Date: 19980617
Docket: 96-3385-IT-G
BETWEEN:
MOHAMMED MIRZA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Christie, A.C.J.T.C.
[1] The years under review are 1987 and 1988. There are three issues to be determined. One is whether the profit of $45,095.00 realized in 1987 on the sale of 59 Brooklyn Crescent, Markham, Ontario (“Brooklyn”) was on income or capital account. The other two issues raise the same question regarding the profit of $26,998.00 made in 1988 on the sale of 63 Atlantic Avenue, Markham, (“Atlantic”) and the profit of $1,842.00 made in that year on the sale of 52 Cooperage Crescent, Richmond Hill, Ontario (“52 Cooperage”). At no time did the appellant reside at any of these three properties. The appellant’s share of these profits was 50% or $22,547.00, $13,499.00 and $921.00. The other one-half went to his wife, Najma.
[2] At trial the relationship between the appellant and additional properties was touched upon. It is sufficient for these reasons to specify three of them. They are: 63 Avening Drive, Rexdale, Ontario (“Avening”), 132 Cooperage Crescent, Richmond Hill, Ontario (“132 Cooperage”) and 590 Velmar Drive, Woodbridge, Ontario (“Velmar”).
[3] The only witness at trial was the appellant. He came to Canada from Pakistan as an immigrant in 1972. His occupation is that of a boiler engineer. He was employed in that capacity by the Department of National Defence at the Downsview Air Force Base from 1979 to 1991. He has never taken any courses pertaining to investment or real estate.
[4] After renting and then owning a condominium he and his wife (“the Mirzas”) bought Avening in December 1980 for $64,000.00. They lived there until they purchased 132 Cooperage. At some unspecified time in 1987 - perhaps in the spring - an attempt was made to sell Avening to a woman in Pakistan. The intended purchaser deposited $5,000.00. The closing date was in October 1987, but the purchaser decided not to go through with the transaction and forfeited the $5,000.00.
[5] On July 26, 1986 the appellant offered to purchase Brooklyn from Clearland Properties Limited (“Clearland”) for $208,900.00. The purchase and sale to be completed on or before May 15, 1987. Clearland accepted the offer on July 31, 1986. The appellant said the property was purchased with the intention of living in it. The transaction was closed on May 15, 1987. A debt in the sum of $50,000.00 with interest at 10% per annum was secured by a one year mortgage on Brooklyn in favour of the Royal Bank. Three days after closing, i.e. on May 18, 1987, the Mirzas signed an agreement of purchase and sale whereby Brooklyn was sold to Eva Masciangelo for $271,500.00. This transaction was closed on September 21, 1987. The appellant said that he owned both Avening and Brooklyn at the same time and he tried to rent either of them. He was showing Brooklyn to a potential tenant when one of his relatives offered to purchase it. The offer was accepted.
[6] On September 29, 1986 the appellant offered to purchase Atlantic for $215,900.00. The transaction was to be completed on or before October 2, 1987. Clause (g) of that agreement was struck out by the parties. It read:
“(g) That the Purchaser will not sell, transfer or assign the above noted unit until all the units in the development have been sold by the Vendor. A clause to this effect may at the option of the Vendor be included in the deed.”
It was emphasized on behalf of the respondent that a similar clause in the agreement of purchase and sale pertaining to Brooklyn had not been struck out. This offer was accepted by Deyncourt Investors Inc. on October 4, 1986. The property was transferred to the Mirzas on October 5, 1987. A loan in the sum of $161,900.00 with interest at 11% was secured by a mortgage on the property. The balance due date was November 1, 1988. The appellant said Atlantic was purchased “... to build a portfolio of rental properties so that we could keep them for long and then some day we can sell”. The appellant said this about Atlantic:
“Mr. Wolfman: Q. When you took ownership, what did you do with the property?
