600166 Ontario Ltd., 567351 Ontario Ltd., Beverley Cameron, Joan Yvonne Johnston, Glen Johnston, F. Scott Cameron and Rod E. Johnston v. Minister of National Revenue, [1993] 2 CTC 2151, 93 DTC 910

Brulé, T.C.C.J.:—These appeals result from assessments by the Minister of National Revenue ("respondent") in which the appellants were assessed on gains from the sales of real property as income whereas the appellants claimed the gains as being capital in nature.

Later in the trial, Joan Yvonne and Glen Johnston abandoned their appeals and are hereby dismissed.

The subject of the reassessments involved four properties in the city of Peterborough, Ontario and for the purpose of appeals may be designated as:

(1) Arbour Apartments, (2) Peterborough Place West, (3) Empress Hotel, and (4) Whitaker Mills.

Issue

The sole issue in these appeals is whether the gain derived from the disposition of the four properties bought and sold from 1984 to 1987 were in the nature of income or capital.

Facts

These appeals were heard on common evidence. The sole witness was Mr. F. Scott Cameron ("Scott"). Rod E. Johnston ("Rod") acted as counsel for all the appellants.

In order to clarify the roles of those involved in these properties the following details are significant and were a part of Scott's evidence.

The appellant 600166 Ontario Ltd. ("600166") consists of three shareholders: FSC Realty Inc. (Scott's holding company); REJ Realty Inc. (Rod's holding company) and 511651 Ontario Inc. ("511651"), John S. MacDonald's holding company (" John"). 600166 is appealing in respect of the sale of 171 Dublin Street (known as “Arbour Apartments") in Peterborough, Ontario which was purchased on November 19, 1984.

567351 Ontario Ltd. ("567351") is appealing in respect of a disposition of property known as Peterborough Place West (" P.P.W.”) which was purchased on August 15, 1985. The shareholders of 567351 are Scott, Rod and 511651.

Beverley Cameron ("Beverley") and Scott are appealing in respect of the sale of their shares in 564525 Ontario Ltd. ("564525")—the company which held the property known as Empress Hotel which was purchased on June 2, 1986.

Scott and Rod are appealing in respect of a property known as Whitaker Mills which was purchased on September 26, 1986.

Scott is a solicitor by profession. As part of his practice he became very involved in real estate transactions and such took more of his time than a legal practice. He made a voluntary assignment in bankruptcy on September 26, 1992. His wife is about to make an assignment in bankruptcy. (The bankruptcy of Scott was caused by many factors. There was a decline in real estate values. There were some cash flow problems. Some management mistakes from 1987 to 1992 were made. In addition, the appellants had signed personal guarantees on mortgages, perhaps up to $25 million.) Scott states that the outcome of these appeals will be of no advantage to himself or his wife.

Prior to the purchase of the properties in question, Scott had interest in three commercial properties. His first property was at 816 Lansdowne St. This property was purchased on December 30, 1976. This property was a house of 1,000 square feet in size which was converted into a law office. He had been renting the premises and working there as a sole practitioner. He practised there until 1980 and then moved to larger premises at 727 Lansdowne St. On February 28, 1979, Rod acquired a 50 per cent interest in 816 Lansdowne St. from Scott. Later, both buildings were held by 402345 Ltd. a company owned equally by Scott and Rod.

Seven hundred and twenty-seven Lansdowne St. (the"Cameron, Johnston Building”) was renovated and 6,000 square feet was added, doubling the office space to 12,000 square feet. The building attracted several financially assisted tenants who provided them with rental income.

On February 16, 1984, Scott, Rod and John, through their company, Capital Court Development Inc., purchased a former P.U.C. building which was converted into a 17,000 square feet office complex which came to be known as Capital Court. Beverley had assisted on [a] part-time basis with the collection of rents and the supervising of maintenance. Eventually a full-time manager was hired for Capital Court, as the appellants did for the other rental properties which they acquired. This property is still held today.

Arbour Apartments

On July 26, 1984, Scott purchased 171 Dublin St., the site of a vacant church. He paid $85,000 on the condition that the property could be rezoned residential. The change in zoning was approved by the municipal authority. At the time of the purchase of this property, Scott had never sold real estate.

It was Scott's plan to convert this church building into Arbour Apartments, consisting of 26 apartment units, which would be held as an investment property. In this regard, Scott investigated vacancy and rental rates for the size of apartments he planned to develop using the existing church structure.

