Shindico Inc. v. Her Majesty the Queen, [1994] 1 CTC 2765, 94 DTC 1538

Beaubier, J.T.C.C.:— This appeal pursuant to the General Procedure of this Court was heard at Winnipeg, Manitoba on March 10, 1994.

At issue is whether the appellant's profit from sales in its 1988 taxation year was on capital or income account. Sandy Shindleman, president, director and sole shareholder of the appellant, was the only witness.

The respondent admitted the facts described in paragraphs 1, 2, 4, 5, 8, 9, 10, 11 and 12 of the amended notice of appeal.They read as follows:

1. The appellant is a Canadian-Controlled Private Corporation which has its principal place of business at 100—1 Evergreen Place, in the City of Winnipeg, in the Province of Manitoba.

2. The fiscal year end of the appellant is March 31.

4. At the end of its 1988 taxation year the appellant owned approximately thirty such rental properties altogether. Most of its properties are commercial realty but there are some residential rental properties in the appellant’s portfolio as well.

5. In its 1987 taxation year the appellant acquired interests in several rental commercial properties in the City of Winnipeg. Three of these were 1331 Portage Avenue (in which it acquired 100 per cent ownership), 2795 Pembina Highway (in which it acquired a two- thirds interest), and 3605-3615 Roblin Boulevard, also known as the Charleswood Shopping Centre (in which it acquired a two-thirds interest). These properties were all sold in its 1988 taxation year and the appellant realized gains as follows:

	Proceeds Net of	Adjusted	Gain Gain
	Disposition Costs	Cost Base
1331 Portage Avenue	$290,639	$170,000	$120,639
2795 Pembina Highway	$557,947	$447,500	$110,447
3605-3615 Roblin Blva.	$465,585	$227,000	$238,585
			$469,671

8. In its 1988 taxation year overall the appellant suffered a non capital loss for income tax purposes. The appellant treated its gains on the sale of its interests in 1331 Portage Avenue, 2795 Pembina Highway, and 3605-3615 Robin Boulevard as capital gains and accordingly included the taxable capital gain portion thereof, being

((275/366 x 1/2) + (91/366 x 2/3)) x $469,671 $254,092

in calculating its non capital loss for its 1988 taxation year.

9. Pursuant to a request from the appellant, the Minister of National Revenue, by notice of determination dated December 14, 1990, determined the appellant’s non capital loss for the 1988 taxation year to be $59,248. In making this determination the Minister of National Revenue assumed that the gains on the sale of 1331 Portage Avenue, 2795 Pembina Highway, and 3605-3615 Roblin Boulevard, were not capital gains but were business income and in the result he included the entire amount of the gains of $469,671 in the calculation of the appellant’s non capital loss for 1988.

10. The appellant duly served a notice of objection in prescribed from and manner objecting to the determination of non capital loss for 1988 by the Minister of National Revenue.

11. By notice of redetermination dated January 10, 1992 the Minister of National Revenue then redetermined the non capital loss of the appellant for its 1988 taxation ear to be $70,876 (making certain changes to his earlier determination of non capital loss on December 14, 1990 which are not relevant to this appeal), but he continued to include as business income in his calculation the full amount of the gains of $469,671 from the sale of 1331 Portage Avenue, 2795 Pembina Highway, and 3605-3615 Roblin Boulevard.

12. The appellant appeals to this Honourable Court pursuant to subsections 152(1.2) and 165(7) of the Income Tax Act in respect of the redetermination of non capital loss of January 10, 1992 for its 1988 taxation year as it relates to the character of the gains from the sale of 1331 Portage Avenue, 2795 Pembina Highway, and 3605-3615 Roblin Boulevard.

The issue concerns three properties located in Winnipeg, Manitoba. Particulars respecting the properties are as follows:

Tabs refer to Exhibit A-1.

