Capital Gains Part II

Capital Gains - Continued from part 1



In 1984, Carl Rudeloff lost his claim for a tax free sale of his home and ten acres which he had lived on and in for ten years. The Tax Review Board ruled that although the excess 9 acres of land certainly `contributed' to the use and enjoyment of his home, it was not necessary. The facts that the Rudeloff family had a woodlot, raised horses and chickens, had a family garden and a play area, did not sway Judge Taylor of the Tax Court of Canada. He said, "I am not persuaded the relevant section of the Income Tax Act permits of the view espoused by this taxpayer - that merely because he resided in a housing unit on the property, and used the balance of the property in one way or another to enhance the utility and attractiveness of that domestic living style, he can expand the boundaries of his housing unit to the parameters of the natural domain desired in his appeal."

This last decision has been partially turned over in the 1991 Federal Court decision where Judge Strayer decided that an extra lot was not essential but certainly contributed to the use and enjoyment of the property. However, I find this ruling unusual for a country like Canada. Certainly, this country was built on small holdings, self-sufficiency, the raising of chickens and the growing of food in a garden. However, it seems that unless you can show that it was necessary for the use and enjoyment of a housing unit, it will not fly. Perhaps if he could have shown that he did not have enough money to feed his family, it would have proved `necessary'. I think I can explain it in other equally ridiculous terms, though. You buy a car with no doors or roof. It has an engine (necessary to use), a transmission (necessary to use), four wheels (necessary to use), a steering mechanism, (necessary to use), and brakes (but brakes are not necessary to use). Brakes, roofs, and doors are an example of things which certainly `add' to the use and enjoyment of a vehicle but are not necessary if you drive in a vacant and level field where it does not rain. Of course, if you want to drive down a hill, brakes would be necessary, but since you don't `HAVE TO' drive down the hill, they are not necessary. However, if you want to drive on a highway, THE LAW SAYS THAT BRAKES ARE NECESSARY. If it rains, you may say that a roof and doors (and windows) are necessary, but all sorts of people ride motorcycles in the rain with no doors, roof or windows. (Okay, okay, a windshield is really nice, but not necessary... my motorcycle does not have one).

In fact, if any case should have been appealed to a higher court, the Rudeloff case should have been, and we at the CEN-TA GROUP had a similar case that was destined to "go to the top". We took our case to `the top' in 1988.


Unfortunately, the Tax Court ruled against five members of the Cillis Family and they have decided not to appeal. But I still feel they should have won. Four generations of one family lived on five acres in two houses. They used the acreage for a riding ring (one son is now a full-time professional equestrian), duck ponds, swimming pool, barns, sheds, and wood lot for themselves. However, as the two houses had been legally subdivided `out' of the five acres, it was ruled that the excess land was not `necessary' for the `Use and Enjoyment'.

And The Cillis family has decided not to appeal with good reason. DNR is treating this entire situation like parking meters. Either the violation flag is up or it is not. The courts have been interpreting the word "necessary" to mean "cannot be done without".

I still feel that the Cillis Family would have won their case on appeal. You have not really lost until the final judge has had his or her say. Marianne Fourt found that out when she did not take "NO" for an answer. Sort of a reverse of the popular T-shirt which says, "What part of No don't you understand".

In 1991, Marianne Fourt received a favorable ruling from the Federal Court Trial Division when the court ruled in favor of the tax free status of the second lot. The judge ruled that although not essential to the use and enjoyment of the family home, it clearly contributed to the use and enjoyment within the meaning of paragraph 54(g)(v) of the Act. She had lost in 1988 as stated below.


In 1988, Marianne Fourt paid tax on an adjoining lot she sold. She bought two lots and built her home on one and used the second lot for an incinerator, storage shed and parking. Judge Goetz of the Tax court ruled that she could have built everything on one lot and the other was not necessary, i.e., could not be done without.

It seems that unless, you have a "Yates" argument, i.e., could not have bought less because of zoning, you will not get anything more than one acre tax free. (to be fair, it is really 1.2 acres (1/2 hectare). Because of welfare, etc., the courts are determining that `eating off the land', i.e., garden, raising animals, etc., is not sufficient for necessity.


