Citation: 2014 TCC 208
Date: 20140627
Docket: 2011-3726(IT)G
BETWEEN:
Belcourt Properties Inc./Les
Propriétés Belcourt Inc.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre J.
Issues
[1]
In the present appeal,
the issues in dispute are whether the Minister of National Revenue (Minister)
erred in recharacterizing as business income the gain (declared by the
appellant as a capital gain) realized by the appellant in its 2005 taxation
year from the disposition of two properties, one located at 5253 Park Avenue,
Montreal (acquired in June 2002) and the other located at 5655-5685 Côte‑des‑Neiges
(corner Côte‑Sainte‑Catherine), Montreal (acquired in December
2000), and in reassessing on that basis. The tax treatment of the proceeds of
those dispositions as declared by the appellant and as recharacterized is shown
as it appears from the proposed adjustments of the Canada Revenue Agency (CRA)
set out in Schedule 1 to the document dated July 14, 2009, filed as
Exhibit A-1, Tab 12 (Appellant’s Written Arguments and Authorities, page
4).
[2]
The appellant submits that its
intention in acquiring those properties was to hold them as investments in
order to produce rental income, hence the capital gain declared following the
disposition, 50 per cent of the profit being taxable in accordance with sections
38 and 39 of the Income Tax Act (ITA). The respondent is of the
view that the sale of the two properties took place in the ordinary course of the
appellant’s business (or at least was an adventure or concern in the nature of
trade) and therefore 100 per cent of the profit had to be included in the
appellant’s business income pursuant to sections 3 and 9 of the ITA.
Facts
[3]
The appellant’s president and sole
shareholder, Michael Zunenshine, and the appellant’s vice-president and chief
financial officer, Maria Lerakis, both testified regarding the appellant’s
activities over the years. According to them, the appellant’s activities were
divided in two categories: building and selling residential condominiums for
profit (the profits from the sales being categorized as business income), and
building and/or purchasing commercial properties as investments for the purpose
of earning long-term rental income. In the information statement filed with Quebec’s Registraire des entreprises du Québec (Exhibit A-1, Tab 1, page 2, Activités
économiques), the appellant referred to these two spheres of activity as being “management
and construction” (“promotion et construction de maisons individuelles” in
French) and “real estate investment” (“sociétés d’investissement” in French).
In the financial statements, the properties being developed for sale are shown on
the balance sheet as current (short-term) assets, and the revenue‑producing
properties appear with the long-term investment assets (Financial Statements
for the taxation years 2000 to 2005, Exhibit A-1, Tab 3).
[4]
The two properties at issue were
not included in the appellant’s inventory but were transferred into the long-term
investment assets in 2002 (the year of acquisition of the Park Avenue property
and of completion of construction on the Côte-des-Neiges property). This is
evidenced by the work-in-progress sheets, which reflect the cost of the two
properties (land and building); the same cost amount is used and included in
the schedule of revenue-producing properties (Exhibit A-1, Tab 5), and the
ending balance amounts are used to calculate the amortization taken, as
reflected in the balance sheet for the 2002 year-end (appellant’s financial
statements for the taxation year ended in 2002, Exhibit A-1, Tab 3-C, page 2
and page 8, note 7). Further, the rental income earned from the two properties
at issue is computed in the statement of net rental income along with the
rental income from five other income-earning properties owned by the appellant
(Exhibit A-1, Tab 4).
[5]
Mr. Zunenshine testified that
he had been involved in real estate development for some 60 years. Prior to
investing through the appellant, he and his late brother, through other
corporate entities that they owned jointly, had developed industrial, residential
and commercial properties and apartment buildings to hold for rental purposes.
Mr. Zunenshine said that he started liquidating the real estate portfolio
jointly held through other corporate entities than the appellant 20 years ago
at the insistence of his sister-in-law when her husband, Mr. Zunenshine’s
brother, became sick with Alzheimer disease; his brother died in December 2013.
Mr. Zunenshine continued on his own, rebuilding a real estate investment
portfolio through the appellant beginning in 1995.
[6]
However, in the mid-1990s, he had
to adjust to a changed economic reality and started investing in residential
condominium projects with commercial space on the ground floor. The residential
condos were developed for the purpose of selling them at a profit. The
commercial premises brought long-term rental income which produced cash flow
(Transcript, pages 40, 84, 92, 158).