Sandy Shindleman was raised in Portage la Prairie, Manitoba where his family was involved in the livestock business. He went to Winnipeg in 1975 to go to the University of Manitoba. In Winnipeg he attended university and to this date remains one credit short of obtaining a degree at the University of Manitoba. He worked in the stockyard business in Winnipeg, took commercial real estate courses, and is a certified commercial investment member. He lectures on real estate investment in Manitoba and has lectured at various real estate courses throughout the world. He incorporated the appellant in about 1978. The appellant has developed a multi-million dollar real estate portfolio of properties which are primarily in Winnipeg. They consist of some industrial properties, two office buildings, some residential high-rise and walk-up properties, and retail premises. Shindico Inc. has sold properties on an income basis and on a capital basis. At the end of 1988 it owned interests in 30 properties. From 1984 to 1993 it purchased interests in 34 properties and sold interests in nine properties. At the end of 1993 it owned interests in 29 properties.

Shindico Inc. and Brownlor Ltd. shared in the ownership of two of the properties in question in this appeal. They are also co-owners of two other properties at the present time. The operating officer of Brownlor Ltd. is Dr. Fleishman, Mr. Shindleman's dentist. Dr. Fleishman was interested in investing with Mr. Shindleman and proposed such an arrangement one day while Mr. Shindleman was in his dentist's chair. Mr. Shindleman pointed out in testimony that it is hard to resist such a proposition. He also stated that it was an opportunity for Shindico Inc. to share risk.

The appellant and Brownlor Ltd. purchased 3605-15 Roblin and 2795 Pembina from Pratt McGarry Inc. ("Pratt") after Pratt asked for and received a "Letter of Interest" from the appellant dated October 25, 1985.

The main issue before the Court respecting 3605-15 Roblin is whether or not, at the time of purchase, the appellant had either a primary or a secondary intention to sell the property. As shown in the table prepared respecting 3605-15 Roblin, the property was purchased for $475,000 on January 24, 1986. It was the only strip-mall in the Charleswood area of Winnipeg that was not owned and operated by Kona Enterprises Ltd., which was apparently a quasi-public limited partnership investment vehicle that later obtained some notoriety in Winnipeg. Shortly after its purchase the appellant attempted to obtain a mortgage on the property for $525,000 through a mortgage broker "Montrose". Montrose could not obtain the mortgage. Then the appellant was put in touch with Imperial Life and was told that to obtain a mortgage for $600,000, the appellant would have to obtain an appraisal by a qualified appraiser showing that the property was worth approximately 50 per cent more than the mortgage that Mr. Shindleman wanted. Imperial Life was prepared to accept any qualified appraiser's valuation of the property. Therefore Mr. Shindleman went to an appraiser he knew and told him the value he needed as a minimum. He further stated, to quote Mr. Shindleman, that the appraiser "didn't need to do an appraisal if they didn't meet the minimum". The result was an appraisal valuing the property at $938,000 and as a consequence of that appraisal Imperial Life granted the owners of 3605-15 Roblin a mortgage of $600,000 on the property in which the owners had only invested $475,000. The mortgage was dated October 31, 1986.

The appellant's offices in Winnipeg contained a small staff. Sandy Shindleman did all of the buying and selling of property by the appellant. The appellant employed a chartered accountant in its office, Mr. Coates, who was in charge of the general staff and all of the accounting functions of the appellant. Mr. Coates prepared a document which was filed as Exhibit A-1 (17-C). It contained a set of financial particulars respecting 3605:15 Roblin before the gas bar was installed and described an "asking price. . .$685,000”. Mr. Shindleman stated that he never authorized the preparation of that document, but he also stated that "this could also have been prepared for Dr. Fleishman".

