Houria Meddaoui v. Her Majesty the Queen, [1995] 1 CTC 2054, 95 DTC 245

Rip J.T.C.C.:-Houria Meddaoui and Sue Meddaoui appeal from reassessments issued to both of them in respect of the 1987 taxation year on the basis their dispositions of shares of 719347 Ontario Ltd. ("Ontario") was on account of capital and not on income account as assessed by the Minister of National Revenue ("Minister").

The appeals were heard together on common evidence pursuant to an earlier direction by the Court.

Houria Meddaoui is the mother of Sue Meddaoui ("Sue"). She is married to Said Meddaoui and has seven other children. She immigrated to Canada from Lebanon in 1958; she cannot read nor write English. Various witnesses including the family lawyer, Brian Phillips, and a son, Michael Meddaoui ("Michael"), described the family as "close", where each person cooperates with and helps the others.

Sue was born in Canada and has a Grade 11 education. She worked in a family-owned restaurant and managed properties owned by the family. She has not worked outside the home since 1990; she is married with three children.

Michael was born and lives in London, Ontario. At time of trial he was 31 years of age. Michael works as manager of a family-owned restaurant. He and his wife and children reside with his parents. Between 1985 and 1990 he managed real estate properties he and others had purchased personally or through corporations.

Michael testified that even as a teenager he knew "a lot what was happening in London". His father had owned property when Michael was young. "I was interested in real estate." The clientele of the family restaurant included a Mr. Pintero and George Georgopolous, real estate agents, who discussed real estate with Michael. However Michael stated he "knew what people told me" and "was aware as a lot of people were aware" about the London real estate market in 1986-1987: the market was good and an investment could be profitable.

In 1984 Said Meddaoui incorporated a corporation to purchase a three- storey building on Richmond Street in London; the ground floor contained a restaurant, the other floors were commercial. Mr. Meddaoui converted the commercial space into 20 residential units under an Ontario government-sponsored program which, according to the evidence, granted the building owner $7,000 for each converted residential unit. Michael stated the whole family participated in working toward the conversion. The units rented quickly and the investment was successful. Michael testified he did most of the work for his father since the latter cannot read English: he arranged the documents, instructed the lawyers, spoke to government authorities.

After the Richmond Street property was completed the family built a restaurant in Kitchener and upon its completion Michael returned to London. In 1985 he testified he "saw an opportunity in London, on York Street, around the corner of the (Richmond) project" and acquired the property and converted the upper two stories to 21 residential units, the ground floor was rented to two commercial tenants. Here, too, a corporation, the shares of which were owned by Michael, acquired the property and applied for grants from the province. It took seven months to convert the property and three months to rent the units. [The project is sometimes referred to as "88 York".] Michael sold his shares in 719241 Ontario Ltd. to Sam Soufan, his brother-in-law, in August 1994.

Sam Soufan was impressed with what Michael accomplished with 88 York and, according to Michael, wanted to acquire a similar property. The availability of another property, 82 York, was brought to his attention by Georgopolous and Soufan agreed to purchase the property. Michael negotiated the transaction with Georgopolous. Before closing projections were made and plans for conversion were started. Construction started in August 1986 and was completed in May 1987. Michael’s brother, Albert, supervised construction. A corporation, the shares of which were owned by Soufan or his wife, Nella, Michael’s sister, took title to 82 York.

In the meantime Michael purchased other real estate properties which he sold within a short time of purchase, all at a profit.

By transfer/deed of land registered February 10, 1986 Michael, his father and his brother Albert purchased property bearing civic address 386 Hamilton Road in London for $250,000; the property was sold by them by deed registered December 23, 1986 for $560,000 after construction of a building rented to a convenience store.

By deed registered August 19, 1986 Michael and his uncle purchased for $210,000 a property bearing civic address 493-499 Adelaide Street in London; the property was sold by them in December 1986 for $238,000.

