Will a gain on sale of second non-residence property be treated as business income or capital?

Such was the issue contemplated by Justice Wong in the Tax Court of Canada in Bygrave v. The Queen, 2019 TCC 138 (CanLII). In Bygrave, the appellant had been living in property A which was purchased in 1998 by him together with his brother, with his cousin co-signing and holding 1% for mere credit-related purposes. The appellant and his brother shared all expenses evenly, including mortgage payments, and resided in the property. The appellant’s brother got married in 2007 and continued to reside in property A along with the appellant. In 2008, the appellant’s father passed away outside of Canada and the appellant’s mother came to live in property A with them.

In 2005 or 2006, the appellant and his brother began discussing going their separate ways. The appellant wished to move to a smaller home and made an offer to purchase property B in 2006 which was still in a pre-construction phase with occupancy not until 2008. However, it was established in evidence that the appellant could not afford both, and when the father died and the mom moved to property A, the appellant changed his plans and listed property B for sale shortly after purchasing it.

The sale of property B gave rise to a net gain.

The appellant reported the net gain as capital for tax purposes. However, the CRA provided a Notice of Reassessment categorizing the gain as business income (an adventure or concern in the nature of trade). The appellant appealed to the Tax Court of Canada.

Justice Wong set out the test as depending on four factors:

(1) Intention at the time property B was purchased

(2) Nature of the business, profession or calling or trade of the taxpayer

(3) The nature of the property and the use made of it by the taxpayer

(4) Extent to which borrowed money was used and the length of time the real estate was held

Intention. Although the appellant purchased property B with the intention of living in it as a primary residence, the court did not find the prospect of resale to have been a secondary intention at the time the appellant acquired the property. His intention to live in the property was simply stymied by the unexpected death of the father, which gave rise to a new family obligation to look after his mother. Accordingly, this factor favored a finding on account of capital.

Nature of the business, profession, trade or calling of the taxpayer. The appellant was a TTC operator and testified that property A was the first property he purchased. The appellant and his brother’s occupations were not closely related to real estate transactions. This factor, also, favored a finding on account of capital.

Nature of the property and the use made of it by the taxpayer. Property B was a residential, apartment-style condo which sold relatively quickly after being listed. The appellant did not ever live in it, and it was listed for sale immediately after he took possession and title. Accordingly, this factor favored a finding on account of income.

Extent to which borrowed money was used and the length of time the real estate was held. The only evidence of borrowed money was that the appellant had refinanced his mortgage of property A to purchase his brother’s share of that property. However, no evidence was led as to the appellant’s financing of the purchase of property B, although he did testify that he could not afford to own both properties. The court found this factor to be neutral.

Ultimately, Justice Wong found that based on the analysis of the above factors, and in particular intention, the sale of property B was a transaction on account of capital. The Tax Court concluded that the gain from the property was a capital gain and reported properly by the taxpayer as such. Therefore, the Minister of National Revenue’s reassessment was referred back on the basis that the gain was properly a capital gain, not income.

If you disagree with the CRA’s Notice of Reassessment—perhaps the CRA has ballooned your income or disallowed certain expenses or has recategorized the proceeds of a sale as income rather than capital, the first step in the tax appeal process is the filing of a ‘Notice of Objection’ to the reassessment which will preserve your appeal rights to the Tax Court of Canada. Importantly, you have a 90-day deadline from the date of the mailing of the Notice of Reassessment to file a Notice of Objection with the Chief of Appeals.

This blog has summarized Bygrave v. The Queen but does not constitute legal advice and is not intended to be a summary of the law relating to whether a gain should be treated as income in an adventure or concern in the nature of trade, or a capital gain. If you might be disputing a reassessment, it is best to contact an accountant or tax litigator. Please do not hesitate to contact us for a consultation: colin@cuttresslaw.com