Tax Court of Canada Judgments

Date: 20040112

Docket: 2001-759(IT)G

BETWEEN:

ANTHONY REALE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on July 10 and October 31, 2003, at Toronto, Ontario.

Before: The Honourable Justice Gerald J. Rip
Appearances:
For the Appellant:	The Appellant himself
Counsel for the Respondent:	Lesley King and Jocelyn Espejo Clarke

_______________________________________________________________

JUDGMENT

          The appeal from the assessment made under the Income Tax Act for the 1995 taxation year is dismissed, without costs.

Signed at Ottawa, Canada, this 12^th day of January, 2004.

"Gerald J. Rip"

Rip, J.

Citation: 2004TCC41

Date: 20040112

Docket: 2001-759(IT)G

BETWEEN:

ANTHONY REALE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Rip, J.

[1]      The issues in this appeal by Anthony Reale from an assessment of income tax for 1995 in which the Minister of National Revenue disallowed a business loss on the disposition of a property located in Florida are:

(a)       whether the appellant and his wife carried on business in partnership for the acquisition of a property in Boco Raton, Florida which they sold in May, 1994;

(b)      if there was a partnership, whether the partnership incurred a business loss on the disposition of the Florida property; and

(c)      whether the appellant is entitled to deduct in 1995 the loss, if any, from the purported partnership between himself and his wife.

[2]      Mr. Reale was not represented by counsel.

[3]      Before 1992, Mr. Reale was the principal shareholder and operator of Dominion Builders Inc., a construction company carrying on business in Toronto. In the late 1980's and early 1990's the Toronto construction trade was depressed, according to Mr. Reale, and he "considered the possibility of doing some work in the United States; as in Canada".

[4]      Mrs. Reale's parents lived in Florida about six months a year. On a visit to his in-laws in Florida in 1989, Mr. Reale and his wife decided to purchase an "old property" in Boca Raton, Florida ("Florida property"). The property included a three-bedroom residence, and a swimming pool. It was located on the inter-coastal waterway, about a 20 minute drive from Mr. Reale's in-laws. To finance the purchase of the Florida property, the Reales mortgaged their home in Toronto, borrowing $250,000 from the Royal Bank of Canada, and "raised as much capital as we could". They registered "Dominion Builders" as a business name in Florida.

[5]      On or about December 15, 1989 the Reales acquired the Florida property for US$350,000. Their intention, Mr. Reale reiterated, was to renovate the property and resell it at a profit. In 1999, Mr. and Mrs. Reale demolished all of the residence on the property, except for one wall and began extensive construction essentially constructing a new residential building. Mr. Reale stated that the property was available for occupancy and sale by 1991, although renovations were not wholly completed until the property was sold on May 17, 1994 for US$700,000 (C$959,000). The residence was vacant at all times until the sale.

[6]      Mr. Reale stated that neither he nor Mrs. Reale resided on the property. During construction, when he was in Florida, he either slept in a sleeping bag or stayed at Mrs. Reale's parents' home. When Mrs. Reale and their children visited Florida, they would stay at Mrs. Reale's parents' home. The children were university students at the time. Mrs. Reale visited Florida "on numerous occasions to supervise renovations but always stayed with her parents", Mr. Reale insisted.

[7]      During construction, Mr. and Mrs. Reale "put in" to the property $500,000 to $600,000 of their "own money". They defaulted on the mortgage of their home to the Royal Bank of Canada and their house in Toronto was sold for $450,000.

[8]      Mr. Reale testified that he listed the Florida property for sale. He was unable to produce any copies of listing agreements because, he said, the realtor was out of business and one of the agents was deceased. He said he had three separate agents trying to sell the house.

[9]      Dominion Builders Inc. constructed commercial buildings since 1983; it had no experience in residential construction. Mrs. Reale had no construction background but looked after the corporation's accounting and administration. Business records were maintained for Dominion Builders Inc.

[10]     Mr. Reale maintained receipts from suppliers of building material to the Florida property. These were produced at trial. All the invoices were issued in 1990. Some of the invoices refer to the "Reale residence". Mr. Reale replied that in the construction industry contractors, architects and engineers refer to the personal residence even if it is not a personal residence. He insisted that "this does not mean the house was built for us". As far as reference to Dominion Builders is concerned, that was the name he registered to carry on the business, he explained.

[11]     In cross-examination, Mr. Reale asked "why would I build a $350,000 home in Florida" when business in Toronto is "lousy?"