[7]
Ms. Lerakis testified as to
her functions, which include supervision with regard to record keeping and the financial
documentation prepared internally. She has been working with the Zunenshine
brothers and subsequently with the appellant for at least 25 years. According
to her testimony, the appellant manages its commercial rental activities internally
through its own staff. These activities include the negotiation of leases,
which is mainly handled by Mr. Zunenshine personally; the maintaining of
lease abstracts by means of a specialized real estate software for lease
management to enable the appellant’s staff to perform the specific tasks that
each person may have with respect to the commercial leases entered into by the
appellant (copies of such abstracts were filed as Exhibit A-1, Tabs 26 and 36,
for the two properties at issue); the drafting of leases based on master leases
created by the appellant that it modifies for each particular tenant (copies of
blank lease agreements between the appellant and the different tenants in 2002
and 2003 were filed as Exhibit A-1, Tabs 28 (Bell), 37 (Telus), 38 (Soup &
Noodles), 39 (Mikes Restaurant) and 41 (Soup & Noodles)).
Ms. Lerakis said that the signed copies were given to the purchasers when
the properties were sold.
[8]
It appears that the appellant’s
rental activities were continuously growing from the time of acquisition of the
first property under dispute in 2000 until the sale of both properties in 2005.
The total gross revenues and net revenues before and after depreciation and
amortization (D&A) from all rental properties between 2000 and 2005 are
reproduced hereunder from the statements of net rental income for the 2000 to
2005 taxation years (Exhibit A-1, Tab 4):
|
|
Gross
|
Net Income
before D&A
|
After
D&A
|
|
2000 year-end
|
$395,265
|
$107,661
|
$48,799
|
|
2001 year-end
|
$622,846
|
$207,147
|
$79,577
|
|
2002 year-end
|
$1,037,594
|
$161,719
|
($34,349)
|
|
2003 year-end
|
$1,115,634
|
$261,087
|
$52,038
|
|
2004 year-end
|
$1,186,423
|
$348,767
|
$142,406
|
|
2005 year-end
|
$834,480
(year of sale of 4 properties)
|
$(37,596)
|
$(92,431)
|
[9]
Furthermore, the appellant used
its own staff to sell the residential condos. The staff was not mandated or
instructed to sell or to find buyers for the commercial properties.
The
Park Avenue property
[10]
Mr. Zunenshine
testified that he was approached by a broker with regard to the purchase of the
Park Avenue property. The building
comprised at the time commercial space on the ground floor leased to Videotron
and space on the roof leased to cellular companies for the installation of
antennas. The upper floors consisted of empty office space that the previous
owner had been unable to lease.
[11]
The appellant purchased the
building with the intent of transforming the office space into residential
condos for resale and keeping the ground floor and the roof for investment
purposes to earn rental income in order to rebuild its cash flow (testimony of
Mr. Zunenshine and Ms. Lerakis, Transcript, pages 16-17, 92, 101,
158).
[12]
At the time of acquisition, the
commercial properties were already rented. The deed of sale was executed on
June 21, 2002 and letters were sent the same day to the three commercial
tenants advising them that the appellant was the new landlord (Deed of sale,
Exhibit A-1, Tab 23 and letters dated June 21, 2002, Exhibit A-l, Tab
24).
[13]
According to the testimony of
Mr. Zunenshine, after the acquisition, the appellant renewed the lease
with Bell at a higher rent and the appellant increased the space rented by
Videotron, for which Videotron paid additional rent (Transcript, pages 16,
20, 78-80). All three leases were for long-term periods: a 5‑year term with
one 5‑year option for Videotron; a 5-year term with three 5-year options
for Bell; a 10-year term with three 5-year options for Rogers (Rent Roll,
Exhibit A-1, Tab 25; Lease Abstract Detail Report, Exhibit A-1, Tab 26; notice
of registration of rights on the land registry by Rogers, Exhibit A-1, Tab 27;
lease agreement with Bell, Exhibit A-1, Tab 28; and notice of registration of
rights on the land registry by Bell, Exhibit A-1, Tab 29). In 2005, the
aggregate annual rents for the three tenants were $77,899.20 (Rent Roll for Park Avenue, Exhibit A-1, Tab 25).
