2019 QCCQ 6242, 2019 QCCQ 6242

Cristofaro c. Agence du revenu du Québec 2019 QCCQ 6242 COURT OF QUEBEC (Civil Division) CANADA PROVINCE OF QUEBEC DISTRICT OF MONTREAL No: 500-80-033330-169 500-80-033343-162 500-80-033344-160 DATE: October 7, 2019 ______________________________________________________________________ BEFORE THE HONOURABLE ENRICO FORLINI, J.C.Q. ______________________________________________________________________ 500-80-033330-169 DIANE CRISTOFARO Plaintiff v. AGENCE DU REVENU DU QUÉBEC Defendant 500-80-033343-162 JAYSEN CRISTOFARO Plaintiff v. AGENCE DU REVENU DU QUÉBEC Defendant 500-80-033344-160 DEAN CRISTOFARO Plaintiff v.

AGENCE DU REVENU DU QUÉBEC Defendant ______________________________________________________________________ JUDGMENT ______________________________________________________________________ Overview [ 1 ] These are appeals from assessments made by the Agence du revenu du Québec (“ Agency ”) pursuant to the Québec Taxation Act (R.S.Q. chap.

I-3 ) and which pertain to the characterization of the proceeds of sale of two buildings sold by one or more of the Plaintiffs. [ 2 ] In May 2011, Jaysen Cristofaro and a third party sell a property located at 1960, Laird Boulevard in the town of Mount Royal (the “ Laird Property ”) for $1,050,000. [ 3 ] Jaysen Cristofaro reports the proceeds from the disposition of this property as a capital gain in his 2011 tax return. [ 4 ] In 2013, Diane, Dean and Jaysen Cristofaro sell a property located at 67, Cornwall Street in the town of Mount Royal for $1,700,000 (the “ Cornwall Property ”). [ 5 ] Diane, Dean and Jaysen Cristofaro each report the proceeds from disposition of this property as a capital gain in their respective 2013 tax returns. [ 6 ] In June 2015, the Agency reassesses each of the taxpayers with respect to the qualification of the proceeds of the sale of the Cornwall Property.

The Agency concludes that the proceeds from the sale of this property should be reported as business income and not capital gain. [ 7 ] Likewise, in the same month, the Agency reassesses Jaysen Cristofaro’s 2011 tax return and concludes that the proceeds from the sale of Laird Property should be reported as business income and not capital gain.

[ 8 ] In file # 500-80-033330-169, Diane Cristofaro appeals from the Agency’s Notice of Assessment for the 2013 taxation year in which the Agency characterizes as business income as opposed to a capital gain the proceeds of disposition of the Cornwall Property. [ 9 ] In file # 500-80-033344-160, Dean Cristofaro appeals the Agency’s Notice of Assessment which similarly qualifies as business income the proceeds of sale of the same immovable. [ 10 ] Finally, in file # 500-80-033343-162, Jaysen Cristofaro appeals Notices of Assessments for the 2011 and 2013 taxation years in which the Agency also qualifies as business income the proceeds of disposition of the Laird Property and the Cornwall Property. [ 11 ] The taxpayers assert in their appeals that the Agency improperly qualified the proceeds of sale of these properties since they claim that they properly reported this income as a capital gain. [ 12 ] The issue in these three appeals pertains to the tax treatment of the gains realized by the taxpayers on the sale of the Laird Property and the Cornwall Property for each of the taxation years at issue. [ 13 ] For the reasons that follow, the Court concludes that the appeals should be allowed and the notices of assessments must be vacated as the taxpayers properly reported the proceeds of disposition as a capital gain.

The acquisitions and sales of the properties do not constitute an adventure in the nature of trade as the transactions were not speculative and intended to yield a profit. Issues

a) Did the Agency properly conclude that the gain realized by Jaysen Cristofaro following the sale of the Laird Property constitutes business income and not capital gain?

b) Did the Agency properly conclude that the gain realized by the taxpayers following the sale of the Cornwall Property constitutes business income and not capital gain?

Context [ 14 ] The sole issue raised in these appeals is whether the Agency properly requalified the proceeds of the disposition of the Laird Property and the Cornwall Property as business income rather than capital gains. [ 15 ] The appeal filed by Jaysen Cristofaro deals with the disposition of the Laird and Cornwall properties whereas the appeals filed by Diane and Dean Cristofaro only take issue with the Agency’s qualification of the proceeds of the sale of the Cornwall Property. [ 16 ] Diane Cristofaro is Dean and Jaysen Cristofaro’s mother.

