Date: 20000411
Dockets: 98-2406-IT-G; 98-2407-IT-G
BETWEEN:
JANE DOODY AND GERARD DOODY
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Margeson, J.T.C.C.
[1] In computing income for the 1993, 1994 and 1995 taxation years, the Appellants claimed principal residence exemptions for the sales of 7688 McGregor Avenue, 5467 Neville Street, 6619 Brantford Avenue and 5688 McKee Street, and claimed that the sale of 7337 Jubilee Street was on account of capital. These properties are subsequently referred to in these Reasons for Judgment as (“the properties”).
[2] By notices dated May 27, 1997, the Minister reassessed the Appellants for the 1993, 1994 and 1995 taxation years to characterize the sales of the properties as on account of income.
[3] At the time of trial in these matters the Appellants argued that all of the properties, except 7337 Jubilee Street were principal residence properties. The Minister’s position was that all of the properties were on account of income.
[4] It was agreed at the outset that these matters would be heard on common evidence.
[5] Gerard Michael Doody testified that he was a realtor. With respect to the property located at 7688 McGregor Avenue, he said that it was purchased in 1993 and contained an old home on the lot. He was looking for a place for his family to live. He built a new home upon the lot for himself and his family. There were not many units available at that time.
[6] The property backed on to a commercial property but there was no lane or abutment. He believed that the property had privacy. It was 180 feet long and contained a large yard. There was a cushion behind the liquor store and a three to four foot breezeway.
[7] The witness introduced Exhibit A-1, by consent, which was a series of four photographs relative to this property. These photographs were taken by the Appellant himself. After the building on the lot was demolished the property became a hangout until he constructed his residence upon it. He had two children and had concerns for their safety so he built a fence to give him a buffer and to provide for their safety. They moved into the residence once it was constructed. They built it for themselves, designed it for themselves and installed 600 sq.ft. of Mexican terra cotta tiles because this was in accordance with their taste.
[8] After residing on the property for a while he was out in the front yard when a person by the name of Daisy Lui, a realtor, came by. She represented Park Realty. She asked him if he would sell the house and that she had an interested party. Gerard Doody discussed this with his wife and permitted the prospective buyers to look at it although it was not listed for sale. Three to four days later the first interested party showed up on the premises with another realtor and the witness said that he would not let them in. He was asked to put the property on multiple listing and he did so. Then an offer was received on the property. He contended that they would accept the offer only if they were allowed to rent it back for six months so that they would have an opportunity to obtain another residence. They sat down and discussed it and accepted the offer.
[9] The second property referred to was the property at 5467 Neville Street. This property was purchased at the end of 1993 and the Appellants built a new home upon it. It was a couple of blocks away from the McGregor property.
[10] The children of the Appellants were going to a Catholic school near there so the witness contended that whether or not a school was close by was not important to them. They did not know that they were going to build a new high tech school in the location of the old school. This new school was built and reopened after the Appellants had commenced constructing their residence.
[11] It was a simple area according to the Appellant and is shown in Exhibit A-2, a series of photographs taken by this witness.
[12] The Appellants suffered some difficulties in their new location and had a window broken in their van on two occasions when the vehicle was located near their parking area. They had not anticipated this type of situation when they bought the lot and built upon it.
[13] The Appellant referred to another incident when his wife was outside of the property and someone came by and asked her if they would sell their house. These people made an offer on the house. The family met and discussed it.
[14] The witness also introduced Exhibit A-3 which contained two photographs of the Neville Street property. One photograph showed a fence which was apparently built after the Appellants sold the property and the second photograph showed the damage by way of graffiti marked upon the garage door of this property. The family had nowhere to go at that time. The property was never listed for sale and the prospective buyers were further advised that the Appellants needed a place to stay for six months. They did stay there for six months after selling this property.