Careful consideration was given to the financing costs and the cash flow which was projected seemed favourable.

This project was financed, in part, with the help of an Ontario government program known as "Convert to Rent" ("CTR") to the extent of $182,000. The appellants stated that the CTR program is at the heart of these appeals. It is a program sponsored by the Ontario Ministry of Housing. This program offers interest-free 15-year mortgages on qualifying properties. No payments of principal are required on the mortgage during the first ten years. The principal amount was to be repaid in equal monthly instalments during the last 60 months of its term. CTR mortgages were available only to convert existing buildings to rental accommodation. Under this program, loans of $7,000 are received for each apartment to be created. Also, up to 25 per cent of units must be offered to local Housing Authority for use under the Rent Supplement Program. In short, the appellants were of the opinion that the buildings qualifying for CTR financing would be good investments. In their view, the preferential government financing and security of rental income combined to produce a relatively risk-free investment.

Peterborough Place West

On August 15, 1985, 1837 Lansdowne St., which would come to be known as Peterborough Place West, was purchased. According to Scott, this property was owned by an insolvent company which had poorly managed it. The property was therefore partially vacant. P.P.W. is a two storey store plaza (formerly known as Brealey Plaza). There were three buildings. One was a store plaza with 13 commercial units for rent. Its second floor was divided in half with office space in one half and 20 bachelor units in the other half. The second building was a residence building for a manager. The third was a motel to the rear of the property.

Scott used the CTR program to convert the plaza into a larger residential rental property. Its application for CTR financing was accepted. JSM Project Management Inc. ("JSM"), a company owned and operated by John, was engaged to renovate the building.

Empress Hotel

On September 20, 1985, 564525 offered to purchase a property known as Empress Hotel for $1,200,000. The closing date was set for June 2, 1986, nine months after the date of agreement of purchase and sale. Scott testified that a long closing was required to prepare costing estimates and arrange financing, including Ontario government CTR financing. Plans had to be made and they did not want to have to service debt while in the planning stage. Also, the P.P.W. project was in progress.

Scott planned to create two floors of commercial space and convert the rest into rental apartments. One part of the building was to be demolished for more parking. Scott stated that they had in mind the same plan as before. The goal of the purchase was a rental income property. Resale was not a motivating factor for all concerned. Promotional letters were sent out after agreement to purchase to attract tenants. The list of those who received such a letter is long and varied. Cash flow projections were made and it looked positive.

Whitaker Mills

On December 3, 1985, JSM signed an offer to purchase the property known as Whitaker Mills for $350,000. The deal was set to close October 11, 1986. Scott, John, Rod and Glenda Lukinuk in partnership were the ultimate purchasers. John had discovered Whitaker Mills through his dealing with Andola Fibres Ltd. for whom his project management company, JSM, had done some construction work. This was another property which appeared to the appellants as a good investment because part of the property could be developed into rental condominiums taking advantage once again of the CTR program. The property had been already rezoned for residential purposes by Andola Fibres Ltd.

Factors leading to sales of properties under appeal

On September 30, 1986, 564873 Ontario Ltd. ("564873"), a company owned by Scott, Rod and 511651, purchased a property near the Trent Canal, known as the Westclox property for $2,300,000. Again, the plan was to renovate and convert part of this property into residential accommodation. It was referred to as the Time Square Project. It was a large building close to downtown and had an area for 500 parking spaces. It has two storeys, but it was suitable for construction of up to five more storeys.

In January of 1987, the owners made proposals for the financing of this project to the Canadian Imperial Bank of Commerce ("CIBC"). They needed to finance approximately $5,600,000 to cover renovation and construction costs, as well as refinancing a vendor take-back mortgage. Scott stated that CIBC required that a large amount of equity be injected into the project.

564873 had financed the purchase of the Westclox property by advances from its shareholders. These advances were made in part with money the shareholders had borrowed on the security of their other investments. CIBC requested that the shareholders repay their personal indebtedness. The shareholders therefore caused the sale of Arbour Apartments. The cash proceeds of the sale were distributed to the shareholders to allow them to repay their debts.

Prior to the dealings with the Time Square property, Arbour Apartments had not been listed for sale; it was sold because of the purchase of Time Square. CIBC’s approval of their loan was based on equity injection of $750,000. (It was sold because of low real estate appraisal.) On June 5, 1986, Arbour Apartments was listed for $1,119,000. It was sold for $1,025,000 on March 30, 1987.