The Laird Property [ 17 ] On April 26, 2010, Jaysen Cristofaro and Michael Stephan purchase the Laird Property for $1,050,000. [1] [ 18 ] On May 20, 2011, roughly one year after they purchase the property, they sell it for $1,700,000. [2] [ 19 ] Between April 2010 and May 2011, over $492,000 is spent to renovate the Laird Property. [3] [ 20 ] In his 2011 tax return, Jaysen Cristofaro reports a taxable capital gain of $20,028.50 following the disposition of the Laird Property. [4] [ 21 ] On June 29, 2015, the Agency, pursuant to an audit of Jaysen Cristofaro’s 2011 tax return, issues a Notice of Reassessment and reclassifies the taxable capital gain on the Laird Property as business income of $75,357.54. [5] The Cornwall Property [ 22 ] In April 2011, Diane Cristofaro acquires the Cornwall Property and pays $649,000. [6] [ 23 ] In June 2011, Dean, Jaysen and Diane Cristofaro enter into an agreement whereby they agree that each will be 1/3 the owner of the Cornwall Property. [7] [ 24 ] On June 27, 2013, the Cornwall Property is sold for $1,700,000. [8] [ 25 ] In her 2013 income tax return, Diane Cristofaro reports her 1/3 share of the proceeds of the disposition of the Cornwall Property as a net taxable capital gain of $124,536. [9] [ 26 ] Dean and Jaysen Cristofaro likewise report in their respective income tax returns the same amount as net taxable capital gains. [ 27 ] On June 29, 2015, following an audit, the Agency requalifies the proceeds of sale of the Cornwall Property as business income rather than as a capital gain and as a consequence, $252,135.29 is added as business income to each of the taxpayers’ income for the 2013 taxation years as per notices of assessments issued by the Agency. [10]

Analysis and Decision The Law Presumption of Validity of the Tax Assessments [28] Under

article 1014 of the Taxation Act, tax assessments issued by the Agency are presumed or deemed to be valid. [29] To rebut or demolish this presumption of validity, a taxpayer must present prima facie evidence that the factual assertions onwhich rest the Agency’s assessments are wrong. If this is accomplished, the burden of proof is reversed and the Agency must bypreponderance of proof, establish the accuracy of the facts supporting its assessment. [30] This rule was summarized by the Québec Court of Appeal in 9027-5967 Québec Inc. v. Québec (Sous-ministre du Revenu)[11]as follows: [13] Dans l'arrêt Durand c.

Québec (sous-ministre du Revenu), la Cour a réitéré les règles relatives à la présomption de validité dela cotisation fiscale et des fardeaux de preuve qui en découlent. Reprenant les principes énoncés par la Cour suprême dans HickmanMotors Ltd. c. Canada, la Cour dit : - La cotisation fiscale jouit d'une présomption de validité (art. 1014

Loi sur les impôts), qui peut être repoussée par le contribuable. - Le fardeau initial du contribuable consiste à « démolir » l'exactitude de la présomption en présentant une preuve prima facie. - Lorsque le contribuable présente une telle preuve, il y a renversement du fardeau de la preuve. - Le fisc doit alors réfuter la preuve prima facie et prouver la cotisation établie par présomption. (Footnotes omitted) [31] As to what constitutes prima facie evidence sufficient to rebut the presumption, the Québec Court of Appeal in St-Georges v.Québec (Sous-ministre du Revenu)[12] explains as follows: [10] Dans Capobianco c.

Québec (Sous-ministre du Revenu), 2007 QCCA 1235 , J.E. 2007-1837 aux paragr. 12 à 14(C.A.), la Cour précise que le contribuable n'a pas à établir le montant exact de son revenu imposable. Cet enseignement metdéfinitivement fin au flottement entourant la question du fardeau de preuve du contribuable qui s'oppose à l'avis de cotisation parce quele montant de son revenu imposable établi par le ministère du Revenu serait inexact.

Le contribuable doit seulement démolirl'exactitude de la présomption en présentant une preuve prima facie de son inexactitude. [11] La preuve du contribuable doit toutefois comporter un certain degré de précision et de probabilité en sa faveur par oppositionà des allégations vagues et ambiguës. Règle générale, la simple affirmation du contribuable ne suffit pas; elle aura avantage à êtresoutenue par une preuve documentaire ou circonstancielle. [12] La thèse voulant qu'une simple négation de la part du contribuable puisse contrer la présomption de validité de l'article1014 L.I. reviendrait à priver cet

article de tout son sens. (Footnotes omitted) [32] In 9027-5967 Québec Inc.[13], the Court of Appeal expanded on the meaning of prima facie evidence: [14] Règle générale, la preuve prima facie se définit comme une preuve suffisante pour établir un fait jusqu'à preuve du contraire.Dans Stewart c.

M.R.N., le juge Cain mentionne qu'« une preuve prima facie est celle qui est étayée par des éléments de preuve quicréent un tel degré de probabilité en sa faveur que la cour doit l'accepter si elle y ajoute foi, à moins qu'elle ne soit contredite ou que lecontraire ne soit prouvé ». (Footnotes omitted) [33] The Court of Appeal has also stated that prima facie evidence constitutes “un début de preuve convaincante”.[14] [34] Finally, in Agence du revenu du Québec v.