In 1989, Elmer Augart won an unusual case when you consider some of the other cases previously mentioned. (Elmo Baird for instance). He had bought 8.99 acres and he lived on it for FOURTEEN YEARS BEFORE the land was rezoned to require 80 ACRES FOR A SINGLE FAMILY HOUSE. Judge Mogan of the Tax Court of Canada ruled that because of the YATES case mentioned before in the text, the entire 8.99 acres was necessary under section 54(g) of the Act.


But also in 1989, the estate of Anna Lewis and the estate of John Lewis were taxed on the land in excess of one acre even though it was shown that the 2.11 acres could not be subdivided and sold as separate parcels. Judge Rip did not apply the Yates argument but he did change the values placed on the property by DNR resulting in a little less tax.


The following cases just add to the argument and are here for your information. They include the YATES CASE.


In 1983, Donald Fraser lost his claim for an extra half an acre used as a garden and play area. D. E. Taylor, member of the Tax Review Board, found that the taxpayer had failed to demonstrate the "necessity" for the garden and play area.


In 1983, Elmo B. Baird, lost his bid for the tax-free sale of land in excess of one acre. Mr. Baird had bought 2.41 acres under the Veterans Land Act in 1951. He built outbuildings, raised farm animals, gardened, and used the size of the land for a septic field. Certainly "use", although an argument could be made by many "city dwellers" that tending a garden and cleaning stalls and septic fields is not "enjoyment", nor necessary. My understanding was that all VLA land was supposed to be in the 2 1/2 acres size `area'. If that is the case, Mr. Baird should have won his case because he could not have bought less land under VLA rules.


In 1991, Glen Windrim paid tax on the value of some 15 acres of land. He had a mobile home on 17.6 acres for three years and when he sold them, he tried to claim the total tax free. However, he had only lived there three years and showed no evidence of use and enjoyment or necessity. It is interesting that DNR voluntarily gave him 2 hectares (4.6 acres) tax free and Judge Muldoon of the Federal Court Trial Division went along with it even though the act only allows 1/2 hectare (about 1.22 acres) and originally allowed only 1 acre.

Interpretation bulletins IT 120 and IT 120R leave the impression that such matters as zoning will contribute to a favorable ruling when capital gains on land in excess of one acre are concerned.


In the case of Mr. Baird, he could not legally have bought less than 2 1/2 acres (VLA financing not zoning rules), which is relevant when the next case is mentioned.


The Famous Yates Case

In 1983, William and May Yates won their case in The Federal Court - Trial Division. The taxpayers could not legally have occupied their residence without ten acres because of local zoning laws. It was necessary to have more than one acre. Even though they had rented the excess out to a farmer, they only sold the excess 9.3 acres under threat of having the area expropriated. Judge Mahoney ruled "The defendants could not legally have occupied their housing unit as a residence on less than ten acres. It follows that the entire ten acres, subjacent and contiguous, not only `may reasonably' be regarded as contributing to their use and enjoyment of their housing unit as a residence; it `must' be so regarded. It also follows that the portion in excess of one acre was necessary to that use and enjoyment." This case was appealed to the Federal Court of Appeal. I am pleased to say that In 1986, William Yates and his wife May Yates won again. Judges Heald, Stone and Ryan found for the Yates.

But, there is a sense of futility here. When people need and use the land, they lose, but when they rent it out and don't use it, they win.


In 1986, the estate of Sarah Raper won the tax free ownership of an extra 4 acres for 9 out of 10 years. Until 1980, zoning laws prevented the subdivision of the land into less than 5 acre plots. Even though she did not subdivide the land in 1980, Judge Tremblay of the Tax Court of Canada ruled that her lifestyle was not sufficient to show `necessity for use and enjoyment' after 1980, and assessed tax on the capital gain after 1980. He said that `use and enjoyment' should be decided on a year to year basis, thus giving credence to my graph in the tax books from 1974 to '82 wherein I suggest that a taxpayer should be able to designate alternate years or different years as tax free, rather than the successive years suggested by DNR.