P.P.W. as an investment had performed well during the period held; it was never offered for sale. A real estate agent called on Scott asking if he was willing to sell any of his properties. He said "no". A few days later, the same lady came back saying she and an associate were interested in buying revenue producing properties. About a week later, a Mr. Klosky (the associate) indicated he was acting for overseas investors who wanted to buy Canadian properties. Later, Mr. Klosky said he could get a buyer and offered $2,750,000. Scott spoke to other shareholders and told Mr. Klosky that this offer was not acceptable. Subsequently, an offer of $3,000,000 was presented and in spite of objections from partners, Scott persuaded them to accept, especially since the Time Square project needed funds. P.P.W. was sold on June 30, 1987. Scott testified that they would not have disposed of P.P.W. had it not been for CIBC pressuring for equity. He stated that the shareholders had difficulty over the sale of P.P.W.

After a great amount of preliminary work as evidenced by the exhibits submitted to the Court, all of which indicated a viable investment for the property, the need for cash for the Time Square project prompted the appellants to accept an offer to sell Whitaker Mills. This offer was for $522,250 dated September 17, 1986 prior to a closing date of April 30, 1987.

Sometime in October of 1985, Scott had been approached by a local realtor to sell the Empress Hotel property. The appellants rejected this offer. But, on or about December 23, 1985, after numerous approaches, the appellants accepted and they signed an agreement to sell the shares of 564525 for $213,750 with a resulting profit to the shareholders of the company of $213,651. A deposit of only $25,000 had been paid with respect to the acquisition of Empress Hotel; no permanent financing of the purchase had been arranged prior to the sale of the shares of 564525.

There were other properties involving at least some of the appellants, but as none of these are the subject of the appeals no details are given herein.

Appellants’ position

Appellants’ counsel claims that they were not in the business of selling real estate. In this regard, he relies on the fact that none of them had ever sold real estate prior to 1985, except for their own residences. He claims that not only did they not sell real estate, but there were no attempts to sell, which is, in his opinion, the best indication of intention. He claims that the property acquisitions were either related to the law practice or the properties were bought as investments because they were or could be turned into income producing assets. He asserts that between 1976 and 1985, Scott and himself (Rod) were engaged in the full-time practice of law. John was not engaged in the selling of real estate; he was a construction and renovation project manager. In short, all properties were bought because they were actually or potentially income producing assets. He stated that financial statements take into account the debts and expenses and still show cash-flows in a positive manner. The exhibits given to the Court bear out this statement.

He explained that the purchase of Arbour Apartments and Peterborough Place West were facilitated by the CTR program which lowers the degree of investment by a taxpayer, and which explains the small equity injection. CTR was designed to promote this type of development.

The appellants claim that it was their strategy to develop Arbour Apartments as an income producing asset and this was accomplished by way of the CTR program. Survey of the rental market showed a need for more apartments. There was no motive of resale. They sold this property in order to trade up in a similar investment.

P.P.W. was purchased with the same purpose and modus operandi as Arbour Apartments. It was held for some length of time indicating no trading intention. It was held for over one and a half years. Promotional brochures were printed, etc., to assist in leasing. The property was not advertised for sale. The property was managed as an investment property and a permanent manager was hired. It was held until they were forced to sell in reaction to the financial needs of the Time Square project.

The purchase of the property known as Empress Hotel was consistent with the appellants’ investment strategy. Their intention was to develop the property for long-term investment, not to resell. An unsolicited offer was declined. Their efforts to attract tenants continued. The appellants discovered that problems existed with on-site parking and the central stairwell.

The intention in buying the property known as Whitaker Mills was the same as others to increase their investment portfolio. Prior to its sale, they intended to build new condominiums. The Time Square project was another CTR program and its purchase was consistent with trading-up.

The crucial factor is the history of the appellants’ activities in dealing with properties. 816 Lansdowne St. no longer suited the appellants, but continued to be held. The fact that the appellants’ projects were largely financed should not be a determining factor. Counsel referred the Court to Gagnon v. M.N.R., [1991] 1 C.T.C. 2203, 91 D.T.C. 473 (T.C.C.). He argued that it was not the market that dictated the sales. Scott's first three properties were held for a considerable length of time. Capital Court was never sold.