Another property, bearing civic address 163 Commissioners Road in London, was purchased by Michael on or about December 23, 1985 for $125,000 and was sold together with two contiguous properties, one owned by his father and the other by his brother Ahmed, for $385,000 in March 1988. Pintero brought the Hamilton Road and Commissioners properties to Michael’s attention.

The Minister assessed Michael tax on the basis the profits from the dispositions of the Hamilton, Adelaide and Commissioners properties were received on income account. Michael appealed the assessments but subsequently withdrew the appeals.

Michael sold shares in 1984 in a company which owned a building in Kitchener. He also incorporated a company which purchased ten apartment buildings during 1988 to 1990. These properties were sold in 1991 under power of sale. He also acquired the shares of a company called New England Land Corporation for a nominal amount in 1989 or 1990 from Mike Soufan, a friend who worked in the family’s restaurant. New England Land Corporation owned some real estate but was heavily in debt. Michael renovated the property in 1990. Michael also caused a corporation, the shares of which he owned, to purchase a former nursing home which was converted to rental units; he still owns the shares of the corporation. A building Michael purchased in 1989 in Windsor was taken back by the mortgagee. Michael also sold, six months after acquiring it in 1983 or 1984, a property consisting of commercial and residential units on Richmond Street in London. A building he purchased in Sarnia in 1990 was sold by the mortgagee in 1991.

In 1987, Ontario acquired what is referred to as the Jenkins building, situated at 359 Rideout Street in London. The building is located about 200 metres from the York Street properties. Michael had considered favourably the Jenkins building as a candidate for conversion to rent under the provincial grant program even before it was available. The building was owned by Royal Purple Garden Supplies Ltd. ("Royal Purple") which operated a business, Jenkins Seed House, in a portion of the premises. The building had an area of about 46,000 square feet and the property included a one acre parking lot. The building is one of four old buildings on the city block-one was built by one of London’s earliest settlers-and was situated across from a park, a residential condominium building and an apartment building.

The Jenkins building has three floors, the bottom floor is half below and half above ground. The building adjacent to the Jenkins building, located at 349 Rideout, was owned and occupied by Sterling Marking Products Ltd. ("Sterling"). Sterling’s principal shareholder is Robert Schram. Sterling had outgrown its building and in 1981 had leased 15,000 square feet of the Jenkins building and sublet 2,400 square feet. The leased area was used by Sterling for administration and production. Its comptroller, Sam Hassen, described the space as an "integral part of operation". The two buildings had a walkway between them.

In 1985 the sublessee left and Sterling occupied all of the leased area. It also rented space in the parking lot for employees.

Royal Purple was owned by one Wally Gibson and, as Hassen recalled, in 1986 Gibson approached Schram with the suggestion that they put up for sale both the Sterling building and the Jenkins building. The feeling was that if Royal Purple sold its building, Sterling would have to vacate its space. Hassen tried to convince Schram to purchase the Jenkins building because "we were too tied into the space". Schram consulted with his accountants, a national firm, who advised him not to purchase the Jenkins building. Their thinking, Hassen recalled, was that if anyone purchased the Jenkins building they would require the Sterling building as well and would pay a good price. There was also some thinking at Sterling that Gibson’s asking price was too high.

In the meantime Gibson retained Georgopolous to sell the Jenkins building. Gibson insisted no signs advertising the sale be put on the property. Georgopolous brought several prospective purchasers to the site but none expressed any interest. Georgopolous stated he was looking for people who could develop the property. He believes the asking price was $1,500,000. He spoke to Michael because the Meddaouis were known to purchase buildings to "convert to rent". He said Michael liked the property.

Michael confirmed that in the spring of 1987 he inspected the Jenkins building. Michael said the building had approximately 40,000 square feet of rentable area. Jenkins Seed House occupied about 6,000 square feet of the main floor. A law firm leased 1,400 square feet and an insurance agency and other businesses owned by a Mr. Holder occupied 1,857 square feet. A significant portion of the third floor was occupied by Sterling. He believed space not accounted for was used by Jenkins Seed House for storage.

Michael and Sam Soufan approached Gibson for the usual documentation a prudent purchaser would require before making an offer.

