Armand Brunet v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2246

Tremblay, J.T.C.C.:— This appeal was heard according to the informal procedure, on June 14, 1993, at Montréal, Quebec.

1. The point at issue

The point at issue is whether the appellant, who is retired, is correct in computing his income to claim farm business losses of $16,052 in 1988, $12,252 in 1989 and $30,599 in 1990, under section 31 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

In short, the appellant contends that his chief source of income during the years in issue was farming or a combination of farming and another source of income.

According to the respondent, the appellant does not satisfy this condition and is entitled to deduct only restricted farm losses.

2. The burden of proof

2.01 The appellant has the burden of showing that the respondent's assessments are incorrect. This burden results from several judicial decisions, including a judgment of the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182.

2.02 In this case, the facts assumed by the respondent are described in subparagraphs (a) to (q) of paragraph 4 of the reply to the notice of appeal. These facts, which were admitted or denied by the appellant, read as follows:

4, In making this reassessment against the appellant for the 1988, 1989 and 1990 taxation years, the Minister assumed the following facts, inter alia:

(a) at all relevant times, the appellant was retired and his income essentially came from investments and various pensions; [denied]

(b) during the 1988, 1989 and 1990 taxation years, the appellant reported the following amounts:

TAXATION YEAR	TOTAL INCOME
1988	$16,052
1989	$12,252
1990	$30,599 [admitted]

(c) during the 1988, 1989 and 1990 taxation years, the appellant’s income came from the following sources:

(d) according to the appellant, investment income is his chief source of income and he does not rely on farming for his living. The appellant inherited $38,968 in 1987 and $428,571 in 1990, which enabled him to continue to invest and bail out of his farm losses while at the same time enabling him to maintain his lifestyle; [denied (but admits having inherited $272,000 in 1990)]

	1989	1989 1989	1990 1990
Old age pension	$ 3,780	$ 3,950	$ 4,148
Quebec pension	3,971	4,134	4,332
Dividends	1,825	168	—
Investment income	25,177	25,276	35,994
Capital gains	2,311	125	—
Farm losses	(21,012)	(21,400)	(13,875)
Total income	$16,052	$12,253	$30,599
			[admitted]

(e) the appellant operates a farming business which consists of breeding horses and

racing them. He has broodmares, their offspring and race horses; [admitted]

(f) the appellant started his farm operations in about 1975 by purchasing a race horse; [admitted]

(g) the appellant does not have any land, working capital, stables or farm equipment. All the facilities for breeding and caring for his horses are rented, and the horses are boarded at various locations; [admitted, with an explanation at the hearing]

(h) since 1988 there have been the following horses in inventory:

on 1-1-88: 7 horses; on 31-12-88: 7 horses

on 1-1-89: 7 horses; on 31-12-89: 6 horses

on 1-1-90: 6 horses; on 31-12-90: 5 horses [denied]

(i) the appellant’s farming activities have varied little for fifteen years, and, starting in 1986, he even reduced his inventory in order to reduce training costs, which were becoming increasingly exorbitant. He had 13 horses in 1985 and owned only five in 1990; [denied]

(j) the appellant hires trainers for his race horses and pays people to look after them. He also covers the costs of boarding, grooming and feeding his race horses; [admitted]

(k) the appellant uses the cash accounting method to report his farming income, and the analysis of his farm expenses does not include any personal, capital or unjustifiable expenses; [admitted]

(l) the time spent on the farming business, in comparison with the time spent on other income-producing activities, is not necessarily decisive in this case, because the appellant has been retired for several years and therefore has all the time he needs to look after his horses and watch them race. Moreover, since the appellant is retired, all of his income comes from pensions or investments. The appellant does not have to spend much time earning his investment income, which is mostly interest from mortgages and bank investments. He therefore has a lot of time to spend on his leisure activities, such as playing golf every day and spending an average of three months per year in Florida with his wife; [denied]

(m) the appellant does not spend more time with his horses than he spent when he was working, because his time is limited to going to Blue Bonnets to supervise the trainers’ work and going to visit his breeding horses, which are all boarded out, once a week. He also goes to various auctions from time to time; [denied]

(n) the appellant has no plans for expansion and has done no analysis or projection to determine the profitability of his business. The appellant is even contemplating the possibility of ceasing operations if he receives an offer to purchase covering all his horses; [denied]

(o) the appellant does not live on a farm. His residence is located at 5210 Place Riviera, apt. 220, Pierrefonds, Quebec; [admitted]

(p) until 1986, the appellant claimed his farm losses under section 31 [admitted]. On that date, he changed the tax treatment of his farm losses and started to claim them in full, without, however, upgrading his farming activities. According to him, his main interest was in recovering the losses he had suffered over the years; [denied]

(q) the appellant's chief source of income during the 1988, 1989 and 1990 taxation years was neither farming nor a combination of farming and another source of income. [denied]

[Translation.]

3. The Facts

3.01 In addition to the above admissions (2.02), the evidence of the facts for the appellant was produced first by Armand Brunet, Jr., the appellant’s son, administrator and partner. He is very familiar with the facts in issue. In fact, he coowns some of the horses with his father. He also spends a large part of his time with the horses, together with his father. It was he who prepared the appellant's income tax return.

3.02 The witness first produced the list of horses his father owned from 1975 to 1993 (Exhibit A-1) with the details for each year as to purchase (price and date), sale (price and date), income, expenses, operating profit (plus or minus) and closing inventory. A fraction sometimes appears beside the name, meaning the appellant’s share in the animal.

The numbers of animals the appellant and his son owned, and their value in inventory, during the years in issue are as follows:

In 1993, he had only three, the value of which was $15,000. The witness pointed out that initially the appellant had mainly purchased thoroughbred mares to build up a stable. He stated that the fact that the purchase price could be deducted in computing income made it possible to invest more.

3.03 According to the card issued by the ministère de I'Agriculture, des Pêcheries et de I'Alimentation (Exhibit A-2), the appellant has been considered to be a farmer by the government of Quebec from 1973 to 1993.

3.04 The witness explained that the appellant did not own a farm, but paid rent. According to him, the capital invested in a farm does not bring in any return, and so "it is wiser" to invest in breeding horses.

