Société De Gestion Immobilière Lapinière Inc. v. Minister of National Revenue (Informal Procedure), [1995] 1 CTC 2837

Archambault J.T.C.C.:-These are appeals governed by the old rules of procedure disputing income tax assessments issued by the respondent for the 1985, 1986 and 1987 taxation years.

The appellant considered the gain resulting from the disposition of two buildings as the disposition of one capital property giving rise to a capital gain. The respondent considered that gain as business income. The respondent relied particularly on the following facts in assessing the appellant for the 1985, 1986 and 1987 taxation years:

(a) the appellant’s fiscal year ends every March 31;

(b) the appellant’s capital stock belonged to the following persons during the taxation years in issue:

Christiane Généreux: 99 per cent

Michel Aubertin: one per cent

(c) Michel Aubertin, who was the spouse of Christiane Généreux, practised the profession of notary during the 1985, 1986 and 1987 taxation years;

(d) on or around March 7, 1984, Christiane Généreux purchased four properties known and designated as being located at 2730-2740 Plessis, 2750 Plessis, 2690-2700 Plessis and 2710-2720 Plessis in Longueuil;

(e) those purchases were allegedly made by Mrs. Généreux as an agent for the appellant in respect of the properties situated at 2730-2740 and 2750 Plessis, and for a real estate broker and his wife with respect to the properties located at 2690-2700 and 2710-2720 Plessis;

(f) the four properties in issue were then sold by Mr. Florian Parent, their owner, because of the financial difficulties incurred by the latter;

(g) during the taxation years in issue, the appellant operated a real estate transaction business, that is related to the purchase and sale of vacant properties;

(h) during the years in issue, Mr. Michel Aubertin, director of the appellant, had the necessary experience and knowledge from his profession of notary to take part in the real estate transactions;

(i) in purchasing the four aforementioned properties, Mrs. Généreux also acted on behalf of a real estate agent who also had a certain expertise in real estate transactions;

(j) on or around March 7, 1984, Mrs. Généreux signed a statement, to which the appellant was a party, to indicate that she was acting only as an agent of the appellant in the purchase of the properties located at 2730-2740 and 2750 Plessis;

(k) on or around May 22, 1994, the appellant resold the building located at 2730-2740 Plessis, then realizing a profit on disposition of $19,433;

(l) on or around June 28, 1984, the appellant resold the building located at 2750 Plessis, realizing a profit on disposition of $62,752;

(m) the period of ownership of the properties in issue was therefore only 79 days in the case of the building situated at 2730-2740 Plessis and only 113 days in the case of the one located at 2750 Plessis;

(n) the purchase of those properties, which was made at a very reasonable price, was financed in full;

(o) the appellant’s intention, principal if not secondary, at the time of purchase of those properties was to resell them at a profit;

(p) subsequent to the years in issue, more precisely in 1987, the appellant proceeded with similar transactions and declared the revenues generated by those transactions as business income;

(q) all the profits realized by the appellant at the time of the disposition of the properties in issue constituted business income of the appellant.

The appellant admitted all the facts except subparagraphs (f), (g), (h), (i), (k), (1), (m), (0), (p), and (q).

Michel Aubertin, one of the two shareholders of the appellant, indicated in his testimony that Florian Parent had not disposed of the four properties because of financial difficulties, but rather in order to realize the increase in value of his investments. He was a chiropractor from Joliette who had invested in those properties in order to create a pension fund for himself. Mr. Parent apparently suggested to Mr. Aubertin that the latter’s wife purchase those income properties for the same reasons. Mr. Aubertin had been a notary since 1979. He met Mr. Parent in the context of his professional activities. Mr. Parent intended to sell to Mr. Jobin, who was unable to obtain sufficient financing to purchase them all, 11 properties which Mr. Parent owned in Longueuil. Mr. Aubertin acted as notary in that transaction. Only seven properties were sold to Mr. Jobin. It was at that time that Mr. Parent allegedly approached Mr. Aubertin for the latter to purchase the other four properties which he had not been able to sell to Mr. Jobin. Mr. Parent no longer wanted to return to Longueuil to manage those properties.

Mr. Aubertin consulted a Mr. Masse who had already been a real estate broker and who owned a number of real estate investments and proposed that he purchase two of the four properties. Mr. Masse purportedly informed Mr. Aubertin that the price asked by Mr. Parent was right. Mr. Aubertin stated that he would not have purchased the two properties if Mr. Masse had not purchased the other two. He considered that he lacked experience in the real estate field, his practice being limited to a general notarial practice. In 1987, he had been practising his profession for only three or four years.