[14]
In 2005, the appellant sold the Park Avenue property (the commercial portion, i-e., the ground floor and roof) as a result
of an unsolicited offer. Mr. Zunenshine testified that he was approached several
times by his daughter’s neighbor, Mr. Shaika, a gentleman from Israel. Apparently, Mr. Shaika persistently expressed his desire to acquire the Park
Avenue property and offered in return to introduce Mr. Zunenshine to
investment opportunities in Israel, having himself very good connections there.
Mr. Zunenshine was interested in investing in Israel for his other
daughter and his son‑in‑law, who were residing there. It was in
that context that Mr. Zunenshine finally agreed to sell at a lower price
than he would have sold at under other circumstances (a 10% return was
apparently given to Mr. Shaika to reciprocate for an investment of similar
value in Israel, Transcript, pages 86, 90). Soon after this sale,
Mr. Zunenshine went to Israel several times and started making real estate
investments through Mr. Shaika. Ms. Lerakis corroborated this and
participated herself in business trips related to those investments in Israel (Transcript, pages 158‑159). The Park Avenue property was sold on November 1,
2005.
Côte-des-Neiges
property
[15]
This property is centrally located
at the corner of Côte‑des‑Neiges and Côte‑Sainte-Catherine in
Montreal, and had been operated as a gas station by Shell, which put it up for
sale. Mr. Zunenshine’s bid for the property was unsuccessful, but the
gentleman who made the winning bid, Mr. Osher, through a corporate entity,
Brandev Properties Inc., approached Mr. Zunenshine with a view to developing
the property in a joint venture. The intent was to build residential
condominiums for the purpose of selling them at a profit. Mr. Zunenshine
and Mr. Osher testified that they intended to have commercial space on the
ground floor (in accordance with municipal regulations) which would be rented
out. Given the central location of the property (close to a hospital and a
university), they believed that the residential units would be sold quickly and
that good tenants for the commercial space would be easy to find.
[16]
A joint venture agreement was
entered into between the appellant and Brandev Properties Inc. (Exhibit A-1,
Tab 33). The property was thereafter acquired by the appellant and S.O.S. Taxi
Ltée, a company belonging to Mr. Osher, and each purchaser held a fifty
per cent interest therein (deed of sale dated December 11, 2000, Exhibit A-1,
Tab 34).
[17]
The joint venture in fact
concluded long term leases with three tenants: Mikes Restaurant, occupying the
largest area on the ground floor; the restaurant Soup & Noodles; and one
Telus franchisee. The leases provided for terms of 5 to 10 years, with rental
increases and options to renew. The joint venture had its first commercial
tenants in the course of the year 2002 (Rent Roll, Exhibit A-1, Tab 35; Lease
Abstract Retail Reports 2000-2005, Exhibit A-1, Tab 36; and the leases and a
notice of registration of rights at the land registry by Mikes Restaurant,
Exhibit A-1, Tabs 37 to 40). In the year 2005, the aggregate annual rents were
$216,772 (Exhibit A-1, Tab 35).
[18]
In 2004, the joint venture entered
into a loan agreement secured by a hypothec registered against the commercial
property (excerpt from the index of immoveables, Exhibit A-1, Tab 31). By that
time, the residential units were almost all sold. According to Mr. Osher,
it is typical for building owners to seek loans in order to have money for immediate
use, and they use the rents to repay those loans.
[19]
In 2004, Mr. Zunenshine was
approached by a broker with regard to the purchase of the property. According to
Mr. Osher and him, Mikes Restaurant, although still paying its rent, was
not doing well, having very few clients at the restaurant. Both were afraid
that it would go bankrupt. The Telus franchisee was also renting space in another
building downtown belonging to Mr. Osher, who was experiencing
difficulties with that tenant there, and Mr. Osher apprehended problems
with that tenant at the Côte-des-Neiges location too (Transcript, pages 111-113).
With regard to the third tenant, which was operating Soup & Noodles, an
internal dispute between the partners and non-payment of rent were concerns for
the joint venture (apparently a notice of resiliation of the lease was sent to
the operator of Soup & Noodles in August 2003, but it was cancelled after
Soup & Noodles’ guarantor fulfilled the restaurant’s obligations,
memorandum of agreement, unsigned, Exhibit A-1, Tab 42).
