Tax Court of Canada Judgments

Date: 20000110

Dockets: 97-1490-IT-G; 97-1494-IT-G

BETWEEN:

ALLAN STREMLER, WARWICK F. JONES,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent,

Reasons for Judgment

McArthur J.T.C.C.

[1] These appeals were heard together on the basis of Agreed Statements of Fact supplemented with viva voce testimony of Allan Stremler, Warwick F. Jones (the Appellants) and Suzanne Hubbard and Frank J. Kelly, F.C.A. experts on behalf of the Appellants. Mr. Stremler appeals from assessments for the 1991, 1992 and 1993 taxation years and Mr. Jones appeals from assessments for the 1990, 1991 and 1992 taxation years.

[2] The Appellants purchased the properties through Reemark Properties Ltd. which was in the business of selling residential condominiums. The Appellants' position is that their sole purpose in acquiring the properties was for resale at a profit and therefore, they were real estate traders. The Minister of National Revenue denies this and states that the properties were capital assets, the Appellants had no reasonable expectation of profit, and they were estopped from characterizing the units as inventory because they had reported them as capital assets in their income tax returns and claimed rental losses from their rental operations. There are other issues which I shall deal with later.

[3] The Agreed Statements of Fact are as follows:

Allan Stremler (97-1490(IT)G)

1. On May 9, 1990, the Appellant entered into agreements with the Reemark group of companies to purchase two residential condominium units in a project referred to as "Master's Green", in Richmond, British Columbia. The Appellant obtained legal title to the properties on September 30, 1993.

2. The purchase price for each of the properties was $171,990, paid and financed by the Appellant in the following manner:

Cash    $ 1,500

Assumption of first mortgage 120,393

Promissory notes    50,097

Total    $171,990

3. During the 1991, 1992 and 1993 taxation years the Appellant received total rental income from the two properties and incurred total expenses in respect of the two properties as follows:

Year	Rental Income	Expenses	Expenses in excess of rental income
1991	$18,988	$61,549	$42,561
1992	$19,938	$58,524	$38,586
1993	$21,566	$50,594	$29,028

4. At no time were either of the properties held for personal use or rented to tenants who were not dealing at arm's length with the Appellant.

5. The fair market values of the properties at the end of each taxation year in issue were as follows:

Date	Unit	Fair Market Value
December 31, 1991	Unit 510	$118,500
	Unit 511	$118,500
December 31, 1992	Unit 510	$129,000
	Unit 511	$129,000
December 31, 1993	Unit 510	$135,000
	Unit 511	$135,000

6. The Appellant listed both properties for sale in October of 1995. Unit 511 was sold by the Appellant on February 15, 1996 for proceeds of $119,800 and Unit 510 was sold by the Appellant on July 22, 1996 for proceeds of $116,500.

7. In computing his income for the 1991, 1992 and 1993 taxation years the Appellant deducted losses in respect of the properties equal to the amount by which the expenses incurred in respect of the properties exceeded the rental income therefrom. By way of reassessments dated June 15, 1995, the Minister of National Revenue disallowed the Appellant's claim for these losses in each of those taxation years and increased the Appellant's total income for the 1991, 1992 and 1993 taxation years by approximately $42,561, $38,585 and $29,028 respectively. The Appellant duly objected to these reassessments by Notices of Objection filed on August 10, 1995.

8. If the Appellant held each of the properties as part of an adventure in the nature of trade, and if subsection 10(1) of the Income Tax Act (Canada), prior to its amendment by S.C. 1998, c. 19, subsection 70(1), applies to the Appellant for the purposes of computing the Appellant's income from those adventures in the nature of trade, then the Appellant's total allowable losses in relation to the two properties are properly calculated as follows:

Year	Cost January 1	Loss in Year	Accumulated Cost (cost plus losses)	Fair Market Value, December 31	Deduction in year (accumulated cost in excess of fair market value)
1991	$305,982*	$42,561	$348,543	$237,000	$111,543
1992	$237,000	$38,586	$275,586	$258,000	$17,586
1993	$258,000	$29,028	$287,028	$270,000	$17,028

* $343,980 aggregate purchase price, less $37,998 allocated to service fees.

