Tax Court of Canada Judgments

Date: 19991112

Dockets: 98-802-IT-G; 98-948-GST-I

BETWEEN:

BRUCE T. MARTINUZZI,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Rip, J.T.C.C.

[1] Bruce Martinuzzi has filed two appeals with this Court, one appeal (General) is from an income tax assessment for 1995 and the second appeal (Informal) is from an assessment issued under Part IX of the Excise Tax Act ("ETA"). Both assessments arise from the same transaction.

[2] Mr. Martinuzzi purchased land in May 1994 and built a residence on the property. He and his wife moved into the residence in October 1994 and sold the property in June 1995. In preparing his 1995 income tax return Mr. Martinuzzi claimed that the profit from the sale of the property was exempt from tax since the residence on the property was his principal residence: paragraph 40(2)(b) of the Income Tax Act ("ITA"). He also applied for a new housing rebate pursuant to subsection 256(6) of the ETA with respect to his residence.

[3] The Minister of National Revenue ("Minister") assessed Mr. Martinuzzi under the provisions of the ITA for 1995 on the basis that he was in the business of selling houses and the profit from the sale of the property was on income account. For a similar reason, he was denied the new housing rebate by the Minister. The ETA assessment included tax, interest and penalty with respect to the sale of the residence since the sale was not exempt from the Goods and Services Tax ("GST"); the Minister did allow Mr. Martinuzzi an input tax credit with respect to the transaction.

[4] Prior to and during 1995 Mr. Martinuzzi worked for a supplier of truss systems for commercial buildings and through his work he got to know Mr. Frank Silvestri. He was also a tenant of Mr. Silvestri. One of Mr. Silvestri's corporations, 897551 Ontario Ltd., had subdivided land in the Port Arthur area of Thunder Bay, Ontario and in 1994 started to market the lots. Mr. Silvestri testified that he "painted a beautiful picture" of the area to convince Mr. Martinuzzi to purchase a lot. Mr. Silvestri said he gave the appellant "a sales pitch" that everything was "rosy". Mr. Silvestri knew Mr. Martinuzzi was about to be married and convinced him to purchase a lot for a small down payment. Apparently no lots had yet been sold. Mr. Silvestri stated that he showed Mr. Martinuzzi plans of the subdivision and hoped "things would be done on time and according to plans".

[5] When Mr. Martinuzzi first spoke to Mr. Silvestri concerning the purchase of the lot, he was engaged to be married at the end of September 1994. He and his fiancée looked at the plans of the subdivision and agreed to purchase one of the longer, pie shaped lots located on Vintage Crescent ("Vintage Crescent property"), for $60,000. Mr. Martinuzzi paid $5,500 in cash and the balance of the purchase price, $54,000, was secured by a mortgage back to the vendor. The transaction closed on May 3, 1994.

[6] A Mr. Michael Cupello acted as solicitor for both Mr. Martinuzzi and the vendor. Apparently Mr. Cuppello did not inform the appellant of any potential problems, legal or otherwise, concerning the Vintage Crescent property.

[7] When he purchased the lot Mr. Martinuzzi realized that the "subdivision had to be cleared" by municipal authorities but he did not realize that he could not start construction of the house immediately. However he "knew people" at City Hall and got in touch with them. Construction of the house began in June 1994 and was completed at the end of September 1994. Mr. Martinuzzi moved into the house a day after his wedding, on October 1, 1994. The interior of the house was painted by then and he and his fiancée had moved the furniture and appliances into the house.

[8] Mr. Martinuzzi built the house with relatives and friends, in particular with the assistance of Mr. John Michelli, who is a contractor, and Mr. Michelli's son. (The appellant said he acted mainly as a "go for"). The appellant did not pay Mr. Michelli for his services. He said Mr. Michelli was a friend of the family, knew he was getting married and wanted to help.

[9] Mr. and Mrs. Martinuzzi lived on Vintage Crescent until August 2, 1995 when they sold the property for $187,500. The property was first listed for sale (by multiple listing) in January 1995. Mr. Martinuzzi entered into an agreement of purchase and sale for another property on June 23, 1995.

