Sarchuk, T.C.J.:—The appeals of Leonard Reeves Incorporated are from assessments to income tax for the 1984 and 1985 taxation years and from a notice of determination of loss for the 1983 taxation year. The principal issue is whether the profit arising on the sale of certain property during the appellant's 1984 taxation year was income from a business rather than a capital gain as declared by the appellant. Three other issues are raised by the appellant, two of which flow from the foregoing property disposition and its treatment for tax purposes. The third has been resolved by the parties.
I turn first to the primary issue.
A. Disposition of the Property
The appellant is a Canadian controlled private corporation, the principal business of which was the management of rental properties, investments and the development and sale of land. The president and principal shareholder of the appellant was Mr. Leonard Reeves (Reeves). Since 1977 it has been involved in the ownership and operation of a number of mobile home parks in the United States. In that year, in partnership with Mr. Walter Piper (Piper), a real estate broker in the State of Florida, the appellant purchased two such parks,
Georgetown Mobile Manor located in Florida and Magnolia Park located in Donna, Texas. In 1978 the appellant, Piper and Edwin Lampman (Lampman), purchased another park named Leisure World in Weslaco, Texas. In January 1980, this same partnership purchased Trails End Park, also located in Weslaco, Texas. In July 1980, the latter three were sold. The fourth, Georgetown Mobile Manor, had been the subject of an Agreement of Purchase and Sale in 1981 but this sale was not completed.
The proceeds from the sale of the aforementioned three parks was used both to invest in other partnerships which purchased other mobile home parks and to invest in other properties through a Canadian subsidiary company. The appellants share of the gains on those dispositions was reported as a capital gain for Canadian tax purposes and was reassessed by the Minister of National Revenue as business income. The appellant appealed this reassessment and its appeal was dismissed by judgment of the Tax Court of Canada reported as Leonard Reeves Incorporated v. M.N.R.,  2 C.T.C. 2054; 85 D.T.C. 419.
In August and September of 1980, the appellant in partnership with others acquired an interest in Rio Valley Estates and Ranchero Village, both mobile home and recreational vehicle parks in Weslaco, Texas. In October 1980 the appellant in partnership with Piper and Lampman acquired the property in issue, Magic Valley Trailer Park (Magic Valley) also located in Weslaco. The appellants interest in this partnership was 45 per cent.
Reeves testified that he was attracted to that property because " it was a deal”. The partnership knew the property in issue and had made overtures to the owner in the event he wished to sell. In 1980 he received a call from the owner offering to sell him the property. Reeves called Piper and with him negotiated the purchase. He described it as a well timed purchase, and while the terms were not great, the price was very realistic. According to him the property had been a profit maker in the hands of the previous operator, showing a profit from day one. Reeves stated that the property was acquired as an income-producing investment and rejected without qualification any possibility that potential resale was a motivating factor in the purchase. Shortly after acquisition the partnership undertook certain improvements to the property. Reeves viewed the income received thereafter as very satisfactory, more than enough to warrant retention of the property as a long-term investment.
In 1983 the partnership received and accepted what Reeves described as an unsolicited offer for Magic Valley. The property was sold pursuant to an agreement of purchase and sale dated April 4, 1983 which agreement called for the vendor to pay a commission to Landmark Properties, Weslaco. The partnership in fact paid commission and sales expenses of $177,985 (U.S.) upon the sale of the property.
According to Reeves the sale was the direct result of two incidents. The first occurred in 1981 when the partnership commenced to make additions. Reeves spoke to the town planner, reviewed the by-law and discovered that there were deficiencies revolving around the size of the spaces being utilized with respect to recreational vehicles in this trailer park. He alleges that the town planner said that the by-law, which had been in existence since 1974 and which had not previously been enforced, “has to be enforced". This, according to Reeves, posed serious problems to their operation of the property.
Secondly in 1981 a serious accident occurred on the property which led to a damage suit against the parties alleged to be responsible including the partnership. Although insured, the initial claim was for an amount substantially in excess of the amount of coverage. Reeves stated that he and his partners obtained a legal opinion (never reduced to writing) and based on that advice took the decision to sell the property. He asserted that the property was not listed but that two realtors were told of their intention to sell. When this information was imparted to the realtors is not known.