Warwick F. Jones (97-1494(IT)G)

1. On September 23, 1988, the Appellant entered into an agreement with the Reemark group of companies to purchase a residential condominium unit in a project referred to as "Wellington Mews", which was to be constructed in St. Thomas, Ontario (the "Property"). The Appellant obtained legal title to the Property on September 29, 1989.

2. The purchase price of the Property was $89,990, paid and financed by the Appellant in the following manner:

Cash    $ 1,000

Assumption of a first mortgage $64,793

Promissory notes $24,197

Total    $89,990

3. During the 1990, 1991 and 1992 taxation years the Appellant received rental income from the Property and incurred expenses in respect of the Property, as follows:

Year	Rental Income	Expenses	Expenses in excess of rental income
1990	$7,920	$17,283	$9,903
1991	$7,920	$16,689	$8,769
1992	$7,168	$18,844	$11,376

4. At no time was the Property held for personal use or rented to a tenant who was not dealing at arm's length with the Appellant.

5. The fair market value of the Property at the end of each taxation year in issue was as follows:

Date Fair Market Value

December 31, 1990 $73,000

December 31, 1991 $78,000

December 31, 1992 $73,000

6. The Appellant listed the Property for sale in June of 1991, and again in February of 1994. The Property was sold by the Appellant in March, 1994 for proceeds of $71,000.

7. In computing his income for the 1990, 1991 and 1992 taxation years the Appellant deducted losses in respect of the Property equal to the amount by which the expenses incurred in respect of the Property exceeded the rental income therefrom. By way of reassessments dated May 27, 1994, the Minister of National Revenue disallowed the Appellant's claim for these losses in each of those taxation years and increased the Appellant's total income for the 1990, 1991 and 1992 taxation years by approximately $9,903, $8,769 and $11,376, respectively. The Appellant was granted an extension of time for filing Notices of Objection in respect of these reassessments, and duly filed such Notices of Objection on August 29, 1994.

8. If the Appellant acquired the Property as part of an adventure in the nature of trade, and if subsection 10(1) of the Income Tax Act (Canada), prior to its amendment by S.C. 1998, c. 19, subsection 70(1), applies to the Appellant for the purposes of computing the Appellant's income from that adventure in the nature of trade, then the Appellant's allowable losses in relation to the Property are properly calculated as follows:

Year	Cost January 1	Loss in Year	Accumulated Cost (cost plus losses)	Fair Market Value, December 31	Deduction in year (accumulated cost in excess of fair market value)
1990	$76,750*	$9,903	$86,653	$73,000	$13,653
1991	$73,000	$8,769	$81,769	$78,000	$3,769
1992	$78,000	$11,376	$89,376	$73,000	$16,376

* $89,990 aggregate purchase price, less $13,240 allocated to service fees.

Estoppel

[4] Before dealing with the balance of the evidence not covered in the Agreed Statements of Fact, the issue of estoppel should be dealt with because there would be no need to proceed further if the Minister's position is correct.

[5] In their income tax returns for the relevant taxation years, both Appellants claimed rental losses having characterized their properties on capital account. The Minister originally allowed this designation. The Minister submits that the Appellants are estopped from alleging the properties were actually inventory because the Minister relied upon the earlier representation to his detriment; namely, that the Minister was statute-barred from reassessing the Appellants at the time they changed their positions. Beaubier J. was faced with a similar question in McPherson v. The Queen.[1] I agree with his conclusion that the Minister's argument fails because the Appellants' description of the properties as capital is a statement of law and not fact. A representation of law is not grounds for estoppel.[2] I agree with the following reasoning in Goldstein v. The Queen,[3] wherein Bowman J. stated at page 1034:

... Although estoppel is now a principle of substantive law it had its origins in the law of evidence and as such relates to representations of fact. It has no role to play where questions of interpretation of the law are involved, because estoppels cannot override the law.

Whether or not the Appellants were carrying on a rental operation is a question of fact to which the doctrine of estoppel would apply. But concluding that the properties are capital or inventory is a statement of law. Having found that the doctrine of estoppel does not apply, the major issue is whether the properties are capital or inventory.