Michael testified his mother and sister had told him if he "saw something good they’d be interested". Michael says he then spoke to his mother and Sue explaining the attractions of the Jenkins building. He testified that since his father owned a rental property, he owned such a property and his brother-in-law owned a rental property it was now time "to look after (my) sister and mother" for their future. His mother and sister were in Kitchener at the time working at the family’s restaurant but they expressed their interest. Michael eventually contacted Georgopolous and on April 1987 Michael and Royal Purple executed an agreement of purchase and sale for $1,300,000. The purchase price was to be paid as to $15,000 on acceptance of the offer, $10,000 on removal of certain conditions, $10,000 on June 15, 1987, and $350,000 by way of second mortgage back to the vendor, and the balance on closing. A first mortgage was to be arranged for the balance. The offer also provided for the vendor to continue to lease its business premises for five years, with options to renew for three additional terms of five years each. The transaction closed on September 3, 1987.

Michael had free rein from his mother and sister to negotiate the purchase of the property and any leases. He said it was part of the family practice that each trusted the other and they trusted him. Mrs. Meddaoui and Sue confirmed this. Michael reported to them what was occurring but largely he did what he thought best in the circumstances.

Once the agreement was signed Michael proceeded to speak to the tenants other than Sterling to advise them of his plans and find out if they wanted to stay on. On or about May 20, 1987 Michael and Royal Purple negotiated a lease for the premises occupied by Jenkins Seed House for a five-year term, including options for three successive renewals of five years each. Michael did not approach Sterling until August.

Meanwhile Michael arranged for the conversion. An architect, Victor Marsh, who had done work for the Meddaouis previously, was retained to determine how many units could be placed on the second and third floors and to prepare layouts for the units. Marsh testified he made plans for both one and two-bedroom units and concluded 31 units could be built. Marsh said he was instructed to prepare drawings for submission to the provincial Minister of Housing or Ontario Housing Corporation in support of an application for a grant under the "convert to rent" program. Marsh stated he retained consulting engineers to prepare such an application. An application also was to be made to the city of London for a building permit.

Marsh testified the Jenkins building was originally designed as a warehouse and office complex and found it a complicated building within which to fit apartments according to the building code. New exits and entrances were required. He consulted with city officials concerning zoning and various by-laws before he started the design. By-laws required 1-1/2 parking space per unit, for example. Eventually the building was found to be within the requirements of the "convert to rent" program. He had completed 65 per cent of his drawings when he was instructed not to continue. On September 2, Marsh sent an invoice for the services he had rendered to date.

Michael recalled that when Marsh was calculating the number of units that could be realized on conversion he expressed concern about Sterling’s occupation on the second floor of the building. Michael asked the Sterling representatives to meet him at Marsh’s office and it was then, probably in July or early August, that he informed Schram and Hassen that he was acquiring the building to "convert to rent" and asked them to move to the bottom floor. Michael recalled "they weren’t too happy to be at the lower level...was undesirable space". Sterling would not be able to move with ease between buildings. Hassen confirmed that Schram and he were unhappy. They were also concerned with the parking situation and in midAugust asked Michael for a long-term lease for the parking lot.

Hassen testified that according to its lease Sterling was to receive 12 months’ notice to vacate the Jenkins building. He was aware the new owners wanted to develop the property into an apartment building. Hassen’s parents knew Michael’s parents. Hassen’s family and the Meddaouis were Moslems and attended the same mosque. Hassen described the London Moslem community as "a small community (where) everybody knows everybody". Hassen, at first, assumed that, based on Lebanese culture, Said Meddaoui was the developer. Hassen said he arranged a meeting with the Meddaouis to help avoid Sterling vacating the Jenkins building. He expected ’’fair treatment" from the Meddaouis.

Hassen remembered that Said Meddaoui attended the first meeting. He recalled introducing Schram and his father "to Michael and his dad". Hassen explained to the Meddaouis that Schram "had been good to me" and "the Schrams were good people". He informed the Meddaouis that forcing Sterling to vacate would hurt Schram. The Meddaouis said to "leave it with them".