In 1987, John Wallace Beaton lost his case for the sale of 2.1 acres tax free showing again how the judge's mind works in these situations. In 1979 he had bought a `remnant' 4 acres in an area that required 25 acres to build a house. He built a house and drilled two wells, one on each half of the property. Neither well was satisfactory. In 1984 he sold 2.1 acres and kept the balance as his residence. He claimed the 2.1 acres was tax free because he needed it for his well and because of the zoning in place at the time of purchase. Judge Brule of the Tax Court of Canada ruled that it could not be said that Beaton could not have built on less than 4 acres as the land in question was already a remnant, and he certainly didn't need the extra 2.1 acres for his water supply because the well was unsatisfactory. The taxpayer was able to "do without" the 2.1 acres (i.e., he didn't need brakes.)


In 1986, Jacob and Ruth Schellenberg won $221,000 out of a $375,000 sale as tax-free gains from the sale of their principal residence and an adjoining lot. DNR tried to reverse the figures to $154,000 for the principal residence, and $221,000 as taxable from the sale of the lot. Judge Christie of the Tax Court of Canada ruled that the Schellenberg's figures were correct.



Death can cause difficulties and hardships with regard to capital gains.


Income Tax is extremely time sensitive. In 1982, the estate of W. E. Hillis was caught in a time warp which our legislators would not have wanted to happen. When W. E. Hillis died in testate on February 21, 1977, his lack of a will (intestacy) delayed normal settlement of the estate, plus left (under Saskatchewan law) part of the estate to the sons, both of who disclaimed any interest in the estate in June and July 1979. His widow was granted the entire estate on December 14, 1979 under the Dependent's Relief Act of the Province of Saskatchewan. The act specifies that to escape capital gains tax on assets transferred to a trust or spouse upon the death of a taxpayer, the assets must vest in that trust or spouse within fifteen months of the death. If not, there is a deemed disposition at fair market value of any assets of the deceased as of the date of death.

In this case, it is obvious that this did not happen. And it is easy to say that the judge was correct in taxing the assets, but is this what parliament wanted, to tax widows because of time delays during moments of hardship? This case was appealed to the Supreme Court of Canada. The Court dismissed the application in 1985.


And in 1989, the estate of Alexander Boger suffered the same indignity. Mr. Boger died in 1979 and left his estate to his wife and 4 daughters. Mrs. Boger contested the will and held up the settling of the estate for 3 years. Judge Rip of the Tax Court of Canada ruled that the property had not been transferred to the children within the required 15 month period. It is obvious that this law needs changing. Fifteen months is not enough time when there are large numbers of items and potential family claims that have to be settled. Legislators awake! The results are not what you expected when fifteen months was allowed in the first place.


But, 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.

Two other cases dealt with slightly different matters but both dealt with Estates.


In 1989, the Estate of Stanley Earl Lewis won its case for tax free rollover. Lewis's final 1982 T1 return was filed showing the rollover of the farm to two grandsons within the 36 months required under section 70(9) of the act. However as the wife was to receive the rents and profits until their grandson's 20th birthday on June 17, 1989 when the two grandsons were to receive the farm, DNR tried to turn it over because the grandsons had not received possession. Judge Kempo ruled that there was an indefeasible vesting even though actual possession had not taken place.

Judge Kempo got another chance to make a wise decision as well.


In 1989, the Estate of Wilbert A. May received the same treatment. Because May died on May 18, 1982 with an ambiguous holographic (personally handwritten but not witnessed) will, it took four years of litigation to reach an agreement as to the disposition of the estate. Mrs. May the widow was finally given the property subject to some rights of first refusal on some of the land on April 9, 1986. Judge Kempo ruled that there was a rollover as defined by section 70(6) of the Act.


And in another estate situation, in 1987, The Estate of Jeannette Bell Kelley lost its bid for tax free capital gains under the US/Canada Tax Treaty. JBK died in 1970, and the land in Alberta was sold in 1980. The two heirs both lived in the United States. Article VIII of the US/Canada Tax Treaty of the time, exempted Capital Gains earned in one country by a resident of another country. The estate tried to claim this treaty exemption. Judge Rip of the Tax Court of Canada ruled that the estate realized the gains and that therefore gains were only indirect for the residents of the U.S. Furthermore, an intervening life estate could have nullified the inheritance if the beneficiary of the life estate had had children, etc.