[20]
Mr. Osher testified that he initially considered
the Côte-des-Neiges property as a trophy property because of its location and
long-term rental potential. Unfortunately, things did not turn out as he had expected.
He was worried and did not want to have to face a situation where he would lose
the tenants. This is why, when he was informed by Mr. Zunenshine that
there was an interesting offer to purchase the commercial property, he was of
the view that this offer should be accepted by the joint venture, and
Mr. Zunenshine agreed. According to them, they decided to sell as a result
of a change in circumstances rather than because of any intention at the time
of acquisition to sell for a profit (Transcript, page 114). On
April 1, 2005, the joint venture sold the Côte-des-Neiges property.
Other facts pointed out by the respondent
[21]
It was pointed out by the
respondent that for a 10-year period (1997 to 2007), the appellant reported,
among other income, total gross rental income and total income from the sale of
properties representing respectively 3 and 84 per cent of total income
(auditor’s report, revenue distribution schedule, Exhibit R-1, Tab 7, page
153). The list of properties sold during that same period indicates that some
24 real estate projects (the majority of which being condominium projects) were
sold by the appellant (Exhibit R-1, Tab 10, 2nd and 3rd pages). It also appears
that, as at June 9, 2008, there were 18 or so residential real estate
projects being developed by the appellant to be sold (Exhibit R-1, Tab 10, 1st
page). From 2000 to 2005, the appellant owned from 2 to 7 rental
properties (including 7 in 2005, 4 of which were sold in that year, Exhibit
A-1, Tab 4, and Tab 2, Schedule 6). The appellant has admitted that in 2005 it
declared for the first time capital gains on the sale of properties (par. 15 k)
of the Reply to the Notice of Appeal (Reply), admitted at the hearing).
[22]
The respondent also pointed out
that the sale of the commercial property on Park Avenue took place 91 days
after the sale of the last residential condo unit (par. 15 y) and bb) of
the Reply). This was not however admitted by the appellant. It was admitted
that the first condo unit was sold in July 2003 and that the appellant handed
over the property to the syndicate in July 2004 (par. 15 w) and x) of the
Reply).
[23]
With respect to the
Côte-des-Neiges property, the respondent referred to the joint venture
agreement (Exhibit R-3, Tab 3, page 1) and noted that the purpose stated in the
preamble was “the development and construction of a 4-6 storey commercial and
residential condominium project” and that the joint owners also expressed their
desire to provide for, among other things, “the leasing or sale and management
of the Property”. The agreement also covers the eventuality of a third party offer
to purchase the property (other than the residential portions) that one of the
co-owners wishes to accept; in such a case, the other co-owner was given the
right to match the offer of the third party and thus to retain the property
(section 11 of the agreement, Exhibit R-3, Tab 3, page 6).
[24]
It is admitted that the appellant
handed over the property (the condominiums portion) to the syndicate in
November 2003. The appellant received a written offer to purchase the commercial
property on August 9, 2004 and the offer was accepted the same day (Exhibit
A-1, Tab 43). The property was sold on April 1, 2005, approximately 18 months
after the appellant had divested itself of the residential properties.
[25]
The respondent also pointed out
that S.O.S. Properties, the joint owner of the Côte-des-Neiges property, had
reported the proceeds of the sale as income from a business and not as a
capital gain.
Parties’
arguments
[26]
The respondent argued that the two
transactions at issue were part of the appellant’s ordinary course of business
(buying, construction, renovation and selling in the real estate field), or in
the alternative, that those transactions could qualify as an adventure or
concern in the nature of trade, and that the profit on the sale of the two
properties should in either case be treated as income under section 9 of the ITA.
[27]
The appellant is of the view that
it has demonstrated that its intention at the time of acquisition of both
properties was to hold them for investment purposes with a view to earning
rental income, as opposed to including the said properties in its inventory of
properties (comprising all of the condo units) to be sold at profit.
Analysis
[28]
Subsection 248(1) of the ITA
defines “business” as including a profession, calling, trade, manufacture or
undertaking of any kind whatever and an adventure or concern in the nature of
trade.
