Loeck v. The Queen, 78 DTC 6368, [1978] CTC 528 (FCTD), aff'd 82 DTC 6071, [1982] CTC 64 (FCA)

Mahoney, J:—This action involves a gain of $51,052.08 realized by the plaintiff during 1971 on the sale of his share of an apartment building, the Yorkshire Towers, in St Catherines, Ontario. The trial was heard together and on common evidence with the trial of another action by the plaintiff against the defendant involving a gain of $69,660.03 realized by the plaintiff during 1972 on the sale of two adjoining farms, the Rolph and the Paxton farms, at St Catherines. The matter of a mortgage reserve under paragraph 85B(1)(d) of the Income Tax Act, as it stood in 1971, is also raised in this action; however, the Court was advised that issues pertaining to it had been settled and no evidence in respect thereof was led.

The transactions leading to the gains are admitted to have been adventures in the nature of trade. The plaintiff was not a resident of Canada in 1971 and 1972; he was a resident of the Federal Republic of Germany. The issue is whether, under subsection 2(2) of the Act as it stood in 1971 and subsection 2(3) of the Act as it stood in 1972, the plaintiff was “a person who . . . carried on business in Canada at any time in the year”. If he was, then, in my view, no provision of the Canada-Germany Income Tax Agreement Act* [1] operates to exempt him from taxation by Canada in respect of the gains.

The plaintiff is a man of some substance. He lives in Hamburg on property owned by himself and his brother. It contains two single family dwellings, occupied by him and his brother, and 17 rented apartments in three buildings which the plaintiff manages. He is a shareholder in a public company operating residential properties in West Berlin. He is not a director and takes no active part in its management. That is the extent of his German real estate activity. He is part-owner of a printing business and manages a personal investment portfolio. His office is a room in his home. The gains on the sales of the St Catherines properties cannot be said to be the profits of a West German enterprise so as to bring the tax agreement into play.

Hubert Weithe lived in Hamburg prior to moving to St Catherines in the mid-1960’s. He appears to have moved his oldest daughter in 1964 when he bought a house there and then, over the next few years, to have liquidated his German holdings and moved the rest of his family. He had made money in real estate dealings around Hamburg and has been an active real estate trader in Canada. The plaintiff knew him in Germany although they had not been in business together. Weithe explained the association in the following terms:

I will try to make it short: it was, even when I lived in Germany, it was very fashionable to invest in Canada: and it was also known that many, many people—and I knew many of them—they were defrauded. They had made investments in Canada, bought, and later on they had a lot of trouble: the buildings run down and other things happen. Sometimes. the money didn’t come back, and so on.

So, when my plan was selling my business in Germany, moving to Canada, Mr Loeck knew that. Mr Loeck and I, we had before seen certain offers which were every day in all the big papers in Germany, advertised for investments in Canada. So it was naturally that Mr Loeck then said, “Gee, if you would do that, I would like—if you invest, I would like to invest, because then I know that I will not be cheated’’ or whatever is the word; defrauded or something like that.

That is the original story where it all began.

Q So that he relied on your decision, is that right?

A Even if maybe I would have bought it myself without him—

Q Yes?

A —the same way I did, maybe it was I liked it also because I could buy a bigger building, or I could share the risk. So that was . . . And, also, I wouldn’t say no to Mr Loeck if he asked me to do what I do, you know, what I would—decisions I would make to buy certain things—this IS how it came about.

But in every single case we talked about and I made sure that he understood, the risk or the chances, or the positive things also; in every investment; and we had only in mind to make one investment originally, but it didn’t work the way as we had planned it. So that from there on it went the way it did.* [2]

The plaintiff first visited Canada between August 27 and September 25, 1966 with his wife. They travelled in Canada and the United States. It was a combined holiday and survey of investment opportunities. They stayed at a hotel in St Catherines. Weithe, by then, was living in St Catherines but had not completed winding up his affairs in Germany. Weithe returned to Hamburg in October with word that a 168 suite apartment, at 30 Easterbrooke Drive, North York, was for sale. I will refer to it as “Coral Towers’’. The plaintiff liked the sound of the deal. Weithe was unable to leave Hamburg immediately and the plaintiff went to Toronto. He was there between October 28 and 30, 1966, contacted a German speaking realtor and a German speaking lawyer and made an offer which was not accepted. Coral Towers was sold to a couple named Schenk, also German speaking.

Prior to his next visit to Canada, between March 25 and April 7, 1968. the plaintiff and his wife joined Weithe and his wife on a Caribbean cruise. By coincidence, they met the Schenks in the Bahamas. The Schenks wanted to sell Coral Towers. After the cruise the plaintiff and Weithe went to Toronto and the purchase of Coral Towers was arranged. While they owned it, it was managed by a succession of management companies. Operating results were disappointing and, later that year, Coral Towers was sold at a profit.

