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Federal Tax - Income

. Wall v. Canada

In Wall v. Canada (Fed CA, 2021) the Federal Court of Appeal considered when proceeds from the building and sale of a series of houses were to be taxed on an income or a capital gains basis:
[24] Therefore, the critical issue in this appeal is whether Mr. Wall was engaged in a business or an adventure or concern in the nature of trade when he had the three houses constructed. Neither party disputed that the tests to be considered in determining whether a gain realized on a disposition of property is an income gain or a capital gain are as set out in Happy Valley Farms Limited v. Minister of National Revenue, [1986] 2 C.T.C. 259, 86 D.T.C. 6421 (F.C.T.D.):
• the nature of the property sold;

• the length of the period of ownership;

• the frequency or number of similar transactions;

• work expended on or in connection with the property;

• the circumstances that were responsible for the sale of the property;

• motive.
[25] The tests are all based on the facts of the particular case and directly or indirectly lead back to the intention of the taxpayer. The significance of the taxpayer’s motive or intention was noted by the Supreme Court of Canada in Friesen v. Canada, 1995 CanLII 62 (SCC), [1995] 3 S.C.R. 103, 127 D.L.R. (4th) 193:
16 The first requirement for an adventure in the nature of trade is that it involve a "scheme for profit-making". The taxpayer must have a legitimate intention of gaining a profit from the transaction. Other requirements are conveniently summarized in Interpretation Bulletin IT-459 "Adventure or Concern in the Nature of Trade" (September 8, 1980) which references Interpretation Bulletin IT-218 "Profit from the Sale of Real Estate" (May 26, 1975) for a summary of the relevant factors when the property involved is real estate.

17 IT-218R, which replaced IT-218 in 1986, lists a number of factors which have been used by the courts to determine whether a transaction involving real estate is an adventure in the nature of trade creating business income or a capital transaction involving the sale of an investment. Particular attention is paid to:

(i) The taxpayer's intention with respect to the real estate at the time of purchase and the feasibility of that intention and the extent to which it was carried out. An intention to sell the property for a profit will make it more likely to be characterized as an adventure in the nature of trade.

(ii) The nature of the business, profession, calling or trade of the taxpayer and associates. The more closely a taxpayer's business or occupation is related to real estate transactions, the more likely it is that the income will be considered business income rather than capital gain.

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

(iv) The extent to which borrowed money was used to finance the transaction and the length of time that the real estate was held by the taxpayer. Transactions involving borrowed money and rapid resale are more likely to be adventures in the nature of trade.
[26] In Cardella v. Her Majesty the Queen, 2001 FCA 39 (FCA), this Court stated that a taxpayer’s intention is “a factor of utmost importance”:
[26] The courts have consistently emphasized that, in determining whether a transaction was intended as an adventure in the nature of a trade, regard must be had to the surrounding circumstances: Happy Valley Farms Ltd. v. The Queen, 86 DTC 6421 (F.C.T.D.), at 6424. The taxpayer's intention as a factor of utmost importance was stressed by the Supreme Court of Canada in Friesen v. Canada, 1995 CanLII 62 (SCC), [1995] 3 S.C.R. 103.


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