In support of his assertions that Magic Valley was an investment Reeves referred to other properties owned by the appellant in the United States. He said Georgetown was a property which was acquired, in partnership with Piper, as a long-term investment and that intention is proven by the fact the appellant still retains its interest in it. He said the same applied to Rio Valley and Ranchero. He explained the agreement of purchase and sale entered into by the appellant in 1981 with respect to Georgetown as being nothing more than an accommodation to its purported purchaser to allow him to accomplish an exchange which might qualify as tax free for the purposes of United States income tax law. He stated that the sale agreement with respect to the property in issue contained a similar arrangement for the benefit of the purchaser thereof.
On these facts it was argued that the clear intention of the appellant was to hold the property as an income-producing investment. Counsel urged the Court to find that this conclusion is supported by the pattern of conduct with respect to other trailer properties and other rental properties in which the appellant had an interest. He argued that with the exception of the three properties which were the subject of the previous appeal the appellant had followed a consistent pattern both in the United States and in Canada of acquiring properties and holding them for the purpose of earning income. He distinguished the appellant’s land development business in Canada in form and intention from the appellants ownership of the mobile home parks in the United States. The sale of Magic Valley within a relatively short period of acquisition was the result of subsequent and unforeseeable developments which had negative impact on the appellants operation of the trailer park. This fact alone distinguished the sale of Magic Valley from the sale of the three trailer parks previously disposed of by the appellant. In support of this argument counsel referred and relied on the decision of the Federal Court of Appeal in Hiwako Investments Ltd. v. The Queen,  C.T.C. 378; 78 D.T.C. 6281.
The position of the respondent was that the evidence totally failed to rebut the Minister's assumption that the appellant, in acquiring its partnership interest in Magic Valley, had as a motivating reason for its acquisition the possibility of reselling it for a profit.
I do not believe the appellant can succeed. Let me state at the outset that I see little to distinguish the intentions of the appellant in the acquisition of Magic Valley from its intentions in the acquisition of the three properties which were the subject of the previous appeal.
A number of factors lead me to this conclusion. First the conduct of the appellant. Between 1977 and 1980 it acquired an interest in seven trailer parks, principally in Texas. Three of these were sold in 1980 and a fourth, Georgetown Mobile Manor, one of the earliest acquisitions, was the subject of a sale agreement which Reeves attempted to slough off as an accommodation for tax purposes and not reflecting an intention to sell. Whether Reeves' explanation is true is irrelevant, since if the partnership did not intend to sell Georgetown, it most certainly was prepared to create a facade which would lead others to believe that there was a legitimate offer of purchase being made. That conduct is a factor I take into account in determining the weight to be attached to the assertions of intention made by Reeves on behalf of the appellant.
The short length of time the property was held is relevant as is the fact that the appellant was aware by the time the sale took place of the then current market; of profitability of reselling mobile home parks and of the impact that improvements after acquisition would have on their value. As Christie, A.C.J. noted in Leonard Reeves, supra, capital improvements to the properties were just as consistent with an intention to sell as with an intention to hold them as income producing investments.
I also take into consideration the experience of the appellant. For a number of years, including the period 1980-1983,it had been involved in Canada in various transactions including the buying of raw land, rezoning, servicing and selling the completed lots. Furthermore, it is proper to attribute to the appellant the experience, knowledge and intentions of the person by whom it was managed and controlled, in this case Reeves. At one time he carried on a real estate business through L.R. Realty Ltd., now inactive. He still retains his personal real estate broker's licence although he also classifies himself as inactive or dormant. Notwithstanding the current status, both of the realty company and of Reeves, it is a fact that in the years 1977 to 1983 when the appellant was involved in the various trailer park transactions in Texas, Reeves brought to the appellant his substantial experience and knowledge of the business of buying and selling, developing and managing properties. Furthermore, his partners in many of the acquisitions, Lampman and Piper, were equally experienced. Piper in particular was a real estate broker active in real estate in the United States and was the person to whom the appellant looked for his expertise in the area when it commenced its activities in the United States.
I have also considered Reeves' assertions that neither the appellant nor its partners ever contemplated the possibility of resale at the time of purchase; his statement that "It didn't cross our minds to resell it at that point" and his expressed philosophy "When I buy a property, I never think of reselling it as far as trying to make a profit. What I look at is, will it return or can it be made to return a profit on a monthly or annual basis." With respect to this evidence I borrow the comments made by Christie, A.C.J. (at page 2057 (D.T.C. 421)) with respect to similar testimony (albeit from Piper) in the appeal previously referred to. I quote: “This was overkill on Piper's part having regard to his background and course of conduct and it cast implausibility over the whole of his testimony regarding intention at the times of acquisition." This description is most apt and is totally applicable to Reeves' testimony.
