Farmer Construction Ltd. v. The Queen, 84 DTC 6331, [1984] CTC 370 (FCTD)

The Associate Chief Justice:—This action is brought pursuant to subsection 177(2) of the Income Tax Act, RSC 1952, c 148 as amended, to appeal against the reassessment made by the Minister of National Revenue in respect to the plaintiffs 1979 taxation year. At issue is the treatment of a gain realized by the plaintiff on the disposition of certain lands and buildings in the Municipality of Saanich on Vancouver Island, in the province of British Columbia.

The history of the property and the building is quite unusual. The plaintiff is incorporated pursuant to the laws of the province of British Columbia and carries on business as a general contractor. In March of 1974, the plaintiff entered into a contract with Jay George Holdings Ltd to construct an alcoholic rehabilitation centre known as the Gillain Manor on the property in question. The plaintiff commenced construction but in October of 1974, Jay George Holdings Ltd went bankrupt. The trustee in bankruptcy attempted to dispose of the property and the partially constructed building but with no hint of success. Efforts were made to create some interest in major centres in Canada and the United States but the property remained for sale in the hands of the trustee without a reserve price during all of 1975. In December of 1975, the plaintiff offered to purchase the property for the sum owing to it, approximately $1,200,000 and in May of 1976, the transaction was completed. Nothing occurred in relation to the property until the fall of 1977 when Abacus Cities Ltd, a substantial Albertabased real estate company entered into discussions with the plaintiff with a view to completing the construction so as to permit Abacus to operate it on a longterm basis for its original purpose, an alcoholic rehabilitation centre. In fact in September of 1977, the plaintiff executed a sixty-year lease of the property with Abacus under which the plaintiff was obliged to complete construction and to provide necessary services. On the basis of the lease, the plaintiff was able to arrange the necessary financing to complete the construction which began in February and finished in September of 1978. Abacus occupied the property and paid rent under the terms of the lease for only a few months but in January defaulted on the rent and ultimately declared bankruptcy. The trustee for Abacus attempted to keep Gillain Manor operating and was able to negotiate an arrangement whereunder a new charitable organization, the Gillain Foundation, was formed to assume the lease, but again this attempt failed due to the inability of the Gillain Foundation to assume the obligations for reasons which are of no concern to this action. What is significant, however, is that one of the founding members of the Gillain Foundation, a Mr George Poole, subsequently made an offer to purchase the property personally rather than see the hopes of the Foundation and the centre end in total frustration. As a result, the plaintiff sold the property to Mr Poole in October 31, 1979, and realized a gain on the transaction which it treated, for income tax purposes, as a capital gain. By notice of reassessment dated February 26, 1981, the Minister reassessed the entire gain as income. The plaintiff filed a notice of objection and the Minister gave notice of confirmation on September 2, 1981.

The trial was somewhat complicated as well. I first attempted to hear the matter at Victoria on March 9, 1983. At the outset of the trial, however, I heard submissions on two procedural questions and later acceded to counsel’s request that the trial be adjourned to permit them to be considered by the Court of Appeal. The actual trial did commence in Vancouver on November 8, 1983 and consumed the best part of three days. Notwithstanding these complicating factors, in the final analysis it is a single-issue dispute. The only question to be resolved is the proper classification of the gain from the disposition of this piece of property. At the conclusion of argument in Vancouver, I indicated that I expected to render my decision within three to four weeks and that I would probably not be disposed to grant the plaintiffs request for costs on a solicitor and client basis. The delay in rendering my decision has more been due to the question of the proposed treatment of costs than to the actual merits of the case for my disposition in that regard has not changed since the conclusion of the trial. It was then, as it is now, my conclusion that the transaction in which the property was acquired was an acquisition on account of capital and that the disposition of it which is in issue here was also a capital transaction.