Claus Janzen was known to be an agent for Kona Enterprises Ltd. He had his office in the Pratt premises in Winnipeg and visited Shindico Inc.'s office a couple of times a week trying to get listings for property which he proposed to sell to Kona Enterprises Ltd.. Both Mr. Shindleman and Claus Janzen knew that Kona Enterprises Ltd. owned all of the other shopping centres in the Charleswood area of Winnipeg. On March 31, 1987 Claus Janzen presented an offer respecting 3605-15 Roblin to Mr. Shindleman. He left the offer with Mr. Shindleman and said that the offer was “dramatically more than it was worth". Mr. Shindleman stated he would have advised Dr. Fleishman of that offer to show that they had paid a reasonable price for the property in the first place. Mr. Shindleman decided to counter offer for $775,000 and stated respecting Brownlor Ltd. and Dr. Fleishman "I didn't tell him what the counter offer would be”. When the counter offer was accepted Mr. Shindleman stated it was a “surprise to everyone”.

The evidence respecting this transaction, taken in total, is such that the Court accepts the Crown's position that at the time of purchase of this property both Shindico Inc. and Brownlor Ltd. had either a primary or a secondary intention to sell 3605-15 Roblin. In Exhibit A-1 (17-C) there is a reference to a mortgage greater than the purchase price of the property; broker Montrose tried to get a mortgage greater than the purchaser price of the property; and Mr. Shindleman was very direct in his successful efforts to obtain a mortgage substantially greater than the purchase price or any investment the owners had in the property. Furthermore Exhibit A-1 (17-C), while it was allegedly prepared by Mr. Coates without any authorization, was prepared in an open office where it would be hard for Mr. Shindleman not to see the document in question and to have participated in discussions indicating the numbers contained in Exhibit A-1 (17-C) from time to time. If it was prepared for Dr. Fleishman, as may be the case, then it indicates an intention to sell by Dr. Fleishman, the operating officer of Brown lor Ltd. Mr. Shindleman stated that the selling price of the property was outrageous and subsequent events proved that to oe the case. But from before the appellant's purchase of the property, Kona Enterprises Ltd. was an obvious purchaser and, with the appraisal that Mr. Shindleman obtained for $938,000 after the gas bar was built on the property, a higher price could be justified to Kona Enterprises Ltd.'s investors. The appraiser was a friend of Claus Janzen but Mr. Shindleman stated he doesn't know if Mr. Janzen knew of that appraisal.

In these circumstances the Court dismisses the appeal in respect to 3605-15 Roblin.

2795 Pembina was also bought by Shindico Inc. in partnership with Brownlor Ltd. It is a strip-mall located in the western suburbs of Winnipeg. The high ratio mortgage placed on it was less than the purchase price. The strip-mall had tenants who had been there for more than five years and were paying low rents. There was an excellent traffic count in front of the premises and a prospect of raising the rents substantially. Shindico Inc. has a record of both buying properties for investment purposes and buying them to resell. Mr. Shindleman stated that Dr. Fleishman was interested in investments for Brownlor Ltd., however one of the assumptions respecting this property is that Brownlor Ltd. reported this sale on income account. The attributes of 2795 Pembina are such that it was a valid investment property. It was purchased for $775,000 and Mr. Shindleman managed to obtain an appraisal from the same appraiser as he used for 3605-15 Roblin, indicating a value of $1,290,000 three months later with no improvements. The appraisal in this case was based upon the owners being able to raise the rent by between 40 per cent and 50 per cent more than was being paid at the time of the appraisal. However Mr. Shindleman could only get a mortgage for $660,000 which was based on a high ratio of the purchase price. He stated that on every occasion, Shindico Inc. takes the highest mortgage it can possibly get over the longest term it can possibly get.

After the purchase, the appraisal and the mortgage, Claus Janzen presented an offer from Kona Enterprises Ltd. to buy 2795 Pembina for $860,000. There is no evidence of previous discussions with Mr. Janzen respecting this property. Mr. Shindleman initially told Mr. Janzen that he wouldn't sell and he wouldn't pay a commission to Mr. Janzen because Kona Enterprises Ltd. was known to Mr. Shindleman (although Mr. Shindleman never did deal directly with Kona Enterprises Ltd.). The owners counter offered at $970,000 and ultimately the parties agreed upon a sale price of $950,000. Mr. Shindleman stated, simply, that 2795 Pembina wasn't worth $860,000 and wasn't worth $970,000 and that he sold because the purchaser was prepared to pay almost $200,000 more than the appellant ana Brownlor Ltd. paid for 2795 Pembina. This was stated despite the fact that he had obtained and used the appraisal for $1,290,000 of 2795 Pembina. In respect to Dr. Fleishman's involvement in the sale Mr. Shindleman stated “if anything came of it I would have let him know".

