BETWEEN:
and
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
Appeals heard on October 26, 2005, at Matane, Quebec.
Before: The Honourable Justice François Angers
Appearances:
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JUDGMENT
The appeals from the assessments under the Income Tax Act (the "Act") in respect of the 2001 and 2002 taxation years are dismissed, in accordance with the attached Reasons for Judgment.
Signed at Edmundston, New Brunswick, this 19th day of December 2005.
Translation certified true
on this 26th day of May 2006
Monica F. Chamberlain, Reviser
BETWEEN:
JEANNOT DUBÉ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
[1] The Appellant, Jeannot Dubé, is appealing reassessments in his file by the Minister of National Revenue (the "Minister") for 2001 and 2002. At issue in this case are the consequences of the disposal of two buildings during 2001 and 2002, as to whether this constitutes business income, as the Minister states, or whether these are provisions resulting in a capital gain, as the Appellant claims.
[2] The Appellant is a building inspector. He was self-employed for several years in the architecture field. In 1997, he formed a company that did business under the name of J.D. Spécialiste de l'habitation. In addition to residential and commercial architectural plans, the Appellant's field of expertise included analysis of building compliance, analysis of the potential of land and buildings, technical consulting and pre-purchase inspection services, manual and computer-assisted drawings, estimating and project management. He also had in-depth knowledge of municipal and provincial standards.
[3] In the years 1997, 1998 and 1999, the Appellant separated from his spouse at the time and his business began to experience financial problems. In June 2000, he accordingly became a building inspector for the City of Rimouski, which did not prevent him from doing some drafting work for his own corporation. The Appellant sold a building located at 288-290-292 St-Germain East, Rimouski, during the period when he was experiencing financial difficulties and acquired, with his new partner, a single-family residence on Lachance Street.
[4] It should be noted that the Appellant, during the taxation years at issue, reported net rental losses in respect of the following buildings that he owned:
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Address of the building |
2001
|
2002 |
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9 Principale St., St-Eugène |
$210 |
($2,963) |
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285 and 287 St-Germain St., Rimouski |
($3,469) |
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289 and 291 St-Germain St., Rimouski |
$1,555 |
$541 |
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376 Lachance St., Rimouski 23-25 6th St., Rimouski 346 Rouleau St., Rimouski |
($1,704) |
$65 ($2,378) ($229) |
[5] The Appellant was looking for a place where he could set up an office and live with his children if he were successful in obtaining legal custody. Thus, on June 1, 2000, he acquired a building located at 36-40 St-François St., in Rimouski, for $15,000. According to the Appellant, the purchase price reflects the value of the land, as the building needed major renovations. After preparing plans and a cost assessment, the building contractor who was to have done the work expressed interest in purchasing the building. The Appellant accordingly sold him the building on September 25, 2000, for $36,000, thereby making a profit of $21,000. This operation is not the object of the assessment at issue.
[6] According to the Appellant, months went by and he consolidated his market share as a building inspector in private practice, which enabled him to establish numerous contacts with real estate agents in the region. As a result, a real estate agent came to offer him the first of the buildings at issue in this case, namely 285-287 St-Germain East. The Appellant maintains that, even though he was still employed by the city and his employment provided him with financial security, he was still looking for a building to reactivate his company.
[7] The property at 285-287 St. Germain East was in receivership and subject to two notices published by the City, namely a notice of demolition and a notice prohibiting the firefighters from entering the building in the event of an emergency. This latter prohibition entered into force on September 22, 2000, and was lifted on May 1, 2001, following a visual inspection that was conducted on April 20, 2001. The Appellant acquired the building in question on March 9, 2001, for $28,493. The Appellant purchased this building without having seen the interior. He had nevertheless been informed by Guy Tremblay, an expert assessor, that, based on his analysis performed in February 2001, in other words, before it was acquired, the value of the building after its conversion into four apartments would be between $155,000 and $160,000.
[8] The Appellant explained that he had acquired the building in the hope of being able to make a profit from it. He described the operation as a throw of the dice. Only after he had acquired the building did he realize the calamitous state it was in. This building had not been prepared for the winter without heat and the water supply pipes had not been shut off. There was ice everywhere and the entire interior accordingly needed to be redone.
[9] The Appellant financed the acquisition with a $27,000 loan from the National Bank of Canada guaranteed by a demand note. The comments by the bank on the approval of the loan indicate that the loan was made for the purchase of a building with a municipal assessment of $59,100 and the financing was for 45% of that amount. In addition, we learn that the building was to be turned into four apartments and that the bank would finance this through a hypothecary loan or the building would be sold. We subsequently read the notation: "EST architect REC MC Goulet" for which no explanation is provided. The loan was reimbursed on September 28, 2001, three days after the Appellant had sold the building. The Appellant explained that it had become necessary to sell the building because the project was not profitable. He had accordingly, while inspecting a property as part of his duties for the City, found someone who wanted to become the owner of an office building. The Appellant recognized that the plans that he made and his knowledge had facilitated the sale of this building by him. The selling price was $54,500 and the Appellant had accordingly made a profit of $26,007. The sale took place on September 25, 2001.
