Woodbine Developments Ltd. v. The Queen, 84 DTC 6556, [1984] CTC 616 (FCTD)

Cullen, J:—The issue is whether the profits realized by the plaintiff from the sale of certain properties, were capital gains or income.

The plaintiff is a company incorporated under the laws of the province of Saskatchewan.

In its 1977 taxation year, the plaintiff disposed of property located at 2420 — 12th Avenue, Regina, Saskatchewan to Ratner Holdings, realizing a profit of $157,808.81. The plaintiff reported one half of this amount, or $78,904.41 as a taxable capital gain in its return of income for the 1977 taxation year.

In its 1978 taxation year, the plaintiff disposed of property at 4th Avenue & 20th Street, Saskatoon, Saskatchewan, to RichJohn Investments Ltd, realizing a profit of $42,113. The plaintiff reported one half of this amount, or $21,057 as a taxable capital gain in its return of income for the 1978 taxation year.

In its 1980 taxation year, the plaintiff disposed of properties at 2240 — 13th Avenue, 2111 — 14th Avenue, 2219 Cornwall Street, 1861 Cornwall Street, 2301

— 11th Avenue, and Smith Street & 11th Avenue, all in the city of Regina, Saskatchewan, to Tekarra Properties Ltd, realizing a profit of $1,602,771. The plaintiff deducted the amount of $681,132 from this figure as a reserve pursuant to subparagraph 40( 1 )(a)(iii) of the Income Tax Act, and reported one half of the balance, or $460,819 as a taxable capital gain in its return of income for the 1980 taxation year.

By notices of reassessment dated December 31, 1981, the plaintiff was reassessed in respect of its 1977, 1978 and 1980 taxation years, whereby the profits realized by the plaintiff on the dispositions described above were treated as income rather than capital gains.

By notices of objection dated July 16, 1982, the plaintiff objected to the reassessments described above.

The reassessments were confirmed by notification of confirmation by the Minister dated February 11, 1983.

Counsel for the defendant accepts the above as an accurate statement of the facts. (In the statement of claim the plaintiff, in paragraph 4, had used a figure of $60,819 which was obviously a typographical error and should have read $460,819. The plaintiff applied at trial for an amendment to the statement of claim and this was allowed without objection from counsel for the defendant.

It is also appropriate to note that: the property at 2420 — 12th Avenue, Regina, was purchased by the plaintiff in May 1975 and sold in June 1976; the property situate at 4th Avenue and 20th Street, Saskatoon was purchased by the plaintiff in October 1974 and sold in December 1977; the following properties were acquired as follows:

and were sold by the plaintiff in April of 1979, the plaintiffs 1980 taxation year.

Evidence was given by Mr E Corman, the president of the plaintiff company and by Mr Alvin Schweitzer, secretary-treasurer, each of whom held a fifty per cent interest in the plaintiff company. Mr Schweitzer had been an employee of Canada Trust reaching the position of Mortgage Manager in Regina at age 34. He had a good salary and a pension plan. Over several years, in his position first with Canada Trust and later with Morguard, he had business dealings with Mr Corman who was then operating Corman Realty Ltd as a real estate broker. Mr Schweitzer was also an accredited appraiser entitled to the accreditation AACI. Mr Schweitzer obviously impressed Mr Corman and several overtures were made by Mr Corman requesting Mr Schweitzer to join his firm as a commission salesman of real estate. Sometime in late 1972 or early 1973 Mr Schweitzer decided to leave Morguard, his salary and pension plan, and to work for Corman Realty as a commission salesman. According to the two witnesses there was really more to it than that for they intended to and in fact did enter into a partnership as Mr Schweitzer put it, “to secure future income for retirement purposes”.