He also argued the fact that properties were either not listed for sale or not listed immediately for sale after the purchase or the completion of their projects indicates no intention to sell.

In support of his argument the appellants’ counsel cited many cases for various considerations in determining whether or not sales of real property should be classed on capital or income account.

Counsel referred to the concept of "trading-up" and cited the following cases:

Hébert v. The Queen, [1986] 2 C.T.C. 123, 86 D.T.C. 6543 (F.C.T.D.);

Maclsaac v. M.N.R., [1974] C.T.C. 576, 74 D.T.C. 6380 (F.C.A.);

The Queen v. Kyllo, [1976] C.T.C. 409, 76 D.T.C. 6235 (F.C.T.D.);

Lee v. M.N.R., [1978] C.T.C. 2192, 78 D.T.C. 1152 (T.R.B.);

Reich Hotels Ltd. v. M.N.R., [1982] C.T.C. 2334, 82 D.T.C. 1297 (T.R.B.);

Wolofsky v. M.N.R., [1967] Tax A.B.C. 93, 67 D.T.C. 107 (T.A.B.).

The proposition that financial difficulties of the taxpayer which forces a sale is a factor to be considered. See:

Torduff Ltd. v. M.N.R., [1972] C.T.C. 295, 72 D.T.C. 6266 (F.C.T.D.);

The Queen v. Sipila, [1977] C.T.C. 280, 77 D.T.C. 5179 (F.C.T.D.);

Parkview Manor Ltd. v. M.N.R., [1974] C.T.C. 402, 74 D.T.C. 6311 (F.C.T.D.);

S. & S. Properties Ltd. v. The Queen, [1978] C.T.C. 412, 78 D.T.C. 6294 (F.C.T.D.).

Management problems are to be considered:

Ross v. M.N.R., [1973] C.T.C. 22, 73 D.T.C. 5060 (F.C.T.D.);

Sipila, supra;

Greenbranch Investments Ltd. v. The Queen, [1980] C.T.C. 514, 80 D.T.C. 6384 (F.C.T.D.);

Carsons Camps Ltd. v. The Queen, [1984] C.T.C. 46, 84 D.T.C. 6070 (F.C.T.D.);

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

Wolofsky, supra.

Speculative nature of a venture is another factor:

Ross, supra; and

Hiwako Investments Ltd. v. The Queen, [1978] C.T.C. 378, 78 D.T.C. 6281 (F.C.A.).

Secondary intention is crucial:

Racine, Demers and Nolin, supra.

How previous profits were treated is another consideration:

Elgara Enterprises Ltd. v. The Queen, [1974] C.T.C. 642, 74 D.T.C. 6500 (F.C.T.D.);

Reich Hotels Ltd., supra.

An unsolicited attractive offer is a factor to be considered:

S. & S. Properties Ltd., supra;

Davella Holdings Ltd. v. M.N.R., [1984] C.T.C. 2742, 83 D.T.C. 1379 (T.C.C.);

Wolofsky, supra;

Ross, supra.

Whether the properties are revenue-producing is a consideration:

Colville-Reeves v. The Queen, [1981] C.T.C. 512, 82 D.T.C. 6005 (F.C.T.D.);

Hébert, supra;

Lee, supra;

Wolofsky, supra.

Previous real estate transactions should be looked at:

Colville-Reeves, supra.

Involvement in real estate through career should be considered:

Davidson v. M.N.R., [1967] Tax A.B.C. 655, 67 D.T.C. 439 (T.A.B.).

Setting high price to discourage sale is indicative of investment:

Desrochers Development Corp. v. The Queen, [1987] 2 C.T.C. 118, 87 D.T.C. 5363 (F.C.T.D.).

Explanations for sudden resale is another factor:

Cappuccitti v. The Queen, [1986] 2 C.T.C. 184, 86 D.T.C. 6403 (F.C.T.D.);

Racine, Demers and Nolin, supra;

Hiwako Investments Ltd., supra.

Having been partners in previous transactions does not determine the issue:

Racine, Demers and Nolin, supra.

Intention to build revenue-producing investment portfolio is crucial:

Hébert, supra;

Reich Hotels Ltd., supra;

Wo I of sky, supra.

"Offer too good to refuse” is a factor:

Davella Holdings Ltd., supra.

Intention to speculate is another:

Wolofsky, supra.

In conclusion counsel rationalized all these cited cases with the behaviour of the appellants in their dealings with the subject properties. As a result, all profits made should be on capital account.