3.05 In 1985, the Government decided to rescue the racing industry, and gave bonuses for breeding livestock. This happened in about the same period as when the appellant sold an eight-unit apartment building. That freed him from the problems of tenants and enabled him to invest more in the breeding operation.

The breeding bonuses had a significant influence on the situation. In 1990, prizes of $11,387,150 were paid under seven programs spread over the period from April 1, 1990 to March 31, 1991 (Exhibit A-3).

3.06 In 1986, the appellant had the best stallion in Canada and four famous mares. The aim was to make a profit, and there was every reason to hope.

3.07 However, in 1987 there was only $730 in income, and $24,025 in expenses. In 1988, some horses were sold at auction for $14,350 and the losses amounted to no less than $47,000. Some horses broke legs, others died of disease, and so on.

In 1990, on the other hand, Shangree (an animal with the best bloodline) earned $13,065 in purses. In 1991, he earned $13,985. A colt sold for $14,000.

3.08 The witness produced a table entitled "projections chart"(Exhibit A-4) for 1984 to 1992, relating to the projected and actual income and expenses for four horses: B.B. Star, Betican, Mendy Rose and Shangree.

The cumulative totals for the projected and actual figures at the end of the years from 1984 to 1987, from 1984 to 1990 and from 1984 to 1992 break down as follows:

The cumulative figures for the four horses for the years from 1984 to 1992 are as follows:

The next witness testified to explain that the forecasts were appropriate but that they did not take into account bad luck.

3.09 This witness was Yves Lachapelle, aged 56, a veterinarian, 95 per cent of whose practice is devoted to race horses. He examines ten horses per day, five days a week. According to this witness, who has known the appellant for 15 years, the difficulty in making a profit breeding race horses lies in the fact that one needs four or five years before it is really possible to tell whether an animal has talent. In the meantime, trainers, rent, feed, veterinarian expenses and so on must be paid. The first year, the cost of buying ($6,000 minimum) and caring for a filly comes to $20,000.

When, after four or five years, one realizes that the animal is not a good runner, all of the expenses, including breeding fees, become fruitless expenses.

According to him, the animals owned by the appellant were some of the finest in Quebec and Canada. Sometimes, the market is very good. Some two- year-old fillies sell for $200,000. Sometimes too, accidents and diseases dash many hopes, many projections, although they were valid at the time they were made, as in this case.

3.10 The appellant, who is 78 years old, testified that he has been in love with horses since he was young, because his father was also "into horses". He personally has always tried to expand his stable to make his business profitable.

During the years in issue, the appellant’s income was as described in paragraph 4(c) of the reply to the notice of appeal (2.02).

When the appellant changed his system in 1986, to focus on breeding, he knew that it would cost him nearly $10,000 for breeding fees for the first year, but he had high hopes. He owned 12 horses, of which four were broodmares and four racers.

During the time the appellant spends in Florida each year, he is still the one who makes the decisions, together with his son, concerning buying horses or choosing stallions and trainers, and so on.

From 1975 to 1985, one need only analyze the inventory of horses to see that this was a serious business. The decision to branch out into breeding in 1986 was also the appellant's decision.

3.11 Sylvie Paquet, the respondent's appeals officer, testified that the decision to consider the appellant's losses as restricted losses was based on the fact that the chief source of income was not primarily farming nor a combination of farming and another source of income. She even contended that there was no reasonable expectation of profit.

Following a meeting with the appellant, she concluded that there was a □sibility of making a profit only if a horse was exceptional and there was no

ad luck.

The appellant spent two to three days per week on farming activities, including visits to the horses he had sold.

3.12 The appellant's farming income and losses for 1975 to 1991 break down as follows:

4. Act — Case law — Analysis

4,01 Act

The main provision of the Income Tax Act involved in this case is subsection 31(1), which reads as follows:

31. Loss from farming where chief source of income not farming.

(1) Where a taxpayer's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be the aggregate of

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses,

and

(ii) $2,500 plus the lesser of

(A) '/2 of the amount by which the amount determined under subparagraph (i) exceeds $2,500, and

(B) $6,250, and

(b) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words "and before making any deduction under section 37 or 37.1” were deleted,

exceeds

(ii) the amount determined under subparagraph (a)(i);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer's "restricted farm loss” for the year.

4.02 Case law

The parties cited the following cases:

1. Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213;

2. The Queen v. Morrissey, [1988] 1 C.T.C. 235, 89 D.T.C. 5080 (F.C.A.);

3. Boddington v. M.N.R., [1988] 1 C.T.C. 2195, 88 D.T.C. 1146 (T.C.C.).

4.03 Analysis

4.03.1 At pages 487-88 (C.T.C. 315, D.T.C. 5216) of Moldowan, supra, the Court distinguished three classes of farmers:

In my opinion, the Income Tax Act as a whole envisages three classes of farmers:

1. A taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of subsection 13(1) in those years in which he sustains a farming loss.

2. The taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carries on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in subsection 13(1) in respect of farming losses.

3. The taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carries on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.

In this case, the respondent has placed the appellant in class 2: by refusing to allow the loss as a farm business loss, she has eliminated the appellant from class 1. By allowing the restricted farm loss, she has excluded him from class 3, legally assuming that there is a reasonable expectation of profit and therefore that the farming activity is considered to be a source of income.

The fact that in her reply to the notice of appeal the respondent contends that there is no reasonable expectation of profit in no way changes the assessment, and the Court does not have jurisdiction to increase the appellant’s tax burden by deciding that there is no reasonable expectation of profit — even if there were evidence to that effect — and, accordingly, to refuse to allow the restricted farm losses.

4.03.2 The point in issue is whether the appellant’s income for the 1988, 1989 and 1990 taxation years came chiefly from farming or from a combination of farming and another source of income.

At page 486 (C.T.C. 314, D.T.C. 5215-16) of Moldowan, supra, the Supreme Court of Canada stated on this point:

Whether a source of income is a taxpayer’s “chief source” of income is both a relative and objective test. It is decidedly not a pure quantum measurement. A man who has farmed all of his life does not cease to have his chief source of income from farming because he unexpectedly wins a lottery. The distinguishing features of “chief source” are the taxpayer's reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work. These may be tested by considering, inter alia in relation to a source of income, the time spent, the capital committed, the profitability both actual and potential. A change in the taxpayer’s mode and habit of work or reasonable expectations may signify a change in the chief source, but that is a question of fact in the circumstances.

