Gilles Coulombe v. Her Majesty the Queen, [1995] 1 CTC 2962, 96 DTC 1085

P.R. Dussault J.T.C.C.:-These are appeals from assessments made for the appellant’s 1987, 1988 and 1989 taxation years, according to which the Minister of National Revenue (the "Minister") determined that transactions in 1987 and 1988 concerning a lot situated in Drummondville gave rise to business income and not to capital gains as the appellant contended. Moreover, the Minister disallowed the appellant’s claim for a reserve with respect to these transactions. However, with regard to this aspect of the case, counsel for the respondent admitted at the beginning of the hearing that the appellant was entitled to a reserve under the provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") and that the reserve would be established by the Minister in accordance with the decision of the Court concerning the nature of the transactions in question.

The main events which gave rise to the transactions at issue are described in the notice of appeal as follows:

7. On April 25, 1985, the appellant and Fernand Levesque agreed to form a partnership to operate a garage in the Drummondville region, and for that purpose to acquire an immovable owned by the Caisse d’Entraide Economique de Drummondville to operate the business, the whole as it appears in a copy of the agreement between the appellant and Fernand Lévesque produced in support hereof as Exhibit A-5, to be read as if it were recited in full herein;

8. For that purpose, an offer to purchase in the amount of $40,000 was submitted by the appellant and Fernand Lévesque to the Société d’Entraide Économique du Centre du Québec Inc. on August 5, 1985, which offer to purchase was accepted by the representatives of the owner on August 16, 1985, the whole as it appears in a copy of that offer to purchase produced in support hereof as Exhibit A-6, to be read as if it were recited in full herein;

9. Upon acceptance of the offer to purchase by the owner, the latter authorized the appellant and Fernand Lévesque to take possession of the premises on August 27, 1985, so that they could proceed to clear the lot and repair the building, the whole as it appears in a copy of a letter sent by a representative of the owner and produced in support hereof as Exhibit A-7, to be read as if it were recited in full herein;

10. Upon acceptance of their offer and receipt of authorization to take possession of the premises, the appellant and Fernand Lévesque retained Robert Talbot to appraise the repairs to be done on the building acquired from the Société d’Entraide Économique du Centre du Québec Inc., which appraisal disclosed that work on the order of $57,275 had to be done to put the building into good condition, the whole as it appears in an appraisal dated September 8, 1985, a copy of which is produced in support hereof as Exhibit A-8, to be read as if it were recited in full herein;

11. Given the extent of the repairs to be done on the building, the appellant and Fernand Lévesque decided not to proceed with those repairs;

12. For reasons beyond the control of the appellant and Fernand Lévesque, the contract for the acquisition of the immovable, which was referred to above, was not signed until September 30, 1985, before Mr. Michel Giguere, a notary in Drummondville, and the act was registered in the office of the registry division of Drummond on September 30, 1985 as number 291716, the whole as it appears in a copy of the contract produced in support hereof as Exhibit A-9, to be read as if it were recited in full herein;

13. As a result of the decision not to make the repairs on the building described above, the appellant and Fernand Lévesque decided by mutual agreement to acquire another building which had previously been used as a warehouse and was situated on the same street as the building previously acquired, which building required only little or no repairs in order to be used for operating the planned business;

14. Unlike what had happened with the first immovable, the acquisition of the second one proceeded rapidly, even without the need for signing an offer to purchase, and was done for the price of $60,000;

15. Moreover, a contract of acquisition of that immovable was signed on September 25, 1985, before Mr. Michel Giguère, a notary in Drummondville, by the appellant, Fernand Lévesque and Line Coulombe, who became the purchasers of the said immovable, the whole as it appears in a copy of the contract produced in support hereof as Exhibit A-10, to be read as if it were recited in full herein;

16. Subsequently to the acquisition of the immovable, Fernand Lévesque acted on his undertaking of April 25, 1985 to operate a garage in the building acquired from Société de Gestion J.N.G. Inc. on the terms of the contract produced as Exhibit A-10, at about the beginning of November, 1985, the whole as will be more fully proved at trial;

17. Moreover, in view of the danger and the dilapidated condition of the building situated on the land which was the subject of the contract produced as Exhibit A-9, the appellant and Fernand Lévesque agreed between themselves to demolish the building, upon issuance of a demolition permit by the municipality on January 20, 1986;