Counsel for the defendant expressed some surprise that two comparatively young men, one thirty-four and the other thirty-nine, would be so obsessively concerned with retirement but I think it is reasonable in the circumstances to expect that someone who leaves a position where he has an assured pension scheme and becomes a commission salesman where there is no pension scheme would be alert to the fact that no provision was made for his retirement. Again, I would underline the fact that these two witnesses were businessmen very much involved with day-to-day dealings in the business community and certainly Mr Schweitzer, coming from Canada Trust and later Morguard, would be aware of the advantages of planning for one’s retirement early. The evidence of Mr Corman was to the effect that here he was thirty-nine years old and had made no provision at all for his retirement. On cross-examination he indicated that he had earlier been involved in the purchase of a building and was able to establish to the satisfaction of the Court that it was in fact a capital asset and revenue derived from it was capital gains. So Mr Corman certainly was aware of this provision of the Income Tax Act.

I feel too that one cannot overlook the fact that both Mr Corman and Mr Schweitzer were involved in enterprises other than their association with the plaintiff company which provided them with income for the purposes of day-to- day living. To my way of thinking the company known as CRS Holdings indicates one form of transaction the two individuals were involved in. In that case there were three transactions: one involving a farm land purchased for $150,000 and sold for $168,000; another property at 2305 McIntyre purchased for $22,000 and sold for $33,700; and another property that was on McIntosh that had been taken apparently in trade as part and parcel of the real estate business which was taken in 1977 and sold in 1979 but there was a small or no profit. As indicated by Mr Schweitzer on his cross-examination, these were all income transactions. Again, Mr Schweitzer in his evidence indicated that he had a company called Schweitzer Appraisals Ltd which despite the wording of the Objects of Incorporation which would have allowed the company to buy and sell and carry on business as a real estate agent, etc, was used primarily as a vehicle to do appraisals even while Mr Schweitzer was employed by Canada Trust. He indicated that he had done appraisals for third parties and had appeared once in court in Regina. This operation too was a source of income.

Incidentally, in his evidence Mr Schweitzer, and this came out in cross- examination, indicated that Mr Corman had approached him to come and work for and with him.

When cross-examined about a property at 240 Argyle in Regina Mr Schweitzer indicated that they owned that property in their personal capacity in the spring of 1977 and that it was raw land. They constructed a building which was to become a letter carrier depot. They were asked specifically to do the job having been approached by someone in the Federal government. It took them three months to get the building built and rented and they sold it in 1981. They reported it as a partnership in their personal name as a capital transaction and to date that has not been disputed.

In any event, in 1973, as indicated above, Mr Schweitzer did work for Mr Corman as a commission real estate agent and they incorporated the plaintiff company. The evidence clearly indicated that this was Mr Corman’s wish from the early 1960s and he felt there was much to be gained and much benefit to be derived through employing Mr Schweitzer and also working with him in partnership through an incorporated company which eventually was the plaintiff company. Mr Schweitzer, on the other hand, was somewhat reluctant because he had a steady job, a splendid position, a good salary, and a pension plan, all of this by age thirty-four. It is not clear from the evidence what finally moved Mr Schweitzer to accept Mr Corman’s offer but the evidence did indicate there was some concern that he might be moved to Winnipeg where he did not wish to go being more familiar with the Regina market, or that, as Mr Schweitzer says in his own evidence, “I felt that I could make more money than the salary being paid by Morguard”.

In the summer or fall of 1973 the Bank of Nova Scotia required a building to house its data centre and space was not available at that time. Mr Corman owned a suitable parcel of land which property was transferred to the plaintiff company at cost and Scotia Place was built at 2240 — 13th Avenue, Regina. It is shown as No I on Exhibit 1 filed by the plaintiff. The evidence clearly indicated that this was a revenue-producing operation.

In the spring of 1974 the plaintiff company was approached by CMHC who wanted a free-standing building and wanted it centrally located. Mr Corman and Mr Schweitzer did not own property for this particular project but negotiated a purchase of a property owned by Mr Corman’s wife which had a house on it and the adjacent property which was owned by a lady in Saskatoon. CMHC also required fifty feet of property for parking purposes and this too was secured. The building was constructed. It is shown in a photograph as Exhibit 3 and is marked as No II on Exhibit 1. This property also was a revenue producer and as indicated both by Mr Corman and Mr Schweitzer, as they paid off the mortgage on the property of course the equity increased.