With respect to the “combination” of two sources of income, the Supreme Court of Canada made the following comment at page 487 (C.T.C. 314, D.T.C. 5216), after examining the provisions of earlier legislation:

It is clear that “combination” in section 13 [now section 31] cannot mean simple addition of two sources of income for any taxpayer. That would lead to the result that a taxpayer could combine his farming loss with his most important other source of income, thereby constituting his chief source. I do not think subsection 13(1) can be properly so construed. Such a construction would mean that the limitation of the section would never apply and, in every case, the taxpayer could deduct the full amount of farming losses.

At page 488 (C.T.C. 315, D.T.C. 5216), the Supreme Court added:

While a quantum measurement of farming income is relevant, it is not alone decisive. The test is again both relative and objective, and one may employ the criteria indicative of “chief source" to distinguish whether or not the interest is auxiliary. A man who has farmed all of his life does not become disentitled to class (1) classification simply because he comes into an inheritance. On the other hand, a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start-up costs.

4.03.3 It appears from these comments, first, that a farmer whose chief source of income is farming is a class (1) farmer, that is, a taxpayer for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who earns his living from farming, is exempt from the limit imposed by subsection 13(1) for years in which he suffers farm losses.

It appears from all these references that the factors to be considered in the passages quoted above are the time spent, the capital committed and profitability.

4.03.4 Time spent

In this case, the appellant is retired. He spends two to three days a week managing his farming activities. We must take into account that the appellant pays people to look after the horses, either directly, as trainers, or indirectly, by renting premises where employees care for the animals. The time spent by a person paid to work on his behalf is the same as time spent by the appellant himself. Nor must we forget his son, who is a partner in the ownership of several horses and who in addition actively looks after the administration and everything relating to "horses" — because he too is in love with horses.

In my view, this first test has been satisfied.

4.03.5 Capital committed

In my opinion, this factor has been fully satisfied by the witness Armand Brunet, Jr. The money was not invested in a farm. According to him, "it was wiser" to rent and to invest in breeding horses (3.04).

This second test has also been satisfied.

4.03.6 Profitability

Must we first conclude that this test has been satisfied because the respondent considers there to be a reasonable expectation of profit?

I do not believe so. In fact, we must decide that this source of income is the chief source, that is, the source for which the reasonable expectation of profit is the greatest or best.

Exhibits A-1 (3.02) and A-4 (3.08) show the sincere efforts that the appellant made in trying to make farming one of his chief sources of income. Unfortunately, if I consider the results shown in these exhibits, the results for 1974 to 1991 shown in the income tax returns, with the other sources of income (subparagraph 4(c) of para. 2.02), I cannot conclude that the farm business is the chief source of income.

Although the Supreme Court of Canada held that the issue is not simply one of proportion, it also said, at page 486 (C.T.C. 314, D.T.C. 5215-16), cited above, "Whether a source of income is a taxpayer's ‘chief source' of income is both a relative and objective test. . . . The distinguishing features of 'chief source' are the taxpayer’s reasonable expectation of income from his various revenue sources. . . .”

To be entirely objective, even considering the years before and after the years in issue, I cannot conclude that during the years in issue farming was the chief source of income, that is, the source of income for which the reasonable expectation of income was the best.

5. Conclusion

For the foregoing reasons, the appeal is dismissed.

Appeal dismissed.

Claude H. Alain, Annie Boucher, Jean Boucher, Claire Boucher, Jean-

[Indexed as: Alain (C.H.) v. M.N.R.]

Tax Court of Canada (Garon, J.T.C.C.), April 2, 1993 (Court File Nos. 90-133 to 90-140).

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

The eight individual appellants were part of a limited partnership which was headed by two of the appellants, A and B. A was a life insurance broker who became active in the field of real estate investments in 1983. B, an industrial administration accountant, devoted his time to real estate management for roughly ten years before going into a restaurant business in 1977 where he worked for some years. From 1980 to 1983, B acted as a financial consultant. In 1983 or 1984, A and B began an association in the real estate field. This association involved a number of projects and A and B developed an established modus operandi. Pursuant to their usual practice, a company, which acted as a real estate promoter, recommended the purchase of a shopping centre in La Malbaie, Quebec. A and B then gave a numbered company the mandate to make an offer to purchase. The original offer was made on March 17, 1986. By March 24, 1986, the numbered company agreed to purchase the shopping centre for $6,150,000. It was planned that the sale would close on July 1, 1986 at the latest. In the view of A and B, the shopping centre represented an excellent investment, having regard to the price paid and to the fact that 55 per cent of the shopping centre's space was leased to "major" tenants. Immediately following the acceptance of the vendor's counter-proposal, A and B set to work to find the necessary limited partners in order to close the deal. To this end, A published an advertisement in the newspaper seeking investors for the limited partnership. On April 8, 1986, when A and B had virtually completed the preliminary work, a real estate agent contacted them to inform them that a group of persons was interested in purchasing the shopping centre. On that same day, the group made an offer in the amount or $6,700,000 to purchase the shopping centre. The following day, the numbered company made a counter-proposal raising the purchase price to $7,250,000. The counter-proposal was accepted on April 19, 1986. In a deed dated June 3, 1986, the vendor sold the shopping centre to a limited partnership headed by A and B. Later that same day, the limited partnership sold the shopping centre to the aforementioned group for $7,250,000. The issue was whether the gain on the sale of the shopping centre was income, as the Minister contended, or a capital gain, as the appellants contended.

HELD:

The evidence disclosed that at the relevant time, more precisely in the second half of March or at the very start of April 1986, A and B had the very firm intention of forming a limited partnership which was to purchase the shopping centre in question. This intention and their subsequent actions constituted transactions which formed an integral part of the operation of a business conducted by A and B. That business, which A and B had operated since 1983 or 1984, involved the formation of a limited partnership which made A and B responsible for handling the administration of the real property, thus enabling them to realize additional income as managers of that real property. Viewed as a whole, the activities of A and B constituted commercial transactions or, put in another way, the operation of a business. The disposition of the shopping centre in question was an activity ‘that fit into the framework of the operation of that business. The gain made at the time of that disposition was consequently in the nature of business income. Appeals dismissed.