18. As a result of approaches made by a representative of Actimum Services Immobiliers Inc. to the appellant and Fernand Lévesque, negotiations were undertaken for the resale of the immovable which was the subject of the contract produced as Exhibit A-9;

19. Under the terms of the agreements negotiated with Actimum Services Immobiliers Inc., the appellant and Fernand Lévesque had to obtain a zoning change from the municipality of St-Nicéphore so that the zone in which the immovable described in the contract produced as Exhibit A-9 was situated would be changed from "industrial" to "residential";

20. Actimum Services Immobiliers Inc. was acting as the real estate developer, since the appellant and Fernand Lévesque had no experience in that field;

21. Moreover, the appellant and Fernand Lévesque never had the intention of acting as real estate developers nor of engaging in the real estate business;

22. As a result of the negotiations with Actimum Services Immobiliers Inc., a contract of sale was entered into on May 5, 1987 before Mr. Pierre Fradette, a notary in Drummondville, which bill of sale was registered in the office of the registry division of Drummond on May 26, 1987, as number 304863, the whole as it appears in a copy of the contract of sale produced in support hereof as Exhibit A-11, to be read as if it were recited in full herein;

23. As attested by the contract produced as Exhibit A-l 1, the appellant and Fernand Lévesque were required to bear substantial costs in order to give effect to the agreement with Actimum Services Immobiliers Inc., such as fees and expenses for an engineer and a surveyor, the cost of installing services and special municipal taxes;

24. As a result of financial difficulties experienced by Actimum Services Immobiliers Inc., it defaulted on the obligations it had contracted under the contract produced as Exhibit A-11, so that the parties were obliged to agree on new terms and conditions for payment of the purchase price, the whole as it appears in an agreement signed before Mr. Pierre Fradette, a notary in Drummondville, on November 2, 1987, a copy of which is produced in support hereof as Exhibit A-12, to be read as if it were recited in full herein;

25. Because Actimum Services Immobiliers Inc. was unable to meet the obligations it had contracted under the acts produced as Exhibits A-11 and A-12, Actimum Services Immobiliers Inc. agreed to return possession of the immovables previously acquired from the appellant and Fernand Lévesque voluntarily, after the appellant and Fernand Lévesque had given them 60 days’ notice, the whole as it appears in the 60 days’ notice and the act of voluntary reconveyance signed on April 21 and 27, 1988, respectively, before Mr. Denis Gariépy, a notary in Drummond ville, and registered in the office of the registry division of Drummond on April 22, 1988 as number 312307 and on April 28, 1988 as number 312487, these acts being both produced in support hereof as Exhibit A-13, to be read as if they were recited in full herein;

26. As attested by the documents produced together as Exhibit A-13, Actimum Services Immobiliers Inc. reconveyed to the appellant and Fernand Lévesque the lots that had not yet been the subject of a resale to third parties, including both the vacant ones and those on which houses had already been constructed or were being constructed, the whole as will be more fully proved at trial;

27. Because the appellant and Fernand Lévesque had no experience in the real estate field and they did not intend to venture into the field of real estate development, on May 5, 1988, nine days after the voluntary reconveyance to them, they resold the land as a whole, except for certain commercial lots excluded by the purchaser, to Les Construction Gaétan Brochu (1984) Inc., by bill of sale signed before Mr. Denis Gariépy, a notary in Drummondville, and registered in the office of the registry division of Drummond on May 6, 1988 as number 312763, which contract of sale is produced in support hereof as Exhibit A-14, to be read as if it were recited in full herein;

[Translation.]

Counsel jointly produced a book containing part of the relevant documentary evidence. Other documents were also produced by each party.

Fernand Lévesque, Yvon Coulombe, Denis Gariépy and the appellant, Gilles Coulombe, testified.