Other evidence to be considered is the appellant's awareness of the state of the real estate market in Weslaco. For example the partnership did not list the property for sale because it was ". . . aware that at this time there was a lot of other investment coming into the valley—some interest shown from some California investors and some interest shown from investors from the Dallas area—and we mentioned to two realtors that if a buyer came for the park we would be interested in selling.”
Without totally discounting the possible effect of the zoning problem and the lawsuit, I must say that I was singularly unimpressed with Reeves' evidence as to their impact on the decision to sell. It was too pat and contrived. Furthermore while it is technically correct to say that the property was not listed, most certainly the sale was not the result of an unsolicited offer.
Considering all of the circumstances surrounding this transaction I can reach no other conclusion but that resale was an operating motivation for the acquisition. Accordingly the appeal fails on this issue.
B. Interest Income
During the three taxation years in issue the appellant had made loans to certain partnerships of which it was a member. The Minister reassessed and acting on the basis that the appellant had advanced funds to or for the benefit of non-residents which were non-interest bearing, imputed interest at the rates prescribed for purposes of subsection 17(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act") in the following amounts:
|Georgetown Mobile Manor Inc.||$4,274.55||$3,902.84||$4,088.69|
Evidence was led which established that the funds had been advanced to a partnership and not to a corporation. At the conclusion of the testimony counsel for the respondent conceded that the appellant should succeed on this issue on the basis that section 17 of the Act does not authorize the imputation of interest with respect to loans made by a Canadian corporation to a partnership.
C. Foreign Tax Credit
The issue is to determine the applicable rate of exchange to be employed in the conversion of U.S. dollars to Canadian currency for purposes of calculating the business foreign tax credit. The respondent takes the position that it is the rate in effect at the time the income on which the tax is payable is earned. The appellants position is that the foreign tax credit to which it is entitled ought to be calculated by applying the average rate of exchange in the year in question. The following sets out the parties' understanding of the issue:
(1) the transaction with respect to which the foreign tax credit was claimed was the sale of Magic Valley Properties by a partnership which sale took place in the fiscal year end of the partnership of December 31, 1983;
(2) the transaction and the foreign tax credit with respect thereto were reflected in the financial statements of the appellant for the fiscal year ended October 31, 1984;
(3) if the appropriate method of converting the foreign tax with respect to which the credit is claimed to Canadian funds is to use the rate of exchange at the date the transaction took place as is contended by the respondent, that rate would be the rate in effect at May 1, 1983;
(4) if the appropriate method of conversion is to use the weighted average exchange rate for the fiscal period in which the gain is realized that rate should be that for the twelve months ending December 31, 1983.
Argument proceeded on this basis.
I have concluded that the appellant's position is correct. Counsel argued that the decision of the Federal Court of Appeal in The Queen v. The Bank of Nova Scotia,  C.T.C. 162; 81 D.T.C. 5115 is on all fours with the present appeal and the principle set out therein is applicable. I agree. The C.T.C. headnote in that case reads:
The respondent's United Kingdom income tax on its UK business for the taxation year ending October 31, 1972 was paid on the required date which was January 1, 1974. In assessing the respondent's tax for its 1972 taxation year the Minister allowed the foreign tax credit calculated in Canadian dollars based on the rate of exchange on the date of payment of the UK tax. The trial judge upheld the respondent's contention that the Canadian dollar equivalent should be calculated on the weighted average of the currency exchange for the fiscal period ending October 31, 1972.
On appeal the Crown contended that pursuant to paragraph 126(2)(a) the right to the tax credit only arises upon actual payment of the foreign tax and that the trial judge erred in concluding that the calculation of the tax credit was a matter of commercial and taxation accounting practice.
The respondent's liability for UK income tax for its 1972 taxation year arose in 1972 when the income creating the tax liability was earned and became attached at October 31, 1972. Based on the evidence before him and the relevant statutory provisions the trial judge was justified in his conclusions. Crown's appeal dismissed.
The rationale in that decision is entirely applicable to the facts before me. Accordingly the appellant is entitled to succeed on this issue.
D. Deduction of a Reserve—Paragraph 20(1) (n) of the Income Tax Act
The appellant in this case, in its 1984 taxation year, treated the gain on the disposition of the Magic Valley Trailer Park, as a capital gain and claimed a reserve under section 40 of the Act with respect thereto. The Minister reassessed, treating the gain as being on income account, and deducted reserves under paragraph 20(1)(n) of the Act with respect to taxation year 1984. As well the Minister consequentially added part of these reserves into the appellant's income in 1985.
