Carsons Camps Ltd. v. The Queen, 84 DTC 6070, [1984] CTC 46 (FCTD)

Muldoon, J [ORALLY]:—This is an action in the nature of an appeal from a decision or judgment of the Tax Review Board, registered as Number 80-320 signed at Ottawa November 23, 1981.

The plaintiff, Carsons Camps Ltd, is a corporation incorporated in the Province of Saskatchewan and at all times material to this claim was carrying on business in the Province of Saskatchewan. It is, today, still a valid and subsisting corporation.

The plaintiff appeals the decision of the Tax Review Board, which I have mentioned. The objection to the assessment was properly taken, the plaintiff was assessed on the basis of the profits earned on the sale of its hotel at Cumberland House Saskatchewan, being business income arising from an adventure in the nature of a trade. The plaintiff takes objection to the assessment on that basis, asserting that the proceeds of the sale were, as it says, capital gains and not income.

The plaintiff purchased the hotel known as the Cumberland House Lodge by an agreement signed on May 14, 1973 for a price of $120,000 and it is alleged by the defendant, an adjusted price of $123,624.08, and then sold the Cumberland House Lodge on April 5, 1974 for proceeds in the amount of $185,000. In the plaintiffs return of income for its 1975 taxation year, the plaintiff reported a capital gain in the amount of $83,375.92 on that sale of the Cumberland House Lodge with a consequence that it included in its income for the year, the taxable capital gain in the amount of $41,687.96.

The Minister of National Revenue, by way of an assessment, assessed or reassessed the appellant in this case, Carsons Camps Ltd, on the basis that the gain realized on the disposition of the Cumberland House Lodge was on income account and he included the same in the plaintiffs income for its 1975 taxation year. In so assessing the plaintiff, the respondent relied upon the following assumptions of fact, among others: first, a motivating reason for the acquisition of the Cumberland House Lodge was the expectation that it could be sold for a profit; and secondly, the sale of the Cumberland House Lodge was a culmination of a scheme of profit-making conducted by the appellant.

The -decision in this matter must be based on objective evidence of facts as well as an appreciation of the testimony of the plaintiffs witness Mr Irwin Car- son, a barrister of Prince Albert, Saskatchewan. That is to say, Mr Carson’s testimony as to the plaintiffs intention in buying the Cumberland House Lodge in view of its resale about eleven months later, must be assessed and appreciated in relation to the objective facts. I draw that principle from the case of Greenbranch Investments Limited v The Queen, [1980] CTC 514; 80 DTC 6384, a decision of Mr Justice Grant of the Trial Division in the Federal Court. The evidence given by Mr Carson is that prior to June, 1971, and indeed, for some months thereafter, he was prosecuting in his professional capacity for the Attorney General of Saskatchewan. He testified that after the change of government in June, 1971, he and his partners apprehended a loss of that prosecuting agency with concomitant loss of professional revenue. Mr Carson, in response to that situation, was looking for a revenue-generating business. After failing in an attempt to buy the Buffalo Narrows Hotel in October, 1972, he looked at, and considered, the Cumberland House Lodge owned by two lawyers, Messrs Wilson and Rendek of Regina.

Mr Carson was familiar with the Cumberland House Lodge because he had attended at Cumberland House from time to time, on at least three occasions, as defence counsel.

Mr Carson, then quite unsolicited, approached Messrs Wilson and Rendek of Regina and he told them of his interest in the Cumberland House Lodge. Mr Carson was quite familiar with the operations of Cumberland House Lodge because he had spoken to the manager and had been there on one or two occasions. He performed, as best he could, given his inexperience in these matters, a study, and assessed in his own mind, the risks, and not unaware that the purchase was to be made one hundred per cent by borrowed money. It was, however, the purchase of a going concern and not vacant property. Mr Carson said that his intention was that he would find a revenue-generating business, preferably a hotel or outfitting business because he was interested in that sort of endeavor, and his hope was that the business would run itself if there were good managers and, indeed, he was inspired by the fact that Messrs Wilson and Rendek practising law in Regina, seemed to be able to cope with the ownership of the Cumberland House Lodge even from such a distance. At the time Messrs Wilson and Rendek owned the Cumberland House Lodge they did not sell hard liquor on the premises, even though that was an expectation, if not a requirement, of their license.