Wilfrid Lefebvre and Alain Côté for the appellant.

Roger Leclaire and Johanne D'Auray for the respondent.

Cases referred to:

Warnford Court (Canada) Ltd. v. M.N.R., [1964] C.T.C. 175, 64 D.T.C. 5103;

Darade Investments Ltd. v. M.N.R., [1985] 2 C.T.C. 2168, 85 D.T.C. 525;

Lacaille, Larose, Ouellette et Associés Inc. v. Immovax Inc., (Commission des

valeurs mobilières du Québec) file no. 7335, March 29, 1985 (unreported);

Les Rentes immobilières Michel Maheux Inc. La Commission des valeurs mobilières du Québec, September 19, 1986 (Que. C.A.) (unreported).

Garon, J.T.C.C.:—These are appeals by the eight appellants from income tax assessments dated January 10, 1989 made by the Minister of National Revenue (the ''Minister") for the 1986 taxation year. In those assessments, the Minister determined that the $813,250 gain realized by the appellants [1] in the sale on June 3, 1986 of the Place Charlevoix shopping centre located at 1000 Boulevard de Comporté, city of La Malbaie, Quebec, constituted business income. In their income tax returns, the appellants considered that this transaction had resulted in a Capital gain.

The appellants consisted of two groups. The appellant Claude Alain is in charge of one of those groups, and the appellant Jean Boucher is at the head of the other group. The appellant Lyse Alain and the appellant Claude Alain — the latter acting both personally and in his capacity as trustee for the Marjorie Alain trust and the Brigitte Alain trust — form one group. Marjorie and Brigitte Alain are the daughters of the appellants Lise [sic] and Claude Alain, who are husband and wife. The other group consisted of the appellant Claire Boucher and the appellant Jean Boucher, who is acting both in his personal capacity and as trustee of the Annie Boucher trust and of the Jean-Philippe Boucher trust. Annie Boucher and Jean-Philippe Boucher are the children of the appellants Jean Boucher and Claire Boucher, husband and wife.

The appellant Claude Alain was a life insurance broker in the early 1980s; then, starting in 1983, he was active in the field of real estate investments. He currently administers 21 real estate companies and is therefore responsible for a large real estate portfolio. The appellant Jean Boucher, industrial administration accountant, devoted his time to real estate management for roughly ten years before going into the restaurant business in 1977 where he worked for some years. From 1980 to 1983, he acted as a financial consultant. His association with the appellant Claude Alain in the real estate field began in 1983 or 1984.

Before considering the transaction which led to the instant case, it is appropriate to describe briefly the manner in which the appellants Claude Alain and Jean Boucher proceeded in the context of their joint activities in the real estate field starting in 1983 or 1984.

The first company, Placements de Haute Direction P.H.D. Inc., ("Placements de Haute Direction’’), takes the necessary steps to find promising real estate projects. In an exhibit filed by the respondent, this company was described as specializing in prospecting for real estate investments. It therefore studies and analyzes various real estate proposals and recommends the purchase of a given real property. On this point, the appellant Claude Alain emphasized that, of roughly 100 real estate investment proposals that might be considered and analyzed, offers to purchase were made only in roughly ten cases, and a given real property was ultimately purchased in only about two of those cases. For this promotional work, the company receives fees and forms limited partnerships which purchases real properties or real estate complexes. From this source, this company allegedly realized income in the order of $700,000 to $800,000 per year at least over a period of several years which apparently included the year in issue, according to Exhibit 1-4. The sole shareholders of this company formed in 1984 are the appellants Claude Alain and Jean Boucher. Acquisition projects are then handed over to Gestion Immobilière P.H.D. Inc. ("Gestion Immobilière"), which prepares the offering memorandum and takes the necessary steps to find investors. Lastly, a limited partnership is formed in order to go ahead with the purchase of a given real property and to hold it as an investment. The general partner is usually a "numbered" business corporation which had previously had no activity — "a virgin company", to use the expression of the appellant Claude Alain. This numbered company has only two shareholders, the appellants Claude Alain and Jean Boucher, whereas the limited partners invariably included the appellants Claude Alain and Jean Boucher and investors who agreed to purchase, through that company, interests in a real estate complex such as, for example, a shopping centre. Gestion Immobilière administered the real property for the benefit of the limited partnership.

It should be noted that the appellants Claude Alain and Jean Boucher agreed on a certain division of labour. Mr. Claude Alain was responsible for finding promising investment situations and appeared to play the leading role in marketing shares in the limited partnerships. Mr. Claude Boucher was more active on the management side. In the case of the purchase of the Place Charlevoix shopping centre, the subject of the instant case, the appellant Claude Boucher spent several days examining the leases pertaining to the space rented at that shopping centre and documents concerning the expenses necessary to the operation of the centre in question. However, these two appellants Claude Alain and Jean Boucher had both taken part in negotiations regarding the offer of purchase that was made to Immeubles Allard concerning the Place Charlevoix shopping centre.

According to the usual procedure, on behalf of the company 92248 Canada Ltée, with the words "in trust" appearing immediately after the name of the company, the appellant Claude Alain made an offer, submitted by a real estate agent, with a view to purchasing the "Place Charlevoix" shopping centre. The appellant Claude Alain was the sole shareholder of 92248 Canada Ltée. The original offer was made on March 17, 1986 to the owner of that shopping centre, Cie d'immeubles Allard Ltée ("Les Immeubles Allard"), of which Mr. Sam Wong was president. The offeror undertook to purchase that real property for the price of $5,900,000. That offer was accompanied by a deposit of $25,000 from the funds of the appellants Claude Alain and Jean Boucher. Another $25,000 deposit was promised by these same appellants at the time of the notification of acceptance of the offer, if such were given, by the company which owned that shopping centre. Les Immeubles Allard made a counterproposal on March 24, 1986, indicating that it was prepared to sell the centre at the price of $6,150,000. This counter-proposal was accepted by 92248 Canada Ltée on March 25, 1986. It was planned that the sale would close on July 1, 1986 at the latest. This acceptance was subject "to examination of the leases and expenses, inspection of the premises and title search by the purchaser within ten days following acceptance of this counter-proposal, the purchaser being required to confirm in writing with the promisor vendor its acceptance of the ten [sic] points within the said time limit", as was provided in clause 2.11 of that counter-proposal. According to the evidence, in the appellants” view, this shopping centre represented an excellent investment, having regard in particular to the price paid and to the fact that 55 per cent of the centre's space available for rental purposes was leased to "major" tenants, as they are called in the business, and to a few other tenants who were, to all intents and purposes, of equivalent standing.