Although his wife held virtually all the appellant’s shares, it was Mr. Aubertin who managed its operations. One of the properties purchased by the appellant contained 12 housing units, while the other contained only six. Mr. Aubertin testified that the tenants had been notified of a rent increase based on the rate of inflation. All the tenants except the caretaker, who did not pay him rent, had apparently informed him that they would leave their housing units. Mr. Aubertin filed no written evidence of the notices of non-renewal of lease. Mr. Aubertin’s wife, Mrs. Généreux, who was pregnant, purportedly panicked upon learning this news. The appellant allegedly paid $2,400 in expenses to advertise his units for rent in the newspapers. Mr. Aubertin stated that Mr. Masse had no experience in property rental. The latter owned only vacant lots.

Mr. Aubertin imagined that he would only have to collect 17 cheques per month and that he could hold that property for the long term. He hoped to build a pension fund for Mrs. Généreux with a single visit per month. He indicated that the appellant had been specifically incorporated for this transaction in order to manage these properties, as the appellant’s business name shows. He considered these properties as a good investment since they did not need repairs and seemed to him to be well built. However, since they were going to be emptied and his pregnant wife was panicking, he decided to discuss his problem with Jacques Labelle, who was the director of a Montreal Trust real estate brokerage branch. The latter informed him that he had a client who might be interested in purchasing those properties.

According to Mr. Aubertin, these properties were the only capital assets purchased by the appellant. The six-unit apartment building was sold on May 22, 1984, only 79 days after its purchase, while the 12-unit apartment building was sold on June 28, 1984, 113 days after its purchase. The appellant subsequently started up in development activities. The profits realized by the appellant in these activities were reported as business income.

Mrs. Généreux had no experience in the real estate field; she was a psychologist with a reception centre. She was expecting a second child and had decided to stop working as a psychologist. She therefore believed she had the time to take care of her new tenants. Mrs. Généreux stated that she did not know how many tenants gave their notices of non-renewal. She thought probably one-third. At the time the buildings were resold, she did not know how many units were empty. She stated that if there had not been lease renewal problems, the appellant would have kept them. She confirmed that her husband had handled the sale of the properties.

Mrs. Lucie Arseneault, an auditor for the respondent, indicated in her testimony that Mrs. Généreux had told her that three to five advertisements had been placed in the newspapers to sell the property and that four or five were for rentals.

Appellant’s claims

Mr. Aubertin argued that the buildings located on Rue Plessis were long-term investments. Their purchase constituted the appellant’s first transaction. He emphasized that there had been no advertisement to sell the property and that the offer to purchase the properties received by the appellant had not been solicited. He pointed out that the appellant had declared its profits earned from its speculative activities as business income.

Respondent’s claims

Counsel for the respondent admitted that the appellant had intended to hold the property for a long-term investment. She claimed, however, that the appellant had had a secondary intention to resell the properties at a profit. The respondent further disputed the appellant’s claims that there had been no solicited offer since Mr. Aubertin had admitted that he had discussed his problem with a representative of Montreal Trust.

Analysis

Determining whether the disposition of a building gives rise to the claim of a capital gain or of a business income is not always easy to do. It is clear that the taxpayer’s intention at the time of purchase of the buildings is the most important element. However, the courts have refused to rely solely on taxpayers’ testimony in order to determine this intention. The whole of the evidence must be considered, including the taxpayer’s conduct. In Leonard Reeves Inc. v. M.N.R., [1985] 2 C.T.C. 2054, 85 D.T.C. 419 (T.C.C.), at page 2058 (D.T.C. 421), the Associate Chief Judge of the Court stated the principles guiding the assessment of the evidence in this kind of case. [1] One of these principles respecting the evidence of a taxpayer’s intention:

3. The direct evidence of a person who has an interest in the outcome of an appeal regarding the intention behind a transaction or series of transactions is not determinative of the existence of the stated intention. Generally speaking the intention is to be ascertained from the entire course of conduct and relevant circumstances and the inferences flowing therefrom: Gairdner Securities Ltd. v. M.N.R., [1952] C.T.C. 371, 52 D.T.C. 1171 per Cameron J. at page 381 (D.T.C. 1175) and Racine et al. v. M.N.R., [1965] C.T.C. 150, 65 D.T.C. 5098 per Noël J. at 159 (D.T.C. 5103).