The next day, according to Hassen, Michael called and told him the family "invested a lot of money" in the project, "had plans and couldn’t see much they could do". Hassen then suggested Sterling become an anchor tenant.

Hassen said he researched the Meddaouis’ plans. He contacted his brother who is an engineer and "closer to the Lebanese community than I am" and "was advised they (the Meddaouis) were convert to rent developers", that is, "they take old industrial buildings, get long-term government financing and convert factories to apartments". Hassen came to realize Sterling had no choice, they "had to make the Meddaouis go away...to develop something else".

Hassen recalled he again met with Michael; Sam Soufan, whom he did know at the time and had no idea of his role, was also present. Hassen’s idea was to "kick the ball around so Sterling could stay". "What Sam is telling me is that it is retirement income. In case of Mike...let’s talk, maybe something could happen". Hassen proposed Sterling be the anchor tenant of the Jenkins building. The idea was not rejected.

Hassen pursued the idea of Sterling remaining as a tenant and suggested a plan to Schram which he approved and Michael accepted. Sterling would acquire another 20,000 square feet. Hassen had calculated the extra costs of moving and concluded there was no advantage either way..."but (being) at a location 30 years and (having) to move...is tough".

Two leases, dated August 24, 1987 and effective January 1, 1988 were prepared, one, a 15-year lease from Ontario to Sterling for the Jenkins building parking lot, the other, a 15-year lease for approximately 15,000 square feet of space in the Jenkins building. The lease was a net net lease in that the lessee was liable for all costs, including taxes and water.

Much of the leased space, Hassen explained, would have been vacant if the property had been redeveloped. Because Sterling took on the extra space, Hassen thought an opportunity may be available for Schram to become a shareholder of Ontario. Sterling, after all, was paying the mortgage. Hassen proposed that Schram invest $200,000 in Ontario and receive 49 per cent of the shares in the company. The Meddaouis "said O.K. right away...I didn’t believe it.... [It] seemed they liked Bob (Schram) and Bob liked them". Michael testified in cross-examination that when the offer to acquire 49 per cent of the shares was made he gave his reply not immediately but "within the week". The deal between Schram and Michael allowed the Meddaouis to withdraw approximately $2,000 they had in- vested in Ontario. Nella Soufan had advanced $145,800 to Ontario and one of Michael’s companies had advanced $19,200.

Once the Meddaouis agreed Sterling would acquire 49 per cent of Ontario Hassen learned that the Meddaouis had arranged to borrow $785,000 to close the transaction with Royal Purple. The loan was to be secured by way of a first mortgage on the Jenkins building at a "very high" rate of interest, 15 per cent per annum; the principal was due February 3, 1988. Michael had personally guaranteed the payments of first and second mortgages. Hassen was of the view that since Sterling was a shareholder the interest rate ought to be reduced. Hassen received permission to speak to the mortgage broker, whom he knew, in order to secure a lower rate of interest. He negotiated a reduction to 11 5/8 per cent per annum, "fixed for 20 years". Hassen had made calculations to show that at the end of 20 years the property would generate $400,000 income annually. "With [Schram’s] investment...it was a good deal for Schram...assuming my assumptions were correct...." In cross- examination Hassen commented that the "issue for us was the stability of interest rates...if not stabilized then the deal wouldn’t go...Bob wouldn’t do anything without a 20-year mortgage".

Hassen stated it was then decided to have a shareholders’ agreement to protect each party’s interest and he instructed Sterling’s solicitors to prepare the agreement. A rough agreement and discussion outline were sent to Hassen by Sterling’s solicitors on September 15, 1987. Schram had not yet reduced to writing his offer to subscribe for the shares of Ontario.