Capital or Adventure in the Nature of Trade

[6] Both Appellants testified that they purchased their units to sell them. They were intent on cashing in on the real estate boom of the late 1980s as they saw it, living in the Toronto area. They wanted on the bandwagon. Reemark made it look easy with a clever presentation. They did not understand all the material presented, which included complex agreements, but they did grasp the basic premise. Their evidence was that they understood they could purchase the attractive condominiums in excellent locations, benefit from some revenues to offset costs, and then sell at substantial profits.

[7] Mr. Stremler relied on the advice of his financial adviser who recommended the purchases and on his lawyer who gave a somewhat casual approval of the documentation. Mr. Stremler is a building contractor who specializes in the construction of service stations. He stated he had no interest in being a landlord particularly given his units were in Richmond, British Columbia. As with Mr. Jones, he had a substantial income and for both, it was their first purchase of similar properties.

[8] Mr. Jones stated that he knew of the rising real estate market and that Ford Motor Company was expanding in St. Thomas, Ontario. The Wellington Mews project was recommended to him by a salesperson he knew and trusted. He attended a presentation with colleagues at the Toronto radio station, CHUM, where he worked as a salesperson. He was satisfied he could resell the property in three to five years and make a large profit.

[9] The question is how to characterize the properties on the day of purchase by the taxpayers having regard to all the circumstances. It is unique to each individual. Each case must be looked at individually to determine if, on the date of purchase, the taxpayer intended keeping the property for the long term to earn rental income, taking into account probable tax deductions, or did he intend to sell it within a reasonably short period of time.

[10] The determination of whether or not the Appellants acquired the properties as adventures in the nature of trade is a question of fact. I find as a fact that both Appellants had as their primary motive in purchasing the properties, the intention to sell. They did not purchase with the intention of earning income from the rental business. They were opportunists, speculators in real estate following the trend of buying in the rising market with the intention of selling at a profit in a few years. In the meantime, the rents would offset some of the costs of holding the units and by taking advantage of the Reemark plan, there would be very little cash expenditures from their pockets and no effort to manage the units. Their acquisition was about 95% financed through a first mortgage and promissory notes all arranged by Reemark. Even vacancies were of limited concern because they entered into a rental pooling arrangement wherein the impact was shared by most owners.

[11] Despite the following facts that support the Minister's position that the properties were purchased as capital property or tax shelters:

(a) Both Appellants had substantial incomes and potential for attractive income tax deductions;

(b) They characterized their units as capital property on their income tax returns;

(c) Neither purchaser had a history of trading in real estate;

(d) The Reemark package of documents indicated the properties were to be held as capital properties;

(e) The documents referred to future capital gains; and

(f) Title was not to be granted immediately, but after the condominium plan was registered. (This is common when purchasing new condominiums).

I find the following indicia, that lead to the conclusion that the Appellants were acting as traders, to be more persuasive:

(a) They were aware that they were purchasing in a rising market which had the greatest impact on their decisions.

(b) They informed themselves with respect to the sales market in the areas where they were purchasing and not the rental market.

(c) They were attracted by the histories of others who had bought and sold real estate at substantial profits.

(d) They had no notice that the real estate market would be hit by a severe economic downturn commencing early in 1990.

(e) They paid very little cash upon purchasing and over 95% of the purchase price was financed.

(f) The yearly expenses demonstrated in the Reemark projections made the units unattractive rental investments.

(g) They had no previous experience in operating rental properties.

(h) They did not inform themselves in any way with respect to the rental markets.

(i) They had other fulltime employment with no time or inclination to become landlords.

(j) Events subsequent to their purchases support their trader intentions. Rather than weathering the economic storm in which they found themselves, they made efforts to sell their units as early as was possible and practical.