The testimony of Fernand Lévesque dealt first with his business activities as the operator of a general mechanical work and bodywork garage and a business selling used cars and car parts in Amqui, Quebec, in the early 1980s. That business was also connected with the operation of a motor-racing track in the same place. When those businesses went bankrupt in 1983, Mr. Lévesque had the idea of opening a garage again in Rimouski, with the participation of the appellant and the appellant’s father, Yvon Coulombe, but gave up the idea because of the bankruptcy, in view of the proximity of the two towns. Then he moved to Drummondville where, after several months of inactivity, when he, as tenant, and his sons decided to operate a Sunoco service station and general mechanical shop. After a few months, they added the more specialized business of repairing and installing radiators. One year after he started the business, Mr. Lévesque was compelled to leave the premises because of the rental cost which the Sunoco company had then set at double the initial cost. At the beginning of 1984, he set up business in a garage in a town close by in order to carry on there his business of general mechanical work, bodywork and radiator repairs and also sell used cars. However, according to him, there was not very much business, so about six months later he agreed to operate again a service station in Drummondville, this time for the Ultramar company, while at the same time carrying on his business of repairing and installing radiators. Mr. Levesque stated that while he was operating that business, representatives of Ultramar let him know, at some point, that the company was considering getting rid of the garage for $295,000, failing which they would simply demolish it; this is what in fact happened later, in 1985, as the company had been unable to sell either to Mr. Lévesque or to anyone else. While Mr. Lévesque had until then carried on his various business activities in Drummondville and the surrounding area, it does seem that it was the difficulties he encountered as a tenant, particularly with the oil companies, that prompted him to look for a lot and a building which he would own himself.

At that point, Mr. Lévesque was also planning to form a partnership with the appellant, his nephew. The appellant, who was then a student in Rimouski, had for several years indicated his interest not only in mechanical work and the reconditioning of old and used cars, but also in joining Mr. Lévesque and his sons in order to operate a garage and a car sales business. The agreement referred to in paragraph 7 of the notice of appeal, which was signed by Mr. Lévesque and the appellant in Rimouski in April 1985, was a result of the discussions with the appellant and with the appellant’s father, Mr. Y von Coulombe. [1] That agreement refers to a desire by the two parties to enter into a partnership to operate a garage in Drummondville as soon as the appellant completed his studies. It also provided that the parties would make an offer to purchase on a site located on Boulevard St- Joseph comprising an industrial lot and a building belonging to the Société d’entraide économique du Centre du Québec Inc. (the "Société d’entraide") and that, if the offer was accepted, Mr. Lévesque would begin operating the garage "as soon as the alterations and repairs to the existing building are completed". The appellant undertook to come and join his uncle, Mr. Lévesque, once an inventory had been done, and to start operating the business in partnership with him, only after he had completed his studies in Rimouski. I understand that it was the appellant’s father who insisted that the appellant finish his studies before going into business with Mr. Lévesque in Drummondville.

An initial purchase offer of $35,000 was made by the appellant and Mr. Lévesque for the lot referred to, which had an area of 450,000 square feet, and on which was constructed a building that had housed an old factory. That offer was refused by the Société d’entraide. A second offer dated August 5, 1985, which is referred to in paragraph 8 of the notice of appeal, in the amount of $40,000, was however accepted on August 16, 1985. Let us point out here that the greater share of the purchase price was paid out of funds borrowed from Mr. Y von Coulombe, the appellant’s father, and from his wife. Since the offer had been accepted, the manager of the Société d’entraide gave Mr. Lévesque and the appellant authorization on August 27 to begin to clear the lot and to do the work required. A Mr. Robert Talbot was asked to provide an estimate of the work to be done, and by letter dated September 8, 1985 he set the price at $57,275. The essential points in respect of the sequence of events concerning the acquisition of that site and the acquisition of a second site comprising three buildings, which was situated not far away on the same boulevard, are essentially described in paragraphs 9 to 17 of the notice of appeal, set out above. The second site, which had an area of 550,000 square feet, was acquired at a price of $60,000 by contract signed on September 25, that is, a few days before the contract for the acquisition of the first site was executed, the offer having been accepted by the Société d’entraide on August 16, 1985.