[29]
From the appellant’s standpoint,
on the one hand it operates a business purchasing real estate and building and selling
residential condo projects. On the other hand, the income-earning properties,
including the two properties at issue, are not part of the business’s trading
activities but are acquired and held for investment purposes, and therefore
must be considered as capital investments and not as being part of a business
venture or an adventure or concern in the nature of trade.
[30]
The decision by the Federal
Court-Trial Division in Happy Valley Farms Ltd. v. The Queen, [1986] 2 C.T.C.
259, is still very relevant when it comes to deciding whether a transaction
which is not itself part of a trade or a business can be held to be an
adventure or concern in the nature of trade. The court stated the following at pages
262-64:
Since income tax was
introduced in Canada, a considerable amount of jurisprudence has arisen from
the use of the phrase “adventure or concern in the nature of trade” used in the
extended definition of business in subsection 248(1) of the Income Tax Act.
This legislative provision states the “business” includes a profession,
calling, trade, manufacture or undertaking of any kind whatever and includes
“an adventure or concern in the nature of trade but does not include an office
or employment.” The most comprehensive analysis of the meaning of “adventure in
the nature of trade” is found in M.N.R. v. Taylor, [1956] C.T.C. 189; 56
D.T.C. 1125 (Ex. Ct.) where the Court set out a number of tests to be applied
to determine when a transaction, which is not itself a trade or business, can
be held to be “an adventure or concern in the nature of trade”. The decision
makes it clear that the question to be answered, in cases of this nature is,
was the asset acquired by the taxpayer as an investment or was it not. If not,
then any gain realized by the taxpayer upon the sale of the asset is taxable as
income. Whether an asset was acquired as an investment is to be
determined by all the facts of a particular case including, the course of
conduct of the taxpayer, the nature of the subject property, the probability of
the asset producing income without the need to be turned over and the
similarity of the transaction in question to a trading transaction.
Several tests,
many of them similar to those pronounced by the Court in the Taylor
case, have been used by the courts in determining whether a gain is of
an income or capital nature. These include:
1.
The nature of the property sold. Although virtually any form of property
may be acquired to be dealt in, those forms of property, such as manufactured
articles, which are generally the subject of trading only are rarely the
subject of investment. Property which does not yield to its owner an income or
personal enjoyment simply by virtue of its ownership is more likely to have
been acquired for the purpose of sale than property that does.
2.
The length of period of ownership. Generally, property meant to be dealt
in is realized within a short time after acquisition. Nevertheless, there are
many exceptions to this general rule.
3.
The frequency or number of other similar transactions by the taxpayer.
If the same sort of property has been sold in succession over a period of years
or there are several sales at about the same date, a presumption arises that
there has been dealing in respect of the property.
4.
Work expended on or in connection with the property realized. If effort
is put into bringing the property into a more marketable condition during the
ownership of the taxpayer or if special efforts are made to find or attract
purchasers (such as the opening of an office or advertising) there is some
evidence of dealing in the property.
5.
The circumstances that were responsible for the sale of the property.
There may exist some explanation, such as a sudden emergency or an opportunity
calling for ready money, that will preclude a finding that the plan of dealing
in the property was what caused the original purchase.
6.
Motive. The motive of the taxpayer is never irrelevant in any of these
cases. The intention at the time of acquiring an asset as inferred from
surrounding circumstances and direct evidence is one of the most important
elements in determining whether a gain is of a capital or income nature.
While all of the
above factors have been considered by the courts, it is the last one, the
question of motive or intention which has been most developed. That, in
addition to consideration of the taxpayer's whole course of conduct while in
possession of the asset, is what in the end generally influences the finding of
the court.
This test has been
carried one step further by Canadian courts into what has generally been
referred to as the “secondary intention” test. This has meant, in some cases,
that even where it could be established that a taxpayer's main intention was
investment, a gain on the sale of the asset would be held taxable as
income if the court believed that, at the time of acquisition, the taxpayer had
in mind the possibility of selling the asset if his investment project did not,
for whatever reason, materialize. In Racine, Demers and Nolan v. M.N.R.,
[1965] C.T.C. 150; 65 D.T.C. 5098 (Ex. Ct.), Noel, J. provided the following
summary of the secondary intention test at 159 (D.T.C. 5103):
. . . the fact
alone that a person buying a property with the aim of using it as capital could
be induced to resell it if a sufficiently high price were offered to him, is
not sufficient to change an acquisition of capital into an adventure in the
nature of trade. In fact, this is not what must be understood by a “secondary
intention” if one wants to utilize this term.
