Blandine Girard L’hérault and Alain L’hérault v. Minister of National Revenue, [1993] 2 CTC 2612, 93 DTC 1108

P.R. Dussault, T.C.C.J.:—So far as the appellant Blandine Girard L’Hérault is concerned, these are appeals from assessments for 1985 and 1987 respectively by which the Minister of National Revenue (the"Minister") regarded as business income rather than a capital gain the profit made on a sale which occurred in each of the years. The year 1985 concerns the sale of a property located on 13th avenue in Charny, Quebec (the “ Charny property"). The year 1987 concerns the sale, by a partnership known as “Les Habitations Char- lesbourg Enr." ("Habitations Charlesbourg") of which the appellant was a member, of three properties located on 2nd avenue in Charlesbourg, Quebec.

So far as the appellant Alain L'Hérault is concerned, the appeal concerns only the assessment for the 1985 taxation year in respect of the sale of the Charny property, of which he was also co-owner. For that year, the appeals of Mr. and Mrs. L'Hérault were heard on common evidence.

The facts assumed by the respondent in assessing Mrs. Girard L'Hérault for 1985 and 1987 are contained in paragraphs 5 (a) to (z) of the reply to the notice of appeal, which reads as follows:

(a) On March 2 1983, the appellant bought as undivided co-owner property located on 13th avenue, Charny (the “ Charny property");

(b) the Charny property was held by the following persons in the following proportions:

Gaétane Delisle	50 per cent
Alain L’Hérault	25 per cent
Blandine Girard-L’Hérault	25 per cent
(c) Alain L’Hérault is the appellant’s husband;

(d) Gaétane Delisle is a real estate agent who has worked in real estate since 1982;

(e) the appellant is familiar with Gaétane Delisle’s expertise in real estate;

(f) Alain L'Hérault has worked as an electrician for Gilles Morin, a real estate broker, who later became the husband of Gaétane Delisle;

(g) Gilles Morin himself referred Gaétane Delisle to the appellant and her husband;

(h) Gilles Morin acted as real estate agent when the Charny property was bought;

(i) Gilles Morin also acted as real estate agent at the time the Charny property was disposed of;

(j) the Charny property was sold on Januar 10, 1985, after being held for only 22 months;

(k) the profit made by the appellant on disposing of the property breaks down as follows:

proceeds of disposition:	$117,000
purchase cost:	94,472
capital gain:	$ 22,528
appellant's share (25 per cent):	$ 5,632

(l) the appellant and the other co-owners purchased the Charny property to resell it at a profit and with the intention of carrying on a business;

(m) during the 1987 taxation year, the appellant participated in the profits and losses of a partnership known as “LES HABITATIONS CHARLESBOURG ENR.” (hereinafter"the partnership"), in which there were 15 partners;

(n) the activity of the partnership, formed on May 20, 1986, was the holding of properties in undivided co-ownership;

(o) the property was administered by a company, "ADMINISTRATION IMMOBILIÈRE MORIN, LACOMBE INC.” (hereinafter"the company”);

(p) the shareholders and the directors in the company were Gilles Morin and Denis Lacombe, both real estate brokers;

(q) Gilles Morin and Denis Lacombe are both partners in the aforementioned partnership;

(r) the partnership purchased three properties on May 20, 1986 through Gilles Morin, who acted as real estate broker;

(s) on October 19, 1987, seventeen months after their purchase, the partnership

received a purchase offer for the three properties through Gilles Morin;

(t) on October 22, 1987 the purchase offer was accepted by the partnership and

the three properties sold by notarial instrument on December 1, 1987;

(u) Gilles Morin saw to the sale of the properties and acted as agent in this respect with the partnership;

(v) in disposing of the three properties, the partnership declared a capital gain of $517,683, calculated as follows:

selling price:	$2,932,019
purchase price:	$2,360,886
commission:	53,450
	2,414,336
	$ 517,683

(w) the appellant holds a share in the partnership with a fraction of 12/192;

(x) the appellant reported $32,355 as a capital gain, that is 12/192 of $517,683;

(y) the appellant claimed a capital gains deduction of $10,478.45 on the taxable capital gain of $15,635 thus reported by the appellant;

(z) the appellant and the other partners purchased the three properties to

resell them at a profit and with the intention of carrying on a business;

[Translation.]

For the purposes of assessing Mr. L’Hérault for 1985, the facts assumed by the respondent are, with the necessary modifications, essentially the same as those stated in subparagraphs (a) to (I) above.

Three people testified: Gilles Morin, a real estate broker, the appellant Blandine Girard L'Hérault and the appellant Alain L’Hérault.