A number of points in Mr. Lévesque’s testimony with respect to these two transactions, which were carried out a few days apart, should be noted. According to him, although the two sites were of large sizes, they were in reality quite appropriate for the type of business they were planning to operate, which included a scrap yard since the scrapped auto bodies could only be disposed of at the back of the lot and not along the side of the road. From his experience in Amqui, Mr. Lévesque also stated that the business he had operated there in the 1980s had required that he made use of lots having even a much greater area precisely to provide a place to dispose of the scrapped auto bodies. Mr. Lévesque also stated that if the offer to purchase the first lot had been made after several visits to the site and after an appraisal of the repairs to be done, which amounted to some $70,000, ultimately it was the fact that the price of those repairs was too high, in view of the opportunity which was offered to them to acquire the second site with three buildings that required only minor repairs before opening for business, that prompted them to prefer that site over the first one. The delay in signing the agreement of purchase for the first site before the notary, and the notary’s uncertainty concerning the titles, would have also provided them with a reason for proceeding rapidly with the transaction in respect of the second site. I understand as well from his testimony that the buildings that stood on that site also offered the opportunity of adding the sale of cars by auction to the activities that had initially been planned. The financing for the acquisition of the second site was secured by obtaining three loans of $20,000 each which Yvon Coulombe granted to his daughter Lyne, his son Gilles and Fernand Lévesque, his brother-in-law, who became the purchasers. That arrangement was made this time, according to Mr. Lévesque, because Yvon Coulombe wanted to protect his two children by limiting in this way the amount of the loan he granted each of them.

Thus at the end of September 1985 Mr. Lévesque found himself the owner of a one-half interest in the first site, with the appellant, and of a one-third interest in the second site, with his niece Lyne and his nephew Gilles, the appellant. The business of selling cars by auction in two of the buildings situated on the second lot lasted only a few weeks, in October and November 1985, and proved to be a failure. However, toward the end of 1985, after leaving the Ultramar service station, Mr. Lévesque carried on his other business activities there, doing mechanical work and radiator repairs and selling used parts. The third building was rented from the outset to another business and continued to be rented to various businesses until 1992 when it was destroyed by an explosion.

Mr. Lévesque said that the first site, which was no longer needed and which was never used for the business that had initially been planned, had been put up for sale simply by placing a sign that he had made himself on the lot. The building that stood on that site was demolished a few months later by Mr. Lévesque himself as a result of pressure from the city, which had found it to be unsafe and a target for vandalism.

While the activities relating to the operation of the garage in the buildings that stood on the second site were carried on until the end of 1987 or the beginning of 1988, Mr. Lévesque stated that he had left primary responsibility for that business to one of his sons from the end of 1986 because business was not as flourishing as he had anticipated. He himself decided to go back to a trade at which he had worked in the past, that of a semiskilled concrete- pouring worker. Through an acquaintance, he was able to get hired, with another of his sons, to pour concrete floors in the new Domtar plant in Windsor, Quebec. As a result of that experience and after doing additional finishing concrete work on contract for contractors or individuals, Mr. Lévesque obtained a licence in 1987 as a contractor specializing in concrete finishing work. As he explained it, it was only much later that he got more involved in construction and he obtained a general commercial and residential construction contractor licence, at the end of 1991 or the beginning of 1992, and he has been working in that field since then.

As a result of these events and other problems experienced by the appellant, the plan to form a partnership to operate a garage has therefore never materialized.

The transactions concerning the first site, which occurred in 1987 and 1988 and which are the subject of this appeal, were preceded by earlier negotiations for the sale of the lot as a whole. According to Mr. Lévesque, while the intention to sell the land had been advertised only by the sign he had put up himself in 1985, discussions did not take place until 1986 with a Mr. Béland who said that he was prepared to purchase the entire lot for $1 per square foot, on condition, however, that the vendors bore the cost of the infrastructure work and certain other expenses. Mr. Béland had studies done and took preliminary steps through his brother-in- law, a Mr. Arel, a professional engineer. However, after a while Mr. Béland indicated that he no longer wished to pursue his plan and he returned the matter to Mr. Lévesque, who stated that he then had to pay $5,500 in engineering fees. My understanding of this part of his testimony is that this disbursement, as well as the subsequent expenses that he and the appellant had to incur under the terms of the agreements with Actimum Services Immobiliers Inc. ("Actimum"), and with Constructions Gaétan Brochu (1984) Inc. ("Constructions Brochu"), were financed by the appellant’s father, Yvon Coulombe. Mr. Lévesque stated that at the time he and the appellant had no knowledge of the market or of real estate development, and that it had been decided after discussions with Yvon Coulombe that these substantial expenses would be incurred solely in order to be able to get rid of the lot and ultimately to repay him the money borrowed at the time of the acquisition.

