of the home allegedly intended for him.
6. At the time of the original purchase by the Corporation the intent of the Corporation (100% owned by Allan Lal) was to develop and sell. Further, it was the testimony of Allan Lal that had he not been able to subdivide, he would have done precisely that, namely build one home and sell. This indicates at least a secondary intention.
7. The construction of the homes was heavily financed by short term bank loans. No arrangements for normal mortgage financing had been put in place.
8. The two homes, after they were listed, sold very quickly.
9. If the Appellants' primary intention was to have their son occupy one of the homes and themselves the other, one would have thought that the Appellants would have rented out the homes, at least for a period of time, hoping their son would change his mind. I find it difficult to accept that the son changed his mind re not wanting to live beside his parents when, in fact, he actually lived with them in their home in 1991. Further, the answer given to Revenue Canada's questionnaire referred to above in paragraph 6 of the facts, is not helpful to the Appellants.
10. Actions speak louder than words. The Appellants continued to live in the large home on Oakland and none of the Lals ever moved into the homes on Imperial Street.
11. Allan Lal and the Corporation were almost one and the same. He owned 100% of the shares. Also, loans for the Corporation were often taken out in the name of Allan Lal. Further, when he made profits on sales of personal residences those profits were put into the Corporation by way of shareholder loans. An overall pattern emerges of the Corporation acquiring properties, improving the sites by demolition or otherwise, then building and selling.
12. Notwithstanding that Allan Lal's testimony concerning his intention relative to his son was generally substantiated by the testimony of the other witnesses, when I consider all the other factors discussed above, I have to conclude that those factors indicate the gains realized were trading gains, that is gains on account of income not capital.
[34] Therefore, the appeals are dismissed with costs.
"T.P. O'Connor"
J.T.C.C.