Immediately following the acceptance of the counter-proposal, the appellants Claude Alain and Jean Boucher set to work to find the necessary limited partners in order to close the transaction by July 1, 1986 at the latest. They had three months in which to amass the necessary capital to form a limited partnership for the purpose of purchasing the real property in question. The appellant Alain in particular oversaw the preparation of the offering memorandum, and the appellant Boucher extracted the required items of information concerning the leases, expenses and certain other matters, items of information which had to appear in the offering memorandum which was to be provided to the prospective limited partners. In addition, the appellants Claude Alain and Jean Boucher contacted the limited partners who had invested in other projects to inform them of the possibility of taking an interest in a limited partnership to be established to purchase the Place Charlevoix shopping centre. The following was mentioned in a letter dated May 13, 1988 from the appellant Jean Boucher to Revenue Canada (Taxation), which was filed by the respondent:

We have prepared our final prospectus with all the relevant figures, and we also made our first presentation, in April 1986, to a group of 40 persons at an annual assembly of another already existing limited partnership. A number of clients immediately said they were interested in investing in this new limited partnership.

As a result of the fact that we had made public the fact that we had a proper offer of purchase on the La Malbaié [2] shopping centre, we received several telephone calls from investors and, inter alios, from a broker who had a client to purchase the said shopping centre in full.

[Emphasis in original, translation.]

The appellant Claude Alain also published an advertisement in the April 5, 1986 issue of the newspaper "Les Affaires", the wording of which gave rise to various interpretations. That advertisement read as follows:

SHOPPING CENTRE

Fully leased.

Guaranteed net income: $764,000

Lot dimensions [sic]: 285,000 square feet

Building dimensions [sic]: 119,000 square feet

Directly with owner.

(418) 656-0191

[Translation.]

It is also in evidence that the appellants Claude Alain and Jean Boucher and their families did not have the necessary resources to purchase the Place Charlevoix shopping centre alone, but expected to be able to do so with other partners through a limited partnership which they were to set up. Furthermore, at the time, these two same appellants had already formed four or five limited partnerships to purchase various real estate complexes, and there was every reason to believe, based on the evidence, that these appellants could have obtained the necessary number of partners to put together the $2,470,000 in capital stock that was planned for the constitution of the prospective limited partnership. That capital stock was to be subdivided into a maximum number of 83 shares of $29,759 each.

On April 8, 1986, when the appellants Claude Alain and Jean Boucher had virtually completed the preliminary work described above, a real estate agent who did not know the appellant Claude Alain contacted the latter to inform him that a group of persons were interested in purchasing the Place Charlevoix shopping centre. He was informed by the appellant Claude Alain that the latter and the appellant Jean Boucher were forming a limited partnership which was to purchase that property and that they were not initially interested in selling that real property. They nevertheless agreed to consider the Dubois group's proposal.

On the same day, April 8, 1986, that group represented by Mr. Clément Dubois made an offer in the amount of $6,700,000 to purchase this shopping centre. The following day, that is on April 9, 1986, 92248 Canada Ltée made a counter-proposal to Mr. Clément Dubois's group raising the purchase price of the centre in question to $7,250,000, with the obligation, were the counter-proposal to be accepted, that that acceptance be accompanied by a deposit of $100,000. Since this was a $550,000 increase over the Dubois group's initial offer, the appellants Claude Alain and Jean Boucher both stated categorically that they had expected this proposal would be rejected. These same appellants also demanded in the counter-proposal that the deed of sale be signed before the notary no later than April 16, 1986. This counter-proposal, which was originally valid for only one day, was extended for a few days on the condition that the deposit be increased to $250,000. This counter-proposal was accepted by the Dubois group on April 19, 1986. It was however, “conditional on inspection of the premises and examination of the leases”, with the obligation for the purchaser "to express its satisfaction in writing within five days of acceptance" of that counter-proposal. The necessary arrangements were then made by the appellants Claude Alain and Jean Boucher with the representatives of the shopping centre's owner, Les Immeubles Allard, to grant the Dubois group access to the premises and to proceed with the examination of the documentation pertaining to the leases and operating expenses of that shopping centre. The Dubois group then substantially did the same work that had just been completed by the appellants Claude Alain and Jean Boucher a few days earlier.

In a deed dated June 3, 1986, Les Immeubles Allard sold the Place Charlevoix shopping centre to the appellants Claude Alain and Jean Boucher, to their wives ana to certain trusts, for the price of $6,150,000. The table below shows the undivided share assignable to each purchaser, as indicated in subparagraph 12(h) of the reply to the notice of appeal in each of the records of the appellants Claude Alain and Jean Boucher:

A few minutes later, on June 3, 1986, the appellants Claude Alain and Jean Boucher, acting both personally and as trustees for the above-mentioned trusts and their wives, the appellants Lyse Gingras and Claire Desrochers, sold the same shopping centre for the sum of $7,250,000 to the group of Mr. Clément Dubois — consisting of 20 individuals and two business corporations — operating as "Le Groupe Charlevoix Enr.".