The essential points concerning the sale to Actimum in May 1987, the financial difficulties that that company experienced, the retaking of possession in April 1988 and the resale to Constructions Brochu a few days later are set out in paragraphs 18 to 24 of the notice of appeal, reproduced above. In his testimony, Mr. Lévesque provided details concerning the negotiations with Actimum. He emphasized the confidence that he and the appellant and his father had that this company would be able to proceed with subdividing the land acquired and pay the agreed price. Only a few houses were built, and they remained unsold. Then came the financial problems, the failure of the plan and the retaking of possession. Mr. Lévesque also described the circumstances of the resale to Constructions Brochu and noted the fact that that company refused to purchase a part of the land which was still zoned commercial, and also the seven or eight houses that had already been constructed by Actimum and were still unsold. According to the explanation given, it was only later, in 1989, that the commercial part of the land that he and the appellant had had to retain was developed by constructing commercial buildings which were then resold. These transactions were reported as giving rise to business income.

Mr. Lévesque also stated that between the time the two sites were acquired and the resale of the larger part of the first site to Constructions Brochu, the only other transaction in which he and the appellant participated was the sale of a small parcel of the second lot to a neighbour who operated a car sales business and who, according to Mr. Lévesque, urgently needed it to operate his business.

In short, my understanding of Mr. Lévesque’s testimony is that the purchase of the first lot was more or less a mistake once the second one was discovered since the buildings that stood on that lot offered the possibility of starting up and even of expanding the planned business activities more rapidly and without having to do the costly repairs that were needed on the building that stood on the first lot. Thus the first site was immediately put up for sale, with the use of a simple sign, and Mr. Lévesque and the appellant engaged in no other form of solicitation. The subsequent negotiations were undertaken at the initiative of interested third parties. Thereafter, the transactions and the undertakings to bear the substantial financial costs made to persons or businesses that had an interest in developing the lot were carried out solely for the purpose of getting rid of an asset initially acquired for the purpose of operating a garage on it. I also understand that Mr. Lévesque and the appellant never took any steps themselves in relation to the subdivision of the lot, such as changing the zoning, negotiating with the municipality or doing engineering studies, although they agreed, both during negotiations with Mr. Béland and during the transactions with Actimum and Constructions Brochu, to bear the costs thereof and also the costs of substantial infrastructure work. Mr. Lévesque’s testimony established that the need to sell the lot became increasingly urgent in order to repay Yvon Coulombe who had financed not only a large part of the cost of that lot but also of the second one, and the subsequent expenses.

Mr. Gariépy’s testimony related to the circumstances surrounding the transactions with Actimum and was of little assistance in deciding this case.

As to Mr. Yvon Coulombe, the appellant’s father and Mr. Lévesque’s brother-in-law, he first described the development of various businesses that he had operated and his investments in real estate. Today, he and his wife own, either directly or indirectly through a management company, several apartment buildings in Rimouski; he stated that he started to acquire them in 1952, and that he has never resold a single one. Mr. Coulombe said that the only thing he had in mind when he decided to finance a large part of the acquisition of the lots in Drummondville through loans to the interested parties was his son’s partnership with Mr. Lévesque for the purpose of ultimately operating a garage. He stated that he would never have considered lending them the money if the purpose of the acquisition had been to build a residential complex. According to him, the only plan was to have a garage and it had been necessary first to purchase an appropriate site, since in any event Mr. Lévesque had to leave the service station owned by Ultramar which wanted to get rid of it one way or another. Although it was Mr. Lévesque who was in Drummondville to conduct the discussions and negotiations for the purchase of the first lot as well as the second lot, and then to put the first one up for sale, Mr. Coulombe said that he had always been kept aware of what was happening by Mr. Lévesque and had full confidence in him. Since it was he who had financed the acquisitions and who had had to pay out substantial additional sums of money, it is my understanding that he had, if not the last word, at least considerable influence in any decision leading up to the transactions at issue. Thus, with respect to the aim and the circumstances surrounding both the acquisitions and the dispositions, his testimony is relevant and essentially confirms that of Mr. Lévesque’s.