To give to a
transaction which involves the acquisition of capital the double character of
also being at the same time an adventure in the nature of trade, the purchaser
must have in his mind, at the moment of the purchase, the possibility of
reselling as an operating motivation for the acquisition; that is to say
that he must have had in mind that upon a certain type of circumstances arising
he had hopes of being able to resell it at a profit instead of using the thing
purchased for purposes of capital. Generally speaking, a decision that such
a motivation exists will have to be based on inferences flowing from
circumstances surrounding the transaction rather than on direct evidence of
what the purchaser had in mind.
[31]
In Canada Safeway Limited v. The Queen,
2008 FCA 24, 2008 DTC 6074, Nadon J. A. said 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, 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, the court will conclude that the
transaction is an adventure in the nature of trade (par. 43). If the
primary intention is to exploit the property, it is necessary to determine as
well whether the taxpayer acquired the property also with a view to reselling
it at a profit depending on the opportunities that might arise (the secondary
intention) (par. 48, 50). Nadon J. A. then reiterated the principle,
with respect to secondary intention, that 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, meaning that the taxpayer’s whole course of conduct has to be
assessed. The requirements of 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 (par. 61).
[32]
It was held in that case that
Canada Safeway did not acquire its co-ownership interest in a shopping centre
with the intention of producing income from that interest, that is, with a view
to generating rental income, nor was its interest to be used in carrying on its
grocery business. The evidence supported the inference that, from the
beginning, Canada Safeway had not wanted to keep its interest in the joint
venture for a long period but had intended to resell it at a profit. The Court
concluded that it was not a case where the sale of property is triggered by
unexpected circumstances, such as financial difficulties or non-solicited
offers to purchase (par. 70, 71 and Pelletier J. A.’s concurring judgment, par. 81).
[33]
In the present case, it is true
that Mr. Zunenshine and the appellant have a history of trading in real
estate in the form of residential condominiums. The respondent argued that this
is a relevant consideration which points away from the purchases in issue having
been made with the primary intention of securing income‑producing assets
(Vaughan Construction Co. v. M.N.R., [1970] C.T.C. 350 at 353, referred
to in Leonard Reeves Inc. v. M.N.R., [1985] 2 C.T.C. 2054 at page 2059).
However, I am satisfied that the appellant has demonstrated that its course of
conduct with regard to the rental-income-earning properties is consistent with
an investment purpose that is distinct from the real estate trading activities.
As a matter of fact, the accounting records for these properties clearly show
that they were not meant to be part of inventory but were reported as long-term
investments either from the very moment of acquisition (in the case of the Park
Avenue property) or at the time construction was completed (in the case of the Côte-des-Neiges
property), in 2002 in both instances. Mr. Zunenshine testified as to his
long history in rental activities and his desire to rebuild his real estate investment
portfolio after he had to cease operating with his brother. Ms. Lerakis
corroborated the evidence regarding the course pursued by Mr. Zunenshine
through the appellant. The internal documentation (lease abstracts generated by
a specialized real estate software for lease management, draft leases based on
master leases created by the appellant, books and records reporting the income-earning
properties as long-term assets and not including them in real estate project inventory)
shows that the appellant’s real estate portfolio included rental-income-earning
properties, and this was in addition to the trading activities.
[34]
The respondent argued that the
Park Avenue property was sold 91 days after the last condo was sold in that
project and the Côte-des-Neiges property a year and a half after the last condo
was sold in that project. The respondent contended that the short length of
ownership is an indication that the properties were part of inventory and that therefore
the gain on disposal should be treated as income. First of all, I note that
there is no evidence as to the date the last condos were sold. Second, I agree
with the appellant that the evidence does not disclose a link between the sale
of the last condominium and the disposal of the commercial property. Had the appellant
had it in mind at the time of their acquisition to sell the commercial
properties rather than to hold them for rental income purposes, there is no
reason why it would not have attempted to sell them before the last residential
condo was sold. The appellant derived rental income from the commercial
properties for three years. In my view, the length of the period of ownership
here is not a factor that should have any impact on the characterization of the
gain.
