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Neither the taxpayer nor her granddaughter reported any income relating to the condos on their 2010 tax returns. The CRA reassessed the taxpayer’s 2010 tax year on the basis that she had failed to report business income of $103,206, that total being the gain on the sale of Unit 6. Similarly, the CRA reassessed the granddaughter’s 2010 tax year, adding $106,025 of business income to her return, representing the gain on the sale of Unit 5. The CRA then charged them both with gross negligence penalties.

In court, the taxpayer and her granddaughter took the position that the profits on the sales of the condos should only be half-taxable as capital gains since they maintained it was their original intent to hold the condos on a long-term basis. They explained the condos were next to Seneca College, which the granddaughter was planning to attend after graduating high school; she would live in her condo while the taxpayer would rent her own condo out to third parties.

The judge was not persuaded by this explanation. As it turns out, neither the taxpayer nor her granddaughter had the financial resources to complete the purchases. The taxpayer’s credit rating was too poor for any conventional lender and her granddaughter was earning less than $7,000 annually. The taxpayer had to borrow money from friends on short-term loans just to bridge the time between the closing of the purchases and the subsequent sales. She then used the proceeds from the sale of Unit 5 to help close the purchase of Unit 6. It also turned out that Unit 6 was listed for sale before the taxpayer even took ownership of it.