Stamatopoulos, the Court of Appeal holds that clear and convincing testimony maybe sufficient to rebut the presumption of validity[15] : [50] … cette Cour reconnaît qu’un témoignage clair, non ébranlé en contre-interrogatoire, offert par un témoin dont la crédibilité n’estpas mise en doute, peut suffire à réfuter les hypothèses des autorités fiscales… Disposition of Real Property: Capital Gain or Business Income? [35] Whether the proceeds of the disposition of real property qualifies as a capital gain or business income is a topic that has givenrise to abundant case law.

The question must be analyzed in light of the facts of each case and the applicable legislative provisions. [36]

Section 1 of the Taxation Act defines “business” as follows: “business” includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and, except for the purposes ofsubparagraph a of the first paragraph of

section 164,

section 250.4 and subparagraph i of the second paragraph of

section 726.6.1, anadventure or concern in the nature of trade but does not include an office or employment;

[ 37 ] This definition is similar to the definition of “business” found in section 248(1) of the Federal Income Tax Act , which likewise includes the expression “adventure in the nature of trade.” Decisions which apply and interpret section 248(1) of the Federal statute are an instructive and useful source in interpreting the meaning of what constitutes a “business” under the Québec legislation. [ 38 ] In Friesen , the Supreme Court of Canada held that the expression “an adventure in the nature of trade” in

section 248 Income Tax Act means that the taxpayer has a trading or business intention with respect to a property he/she has purchased. In other words, the transaction must “involve a "scheme for profit-making." The taxpayer must have a legitimate intention of gaining a profit from the transaction.” [16] [ 39 ] In Canada Safeway Limited , the Federal Court of Appeal commented as follows as to the meaning of the same terms: B.

Adventure in the Nature of Trade ; [40] Although the definition of “business” found in section 248(1) of the Act includes “an adventure or concern in the nature of trade”, it does not define that concept.

In Principles of Canadian Income Tax Law, 5th ed.(Toronto: Carswell, 2005) at p. 333, the learned authors, Hogg, Magee and Li, explain the concept of an adventure in the nature of trade as follows: An adventure or concern in the nature of trade is an isolated transaction (which lacks the frequency or system of a trade) in which the taxpayer buys property with the intention of selling it at a profit and then sells it (normally at a profit, but sometimes at a loss). Accordingly, when a taxpayer enters into an isolated transaction (or only few transactions), he or she is not a trader.

But, if the transaction was a speculative one, intended to yield a profit, it is in the name of a business . … [43] I agree entirely with the authors of Principles of Canadian Income Tax Law, supra , when they say, at page 334, that although the courts have used various factors to determine whether a transaction constituted an adventure in the nature of trade or a capital transaction, namely, those found in IT-218R, the most determinative factor is the intention of the taxpayer at the time of acquiring the property.

If that intention reveals a scheme for profit-making, then the Court will conclude that the transaction is an adventure in the nature of trade. [Underlining Added] [ 40 ] In the same decision, the Court summarizes the applicable rule in assessing whether a real estate transaction gives rise to business income or a capital gain: [61] A number of principles emerge from these decisions which I believe can be summarized as follows.

First , the boundary between income and capital gains cannot easily be drawn and, as a consequence, consideration of various factors, including the taxpayer’s intent at the time of acquiring the property at issue, becomes necessary for a proper determination. Second, for the transaction to constitute an adventure in the nature of trade, the possibility of resale, as an operating motivation for the purchase, must have been in the mind of the taxpayer . In order to make that determination, inferences will have to be drawn from all of the circumstances.

In other words, the taxpayer’s whole course of conduct has to be assessed. Third, with respect to “secondary intention”, it also must also have existed at the time of acquisition of the property and it must have been an operating motivation in the acquisition of the property. Fourth, the fact that the taxpayer contemplated the possibility of resale of his or her property is not, in itself, sufficient to conclude in the existence of an adventure in the nature of trade .

In Principles of Canadian Income Tax Law, supra , the learned authors, in discussing the applicable test in relation to the existence of a “secondary intention”, opine that “the secondary intention doctrine will not be satisfied unless the prospect of resale at a profit was an important consideration in the decision to acquire the property” (see page 337). I agree entirely with that proposition.

Fifth, the viva voce evidence of the taxpayer with respect to his or her intention is not conclusive and has to be tested in the light of all the surrounding circumstances . [Underlining added] [ 41 ] The parties in this case all agree that the Canada Revenue Agency

Interpretation Bulletin IT-218R summarizes the criteria developed by the case law in determining whether a transaction leads to a capital gain or business income. [ 42 ] Indeed, the Québec Court of Appeal in Hardy [17] , recognized that the criteria listed in this bulletin reflect the applicable criteria as develop by the case law. [ 43 ] The Bulletin states: 1. A gain arising on the sale of real estate will be considered to be business income, property income or a capital gain.