The next property was at 1861 Cornwall shown as No III building on Exhibit 1 which, from the evidence of both Mr Corman and Mr Schweitzer, had a good location, it had been an electric repair shop and it would be a good long-term investment with some repair work and a good tenant. They totally renovated the building and were able to lease it to the Department of Public Works with a four-year lease with a one-year option. Here again the building produced revenue.

The next move was somewhat of a departure for the plaintiff company because the market they knew and knew very well was in Regina and yet they acceded to the request of Central Mortgage and Housing Corporation’s manager to construct a building for CMHC in Saskatoon. In this instance they had an assured tenant before the building was constructed. They knew specifically what the tenant was looking for because the building was to be a copy of the one built earlier in Regina and so, not surprisingly, this building also was a revenue producer. As an aside it should be noted that CMHC did not want all of the property and they used about 85 per cent of it on a five-year lease with a five-year option. And so the remaining 15 per cent was leased to a company called Block for five years. Due to the fact that this building was located in Saskatoon Mr Corman suggested that a friend of his, a Mr Wolfe, should manage the building but this proved to be beyond and above the talents and abilities of Mr Wolfe and so it fell to Mr Corman and Mr Schweitzer, shareholders in the plaintiff company, to perform that particular service. On one of their visits to do this particular kind of maintenance and management work they received an offer from the manager of Block to sell. Given the fact that it was not in the geographic area with which they were familiar, namely Regina, and given the fact that they had to travel several miles in order to maintain the building and see that it was properly serviced, they decided to unload the building and concentrate in the future on Regina properties only. The property was sold at a profit of $42,113.

The next investment came about as a result of a contract from Consumer and Corporate Affairs Department who needed office space and a specially constructed building to handle their Weights and Measures Division. The property immediately adjacent to the CMHC building they had constructed was available to them and there were two houses which had to be demolished. Because of sideright municipal requirements the property immediately adjacent could not be decided to add on to the CMHC building. [sic] By joining these two buildings they made provision for the Weights and Measures needs. This building had three tenants: CMHC with a five-year lease and an option for a further five; Consumer and Corporate Affairs with a five-year lease and an option to renew for a further five; and the Office of the Secretary of State for five years with a one or two-year option to be renewed. Here again there was revenue realized.

On the next property the plaintiff company was not as suuccessful having purchased property at 12th Avenue and Smith in the city of Regina. As indicated above this was purchased in 1975. Both witnesses concede it was bought with no real plans in mind but they needed a good site for development. They had no tenants in mind. As it turned out this property was never developed. Much was made by both witnesses of the fact that it only had a 94-foot frontage which gave them some difficulty not only with the city’s by-law requirements but also with respect to architects’ plans in endeavouring to secure appropriate parking. It was clear from the evidence that this was a matter of some concern and accordingly Mr Sneath, the owner of the adjacent property, was approached to see if he would sell his property but he indicated he was not interested. There was a small lease to someone named John Douglas.

The next property was at 11th Avenue and Smith shown as No VI on Exhibit 1 which had an old garage that had been at one time a retail outlet. In this instance we are talking about two buildings, one for the CBC and one for the Department of Indian and Northern Affairs. Extensive renovations were required and as witness Mr Schweitzer said, ‘‘We practically rebuilt the building”. Without going into further detail suffice it to say that these two structures were also revenue producers which provided, in the case of CBC, for a four-year lease with a one-year option to renew and for the Department of Indian and Northern Affairs a five-year lease with an option to renew for four years.

The final property is located at the corner of 11th Avenue and Lome and is shown as No VII on Exhibit 1. In this case the property had been sold to people named Ceronis subject to their securing appropriate financing which they were unable to do and dropped the sale. The plaintiff company purchased this property which had four tenants in what one witness described as dilapidated structures and they secured $2,000 by way of rent. There was no mortgage on this property. The evidence is that various plans were drawn and overtures were made to Sask/Tel and others. The witnesses indicated that they wished to locate their office in this building or a building to be built to be called Woodbine Towers which had been, “our dream”.