A. In that property, Your Honour, when we closed the property on 5th of October 1987, a day before closing, we went for the inspection. There was a lots of deficiency in that house. That house was not a livable, such as there was a lighting missing most of the area, no lights. An electrician was still working. There was no washroom doors. The roof on the back of the kitchen was slip down, so they had to repair that. There was quite a few other areas. The water was leaking in the basement. One of the wall, double wall, was swing outward. They had to fix it, but they put everything in their report that has to be fixed. But I refused to close the house, but at that time they told me that, ‘Look, the deed has been done, the lawyers have completed the paperwork, those deficiencies will be finished within the next 15 days, but you must close the house,’ and I was even forced to close the house when even the paint was wet.”
The tenants could not be found because of the condition of Atlantic. Litigation ensued which was eventually settled.
[7] On October 3, 1986 the appellant offered to purchase 132 Cooperage from Yonge North Homes for $204,900.00. The purchase and sale to be completed on or before July 31, 1987. The offer was accepted on behalf of Yonge North Homes by its solicitor on October 6, 1986. The transaction was closed on July 31, 1987. A loan in the sum of $153,000.00 with interest at 11% per annum was secured by a three year mortgage. It was repayable at $1,472.00 per month commencing August 31, 1987. The mortgagee was Yonge North Homes. The Mirzas moved into 132 Cooperage upon becoming the owners of it and rented Avening. Avening was sold for $240,000.00 under an agreement of purchase and sale dated October 2, 1989. The transaction closed on December 29, 1989.
[8] On January 26, 1987 the appellant offered to purchase 52 Cooperage from Yonge North Homes for $225,900.00. The purchase and sale to be completed on or before September 30, 1987. The offer was accepted on behalf of Yonge North Homes by its solicitor on January 26, 1987. The transaction closed on October 15, 1987. A loan in the sum of $169,000.00 with interest at 11% per annum was secured by a three year mortgage. The monthly payments were $1,627.00. The appellant said it was his intention to keep the property for the purpose of renting it. The rent was to be in the $1,700.00-$1,800.00 range. Taxes were around $3,100.00 per year. The Mirzas would make up the deficiency between rental income and expense from their own resources.
[9] Before it was rented 52 Cooperage was broken into and completely vandalized. It took some three months to repair the damage. After that period attempts were again made to rent the property. And as happened with respect to Brooklyn, a person to whom he was showing the property with a view to renting it, offered to purchase it. These are the appellant’s words in this regard: “And after three months, we were renting again. Same way, somebody came at the door. They want to purchase the property instead of renting it and I had no choice.”
[10] In February 1988 Omesh and Usha Annand offered to purchase 52 Cooperage for $249,000.00. The purchase and sale to be completed on March 31, 1988. This offer was accepted by the Mirzas. The transaction was closed on March 31, 1988.
[11] On February 18, 1988, an agreement of purchase and sale was entered into whereby Jatinder S. Suri offered to purchase Atlantic for $283,000.00. The Mirzas accepted the offer the same day. The transaction was closed on May 27, 1988. This exchange between the appellant and his client occurred about this transaction:
“Q. At tab 28 there’s an agreement of purchase and sale relating to 63 Atlantic Avenue, and on the second page there’s a signature. It says, ‘18th of February, 1988.’ Whose signature is that?
A. My wife’s signature and mine.
Q. How did this agreement of purchase and sale come about?
A. That was sold through another real estate agent, that they were willing to buy the house as is. Because when we could not rent it, when we could not rent the house, then another agent came to me, as an exclusive agent, and he said, ‘I have a guy, he will buy the house as is, and we will try to deal with the builder ourself to complete the deficiencies.’ And I agreed to sell the house while the litigation was also there.
His Honour: Wait a minute. The litigation didn’t start ‘til the 2nd of March?
The witness: Yeah, 2nd of March, because I already spoke to my lawyer that we have to take them to the court.
His Honour: Yes. But you signed this agreement here on -- just a moment -- 18th of February?
The Witness: Yes, Your Honour, that’s correct. Because the house was wrecked and it wasn’t livable anyway. It wasn’t renting. Nobody could move in. It was costing me every month.