In 1981, Murray Schafer, (one of Canada's foremost musicians and composers) sold a large number of his original manuscripts, his diary, and other effects to the National Library of Canada. The tax office taxed him on these items as straight income. Guy Tremblay of the Tax Review Board ruled that the items were unique and not for resale and were not a commodity, and were of a personal property capital nature. The problem of valuation day then came up because if there was no increase in value from January 1, 1972 there would be no tax on the sale price of $25,000. However, eight of the documents were written after 1971 and could not have had any value before 1972. In an unusual move, the court in this case decided on a value and recommended that both sides accept that value. Guy Tremblay C.G.A. decided that the value of pre-1972 documents on valuation day was $15,000 and that they had sold for $20,000 and that they were more valuable because of their age and relevance than the post 1972 documents, which he assessed as sold for $5,000. This resulted in a capital gain of $10,000.




In 1980, Greenbranch Investments Limited received a favorable ruling from the Federal Court - Trial Division. Greenbranch had built 152 maisonette units for rental purposes. These units were sold. In 1971 the taxpayer foreclosed on the property and ran the units as a rental project for another year and a bit, but the failing health of one of the principals and serious structural defects caused it to be sold again in 1973. Judge D. J. Grant ruled that the property had been foreclosed on, in an attempt to keep it, rather than by using an `order for sale' to recover the monies. Given that the company had built the units once and sold them twice, you can see that it IS possible to have capital gains tax treatment, even if outwardly the deal looks like a venture in the nature of trade.


And 10 years later, in 1990, Frank Grouchy, an auto parts dealer did better in his Real Estate Venture than the Dands did in their Horse Breeding business (see Expectation of profit section). Grouchy had bought 14 townhouses in partnership with an experienced real estate investor. When the partnership received an unsolicited offer soon after the purchase, they sold at a substantial profit. Judge Martin of the Federal Court ruled that the taxpayer was an open, frank, and credible witness and allowed him capital gains treatment even though the partner was taxed at full rates.


And in 1990, corporations do not always lose either. In 1990, W. Hanley & Company were allowed capital gains treatment on their 7% share of an apartment condominium project. They had taken the 7% in lieu of a smaller commission on a project originally built for resale. However, when the developers decided to keep it and rent it, Hanley got the 7% ownership. When the project was subsequently sold because of rent controls, the 7% was $146,000 instead of the $20,500 they had given up in favor of the 7%. Judge Collier of the Federal Court ruled that because the developer had control of the project and made the decision to sell, Hanley's profit was a capital gain. Most of the time, these cases end up in court because there is something different and the next one is no exception to that rule.



In 1985, Charles A. Beghin had his capital gains and possible personal use claim changed to straight income and penalties were added for the unreported income on the sale and the interest on the mortgage resulting from the sale.


In 1985, Robert Blais, who had bought 59 buildings and sold 29, was assessed straight tax. His purpose in buying the buildings was to improve his financial position.




In 1985, Leonard Reeves Incorporated was assessed straight tax on trailer courts sold in Florida. The mobile home parks were owned with two others but the taxpayer made no attempt to hold on when the others wished to sell.

In 1985, Paul Zen, whose regular occupation was that of land developer, had his 1977 return changed by the Federal Court - Trial Division. Judge Muldoon ruled that the building had been built in the ordinary course of business and was properly taxable at straight income rates rather than capital gains. In this case, only a couple of years were involved and the taxpayer was a builder. In the following case, 23 and 10 years went by.



In 1985, Climac Hotels Ltd. and B & C Hotels Ltd. lost their claim for capital gains on the sale of three hotels. The taxpayers claimed that large sums of capital had been invested and that theirs had been hands on management. Judge Brule of the Tax Court of Canada ruled that a profit motive existed and that the profits had been properly assessed as income.

