Rudelier Ranches & Livestock Co. Ltd. v. The Queen, 89 DTC 5180, [1989] 1 CTC 417 (FCTD)

Dubé, J.:—These two income tax actions were heard together by consent and by order of the court. The issue in both cases is whether or not the sale of an apartment building, the Brookland Court, situated at 540 Helmcken Street, Vancouver, B.C., on November 28, 1980 constituted capital gain as claimed by both plaintiffs, or income as assessed by the defendant.

The plaintiff Marvin Mogul, aged 48, is presently a construction supervisor and property manager for Burlington Finance Corp. Ltd. and a resident of Richmond, B.C. He has worked most of his life in building supplies, building supervisorship, mortgage brokerage and generally in and around the real estate business. In 1977 he was given the opportunity to purchase a rental income property in New Westminster. Lacking the financial backing, he contacted his good friend, Nelson Rudelier. Their friendship goes back to their childhood days in Winnipeg.

Nelson Rudelier is also involved in the real estate business and is the sole owner of a holding company, the defendant Rudelier Ranches & Livestock Company Ltd., incorporated in 1973. He became very much interested in acquiring the New Westminster property with his friend Marvin Mogul. Due to circumstances beyond their control, that property became unavailable to them and they were offered the Brookland Court instead.

They obtained an appraisal on it from Cunningham and Rivard Appraisals on October 26,1976. According to the appraisal, the probable market value for that property was $1,100,000 as of that date. It is described as an older apartment block, erected in 1910, consisting of 87 suites on seven storeys. As of the date of inspection, 43 units had been renovated. The practice of the former owner was to remodel the units as they became vacant and to refurnish them so as to appreciate the rental income. The current monthly rental was $195 for the 43 renovated units and $130 for the others. After renovation the rent could be increased to $221.42 and $149.53 respectively, increasing the annual income from $169,260 to $193,203 per annum.

Both men thought the appraisal was excellent and decided to proceed almost immediately with the purchase. They were successful in lowering the asking price from $1,250,000 to $1,000,000. Mr. Rudelier put $75,000 down, the balance of $925,000 was financed through loans. Mr. Mogul would look after the administration of the building. On November 28, 1980 they disposed of the property for $1,600,000.

In reassessing the plaintiffs with respect to their respective taxation years, the Minister of National Revenue relied on certain assumptions, including the assumptions that Mr. Rudelier could be considered as a trader or speculator, that Mr. Mogul in joining in partnership with him or his company was by that association in no different position than Mr. Rudelier and his company and that both had the intention of turning the property to account by means of resale as part of a profit making concern or undertaking. Alternatively, if the property was not acquired with the primary intention to sell for a profit, it was at least with “a dual or alternative intention, ab initio, to do so".

Undoubtedly, both men can be qualified as realtors. Although it was the first large apartment building that they purchased and sold, in the course of the few years preceding that transaction they were both involved in the purchase and sale of a number of rental properties, either themselves directly or through Mr. Rudelier's holding company and, in the case of Mr. Mogul, through Burlington Finance Corp. Ltd. (owned entirely by his wife) for whom he was an employee. Those various, rather complex, transactions were described in court by both Mr. Mogul and Mr. Rudelier themselves. For purposes of brevity and clarity I asked counsel to prepare and file two schedules reflecting the transactions in which the two men were involved directly or indirectly. They read as follows:

REAL ESTATE TRANSACTIONS

A. MARVIN MOGUL (personal)

	Date of Purchase	Date of Sale
(1) 540 Helmcken Street,	Apr. 1, 1977	Nov. 1, 1980
Vancouver (50%)
(Brookland Court
Subject Property)
(2) Georgia Shopping Centre (50%)	May, 1979	1985
Powell River, B.C.		(foreclosure)
(3) Berkeley Place	Oct. 15, 1982	1984
Davie Street, Vancouver (25%)		(Quit-claimed)

B. BURLINGTON FINANCE CORP. LTD. (100% owned by Patricia Mogul) (Wife of Marvin Mogul) (Marvin Mogul —Employee)

	Date of Purchase	Date of Sale
(1) Commercial Bldg.	1972	1976
North Vancouver
(2) Six (6) Revenue Houses	1971-1975	1976
(Rooming Houses)
(3) 14 Unit Condominium	1981	1981
Powell River
(4) /3 Interest Sunnycrest	1981	1981
Shopping Centre,
Gibsons, B.C.
(5) 18 Unit Condominium	1987	1987-1988
Powell River
REAL ESTATE TRANSACTIONS
A. NELSON HILLEL RUDELIER (personal)
	Date of Purchase	Date of Sale
(1) 1875 W. 12th	Oct. 26, 1973	July 9, 1976
Vancouver (50%)
(2) 1965 W. 15th	Nov. 27, 1973	May 15, 1974
Vancouver (50%)
(3) 1865 W. 12th	Mar. 29, 1974	Apr. 1, 1975
Vancouver (50%)