[10] During the first three months he lived in the subdivision, Mr. Martinuzzi said, he began to notice "things" happening that Mr. Silvestri told him would not happen. He was "disappointed" with the subdivision; it was not what Mr. Silvestri had represented to him. The curbs and lighting, for example, were not installed at the date that Mr. Silvestri represented they would. He thought it would be a "fancier" subdivision. The homes on some of the other lots were not "upscale". The lots were "rough" and in disorder. The houses being built on other lots were smaller than his was. They were "box types", square and "hideous". The appellant's home was approximately 1,500 square feet; the neighbouring homes were about 1,200 square feet. Mr. Silvestri had told him the average size of the homes would be about 1,400 square feet. The subdivision "looked like a dump". One of Mr. Silvestri's employees built a house on one of the lots and kept old cars along side of the house. Mr. Martinuzzi was not happy.

[11] The zoning for the subdivision, according to the appellant, was for single family residential homes. However sometime after Mr. Martinuzzi purchased the property, Mr. Silvestri informed him of the possibility of low income housing being built on a section of the subdivision.

[12] Mr. Silvestri acknowledged that when the appellant acquired the property much work remained to be done on the subdivision which still required final municipal approval. This included road paving and installation of curbs and street lights.

[13] The subdivision was Mr. Silvestri's first subdivision and "in the first couple of years lots of things didn't work out". Appellant's counsel asked Mr. Silvestri, what part of the "rosy picture" he was describing to the appellant was true and what part was not true. Mr. Silvestri replied that he believed all would be "rosy", but the appellant "fell into the part that didn't come true". "Eventually", he said, the work was done, but not according to his original schedule.

[14] Mr. Silvestri said that he thought that he would convert part of the subdivision into a "condo system" for low rental housing or government supported dwellings. He anticipated that 25 percent of the subdivision would be devoted to affordable housing. This would require approval by the City of Thunder Bay. Mr. Silvestri realized that it would be difficult to sell lots for $160,000 homes if subsidized housing was a block away. "People move if they are not happy". He said that the appellant did not ask - and he did not volunteer the information - if there would be any subsidized housing in the subdivision.

[15] In cross-examination Mr. Martinuzzi denied that the Vintage Crescent property was for sale before the first snowfall of autumn 1994. He did confirm that during construction of the Vintage Crescent house, he put a "For Sale" sign on the property. He explained that he had been trying to sell a truck but as construction of the house progressed and Mr. Silvestri's promises were not being fulfilled he got angry and installed on the property the "For Sale" sign meant for the truck. The sign was on the property for several weeks. Once his anger subsided, he said, he took the sign away. The sign, he insisted, was a "joke".

[16] Mr. Martinuzzi stated he never showed the Vintage Crescent house for sale purposes during construction. People asked to look at it while it was being built and he let them. At first he was proud of the house, then he became annoyed because so many people were asking to look at it. Before the windows and doors were installed people were free to come and go as they pleased. He said he never gave permission to any real estate agent or anyone else to show the house for sale.

[17] The appellant first informed Ms. Diane Lee, an appeals officer with Revenue Canada, of the "For Sale" sign on the Vintage Crescent property in November 1997. Ms. Lee testified that the appellant told her that he originally wanted to list the property for $192,000, but the actual listing price was $189,900.

[18] In his notice of objection, the appellant represented that "we even dropped our price a couple of times just so we could get out of there as fast as possible". In fact, Mr. Martinuzzi never "dropped" the asking price but did make counter offers to several offers to purchase presented to him by Mr. Belluz, his agent.

[19] Once the appellant and his wife sold the Vintage Crescent property they rented a smaller house "across town". On June 23, 1995 the appellant had agreed to purchase a lot on Falconcrest Drive in the Fort William area of Thunder Bay for $45,000; the vendor was to give back a mortgage for $39,999. Construction of the house started at the end of September 1995 and the appellant and his wife moved into the house in January 1996. Mr. Martinuzzi stated that this lot was in a nicer subdivision that was mostly built-up. He "knew what we were getting into".