[15] The third property that was referred to is 5688 McKee Street. This was in the same area and about five to six blocks down the hill near Marine Drive. This property had originally been referred to as 5694 McKee Street. The property was located on a dead end street. The Appellant built a house upon the lot. In this new construction they incorporated some of their own ideas. They loved the house. However, they ran into some trouble with the neighbour who had apparently constructed his residence without obtaining a building permit and in the end result his property infringed upon the property of the Appellants. It was the Appellant’s position that he was prepared to forget about the problem until such time as the property was to be sold. He was unable to have satisfactory relations with this neighbour, so at the end of the day he told him that he would have to remove the encumbrance from the Appellants’ lot.
[16] The Appellants cut down some trees from the lot, started to build upon it but as the Appellant put it, “the neighbour caused them torment”. It was the original intention of the Appellants to stay there in the property as they had built it differently than other properties. Other neighbours were very good but some of them were afraid.
[17] Exhibit A-4 contained three photographs showing the subject property and an adjoining one. The witness said that there were no curbs on the street although it did appear from the photograph that there was a curb there of some sort. The Appellant incorporated a log retainer on the property but the neighbour complained about it and he was forced to remove it. The neighbour cursed and swore at the Appellant and his family and the son would arrive at his father’s house and park his vehicle in front of the house of the Appellants. When he left he did whatever he could to spin-off the gravel in front of the Appellants’ residence. Further, he tried to run the Appellant’s wife off of the road. As the Appellant put it, “He gave us tortures. He made our life there unliveable.”
[18] According to this witness Daisy Lui again approached him and said that she had a client interested in purchasing their house. They were unsure but the Appellants allowed the agent to take the prospective purchasers through the house. They apparently liked it and the Appellants were asked to put the property on multiple listing. These particular purchasers did not come back until December, “out of the blue”, and made an offer on the property and purchased it.
[19] Again the Appellants said that they had no place to go but the property was so unliveable that they were happy to go and they did not even attempt to rent the property as they had done before.
[20] Another property in issue was 6607 Brantford Avenue. This was an older house containing two lots and was located in a different area entirely. When they bought it they did not know the municipal regulations and they believed that they could subdivide it and sell it without moving the house off of the lot. At that time they intended to just relax and wait because they were not able to build a home due to their financial difficulties. Then they found out that they could not subdivide the lot without demolishing the building. It had been their intention to lease the house on the lot as well as living in it for a while. They found that they could not do so. They subdivided it into two lots. They sold one lot and built a house upon the other lot.
[21] In cross-examination he admitted that both he and his wife were realtors in the years 1993, 1994 and 1995. He became a realtor in 1992 and his wife was involved in real estate between 1989 and 1999. He agreed that between March of 1989 and May of 1992 the Appellant and his spouse had bought and sold three houses in the same neighbourhood. However, two were side by side and one was several blocks away. It was his contention that he could not say how much profit he made from the sale of these properties. Then he said that he did make a profit from the sale of one of the properties which he referred to as 5410. He said that he did not make a profit on the sale of 5330 and 5350. It was suggested to him that he had made a profit of $267,000 on these three properties and he said that he had no idea what the profit was. Further, he said that he had no documents to show that it was any less than that amount suggested by counsel for the Respondent. He agreed that he had bought 7692 McGregor for $223,000 as referred to in the Reply to Notice of Appeal.
[22] He was referred to the transcript of the discovery evidence taken on January 26, 2000 and he agreed that he had given an undertaking to provide the documents showing a lesser profit than the amounts suggested by counsel for the Respondent. He agreed that he had been asked the questions referred to and had given the answers. He did not provide any documents.
[23] Further, he had no documents to dispute the profit alleged on the Neville Street property and confirmed that he had given an undertaking to provide such documents but had not done so.
[24] With respect to the McKee Street property he confirmed that at discovery he had said that he had stayed in over 100 places between 1972 and the present date. He said that he has a list showing that he only stayed at 25 places between 1972 and the present. He further said that he stayed at two places for over three years.
[25] Again it was suggested to him that between 1989 and 1995 he bought and sold eight houses. He would not agree with this. He confirmed that he had said as much in discovery and that he had built houses upon four of the lots. He explained that the lot referred to as 5330 was bought by him in 1983 and then transferred to another party due to some financial difficulties, and then transferred back to the Appellant in 1989. This was one of the eight transactions that was referred to.