Mr. Jones listed his property for sale in 1991. Having no offers he let the listing lapse and finally sold it in 1994 for $18,000 less than his purchase price. Mr. Stremler's financial adviser encouraged him to hold on for the market to recover. He listed his properties for sale in 1995. His selling price for each unit was at least $50,000 lower than the purchase price. The evidence does not lead to the conclusion that the Appellants intended to purchase a tax shelter. The following statement of Reid J. in Ward v. R.[4]applies to the present situation:

I cannot accept the desire to reduce one's taxable income as a primary purpose. A desire to reduce one's taxable income immediately, but with the expectation that a profit will arise therefrom at a later date, is entirely consistent with the acquisition of a property for the purpose of development and resale. And, I have no doubt that the intention to obtain a profit, from development and resale, will always take precedence over the desire to reduce one's taxable income. ...

[12] During the 1980s, purchasing and selling property only a few days, weeks or months after acquisition was common and often referred to as "flipping" and the entrepreneurs as "flippers". In the present case, the Appellants were not flippers in the true sense of the term. They realized prior to purchasing that they required two or three years to realize a gain from sale. A sale could not be made in the case of Mr. Stremler for at least two years until he obtained title. Both Appellants paid for the Reemark services to include payment guarantees and rental pool for a period of three years. I find that the delays which prevented them from selling do not take them out of the characterization as traders. They did not intend to retain the properties as long-term rental units. They intended to profit from the sale of the units, not from rental income. The rental income assisted with the carrying costs. Upon purchasing, they had a reasonable expectation of profit from resale. They did not have a reasonable expectation of profit from rental income. They had evidence and knowledge of this from sharply rising real estate markets particularly as they saw it in the Toronto area. The prospectus indicated long-term losses from renting. That was not their intention. I do not accept a desire to reduce their taxable income as a primary purpose. Suzanne Hubbard, a well qualified real estate appraiser with Royal Lepage, stated that during the late 1980s, the real estate market rose dramatically in many parts of Canada particularly in the Toronto area.

[13] The Appellants have satisfied the Court, upon reviewing all of the evidence, that their primary intention was to sell as quickly as possible and realize a profit. The real estate frenzy was such that they did not consider a downside. They were absolutely convinced that real estate values were going in one direction, upwards. The comprehensive documentation given to them by Reemark was complex and they did not fully understand the details of income tax deductions, promissory notes, refinancing, rental pools and the like.

[14] They were convinced they could buy and sell quickly and quietly with little cash expenditure and little effort. Theirs is not the actions of a long-term investors. Applying the test in Friesen v. The Queen,[5] "did the taxpayer have an intention to resell?", the clear answer is yes. In M.N.R. v. Taylor,[6]the test, simply put, is if after an objective review, did the Appellants act more like traders than long-term investors. For the reasons referred to, I find the Appellants acted more like traders than long-term investors. At page 5556 of Friesen, supra, Justice Major stated:

... In determining whether the gains from a sale of real estate are income or capital, particular emphasis is placed on the taxpayer's intention at the time of the initial purchase of the real estate. Thus, a particular piece of real estate becomes either inventory or capital property in the hands of the taxpayer from the time of the original purchase. ...

As stated, I find as a fact that it was the primary intention of both Appellants from the time of original purchase to hold the properties for the purposes of resale as soon as the market warranted.

[15] The fact that the Appellants paid for services such as the rental pool and management does not derogate from their intention to sell or act as a trader. They were not in the rental business and were prepared to pay to have others look after their properties. This is consistent with their intentions and actions to buy, wait for a short period for an increased value, and then sell. They wanted a turnkey operation. Their venture was a "business" within the definition in subsection 248(1) having met the tests for an adventure in the nature of trade.

[16] In addition to the transactions being characterized as adventures in the nature of trade, the properties in question must also be characterized as inventory in order for the Appellants to fall within the confines of subsection 10(1.01). Subsection 248(1) contains a definition of "inventory" as follows:

"Inventory" means a description of property the cost or value of which is relevant in computing a taxpayer’s income from a business for a taxation year.

In Friesen, Major J. made the following comments regarding the meaning to be attributed to “inventory”. At page 5555, he stated:

The first point to note about this definition of inventory is that property is not required to contribute directly to income in a taxation year in order to qualify as inventory. Provided that the cost or value of an item of property is relevant in computing business income in a year that property will qualify as inventory. Generally the cost of value or an item of property will appear as an expense (and the sale price as revenue) in the computation of income.

...