The plaintiff and Weithe then, in December 1968, bought the 104 unit Yorkshire Towers. The purchase closed January 1, 1969. Weithe negotiated this deal entirely and executed the agreement on the plaintiff’s behalf on authority of a power of attorney. The plaintiff first saw Yorkshire Towers on his next visit to Canada, between March 13 and 23, 1969. Weithe personally was responsible for its general management. There was a building superintendent and a resident took care of leasing and collections. Public accountants did the books. A variety of operating troubles ‘led Weithe to recommend and the plaintiff to. agree to sell Yorkshire Towers in the fall of 1971.

The plaintiff again visited Canada between September 17 and October 7, 1969. Again this was a combined holiday-business trip. He visited friends and looked at investment opportunities. Weithe was then considering purchase of the Rolph farm; a 35 acre parcel in St Catherines fronting on Lake Ontario. The vendors wanted to retain a life tenancy in the five acres comprising the farm house and other buildings, which Weithe bought for his own account. The remaining 30 acres were purchased by Weithe and the plaintiff. The purchase was affected by Weithe in trust. The plaintiff did not sign the offer. The farm itself had been managed for the previous owners and that arrangement was continued with Weithe stepping into the owner’s shoes for the joint account of the plaintiff and himself.

The Paxton farm adjoins the Rolph farm. It was purchased some six months later and was rented to a farmer for $5000 per year. No significant management was necessary.

It was intended to subdivide the Rolph and Paxton farms and to contract their development as a residential area. A zoning change frustrated this intention and, in 1972, they were sold to the City of St Catherines.

The plaintiff also visited Canada between September 22 and October 8, 1970 and September 19 and October 11, 1972, as well as since 1972. All visits have been holidays combined with an inspection of investments and opportunities therefor.

The plaintiff transferred money from Germany as needed to fund his share of the cash required to buy the various properties. In addition the gains, as realized, were retained in Canada. Separate bank accounts were maintained by Weithe in respect of the various business operations, ie Coral Towers, Yorkshire Towers, the farms. Funds were paid into the operating accounts by the plaintiff and Weithe as required and surplus funds were distributed to them when no immediate need was perceived. When there were surplus funds likely to be needed in the near future, they were invested by Weithe in certificates of deposit. Weithe had signing authority, along with the plaintiff and his wife, on the plaintiff’s personal accounts.

On at least one occasion when there were substantial surplus funds, on the authority of his power of attorney, Weithe opened an account with a broker for the plaintiff and purchased identical stock portfolios for the plaintiff and himself. The power of attorney was, as stated, used on occasion to permit Weithe to execute agreements to buy and sell real estate and, once, when time dictated, he signed the plaintiff’s personal income tax return.

Weithe drew a salary for managing their common interests. The plaintiff drew no salary. Except for the salary and the five acres out of the Rolph farm, the plaintiff and Weithe appear to have entered into their common ventures on an equal basis. Weithe had other interests in Canada in which the plaintiff had no association. He managed his own and their joint affairs out of an office in his home. There is no evidence that the plaintiff had any Canadian interests other than in association with Weithe except bank accounts and they served no purpose other than to channel funds to and from the joint operations. The accounts of their common ventures were prepared by chartered accountants on the basis that Weithe and the plaintiff were partners. They also prepared the plaintiff' Canadian income tax returns. Cheques paying Weithe’s salary, prepared by him or one of his daughters on his authority, were annotated “Partner salary”.

Counsel made much of the evidence that, while the plaintiff gave Weithe the power of attorney early in their relationship, it was not used except on the express authority of the plaintiff on each occasion. Likewise before negotiating either a purchase or a sale for their common account, Weithe consulted and obtained the plaintiff’s particular agreement. I have no reason to doubt the truth of any of that evidence but do not find it crucial. Subsequent to 1972, the plaintiff has continued his interest in real estate in the St Catherines area through a company, of whose shares he and his wife own equally 49.98%, Weithe owns 49.98% and a third party owns the balance.

The transactions relative to Yorkshire Towers and the Rolph and Paxton farms were not isolated adventures in the nature of trade. They were transactions in a series with those before and since in which the plaintiff actively engaged in the business of buying, operating and selling real estate interests in Canada either in partnership with or through the agency. of Weithe, at least until the subsequent introduction of the company. The precise nature of the relationship between the plaintiff and Weithe, be it partners or principal and agent, is not, in my view, material but, if it were, I should hold them to have been partners.

The plaintiff carried on business in Canada during 1970 and 1971 and, accordingly, was properly assessed to tax in Canada in respect of the gains in question.

The action will be dismissed with costs. The other action will also be dismissed but without costs other than disbursements.