The testimony of the appellant Gilles Coulombe dealt first with his interest in mechanics and old and used cars, which he had fun repairing and rebuilding since he was a teenager: he said that he had rebuilt sixty or so cars over the years and still owned five old cars. He also talked about his visits to his uncle, Fernand Lévesque, when the latter was operating his garage and motor-racing track in Amqui. It was from these experiences of learning about the field that the plan to go into partnership with his uncle to operate a garage in Drummondville hatched in 1985. The appellant, who was then 20 years old and still in school, also referred to his father’s insistence that he complete his studies before going into business with his uncle in the operation of a garage, the management of which he thought he would eventually take over. His testimony also dealt with the initial steps in which he was involved concerning the acquisition of the first lot, his perception of the condition of the premises and the major repairs needed and the opportunity they were offered to acquire the second lot at a good price, where the buildings required very few repairs, and also the decision they made to get rid of the first lot, where the building, by comparison, required a larger total investment and did not provide as many advantages.

The appellant’s testimony also dealt with the subsequent events relating to the offers received to purchase the first lot which he and Mr. Lévesque wished to get rid of as a single unit and to the various agreements and the difficulties they encountered in that respect. He also described the health problems that forced him to put his studies in Rimouski temporarily on hold, resuming them a year later on a part-time basis only. He mentioned the other activities in which he had been involved since then in Rimouski and explained the circumstances as a result of which he never came to join his uncle in Drummondville. The appellant actually contributed little new information with respect to all of the circumstances surrounding the various transactions, and confirmed the testimony given by Mr. Lévesque and his father, Yvon Coulombe.

Counsel for the respondent supplemented this testimony by entering part of the transcript of the appellant’s examination for discovery.

Counsel for the appellant contended that the transactions at issue must be considered to be capital in nature since this was a sale of an asset acquired for the sole purpose of operating a business on it. He stated that there was ample documentary evidence of Mr. Lévesque’s and the appellant’s intention to operate a garage in partnership. He recalled that in fact Mr. Lévesque and his sons did operate a garage, although it was operated in the buildings located on the second lot and without the planned partnership with the appellant. Counsel for the appellant emphasized that neither the appellant nor Mr. Lévesque had any experience at all at that time in the real estate field, and that in any event all they had done was try to get rid of the first lot which had then become useless in view of the acquisition of the second one, but which they had been obliged to acquire as a result of the prior acceptance of the offer to purchase together with a deposit. Moreover, according to him, the subsequent events establish only the desire to get rid of that lot as a single unit, which they were however able to do only in part, and after experiencing a number of difficulties and reversals both with Mr. Béland and with the Actimum company. In addition, in his view, while the sale price set both with Actimum and with Constructions Brochu may appear high in comparison to the acquisition price, it must be taken into account that in each case there was an undertaking to bear substantial costs, particularly for the infrastructures. According to him, although the lot was of a large size, it was suitable only for the requirements of the type of business that the appellant and Mr. Lévesque were proposing to operate together, and at the time it was situated in an industrial zone in which this sort of operation was permitted. Moreover, the zoning change for subdividing it was made at the request of the third parties involved, and specifically in response to the efforts made by Mr. Béland and his brother-in-law Mr. Arel. Counsel pointed out that neither the appellant nor Mr. Lévesque had done anything at all to develop the lot other than what had initially been planned, although they did agree, in order to get rid of the lot, to bear the costs connected with the change of use. In his opinion, the context of the investment, and particularly the financing by the appellant’s father who, like the appellant, resided in Rimouski, some five hours by road from Drummondville, made it to some extent unlikely that they could even have contemplated making a subdivision there. Counsel contended that at the time of the acquisition, in view of the circumstances and more particularly of the partnership agreement between the parties, there could not have been a secondary intention to resell at a profit. In support of his position that the gain realized from the transactions had to be treated as a capital gain, counsel for the appellant referred to the following decisions:

-Lapp v. M.N.R. (1951) 3 Tax A.B.C. 301, 51 D.T.C. 75 (T.A.B.);

—Quon v. M.N.R., [1962] C.T.C. 343; 62 D.T.C. 1204 (Ex. Ct.);

—Westmount Lumber Co. v. M.N.R. (1965), 39 Tax A.B.C. 307, 65 D.T.C. 666 (T.A.B.);

-Racine, Demers and Nolin v. M.N.R., [1965] C.T.C. 150, 65 D.T.C. 5098 (Ex. Ct.);

-Armstrong v. The Queen, [1985] 2 C.T.C. 179, 85 D.T.C. 5396 (F.C.T.D.).