You will have to agree that my point about the government taxing as `straight income', transactions that many people considered capital gains, has been made `in spades'. There were more cases in 1986 than during the last three or four years put together. The TAXPAYER usually lost. 1987 saw another 30 reported cases, 1988 over 30 and another 30 in 1989. 1990 has been a slow year with only a dozen. I guess that a lot of individuals are looking at the precedents and not bothering to go to court. 1991 Has been busy again with many capital gains versus straight income tax cases clogging the courts.

Because of the extreme number of cases, I have chosen to deal for the most part with cases from the Federal Court of Canada and above.


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 1986, V. S. Ramachandran and Rolf F. Feldman lost their bid for capital gains treatment on two buy and sells. They were dealing with a noted real estate speculator, and although they held the apartment block for four and a half years and a townhouse development for three years, they failed to show sufficient determination to hold on for investment purposes when the going got rough.


In 1986, Demetrios and Dimitra Giannakos lost their try at capital gains for the last two out of six houses which had been bought over four years. They had lived in one and rented out three. The last two were bought when the others were losing money ($1400 a month), and Judge Cullen of the Federal Court ruled that the taxpayers had failed to establish that the last two properties were purchased as an investment for long term holdings. The other three rental houses were treated as capital gains by the department and were not part of the appeal. This likely explains why the Giannakos have taken their case to the Federal Court of Appeal.


In 1986, Hyman Fisher and Marsted Holdings Ltd. lost their appeal from their 1974 tax returns. They had a building which was sold after a series of disasters and lawsuits. They claimed the rather large profit as a capital gain. Judge Joyal of the Federal Court disagreed. Mr. Fisher has appealed his case, so stay tuned (i.e., buy the next edition of this book).


Judge Rouleau of the Federal Court agreed with the taxpayer in one case for the little guy (no pun intended). Guy Hebert won his case in 1986. He had built a series of rental buildings over the years. In 1977 and 1978 he sold seven of the buildings to finance the construction of a larger apartment complex he was building for rental purposes. The judge ruled that he had demonstrated the intention to produce a living for himself and his family with his rental units.


In 1986, James Lampard won his case for capital gains treatment before Judge Christie of the Tax Court of Canada. He proved to the court's satisfaction that the intention was to buy and build a shopping center in downtown Red Deer, Alberta. He only changed his mind when another shopping center was built north of town. The city could not support two new shopping centers. The Crown has not appealed this case.




In 1986, Fedel Saccomanno won the sale of his home as a tax free capital gain as his principal residence. He had bought a triplex with two units rented out, and lived in the third unit with his wife on weekends when he was not teaching at the University of Waterloo. When he did not get tenure at Waterloo, and sold the property, DNR tried to tax two-thirds of the profits. Judge Taylor ruled that the entire triplex was tax free, giving credence to my claim in my Investment Guide. In the Investment Guide, I suggest that people with duplexes and triplexes should claim the whole building tax free in spite of the fact that Bulletins IT 120R2 and R3 stated that half a duplex and two thirds of a triplex would be taxable.


In 1989, Normand J. Robitaille paid tax on 1/3 of the capital gains on his principal residence during the period he had rented out part of his house. He did NOT fight the case on the tax free merits but rather on the amount of capital gains he had reported. I would say he paid tax he did not owe based upon Saccomanno above.




In 1987, Mary Finochio lost her attempt to have the sale proceeds from the sale of some real estate, put into her 1978 taxation year. She sold real estate with a closing date in November 1977. The deed was registered on November 30, 1977. However, she did not receive the money (with interest) until January 4, 1978. Judge Cullen of the Federal Court, Trial Division, found that the transaction had taken place in 1977 and was properly taxed in that year. She had also lost her case in the Tax Court in 1984.