Other cases presented for the Court's consideration by the appellants’ counsel:

Power v. The Queen, [1975] C.T.C. 580, 75 D.T.C. 5388 (F.C.T.D.);

Van Der Haegen v. M.N.R., [1987] 1 C.T.C. 2193, 87 D.T.C. 126 (T.C.C.);

Smith v. M.N.R., [1987] 2 C.T.C. 2296, 87 D.T.C. 595 (T.C.C.);

Matt's Apartments Ltd. v. M.N.R., [1989] 2 C.T.C. 2199, 89 D.T.C. 441 (T.C.C.);

Hannibal Holdings Ltd. v. M.N.R., [1989] 2 C.T.C. 2053, 89 D.T.C. 345 (T.C.C.);

Bell v. M.N.R., [1989] 1 C.T.C. 2272, 89 D.T.C. 165 (T.C.C.);

Hanover Management Ltd. v. M.N.R., [1989] 2 C.T.C. 2076, 89 D.T.C. 355 (T.C.C.);

Crystal Glass Canada Ltd. v. The Queen, [1989] 1 C.T.C. 330, 89 D.T.C. 5143 (F.C.A.);

Wright v. M.N.R., [1990] 1 C.T.C. 2477, 90 D.T.C. 1265 (T.C.C.);

Grouchy v. The Queen, [1990] 1 C.T.C. 375, 90 D.T.C. 6267 (F.C.T.D.);

W. Hanley & Co. v. The Queen, [1990] 2 C.T.C. 71, 90 D.T.C. 6354 (F.C.T.D.);

Veltri & Son Ltd. v. M.N.R., [1991] 1 C.T.C. 2691, 91 D.T.C. 862 (T.C.C.);

Les Placements Richard Martineau Ltée v. M.N.R., [1992] 1 C.T.C. 2170, 92 D.T.C. 1051 (T.C.C.);

Degroat v. M.N.R., [1992] 1 C.T.C. 2258, 92 D.T.C. 1256 (T.C.C.).

Respondent's position

Counsel for the respondent argued that the appellants acquired the properties in question with the intention of "dealing-in, trading, or otherwise turning it to account for profit". She argued, in the alternative, that the properties were bought with possibility of reselling at a profit as an operating motivation.

In support of her position, she presented to the Court the following cases:

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

Happy Valley Farms Ltd. v. The Queen, [1986] 2 C.T.C. 259, 86 D.T.C. 6421 (F.C.T.D.);

Leonard Reeves Inc. v. M.N.R., [1985] 2 C.T.C. 2054, 85 D.T.C. 419 (T.C.C.);

Racine, Demers and Nolin, supra;

Crystal Glass Canada Ltd., supra;

Deloro v. M.N.R., [1965] C.T.C. 321, 65 D.T.C. 5194 (Ex. Ct.);

Fraser v. M.N.R., [1964] S.C.R. 657, [1964] C.T.C. 372, 64 D.T.C. 5224:

Stroz v. M.N.R., [1990] 1 C.T.C. 2417, 90 D.T.C. 1271 (T.C.C.);

Campeau v. M.N.R., [1992] 2 C.T.C. 2673, 93 D.T.C. 92 (T.C.C.).

She referred to how in Taylor, supra, and Happy Valley Farms Ltd., supra, the factors to be considered in determining whether a transaction was an adventure in the nature of trade were developed. In particular she referred to page 263 (D.T.C. 6423-24) of Happy Valley Farms Ltd., where Rouleau, J., stated :

Several tests, many of them similar to those pronounced by the Court in the Taylor case, have been used by the courts in determining whether a gain is of an income or capital nature. These include:

1. The nature of the property sold. Although virtually any form of property may be acquired to be dealt in, those forms of property, such as manufactured articles, which are generally the subject of trading only are rarely the subject of investment. Property which does not yield to its owner an income or personal enjoyment simply by virtue of its ownership is more likely to have been acquired for the purpose of sale than property that does.

2. The length of period of ownership. Generally, property meant to be dealt in is realized within a short time after acquisition. Nevertheless, there are many exceptions to this general rule.

3. The frequency or number of other similar transactions by the taxpayer. If the same sort of property has been sold in succession over a period of years or there are several sales at about the same date, a presumption arises that there has been dealing in respect of the property.