Mr. Wolfman: Q. While you owned the property, did the builder ever fix the problems?
A. They fixed only minor things, like they tried to fix the electricity, but the one room was fixed, the other one was not. They were so busy in their houses that you go and spend the whole day finding the foreman, and they will promise to come, they will never come.
So it was -- it took them so many months just to correct some lights and patch up some cracks. One of the windows was broken. It took them two and a half months to put the glass in the window. But major deficiency was not fixed at the time of sale.”
[12] In 1989 the Mirzas purchased Velmar and occupied it in September of that year as their principal residence. They thereupon rented 132 Cooperage until it was sold in December 1996.
[13] To recap briefly, this occurred with respect to the three properties in issue on these appeals, namely, Brooklyn, Atlantic and 52 Cooperage. The Mirzas agreed to purchase these properties and then disposed of them between July 31, 1986 and May 27, 1988, a period four days short of 22 months. The period between their acquiring ownership and disposition of the three properties was from May 15, 1987 to May 27, 1988 which is 12 months and six days. The time lapse between the Mirzas becoming owners of each property and their disposition is: Brooklyn - four months, six days; 63 Atlantic - seven months, 22 days; 52 Cooperage - five months, 16 days. When the Mirzas contracted to purchase Atlantic and 52 Cooperage the vendor was selling them vacant lots upon which homes were to be built. The cost of the homes was included in the purchase price.
[14] In my opinion the doctrine of secondary intention applies to the transactions in issue in these appeals. That intention arises and its existence is relevant in relation to trading cases where the issue is whether the profit made on the acquisition and sale of property is a capital gain or is on revenue account.
[15] If at the time of acquisition the taxpayer had as an operating motivation for the acquisition the intention of selling the property at a profit, if an acceptable opportunity arose, the profit is on revenue account, even though the primary intention may have been to hold the property as an investment. In Crystal Glass Canada Ltd. v. The Queen, 89 DTC 5143 (F.C.A.) Mahoney J., speaking for the Court, said:
“Secondary intention requires not only the thought of sale at a profit but that the prospect of such a sale be an operating motivation in the acquisition of the capital property.”
[16] As indicated in Jordan v. M.N.R., 85 DTC 482 (T.C.C.) the concept of secondary intention had its origins in Bayridge Estates Ltd. v. M.N.R., 59 DTC 1098 (Ex. Ct.). In the leading case of Racine et al. v. M.N.R., 65 DTC 5098 (Ex. Ct.) Noël J. said at page 5103:
“In examining this question whether the appellants had, at the time of the purchase, what has sometimes been called a ‘secondary intention’ of reselling the commercial enterprise if circumstances made that desirable, it is important to consider what this idea involves. It is not, in fact, sufficient to find merely that if a purchaser had stopped to think at the moment of the purchase, he would be obliged to admit that if at the conclusion of the purchase an attractive offer were made to him he would resell it, for every person buying a house for his family, a painting for his house, machinery for his business or a building for his factory would be obliged to admit, if this person were honest and if the transaction were not based exclusively on a sentimental attachment, that if he were offered a sufficiently high price a moment after the purchase, he would resell. Thus, it appears that 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 intention’ 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.”
[17] In determining on the whole of the evidence that the appellant had a secondary intention at the time of the acquisition of Brooklyn, Atlantic and 52 Cooperage, included in the factors taken into consideration are the number of acquisitions and sales of residential real estate by the appellant and the length of time for which these properties were held. In this regard reference is made to Diamond Developments Ltd. v. M.N.R., 84 DTC 1811 (T.C.C.) at 1813 and Happy Valley Farms Ltd. v. The Queen, 86 DTC 6421 (F.C.T.D.) at 6424.
[18] The appeals are dismissed. The respondent is entitled to party and party costs.
Signed at Ottawa, Canada, this 17th day of June 1998.
"D.H. Christie"
A.C.J.T.C.C.