In another example of justice delayed:


In 1985, Imperial General Properties Limited lost their case in the Federal Court of Appeal. As they had won in the Federal Court in 1983, and the matters in question took place in 1968, and 1970, one can see that one cannot always count on advice and professional help. The case involved the sale of 307 suites. The question was what year did the suites actually sell because of the subject clauses involved. The subject clauses involved zoning, soil tests, CMHC approval, and servicing of the land by the municipality. Two years were allowed for the clauses to be removed. In this case, the taxpayer wanted the money included in income in 1968. The Tax Office wanted it to be in 1970's income when the subject clauses had been removed or fulfilled. The reason was that a corporate amalgamation was taking place, and the losses of one of the participants could not be carried into the new amalgamation and used in 1970... we are dealing with a million dollars here.


By moving the profit into later years, DNR cost Imperial many, many dollars. But the Federal Court agreed with Imperial, so who is right????

Just remember, any one of these cases could be you. And as I implied at the start of this chapter, it will be "REAL HARD" to get that $100,000/500,000 tax-free capital gains exemption.



Watch out for kinky deals. It is quite possible to be dealing with an organization and end up in a serious audit, simply because you are a client of that organization. All the investors in The Abacus Cities deals found this out. All the Community Builders investors found this out. The Imperial Ventures MURB deals fell apart across the country. And the best I saw was a letter addressed to clients of a Toronto Investment and Tax Consultant. In this letter, the Head of Special Investigations tells the investment clients that they will all be reassessed. When I first saw the deal, I could only say, `this is crazy'. However, it was sold for several years. In two or three cases that I have seen, the amount of tax will be in the $50,000 range.

Whenever you are offered five for one or four for one tax write-offs, run to the nearest exit... You are asking to have your returns audited. At the very least, you will find yourself tied up in litigation for years. Many operations are using the case of Dr. W. S. J. Buckler to sell their four or five to one tax shelters. If you are tempted to buy because Dr. Buckler won his case, I wish to advise you (the people selling the deals do not) that the case is under appeal, and I do not expect Dr. Buckler to win. But before you buy, why not phone Dr. Buckler in Vancouver and ask him about it. i.e., was it worth the turmoil???


In 1988 the sale of containers and the sale of units in two different magazines have received cease trading orders from the Superintendents of Brokers in Ontario, B.C., and Saskatchewan, with other provinces expected to follow suit. (Some of these operations have since had prospectuses approved and are again being offered for sale.) In November, 1987 I was approached by the seller of one rather large tax shelter operation. We were being asked to sell the product which involved an investment of over $100,000. All paperwork indicated that the tax shelter was `perfect, true and okay'. My research found that 100 of the 900 present investors have had their $25,000 refunds held up in the court system and they can expect to have to go to court to win. (I do not think they will win.) Furthermore, in an hour and a half presentation, the chance of profit was not mentioned once. All that was shown to me was the wonderful tax refunds to be expected. (For business loss expenses to be deductible against other income, the primary reason for the investment MUST be the expectation of profit from the business or investment.)

In December 1991, investors in one of the Shipping Container investments which I had criticized were picketing the promoter's residence. In general most of these deals collapsed.


With so many S.R.T.C. deals having gone down, with so many unfinished MURB projects a couple of years ago, with so many people hurting because of extremely speculative `tax shelter' investments, with so many people hurt in the recent stock market crash, please think twice before you buy a tax deduction on December 28th.

After writing the above, in the week of December 15 to 22, 1987, seven `tax sheltered' investments were handed to me. All seven likely had merit. However, to `pitch' them to my clients in the last weeks of the year is an insult to everyone. If a product is good, it is good in July. Almost all our staff are gone between Xmas and New Years.

In 1989, there were over 30 reported cases dealing with whether a profit was a capital gain or a straight income profit. Obviously, DNR is `not' just rolling over and allowing people to claim capital gains. And even with the `closing' of the limits from 50 to 75% of the profit taxable as capital gains, we will still see more and more cases. i.e., if it is capital gains, then the profit qualifies for the $100,000 or $500,000 tax free exemption plus reserves for the unpaid portion of the sale. If the profit is treated as straight income, there is no exemption and no reserves.

Following are some of the 1989 cases (those that add to the information).