4. Work expended on or in connection with the property realized. If effort is put into bringing the property into a more marketable condition during the ownership of the taxpayer or if special efforts are made to find or attract purchasers (such as the opening of an office or advertising) there is some evidence of dealing in the property.

5. The circumstances that were responsible for the sale of the property. There may exist some explanation, such as a sudden emergency or an opportunity calling for ready money, that will preclude a finding that the plan of dealing in the property was what caused the original purchase.

6. Motive. The motive of the taxpayer is never irrelevant in any of the cases. The intention at the time of acquiring an asset as inferred from surrounding circumstances and direct evidence is one of the most important elements in determining whether a gain is of a capital or income nature.

While all of the above factors have been considered by the courts, it is the last one, the question of motive or intention which has been most developed. That, in addition to consideration of the taxpayer's whole course of conduct while in possession of the asset, is what in the end generally influences the finding of the Court.

This test has been carried one step further by Canadian courts into what has generally been referred to as the "secondary intention” test. This has meant, in some cases, that even where it could be established that a taxpayer's main intention was investment, a gain on the sale of the asset would be held taxable as income if the court believed that, at the time of acquisition, the taxpayer had in mind the possibility of selling the asset if his investment project did not, for whatever reason, materialize . . . .

Counsel for the respondent relied on Racine, Demers and Nolin, supra, for the definition of secondary intention. In that case, at pages 159-60 (D.T.C. 5103) Noël, J., stated:

To give 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.

When a man purchases a large expanse of land for the avowed purpose of building on it, for example, a shopping centre and of renting stores to yield an income from rent, but at the moment of the purchase he does not make any arrangement at all to obtain the permanent financing of a considerable amount of money that he must invest or which will be required for the purposes of his project, or any arrangement at all to obtain tenants, and he has not obtained any information at all concerning the question of learning if the site in question possesses the characteristics necessary and adequate for such a project, or when this plot of land is situated in a sector which is adjacent to another sector which is growing and which is in full expansion on the periphery and where the value of these lands has already begun to rise or where the purchaser possesses experience in the realm of real estate which allows him to anticipate the changes which may arise in real estate values, there arises an almost irresistible inference that this man had the idea when he made the purchase that if he did not succeed in making the necessary arrangements to establish a shopping centre, he would indubitably be able to resell this land at a profit.

In respect of the present case, counsel for the respondent stated that the following four factors are crucial:

1. the knowledge and experience in real estate transactions of the principals;

2. the pattern that developed in dealing with their properties;

3. the holding of properties for short periods of time;

4. the building of income streams in anticipation of possible sales.

Firstly, with respect to the knowledge and experience of principals, the respondent pointed out the following. Scott, the principal mover in these transactions, had nine years’ experience as a real estate lawyer in Peterborough from 1981 to 1990. Rod also used his knowledge and experience as a lawyer with eight years in practice. The promotional brochures of JSM showed the experience of John in the real estate development projects. Scott took care of marketing. John was in charge of construction management. Rod looked after budgeting and municipal matters. In short, as a team, the three principals had the basic areas covered.

Secondly, a pattern had developed in respect of their dealings with properties. They used earlier acquisitions to persuade lenders to advance funds, then plan and execute renovations, then market their properties. The appellants not only took advantage of CTR interest-free financing, but their assignability; these factors would be attractive for a sale. They repeated this modus operand! in all four transactions under appeal.

Moreover, the properties in question were highly leveraged. Arbour Apartments was wholly financed. There was a $400,000 first mortgage to National Trust Co., $182,000 second mortgage to the Ontario Government (CTR loan program), and a $150,000 third mortgage to CIBC. The 1985 and 1986 balance sheets for 600166 indicate that there were no advances from shareholders. Funds were borrowed from corporations interest-free. Scott was assessed on interest benefits for 1985 and 1987. Rod’s income tax returns indicated the same.

The Peterborough Place West project cost was $1,742,452 almost all of which was 100 per cent financed. The 1985 balance sheet for 567351 indicates that there were no shareholder loans to corporations and no shareholder capital. In 1986, it showed shareholders loans and advances for $160,314. Long-term debt was $1,550,511.

Empress Hotel was purchased with only a $25,000 deposit which was returned at the time the deal was closed. There was no dedication of capital. Each of the appellants involved in this project subscribed for one dollar and received a large return.