[12]     Mr. Reale acknowledged costs of construction of the Florida property may have been high. He explained that he was "frequently away" from Florida and was not "hands on"; this, caused expenses to rise. He declared that he built the residence without any particular prospective customer in mind. He had offers to sell before May, 1994, but they were "low".

[13]     I do not agree with the Minister that Mr. and Mrs. Reale did not carry on a business in partnership with respect to the acquisition, renovation and disposition of the Florida property. While it is true that Mr. Reale did not maintain books and records that one would reasonably expect to be maintained for such a business, he has maintained many, if not all, of the invoices sent to him during the construction of the residence on the property. I accept his testimony that he did not acquire the property as a residence for his family. The money invested and the source of the loans are not compatible with the acquisition of a family home, in particular when one's main source of income, Dominion Builders Inc., is in a bad way.

[14]     Mr. Reale was in the construction business. While he had no prior experience in building homes, he did have experience, as he said, in negotiating construction contracts. He knew how to build, he knew the vagaries of the construction industry, at least in Toronto. If he and Mrs. Reale did not carry on a business in the ordinary sense of the word, they did enter into a venture in the nature of trade, a "business" for purposes of the Act. Indeed, if Mr. and Mrs. Reale had made a profit on the disposition of the property, I am pretty certain that the CCRA would have enforced its right as a partner of Mr. and Mrs. Reale and assessed their profit as income from a business.

[15]     I also find that Mr. and Mrs. Reale carried on the business in partnership. The Florida property was registered in their names as tenants in common. I accept Mr. Reale's testimony that the purpose of the venture was to make a profit.

[16]     However, this is not the end of the matter. There remains to decide the year of disposition and, thus, the year the loss was incurred.

[17]     Near the end of the trial, bearing in mind the date the property was sold, May 17, 1994, and the year in issue, 1995, I queried Mr. Reale as to the fiscal year of the partnership. He was unable to reply. I requested him to provide me with some information concerning the partnership's year end and when he forwarded an explanation, I reconvened the trial to afford Mr. Reale the opportunity to clarify his evidence and for the respondent to cross-examine. When the trial continued Mr. Reale's accountant, Alex Dey, testified on behalf of the appellant.

[18]     Mr. Reale's 1995 income tax return was produced. The income tax return for 1995 is dated March 24, 1997, 11 months after it ought to have been filed. The Statement of Business Activities, House Construction, that is, the construction sale of the Florida property, is a report for the period May 1, 1994 to April 30, 1995 and is part of the income tax return. The sale of the Florida property is reported in this return and a business loss is claimed.

[19]     On May 13, 1997, two months after the 1995 income tax return was filed, Mr. Reale filed a "T1 Adjustment Request" for 1995 to the effect that:

Construction business reported in wrong year. See also T1-ADJ for 1994. Request carried forward from 1994.

The "Statement of Business Activities", House Construction for 1995, was adjusted so that the reporting period for the business was January 1, 1995 to December 31, 1995. The Adjustment Request states:

Year end previously assigned in error as April 30, 1995 but should have been December 31, 1994, business income properly included in the 1994 year and now excluded from 1995.

The final year of the business is acknowledged on the Statement of Adjustments, to be 1994.

[20]     Mr. Dey discussed the constant tardiness by Mr. Reale in filing his own and his corporation's income tax returns; usually the returns were filed only after the tax authorities demanded that they be filed. Mr. Reale's personal 1994 income tax return was filed on time - this appears to be the only return filed on time - but the sale of the Florida property was not reported in the return.

[21]     Mr. Dey then had no contact with Mr. Reale, except by telephone twice a year, until late 1996 when Mr. Reale brought to him notices of demand to file his 1995 income tax return. Apparently Mr. Reale told Mr. Dey that he had tax outstanding for 1991, 1992, 1993 and 1994 and wished to carry back the loss from the disposition of the Florida property. Mr. Dey asked Mr. Reale for information, including invoices, sale documents, etc. about the Florida property to determine the loss. He realized that Mrs. Reale "was involved in this property" and believed that the property, which was registered as "tenants in common", was owned by Mr. and Mrs. Reale as partners.

[22]     By the time Mr. Dey was able to review the sale of the Florida property, he said, the time for objecting to the 1994 assessments had expired. Therefore, in Mr. Dey's view, the only way to have its loss claimed in 1994 was to file a Request for an Adjustment. However, Mr. Dey realized the Notices of Adjustment could be disallowed and, if so, he would have no recourse: there were no books or "normal" records one would expect to see in a normal business operation and these deficiencies may result in a denial of the request.

