Independent Gaz Service Inc. v. The Queen, 88 DTC 6230, [1988] 1 CTC 309 (FCTD)

Dubé, J.: —[Translation]: This is an appeal from a decision of the Tax Review Board that the proceeds of the group sale of service stations by the plaintiff on December 22, 1971 resulted in business income.

This group sale was the second one of its kind between the same parties. The circumstances surrounding these two sales were as follows.

Mr. François Durocher began operating service stations in 1962. Between 1963 and 1966 he built five service stations and sold these stations on August 2, 1966. This sale was not without its problems. A friend of Mr. Durocher, Mr. Robitaille, told him that a group wanted to buy a number of service stations. Mr. Robitaille, who did not have enough service stations, interested Mr. Durocher and the latter signed a purchase option in favour of Mr. Robitaille. On March 26, 1966, however, negotiations with the group broke down.

Mr. Durocher continued to operate his stations and built a new one at St- Janvier, incorporating Indépendant Gaz Service Inc. ("Service") on May 3, 1966. Mr. Robitaille then told Mr. Durocher that he had found a new buyer, Independant Gaz Stations (1966) Ltd. ("Stations"). However, Mr. Durocher no longer wanted to get rid of his service stations. Mr. Robitaille told Mr. Durocher he planned to exercise his option. After exhibiting some reluctance, Mr. Durocher sold his stations to "Stations". In return he was given a lease to operate the service stations for 13 months. The first group sale was treated by the Minister of National Revenue as a capital transaction.

Subsequently, in 1967, Mr. Durocher built a station at St-Luc. In 1968 he purchased a service station on rue Rouen in Montréal and built another at Auteuil. He equipped these service stations with car washes. In fall 1969 Mr. Durocher induced his nephew, Mr. Lorrain Durocher, to build and operate a service station at Joliette and during the first quarter of 1970 Mr. Durocher built another one at Beauharnois. In fall 1971 Mr. Chevalier, general manager of the "Stations" company, suggested that Mr. Durocher buy the business of the plaintiff “Service” for $375,000. Mr. Durocher signed the deed of sale with "Stations" on December 22,1971 for $425,000 after receiving a solicited offer of $400,000 from Golden Eagle. On the same day "Service" purchased the service station operated by Mr. Lorrain Durocher: this station was included in the group of service stations sold to "Stations".

It is this second group sale which is the subject of the case at bar.

When the sale had been concluded, Mr. Durocher still had his contracts to supply oil, first with "Stations" and second with Gasbec. On April 26,1972 Messrs. Guilbault and Lachapelle, who wished to operate car washes, incorporated G L Gaz Services Ltd., issuing a third of the shares to Mr. Durocher as security for oil supplies. The company built a service station in Terrebonne. The business proved to be a disaster. Acting as the company's agent, Mr. Durocher negotiated the sale of the station at a loss to Golden Eagle and signed the deed of sale on April 8, 1975.

On January 24, 1975 the Minister of National Revenue issued a notice of reassessment in which the sum of $175,460 resulting from the 1971 sale of the business was regarded as business income and not a capital gain. The Tax Review Board upheld the notice.

A fundamental principle of taxation is that the disposition of a business results in a capital gain, a fortiori for a business which requires care and labour to operate. Counsel for the plaintiff listed the reasons for the sale, which was not solicited: the offer of an attractive price, Mr. Durocher's weariness and wish to retire, the imminent adoption by the legislators of provisions taxing capital gains and favourable advice by the company's accountant. Mr. Durocher also refuted the testimony of Mr. Léopold St- Jean. His counsel asked the Court to conclude that the plaintiff had not purchased the service stations with the primary or secondary objective of making a profit.

On the other hand, counsel for the Minister responded that the transaction of December 22, 1971 was clearly a venture in the nature of trade and that Mr. Durocher had a primary, or at least secondary, intent of selling at a profit.

It has to be borne in mind from the outset that the burden of proof in taxation matters is on the taxpayer to show that the amount which is the subject of a notice of reassessment is, on a balance of probabilities, a capital gain and not business income.

When the taxpayer is a corporation, the intent of the taxpayer is that of its alter ego. In the case at bar Mr. François Durocher, the president of "Service", is the company's prime mover.