This bulletin does not deal with gains arising on the sale of real estate that is or was designated as a principal residence because such gains are dealt with in IT-120R3. 2. The word "business" is defined in subsection 248(1) so as to include, inter alia, an adventure or concern in the nature of trade. This definition can cause an isolated transaction involving real estate to be considered a business transaction. As a business, any gain or loss which arises therefrom is, by virtue of

section 9, required to be included in computing income or loss, as the case may be. 3. There is no provision in the Income Tax Act which describes the circumstances in which gains from the sale of real estate are to be determined as being either income or capital. However, in making such determinations, the courts have considered factors such as those listed below: (The list is not intended to be exclusive of any other factor.) (

a) the taxpayer's intention with respect to the real estate at the time of its purchase; (

b) feasibility of the taxpayer's intention;

(

c) geographical location and zoned use of the real estate acquired; (

d) extent to which intention carried out by the taxpayer; (

e) evidence that the taxpayer's intention changed after purchase of the real estate; (

f) the nature of the business, profession, calling or trade of the taxpayer and associates; (

g) the extent to which borrowed money was used to finance the real estate acquisition and the terms of the financing, if any, arranged; (

h) the length of time throughout which the real estate was held by the taxpayer; (

i) the existence of persons other than the taxpayer who share interests in the real estate; (

j) the nature of the occupation of the other persons referred to in (

i) above as well as their stated intentions and courses of conduct; (

k) factors which motivated the sale of the real estate; (

l) evidence that the taxpayer and/or associates had dealt extensively in real estate. 4. None of the factors listed in 3 above is conclusive in itself for the purpose of determining that a gain arising on the sale of real estate constitutes income or a capital gain. The relevance of any factor to such a determination will vary with the facts of each case. 5. A taxpayer's intention at the time of purchase of real estate is relevant in determining whether a gain on its sale will be treated as business income or as a capital gain.

It is possible for a taxpayer to have an alternate or secondary intention, at the time of acquiring real estate, of reselling it at a profit if the main or primary intention is thwarted. If this secondary intention is carried out, any gain realized on the sale usually will be taxed as business income. 6. The more closely a taxpayer's business or occupation (e.g. a builder, a real estate agent) is related to real estate transactions, the more likely it is that any gain realized by the taxpayer from such a transaction will be considered to be business income rather than a capital gain (see 3(

f) and (

j) above). [ 44 ] The Court agrees with the following comments made by Justice Favreau in Ayala v. The Queen [18] , referring to the “secondary intention” criteria which appears in paragraph 5 of IT-218R: [11] En plus de ces critères, les tribunaux canadiens ont développé le critère de « l’intention secondaire » qui peut s’appliquer même lorsqu’il est établi que le contribuable avait comme intention principale de réaliser un investissement à long terme.

Ce critère s’applique, si au moment de l’acquisition du bien, le contribuable avait à l’esprit la possibilité de vendre le bien à profit si son projet d’investissement à long terme ne pouvait se réaliser pour quelque raison que ce soit. [ 45 ] Finally, in applying all these criteria, the Court should keep in mind the following fundamental question as formulated by the Court of Appeal in Hardy [19] : [6] La question en litige consistait à déterminer si la vente des deux résidences concernées était un « un projet comportant un risque ou une affaire de nature commerciale », de sorte que le gain réalisé lors des deux ventes constituait un revenu d’entreprise. [ 46 ] The transactions relating to the Laird Property and the Cornwall Property will therefore be analyzed in light of the law summarized above.

a) Did the Agency properly conclude that the gain realized by Jaysen Cristofaro following the sale of the Laird Property was business income and not capital gain? [ 47 ] In the spring 2010, Jaysen is approached by a friend, Michael Stephan, who informs him that the Laird Property is on the market. It is a 50 to 60-year-old property in generally good condition and located close to Mr. Stephan’s personal residence.

Since he does not have sufficient funds to purchase the Laird Property, he asks Jaysen whether he would like to team up with him to purchase the property. [ 48 ] Considering that the price at which the Laird Property was offered was a reasonable price and considering the condition of the property, Mr. Stephan and Jaysen Cristofaro agree to purchase it jointly. [ 49 ] They purchase the Laird Property in April 2010 and pay $1,050,000. [20] [ 50 ] According to the viva voce evidence of the taxpayers, their goal is to renovate and rent it out so as to generate rental income.

There is no intent to resell it within a short time frame and realize a quick profit. [ 51 ] Initially, Mr. Stephan and Jaysen Cristofaro’s intention is to carry out minor renovations on the Laird Property before putting it on the rental market. Each is supposed to contribute equally towards the renovation expenses. [ 52 ] As time goes on, both Jaysen and Mr. Stephan realize that the task at hand is larger than they expected. Renovation expenses escalate significantly and take more time than expected. The renovation budget explodes. Mr.

Stephan realizes he cannot keep up with his equal share of the cost of the renovation expenses. [ 53 ] Ultimately, while Mr. Stephan and Jaysen Cristofaro were supposed to split the renovation costs, Mr. Stephan only contributes

30% whereas Jaysen contributes 70%. [ 54 ] They try to rent the Laird Property, but are unable to do so. Even if they had rented it out, they realize that rental revenue would not be enough to recover the expenses they put into renovating the property. [ 55 ] As time goes on, Mr. Stephan and Jaysen Cristofaro realize that they are overburdened by the escalating renovation costs. [ 56 ] Mr.