[20] The appellant built a house on the Falconcrest Drive lot "the way we wanted". The house was more upscale and consisted of 2,000 square feet with a garage. The house was again built by Mr. Martinuzzi's family and friends. Mr. Michelli came around the house "a few times".

[21] On April 10, 1996 the appellant listed the Falconcrest Drive property ("Falconcrest Drive property") for sale for $234,900. The final building inspection of the house had not yet taken place. Mr. Martinuzzi explained that during construction "lots of realtors were passing by" asking to have the house listed with them. "A lot of people were bothering me". He got in touch with the realtor, Mr. Anthony Belluz, who had sold the Vintage Crescent property. The appellant and Mr. Belluz have known each other since school. Mr. Belluz told Mr. Martinuzzi that it was common for realtors to try to hunt down a listing to get a commission. Mr. Martinuzzi agreed to have the property listed with Mr. Belluz on April 16, 1996. They both testified that a listing would reduce chances of other realtors bothering the appellant. If any other realtor came along Mr. Martinuzzi would simply tell that person that the property was already listed. The listing with Mr. Belluz was an exclusive listing. In Mr. Martinuzzi's view, an exclusive listing meant that he was not serious about selling and simply wanted to be left alone. The appellant testified that Mr. Belluz "never showed the house to anyone" since it was not listed for sale.

[22] Mr. Belluz declared that Mr. Martinuzzi told him that "if I have to sell [the Falconcrest Drive property], I want you to sell it for me". According to Mr. Belluz "we were fishing the market" and he and the appellant wanted to see if there were some serious offers.

[23] When the appellant acquired the Falconcrest Drive property, he said, he also looked for another property in the same subdivision for his father. He and his father agreed that once the appellant's home was built, a home would be built for his father. The reason he wanted his house built first was because he and his wife were renting at the time. The appellant's father agreed to wait. Mr. Martinuzzi told the developer of the subdivision of his father's interest and their plans. According to the appellant, the principal of the developer agreed not to sell the lot the appellant's father had his eye on until the elder Martinuzzi was ready to buy. The second lot was never purchased since the appellant's father died in October 1996. The lot was released for sale when the developer was informed of the death of the senior Mr. Martinuzzi, said the appellant.

[24] Nothing was ever put into writing that the father or the appellant, for that matter, had an option or a right to acquire the second lot. According to the appellant there was simply a verbal agreement between the principal of the developer and the appellant.

[25] Mr. Martinuzzi acknowledged that Mr. Belluz placed advertisements in the local newspaper showing a photograph of the Falconcrest Drive property. Mr. Martinuzzi stated that Mr. Belluz was not interested in selling the property but used the picture as a selling tool for a similar house being built by Mr. Martinuzzi in the subdivision.

[26] Mr. Martinuzzi stated that he received various unsolicited offers for the Falconcrest Drive property, including one for $234,000. He refused all offers. He told Ms. Lee that if he could get "a gazillion dollars" for the property he would sell it. The offers, he said, "piqued my curiosity". The house was listed with Mr. Belluz for $234,900.

[27] Once he heard from a Ms. Carol Voth, an auditor for Revenue Canada, informing him that Revenue Canada was reviewing his income tax return for 1995, the appellant took the Falconcrest Drive property off the market. He "didn't pursue the matter". Ms. Voth testified she met Mr. Martinuzzi on May 27, 1996 and again on April 9, 1997. At their last meeting Mr. Martinuzzi told her that the "For Sale" sign on the property was a "joke".

[28] At the time of his father's death, Mr. Martinuzzi and his wife had moved into the Falconcrest Drive property. In April 1996 he started clearing the lot anticipated for his father. By the time his father died the lot had been cleared to "a reasonable point".