As discussed above, an adventure in the nature of trade constitutes a business under the Act. Therefore, an item of property sold as part of an adventure in the nature of trade is relevant to the computation of the taxpayer’s income from a business in the taxation year of disposition and so is inventory according to the plain language of the definition in subsection 248(1).

...

The characterization of an item of property as inventory or capital property is based primarily on the type of income that the property will produce.

At page 5557, Major J. went on to state that:

I prefer to follow the well-established line of cases which have specifically held as part of their ratioes decidendi that real estate held for resale in an adventure in the nature of trade constitutes “inventory” for the purposes of subsection 10(1): Bailey; Weatherhead v. M.N.R.. [1990] 1 C.T.C. 2579, 90 DTC 1398 (T.C.C.); Van Dongen v. Canada, [1991] 1 C.T.C. 86, 90 DTC 6633 (F.C.T.D.); Skerrett v. M.N.R., [1991] 2 C.T.C. 2787, 91 DTC 1330 (T.C.C.); and Cull v. The Queen [1987] 2 C.T.C. 63, 87 DTC 5322 (F.C.T.D.). I endorse the approach taken in these cases of considering the definition of “inventory” in the context of the basic distinction between business income and capital gain.

Major J. then adopted the following statement of Cullen J. in Van Dongen, supra, at page 87:

The characterization of these properties as inventory is significant, because any gain or loss from the disposition of the inventory will be treated as business income or loss rather than capital gain or loss.

       Emphasis added

I have already determined that the properties were purchased as an adventure in the nature of trade. Accordingly, I also find that the properties were inventory. Thus, the Appellants are required to calculate their income from business in accordance with subsection 10(1.01) of the Act if it is applicable to them.

[17] I will now deal with the issues of (i) whether the recent legislation, subsection 10(1.01) of the Income Tax Act, applies; and (ii) whether the Appellants are entitled to deduct their property losses in computing their income for the relevant years.

[18] Does subsection 10(1.01) apply? The Appellants submit that the newly enacted subsection 10(1.01) is not applicable to them retroactively because it interferes with their right to enjoyment of property contrary to subsection 1(a) of the Canadian Charter of Rights & Freedoms. I agree with the Minister's position and have no difficulty in dismissing this submission and finding that subsection 10(1.01) does apply to the present circumstances.

[19] Subsection 10(1.01) reads as follows:

10(1.01) For the purpose of computing a taxpayer's income from a business that is an adventure or concern in the nature of trade, property described in an inventory shall be valued at the cost at which the taxpayer acquired the property.

The summary of the Bill with respect to subsection 10(1.01) presented to Parliament contained the following:

Adventures in the Nature of Trade: implements the measures announced by he Minister of Finance on December 20, 1995 according to which, for income tax purposes, inventory held as an adventure in the nature of trade must be valued at its historical cost, rather than at the lower of cost or fair market value, so that accrued losses on such property will be recognized only in its disposition.

Subsection 1(a) of the Bill of Rights reads as follows:

1. It is hereby recognized and declared that in Canada there have existed and shall continue to exist without discrimination by reason of race, national origin, colour, religion or sex, the following human rights and fundamental freedoms, namely,

(a) the right of the individual to life, liberty, security of the person and enjoyment of property, and the right not to be deprived thereof except by due process of law.

It has been well established that tax legislation can be applied retroactively provided the legislation is explicit in its intention to do so.[7] The enactment of subsection 10(1.01) did not affect the Appellants' Charter rights to enjoyment of property because the Appellants were not relying on the properties being inventory at the time of the press release.[8] The force of the amendments do not depend on either the press release or whether the Appellants were aware of it.[9] In addition to being explicit in its intention to apply retroactivity, the amendments to

section 10 were not enacted without grandfathering provisions to aid those taxpayers caught in transition. The press release stated, in part, that "... where a taxpayer has claimed an inventory write-down ... for a taxation year ending before today (December 21, 1995) ..." the write-down was available.