[26] The Appellant confirmed that the liquor store was there when he bought the property at 7688 McGregor Avenue and that he knew about the three to four foot breezeway. He also confirmed that he changed the numbers of the McGregor and the McKee street properties to add the numbers 88.
[27] It was suggested to him that he knew that all eight properties were sold to Asians and that numbers 8 and 88 were good luck numbers to Asians.
[28] Further, it was suggested to him that he sold 200 properties as an agent between 1982 and 1995 and that one half of them were sold to Asians or Oriental purchasers. He agreed with this but he denied that he was “quite knowledgeable” of what characteristics could be attributable to Asian buyers. However, he was referred to the transcript which indicated that he did know what characteristics were attributable to Asian buyers. The exchange that took place at discovery also indicated that the Appellant knew that Orientals did not like Mexican features.
[29] He did confirm that in the years 1993, 1994 and 1995, residential prices were going up in the Burnaby area and that it was a busy real estate market. The end result was that he was able to sell his properties but that was not his original intention when he purchased them.
[30] With respect to the Neville property he said that there had been a school on the lot two years before he purchased it but it was a vacant lot when he bought it. He admitted that he reported none of the incidents between he and his neighbours to the police.
[31] With respect to the Brantford property he admitted that he made an application to subdivide it long before the transaction closed. Regarding the McKee property he said that he saw a log come over the fence and land in his concrete. This evidence was inconsistent with the discovery evidence to which he was referred wherein he said that an old lady saw his neighbour throw the log over the fence and told the Appellant about it. He did not know when he took the photographs referred to in Exhibit A-2 and A-3 but Exhibit A-3 was taken after he moved out. He could not say about the others.
[32] In re-direct he said that he lived at 5330 Keith Street for about five to six years and then transferred the property to John Lyons. He bought it in 1982 or 1983 and assumed the 22% interest rate on the mortgage. He got into financial trouble and Mr. Lyons paid out the mortgage and arranged a new mortgage in his name. The Appellant made the payments on it for one year and then the property was transferred back into his name in 1989.
[33] With respect to the property at 5410 Keith Street he said that this was a property which came about as a result of a divorce between the owners. One of the parties came to him in his yard and said that it was a good buy. He bought it with the intention to work at it and then to move in.
[34] He said that 5350 Keith Street was a property that he was selling as a realtor. However, it did not sell for three months so he and his wife bought it and they sold 5330 to obtain money to buy 5350 Keith Street and they lived in it for three years. They held on to 5410 Keith Street for one to two years and were forced into selling it as they needed the money.
[35] With respect to Jubilee Avenue he said this was bought as an investment property. Then he said that it was and it was not. However, he bought it with the intention of building a house upon it to move into. He never listed it. He wanted to have some place to move to in the event that the McKee property sold in the summer and it did not.
[36] According to him, no normal person waits until the sale is completed before applying for a building permit and it was permissible for him to make an application for the building permit with the consent of the owner. This expedites matters. He admitted that in Vancouver and Burnaby there were many sales to Asians and that 75% to 80% of all homes might fit in to that category. However, he said that he could count on one hand the houses that he sold to Asians. His job was listing, not selling. He was not usually the selling agent and had no contact with Asian buyers. He addressed the issue of interest-only short term mortgages and he said that this was the only way that he could receive a loan to build a home due to his financial position. He referred to it as a “short-term builders’ loan.” This was the only type of mortgage that he could obtain. When the house was completed and all of the money was drawn down the mortgage was switched over to a conventional mortgage.
[37] Again with respect to the Brantford property he said that he applied for the right to subdivide the property because there was a new regulation pending and if it came into effect he might not be able to subdivide the lot and consequently the property would be worth considerably less in value.
[38] With respect to the number 8, he said that he used it because it had special significance to him. His life path was number 8 and the number has also been lucky for him. Regarding the use of Mexican tiles he said that if he was wanting to cater to Oriental purchasers he would not have put in expensive Mexican tiles which they do not like.