The Associate Chief Judge made the following comments on the objects pursued by a corporation:

4. A consideration of statements in articles of incorporation regarding the objects of the corporation or restrictions on the businesses it may carry on is not helpful. What the company did in fact is paramount: Regal Heights Ltd. v. M.N.R., [1960] S.C.R. 902, [1960] C.T.C. 384, 60 D.T.C. 1270 per Judson J. at 390 (D.T.C. 1272-73); Glacier Realties Ltd. v. The Queen, [1980] C.T.C. 308, 80 D.T.C. 6243 per Addy J. at page 310 (D.T.C. 6245). The same is true with respect to what may be said in a partnership agreement regarding the nature of the partnership’s business.

Lastly, on the importance of offering a property for sale or the fact that there has been an unsolicited offer, he added:

6. The fact that real estate is not advertised for sale and that an offer which results in a sale and purchase is unsolicited is not preclusive of there having been a primary intention on the part of the appellant at the time of purchasing the property to sell it at any time he regarded it as financially favourable to do so. Lack of advertising and the fact of an unsolicited offer are simply matters to be weighed together with the other relevant evidence: Slater et al. v. M.N.R., [1966] C.T.C. 53, 66 D.T.C. 5047, at page 59 (D.T.C. 5050).

In short, each case stands on its own merits and the Court must take into account all the relevant circumstances in order to make a decision.

The burden is on the appellant to show that the respondent’s assessment is incorrect. In this instance, as is generally the case, the evidence revealed certain facts pointing in favour of the appellant’s arguments and others in favour of the respondent. In support of the conclusions sought by the appellant, there was first the testimony of Mr. Aubertin and his wife confirming that their intention was to hold this investment for the long term. This was also their first investment. When the appellant subsequently began its speculative activities, it declared its income as business income.

Supporting the respondent’s claims are the following facts. The most important, in my view, was the very brief holding period for the two buildings. One was held 79 days, the other 113 days. These were very brief periods for buildings. The appellant tried to explain these brief periods by the difficulties encountered in renting the two buildings. Mr. Aubertin stated that all the tenants had given notice that they would not renew their leases, while Mrs. Généreux, who holds 99 per cent of the shares, was not able to indicate the number of tenants who were supposed to leave. She thought they represented one-third of the tenants. Since Mr. Aubertin insisted that it was mainly because of his wife’s panic that they sold so quickly, it was rather surprising that Mrs. Généreux was not able to confirm whether all the tenants had said they would leave their apartments. One-third of departures: was that enough to explain the state of panic leading to such a quick resale?

There was also the testimony of Mrs. Arseneault that certain advertisements concerned the offering of the property for sale. Mrs. Généreux did not contradict Mrs. Arseneault on this question. The circumstances surrounding the purchase of these properties must also be taken into account. Mr. Aubertin acted as a notary for the vendor. It was therefore in his capacity as notary that he came into contact with the eventual vendor of these properties. Mr. Aubertin also had contacts in the area, including in particular the manager of the Montreal Trust real estate brokerage branch. He could therefore rely on his contacts to dispose of his properties. That is what occurred.

Having regard to his profession and his experience, one may think that Mr. Aubertin must have expected that there would be certain difficulties in the management of these buildings. The fact that the appellant had disposed of them so quickly creates a serious doubt as to the appellant’s claims that its only intention was to hold them for the long term. In my view, the appellant also intended to resell them at a profit at the time of purchasing the properties, and that intention played as decisive a role in the decision to purchase as the intention to hold them in order to earn rental income. A number of indicators confirm my determination on this fact. The appellant did not persevere greatly in resolving its rental difficulties. It cannot be said that the offer to purchase which the appellant received was not solicited. Mr. Aubertin admitted that it was as a result of his efforts that this offer was elicited. Moreover, the entire acquisition cost of these properties was financed through loans. With his training and experience, even though he was only in his third or fourth year of professional life, Mr. Aubertin must have expected that a fully financed property would be more vulnerable to operating difficulties. Lastly, the fact that the appellant had associated with a former broker in order to purchase the four properties from Mr. Parent does not help the appellant’s case.

I come to the conclusion that the appellant did not discharge its burden of proof to show that these buildings were not purchased in an adventure in the nature of trade and that the respondent’s assessments were incorrect.

For these reasons, the appellant’s appeals are dismissed.

Appeals dismissed.