Stephan informs Jaysen Cristofaro that he wants to sell the Laird Property because the costs are prohibitive and he does not have enough time to manage the property given his full-time job. [ 57 ] On May 20, 2011, Jaysen Cristofaro and Michael Stephan sell the Laird property for $1,700,000. [21] [ 58 ] When Jaysen Cristofaro and Mr. Stephan purchase the Laird property, their intent is not speculative. Rather, their goal is to renovate the property, rent it out, and derive rental income.

Their testimony is believable and was not seriously undermined in cross- examination. [ 59 ] Ultimately this plan (i.e. original intention) is modified as explained above. [ 60 ] It is true that the length of time they owned the Laird property is short [12 months] and militates against qualifying the gain as a capital gain. However, Mr. Cristofaro’s and Mr. Stephan’s explanations as to the reason why the plan changed is credible and believable. [ 61 ] As the renovations in the Laird Property progress and the costs skyrocket, Mr. Cristofaro and Mr. Stephan realize, and this is especially true for Mr.

Stephan, that they are in over their heads and have over extended themselves. As Mr. Stephan explains “it was simply too much’’. [ 62 ] Neither Mr. Jaysen Cristofaro nor Mr. Stephan are habitual or sophisticated real estate investors. [ 63 ] Mr. Stephan owns and operates a nightclub and has no real estate experience. As he explains, given his limited knowledge of the real estate market and home renovations and the time he spends operating his nightclub, he has no time to oversee the renovations to the Laird Property and relied on Jaysen.

More significantly, he lacks the financial resources to keep up with the spiralling renovation costs. [ 64 ] His inexperience in real estate transactions is demonstrated by his lack of understanding of what is entailed by a sale without legal warranty. [ 65 ] Jaysen Cristofaro operates an automobile sales and leasing business. He has limited experience with real estate transactions. [ 66 ] Prior to 2010, he owned three real estate properties: (

i) his personal residence (ii) a single family residential property which he purchased with his brother Dean in May 2006 in Saint-Lazare, Québec and sold in December of the same year [22] , and (ii) a condominium unit in Montréal purchased in 2008 for which he paid $125,000. [23] [ 67 ] Jaysen and Dean purchased the Saint-Lazare property in 2006 because the price was low as it had been seriously damaged by fire and required extensive renovations, which they carried out.

The property was not rented during the period they owned it because it was undergoing renovations. [ 68 ] Jaysen and Dean sold the Saint-Lazare property because it was difficult to manage as it was located quite a distance from their respective homes. [ 69 ] The condominium unit has been rented out to third parties since its purchase and has never been on the resale market. Jaysen Cristofaro still owns the property as of the date of the trial. [ 70 ] In short, neither Mr. Stephan nor Jaysen Cristofaro have dealt extensively in real estate. In fact, this is Mr. Stephan’s first foray in the field.

Moreover, their respective occupations are not closely related to real estate transactions. [ 71 ] As the renovation expenses on the Laird Property escalate, the partnership formed between Mr. Stephan and Jaysen Cristofaro falls apart. [ 72 ] If the intention of Jaysen Cristofaro and Mr. Stephan changed after the purchase, this is attributable to the skyrocketing renovation costs and the difficulty in finding a tenant, and not because they were motivated by realizing a profit through a quick flip. [ 73 ] When considering all the surrounding circumstances in light of the criteria listed in

Interpretation Bulletin IT-218R, the Court believes that Jaysen Cristofaro has presented prima facie evidence rebutting the presumption of validity with respect to the notice of reassessment for the 2011 tax year. [24] [ 74 ] Fundamentally, the proof adduced by the taxpayer is convincing and believable: based on an assessment of the whole course of conduct of the taxpayer, the purchase of the Laird Property was not a scheme for profit making. The evidence does not establish that in the minds of Jaysen Cristofaro and Mr.

Stephan, the possibility of resale was an operating motivation for the purchase. [ 75 ] While the taxpayers’ intention was not carried out, the reason it was thwarted is reasonably explained and plausible. The decision to sell the Laird Property does not turn this acquisition into an adventure in the nature of trade. [ 76 ] The nature of Mr. Stephan’s occupation, and to a lesser extent Jaysen Cristofaro’s, is not consistent with a scheme for profit- making.

[ 77 ] As the Agency did not refute this prima facie evidence on the preponderance of evidence, Mr. Jaysen Cristofaro’s appeal for the 2011 taxation year must be granted.

b) Did the Agency properly conclude that the gain realized by the taxpayers following the sale of the Cornwall Property constitutes business income and not capital gain? [ 78 ] The purchase of the Cornwall Property is a family affair.

