And in 1989, Irene Unger also lost her claim for capital gains treatment on her 2% interest in a scheme to buy, rezone, subdivide and resell industrial land in Brampton. Judge Mogan ruled that even if she had not signed the joint venture agreement and was a minor player among the 26 members of the syndicate, her motives were the same as the major players. Interestingly, George Jellaczyc was a 5% member and his company was the agent for the deal. (see INTEREST DEDUCTION section under VACANT LAND NOT DEDUCTIBLE).
In 1985, Dr. Hirsh Rosenfeld and Harry C. Patrick lost their bid for capital gains on land bought in 1953 and 1966 and sold in 1976. The evidence showed that the taxpayers had been involved in other real estate deals, some involving subjacent land, and that they had made no efforts to use this land for their own use but had clearly intended to resell at a profit. Time was not a factor in determining Capital Gains or Straight Income.
In 1985, Douglas J. Mintenko was assessed straight income tax on the sale of several parcels of farmland. He had past experience as a real estate agent and the number of buys and sells worked against him.
In 1985, Rivermede Developments Limited were assessed straight income on greenbelt land sold to the Province of Ontario. Judge Rip of the Tax Court of Canada ruled that the taxpayer had always been prepared to sell the land when it was to their advantage.
In 1985, F. J. Lamb Farming Ltd. was assessed straight tax on land which, while used in the farming business and rented out, had been slated for resale when bought. The evidence showed that the taxpayer had hired an engineer and retained a real estate agent to develop the property after the property was bought in 1958. Although the land was then held for some 16 years, insufficient evidence was presented to show that there was a change of intention to hold the property forever. However, you can be a professional developer and get capital gains treatment if you can prove enough intention to hold for the long term.
In 1989, Hanover Management Ltd. and Candor Investments Ltd. won capital gains treatment on a building which was bought, renovated and then sold in two pieces to the same purchaser in less than 28 months. Judge Kempo of the Tax Court ruled that the sale was made only because of the collapse of a Civic Center Project and that it was sold to minimize their losses. The reason for the two part sale was to accommodate the purchaser's cash flow.
In 1989 John Irwin lost his bid for Capital Gains treatment on the sale of two farms and the resale of one after a partial foreclosure. Judge Christie ruled that Mr. Irwin was an intelligent man who understood all the ramifications of his actions and that his intent was to sell and resell for a profit.
In 1989, Medici Management Ltd. lost its claim for capital gains treatment on the purchase and resale of raw industrial land he had purchased through a trust. Judge Lamarre Proulx of the Tax Court ruled that he had presented no evidence to prove an intention to hold as a long term investment. The trustee sold the property with no protest from the owner.
And in 1989, Matt's Apartments Ltd. lost its claim for the capital gains treatment also. They had purchased several properties in Vancouver. Judge Lamarre Proulx ruled that the sales were ventures in the nature of Trade. There were no rental projections presented or financial plans presented to show long term intent to hold for long term investment.
In 1989, 145101 Canada Ltd. paid straight tax on the sale of land which it owned with another company. The other company reported the sale as straight income. Judge Christie of the Tax Court of Canada ruled that it was straight income for the taxpayer company as well. If you are involved with complicated commercial real estate deals, this case is worth reading in its entirety. It is Court file No. 87-1008 and can be found at 89DTC644 in the CCH Reporter series.
Crystal Glass Canada Ltd. received good news in 1989. Judges Pratte, Heald and Mahoney of the Federal Court of Appeal ruled that their losses before the Tax Review Board in 1975 and in the Federal Court in 1977 were in error and that the Trial Judge erred in law in finding that the sale of an apartment block in 1971 was a trading profit rather than TAX FREE CAPITAL GAINS. Remember, in 1971 there was NO CAPITAL GAINS TAX. But why did it take EIGHTEEN YEARS ?
Rudeller Ranches & Livestock Company Ltd. and Marvin Mogul lost their claim in 1989 for a similar sale. However, they had made fifteen other such sales and Judge Dube of the Federal Court - Trial Division ruled that the primary purpose was to facilitate a resale at a profit.
In 1986, Samoth Financial Corporation Ltd. lost their bid to have the sale of Century 21 Real Estate Franchises treated as capital gains rather than straight income. Judges Heald, Mahoney, and Stone of the Federal Court of Appeal agreed with the Federal Court's 1985 decision.
In spite of Section 39(4) which allows traders in shares to consider themselves investors rather than traders, Ross J. McGroarty lost capital gains treatment in 1989. He was a licensed stockbroker for eleven years before becoming the communications officer for a public company. He then proceeded to buy and sell shares of that company in substantial numbers. In four years he made over 300 trades but never controlled over 2 or 3% of the stock. He received no dividends but financed the purchases by mortgages on his house, bank loans, and margin accounts through the brokers. Judge Garon of the Tax Court of Canada taxed him at full rates on his net profits of $660,000 for the years 1978 to 1982.