The position of counsel for the respondent is that the acquisitions of the two lots with the buildings that stood on them were in reality parallel transactions for different purposes. She contended that the first lot was acquired for resale or subdivision while the second was acquired in order to carry on the activities relating to the operation of a garage, and she admits that those activities were in fact carried on there. In the alternative, counsel for the respondent contended that when the first lot was acquired, the intention of the parties involved was to resell it at a profit if the repairs to the building were found to be too costly. According to her, the building located on the first lot was dilapidated and had no value, which both Mr. Lévesque and the appellant and his father certainly knew. My understanding of her position is that the building could never have been used for the activities planned in relation to the operation of a garage or a used car and parts sales business, so that the acquisition of that lot could have been motivated only by the desire to resell it at a profit. Counsel for the respondent believed that the acquisition of the first lot might in some way have been cancelled after the appellant and Mr. Lévesque discovered the second lot, particularly because there were problems with the titles that delayed the signing of the contract. In her view, the acquisition in such circumstances could have been motivated only by the intention to resell at a profit. Similarly, she contended that subsequent events confirm that initial intention, in that the financial undertakings made both to Mr. Béland and to Actimum, and later to Constructions Brochu, confirmed their intention to participate in the proposed subdivision of the lot. Counsel for the respondent therefore believed that the appellant had been involved from the outset in an adventure in the nature of trade, and that the negotiations, transactions and financial undertakings with these various developers amounted to a participation in developing the lot, thereby in some way giving concrete effect to the initial intention to sell at a profit. She also pointed out that the transactions must be considered to be transactions concerning a vacant lot in view of the condition of the building constructed on it, which was demolished shortly after the acquisition. According to her, in that context, the large size and the location of the lot must also be taken into consideration. In support of her position, counsel for the respondent referred more specifically to the decisions in the following cases:

—M.N.R. v. Taylor, [1956] C.T.C. 189, 56 D.T.C. 1125 (Ex. Ct.);

—Marois v. The Queen, [1983] C.T.C. 304, 83 D.T.C. 5344 (F.C.T.D.).

Analysis

The oft-cited classic distinction between a transaction that gives rise to business income and a transaction that results in a capital gain was stated by Clerk L.J. in California Copper Syndicate v. Harris, as follows at (1904), 5 T.C. 159 at pages 165-66:

It is quite a well settled principle in dealing with questions of assessment of income tax, that where the owner of an ordinary investment chooses to realize it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to income tax. But it is equally well established that enhanced values obtained from realization or conversion of securities may be so assessable, where what is done is not merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realization, the gain they make is liable to be assessed for income tax.

What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being-Is the sum of gain that has been made a mere enhancement of value by realizing a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?

[Emphasis added.]

Similarly, while the decision in Taylor, supra, provides us with the classical tests for determining the existence of an adventure in the nature of trade, it is particularly in the oft- cited judgment of Racine, Demers and Nolin, supra, that the "secondary intention" doctrine is stated. On this point, Noël J. of the Exchequer Court stated, at page 159 (D.T.C. 5103):

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.

[Emphasis added. ]

While these distinctions have long been used by our courts in their efforts to determine the true nature of a transaction, and while we might note that the results have not always been very consistent, the fact is that each case must be examined in light of its specific circumstances, one of the most important one being the intention. With this in mind, it has often been said that the case law offered limited assistance in deciding a case involving different factors in a different context, so that they must necessarily be given different weight. On the question of intention, while we must try to determine it mainly by examining the overall conduct of a. taxpayer in the specific context of the transaction that is the subject of the case, the credibility that may be assigned to his testimony is an aspect that is of prime importance in the analysis.