The course of conduct of the Cristofaro family and the surrounding circumstances of the acquisition and sale is imperative to understand whether the proceeds from the sale of this property qualify as business income or a capital gain. [ 79 ] Diane Cristofaro is the mother of the taxpayers Jaysen and Dean Cristofaro. [ 80 ] Her previous husband and the boys’ father ran an automobile leasing and sales business. [ 81 ] When he was alive, the family lived in a duplex in east end Montréal. [ 82 ] In 1986, the Cristofaro family purchased a duplex located at [...] in the Town of Mount Royal (“Laird Duplex”) and moved into one of the two apartments. [ 83 ] After Diane separated from her husband, she continued to reside with her boys in one of the two apartments.

After her boys aged and moved out, she continued to live in the Laird Duplex and occupied one of the two apartments. [ 84 ] Her elderly mother has also lived in the same duplex, occupying the apartment that was not occupied by Diane and her family. [ 85 ] In 2004, Diane Cristofaro’s mother moved out of her apartment and moved into with Diane. The apartment she used to occupy was rented out to a third party. This apartment has been leased since then. [ 86 ] Mrs. Cristofaro also owns a residential property on Algonquin Street in TMR which she purchased approximately in 2010 and has leased.

She reports rental income from this property. [ 87 ] Mrs. Cristofaro is very close to her sons Jaysen and Dean. When the boys set up their automobile leasing and sales business in the 90s, she helped them notably by acting as a director of the company, by obtaining the bond required to operate an auto business and by agreeing to hypothecate her duplex to guarantee the line of credit taken out by Dean and Jaysen to finance their business. Purchase of the Cornwall Property and the Taxpayer’s Intent [ 88 ] In April 2011, Dean notices that the Cornwall Property, a single-family residence, is for sale.

It is an estate sale and the interior of the property has not been renovated for many years, perhaps decades. [ 89 ] Dean recommends to his mother to visit the property knowing that she has always wanted to purchase a single family residence and given that the sale price is attractive. [ 90 ] In early April, Mrs. Cristofaro visits the Cornwall Property and is attracted by the low selling price of $649,000.

She decides to purchase the Cornwall Property first because she has always wanted to live in a single-family dwelling, having lived in duplexes all her adult life, and because the price is low compared to other homes in the neighbourhood. [ 91 ] By acquiring a single family home, she was fulfilling a lifelong goal. She further believed that the Cornwall Property would be an ideal home for her and her aging mother.

Dean and Jaysen’s testimony corroborates their mother’s testimony with respect to her intent at the time of acquiring the Cornwall Property. [ 92 ] On April 20, 2011, Diane Cristofaro purchases the Cornwall Property and pays $649,000. [25] Nature of Taxpayers’ Occupations and Experience in Real Estate Transactions [ 93 ] Mrs. Cristofaro is not in the real estate trade by profession.

While she has dabbled in the auto industry because her former husband and children are active in this industry, she has principally worked in the retail clothing industry all her adult life. [ 94 ] She is a shareholder of 174682 Canada Inc., which owns a commercial building from where she operates a retail clothing store where she works from. [ 95 ] Other than owning this building through the corporation, as well as her duplex on Laird Street and her rental property on Algonquin Street, she has no other real estate experience. [ 96 ] To conclude, her occupation is not related with real estate transactions and she has not dealt extensively in real estate transactions. [ 97 ] While Dean Cristofaro is not a stranger to real estate transactions, his occupation involves operating two auto and sales and leasing enterprises, 9046-9479 Québec Inc. (Motorcarlease.com) and Royal Leasing Company

(2007) Ltd., with his brother Jaysen. [26] [ 98 ] Through 9086-6807 Québec Inc., of which he is a shareholder and director, he owns a commercial building on Paré Street in Montréal which houses Royal Leasing Company Ltd, a company which he also is a shareholder and director and which operates the auto leasing business which is his principal source of employment.

[ 99 ] Dean Cristofaro has owned at least six real estate properties. Of these, he has owned or owns four rental properties: • He owns a condominium unit in Westmount Square for which he declared rental income in 2013. [27] He has owned this condo for 15 years and still owned it at the time of the trial; • He also owns a condominium unit in a vacation resort in the Laurentians for which he also declares rental income in 2013. [28] He purchased this property in 2011 and still owned it at the time of the trial; • Dean owned a condo in Old Montréal which he purchased in 2006 and sold in 2012.

He derived rental income from this property and reported a capital gain of $47,885 in 2012; [29] • A house in the Laurentians (Saint-Adolphe-d’Howard) purchased in May 2010 and sold in September 2012. He reported a capital gain upon this position in 2012 of $26,395; [30] • A house in the Western suburbs of Montréal purchased with his brother Jaysen in May 2016 for 59,000 and which he resold only seven months later in December 2016 for 289,000, realizing a net gain of 230,000.