[10] The Appellant acknowledged that he used the profit from this sale to acquire another building. On September 19, 2001, he applied for a loan from the same financial institution in the amount of $47,645. The aim of the Appellant was to acquire a building located at 23-25 6th Street East, Rimouski, the selling price of which was $31,217. Obtaining a loan was subject to the condition that the Appellant repay the note in the amount of $27,000 and another loan of $4,000 to a credit union. The financial institution thus modified the loan authorization granted previously. The Appellant stated that in making a profit on the sale of a building, it was easier for him to negotiate with the banks to carry out his purchase, since he acknowledged that he did not have a penny in his bank account.
[11] The Appellant testified that he was looking for buildings listed with a real estate agent for at least four months, which no one wanted. This was how he was able to put his knowledge to use. In other words, it had to be a bargain.
[12] The building at 23-25 6th Street Easthad no basement. It accordingly had to be raised, as the Appellant intended to turn it into a building containing four apartments, two more than the existing structure. The Appellant submitted in evidence a list of work to be done, the cost of which totalled $45,000. Materials and labour were included in the list, except that the labour portion was provided by the Appellant. The profit from the previous sale had generated funds and made it possible for him to obtain a hypothecary loan.
[13] He took steps to raise the building, except that the problems that came to light quadrupled the cost of the operation. Furthermore, no engineer would validate the concrete. He had thus been obliged to redo the foundation. The Appellant had taken the decision to sell when the contractor, who had estimated the costs, had made him an offer to buy. The Appellant accordingly sold the building on March 1, 2002, for $42,000, thereby making a profit of $10,783. He subsequently purchased a building on Rouleau Avenuefor $49,000. According to the municipal assessment, the value of this building was $91,500. It was a large house with three apartments. The Appellant occupies one apartment and set up his office there. He has lived there since 2002.
[14] According to The Minister of National Revenue v. Taylor, [1956] D.T.C. 1125 and Happy Valley Farms Ltd. v. The Queen, 86 D.T.C. 6421, the Court's examination must in its analysis take into account the following criteria in order to determine whether a given operation constitutes a project involving commercial risk or whether it is a capital operation.
1. The nature of the property sold
In the instant case, it is possible that the property sold, namely 285-287 St-Germain Street East, sold in the 2001 taxation year, and 23-25, 6th Street East, sold in the 2002 taxation year, was acquired as rental property or as property that formed part of a project comprising a risk of a commercial nature or of a commercial operation.
2. The length of possession as owner
There is no doubt in the instant case that three real estate operations within the space of 21 months occurred before the Appellant made his last acquisition. The Appellant acquired a first building (which does not form part of this case) on June 1, 2000, and re-sold it on September 25, 2000, making a profit of $21,000. On March 9, 2001, he purchased 285-287 St-Germain Street East, and resold it six months later, making a profit of $26,007. One year later, he purchased 23-25 6th Street East and, five months after that, he re-sold it and made a profit of $10,783. He ultimately bought a building in which he set up his office and where he occupies an apartment. A series of similar operations is tantamount to operations of purchase and sale of property giving rise to activities of a commercial nature. In his testimony, the Appellant declared that, in each situation, there were surprise elements, such as the fact that he was unable to go inside 285-287 St-Germain East and see the calamitous state it was in, or the fact that he had not made provision for the extra costs represented by the installation of new foundation and the costs associated with the raising of the house at 6th Street East. This statement is surprising, in view of the fact that the Appellant has expertise in the real estate field. We must not forget that the Appellant is an expert in the potential of land and buildings, that he is a technical consultant, that he carries out pre-purchase inspections and estimates. The Appellant, on this latter issue, specified that he was relying on an estimating software that he had never previously used and that he was asking others for help in this area. Nonetheless, I find it difficult to believe that an expert in this field would not be capable of estimating, on the basis of his own experience, the approximate cost of renovation or construction work for his clients or for himself.
3. The frequency of the number of similar operations carried out by the taxpayer
The two real estate operations at issue in the instant case are not isolated operations. In fact, we are dealing in this case with a series of four real estate operations which took place before the Appellant decided to move into the last building that he purchased. I am prepared to believe all the explanations provided by the Appellant in respect of the reasons for the sale of the first three buildings, but I cannot ignore the fact that, at the time when the first three operations were carried out, his financial situation was precarious indeed. The profits made from each operation increased his credibility with the financial institutions and ensured the funding for his subsequent activities. These accumulated profits were what facilitated the financing of subsequent purchases. This seems to me to be incompatible with the Appellant's statement that he wanted to start again on his own, given the fact that he was dissatisfied with his job with the City, which would explain why he wanted to open an office and move into an apartment that was sufficiently large to have his children there.