[39] Again, regarding the McGregor Street property he said that the liquor store was there when he purchased the property but the problems were not there because the house on the property was demolished after he purchased it and that was when the problems began.
[40] Jane Beverley Doody testified that she agreed with everything that her husband had said in his testimony. Regarding the McKee property she attempted to obtain a letter setting out what kind of neighbours were there but she was unable to do so. She also said that her life path number was 8.
[41] In cross-examination she admitted that she had been a real estate agent for 10 years including the years 1993, 1994 and 1995. She admitted that there was a rising real estate market for properties in the years 1989 to 1995. They built on three properties, subdivided another lot, built a house on it and sold the other lot. She admitted that all were sold to Orientals except the one sold to Mr. Tandy. She did not know what profits were made on the properties but she referred to her discovery evidence which indicated that they made a profit of $267,000 on the three properties and she said that it sounded right and that she gave those numbers. They probably made $267,000 profit on the Keith Street properties.
[42] A neighbour threw a board or a piece of wood over the fence and it landed on the cement. She agreed that in discovery she said that it was a brick. She did not call the police.
[43] She knew that the McKee Street property was not liked by Orientals because it was on a slope, it was not level and there were trees out front. She did not know that 8 and 88 were lucky numbers to Orientals.
[44] With respect to interim financing she said that she did not know what it was. However, when she was referred to her discovery evidence it indicated that she had agreed that the type of financing was interim financing. All properties were close to one another.
[45] In re-direct she said that she did use the word brick. With respect to the interest only type of mortgage she said that she had indicated that at the time of discovery because she had been shown documents which referred to interest only.
Argument on behalf of the Respondent
[46] Counsel for the Respondent argued that the issue in the case at bar was whether or not the properties were on account of capital or income. His position was that they were not principal residences since there was not enough evidence given on that issue for the Court to conclude favourably for the Appellant in that regard. These properties were bought and sold with the intention of resale.
[47] He referred to the case of Happy Valley Farms Ltd. v. The Queen, 86 DTC 6421 at 6423 where the Court listed five different tests to be considered in deciding whether or not the transfers were an adventure or concern in the nature of trade. When reviewing those tests one must conclude that when you are dealing with real estate there is a great chance to make money on their transfer. This is the kind of transfer which is the subject matter of an income property. With respect to the frequency of the sales, all assumptions set out in the Reply were admitted by the Appellant as being correct. It could be seen that each period of sale was remarkably short. This suggested that sale was a primary motive for purchasing but if not then there was certainly a secondary intention to sell.
[48] Counsel frowned upon the Appellants’ position that they just happened to be in the yard when someone came by and asked to buy the property. However, even if that was correct, the relative ease of the Appellants in accepting such an offer was indicative that they had a secondary motive to sell.
[49] Further, the number of other similar transactions of the taxpayer suggested that there was the intention to sell. With respect to the work expended on the properties, counsel said that the efforts that they put forward were to make the properties more marketable during the ownership of the property and this is evidence of dealing in the properties. The Appellant admitted that 200 properties were sold to Oriental buyers. The Appellants made use of their special knowledge in buying and selling of properties and that was their motive for acting as they did.
[50] With respect to the circumstances responsible for the sale, counsel argued that the pictures should not be given too much weight as there is no satisfactory evidence as to when they were taken. One has to consider the circumstances in the context of the rapidity of the sales. Further, counsel argued that the school would not have been opened up without the Appellants knowing about it.
[51] Again with respect to motive, the Appellants were two experienced real estate dealers and were aware that money could be made by developing properties and selling them. This is what they were doing.
[52] Counsel referred to the case of Jack Schlamp v. The Queen, 82 DTC 6274 and indicated that actions are more important than statements of the Appellants as to what their intentions were. What happened in the case at bar is that they made eight sales in six years. They were buying, building and moving in and out of the properties in question.