He declared a capital gain following the sale. [31] Dean Cristofaro explains that he sold the property because it was difficult to rent and it was located far from his residence in TMR which made it difficult to manage. • In addition to the above four mentioned properties, he owns a family residence in TMR. [ 100 ] These real estate transactions do not illustrate a conduct of purchases and resales in the context of schemes for profit-making.

Except for the Saint-Lazare property, and the Laurentian property, Dean has owned real estate to generate rental income. [ 101 ] Dean’s principal occupation, is operating the auto sales and leasing businesses, 9046-9479 Québec Inc. (Motorcarlease.com) and Royal Leasing Company

(2007) Ltd., which he owns with his brother Jaysen. [ 102 ] Dean and Jaysen’s occupations in the auto sales and leasing businesses are not related to real estate transactions. Jaysen has not dealt extensively in real estate. Dean’s experience is broader that his brother’s, but it does not reveal a pattern of purchases and sales within a short time frame. Financing of the Acquisition of the Cornwall Property [ 103 ] To finance the purchase of the Cornwall Property and the extensive renovations, Mrs. Cristofaro obtains a line of credit from the Bank of Montréal in April 2011.

She decides to finance through a line of credit rather than through a loan agreement secured by a hypothec because she knew that she would have to renovate the property. [ 104 ] The Agency argues that this type of financing is indicative of an adventure in the nature of trade. Perhaps it is, but the Agency has not adduced evidence to establish that line of credit financing is more indicative of a profit motivated transaction rather than a capital acquisition. [ 105 ] The Agency also argues that since Mrs.

Cristofaro declares in the line of credit agreement that the Cornwall Property “is not and will not be her principal family residence’’ [32] , this demonstrates that she never intended to live in the Cornwall Property despite what she states at the trial. [ 106 ] Mrs. Cristofaro explains that she agreed to this statement because given her limited source of income, her lender would not agree to the financing unless she stated that she was going to rent the property. Her explanation is plausible and the Agency did not adduce any evidence from her lender which refutes her claim.

Diane Cristofaro’s Plans are Thwarted and Her Sons Come to Her Help [ 107 ] Ultimately, Mrs. Cristofaro never moves into the Cornwall Property. She sells it in June 2013, twenty-six months after she purchased it, for $1,710,000. [33] [ 108 ] The changing circumstances between the purchase of the Cornwall Property and its sale twenty-six months later are explained as follows. [ 109 ] When Mrs.

Cristofaro took possession of the property, she realized that it was in a dilapidated state and that it required significant renovations. [ 110 ] The scope and the extent of renovations that were required to update the house to the level of homes in that neighborhood was significantly beyond what she had originally anticipated. What she believed was going to be a small renovation project turned out to be a full-blown interior rebuild. [ 111 ] In May 2011, as the extent and the cost of renovations increased significantly, Mrs.

Cristofaro came to realize that the task at hand was too challenging to carry out on her own. She turned to her family for help, as could be expected in the circumstances. [ 112 ] Jaysen and Dean readily agreed to come to their mother’s assistance with respect to the renovation of the Cornwall Property. They add that she agreed to help them when they established their car leasing business, so it was only normal for them to help her when she needed assistance.

[ 113 ] Hence, on or about June 1, 2011, Diane, Dean and Jaysen entered into a counter letter which states as follows: Agreed upon today June 1 2011, Dean Cristofaro, Jaysen Cristofaro and Diane Cristofaro have agreed to purchase the property located at [...], Town of Mount Royal Quebec [...]. The purchase, renovation and resale of the property will be divided equally 33.3 percent each. The property will first be for rent – and if the property is rented out long term before a sale, the rental income will be divided equally at 33.3 percent each, between Jaysen, Dean and Diane.

The sale and possible capital gain on the property will be divided and shared equally, at 33.3 percent each. Each party will be responsible for paying the capital gain due to the Government on his or her income tax return after the sale of the property. [34] [ 114 ] By late May early June 2011, Mrs. Cristofaro realizes that her goal to move into the Cornwall Property is not feasible for two reasons. Firstly, her mother’s health, who is close to 91 years old, has taken a turn for the worse. When the Cornwall Property was initially purchased in April, her health was fine and Mrs.

Cristofaro intended that she would move in with her. However, between April and late June, her health deteriorated quickly. Given her mother’s Alzheimer diagnosis, Mrs. Cristofaro felt that it would not be appropriate for her mom to move into a new environment. [ 115 ] Secondly, Mrs.

Cristofaro realized that moving into the Cornwall Property was no longer financially feasible given the extensive renovation costs which she had undertaken and which she had not originally anticipated. [ 116 ] This explains why the parties stated in the counter letter that ‘’the property will first be for rent – and if the property is rented out long term before a sale, the rental income will be divided equally at 33.3 per cent each between Jaysen, Dean and Diane.’’ [ 117 ] By June 2011, Mrs.