It is the appellant's position that the deduction of a reserve under paragraph 20(1)(n) is at the option of the taxpayer and not that of the Minister. Counsel argued that in the circumstances of this case it would appear the partnership, and not the partner, and most certainly not the Minister, was the only one entitled to deduct such a reserve. He submitted the reserve should not have been deducted in 1984 and that a portion of it should not have been added to the income of the appellant in 1985. As authority for this proposition the appellant referred to the decision in Station Heights Subdivision Ltd, v. M.N.R.,  C.T.C. 2004; 73 D.T.C. 13.
The respondent's position is that paragraph 20(1)(n) does not preclude the Minister from deducting an appropriate reserve. Furthermore, counsel for the respondent argued that since the appellant did not protest the Minister's deduction of a reserve pursuant to paragraph 20(1)(n) of the Act for its 1984 taxation year it cannot oppose the inclusion of that reserve in income in its 1985 taxation year pursuant to paragraph 12(1)(e) of the Act. Counsel relies on the decision in Weinstein v. M.N.R.,  C.T.C. 357; 68 D.T.C. 5232.
Let me dispose of one facet of the respondent's argument at this point. Counsel's submission that the ratio in Weinstein is applicable to the facts in the case at bar because the appellant did not protest the Minister's deduction of a reserve made pursuant to paragraph 20(1)(n) of the Act for its 1984 taxation year is in my view founded on a faulty appreciation of the facts. It is true, and I have reviewed the notices of objection which were filed by the appellant with respect to the 1984 and 1985 assessments, that they do not specifically take issue with the Minister's deduction of a reserve under paragraph 20(1)(n) of the Act. However, paragraph 5 of the appellant’s notice of appeal: Statement of reasons, sets out its position in clear terms. While it is a fact that the notice of appeal sets out the remedies sought in imprecise language, and I quote". . . that the amounts added to the income of the appellant with respect to the disposition in Magic Valley Properties be deleted therefrom . . .”, that language must be read in conjunction with paragraph 6(b) of the statement of facts, which reads: "The Minister deducted reserves under paragraph 20(1)(n) of the Act with respect to 1984 and added part of these reserves into the income of 1985. The effect of these adjustments was to increase the income of the appellant by the following amounts”. A more precise and clear pleading would have precluded the advancement of the "adoption by conduct” argument relied upon by the respondent. Nonetheless I am satisfied that, contrary to the case in Weinstein, supra, this appellant did appeal from the undesired deduction.
The judgment in Station Heights is cited by counsel for the appellant as authority supporting the proposition that the Minister is precluded by the wording of paragraph 20(1)(n) from imposing upon a taxpayer what the Minis- ter considers to be an appropriate reserve. With respect I do not believe the decision goes that far. At issue in that case was whether the amount claimed by the appellant as a reserve was reasonable and correct. The decision of the Tax Review Board as set out in the D.T.C. headnote reads as follows:
Section 85(B) does not provide the taxpayer with any formula for the calculation of what is called a "reasonable amount” and does not stipulate any maximum or minimum amount allowable as a reserve. Consequently, the Board agreed with the appellant's submission that the use of the permissive word "may" in section 85 indicates that a taxpayer can take less than the maximum amount for a reserve, if he so chooses. Jurisprudence cited by the Minister in support of his position was applicable to cases where it was obviously necessary to set a maximum reserve so that the taxpayer could not unduly reduce his income. In this instance the appellant was not trying to reduce unduly his income but rather to average, by deferring, his profits in accordance with the section enacted for that very purpose.
I do not read the decision as suggesting that the Minister is (or for that matter is not) precluded in the course of reassessing a taxpayer from deducting an appropriate reserve.
The issue as I see it is whether the reserve provided for in paragraph 20(1)(n) is permissive or mandatory, and if permissive, does the Minister of National Revenue have the authority to allow a reserve not claimed by the taxpayer? The paragraph in issue reads:
20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:
(n) where an amount has been included in computing the taxpayer's income from the business for the year or for a previous year in respect of property sold in the course of the business and that amount or part thereof is not due,
(ii) where the property sold is land, until a day that is after the end of the taxation year,
a reasonable amount as a reserve in respect of such part of the amount so included in computing the income as may reasonably be regarded as a portion of the profit from the sale;
In addition to the deferred payment reserve found in paragraph 20(1)(n), there are several different types of reserves provided for in the Act. For example, there are reserves for doubtful debts (paragraph 20(1)(l) ), reserves for guarantees (paragraph 20(1)(1.1)), reserves in respect of certain goods and services (paragraph 20(1)(m)) and reserves for capital gains not due (subparagraphs 40(1)(a)(ii) and (iii)). The capital gains reserve found in paragraph 40(1)(a) is worded slightly differently. Instead of the impersonal "there may be deducted", it reads "such amount as he may claim”.