Shortly after the plaintiff company purchased this particular property the Cornwall Project was announced as a government $20 million enterprise. Mr Schweitzer’s evidence was to the effect that this changed the whole nature of the way in which business and particularly real estate business would be done in the city of Regina. With many thousands of feet of rental space available in the Cornwall Project and many tenants of course moving into that particular building complex it would leave several thousand square feet of rental space available in the Regina. [sic] Also, and this evidence is uncontradicted, the kinds of tenants that would be attracted to the Cornwall Project such as Sask/Tel were the sort of clients that the plaintiff company had relied upon as anchor tenants in their projects.

With their unquestioned knowledge of the real estate market, and with the construction of the Cornwall Project, and with the problems they had had, particularly with respect to the last two properties purchased, and with their view as to how the real estate market would be affected in the future, it was not surprising that when approached first by an agent and later by the principal himself, and after discussions with their chartered accountant, they decided to sell out all of their properties although the principal had been interested primarily in the last property purchased. The evidence is clear and the figures are set out above that the plaintiff company made a handsome profit both from this sale of several properties and from the earlier sale of the Saskatoon property. Is this revenue to be considered income or capital gains.

For the purposes of this hearing the witnesses were excluded and so did not have the opportunity to hear the others’ evidence. The evidence of one John Williams, a rcognized expert in the field of construction, corroborated the statements made by both witnesses that when they built a building it was done in a first class manner and in many cases involved considerable additional expenditure of money. There was a good deal of uncontradicted evidence that the buildings were in fact built in such a way that they would last. Secondly, there is the evidence that in many instances the tenants themselves spent large sums of money to improve the facilities on the inside which any reasonable person would read as an intention to remain. The calibre of the buildings I think is borne out by the fact that CMHC, having had one building constructed by the plaintiff company, approached that company with a view to constructing exactly the same kind of building but in a different community, namely, Saskatoon. Again, I think it is important to look at the length of the leases involved because here we are dealing with government agencies who never know from year to year just what their particular requirements might be or what Parliament or legislatures might impose upon them as additional responsibilities. Notwithstanding this, the plaintiff company was able to secure a five-year lease and in many instances with an option to renew for a further five years.

The time and money spent on the construction of the various buildings is a clear indication of the intention of the plaintiff company to keep that particular building and in my view to keep it for investment purposes. If the plaintiff company had been interested only in renting with a view to selling and thereby involving itself in business in the nature of a trade then it would not have made good economic sense to spend the kind of additional money that was spent to improve things like basements or frontages because that would significantly reduce the amount of benefit to be derived if they were only interested in building the building, renting it out, and then immediately selling it. It would have been much more sensible to spare some of the costs involved in first-class construction and use some form of substituted material thereby enabling them to make a significantly larger profit.

It is trite law that one must view with some suspicion the evidence of the persons endeavouring to establish that they were indeed interested in investment. In this instance I was impressed with both the witnesses and I felt that their evidence should be given a great deal of weight. They gave their evidence separately; they gave it cogently and concisely; they bore out each other’s testimony although they had not been present in the courtroom at the same time; and as to the fact of the kind of construction, they were corroborated in every detail by the independent expert witness Mr John Williams.

It was suggested by counsel for the defendant that the size of the mortgage left them very little equity in the building but to my way of thinking that was an indication of the fact that they were looking to the long term and not for an immediate sale.

With respect to one of the properties both witnesses conceded that they had no real plans in mind nor did they have any tenants in mind but they were looking for property that could be developed. Unhappily for them that particular property was not able to be developed but I think it is an indication of their long-term view of the projects as investments.

Again, I don’t think one can ignore the fact that both of the principals involved in the plaintiff company carried on extensive business operations other than their involvement with the plaintiff company.

The two principals involved were also very careful to seek the advice of chartered accountants knowledgeable in the field and one of the principals, Mr Corman, had actually been involved in an investment and a case earlier where it was determined that his particular investment led to a capital gain.

There is no question in my mind that the construction of the Cornwall Project by governments was the death knell to the kind of investment both Mr Corman and Mr Schweitzer had been seeking.

I think it was fortuitous that a purchaser came along at the appropriate time to buy not just the one facility that he expressed an interest in but all of the remaining properties held by the plaintiff company. It is surprising to me that the two principal shareholders of the plaintiff company did not accept with alacrity the intitial offer because they could certainly see the handwriting on the wall. I rather feel it was their reticence to let go of an investment that they had carefully put together after the initial partnership transaction was entered into.