Assumption 6(d)(iii) in respect to 2795 Pembina reads:

At the time of the acquisition of the property, the appellant had present in his mind the possibility of resale at a profit and that possibility was an operating motivation for the acquisition of the property.

The Court accepts the evidence that Kona Enterprises Ltd. was embarked on a scheme of purchases for prices that were substantially above market value to the detriment of its investors, but to the advantage of a property owner such as Shindico Inc. which had a knowledgable and intelligent officer. The parallel of 3605-15 Roblin and 2795 Pembina is obvious — the same vendor, a small mall, a very high appraisal by the same appraiser, a very high mortgage to Imperial Life, Claus Janzen as agent, and a sale to Kona Enterprises Ltd.

A person such as Mr. Shindleman who was completely knowledgable as to the Winnipeg real estate market would know of Kona Enterprises Ltd. and its pattern of purchases before the appellant purchased its interest in 2795 Pembina. The high appraisal has a value, not only to obtain a high mortgage, but also for sale purposes. A very high mortgage assists in a sale and reduces the amount of actual investment by the owner in the property itself. Moreover the mortgage for 2795 Pembina was executed and registered approximately four months before the mortgage for 3605-15 Roblin although both the purchase and sale of 2795 Pembina occurred after the Roblin purchase and sale. The circumstances of this transaction indicate that at the time of purchase the appellant had either a primary or secondary intention to sell the property and that an obvious prospective purchaser would be Kona Enterprises Ltd. The appellant has failed to overcome the assumption of the Crown that the resale of this property at a profit was an operating motivation for the appellant’s acquisition of the property. The appeal is dismissed.

Mr. Shindleman discovered 1331 Portage Avenue was for sale when he was going home from downtown Winnipeg one day and saw a sign being put up offering it for sale. It was a corner store on the "going home side of Portage Avenue". Mr. Shindleman contacted the real estate agent and Shindico Inc. purchased the property for $170,000. The property had a lease which would expire on June 30, 1988 at a rent which was dramatically under the market rate. Nearby on the same side of Portage Avenue were Domino's Pizza, Tandy, and other prominent franchise outlets. The appellant mortgaged the property to Royal Trust for approximately 75 per cent of the purchase price.

After Shindico Inc. purchased 1331 Portage Avenue, the tenant offered to buy it from Shindico Inc. That offer was refused. The Court accepts Mr. Shindleman's statement that the sole intention of the appellant in purchasing 1331 Portage Avenue was to keep the property and buy anything else available on that side of Portage Avenue.

The property was sold as the result of an unsolicited offer from an individual who wanted to put a pet store in which he was interested into the property. Mr. Shindleman testified, and the Court believes, that he doesn't recall the price that was offered initially, but Mr. Shindleman dickered with the realtor until the realtor agreed to accept one-half of his ordinary commission whereupon the property was sold for $300,000.

The Court accepts the evidence that indicates that this property was a good long term investment with strong upside potential in the rent. There is no evidence of any intention respecting the sale or this property by Shindico Inc. or Mr. Shindleman at the time of purchase. Mr. Shindleman testified that Winnipeg was not at the times in question and still is not an area given to dramatic increases in prices. In the circumstances an offer which closed at $300,000 without any solicitation on the part of the vendor respecting a property which was purchased with an obvious long term positive rental potential, is accepted by the Court as merely the realization of an investment. This is a case of an investor purchasing at a good price and realizing on his investment upon the receipt of a very high unsolicited offer. The appeal respecting 1331 Portage Avenue is allowed.

The respondent is awarded its costs.

Appeal allowed in part.