In the case at bar, and in view of the general principles stated by the courts to which I have briefly referred, I believe that I may conclude from the evidence adduced that the transactions at issue must be treated as giving rise to a capital gain and not to business income.

The testimony of the appellant, his father Yvon Coulombe and Fernand Lévesque are consistent on the essential points surrounding the acquisition of the two sites in question here in 1985. The same is true for the disposition of the first lot as a single unit in 1987, the possession and the resale of the larger part of that lot in 1988. I have no serious evidence which could cast doubt on the credibility of these persons with respect to the true purpose and, ultimately, with respect to what appears to be the sole reason that prompted them to acquire both the first and the second lot. The appellant and his uncle, Fernand Lévesque, wished to acquire a lot in order to operate a garage there, alongside which they would operate a used car and parts sales business. The knowledge, background and experience of both Mr. Lévesque and the appellant, and their respective personal situations, make this hypothesis entirely likely, and the only one that should be accepted in the circumstances. Let us recall that at the time of the acquisition Mr. Lévesque was already operating a garage in Drummondville while the appellant, who was 20 years old, was still a student in Rimouski. Neither of them had experience in subdividing land or had previously been personally involved in any real estate transactions at all. It is difficult to imagine that Yvon Coulombe, who financed the greater portion of the acquisition price of the two lots, either directly or with his wife, through loans to the parties involved, would have granted those loans for the purpose of purchasing the lots, and the buildings that stood on those lots, for a speculative purpose. While it may be argued that Yvon Coulombe had experience in real estate, the evidence established that his experience was as an investor who had, over the years, acquired a large number of apartment buildings of which he had never disposed. It appears unlikely, in this context, and this is consistent with his testimony, that he would have agreed to finance the acquisitions if they had been made by his son and Fernand Lévesque for a reason other than that of operating the planned business. While I believe that the purpose of the assistance offered to his son and Mr. Levesque was essentially to acquire a suitable site for the type of operation they were planning, I further believe that there was no serious evidence from which I could conclude that the possibility of reselling at a profit might have been a determining factor in the acquisition.

I therefore consider that the evidence establishes that the only concern of Mr. Lévesque and of the appellant was the acquisition of a suitable site for the operation of the business planned. While the first lot and the building that stood on it seemed at first to meet their expectations despite the repairs needed, to the point that they believed they were getting a good deal, it was found to be less of a bargain when they realized that the second lot and the buildings that stood on it could be acquired for a price more or less equivalent to the cost of the repairs needed on the building located on the first lot. The evidence established that the second site presented a number of advantages that the first one did not have, namely the fact that no repairs were needed, the possibility of starting operations more quickly, the possibility of adding the sale of cars by auction to the planned business activities and even the possibility of renting one of the three buildings to another business. At that time the offer on the first lot, together with a deposit, had already been accepted several weeks before, so that it appeared unrealistic, in the circumstances, that they could have refused to sign the purchase contract. The subsequent efforts to sell the lot following negotiations and the receipt of offers were, in my opinion, essentially intended to enable them to get rid of a useless asset as a single unit, and not to participate in a residential construction project that they would have envisaged from the outset. Accordingly, I believe that Mr. Lévesque and the appellant, as well as the appellant’s father, tried to get out of that situation by acting on the offers they received. Apparently, none of the third parties interested in acquiring the lot in order to subdivide it could finance both the cost of acquisition and the necessary infrastructures. In this context, I would tend to believe the testimony of the interested parties when state that they quite simply had not to act on the basis of the offers received and that agreeing to finance the infrastructures or to bear other costs seemed to be the only possible way of getting rid of the lot. It is clear that after the sale to Constructions Brochu in 1988 matters proceeded differently and Mr. Lévesque became more active in developing the part of the lot that was still unsold. However, these are different transactions, and moreover they have been declared as giving rise to business income. I therefore believe that the appellant has established the necessary facts for me to conclude, on a balance of probabilities, that the transactions at issue were capital in nature.

The appeals are therefore allowed and the assessments referred back to the Minister of National Revenue for reconsideration and reassessment taking into consideration that the transactions at issue give rise to capital gains and not to business income and that the reserves must therefore be calculated according to the provisions of the Act. The whole with costs to the appellant.

Appeals allowed.