Mr. Morin first explained his function as a broker in the purchase and sale of the two properties which were the subject of the instant case, and in respect of two other properties purchased by Mr. and Mrs. L'Hérault, one at Loret- teville, Quebec, in 1980 and the other at Ste-Foy, Quebec, in 1984. The disposal of each of these properties some six months later for various reasons was not the issue in the case, but the parties referred to them to illustrate the appellants' actions. Each of the sales was explained by the appellants themselves and I will return to this below. For the moment it will suffice to note that Mr. Morin himself contacted the appellants for the purchase of each of the properties which another broker was authorized to sell and with whom he then shared the commission. For the resale, Mr. Morin stated that on each occasion he also found a buyer for the property in question, and to do this he drew on a "bank of clients" who were buyers or sellers of income property, depending on the circumstances. The clients were contacted as necessary by Mr. Morin with the obvious purpose of arranging a deal, since this was how he earned his living. Mr. Morin further explained that he frequently formed groups of people to invest in such properties. Thus, with regard to the purchase of the Charny property, Mr. Morin said that it was he who suggested to Mr. and Mrs. L'Hérault the purchase jointly with Mrs. Gaétane Delisle, who was then his girlfriend and whom he subsequently married. Mrs. Delisle is a real estate agent and as such, according to Mr. Morin's testimony, works exclusively in the field of single-family residential property.

Mr. Morin further testified as to his function in forming a partnership of some 15 persons to purchase the three properties through the partnership Habitations Charlesbourg in 1986. As some individuals, including one Alphonse Bélanger and Yvon Dupuis, as well as corporations controlled by them (collectively known as "Group B” in the partnership contract) had indicated their interest in purchasing these properties but without having all the capital necessary for the investment, Mr. Morin undertook to form another group of some ten people (collectively known as "Group A" in the partnership contract) to complete the financing of the purchase. Mr. Morin himself, Denis Lacombe his partner in his real estate brokerage, several members of the family and certain customers, including Mrs. Girard L'Hérault, formed part of this group. In order to interest these investors in financing 50 per cent of the initial amount required, Mr. Morin himself undertook a feasibility study of the three properties, comprising 98 apartments, for a five-year period. The contract between the partners who were thus divided into two groups, each with a 50 per cent interest, provided for "a general partnership to hold real and personal property as investments, improve it, administer it and rent it". It was to last for 30 months with subsequent tacit reconduction from year to year, unless there was a decision to the contrary by a majority, fixed at 75 per cent of the copartners. In clause XVIII, the contract also contained a right of pre-emption, stated as follows:

On the sale of the property, the group represented by Alphonse Bélanger,” Group B", shall have the first option of purchasing the property on the same conditions as the final offer of a third party. It is agreed that Group B will, at that time, have 15 days to determine whether it will purchase the property at the same price and on the same terms as the final offer made by a third party and accepted by a majority of the co-owners.

‘[Translation.]

It should further be noted that this partnership contract provided for a board of directors of four members, two of which represented Group A and two Group B.

A company in which Mr. Morin and Mr. Lacombe were the leading figures, Administration Morin et Lacombe Inc. [sic], was made responsible for managing Habitations Charlesbourg.

Several problems occurred when the properties were purchased. Mr. Morin noted, first, that the structure of the buildings was in lightweight concrete known as "Siporex", a new material at the time but apparently little used in building construction since then as it made maintenance more expensive. He further noted that the roofing of two of the three buildings had to be redone, that drainage problems also occurred, that additional work had to be done on the swimming pool, and finally that several other assorted jobs had to be undertaken to meet government safety standards. According to Mr. Morin, most of the work, except for some involved in compliance with government standards, was not foreseeable at the time of the purchase and required large additional investments by the partners. As to questions of compliance, he stated that it was known at the time of the purchase that some standards had not been met and that this was in fact the subject of a warranty by the sellers. However, he said, other work also had to be done to meet new standards which, according to him, changed frequently.

To sum up, it was these repairs which seemed endless and the cost of which amounted to nearly $240,000 in 19 months, combined with problems involving the quality of tenants and the high turnover rate, which led to the decision to sell the properties. This decision to sell was apparently taken by the board of directors following the acceptance by Mr. Bélanger, as Group B representative, of the conditions of an unsolicited offer by one Mr. Mathieu. This individual, who Mr. Morin already knew, himself contacted Mr. Morin and said he was interested in purchasing the properties though his liquid funds were limited. Accordingly, in order to be at least partly rid of the properties, Habitations Charlesbourg, while agreeing to sell at a relatively high price, agreed to allow the buyer to increase the amount of the first mortgage to finance the considerable additional work and even, in the circumstances, to retain a portion of the substantial selling price. Mr. Morin further stated that a part of this balance of the selling price was never paid, as the purchaser, Mr. Mathieu, was unable to succeed with his project for the properties bought and this led to his bankruptcy.