The facts upon which I rely in reaching my conclusion relate to the intention of the purchaser upon acquisition of the property and the fortuitous nature of the ultimate disposition of it. During his submissions, I suggested to counsel for the Crown that in order for him to succeed, I must find that the taxpayer not only acquired the property for resale but that he in fact acquired it with the intention of resale at a profit. In his response, counsel argued that rather than having a particular profit in contemplation at the time of acquisition, the question should be whether it was an investment, or whether the transaction was speculative in nature. In my view, by either standard the result is the same.

The plaintiffs evidence concerning the history of the property and of the financial difficulties of Jay George Holdings Ltd and Abacus Cities Ltd is largely uncontradicted. There was some cross-examination on the existence of a possible market for the property after the plaintiff acquired it, but there is nothing in the evidence to persuade me that any interest had been shown by any purchaser at any material time. For people in the general contracting business, this is not a happy situation, but it is certainly not uncommon. Here, the general contractor was unpaid and seemed to me to have no alternative except to take over the property. In taking over the property, there is not the slightest evidence that it had any hope of disposing of it at all, much less at a profit. The uncontradicted evidence is that it is a single purpose building, unsuitable even for other similar uses such as a nursing home or a senior citizens’ residence. When Abacus Cities Ltd negotiated the long term lease, it did so with the intention of operating it as a rehabilitation unit as was the case when it appeared that the charitable foundation might take it over, and as was the case when the ultimate purchaser acquired it. To this day, notwithstanding an almost miraculous act of generosity on the part of the ultimate purchaser in injecting in excess of $3,000,000 of personal cash, the building still does not function and sits idle. The intention of the plaintiff in acquiring the property was to reduce or possibly eliminate a substantial loss. As such, it would naturally hope to dispose of the property but obviously had to consider some kind of operation of it on a long-term basis, which it did. Having regard to the utility of the building and the history of the project up to the point of acquisition, the thought of resale at a profit could not possibly have been in contemplation and I would have found it astonishing had the plaintiff turned down any offer in the early months of ownership that would have reduced the loss to a more reasonable sum.

I have used the word “miraculous” to describe the purchase by Mr George Poole and I do not think it is an exaggeration. This man obviously had made a great deal of money and I gather had some personal reason to be extremely supportive of alcoholic rehabilitation efforts. The Gillain Foundation proposal to operate the property was considered feasible only because Mr Poole was personally and very deeply committed to it. When it failed he personally, for what can only be described as the most altruistic of motives, purchased the building as a last desperate attempt to avoid the collapse of this project which he obviously cherished. To repeat, even with that, it still does not function. Every one of these facts supports the conclusion that the plaintiff could not possibly have dreamed of making a profit on this transaction and was fortunate in the extreme to do so.

The appeal must therefore be allowed and the matter returned to the Minister for a reassessment on the basis that the gain realized by the disposition of the property in 1979 was a capital gain.

Counsel for the plaintiff made a very persuasive presentation on the question of costs and indeed I have substantially accepted his submission that there was never any justification for classifying this property other than as a capital asset. To a certain extent, I also accept his suggestion that there is the appearance here that the Minister’s officials became preoccupied with the fact that the sequence of events here enabled the plaintiff to write off a substantial loss and then treat the ultimate gain as capital rather than income, without having to recapture the earlier losses. This is the aspect of the matter that caused me to give it such extensive consideration, but in the final analysis, solicitor and client costs should be reserved for situations in which a party causes litigation to be necessary by irresponsibility or intransigence. The law on acquisitions of this sort is difficult and in this case the facts are far from simple, and while I have accepted the submissions of counsel for the plaintiff, the argument of counsel for the Crown is certainly not without merit. It does appear that the plaintiff acted in good faith at all times, but bearing in mind the complexities of both fact and law here, it is not a proper case for solicitor and client costs. The taxing officer should bear in mind, however, that the ultimate trial was conducted at Vancouver for the convenience of the Court, not the litigants, and that the plaintiff should fully recover actual disbursements related to the conduct of the trial.

The appeal is therefore allowed with costs.