[20] Can the Appellants claim an inventory write-down and in what amount? Essentially, subsection 10(1) of the Act articulates GAAP[10] in directing that when computing income from a business, inventory of the business may be valued at the lower of its cost and fair market value. This, in effect, allows businesses to deduct losses accrued as a result of diminishment in the value of the inventory of the business, even if the loss has not actually been realized upon a disposition of the inventory. The inventory write-down differs from the treatment accorded to accrued losses in respect of non-depreciable capital property; namely, such losses are recognized as capital losses only in the year the properties are actually disposed of.

[21] In Friesen, the Supreme Court determined that inventory held as an adventure in the nature of trade could be written down in accordance with section 10 of the Act (now amended). The Federal Government issued a press release shortly after the decision indicating that as a result of Friesen, the tax base of the country could be destabilized as a result of a large number of taxpayer’s claiming deductions from their income for the 1995 taxation year as a result of an inventory write-down.[11] The press release also indicated that amendments to

section 10 would be made so that inventory held as an adventure in the nature of trade would no longer be eligible for the write-down.

[22] The amendments to section 10 have created a new class of property which is somewhat of a hybrid between capital property and inventory. Subsection 10(1.01) states that inventory held as an adventure in the nature of trade is no longer eligible for an inventory write-down; any gain or loss in the value of the property will be recognized only upon the actual disposition of the property. The addition of subsection 10(1.01) begs the question of what treatment should now be accorded to carrying costs, such as rental losses, incurred with respect to inventory held as an adventure in the nature of trade. Under the old subsection 10(1) these losses would be capitalized to the cost of the inventory, and when the yearly inventory write-down occurred the taxpayer’s income would be adjusted in accordance with the inventory write-down.[12] The new subsection 10(1.01) disallows a write-down with respect to property held as inventory held as an adventure in the nature of trade; therefore, accrued gains or losses in the value of the property will only be recognized upon the disposition of the property. In this respect, it would appear that inventory held as an adventure in the nature of trade is to be accorded treatment similar to that of capital property except that the gain or loss realized upon the disposition of inventory will be deductible from any other income of the taxpayer.

[23] Prior to the enactment of subsection 10(1.01), several decisions have held that expenses relating to the inventory should be capitalized. In Stein v. The Queen,[13] Judge Archambault of this Court found that while the taxpayer had a reasonable expectation of profit from the resale of property, the carrying costs including rental losses were to be capitalized and added to the cost of the inventory. The losses would be realized when the inventory was written down pursuant to Friesen. Judge Archambault referred to the same sources relied on by Justice Major who wrote for the majority in Friesen.

[24] As stated, subsection 10(1.01) was enacted to counteract Friesen.Subsection 10(1.01) states for the purpose of valuing inventory held as an adventure in the nature of trade "... property described in inventory shall be valued at the cost at which the taxpayer acquired the property". This is an exception to the "matching principles".[14] The question this raises is when is the appropriate time to deduct the carrying costs associated with inventory other than vacant land,[15] held as an adventure in the nature of trade. What is the correct method of determining the taxpayer's profit or loss?

[25] In Canderel Ltd. v. Canada,[16] Iacobucci J. writing for a unanimous Court, emphasized the need for the Courts to use the method which provides the most accurate picture of a taxpayer's income for the year. At page 6106, he stated the following:

... The starting proposition, of course, must be that the determination of profit under s.9(1) is a question of law, not of fact. Its legal determinants are two in number: first, any express provision of the Income Tax Act which dictates some specific treatment to be given particular types of expenditures or receipts, including the general limitation expressed in s. 18(1)(a), and second, established rules of law resulting from judicial interpretation over the years of these various provisions.

Beyond these parameters, any further tools of analysis which may provide assistance in reaching a determination of profit are just that: interpretive aids, and no more. Into this category fall the “well-accepted principles of business (or accounting) practice” which were mentioned in Symes also referred to as “ordinary commercial principles” or well-accepted principles of commercial trading”, among other terms. A formal codification of these principles is to be found in the generally accepted accounting principles” (“GAAP”) developed by the accounting profession for use in the preparation of financial statements. These principles are accepted by the accounting profession as yielding accurate financial information about the subject of the statements. These principles are accepted by the accounting profession as yielding accurate financial information about the subject of the statements, and become “generally accepted” either by actually being followed in a number of cases, by finding support in the writings of academics and others. What must be remembered, however, is that these are non-legal tools and as such are external to the legal determination of profit, whereas the provisions of the Act and other established rules of law form its very foundation.