Cristofaro’s intention was to complete the renovations to the Cornwall Property and then to rent it out. [ 118 ] This change in intention was motivated in large part because of the realization that the extent and expense of the renovations were such that Mrs. Cristofaro realized that she was way over her head. This realization caused her to seek her sons’ help and hence, the signature of the counter letter. What was originally purchased as a property she would live in became a rental property. [ 119 ] Mrs. Cristofaro spent upwards of $312,000 towards renovations on the Cornwall Property.

These were carried out over roughly a twenty-month period beginning in May 2011. [35] She did not hire a general contractor to carry out the renovations, rather she contracted with the sub trades herself, with the help of her two sons. [ 120 ] The renovations were completed by the end of the year 2012. The length of time it took to carry out the renovations is likely attributable to the fact that Mrs.

Cristofaro was carrying out this work on top of her employment in the retail clothing store. [ 121 ] In November 2012, having realized that her original intent, which was to move into the Cornwall Property, was not feasible, Mrs. Cristofaro decides to put the property on the market for sale or potential rental. [ 122 ] She enters into a brokerage agreement with a prominent TMR real estate brokerage firm and the house is listed for sale at $1,895,000. [36] According to her real estate broker, the parties had agreed that if Mrs.

Cristofaro rented the Cornwall Property at $8,500 or $9,000 per month, then the property would not be sold and the broker would not be entitled to its commission. [37] [ 123 ] That said, as the real estate broker testified, renting a residential property for $8,500 to $9,000 per month is difficult to do given the prevailing real estate market conditions at the time. [ 124 ] In March 2013, Mrs. Cristofaro accepted a promise to purchase the Cornwall Property.

The deed of sale was signed in June 2013 at a price of $1,710,000. [38] Conclusion [ 125 ] The overall impression that emerges from the taxpayers’ testimony and the documentary evidence is that Diane Cristofaro’s purchase of the Cornwall Property was made with the intent of living in it. She was fulfilling a lifelong goal by purchasing a single family home where she would reside with her mother. From her perspective, this was not a speculative purchase aimed at renovating the property and reselling it at a profit.

The possibility of a resale was not on her mind at the outset. [ 126 ] Ultimately, this goal did not materialize because Diane Cristofaro was overwhelmed by the scope and the expense of the renovations. This is not surprising giving that she is a novice in the field of real estate investment. [ 127 ] This change of circumstances caused her to reach out to her sons and to sign the Counter letter. [ 128 ] The Cristofaros signed the Counter letter as a family, not as a business transaction.

Jaysen and Dean’s motivation in signing this agreement was motivated by their desire to help their mother, and not because they were interested in realizing a profit. Just as she had helped them when they started out in auto business, Dean and Jaysen agreed to help her out when she needed financial help and guidance for the extensive renovations that had become too large and expensive for Mrs. Cristofaro to handle by herself. [ 129 ] The family’s testimony is believable and convincing. Their proof is not vague; the Court finds it to be precise and more than probable.

It is “un début de preuve convaincante” to borrow language from the Court of Appeal. [ 130 ] The prospect of the sale at a profit was never a primary or secondary intention of the Cristofaros. For Diane, the intention in acquiring the Cornwall Property was to finally own a single-family dwelling that she could move into with her mother. For her sons, they became owners because they wanted to help out their mother. In neither case was this acquisition a profit-making scheme. Thus, it cannot be considered an adventure in the nature of trade. [ 131 ] In

summary, the overall testimony adduced by the taxpayers leads the Court to conclude that they have presented a sufficiently

[ 131 ] In

summary, the overall testimony adduced by the taxpayers leads the Court to conclude that they have presented a sufficiently strong prima facie case that rebuts the presumption of validity. The taxpayers’ evidence raises such a degree of probability in their favour that it must be accepted as it is believable. [ 132 ] Given that their evidence was not rebutted, nor was the contrary proved by the Agency, the taxpayers’ appeals in regard to the Cornwall Property must be allowed and the Agency’s assessments for 2013 for each of these taxpayers will be vacated.

FOR THESE REASONS, THE COURT: In file 500-80-033330-169: [ 133 ] ALLOWS Diane Cristofaro’s appeal; [ 134 ] VACATES the Notice of Assessment dated June 29, 2015, bearing number MW574338C01; [ 135 ] WITH LEGAL COSTS; In file 500-80-033344-160: [ 136 ] ALLOWS the appeal; [ 137 ] VACATES the Notice of Assessment dated June 29, 2015, bearing number QV457383C01; [ 138 ] WITH LEGAL COSTS; In file 500-80-033343-162: [ 139 ] ALLOWS the appeal; [ 140 ] VACATES the Notices of Assessment dated June 29, 2015, bearing number QV344553C01 for the 2013 tax year and number MV853057C01 for the 2011 tax year; [ 141 ] WITH LEGAL COSTS . __________________________________ ENRICO FORLINI, J.C.Q.

Me Brian Moulaison and Me Charles Leibovich GWBR sencrl and Services Juridiques CML inc. Plaintiffs’ counselor Me Kamal Saoud Larivière Meunier Defendant’s counselor Date of hearing: February 6, 7 and 8, 2019