SALE OF REAL ESTATE (not a principal residence)


In 1990, Homes Development Ltd. were taxed as straight income on farm land which they had held for fifteen years. They bought the land in 1967 as part of a partnership with no thought at the time of developing or reselling. However, in 1972, they did submit a plan for subdivision which was turned down. Judge McNnair ruled that their intention had clearly changed and was now that of the partnership group, to achieve a residential development of the property for resale and taxed Homes at straight income rates.


In 1990, Algonquin Enterprises Ltd. and Dartmouth Developments Ltd paid straight tax on the lease / sale of lots which they had available for sale on either a straight sale basis or a 50 year lease with an "open" option to purchase. Judges Pratte, MacGuigan and Hugessen of the Federal Court of Appeal ruled the only intention was to sell, not convert the lots to a long term inventory. The only reason for the lease scheme was to make it easier to sell.


O & M Investments Ltd. lost an isolated sale in 1989. Judge Jerome of the Federal Court did not even allow the lawyer for National Revenue to make a closing argument. He was adamant that the evidence overwhelmingly showed the plaintiffs to be professional real estate traders and taxed them accordingly on an isolated purchase and sale. His judgment is wonderful for anyone in this situation. It analyses the "real" world of real estate from large rental operations who for all intents and purposes "never sell" to custom builders who only build to order. One source of the full judgment is CCH's Dominion Tax Cases. It can be found at: 90 DTC 6150 and is worth reading.


In 1989, Robbin and Jason Rodd lost their capital gains claim on a piece of commercial property on which they had sought subdivision approval. In addition, their loan application at the bank contained the following notes to purchase commercial property for subdivision and sale or development. (remember my prior comments to "watch what you tell the bank"). Judge Sarchuk of the Tax Court of Canada ruled that the profit was straight income for tax purposes.


However, also in 1989, William Bell, Renee Makino, and Fred McCullough won their claim for capital gains treatment on the sale of their commercial property. Judge Mogan of the Tax Court of Canada ruled that their long term financing, attempts to secure a tenant and the recessionary downturn all contributed to their argument that the property had been bought for long term holding.


In 1986, Fairhaven Estates Ltd. and Jodare Limited won their case for capital gains treatment in the Federal Court. Judge Roleau agreed that the land in question had been bought for the purpose of long term investment. They had originally purchased the land to build a manufacturing plant. However, their plans were continually thwarted by the municipality. The situation began in 1966, the land was sold in 1973, and it did not come to trial until 1986. It was to be heard in 1981 but got lost in the paperwork. DNR has appealed the case to the Federal Court of Appeal, and Fairhaven has another ordeal to go through.


In 1986, Future Investments Ltd. lost their claim that the sale of three out of ten lots was a capital gain. Judge Cullen of the Federal Court ruled that it was a venture in trade. Future Investments claimed that the three lots were only sold to finance the development of the remaining lots.


In 1986, Regina Shopping Mall Limited had its claim for Capital Gains treatment turned down by Judge Pinard. They had been unable to go ahead with plans to build a large shopping mall. The success of the mall was dependent upon their obtaining a major department store as a tenant. When they failed to get the major tenant, they sold the land at a profit. They lost because they did not have the tenant when they bought the land. Therefore, they must have had a secondary intention to sell the land if they did not get the tenant. This case is under appeal to the Federal Court of Appeal. In 1989, Judges Marceau, Stone and Desjardins of the Federal Court of Appeal dismissed the appeal with costs to DNR.


In 1986, George Schneider, George L. Schneider Limited, Mohawk Horning Limited, Maplepark Development Limited and Dekston Limited lost their claim for the tax free sale of 73 acres which they had bought to develop and sell. Judges Urie, Heald and Ryan of the Federal Court of Appeal ruled that even if the intentions of one of the members (the guiding member) of the consortium changed as was decided in a 1984 case, the sale was still a venture in the nature of trade and the consortium was bound by their collective actions.

And, you can apply for a subdivision and get capital gains treatment.


Also in 1989, Paul and Dorothy Hayes received a favorable ruling from Judge Bonner of the Tax Court. The taxpayers had done little more than install culverts and put some gravel on the roads. There was no business plan. They did no more than take necessary steps to optimize the sale of their capital asset. <

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