It must also be remembered that not all the service stations can be treated in the same way. The one in Joliette was owned by the president's nephew, Mr. Lorrain Durocher: he sold it to "Service" who resold it to "Stations". The purchase and sale of this service station on the same day gave rise to business income; but since the selling price equalled the purchase price, no profit resulted from the transaction.

The St-Janvier service station also requires some comment. Mr. Durocher built it before "Service" was incorporated and entered it on the "Service" balance sheet though the station was only transferred subsequently to "Service". Accordingly, the Court must only consider Mr. Durocher's intent in 1966, not when the situation of fact was legally corrected by the deed of transfer. This station must accordingly be treated like all the service stations except the one in Joliette.

It may at first sight appear that the plaintiff intended to engage in a profitmaking transaction from the outset, and that it accordingly created a second group of service stations with the premeditated purpose of making another group Sale which would result in a capital gain.

However, my consideration of the evidence leads me to conclude that Mr. Durocher actually wished to build up another chain of service stations, to operate it at a profit, and that the second group sale was no more premeditated than the first, even though it was made to the same buyer.

The evidence showed that Mr. Durocher gave "Service" a sound system of administration (for bill collection) and a sales promotion program (a drawing for a Renault in 1972). For three years he worked very hard operating the service stations to make a profit. His actions at the time suggested an intent to consolidate and operate stations rather than an intent to sell. This evidence rested on unrefuted testimony not only by the principal person concerned, Mr. Durocher, but by his nephew, his accountant and the president of the purchasing company.

I note in particular that Mr. Durocher sought out his nephew, who at the time was living in Trois-Rivières, to make him part of the development of his service station chain, though the nephew had a full-time job and was about to be married. Mr. Durocher was obviously preparing someone to succeed him. When he built his new house in Montréal, he accordingly set aside two areas for his office and that of his nephew. The nephew thus had to move to Montréal and reorganize his life around a career with his uncle, operating a chain of service stations. His testimony in this regard was quite credible and acceptable. When the sale occurred the uncle was able to find a job for his nephew with "Stations".

The circumstances surrounding the sale do not suggest that it had been in Mr. Durocher's mind since the service stations were purchased. The evidence was that Mr. Durocher did not solicit the sale of the "Service" business. He responded to an offer which was as attractive as it was unexpected by Mr. Maurice Chevalier, the president of “Stations”. According to his own testimony, Mr. Chevalier had not spoken to Mr. Durocher previously about purchasing service stations. Once Mr. Durocher became interested, he put up the price. At this point Mr. Durocher also began feeling weary and inclined towards retirement, and it was the time when legislation taxing capital gains was about to be introduced: the company's accountant had strongly advised him to take the opportunity before it was too late.

Mr. Durocher's actions after the transaction of December 22, 1971 do not contradict his intent to withdraw from the operation of service stations. However, he retained certain supply contracts so he could continue operating a part-time business of bulk distribution of oil. His involvement in G L Gaz Services Ltd. resulted from problems obtaining payment for oil deliveries. Mr. Durocher accordingly negotiated the sale of the service station owned by G L Gaz Services Ltd as agent in order to limit the losses of the business. The company owed Mr. Durocher as much as $85,000, and he thus suffered a loss of $25,000.

The only witness to sound a discordant note was a seller of car washes, Mr. Léopold St-Jean, who testified for the defendant that Mr. Durocher told him he was interested in building several stations so he could resell them as a group. I was not very impressed by this witness. He contradicted himself several times. His testimony lacked coherence and credibility. He had already sold Mr. Durocher two car washes and was perhaps disappointed that he could not sell him any more.

The taxpayer has thus convinced me that the transaction of December 22, 1971, like that in 1966, resulted in a capital gain. The actions taken in purchasing and operating the group of service stations from 1966 to 1971, including the involvement of Mr. Durocher's nephew in creating the chain of service stations, are clear proof of the intent which Mr. Durocher has at the outset to develop and establish a permanent business. The purchase offer in 1971 was thus as unexpected as the preceding one. The succession of two transactions of the same type does not necessarily create an established pattern of transactions in the nature of trade.

The appeal is accordingly allowed with costs and disbursements and the assessment of January 24, 1975 is referred back to the Minister for the plaintiff to be reassessed so as not to include the sum of $175,460 in calculating his income.

Appeal allowed.