Also on the same day, in a contract signed with Placements Léger (1973) Inc., the appellants Claude Alain and Jean Boucher, using funds from the sale of the Place Charlevoix shopping centre, purchased jointly with Mr. Sam Wong and Mr. Perry Wong, all operating as “La Société Immobilière Alma Enr.", for the sum of $2,650,000, a building housing a shopping centre known and designated as "Les Galeries Lac St-Jean", with a surface area of 138,000 square feet located on a lot subject to an emphyteutic lease of which the Caisse de dépôt et placement du Québec was the lessor. On that same June 3, 1986, Mr. Sam Wong, Mr. Perry Wong and the appellants Claude Alain and Jean Boucher purchased a lot near that shopping centre from Placements Léger (1973) Inc. for the sum of $200,000. In the case of the purchase of the "Les Galeries Lac St- Jean” shopping centre, it was Mr. Sam Wong who had invited the appellants Claude Alain and Jean Boucher to take part in that transaction in discussions which had taken place a few weeks previously and whose purpose was to enable the group of Clément Dubois to gain access to the premises and desired documentation in their efforts which, as we know, were to lead to the purchase of the Place Charlevoix shopping centre by the Dubois group. It will be recalled that the company that owned that shopping centre, Les Immeubles Allard, was then represented by Mr. Sam Wong. The lot itself where the "Les Galeries Lac St-Jean" shopping centre was located was purchased from the Caisse de dépôt et placement du Québec on November 18, 1986 for the sum of $640,000 by Mr. Sam Wong and his group jointly with the appellants Claude Alain and Jean Boucher, the appellants Lyse Alain and Claire Boucher and the above- mentioned trusts. The emphyteutic lease on the real property where the "Les Galeries Lac St-Jean” shopping centre was located was expressly cancelled by the deed of November 18, 1986.

The evidence also shows that La Société Immobilière Alma Enr., owner of the "Les Galeries Lac St-Jean" shopping centre since June 3, 1986, had been formed in April 1986 for an indeterminate length of time in order to administer that income property. Its operations thus began in June 1986. On November 18, 1986, La Société Immobilière Alma Enr. sold, for $3,475,500, its undivided halfinterest in that real property to Société en commandite les Galeries d’Alma, which had been formed in order to finance, in particular, the major part of the substantial improvements and renovation works that had just been done to that real property. The cost of those works and improvements had been determined at $840,000. The Société en commandite Les Galeries d’Alma formed on October 8, 1986 was represented in the deed of purchase of November 18, 1986 by its sole general partner, the company 143978 Canada Limitée, which general partner acted through the appellant Claude Alain. This shopping centre was thus held in undivided ownership by La Société Immobilière Alma Enr. and the above-mentioned Société en commandite Les Galeries d'Alma. The market value of this shopping centre at the time these appeals were heard amounted to some $9 million, according to the appellant Claude Alain. The appellant Claude Alain and his family still hold in undivided ownership a 12 '/2 per cent portion in the Les Galeries Lac St-Jean shopping centre. The appellant Claude Alain is also the manager of the entire shopping centre. As for the appellant Jean Boucher and the members of his family, they disposed of their share in the limited partnership La Société Immobilière Alma Enr. in 1991 as a result of financial difficulties.

The evidence also shows that, since his career had taken a new direction in the early 1980s, focusing on the formation of limited partnerships in order to hold real estate investments, the appellant Claude Alain, together with others, including the appellant Jean Boucher, had set up 24 or 25 limited partnerships in order to administer real estate complexes. Of those 24 or 25 limited partnerships, the appellant Claude Alain had relinquished his interests in only three or four cases. It was also adduced in evidence that, from 1975 to 1980, the appellant Claude Alain had purchased five or six real properties. He had sold some of that group after holding them for two to four years. Furthermore, he disposed of another one of those five or six real properties eight to ten years after its purchase. Lastly, one final real property in this group of five or six is still held by the appellant and two other individuals. The appellant Claude Alain also assigned his shares in a company which owned real properties in Florida following a "dispute between the partners", to use his expression. As for the appellant Jean Boucher, following serious financial difficulties, he disposed of his interests in the limited partnerships which had been established in the context of his association with the appellant Claude Alain.

Claims of the appellants

It was put forward on the appellants’ behalf that the two leaders of the two groups of appellants, the appellants Claude Alain and Jean Boucher, were not real estate speculators and that the gain realized in the transaction involving Place Charlevoix was an isolated and unplanned transaction which did not result from any real estate speculation or business. It was argued that, in the particular case of this transaction, the appellants had had no intention of speculating. This offer was made, it was added, as had others in the past, purely with the intention of forming a limited partnership which would hold the real property as an investment. Paragraph 14 of the notices of appeal in the files of appellants Claude Alain and Jean Boucher reads as follows:

14. The appellant’s past practice shows that the steps taken by the appellant to purchase the real property were part of a well-established operation the purposes of which were to have the real property held by a limited partnership for long-term investment purposes and to produce professional fee income for the appellant.

[Translation.]

Claims of the respondent

In each of the replies to the notices of appeal in the records of the appellants Claude Alain and Jean Boucher, the Minister of National Revenue took for granted, in particular, the following, at subparagraph 12(p):

(p) the appellant purchased an undivided share in the “Place Charlevoix” shopping centre with the intention of reselling it at a profit, or at the very least the possibility of reselling it at a profit constituted one of the principal factors that incited the appellant to purchase it. . . .

[Translation.]

In support of these assessments, the Minister of National Revenue in particular advanced three other assumptions in this same paragraph 12 of the replies to the notices of appeal in the records of the appellants Claude Alain and Jean Boucher, the texts of which read as follows:

(o) when the contract of sale of June 3 between the appellant, his partners and Les Immeubles Allard Ltée was signed, the purchasers already knew that they were going to sell the property to the group represented by Clément Dubois and thus realized a considerable profit;

(q) the appellant being one of the principal shareholders of a number of companies that trade in the real estate field, he knows this market well and has solid experience with transactions of this scope, which leads us to believe that the appellant handled the real property which he acquired with his partners on June 3, 1986 in the same manner as a trader would ordinarily have handled such real property.

(r) the profits realized by the appellant in the resale of the “Place Charlevoix” shopping centre in La Malbaie constitute business income.

[Translation.]