[23]     At the time, the income tax returns of Mr. and Mrs. Reale for 1995 had not been filed. He prepared and filed their income tax returns for 1995 and chose an April 30, 1995 year end for the business. On assessment, he thought he would be able to object and attempt to convince the fisc to have the loss from the Florida property included in computing income for 1994, allowing a carry back of losses to 1991. If he were not successful in convincing the tax authorities, the loss would remain in 1995, but would not be available to be carried back as far as 1991.

[24]     The notices of assessments for 1995 were dated April 17, 1997. Mr. Reale then filed the Request for Adjustment referred to earlier to convince the Canada Customs and Revenue Agency ("CCRA") to recognize a December 31 year end for 1995. This would create a December 31 year end for the partnership for all years, so that for 1994, the partnership's year would end on December 31. The disposition would then have occurred in 1994. This was Mr. Dey's plan.

[25]     The CCRA rejected the Request for Adjustment. The CCRA also disallowed the loss for 1995 on the basis the appellant did not carry on a business with respect to the Florida property; that the Florida property was personal property.

[26]     Respondent's counsel submits that any partnership of Mr. and Mrs. Reale with respect to the Florida property dissolved on May 17, 1994, the date of disposition of the property, and for purposes of the Act, the fiscal period ended immediately before May 17, that is, May 16, 1994: subsection 99(1) [1]. Mr. Reale does not appear to have made any election under subsection 99(2) to prevent the cessation of the year end.

[27]     On the facts before me, it is clear that once the Florida property was sold, Mr. and Mrs. Reale's venture to make a profit on the construction or renovation of residential (or other) property in Florida came to an end and their partnership ceased to exist. The partnership retained no other property and carried on no other business.

[27]     In Ontario, the province in which the Reales reside, the dissolution of partnerships is governed by section 32 of the Partnerships Act[2]. The relevant provisions of the Partnerships Act are common to similar statutes throughout Canada. Section 32 provides that a partnership is dissolved, among other reasons, "if entered into for a simple adventure or undertaking, by the termination of that adventure or undertaking". The adventure to acquire and sell the Florida property was, it is clear, a "one-shot" affair and it ended on the sale of the property. Only if it were successful, would Mr. Reale have considered other residential construction projects. In any event, once the property was sold, Mr. and Mrs. Reale had no intention to continue to carry on the construction business in common with a view to profit.[3]

[29]     I agree with the respondent: the partnership ceased to exist on May 17, 1994 and the year end was May 16, 1994. The Florida property was disposed of in the partnership's 1994 tax claim and the loss was incurred in that year, not 1995.

[30]     The Crown will have to succeed in the defence of the assessment. My jurisdiction under the Act is only to consider the taxation year appealed, no other. Unfortunately this leaves Mr. Reale in a situation where he has won the battles that he carried on business in partnership with his wife and that they incurred a business loss on disposing of the Florida property but he lost the war: he cannot deduct his share of the loss in 1995.

[31]     To a great extent Mr. Reale is a victim of his tardiness in filing his tax returns. Strangely enough, the only return he filed on time was for 1994 and he omitted to claim the loss on the Florida property. Had he attended to his tax matters on a timely basis, perhaps he would have been in time to object to 1994 in order to correct the situation or file a waiver to permit the Minster to assess beyond the normal assessment period. However, although there is no requirement for the CCRA to act on a waiver, a subsequent judgment, like this one, would have some moral weight in convincing the Minister to reassess 1994.

[32]     I am not ordering Mr. Reale to pay costs; to do so would be rubbing salt into an unfortunate wound and, on the facts of this appeal, would not be in the interest of justice.

[33]     The appeal for 1995 is dismissed.

          Signed at Ottawa, Canada, this 12^th day of January, 2004.

"Gerald J. Rip"

Rip, J.

CITATION:

2004TCC41

COURT FILE NO.:

2001-759(IT)G

STYLE OF CAUSE:

Anthony Reale v. The Queen

PLACE OF HEARING:

Toronto, Ontario

DATE OF HEARING:

July 10 and October 31, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice Gerald J. Rip

DATE OF JUDGMENT:

January 12, 2004

APPEARANCES:

For the Appellant:

The Appellant himself

Counsel for the Respondent:

Lesley King and Jocelyn Espejo Clarke

COUNSEL OF RECORD:

For the Appellant:

Name:

Firm:

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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