In 1989, Karben Holdings Ltd. had to pay tax as a trader on publicly traded stock, 91% of which, had been held less than twelve months. The company had retained a professional management company to manage its portfolio. Judge Pinard of the Federal Court - Trial Division, ruled that the evidence did not support an argument that the formation of the corporation was to preserve the original capital.
In 1990, John Arthur Pollock lost his claim for capital gains treatment before Judge McNair of the Federal Court. He was a professional mining engineer who made $117,000 in 1979 and $560.000 in 1980 trading in the shares of junior resource companies. Judge McNair ruled that the volumes were large and dispositions were made shortly after acquisition for profit. The transactions were "akin" to an ordinary Trader.
The prior sales involved the sale of public company shares. However, in 1988, Guy Dumas won capital gains treatment on the sale of the shares of his company which had acquired a large piece of real estate. Judges Pratte, Hugessen and Desjardins agreed that he had not intended to sell the shares when he acquired them. He had simply wanted to carry on his business.
In November, 1986, Samuel Edlinger won his case in the Federal Court of Appeal. Judges Pratte, Hugessen, and MacGuigan agreed that his collecting of formerly worthless notes acquired with the shares of a corporation were of a capital nature and not straight income. He had sold his business to a separate company. When that company failed to operate the business successfully, he bought the shares back, turned the business around, and in 1971 and 1972, paid himself for the notes he had acquired rather than take a salary. DNR tried to tax this as straight income. The court ruled that the notes were incidental to his purchase of the business.
In 1989, Ronald Smith lost his claim for Capital Gains Treatment on the purchase and resale of a SRTC. Price Waterhouse had sold him a SRTC which involved purchase and immediate resale of a note and a debenture. As an example, he bought a promissory note from CN Ltd. for $100,000 and immediately resold it for $58,000 getting a $34,000 Scientific Research Tax Credit. He tried to set the adjusted cost base of the note and a debenture from Canadian Coal as $50,000 each and the $117,000 sale price less the $100,000 ACB as a capital gain. DNR treated the $117,000 less $100,000 as straight income (it all happened at once) and Judge Teskay of the Tax Court of Canada agreed. I do too.
Also in 1989, Financial Collection Agencies lost out on their claim for capital gains on a "quick flip". They bought and sold their S. R. T. C. the same day and then tried to claim the $14,000 profit as a capital gain instead of straight income. Judge Rip agreed with Revenue Canada and taxed it at full rates. The reason in these two cases makes sense. How can it be a "capital" gain when you knew in advance "exactly what and when" you were getting in the deal?
But it can go the other way too, as two other 1989 cases did:
Stanley Drug Products Ltd. won capital gains treatment when Judge Rowe of the Tax court of Canada ruled that the transactions were anything "BUT" an adventure in trade. <169>They were wholly artificial devices which were intended to procure a tax advantage."
Judge Rowe wasn't alone in his opinion either that year.
Judge Garon of the Tax Court of Canada made the same decision for Henry Loewen. He ruled that: "the transaction in its entirety possessed none of the characteristics of an adventure in the nature of trade." The taxpayer had made the purchase to get a $102,000 tax credit.
Strangely enough, Revenue Canada did not appeal Stanley Drug Products, or Henry Loewen, and Ronald Smith and Financial Collection Agencies did not appeal theirs. This is unusual under the circumstances. Again without making any comments about the relative merits of the SRTC's sold to the above 4 taxpayers, so many of the SRTC's were nothing but completely artificial transactions that the real tragedy in these deals is the time that Revenue Canada has had to spend on them.
And that brings me to another point. I continuously have some one tell me: "The tax office wouldn't let me." Then I find out that the "turn-down" was an anonymous phone call to the public information line. SHEESH! It isn't over 'Til it's over!
I like this one. It is one for the little guy. In 1973 Patrick Flanagan bought a waterfront lot on Shuswap Lake in British Columbia. He then found, as so many people do `after' buying a piece of property, that he could not build on it without a septic field and that the land was below the high water mark for a septic field. He tried to negotiate for some land next door and finally in 1978 bought a lot across the road and ran a pipe under the road and created a permanent easement for the pipe, thereby giving his original lot the amenity it needed. In the meantime he parked one of two mobile vans he owned on the properties when he was there, but did not leave them on the property when he was not in residence. He did spend most of his time there. He then sold the first lot in 1982 and the second in 1983. He claimed them both as tax free sale of a principal residence. Judge Rip ruled that the first lot was a tax free piece of land contiguous with the van parked on it but that the second was not attached or contiguous and was therefore subject to capital gains tax. Remember, this would not apply to any motor home on any lot. In this case Flanagan spent all his free time there. It was a genuine vacation home and vacation homes qualify as principal residences.