	Date of Purchase	Date of Sale
(4) 1214 W. 7th	May 15, 1974	Apr. 9, 1976
Vancouver (25%)
(5) 2405 W. 6th	Apr. 10, 1974	Oct. 30, 1975
Vancouver (25%)
(6) 1224 W. 7th	May 15,1974	Apr. 9, 1976
Vancouver (25%)
(7) 7307 —7309—11th Ave.	1976	1981
Vancouver (50%)
(8) Whistler Vale, Unit #10	1978	1981
(9) Whistler Condominium,
Whistler, B.C, (held in trust
by Rudelier Ranches)	1981	still owns

B. RUDELIER RANCHES & LIVESTOCK COMPANY LTD. (plaintiff)

100% owned by Nelson Rudelier

	Date of Purchase	Date of Sale
(1) 540 Helmcken St.
Vancouver (50%)	Apr. 1, 1977	Nov. 1, 1980
(2) SunnyCrest Shopping Mall
Gibsons, B.C.	Aug. 1981	still owns

In most of those transactions, and more particularly with reference to the Rudelier transactions, the same pattern was followed. Properties were purchased with very small downpayments and heavy financing. They were renovated and sold at a profit within a very short period. Except for the two personal Mogul transactions which were foreclosed or quit-claimed, all sales resulted in substantial profits.

It is true that the plaintiff Marvin Mogul, when considered solely in the light of his three personal transactions, can hardly be defined as a trader, but his own vast experience in real estate financing combined with his association with Nelson Rudelier, with the plaintiff Rudelier Ranches & Livestock Company Ltd. and with Burlington Finance Corp. Ltd., the company owned by his wife, places him in the same position as the others. In that respect the following remarks of Walsh, J. in Pierce Investment Corp. v. Minister of National Revenue, [1974] C.T.C. 825; 74 D.T.C. 6608 bear reproduction:

As always in cases of this type, the determination of what were the real intentions of the purchasers at the time they acquired the property and whether they had, at that time, as secondary intention in the event that their primary intention could not be carried out, is a difficult one. There is no doubt, however, that the intentions of appellant cannot be differentiated from the intentions of the Shragie brothers nor can they disassociate their own real estate experience and that of the other family real estate companies from that of appellant.

I am also of the view, as has been expressed in other cases,that while the evidence of the witnesses is helpful in endeavouring to determine their intentions, their actual conduct and the steps they took to carry out these intentions gives a much better indication of what they actually were. Without intending to cast any aspersions on the credibility of the witnesses in the present case it is nevertheless evident that in any case where a distinction must be made between a transaction which constitutes an adventure in the nature of trade and one which leads to a capital gain, one must expect the witnesses to insist that their intentions were solely to make an investment and that the idea of reselling the property at a profit had never occurred to them even as a secondary intention at the time of making the original investment, but was merely forced on them subsequently by some event beyond their control. If they were not in a position to testify to this effect they would have little or no ground for appealing against the assessment.

As with the taxpayers in the Pierce case, the two witnesses in this case, Messrs. Mogul and Rudelier, could be expected to insist that their intention, when they purchased the building, was only to make a long term investment and that it never occurred to them they would resell at a profit. But in this case, as in all other income tax cases, the real intention of the purchasers is determined from their conduct before, during and after the transaction.

According to their own evidence, the plaintiffs decided to sell the property in 1980 for several reasons. Mr. Mogul became highly frustrated with the daily administration of the building: good tenants had left and prostitutes, drug addicts, pimps, transvestites and other undesired derelicts had moved into the building. Substantial additional repairs were needed. New elevators would have to be installed. The rate of interest was going up steadily. Financing became more and more onerous.

On the other hand, the appraisal obtained by the plaintiffs before they put up the building for sale, projects a much brighter outlook. The report, dated July 30, 1980, was prepared by Overland Management Corporation Ltd. of North Vancouver, B.C. Under the chapter "Neighbourhood Data”, the appraiser writes that "the subject property is located in the downtown core of Vancouver in an area which is currently seeing signs of redevelopment from older single family houses to small commercial offices and shops . . . The type of tenant to utilize these apartments is [sic] primarily older retired people or young single people working in the surrounding area. Very little apartment accommodation is provided for east of Burrard Street and this area would cater particularly to the lower income level of the population.”

The report does not suggest the need for further extended repairs. The report further notes: "The apartment is presently being painted on the exterior, and a new roof is being installed, internally drop T-bar ceilings on all floor levels have been completed, and new lighting will be installed, as well as having the sprinkler heads extended to reach the area below the drop ceilings". The report concludes by stating that the building as of that date (July 30, 1980) was worth $1,570,000.

Consequently, I must conclude that the plaintiffs purchased the Brookland Court with the primary intention to renovate it and to resell it at a profit and that the profitable transaction resulted in income as assessed by the Minister. The action is therefore dismissed with costs.

Appeal dismissed.