Consequently, in the opinion of the respondent, the appellants could not realistically hope to hold properties which were highly leveraged as capital investments. Indeed, the sales of the four properties in question took place over a short, 18-month period: Empress Hotel was sold in January, 1986; Arbour Apartments in March, 1987; Whitaker Mills in April, 1987; P.P.W. in June, 1987. According to the respondent, there was a very rapid rise in property values. The market place was the driving force for the appellants. The market value of Arbour Apartments, for example, had exceeded appraisal value. Willing purchasers came forward frequently and eventually a large gain was realized when it was sold.

Thirdly, the properties were held for short periods. Empress Hotel was the shortest. Peterborough Place West was held for approximately 26 months. It was only saleable approximately 18 months ahead of sale. Arbour Apartments was held for 32 months. It was saleable 20 months ahead of sale.

And lastly, the respondent argued that the appellants had hopes of being able to sell at a profit. Resale was the ultimate purpose to their modus operandi. They used appraisals to determine market value. They used the renovation projects so as to earn more on the sale of the properties. They built an income stream and then entertained possible sales.

There was an anticipated $500,000 gain on Time Square. They therefore could afford to forget and sell their other properties. The need to inject equity into Time Square given as reason to sell others was questionable. At time of purchase $500,000 was needed. $150,000 in cash came from the persons involved. $350,000 was from personal loans from CIBC. Guarantees were given by the holding companies, the Cameron, Johnston Building, Capital Court and P.P.W. Really only $150,000 was put up front.

No financial statements in 1986 or 1987 which would show equity put in by shareholders were given to the Court.

If one traces funds $213,700 went from Empress Hotel to shareholders, $135,609 to parties in Whitaker Mills, $244,912 to shareholders in Arbour Apartments, $385,992 in 1987 and $356,592 in 1988 to shareholders in P.P.W. Gains of $1,336,915 went back to the appellants. Scott received $284,000 in fees as shown in his tax returns. A total of $1,621,415 was paid out. Moreover, the law firm of Cameron, Johnston and JSM Management were all the while receiving fees for their services.

Income tax provisions

The appellants rely upon the following Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") provisions, as they read in the 1986 and 1987 taxation years:

Paragraph 3(b) of the Act read:

The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:

(b) determine the amount, if any, by which

(i) the aggregate of

(A) the aggregate of his taxable capital gains for the year from dispositions

of property other than listed personal property, and

(B) his taxable net gain for the year from dispositions of listed personal property, exceeds

(ii) the amount, if any, by which his allowable capital losses for the year from dispositions of property other than listed personal property exceed his allowable business investment losses for the year;

and the amount, if any, determined under paragraph (d) is the taxpayer's income for the year for the purposes of this Part.

Subsection 39(1) stated:

39. (1) For the purposes of this Act,

(a) a taxpayer's capital gain for a taxation year from the disposition of any property is his gain for the year determined under this subdivision (to the extent of the amount thereof that would not, if section 3 were read without reference to the expression "other than a taxable capital gain from the disposition of a property” in paragraph (a) thereof and without reference to paragraph

(b) thereof, be included in computing his income for the year or any other taxation year) from the disposition of any property of the taxpayer other than

The respondent relies further on subsection 9(1) of the Act which read :

9. (1) Subject to this Part, a taxpayer's income for a taxation year from a business or property is his profit therefrom for the year.

Analysis

The determination of whether certain transactions resulted in a capital or income gain is not a simple matter; the Court must decide, based on the appellants’ whole course of conduct and all the surrounding circumstances, what is the correct inference to be drawn. In Cragg v. M.N.R., [1951] C.T.C. 322, 52 D.T.C. 1004 (Ex. Ct.), Thorson, P., stated at page 327 (D.T.C. 1007):

Such a decision cannot depend solely on the number of transactions in the series, or the period of time in which they occurred, or the amount of profit made, or the kind of property involved. Nor can it rest on statements of intention on the part of the taxpayer. The question in each case is what is the proper deduction to be drawn from the taxpayer's whole course of conduct viewed in light of all the circumstances. The conclusion in each case must be one of fact.

In light of this statement, a discussion of all cases cited by both counsel would not be useful; each case falls to be decided on its own merits. Case law has seen the delineation of guidelines or general principles, but there is no single criterion for determining whether a transaction was an adventure in the nature of trade: vide, Taylor, supra.