In her oral argument, counsel for the respondent vigorously defended the proposition that the appellants had at least a secondary intention of selling the Place Charlevoix shopping centre. She contended that many indicators supported this view of matters. She placed considerable emphasis on the matter of the advertisement. She added that the fact that 92248 Canada Limitée, which made an offer to purchase the shopping centre in question, was not that which proceeded with the purchase of that centre was not without importance. According to her, the low degree of participation of the appellants Claude Alain and Jean Boucher in the various limited partnerships is another important factor to bear in mind.

Analysis

It must therefore be determined, in light of these facts, what the appellants’ intention was at the appropriate time during the period which ended with the purchase of the Place Charlevoix shopping centre by the appellants on June 3, 1986.

Regarding the period which must be considered in order to determine this intention of the appellants, it seems clear to me, based on the evidence, that it must be situated in the period starting at the point the appellants Claude Alain and Jean Boucher submitted an offer to purchase to Les Immeubles Allard and ending at the latest when those same appellants, upon inspection of the premises and examination of the relevant documentation, confirmed their acceptance of Les Immeubles Allard’s counter-proposal, thus a few days after the date of that counter-proposal. It was actually during this brief lapse of time that the appellants necessarily formed the specific plans for the method of purchasing this property. Pressed by the Court, counsel for the respondent advanced the date of May 10, 1986 as the point in time at which the appellants’ intention was to be examined for the purposes of the instant case. However, there is no evidence to support this statement. On the subject of this question of the time at which the appellants’ intention must be considered, I would like to refer to the decision of the President of the Exchequer Court of Canada — who was later to become Chief Justice of the Federal Court — in Warnford Court (Canada) Ltd. v. M.N.R., [1964] C.T.C. 175, 64 D.T.C. 5103 (Exch. Ct.). At that time, Jackett, J. made the following comments, at page 176 (D.T.C. 5104):

For the purpose of determining whether a transaction is a transaction in the course of a business or is a venture in the nature of trade, the time as of which the intention of the purchaser is significant is ordinarily, in my opinion, the time when the purchase agreement becomes legally binding rather than the time when legal title is acquired.

It is true that, in the instant case, the offer made to the owner of the Place Charlevoix shopping centre was transmitted by the broker on behalf of 92248 Canada Ltée, as appears from the very text of the offer to purchase of March 17, 1986. The words "in trust" appear immediately after the name of that company. The counter-proposal made by Les Immeubles Allard described the offeror in the same manner. In acting in this way, the parties concerned, the appellants Claude Alain and Jean Boucher and the company 92248 Canada Ltée, did not create a trust under Quebec law. On this point, it should not be forgotten that under article 981a of the Civil Code, a trust is established only by gift or will. Apart from the Civil Code, certain Quebec statutes also provide that a trust may be established in certain circumstances, but none of those circumstances applies here. It therefore appears to me that the company 92248 Canada Ltée in question could act only as an agent. The mention of the name of the offeror with the addition of the expression “in trust" clearly suggested that 92248 Canada Ltée would not be the purchaser when the contract of sale would be executed. It seems clear to me in the circumstances that 92248 Canada Ltée was responsible for executing a mandate in which, based on the evidence, the principals could only be the appellants Claude Alain and Jean Boucher. Even if the appellants Claude Alain and Jean Boucher had originally, at the time the offer was made to Les Immeubles Allard, planned that the purchase of this shopping centre was to be made by a limited partnership, 92248 Canada Ltée held the offer for the appellants Claude Alain and Jean Boucher as long as that limited partnership was not formed.

Even if we consider a time subsequent to that which II have just suggested, at a time immediately preceding the sale, on June 3, 1986, of the Place Charlevoix shopping centre, it is beyond any doubt that the intention of the eight appellants was in fact that of the appellants Claude Alain and Jean Boucher. It was these latter who made all the decisions for all the appellants. The evidence is conclusive on the point that the appellants Lyse Alain and Claire Boucher played no real role in the purchase and sale of the Place Charlevoix shopping centre. They adduced no evidence of any activity in the context of the course of the events relevant to the instant case. As for the other four appellants, each of them was the beneficiary of a trust established by his or her father, who was also the trustee. The appellants Claude Alain and Jean Boucher were thus the only persons authorized to act for the trusts in question. This question of the intentions of individuals or bodies corporate which it is important to consider for the resolution of a dispute such as the one that currently concerns us brings to mind the comments of the Associate Chief Judge of this Court, Judge Christie, in Darade Investments Ltd. v. M.N.R., [1985] 2 C.T.C. 2168, 85 D.T.C. 525, at page 2171 (D.T.C. 527):

In Leonard Reeves Inc. v. M.N.R., [1985] 2 C.T.C. 2054, 85 D.T.C. 419, a number of propositions are enumerated which are applicable to ascertaining relevant intentions in relation to “trading cases” of the kind under consideration. They need not be repeated here, but applying what is pertinent therein to the facts of this appeal, this may be said. Ordinarily the intention to be attributed to the appellant at the time of the acquisition by it of a 25 per cent interest in the property would be that which Sherrin, as president and sole shareholder, had for it, but this does not obtain for these reasons. Sherrin placed the appellant in the position where it was a passive investor in relation to Fred Westen Construction Ltd., which was clearly dominant and authoritative in the group. The intention of the construction company at the time of acquisition is therefore what decides whether the profit from the sale of units of the property was a capital gain or an adventure in the nature of trade and therefore business income of the appellant. Also the intention to be attributed to Fred Westen Construction Ltd. is that which Jack Westen had for it at the relevant time which is the time when a legally binding agreement to purchase the property came into existence: Warnford Court (Canada) Ltd. v. M.N.R., [1964] C.T.C. 175, 64 D.T.C. 5103 (Exch. Ct.) per Jackett, P. (as he then was) at page 176 (D.T.C. 5104).

The intention of the appellants Claude Alain and Jean Boucher in the last two weeks of March or at the very start of April 1986 regarding the purchase of the Place Charlevoix shopping centre must therefore be determined.