[53] Counsel relied upon the case of Pierce Investment Corporation v. M.N.R., 74 DTC 6608 at page 6612 in support of his position that it is the actual conduct of the parties that gives a much better indication of what the taxpayers were about rather than what they said of their intention. Counsel compared the experience and knowledge of the taxpayers in the case at bar with that of the taxpayer in Peter Litvinchuk v. The Queen, 96 DTC 1315 where the Court found that the taxpayer was highly experienced and knowledgeable in real estate, had an in-depth knowledge of mortgages and was aware of the many subtleties in arriving at values. Further, when considering the taxpayer’s history, he had a knowledge of the area where the properties were located. They were in the heart of the real estate area which he knew very well. Further, he had bought, sold, built and mortgaged a considerable number of properties over a 15-year period, had a considerable knowledge of the abutting lands and was aware of a recent resurgence in the real estate market. This history was not consistent with an intention to hold the property for the long term. In that case the Court found a strong inference that he would be prepared to sell the property upon the realization of a quick and considerable profit. Counsel argued that the same is true in the case at bar.
[54] With respect to the quick and considerable profit argument, counsel submitted that at the very least this is what the Appellant did when someone came to their door and showed an interest in their property. Further, the Appellants knew the preference of Asian clients and changed the numbers on the properties to make them more attractive to them. The argument of the Appellants that their life path number was 8 was not a reasonable argument.
[55] Counsel also submitted that the question of credibility was important in the case at bar. The Appellants failed to comply with the undertakings given at discovery and they produced no evidence to show that the profit was less than that claimed by the Minister in the assessment.
[56] With respect to the Brantford property the Appellants made application to subdivide it days after he moved in. Why would he not wait if he intended to live in it for some period of time? In any event, he must have had a secondary intention to sell because he wanted to be able to sell it even if the regulations changed.
[57] With respect to the McKee property and the allegation of problems with the neighbours, the evidence in discovery and that given in Court was inconsistent. The Court should draw an adverse inference against the Appellants in that regard.
[58] Further, the Appellants did not call any witnesses to corroborate their position as to their intention. Why was Daisy Lui not called and why was no one called to corroborate the evidence of the problem with the neighbours. Further, the vacant lot was not reported at all as a sale on account of capital or on account of trade. The Appellants intended to sell the property and to keep the profits without reporting it.
Argument on behalf of the Appellants
[59] In argument Mr. Gerard Doody said that if he intended to sell the properties why would he put in a clause in several of the properties that he wanted to stay in them for six months? Further, two of the properties were never listed for sale. Daisy Lui was not present in Court because “she was scared to death to get involved”. Other witnesses were not called because they were out of town. He did not sell eight houses in six years but sold six houses in 12 years. With respect to the Brantford property, it contained a big house on a big lot. If he did not make application to have the property rezoned and the regulations changed the value of the property would have been reduced by about $200,000.
[60] Further, if the Appellants knew so much about the wishes of Oriental purchasers why would they put Mexican tile in a property knowing that they disliked it? Furthermore, the fourth property was not sold but it was taken to meet financial obligations.
[61] The appeal should be allowed.
[62] The Appellant, Jane Doody did not wish to address the Court by way of argument.
Analysis and Decision
[63] With respect to the allegations of fact contained in the Reply it is notable that the Appellant Gerard Doody, and Jane Doody, by her acceptance of Gerard Doody’s testimony, accepted basically all of the presumptions contained in the Reply with the exception of paragraph 7(l) regarding the profit from the sale of the McGregor property; with respect to the profit on the sale of the Neville property as set out in subparagraph 7(r); with respect to the profit alleged on the sale of the McKee property as set out in subparagraph 7(z); with respect to the presumption contained in subparagraph (ll) and with respect to the amount of profit made from the sale of 6619 Brantford Avenue set out in subparagraph (nn). The Appellants produced no documents to dispute these presumptions even though they gave an undertaking at discovery that they would do so. They denied that they solicited purchasers for the properties except for a couple of times and argued that the purchasers just dropped in on them. They denied that they had the possibility of resale at a profit in mind except that they might do so within 20 to 30 years down the road.