[29] During the construction of the Vintage Crescent property, Mr. Silvestri showed the property to at least one other couple. He said that he showed the house not to sell, but to permit a couple to compare the appellant's house to another similar house that was also under construction. He denied telling the couple that the house could be painted colours of their choice or that a space could be substituted for an existing wall. Mr. Silvestri stated that he himself never built houses for resale. He assembles land, subdivides and sells vacant lots.

[30] Cheryl Yamashita, the lady who was part of the couple to whom Mr. Silvestri showed the Vintage Crescent property, testified she saw the Vintage Crescent property in June 1995 while it was under construction. She stated that she and her common-law husband met Mr. Silvestri at a coffee shop. Her husband and Mr. Silvestri knew each other. Mr. Silvestri told them about the subdivision and a house that was being built and volunteered to show them the house. This was the house the appellant was building. Ms. Yamashita said she understood that Mr. Silvestri was "selling" the house. There were things she did not like about the house and Mr. Silvestri said he could accommodate her wishes to make various changes. At trial, she did not know whether Mr. Silvestri was discussing the house he was showing her or some other house. Eventually, Ms. Yamashita and her husband purchased another house on Vintage Crescent that is similar to the Martinuzzi house.

[31] In cross-examination Mr. Silvestri denied ever putting up a sign in the subdivision stating that the sales of lots were not subject to the GST. However, he stated that he volunteered to pay the GST on the sale of a lot. Ms. Yamashita testified that he told her and her husband they would not have to pay GST on any house they purchased. Since the house had been occupied no GST was exigible, he explained. Her understanding was that Mr. Silvestri would obtain an occupancy permit for the house. In other words, he would claim that someone was living in the house before the sale took place and no GST would be payable. Ms. Yamashita could not say with any certainty that the house that would be occupied and then sold, was the appellant's house or another house under construction at the time.

[32] Ms. Yamashita and her husband eventually acquired a fully completed house at 105 Vintage Crescent. This house was similar to the Vintage Crescent property. Ms. Yamashita believes she saw the vendor of the house on one occasion, he was working as a tradesman at one of the houses under construction in the subdivision. She also stated that Mr. Silvestri took them to see approximately four houses in the subdivision before they agreed to purchase their home.

[33] No GST was paid by Ms. Yamashita or her husband when they purchased the house at 105 Vintage Crescent. She said the man who built the house "supposedly, but not really, lived in the house".

[34] In Ms. Yamashita's view, the Vintage Crescent property was located in a "nice neighbourhood". The area was quiet and the people were nice. She said that the house that she acquired was about the same size as other houses in the area, but she did admit that she is not a good judge of size. Ms. Yamashita described the subdivision as clean, but still undeveloped. She also acknowledged that construction material was strewn in various parts of the neighbourhood.

[35] Mr. Silvestri stated that he was trying to create activity in the subdivision because "business was dead". He did not intend to sell the appellant's house when he was showing it to Ms. Yamashita.

[36] Mr. Belluz said that he was asked by the appellant to sell the Vintage Crescent property because the appellant and his wife were newly married and Mrs. Martinuzzi did not like the Port Arthur side of the City of Thunder Bay. She preferred to live in the Fort William area. Mrs. Martinuzzi, he said, worked late hours and there were neither lights, sidewalks or curbs to help her walk safely on the street when she arrived home from work.

[37] The Vintage Crescent property was listed for sale only three months after the house was completed. The house was for sale during construction and that history repeated itself on acquisition of the Falconcrest Drive property: the property was listed for sale three months after the house was completed and, the appellant had an interest in a second lot in the subdivision. Ms. Voth acknowledged the appellant did not have a prior history of buying and selling property and that he did not personally show the Vintage Crescent property.

[38] Mr. Martinuzzi's counsel very ably argued that his client's proceeds from the sale of the Vintage Crescent property was a sale of Mr. Martinuzzi's principal residence and therefore is free from income tax. On acquiring the house built on the property, Mr. Martinuzzi was entitled to a new housing rebate pursuant to the ETA, counsel added.