To this point, in viewing the evidence, Mr Carson’s testimony of the purpose for the purchase of the Cumberland House Lodge by the corporation of which he was the principal, if not the sole directing mind, that is to say Carsons Camps Ltd, is entirely plausible. On the evidence I find that he had no other intent but than to buy a going concern, a revenue-generating business. As time went on, his illusions were disappointed and some of his expectations turned virtually to ashes. The manager who was installed in the Cumberland House Lodge, and operating it for Messrs Wilson and Rendek, was apparently a person of high moral integrity in so far as the business is concerned, that is to say his honesty was unquestioned, and his ability to operate the business was excellent. Mr Car- son expected that that manager, Mr Lloyd, would continue on for some years and that he, Mr Carson, would have to devote very little time to the operation of the Cumberland House Lodge. Because of unhappy marital differences between Mr Lloyd, the manager, and Mrs Lloyd, as it would appear from Mr Carson’s testimony, and I find no reason to disbelieve him on that score, Mr Lloyd finally left, departed from his business.

It had so been Mr Carson’s hope to retain Mr Lloyd that he had offered him various incentives to stay, in terms of profit sharing or partnership. Obviously Mr Lloyd was also looking at Mr Carson to assess whether he would be the kind of owner for whom he, Mr Lloyd, would be prepared to carry on working. From the evidence I have heard, I cannot but conclude that it was not because of unhappy differences between Mr Lloyd and Mr Carson, but rather unhappy differences between Mr Lloyd and Mrs Lloyd, that Mr Lloyd departed.

Mr Carson sought another manager who turned out to be inept in the management of the hotel. I will not recite all the evidence because it is entirely fresh in my mind, having heard it earlier today, but Mr Carson, as it would appear, and I think that must be taken as uncontradicted, had to devote more and more of his time to the affairs of the Cumberland House Lodge. The bright expectat- ons he had were disappointed and frustrated. He began looking for a partner. After the departure of the inept manager, he found Mr and Mrs Thompson as a couple to take over the hotel and they did better than their predecessors but not so well as Mr Carson anticipated. However, in order to spur them on in their efforts at operating the hotel so that Mr Carson would be able to devote less time to it, he offered them a form of partnership. They were unable to raise the money necessary to buy in, that is to say, to buy shares in Carsons Camps Ltd, the plaintiff in this action.

Mr Carson then wrote, (and we have the letter on file as an exhibit), his friend Mr Polischuk in British Columbia, also proposing that Mr Polischuk return to Saskatchewan and help him in the operations of Cumberland House Lodge. I am not unmindful that in Mr Carson’s letter to Mr Polischuk he made reference to the possibility of a turnover and of “peddling”, to use Mr Carson’s own words, the business, within a year or two. At that time, that is to say, January, 1974, it is apparent on the evidence that Mr Carson was devoting more of his time to the hotel and enjoying it less, and that he had no fixed expectation that the management would be satisfactorily stabilized for the next five to ten years. That is not to say that the hotel was in dire straits at that time. The Thompsons appeared to be at least adequate. But when I review the testimony of Mr Carson, in relation to the fact as as they are well documented in this case, I must conclude that Mr Carson, like many of us, is not a cold-blooded computer but had simply lost heart with his venture.

I am unable to find, among the objective facts and on the documents of this case, and in the testimony of Mr Carson, any secondary intent in buying the hotel. That does not mean to say that as a practising barrister, or any other educated person who knows the ways of the world, he might not have considered at some time that the property might be sold. Everyone who buys such a venture, if I may say so, probably considers that at some time; but I think that was not a significant thing in Mr Carson’s intention when the Cumberland House Lodge was acquired.

His intentions changed later as he became more and more weary and disappointed with the venture as he was unable to find a partner, because Mr Polischuk turned him down too.