...

... financial accounting is usually concerned with providing a comparative picture of profit from year to year, and therefore strives for methodological consistency for the benefit of the audience for whom the financial statements are prepared: shareholders, investors, lenders, regulators, etc. Tax computation, on the other hand, is solely concerned with achieving an accurate picture of income for the benefit of the taxpayer and the tax collector. Depending on the taxpayer’s commercial activity during a particular year, the methodology used to calculate profit for tax purposes may be substantially different from that employed in the previous year, which in turn may be different from that which was employed the year before. Therefore, while financial accounting may, as a matter of fact, constitute an accurate determination of profit for some purposes, its application to the legal question of profit is inherently limited. Caution must be exercised when applying accounting principles to legal questions.

        Emphasis added

[26] What method of dealing with the carrying costs of the properties should be used? The carrying costs cannot be simply ignored. Justice Iacobucci suggests using the method which provides the most accurate picture of the taxpayer's income for the year.

[27] The Appellants have taken the position that the carrying costs[17] should be deducted in the taxation year in which they are incurred. In contrast, the Respondent argues that all costs associated with the property should be capitalized.[18] In my opinion, costs must be capitalized with respect to inventory eligible for the inventory write-down pursuant to subsection 10(1), but it does not work for the purposes of subsection 10(1.01). The scheme of section 10 itself can be used as support for the Appellants position that carrying costs should be deductible on an annual basis, except for interest and property taxes applicable to vacant land which is dealt with specifically in subsection 10(1.1).[19] Such costs in subsection 10(1.1) include interest expenses and property taxes, which are ordinarily disallowed by subsection 18(2). Therefore, to the extent that such deductions are disallowed by subsection 18(2), subsection 10(1.1) provides for them to be capitalized, or added to the cost at which the taxpayer acquired the vacant land.

[28] In following the reasoning of Justice Iacobucci in Canderel, I find that the carrying costs associated with the properties should be deducted in the years in which the costs were incurred. In Canderel, the proper manner in which to calculate profit is to follow that calculation which best depicts the reality of the taxpayer's income losses. This method is also in keeping with that proposed by Mr. Kelly whose expert evidence I accept. The Appellants present in argument a computation of their annual losses applying subsection 10(1.01) which reflects the correct result from an accounting perspective. The parties had agreed in the Agreed Statements of Fact to a similar treatment if the old section is applied. I agree with these calculations which are as follows:

Computation of Appellants' annual losses applying subsection 10(1.01)

Schedule of Losses – Jones

Year	Cost at January 1	Loss in Year	Accumulated cost (cost plus losses)	"Cost at which acquired"	Deduction in year (accumulated cost in excess of "cost at which acquired")
1990	$76,750	$9,903	$86,653	$76,750	$9,903
1991	76,750	8,769	85,519	76,750	8,769
1992	76,750	11,376	88,126	76,750	11,376

Schedule of Losses – Stremler

Year	Cost at January 1	Loss in Year	Accumulated cost (cost plus losses)	"Cost at which acquired"	Deduction in year (accumulated cost in excess of "cost at which acquired")
1991	$305,982	$42,561	$348,543	$305,982	$42,561
1992	305,982	38,586	344,568	305,982	38,586
1993	305,982	29,028	335,010	305,982	29,028

While this may not be the intention of Parliament's apparent quick reaction to Friesen, it is the conclusion to be drawn from the wording of subsection 10(1.01) coupled with the statutory scheme in section 10. This procedure most accurately presents the reality of the taxpayers' situation. The carrying costs are actual expenses. To deny these costs would not portray the reality of the Appellants' income and losses.

[29] The appeals are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the properties are inventory and were acquired as adventures in the nature of trade, subsection 10(1.01) is applicable and the carrying costs associated with the properties are deductible in the years in which they were incurred.

Signed at Ottawa, Canada, this 10th day of January, 2000.

"C.H. McArthur"

J.T.C.C.

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