4. The improvements made to the property or related to a similar property
Improvements were made only to 285-287 St-Germain Street. In this building, the Appellant cleaned the interior and prepared plans for a project that his financial situation did not allow him to carry out. He was thus obliged to sell it. The fact that he was working in the real estate field and that he had the skills needed to sell a project that he had himself planned had helped. As far as the second building was concerned, he believed that this was a good project, and that he would turn it into four apartments. However, he had not taken into account, he said, the unforeseen costs in respect of the foundation. He did no work and, six months later, he sold the apartment to the contractor with whom he was doing business.
5. The circumstances resulting in the sale of the property
There is no evidence that the Appellant openly placed on the market the two real estate properties at issue in this case. In fact, according to the Appellant, in both cases, the purchasers expressed an intention to buy only by chance. That said, we must recognize that the Appellant came to do business with the purchasers as a result of his knowledge, his contacts in the real estate industry and his work in his capacity as a building inspector. Neither should we forget the fact that the Appellant had the necessary skills to draw up plans and to prepare an interesting project. He also successfully sold the building at St-Germain Street East for a profit, without having done anything more than clean the property. The same is true for the second building, where no changes or improvements were made over a period of six months and where, after having taken a number of steps, he managed to sell the building to the person whom he had retained to do the work. Here again, we are dealing with circumstances which, at first sight, seem to be the result of chance. The fact remains, however, that the Appellant works in this field and that he could rely on that to amass some capital and, eventually, carry out his project. His financial situation at the time of the initial operations would indicate that he had to amass the capital to finance a project and make it profitable and that he agreed to take the necessary risks inherent in carrying out projects of a commercial nature.
6. The taxpayer's motive or intention at the time the property was acquired
According to the testimony of the Appellant, he was looking for a building where he could establish an office and work for himself, given his dissatisfaction with his employer. He was also looking for an apartment large enough to live there with his children. His financial situation was precarious; he was seeking to buy a building at a price lower than its reality assessment in order to obtain funding from financial institutions and to be sure of being able to resell it at a profit. The problem that arises in interpreting the reasons put forward by the Appellant is the fact that he would have to acquire four buildings before achieving his aim. In view of the fact that the Appellant purchased the first building at issue without visiting it and that, in the case of the two buildings at issue in the assessment, steps intended to lead to renovation and changes were made following their acquisition, these can, in my view, be nothing other than situations where the Appellant chose to purchase property at a price lower than the municipal assessment in the hope of selling them at a profit. These exercises enabled him to assemble money with a view to a purchase that would address his needs and his resources.
[15] The Court may draw inferences from the circumstances of the case (see the decision in Racine et al. v. The Minister of National Revenue, [1965] C.T.C. 150), specifically from the overall behaviour of the taxpayer when he had the property in his possession (see HappyValley Farms, supra). If the Appellant had truly intended to retain the two buildings at issue in this case, there is no doubt that he would have inspected them himself, given that he had the skills to do so. Even if one admits that an inspection was not possible in the case of the first building, there would appear to have been nothing to prevent the inspection of the second building. All the appraisals took place after the purchases and were germane to the sale in both cases. In light of the factors that I have examined in applying the other criteria, it is possible for me to conclude that the intention of the Appellant was primarily the sale for profit with a view to obtaining funds to purchase the building that would meet his real needs. Even if he was not happy with his job and wanted an apartment that met his needs, he was ready to wait. We must not forget that the Appellant, throughout this case, was the owner of other buildings.
[16] I accordingly conclude that the Appellant has not discharged the burden of proof that was upon him. His primary intention was to sell the buildings rather than to keep them for rental purposes. The sales accordingly produced business income. The appeal is dismissed.
Signed at Edmundston, New Brunswick, this 19th day of December 2005.
"François Angers"
Angers J.
Translation certified true
on this 26th day of May 2006
Monica F. Chamberlain, Reviser
STYLE OF CAUSE: Jeannot Dubé and Her Majesty The Queen
PLACE OF HEARING: Matane, Quebec
DATE OF HEARING: October 26, 2005
REASONS FOR JUDGMENT BY: The Honourable Justice François Angers
DATE OF JUDGMENT: December 19, 2005
APPEARANCES:
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For the Appellant: |
The Appellant himself
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Counsel for the Respondent: |
Jean Lavigne |
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Ontario