I think it is also pertinent to note that on more than one occasion the two principals turned down an opportunity to sell a parcel of property which was part and parcel of their investment portfolio and when they in fact did sell a parcel of land it was a property located in Saskatoon beyond the area where they felt they were able to adequately service the building and the tenants.

Counsel for the defendant was quite correct to stress the fact that these two individuals, through the plaintiff company, were giving up an income of $120,000 a year and couldn’t understand when they were approached by the agent and later the principal purchaser why they gave it up when there was no indication of a major problem. The answer to that was given very effectively by Mr Corman when he said, ‘ We thought it would become obsolete and here we had an opportunity to take advantage of our investments. We sold at a good profit. It was time to sell”, and finally, in an almost reflective way Mr Corman said, “I’m sorry we had to sell. These were my babies”.

I believe both witnesses when they said that they had no intention of selling these properties and even though it might have been in the back of their minds that it would be possible it was the last thing that they wanted to do and that they were dedicated to an investment for their retirements.

In my view this case is almost on all fours with the case of Elgin Cooper Realties Ltd v MNR, [1969] CTC 426; 69 DTC 5276. Reading from the headnote at 426:

The appellant’s controlling shareholder had long been active in real estate, sometimes as a developer or speculator and sometimes as an investor. In the present instance an apartment building was erected for the appellant between 1958 and 1960 and wa sold in 1961 for a profit of $78,403 which the Minister sought to tax as arising from an adventure in the nature of trade but which the appellant considered a capital gain resulting from the sale of the property intended as an investment.

HELD: On the evidence, the building had been intended as an investment and that intention was altered as a result of difficulties and faults encountered during construction. It followed that the sale was not one made in the course of an adventure in the nature of trade. Appeal allowed.

Here the plaintiff company by marshalling the talents of Mr Schweitzer and Mr Corman were able to establish an investment portfolio and but for the construction of Cornwall Project would in my view have continued.

In law I think too it is necessary to look at the fact that in no instance were any of the properties ever offered for sale and the two offers which were accepted namely the Saskatoon property and the final sale were unsolicited. Refer- ences to the case Bead Realties Limited v MNR, [1971] CTC 774; 71 DTC 5453 and quoting from the headnote at 774:

The appellant’s only transaction was the acquisition of a 5-lot parcel of land on Industrial Avenue in Ottawa in 1959 and its resale in 1962 for a profit of $67,000. The appellant’s stated purpose was to find tenants for whom it would construct buildings to their specification for long-term leasing and several tenative negotiations to this end were begun but fell through. The land was never offered for sale and the offer which was accepted was unsolicited The Minister nevertheless took the view that the appellant had acquired the land for the purpose of trading in it or otherwise turning it to account in an adventure in the nature of trade within Section 139(l)(e).

HELD: The incorporators were well able to carry out their stated objective and there was no evidence that suggested an alternative intention. Moreover, the mere fact that a property was acquired for the purpose of resale at a profit did not of itself make the profit “income” if nothing was done to advance or foster the sale. Here, the acceptance of the offer did not convert what was an investment into an adventure in the nature of trade. Appeal allowed.

I can find nothing in the evidence to justify my rejecting the sworn testimony of Mr Schweitzer and Mr Corman in regard to the explanations which they gave to justify the sale of the property in Saskatoon and the eventual sale of all of the properties. It could not be called a rapid resale in either instance nor were any offers solicited to effect a sale.

I am therefore satisfied both on the facts and the law that the profits realized from the sale of the properties were capital gains and I would therefore allow the appeal.

Having made this determination there is probably no necessity for dealing with the technical argument raised by counsel for the appellant. Although it is a technical argument I feel it is an important one and should be dealt with at this time albeit almost by way of obiter.

As counsel for the plaintiff conceded the proposition is well known in income tax law that when an assessment is made, the onus is on the taxpayer to disprove or demolish or destroy the factual assumptions upon which it was made. Quoting directly from the argument made by the counsel for the plaintiff:

It has become a uniform pattern for the Crown to plead in its Statement of Defence in Income Tax appeals what were the assumptions of fact that the Minister relied upon in making his assessment, and he therefore sets those up so the taxpayer can knock them down, if he can, can that’s what the whole affair is about when the Minister pleads in these kinds of cases.