The general principles involved in assisting in arriving at a decision may be set out as follows:

1. test of primary intention;

2. doctrine of secondary intention;

3. aids in determining the taxpayer's intention

(a) frequency of similar transactions;

(b) nature of the assets;

(c) related business activity;

(d) degree of organization—similar or not to a dealer in such assets;

(e) declared objects if a corporation;

4. capital property as defined in paragraph 54(b) of the Act;

5. jurisprudence.

I do not intend to review the cases which set-out these principles. The important ones have been discussed above. The main consideration is their application to the present appeals.

In the present appeals, the respondent based his arguments on two main features of the taxpayers' transactions:

1. the method of financing; and

2. the fact that two of the ten properties were sold before the closing of the various agreements of purchase and sale.

Although these facts should be considered, the case law is clear that no single criteria is conclusive of the matter and that the totality of the evidence must be assessed before making a determination on the issue.

Furthermore, given that matters dealing with the issue of whether profits are on capital or income account are frequently resolved on the basis of their own facts, legal precedent will only be of some assistance.

The appellants were persons with some knowledge of real estate, but their stated intention for the purchase of the properties in question was investment. Their whole course of conduct confirms this. They went to great lengths to improve upon the profitability of their properties. They investigated the rental market. They converted existing building structures to provide for greater space for rental accommodation. They complied with municipal government requirements. They sent letters and promotional brochures to attract desirable tenants. They made cash-flow projections for each of the properties. They arranged permanent financing for Arbour Apartments and P.P.W. The properties were not listed except for Arbour Apartments.

The crucial question is whether the financial needs of the Time Square project was a plausible reason for the sales of Arbour Apartments, P.P.W. and Whitaker Mills. This explanation for the rapid resales, in my opinion, was plausible and reasonable. Accordingly, the sales of Arbour Apartments, P.P.W. and Whitaker Mills were the realization of capital for the purposes of acquiring a larger capital investment.

The sale of Empress Hotel had no relation to the Time Square project. It was sold, it was suggested, because they ran into unforeseen difficulties with onsite parking and the centre stairwell. These unforeseen difficulties, which would have caused problems with their plans to use CTR financing to convert the building, was, in my opinion, serious enough that they would want to sell the property when an unsolicited and attractive offer was made.

Counsel for the respondent asserted that the decision in Campeau, supra, was applicable to the facts of these appeals. I must disagree. Although the properties in these appeals were almost wholly financed, they could expect to hold on to these properties. The cash-flow projections indicated that there was a realistic hope of holding the properties as capital investments. Moreover, cash-flow problems did not force the sale of properties. It was their purchase of Time Square—a project which required that the appellant shareholders pay off some of their personal indebtedness. In Gagnon, supra, at page 2210 (D.T.C. 478) Tremblay, J., stated “An investment originally intended to be for a long term is not inconsistent with gradual payments on a loan practically equal to the purchase price of the purchased property". In other words, the high level of financing does not preclude a finding of an investment.

The appellants’ conduct in respect of the properties at 816 Lansdowne St., 727 Lansdowne St. and Capital Court—three properties which were held for long periods—indicate that the appellants were interested in investment properties. They earned rental income from these properties for between seven to ten years.

On the balance of probabilities, the evidence indicates that the properties in question were purchased for investment purposes. I find no significant evidence to suggest that there was a secondary intention to trade in real estate. I am convinced that the appellants were not sellers of real estate during the years in question; the appellants’ activities did not amount to an adventure in the nature of trade within the extended definition of "business" in subsection 248(1) of the Act and as interpreted by the courts.

Perhaps if the opportunity to purchase Time Square had not come along, then the status quo of at least the majority of their other properties would have become viable long-term investments. The large amount of financing for Time Square virtually required all the available funds that the appellants could muster. This resulted in the sale of other properties both before and after completion of their plans for certain of these properties.

Conclusion

In my opinion, based on the testimony of Scott, the surrounding circumstances of the purchases and sales of the various properties and the whole course of conduct of the appellants, the gains received from the sale of the four properties in question were capital in nature.

The appellants’ primary intention, as evidenced, in part, by their involvement in the CTR program, was to develop existing properties into rental income-producing capital assets. I am satisfied that holding the properties as rent producing assets was their sole intention. I do not find that, at the time of the purchases, an operating motivation in purchasing the properties in question was to resell them for profit.

For the foregoing reasons, these appeals are allowed, with costs, and the assessments are referred back to the respondent for reconsideration and reassessment.

Appeals allowed.