[35]
The respondent also raised the
fact that only a small percentage of the appellant’s total income was derived
from those rental activities. In my view, this has no bearing on the fact that
the properties in question were in reality held as investment properties.
Indeed, as stated by Judge Dussault in Immeubles M.H.T. Ltée v. Minister of
National Revenue, 1992 CarswellNat 428, at par. 30, 93 DTC 79 at 87, “a
taxpayer may have two different approaches to the ownership of assets
consisting in real property, and . . . the fact that he or she previously
acquired a property in order to resell it at a profit does not mean that all
subsequent transactions by the taxpayer must be considered as giving rise to a
business income rather than to a capital gain.”
[36]
The two properties at issue were
in good locations; they attracted long-term tenants and were geared towards
producing a steady rental cash flow. Over the years, the total gross rental
income increased. This, combined with the fact that Mr. Zunenshine,
through different entities, always kept income-earning properties among his
real estate assets, is an indication that the appellant acquired those
properties as part of its investment portfolio.
[37]
Further, an investment in an
income-producing property with the prospect of an increasing capital value is
not necessarily evidence of a purchase for resale amounting to the launching of
an adventure or concern in the nature of trade (Hiwako Investments Ltd. v. R.,
1978 CarswellNat 200, par. 7, 78 DTC 6281 at 6282 (FCA)). Nor is the mere
fact that a person buying a property with the aim of using it as a capital asset
might be induced to resell it if a sufficiently high price was offered
sufficient to change an acquisition of a capital asset into an adventure in the
nature of trade (Racine Demers and Nolin v. M.N.R., 65 DTC 5098 at 5103,
[1965] C.T.C. 150 at 159 (Fr.)). “To give to a transaction which involves the
acquisition of capital the double character of also being at the same time an
adventure in the nature of trade, the purchaser must have in his mind, at the
moment of the purchase, the possibility of reselling as an operating motivation
for the acquisition” (Racine, supra, at 5103 DTC, 159 C.T.C.).
This is what is referred to in the case law as being the secondary intention, as
mentioned by Nadon J. A. in Canada Safeway, supra.
[38]
In the present appeal, the
secondary intention is alleged in the grounds relied on by the respondent in
the Reply. However, that allegation cannot be taken as a plea that the Minister
assumed in making the assessment that a motivating reason for the purchase of
the property was an expectation that, in the event that the investment did not
prove to be profitable, it could be sold at a profit, and that this expectation
was one of the factors that induced the taxpayer to make the purchase (Hiwako,
supra, at 6284-85 DTC, par. 16 and 17 CarswellNat). The assumptions
of fact relied upon by the Minister are stated in paragraph 15 of the Reply,
and it was assumed that: “[t]he appellant’s intend [sic] when he
acquired the Park Avenue property was to renovate, subdivided [sic] the
units in [sic] condominium units and sell them for profit”(15 n)); “[t]he
appellant always intended to sell the commercial property for profit” (15 ff));
“ [t]he appellant’s intend [sic] when he acquired the Côte-des-Neiges
property was to sale [sic] all condominium units for profit” (par. 15
hh)); “[t]he appellant always intended to sell the commercial units for profit
(par. 15 vv)); and “[t]he appellant always knew that it could sale [sic]
the commercial units of the Park Avenue property and the Côte-des-Neiges
property for profit” (par. 15 zz)). Those assumptions refer in my view to the
primary intention or true intention of the appellant, which, according to the
respondent was to acquire the properties at issue not in order to exploit them
as income properties, but in order to resell them at a profit.
[39]
As was pointed out by Judge
Dussault in Immeubles M.H.T., supra, at 86 DTC, par. 23 CarswellNat, the
appellant does not have the burden of proving that a fact on which the Minister
did not rely in making his assessment, and further, which was not alleged in
the pleadings, does not exist. Therefore, and similarly to the situation in Immeubles
M.H.T., since the secondary intention of reselling at a profit was not
explicitly alleged by the respondent in the Reply as a determinative factor
which motivated the appellant to purchase the two properties at issue, the appellant
did not have to lead evidence that there was no such intention (Immeubles M.H.T.,
supra, at 86 DTC, par. 23 CarswellNat).