[64] The admissions made by the Appellants are of considerable significance in this case. Further, the element of credibility is significant in this case. The Court looks upon the evidence of Gerard Doody with great scepticism. The witness was argumentative when questioned by counsel for the Respondent, he disputed the accuracy of some of the facts even though these facts were admitted in the Reply and some were shown in the photographs which he introduced himself. Further, the evidence given in Court was inconsistent with the evidence given in discovery and in spite of the fact that he disagreed with the Minister’s presumptions regarding the amount of the profit realized on the sale of the properties he failed to complete the undertakings given at discovery with respect thereto and produced no evidence in Court to show that the Minister’s calculations were incorrect and offered no acceptable reason for such failure.
[65] The evidence of Jane Doody was of very little use to the Court since she merely accepted the bulk of what her husband had to say in spite of the fact that the evidence given in Court by the husband was inconsistent with much of the evidence given at the time of discovery. It is also to be noted that some of her evidence was inconsistent with the evidence that she gave in discovery.
[66] Consequently, the Court is forced to place very little weight on the evidence of either Appellants, particularly on the issue of their intention with respect to these properties at the time they purchased them. Further, much of the evidence upon which the Appellants relied should have been capable of being corroborated by independent testimony, such as by calling of Daisy Lui, some or all of the neighbours that were referred to, some or all of the purchasers of the properties in issue and some or all of the real estate agents who are familiar with the Appellants and their purchases and sales. No explanation was offered at the time of the giving of the evidence as to why these witnesses were not called and to attempt to explain it at the time of argument was of very little assistance to the Appellants’ causes. The Court must draw an unfavourable inference against the Appellants based upon this failure.
[67] It is the duty of the Appellants to establish on the balance of probabilities that when they purchased the properties they did not have either a primary or secondary intention to sell the properties at a profit. These questions must be determined by all of the facts of a particular case and some of the tests to be applied are set out in Happy Valley Farms Ltd., supra.
[68] The only evidence of the Appellants’ intention at the time they purchased their properties in question was the evidence of the Appellant Gerard Doody which was accepted in a general way by Jane Doody. There was no corroboration of this intention by any independent evidence. Surely this could have been corroborated to some extent by the calling of the witnesses which the Court has earlier referred to.
[69] In any case of this nature, 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. The acceptance of their stated intention is also made more difficult when the taxpayers, as those in the case at bar, had a history of dealing in properties of this nature, had made many transactions over a relatively short period of time, who had a special knowledge of and an interest in the real estate market and would be expected to know where and when a profit might be made.
[70] In the case at bar the Court is satisfied that the Appellants had a special knowledge of the real estate market, the demands of the real estate market and the enormous possibilities of making a good profit on a quick turnover of these properties. That was the factual situation under which the Appellants in the case at bar operated.
[71] The Court is satisfied on the basis of the evidence that both Appellants were knowledgeable of the particular interest of persons of Oriental background in purchasing properties in the areas in question and that the real estate market was basically humming during that period of time. They were aware of the possibility of purchase by persons of Oriental background who considered that the numbers 8 or 88 were indeed lucky numbers. The Court is satisfied that when the Appellants acted to change the numbers on the house they could only have been doing so to make it more readily attractive to possible purchasers with an Oriental background.
[72] The Court does not accept the indication of the Appellants that the numbers were changed because they were lucky numbers to them or that these numbers were in their life path. This explanation is not credible under all of the circumstances of the case as disclosed by the evidence.
[73] As McArthur, J. found in the case of Litvinchuk, supra, at page 1321, this Court is satisfied that the history of the Appellants in all aspects is not consistent with their intention to keep the property for the long term nor to live in the property as their personal residence for any length of time. Indeed, there is a very strong inference that the Appellants would be prepared to sell the property and indeed were prepared to sell the properties upon the realization of a quick and considerable profit, which the Court is satisfied they made in the case at bar as set out by the Minister in the assessment.
[74] In the end result the appeals are dismissed and the Minister’s assessments are confirmed.
[75] The Respondent will have its costs to be taxed.
Signed at Ottawa, Canada, this 11th day of April 2000
"T.E. Margeson"
J.T.C.C.