Meanwhile Hassen worried whether the deal was really good for Schram. Sterling would pay rent to Ontario. The money Schram would make was income lost to Sterling; Sterling was financing Ontario. The money Schram was to invest in Ontario would be withdrawn by the other shareholders. Hassen concluded he "didn’t do too good a job for Schram. Schram’s investment was safe so long as Sterling remained a tenant. It made financial sense but Sterling...not optimized". Hassen suggested to Schram that instead of using the $200,000 as equity to purchase 49 per cent of the shares, he should "try to get Meddaouis to sell the whole". Hassen realized, he said, Schram was not experienced in real estate and "thought we’d have to pay additional $500,000 for 100 per cent [of Ontario]".

When the offer to purchase all the shares of Ontario was put to the Meddaouis they accepted. All the proposals were made within a short interval, Hassen stated. "To this day I don’t know why they agreed", Hassen stated at trial. Only Sam Soufan objected to selling the Ontario shares, Hassen recalled. "Mike said yes very quickly". Hassen said he still does not know "who the payers were on the other side". The cost of the shares was $350,000 above the amount financed; Schram had to borrow $150,000 to close the transaction. Hassen and another employee of Sterling each purchased five per cent of Ontario. The other purchasers were Schram, Mrs. Schram and a trust for the Schram family. By accepting the offer, the Meddaouis were able to withdraw the money they advanced to Ontario and obtain an additional $150,000.

Michael’s evidence was not dissimilar from that of Hassen’s. He recalled Sterling wanted to remain in the Jenkins building and to lease the parking lot. Finally the Meddaouis agreed to ’’leave them alone” and "convert to rent” the lower levels because "we knew they were strong people...they owned the building next door...projections worked well". After discussing the two proposed leases with his family, Michael signed the leases, dated August 24, 1987, with Sterling. He now had leases with Sterling and Jenkins Feed, "two good commercial tenants". Michael was "not worried about the residential tenants". All space not used for commercial would be converted to rent and Michael instructed Marsh to prepare drawings.

Between August 24, the day Sterling signed the leases, and September 2, negotiations continued. "Sterling...kept telling us not to convert", said Michael. Hassen and Schram kept telling him they probably could take all the available space. "We would be ready to lease to Sterling on longterm...[they were a] good tenant...was a secondary option.... [Our] first choice [was] to convert to rent.... If Sterling wanted all...[that] would avoid construction", Michael testified.

Michael stated the cost of a residential unit was $25,000 of which $7,000 would be subsidized by the Ontario government. His mortgage broker had informed him that there would be "no problem" to borrow $540,000 to convert the building into 31 residential units.

"Sterling", Michael recalled, "kept telling us they were to be awarded...a contract to publish the London-St. Thomas MLS listing book every two weeks and would need all the space...but they couldn’t commit". At the end of August, however, Sterling agreed to take all the space on condition they get 50 per cent of the property, Michael testified. Hassen showed Michael the projections showing a positive cash flow and the building being paid up in 20 years, among other things. Because the lease was net net ‘all we need to do is collect the rent and pay the mortgage", said Michael. "The building would care for itself." The Meddaouis would still manage the property. Michael thought this proposal was a viable and good for his mother and sister. He advised his mother and sister to give up 50 per cent of the property because it was a "good deal and hassle free". He also instructed Marsh to stop work.

Michael said the deal provided for Sterling to take the unoccupied space and obtain 50 per cent of the shares of Ontario for nominal amount. Sterling would then lend Ontario $200,000 and that money would be repaid to the Meddaoui family.

Michael saw the letter of September 15, 1987 from Sterling’s solicitors in mid-September. He said the rough shareholders’ agreement assumed he was a shareholder of Ontario and Nella Soufan was a shareholder because she advanced money to Ontario. Michael made notes and asked his solicitor, Phillips, for his comments on the agreement because he, Michael, had "never done a shareholders’ agreement before". He reviewed the agreement in detail with Phillips.

By letter dated October 7, 1987 Sterling’s solicitors forwarded a draft shareholders’ agreement to Phillips for his consideration with the Meddaouis. The author of the letter expressed urgency to have the agreement completed before Michael left on his honeymoon on October 12; he was to be married October 11.