[39] I cannot agree with counsel. Firstly, the appellant's testimony troubled me. There were certain things he stated at trial or that he wrote in his notice of objection that, if taken alone, perhaps, could be rationalized in his favour, but taken together, cause me to doubt his evidence. I do not believe that the installation of a "For Sale" sign on the property during construction was a "joke". Who was the appellant trying to kid? In his notice of objection he wrote that he "dropped our price a couple of times" but in fact he never did; he only made counter offers to certain offers to purchase he received from his agent.

[40] I also do not believe that Mr. Martinuzzi thought for a moment that the construction of a house, first in a new development and later in a mature development, would not attract the curious. As he testified, the house under construction on the Vintage Crescent property, at least, was superior to the other houses in the subdivision and this would normally cause potential purchasers of subdivision lots to view houses under construction. Neither do I sympathize with the appellant when he says he put the Falconcrest Drive property for sale because he was being harassed by people wanting to see the house.

[41] Mr. Martinuzzi testified that at the time of closing of the Vintage Crescent property he was not aware he could not yet start construction of the house nor was he aware of any potential problem related to the property. Mr. Michael Cupello acted as his solicitor on the purchase of the property; Mr. Cupello also acted as the vendor's solicitor. Later on, when Mr. Martinuzzi acquired the Falconcrest Drive property, Mr. Cupello again acted on his behalf. Did Mr. Cupello not advise him of possible problems? To accept Mr. Martinuzzi's evidence I would have to conclude that Mr. Cupello did not advise Mr. Martinuzzi of any problem with the Vintage Crescent property when, according to the appellant, there was at least one major problem; he could not yet build his home. Even after he expressed difficulties with the Vintage Crescent property he retained Mr. Cupello to act for him on the subsequent purchase. Mr. Cupello did not testify at the trial.

[42] On the evidence before me Mr. Martinuzzi had in his mind, at the time he acquired the Vintage Crescent property, the possibility of reselling as an operating motivation for its acquisition.[1] It may well be that he and his wife intended to reside on the property and in fact the residence on the property was their only residence during the time they resided there. Mr. Martinuzzi's cost of construction was relatively low and the lot was highly mortgaged; it was ripe for resale and he realized the sale potential when he undertook the venture. I cannot satisfy myself that Mr. Martinuzzi acquired the property solely with the intention or operating motivation of building a residence for himself and his wife.

[43] In my view the profit from the disposition of the Vintage Crescent property arose from an adventure or concern in the nature of trade: the purchase of a vacant lot, the construction of a residential building on the lot and the sale of the property were all contemplated a the time of the acquisition of the property by the appellant. The Vintage Crescent property was not capital property to the appellant.

[44] The profit from the sale of the Vintage Crescent property is therefore to be included in the appellant's income for 1995 in accordance with section 3 and subsection 9(1) of the ITA.

[45] A "builder", for purposes of the ETA, is defined in paragraph 123(1):

"builder" of a residential complex ... does not include

(f) an individual described by paragraph (a) ... who

(i) carries on the construction ...

otherwise than in the course of a business or an adventure in the nature of trade ...

[46] The fact that the appellant's secondary intention only was to build a house to sell at a profit and that his primary intention was to live on the property does not remove the appellant from the definition of "builder". The appellant was engaged in the course of a business or an adventure or concern in the nature of trade. The appellant's operating motivation in acquiring the Vintage Crescent property and to construct a house on the property was the prospect of its sale at a profit. The appellant was a builder as defined by paragraph 123(1)(f) of the ETA.[2]

[47] That Mr. Martinuzzi's main purpose was to live in that house he built on Vintage Crescent does not mean that he built that house for use as the "primary place of residence" of him and his wife so as to entitle him to a housing rebate under the provisions of subsection 256(2) of the ETA. Where the house is for sale as well as for use as a residence, it is not for use as a primary place as residence.[3]

[48] The appeals are dismissed. The respondent shall be entitled to her costs in the appellant's appeal from the income tax assessment.

Signed at Ottawa, Canada, this 12th day of November 1999.

"Gerald J. Rip"

J.T.C.C.

---