There appears to be no contradiction, either, of Mr Carson’s testimony that Mr Jardine of Jardine Holdings, approached Mr Carson without any solicitation on Mr Carson’s part, although there is some suggestion in the evidence that Mr Carson’s brother, also a lawyer, may have steered Mr Jardine to Mr Irwin Car- son. However, Mr Jardine found Mr Carson, it is clear on the evidence that it was not with Mr Carson’s own doing. Indeed, Mr Jardine approached Mr Car- son, just as Mr Carson had approached Messrs Wilson and Rendek the previous year, unsolicited.

Upon the examination of the operation, financial statements of the Cumberland House Lodge, a bargain was arrived at, a deal struck and the sale price of $185,000 was arrived at. Mr Carson was not in the business of buying and selling or trading in real estate. His only other personal real estate holdings at that time, were his house, his lake cabin at McPhee Lake and a hangar for his aeroplane. According to the certificate, Exhibit 1 in this matter, that is to say, the certificate of authentication issued under the Business Corporations Act of the Province of Saskatchewan, Carsons Camps Ltd is indeed restricted in the nature of the business the corporation may carry on. The company, that is to say, the plaintiff in this case, is not empowered to deal in real estate on a regular basis as though the company were a realtor. The purpose for Mr Carson’s purchase of the Cumber land House Lodge is a plausible one. This is a case which is to be determined on a balance of probabilities and not beyond a reasonable doubt. On a balance of probabilities I conclude that Mr Carson bought the Cumberland House Lodge as an investment and not for resale and that the resale, therefore, of the Cumberland House Lodge constituted a capital gain and not income to the plaintiff, Carsons Camp Ltd. Accordingly, I shall vacate the assessment and award the plaintiff the costs of this action.

I may say in concluding that I appreciated very much the helpful services of both counsel in this case, and I was pleased at the thoroughness of their presentations, not only of the evidence and argument, but their research on the authorities.

I shall finish simply by noting for anyone who may be interested still, that the plaintiff has referred to me the following cases:

Californian Copper Syndicate v Harris (1904), 5 TC 159; Anderson Logging Co v The King, [1925] SCR 45; [1917-27] CTC 198; Greenbranch Investments Ltd v The Queen, [1980] CTC 514; 80 DTC 6384; Hazeldean Farm Company Limited v MNR, [1966] CTC 607; 66 DTC 5397; Roy M Power v The Queen, [1975] CTC 580; 75 DTC 5388; Karmel Apartments Ltd v MNR, [1975] CTC 2130; 75 DTC 116; Coronation Holdings Limited v MNR, [1968] Tax ABC 513; 68 DTC 419; Allan Morrison v MNR, [1917-27] CTC 343; 1 DTC 113; La Cie d’Immeubles Courville Ltée v MNR, [1980] CTC 2834; 80 DTC 1719; Robbie Holdings Ltd v The Queen, [1980] CTC 422; 80 DTC 6336; Hans Reicher v The Queen, [1975] CTC 659; 76 DTC 6001; Regal Heights Limited v MNR, [1960] CTC 384; 60 DTC 1270; and Racine v The Queen, [1965] CTC 150; 65 DTC 5098. Defendant’s counsel has referred to me some of the cases, but as well, MNR v James N Sissons, [1969] CTC 184; 69 DTC 5152; J Harold Wood v MNR, [1969] CTC 57; 69 DTC 5073; Coronation Holdings Limited v MNR, [1968] Tax ABC 513; 68 DTC 419; Arthur Dansereau v MNR, (1965) 37 Tax ABC 425; 65 DTC 169; Ulderico Dolente v MNR, 37 Tax ABC 404; 65 DTC 179; and MNR v Muzly Lawee and Naima E Lawee, [1972] CTC 359; 72 DTC 6342.

I have considered all of those cases in the short time between the end of argument and the delivery of this judgment and I think that what has now been said disposes of the matter. I would ask Mr Gaucher to draw the judgment order and submit it for signature. If possible you will try to obtain the approval as to form on that judgment order which you will be submitting for signature, from Mr Kennedy or another member of the Department of Justice. If there be any difficulty about formulating the judgment order, I shall be prepared to intervene in that matter to settle it.

Again, thank you gentlemen for a most interesting day. Your case was well presented.