The deduction of an allowance or reserve found in subsection 20(1) is generally permissive. The opening words of the subsection specifically provide that “in computing a taxpayer's income for a taxation year from a business or property, there may be deducted". In Claude Théoret v. M.N.R.,  C.T.C. 2960; 84 D.T.C. 1844 (T.C.C.), St. Onge, J. confirmed that the words "there may be deducted" confer an option on the taxpayer. In addition, "the taxpayer may claim as little or as much of the allowance or reserve as he chooses". For example, it is generally accepted and understood that a taxpayer may claim any amount of capital cost allowance in one year up to the permitted maximum.
Similarly, a taxpayer is free to claim a reserve under paragraph 20(1)(n) for any amount not exceeding a reasonable amount.
In the Weinstein decision relied on by the respondent the taxpayer, although not originally objecting to the allowance of the reserve, subsequently sought to escape taxability on the basis that the Minister lacked authority to grant the reserve on his own initiative. The focus in Weinstein was the proper interpretation of paragraph 858(1)(b) of the Act (now 12(1)(b)). This provision stated that in computing income of a taxpayer for a taxation year, ”. . . every amount receivable . . . shall be included notwithstanding that the amount is not receivable until a subsequent year when the method adopted by the taxpayer. . . and accepted for the purpose of this Part does not require him to include any amount receivable . . .”. Even though the provision explicitly stated that the method is adopted by the taxpayer and accepted by the Minister, Gibson, J. concluded that adoption and acceptance did not have to come in that order. In his opinion, the appellant's failure to challenge the assessment constituted an “adoption”.
Gibson, J.'s comments were cited with approval in Abed v. M.N.R.,  C.T.C. 5; 78 D.T.C. 6007 (F.C.T.D.) at 20 (D.T.C. 6017-18). Walsh, J. cited the Weinstein case for the proposition that the Minister could, of his own accord, apply the provisions of section 858, but he added the following caveat: "this is nevertheless contingent on the taxpayer failing to object to this . . .” (page 20 (D.T.C. 6018) ). This is an important observation. St. Onge, J. in Théoret, supra, emphasized this point at page 2962 (D.T.C. 1845): "In the case at bar and the cases cited, it is true that the Minister of National Revenue has a discretionary power, but he must apply this in accordance with taxpayers’ rights."
The reserve provided for under paragraph 20(1)(n) of the Act is undoubtedly permissive. However, it is not correct to conclude that it is also exclusive. By this I mean that there is nothing to suggest that the Minister is precluded from allowing a reserve in appropriate circumstances. In a number of cases the Minister has taken the initiative in allowing a reserve for a taxpayer on reassessment. This has occurred in situations where previously unreported income was assessed as taxable or a previously reported capital gain was later assessed as business income. However, where the Minister takes the initiative of calculating and deducting a reserve from the taxpayer's income the taxpayer can object and in my view the Minister cannot force the taxpayer into taking the reserve. Only where the taxpayer acquiesces should he be regarded as having adopted the reserve.
For the foregoing reasons the appeal of Leonard Reeves Incorporated is allowed, with costs, and the matters are referred back to the Minister of National Revenue for reconsideration and reassessment on the following basis:
1. That the interest imputed to the appellant pursuant to the provisions of subsection 17(1) of the Act in the following amounts:
|Georgetown Mobile Manor Inc.||$4,274.55||$3,902.84||$4,088.69|
be deleted from the computation of the appellant's income in those taxation years;
2. That the gain realized upon the sale of the property referred to as Magic Valley be regarded as income from a business and not as a capital gain; 3. That the foreign tax credit to which the appellant is entitled be calculated on the basis that the appropriate method of conversion is to use the weighted average exchange rate for the relevant fiscal period, that being the 12-month period ending December 31, 1983;
4. That with respect to taxation year 1984 the reserve deducted by the respondent under paragraph 20(1)(n) of the Act be deleted. As a further consequence with respect to the appellants taxation year 1985, that portion of the reserve added to the appellant's income is deleted.