The appellant Alain L’Hérault testified as to the transactions involving the Charny property acquired jointly with his wife Blandine Girard L’Hérault and Mrs. Gaétane Delisle in March 1983 and resold in January 1985. He also mentioned investments in two other income properties, one before and the other after the purchase of the Charny property. The first transaction involved a 16-unit property located in Loretteville, purchased jointly with his wife in the fall of 1980 and resold in May 1981. Mr. L'Hérault explained that at the time he had been looking for over a year for a quality property as an investment when the purchase was suggested to him by Mr. Gilles Morin, one of the many real estate brokers he had contacted. According to Mr. L'Hérault, some time later, that is after refusing an initial offer made also by Mr. Morin, the couple changed its mind and decided to resell the property. He said that a number of factors explained this decision, in particular the distance from his residence, the burdensome maintenance and administration requirements, a four-month stay in the hospital which his wife had to undergo during a pregnancy, and at the time the couple already had two children at home, and finally, the fact that he himself decided to go into business working for himself as an electrician.

The Charny property was purchased jointly with Mrs. Delisle some two years later, apparently at the instigation of Mr. Morin. According to Mr. L'Hér ault, he and his wife were still looking for a quality investment to provide them with security for the future. As this time the property was much smaller, having only six units, and there was an agreement as to the sharing of work, with Mrs. Delisle being responsible for collecting rent and administration while he would look after maintenance, the purchase seemed more attractive in the circumstances than that of the Loretteville property in 1980. It may be noted that immediately before this purchase, on Februar 17, 1983, the appellants and Mrs. Delisle registered with the Superior Court registry a declaration of firm name in which the parties stated, inter alia, the following:

. . . we are engaged and will be engaged in the business of purchasing and operating income properties and everything pertaining thereto, under the firm name of: L'Hérault et Delisle enr".

[Translation.]

Another property was purchased by the appellants with Mrs. Delisle. This also was a six-unit property located on St-Louis Street in Sillery. According to Mr. L'Hérault's testimony, the purchase of this property was motivated largely by the prospect of also acquiring the adjoining land in order to build the couple's main residence on it. This residence was in fact built some years later on the desired land, which the appellants succeeded in purchasing shortly after purchasing the property itself. Mr. L'Hérault further stated that it was disagreements with Mrs. Delisle over the management of the St-Louis Street property, and in particular the repairs to be done and the way in which they should be done, that led not only to the sale of this property in 1984 but also that of the Charny property in January 1985. According to Mr. L’Hérault, no offer was solicited and Mr. Morin came with a purchase offer from his own brother, who wanted to have an income property in which he could live himself. It may be noted that Mr. Morin was undoubtedly aware of the relations between the L'Héraults and Mrs. Delisle and once again knew how to turn it to his advantage. Mr. L'Hérault further stated that he had not invested in any other property between 1985 and 1990, except in the family residence built in 1988 on the land adjoining the St-Louis Street property. However, shares in a real estate limited partnership were apparently purchased some years ago. The payment of the purchase price was monthly, spread over a period in excess of ten years. According to Mr. L'Hérault, all these investments were made with a view to obtaining security for the future and the sale of the properties only occurred as the result of special circumstances. Mr. L'Hérault said he preferred investing in real estate rather than a small business, such as a convenience store, since the risks are simply not as great.

The appellant Blandine Girard L'Hérault also testified, first, as to the transactions involving the Charny property the sale of which is the subject of the instant case. She also explained the circumstances surrounding the purchase and sale of the Loretteville property and the sale of the one on St-Louis Street in Sillery. Essentially, her testimony corresponds to that of her husband in that, on each occasion, the purpose was simply to acquire a long-term investment so as to build up a pension fund for the future that was both more profitable than certificates of deposit and, as her husband said, safer than the operation of a small business. Mrs. Girard L'Hérault further stated that it was special circumstances, such as the family situation in 1981 and the disagreements with Mrs. Delisle in 1984 and 1985, which led to the decision to accept the offers which had in no way been solicited but which were made to them on each occasion by Mr. Morin.

The appellant also testified regarding the circumstances surrounding the purchase and sale of her interest in Habitations Charlesbourg. On being approached by Mr. Morin, who said he knew that the L’Héraults had a certain amount of savings, Mrs. L'Hérault said she was interested by the project as a large number of investors had been collected, which made the situation more stable, especially as the properties were to be administered by a management company and this required less staff. On examining the feasibility study submitted, the appellant stated that everything seemed in order and she hoped that once the initial investment was made, “it would run itself”, according to the expression used. She then noted the problems Mr. Morin had already mentioned regarding both the tenants and the buildings themselves, and the three additional investments required of investors in order to make the property meet standards and to correct construction defects. The appellant said she was somewhat upset by the repeated requests for additional money, since this happened at the time the L'Héraults needed money to build the family residence. She said that the project had become a real financial drain and this is what led her to look at matters more closely and to be appointed to the board of directors.