According to the respondent, one indication of the appellants’ intention was the advertisement that appeared in the newspaper "Les Affaires". Much discussion focused on the meaning to be ascribed to that advertisement. Counsel for the respondent, for her part, contended that the appellants had informed the reading public through that advertisement that they wished quite simply to sell the real property. According to the appellants, the purpose of this advertisement was to solicit persons who might be interested in purchas- ing shares in a limited partnership to be established. A valid explanation was provided by the appellant Claude Alain during his testimony on the subject of the very vague wording of that advertisement and, in particular, of the absence of any mention that the purpose of that advertisement was to recruit limited partners or, to express myself more accurately in legal terms, to offer shares in a limited partnership. The explanation given concerns the fact that the appellants wanted to avoid difficulties they might otherwise have had with the Commission des valeurs mobilières du Québec. They feared that the latter might consider that the Securities Act might apply to the offering of shares ina limited partnership. If such had been the case, the Commission would have had authority to require that certain formalities be completed.

I accept the appellants’ argument for two reasons. The appellant Claude Alain seemed to me a credible witness, and I have no reason to doubt his statement on this matter. Second, the explanation given appears to me valid and entirely rational. It seems to me plausible that, if one wished to sell a real property worth $6,000,000 or $7,000,000, one would proceed in another manner. One would have sought the services of brokers, and the wording of the advertisement would have been different. One could clearly have mentioned that the idea was to sell a shopping centre. I also add that no evidence was adduced or any serious claim advanced, in the course of the oral argument, on the respondent's behalf, evidence or claim that would have enabled me to conclude that the explanations given by the appellant Claude Alain concerning the text of this advertisement were not based on any solid foundation. Consequently, this fear on the appellant Claude Alain’s part seems to me justified, given that the Commission des valeurs mobilières du Québec had adopted the position at the relevant time that the purchase of undivided shares in a real property could constitute an investment contract subject to the Securities Act, as appears from a decision, no. 7335, of that Commission dated March 29, 1985 in a matter concerning Lacaille, Larose, Ouellette et Associés Inc. and Immovax Inc. See also the Quebec Court of Appeal judgment of September 19, 1986 in Les Rentes immobilières Michel Maheux Inc., Michel Maheux et Denis Lasnier c. La Commission des valeurs mobilières du Québec. Furthermore, in an amendment made by order no. 1263-85 to the regulations made under the Securities Act, it became expressly provided under section 1.7 that the purchase of shares in a limited partnership was governed by the Securities Act.

Based on the evidence as a whole, the offer to purchase originally made by 92248 Canada Ltée was undeniably to be followed, if accepted, by the purchase of that property by a limited partnership. That was the manner in which the appellants had proceeded for some years. It was their preferred modus operandi. It was simply because the appellants Claude Alain and Jean Boucher received a very attractive offer that they changed their plan regarding the Place Charlevoix shopping centre. That offer enabled all the appellants to realize a potential gross gain of $1,100,000 relative to a purchase price of $6,150,000. It should be noted on this point that the appellants refused a first offer which would have yielded a gross gain of $550,000 and prepared a counter-proposal which represented a very substantial increase in the purchase price. The comments of President Jackett in Warnford Court, cited above, at pages 175-76 (D.T.C. 5103), apply to the instant situation:

On the other hand, there is the fact that the sale had hardly been completed when there was a quick resale resulting in a substantial profit. Unexplained, that quick resale and profit might give rise to an inference that the acquisition and resale was a venture in the nature of trade within the meaning of those words as used in the definition of "business" in the Income Tax Act. The resale, however, has been explained by the evidence of Mr. Sebba, which I accept, that the increasing amounts of the offers made to the appellant by the person who purchased from the appellant, which offers were completely unexpected, became too great for him to resist.

I further accept his evidence that possibility of resale was not one of the possibilities contemplated by the appellant at the time that the appellant entered into the agreement for acquisition of the property.

I therefore conclude that, at the relevant time, more precisely in the second half of March or at the very start of April 1986, the appellants Claude Alain and Jean Boucher had the very firm intention of forming a limited partnership which was to purchase the shopping centre in question. This finding of fact necessarily implies that, during that same period, in March or April 1986, the appellants Claude Alain and Jean Boucher intended to relinquish the right they then held to purchase the entire shopping centre in question themselves. They then proposed to offer to third parties the very large majority of the shares in a limited partnership to be formed in order to purchase this real property and to retain for themselves only a small interest in that same limited partnership. This intention not to exercise their right to purchase the shopping centre in question and the steps which the appellants Claude Alain and Jean Boucher intended to take toward the constitution of the limited partnership and the purchase of this shopping centre by the latter apparently constituted transactions which formed an integral part of the operation of a business conducted by the appellants Claude Alain and Jean Boucher. It seems clear from the evidence that these appellants had, since 1983 or 1984, operated a business which had a number of facets and which required the assistance of a number of intervening parties.

The various components of this business should be described. First, a company by the name of Les Placements de Haute-Direction P.H.D. Inc., specialized in the search for real estate investment projects, acted as real estate promoter and recommended the purchase of a given real property to the appellants Claude Alain and Jean Boucher. These latter gave a numbered company a mandate to make an offer to purchase to the vendor of the real property in question through a broker. If the offer to purchase was accepted, the appellants Claude Alain and Jean Boucher made efforts to solicit the desired number of persons who would agree to be limited partners and prepared the appropriate documentation in order to do so, in particular the offering memorandum or the prospectus, as the case might be. Once this work was completed through the efforts of the appellants Claude Alain and Jean Boucher, a limited partnership was formed, and the latter proceeded with the purchase of the real property in question. This stage necessarily required that the appellants in question waive in practice the right that they held to purchase a given real property in order to purchase a relatively small interest in the limited partnership which was going to become the owner of that real property. At the same time, the appellants Claude Alain and Jean Boucher did what was necessary to set up a business corporation in which they would be the sole shareholders and which would be the general partner of the limited partnership in question. The appellants Claude Alain and Jean Boucher were also made responsible by the general partner for handling the administration of the same real property, thus enabling them to realize additional income as managers of that real property.

Viewed as a whole, the activities of the appellants Claude Alain and Jean Boucher constituted commercial transactions or, put in another way, the operation of a business. The disposition of the Place Charlevoix shopping centre is an activity that fits into the framework of the operation of that business. The gain made at the time of that disposition is consequently in the nature of business income.

For these reasons, the appeals are dismissed.

Appeals dismissed.