In this particular case the respondent assumed, among other things, the following, quote:

An operating motive for the acquisition of the properties described in paragraphs 2, 3 and 4 of the Statement of Claim herein was for the resale of same at a profit.

The technical argument raised by counsel for the plaintiff is and I quote again from the argument:

It (referring to the quote above) doesn’t go sufficiently far to support the taxability imposed by the assessment in this case.

Counsel for the plaintiff, as I indicated above, took the position that there was an onus on the applicant but that that onus had been discharged.

The technical argument, however, was that even if the plaintiff hadn’t discharged that onus, the Minister has not pleaded grounds or assumptions of fact that will support the taxability as assessed. In Hiwako Investments Limited v The Queen [1978] CTC 378; 78 DTC 6281 (FCA) this case was in the Federal Court of Appeal and at 382 [6283] Chief Justice Jackett said:

The question remains, however, as to whether, on the pleadings, there was an onus on the appellant, that was undischarged, to establish that he was not motivated in making the purchase by an intention to use the property in an adventure or operation in the nature of trade.

Such an onus would have to arise from the fact that the assessments were based on an assumption of facts that would support such a conclusion.

The technical argument then is that the pleading in paragraph 7(d) is not sufficient to establish taxability or to raise an onus that the plaintiff has to meet to disprove his proposition.

With respect, it is my considered opinion that the pleading is adequate for the purpose intended and gives sufficient information to place the onus on the taxpayer to disprove the factual assumptions upon which the assessment was made. Counsel for the defendant cited the case of Paul Racine, Amédée Demers and Francois Nolin v MNR, [1965] CTC 150; 65 DTC 5098. Counsel for the defendant argued that this particular case is perhaps the, “leading decision with respect to the doctrine of secondary intention which is really what the litigation here is all about”.

Counsel for the defendant, quoting from the Racine judgment at 159 [5103], stated: “The paragraph commences the examination of the doctrine of secondary intention and there is the classic quotation of what ‘secondary intention’ means:”

On examining this question whether the appellants [sic] had, at the time of the purchase, what has sometimes been called a “secondary intention” of reselling the commercial enterprise if circumstances made that desirable it is important to consider what this idea involves. It is not, in fact, sufficient to find merely that if a purchaser had stopped to think at the moment of the purchase, he would be obliged to admit that if at the conclusion of the purchase an attractive offer were made to him he would resell it, for every person buying a house for his family, a painting for his house, machinery for his business or a building for his factory would be obliged to admit, if this person were honest and if the transaction were not based exclusively on a sentimental attachment, that if he were offered a sufficiently high price a moment after the purchase, he would resell. Thus it appears that the fact alone that a person buying a property with the aim of using it as capital property 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 is meant and understood by a “secondary intention” if one wishes to utilize this term.

To give 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 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.

I am satisfied and Counsel for the defendant has argued correctly that the wording of this pleading, namely paragraph 7(d), conforms completely with the doctrine of “secondary intention” as set forth by Mr Justice Noël in the Racine case in that Mr Justice Noël states that to give the character of “secondary intention”, and I quote: “The purchaser must have in his mind at the moment of purchase the possibility of reselling as an operating motivation for the acquisition”. The Crown has fully satisfied the requirements of pleading a “secondary intention” by using those words (The emphasis is mine).

I am also bound to accept the second argument made by counsel for the defendant that if the plaintiff in this matter wished to raise this technical point it would have been open to the plaintiff to bring application pursuant to Rule 419 of the Federal Court Rules. Although the procedure provides that the Court may at any stage of an action order any pleading or anything in any pleading to be struck out with or without leave to amend on the ground that it discloses no reasonable cause of action or defence as the case may be, it seems to me a motion pursuant to that Rule would have been more appropriate than to raise the issue at the trial. The option of course belongs to the party applying but this technical argument in my view would have been much more appropriate prior to the trial of the action.