Michael remembered the meeting which took place during the afternoon of Friday, October 9 at which time Sterling, according to Michael, wanted the shareholders’ agreement completed. He had discussed the draft agreement with his mother and sister. Michael testified he thought the issue had to be resolved by October 9, before he went away. He had concerns with the draft agreement and sat "there trying to figure out what to do.... [We] were talking back and forth.... Out of the blue either Sam (Hassen) or Schram said ’why don’t we buy you out?’.... I thought we had to decide immediately...so I said O.K...they asked the price.... I took a number out of the air...$200,000.... [I]...thought this was a negotiating tactic.... We were respected people and I gave my word.... [I] had invited Hassen and Schram to the wedding...". In cross-examination Michael stated he "had to say something once the offer was made...[they were] across the table from me". He also told the Sterling people, he said, he would have to confirm with his mother and sister. His mother’s attitude was that he had given his word and had to honour it, he stated.

After the meeting, Michael reported to his mother and sister. He said he told them "they called my bluff but its O.K...".

Michael stated there were no other offers for the property or the shares.

Michael recalled that when he agreed to sell, he "asked why they wanted to buy". He said he could not understand the reason "they would buy now when they could’ve bought earlier". He insisted he accepted the offer "because they asked for a number...[it was] spur of the moment...didn’t think they would accept...". Michael repeated that he thought the offer was a negotiating tactic.

Michael testified Nella Soufan received about $140,000 on closing and the balance in monthly payments. Michael’s company received the money it advanced. After discussions with Sue and his mother, it was agreed they should pay him $25,000 for his efforts.

Michael claimed that the Jenkins building was to be "the jewel of our properties". It was well situated in downtown London; it had three street frontages and was across from residential properties. Moreover, the projections predicted a 20 per cent annual return on the investment.

Phillips testified Michael is the spokesman for the Meddaoui family and most of his contact is with Michael. He has known the Meddaouis for about 11 years and has acted for them the past ten years. Phillips had acted on the various purchases and sales of properties by the Meddaouis, including Michael, over the years.

Michael instructed Phillips to incorporate Ontario in June 1987 and the company was incorporated on June 26, 1987. The share capital was not unusual, according to Phillips. The usual corporate by-laws and resolutions, dated June 26, the date of incorporation, were signed after his reporting letter of September 11 was sent out.

Phillips reviewed the rough and draft shareholders’ agreements and expressed his concerns to Michael. He doubted whether he heard back from Michael about his comments because "they were now selling". Negotiations were being handled by Michael and Phillips said he had only a "passing involvement". He acted for Michael on the eventual sale of the Ontario shares to Schram.

Sue and Mrs. Meddaoui both stated Michael was responsible for the transactions with Sterling. Sue corroborated Michael’s evidence that he discussed the property with her and their mother. She recalled the purpose of the purchase of the Jenkins building was to "convert to rent" but "one of the commercial tenants had a few words with Michael and all of a sudden they wanted to buy us out". At the time she and her mother were working in Kitchener. Michael, she said, told them he would explain the situation but she agreed "Mike did everything and informed [us] what was happening”.

Mrs. Meddaoui testified she worked all her life and wanted money for retirement. "Mike said it was a good idea...he did the work and bought the building (for me) and Susie." She could not understand why "people wanted to buy it".

The Minister assessed the appellants on the basis that the Jenkins building was acquired for the primary purpose of converting the building to rental units but the secondary or alternative intention was to sell the Jenkins building at a profit; accordingly the profits are to be included in computing the appellants’ incomes from a business: section 3 and subsection 248(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The concept of "secondary intention" is explained by Noel J., as he then was, in Racine, Demers and Nolin v. M.N.R., [1965] C.T.C. 150, 65 D.T.C. 5098 (Ex. Ct.), at page 159 (D.T.C. 5103):

In examining this question whether the appellants 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 is 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 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 must be understood by a "secondary intention" if one wants to utilize this term.

To give to 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 the 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.

There is no question that the motivation to purchase the building was that of Michael. He was the force who acted on behalf of the appellants and Ontario with their blessings. Thus one must look to Michael to determine whether the profits in the transaction were on account of income or capital.