[40]
With respect to the Park Avenue
property, I have no reason to disbelieve the testimony of Mr. Zunenshine
that, in exchange for his help in investing in Israel, he agreed to sell to
his daughter’s neighbour, Mr. Shaika, upon the latter’s insistence, at a
lower price than he could have asked on the market. Ms. Lerakis
corroborated this. Further, the evidence does not disclose that the appellant was
holding that property until it became ripe for profitable disposition and in the
interim deriving income from the rental of the property (as it was put in Hazeldean
Farm Co. Ltd. v. Minister of National Revenue, [1967] 1 Ex. C.R. 245 at page 256,
referred to in Canada Safeway, supra, at par. 49). On the contrary,
Mr. Zunenshine said that the appellant did not sell at market price but
sold on the basis of a 10% return on the sale price. Furthermore, the appellant
performed on the commercial portion of the property work which resulted in
higher rent and long, renewable terms being negotiated with at least one of the
existing tenants.
[41]
With respect to the
Côte-des-Neiges property, the existence in the joint venture agreement of the
right given to a co-owner to match the offer to purchase of any third party and
to thereby retain the property might perhaps have given the appellant the
additional idea that it might resell the rental-income-producing property if things
did not turn out as planned. However, Mr. Zunenshine explained that that
kind of clause was not unusual and that the clause served to protect the co‑owners
from any attempt by their partner (acting alone or with a third party) to buy
them out (Transcript, page 68). Further, that clause applied specifically to
the commercial units; no such clause was necessary for the residential
condominiums as it was not the intent of the co-owners to keep them (Transcript,
page 92). As a matter of reality, and as mentioned earlier in my reasons,
Mr. Osher testified that he had initially considered the Côte-des-Neiges
property as a trophy property because of its location and long-term rental
potential. Unfortunately, things did not turn out as he had expected. He became
worried and did not want to be faced with a situation in which they would lose
the tenants. This is why, when the unsolicited offer was presented,
Mr. Osher told Mr. Zunenshine that he wanted to accept the offer, and
Mr. Zunenshine agreed to do so.
[42]
Further, I agree with the
appellant that the preamble to the joint venture agreement, which provides that
the purpose of the joint venture was, among other things, the “leasing or sale”
of the property, did not mean that the commercial portion of the project was
intended to be either sold or leased, but rather meant, as stated by
Mr. Zunenshine and Mr. Osher in their testimony, that the leasing
activity referred to the commercial part of the building and the selling
activity referred to the residential condos (Transcript, pages 61 and 109).
[43]
With respect to the fact raised by
the respondent that S.O.S Properties reported the proceeds of the sale as
business income, Mr. Osher explained that he did not have any training in
accounting and that he did not know how his accountant treated the profit
(Transcript, page 125). I am satisfied that this does not necessarily have any
impact on Mr. Osher’s credibility with respect to his testimony on his
intent at the time of the investment (Mr. Osher corroborated Mr. Zunenshine’s
testimony that the purpose of the joint venture was to sell the residential
condominiums and to keep the commercial space on the ground floor as a revenue
property (Transcript, page 40 and page 109). Rather, it is my understanding
that Mr. Osher, because of his lack of knowledge, did not discuss with his
accountant how the profit on the sale should be reported in S.O.S.’s tax return
for the 2005 taxation year.
[44]
Considering that the Minister did
not clearly contemplate the secondary intention of reselling at a profit as a
determinative factor which motivated the appellant to purchase the properties
at issue and that therefore the burden to prove the contrary does not fall on
the appellant, I am satisfied with the explanation given by Mr. Osher and
Mr. Zunenshine that they accepted unsolicited offers for reasons beyond
their control that they could not foresee at the time the properties were
purchased.
Decision
[45]
The appeal is allowed and the reassessment
is referred back to the Minister for reassessment on the basis that the profit
on the sale of both properties at issue was properly declared as a capital gain
as reflected in the appellant’s books and records and in its tax return for the
2005 taxation year.
Costs
[46]
The appellant is awarded its
costs. At its request, it shall file its submissions with respect to the amount
of costs claimed within 30 days of the date of this judgment. The respondent
will have 30 days thereafter in which to reply.
Signed at Ottawa, Canada, this 27th day of June
2014.
“Lucie Lamarre”
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