It is possible to sell a property and buy another similar property and claim the sale as a tax free rollover. To qualify, the property must be used in an active business such as your farm property or business building. It could also be a rental property or vacation property if it was expropriated.
However, to claim the tax free "rollover" status, you MUST report the sale and purchase on time. If you do not, the tax free status may not be claimed and penalties and interest can be applied. This is to stop you from making a profit which gets "lost" in the shuffled leaving you free to claim less profit in the future. I know you would never do this but some people might try and "slide" a profit through the system on either the $100/500,000 exemption or the rollover exemption by not reporting it "because it was tax free anyway, wasn't it?" Then when it was lost in time as it were, they would be able to claim another gain tax free.
In 1991, Florence Hawkins found this out about the 1980 exchange of her farm property. No money was exchanged, just the property. Judge Joyal of the Federal Court ruled that she was taxable on the $19,000 profit because to be tax free under a Section 44 rollover, one must report the profit and claim the exemption by notifying the minister. This is one of the exemptions which is not spelled out in the act with a special form like the T657 for the capital gains exemption.
in 1991, the Boger Estate fared better. There was a problem with the legal definition of "when the property transferred" because of a challenge to the will by the wife. To be tax free the property has to be vested or transferred within 15 months. Judge Jerome of the Federal Court ruled that it was necessary to look at concepts and terminology from real property law. As such, he ruled that the property was vested under the terms of the will under section 70(9) because there were no conditions precedent to stop the vesting. The Estate had lost in the Tax Court of Canada. The difference between this and the Hillis Estate, is that Hillis had no will, therefore, there was no immediate vesting which was challenged.
This next case points out the danger in rolling rental properties into a holding company. Joan and Robert Colbert lost their expected capital gains and recapture tax treatment in 1989. They had rolled some rental property into a corporation. They attempted to have it qualify as former business property as defined in section 248(1) of the act. To be former business property, it must have been property from an active business and Judge Taylor ruled it was rental property. As such, the Colberts had to pay immediate capital gains and recapture taxes on the deemed disposition, rather than have the property transfer at the adjusted cost base of the Colberts.
That old Valuation Day of January 1, 1972 or December 22, 1971 for Publicly traded shares still rears its ugly head. The following case points out the problem with something like a Yacht Club membership or a Golf Club Membership.
In 1989, the members of the Northwood Country Club received a reasonable ruling when David Ades went to court. The members had claimed a value of $28,000 for the value and DNR had countered with $4,300. The valuation was required because the golf club was sold for $24,000,000 plus and the members all received their share. Because 271 of them were members in 1971, it was up to the court to determine the value of the land, buildings, etc. on January 1, 1971. Judge Kempo of the Tax Court of Canada settled on $20,000. The whole case is an interesting read for any member of a club.
In 1989, George Choquette had the minister's VD figure accepted by Judge Sarchuk of the Tax Court. Choquette had claimed a VD of $281,000 and DNR a VD of $105,000. The lower figure was accepted. Choquette presented no argument to rebut the minister's highest and best use as a ranch, and his own subdivision for recreation proposal had nothing to back it up.
The next case was even further apart with the minister's value being $63 to $99 per acre and the taxpayer's appraisal being $710 to $2,500 per acre. The main argument was around whether the land in question was best used as a blueberry farm, a potential mine, or a woodlot.
In 1986, Bridges Brothers Ltd. lost their claim for $700 an acre and in 1989, Bridges lost again before Judge Martin of the Federal Court - Trial Division. Most of the argument revolved around whether or not a neighboring company would use the land for a tungsten mine. Both judges decided that since the company had not made any agreement prior to January 1, 1971, and in fact suspended operations shortly thereafter, no potential value of a mine could be taken into account. The Tax Court Judge allowed $100.00 per acre. Judge Martin increased the VD value to $140 per acre.
In 1989, MEL-BAR Ranches Ltd. won the capital gains treatment for some $294,000 worth of timber it had sold and originally included in its income as straight income. In 1979 and 1980, they sold a lot of timber off their land and included it as straight income. their accountant advised them to report it as capital gains. DNR objected and the Tax Court of Canada agreed with Mel-Bar Ranches in 1987. DNR appealed and in 1989, Judge Strayer of the Federal Court again agreed with Mel-Bar Ranches Ltd.
In 1989, Schofield Oil Ltd. lost their appeal to the Federal Court Trial Division. They had a contract to sell waste oil to Imperial Oil Limited. Imperial Oil bought their way out of the contract with a payment of $1,300,000 to Schofield. Schofield claimed the money was a tax free `damages' award because their business was dependent on the contract for its entire future income stream. Judge Strayer disagreed and counted the $1,300,000 as straight income and taxable at full rates.