Michael, although young at the time, had a taste for real estate and was in the business of buying and selling real estate. However he also had acquired real estate as an investment both for himself and family members. Based on Michael’s history of buying and selling real estate, it would not be an unfair inference that Michael’s motivation for acquiring the Jenkins building was the expectation that the building could be turned over at a profit. This was the inference made by the Minister. However an explanation of the transaction may override such inference: Elgin Cooper Realties Ltd. v. M.N.R., [1969] C.T.C. 426, 69 D.T.C. 5276 (Ex. Ct.).

There is no doubt that "at the moment of acquisition" of the Jenkins building, that is, on September 3, 1987, the date of closing, Michael’s intention was not to convert the building to residential rental units but to rent the building to commercial tenants. However in transactions such as these one must look to the moment the taxpayer entered the transaction and became legally obligated to purchase the property to determine his or her intention. In the case at bar that moment was when Michael executed the agreement of purchase and sale with Royal Purple on April 1, 1987.

I have set out in some detail the evidence of Hassen and Michael. Their testimonies set out the thinking of the purchaser and that of the vendor during negotiations that culminated in Sterling acquiring 100 per cent of the shares of Ontario. I observed both of these witnesses with care during their evidence in chief and cross-examination and in my view they gave evidence in a frank and candid manner. The substance of what one said coincided with the substance of what the other said. I accept the substance of their evidence as being truthful. Any discrepancies were in point of detail which are to be found in the ordinary course when a person is attempting to recall details of what happened seven years ago.

I accept the evidence of other witnesses that the Meddaoui family is close and its members assist each other. (Michael’s mother said she had in mind owning an income producing property for her retirement but I do not think this is material to the question in issue in this appeal: Elgin Cooper Realties, supra, page C.T.C. 428 (D.T.C. 5277). ’’Retirement income" is often a declared intention for acquisition of property in appeals of this nature.) I therefore find it reasonable for Michael to have looked for investment for his mother and sister. That he was paid $25,000 once the shares were sold does not taint the nature of the transaction; one may explain the payment as a sharing of the good fortune that arose from the transaction with the person responsible.

To carry out the principal intention Michael retained an architect who had participated in other "convert to rent" projects for the family. The architect had discussions with local and provincial officials. The architect completed 65 per cent of the work required before he was told plans to convert the building to residential units was abandoned.

For Michael to have had in mind, at the time he entered into the transaction, the possibility of reselling as an operating motivation for acquisition would require Michael to have knowledge of facts which simply did not exist at the time. The Jenkins building was an old commercial building and these types of property are not those that are generally acquired to be turned over at a profit. One of its primary tenants, and the owner of a contiguous building, Sterling, had not even expressed an interest in acquiring it when it was first put up for sale.

Michael’s father, Michael and his brother-in-law had each acquired commercial properties through a corporation and converted a substantial portion of the properties to residential rental units. This transaction was structured in the same manner as the previous "convert to rent" property acquisitions.

Once Sterling learned Ontario was purchasing the building to "convert to rent" Sterling realized it had to make the best of a difficult situation. The offers to enter into 15-year leases for space in the Jenkins building and parking and to subscribe for 49 per cent of the shares of Ontario were initiated by Sterling to protect its interests; the acceptance of the proposals did not taint the investment intent of the Meddaouis. It was only because Sterling wanted to maximize its own interests in the Jenkins building that it offered to buy out the Meddaouis.

I cannot infer that Michael thought, when he entered into the transaction, that he would be able to sell the building at a profit to Sterling or any other person. There was no evidence led by the respondent that Michael must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell the Jenkins building at a profit rather than converting it to residential rental units. The Sterling offer to purchase was fortuitous. Michael’s hopes of selling the building in such a circumstance, or any other circumstance, did not exist when Michael signed the agreement of purchase and sale, when Ontario actually acquired the building on September 3, 1987 or when the meeting of October 9 commenced.

The appeals are allowed with costs.

Appeals allowed.