Mrs. L'Hérault also mentioned doubts that were felt as to whether the management company was managing the properties properly. She said everyone was fed up with the problems that seemed endless, and the board of directors’ main concern was to spread out work so as to avoid new demands for money from investors. These were the circumstances in which Mr. Mathieu made an offer and it was submitted by Mr. Morin. Although the offer required a large balance of the selling price to be retained, it was first submitted to Mr. Bélanger who decided to accept it on account of pressure from the group of investors he represented. The other members of the board of directors to whom the offer was later submitted indicated no objections to the sale, as they were apparently quite glad to be rid of what had become a financial burden rather than a profitable investment. According to Mrs. L'Hérault, the high selling price was justified by the risk the partners took, in view of the balance on the high selling price, a balance which was in fact only paid in part considering the failure of the project initiated by the new purchaser, Mr. Mathieu.

In short, according to the appellant, who said she did not know at the outset what the other persons involved in Habitations Charlesbourg intended, this was a long-term investment as such a project could not be started and so many people collected for something that was only short-term. She also said she was in no way influenced by the fact that the partnership contract was for an initial period of 30 months, since it was renewable thereafter from year to year. Further, she said the contract provided for a vote by 75 per cent of the partners in the event of sale.

The appellant also mentioned, as her husband did, the long-term purchase of shares in a limited partnership dealing in real estate. Finally, she noted the purchase with her husband of a small four-unit income property in 1992.

After noting the principle that each case should be examined on its own particular circumstances, counsel for the appellants argued that when several persons are involved in a transaction that may result in a capital gain or in business income what must be determined is the prevailing intent of the group at the time of purchase. He said that intent, with respect to the Charny property, was that of Mr. and Mrs. L'Hérault whose conduct was that of prudent and selective investors seeking a quality property. They bought the property to keep it and the association with Mrs. Delisle, who had some knowledge of the real estate market, does not alter that situation. In his submission, the resale was only contemplated and only occurred because of special circumstances, in particular in this case because of the disagreement with Mrs. Delisle. Counsel for the appellants further submitted that Mr. Morin's presence, acting as broker both in the purchase and resale, is not an indication of a secondary intent to sell at a profit which may have been decisive at the time of purchase, since the resale was never solicited by the appellants and only decided on as the result of special events.

Counsel for the appellants further noted the fact that Mr. Morin, who operates a brokerage business, himself invested in income properties and also drew on his "bank of investors" to form groups for the purchase of properties. On this point, he noted that the courts have recognized that a person may invest in real estate even if he is also engaged in a brokerage business. The Habitations Charlesbourg purchase was in fact the result of the formation of a group of investors including Mr. Morin himself, which the appellant Girard L’Hérault joined in 1987. Counsel further argued that, at the time of her purchase, Mrs. Girard L’Hérault was thinking only of making a good investment in a project which seemed profitable at the outset. Unfortunately, the investors found that they had a defective product and got rid of it, though they first tried to restore the properties to good condition by several additional investments of money. Stressing that, in this case too, what is important is the controlling intent, counsel for the appellant submitted that this intent was that of Mr. Bélanger who, with his group that included Mr. Dupuis, held 50 per cent of the shares in the partnership. Counsel noted that Mr. Bélanger was the principal investor, that it was to him that Mr. Mathieu's purchase offer was first submitted, and finally, that it was he who was the first to decide to sell. Counsel for the appellant also noted that Mr. Morin had described Mr. Bélanger as a capable businessman and investor, but one who had not previously been very active in real estate.

In support of his arguments, counsel for the appellants referred in particular to the decisions in the following cases:

Schillaci v. M.N.R., [1992] 2 C.T.C. 2001, 92 D.T.C. 1648 (T.C.C.);

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

Mohawk Horning Ltd. v. The Queen, [1986] 2 C.T.C. 89, 86 D.T.C. 6297 (F.C.A.);

Lee v. Canada, [1992] 1 C.T.C. 64, 92 D.T.C. 6067 (F.C.T.D.);

Sardo v. The Queen, [1988] 2 C.T.C. 290, 88 D.T.C. 6464 (F.C.T.D.).

For her part, counsel for the respondent noted that the taxpayers' testimony as to their intent must be borne out by the facts and that, in this connection, it is necessary to look at their conduct as a whole in relation to the various tests developed by the courts. In her submission, if the appellants’ various transactions are looked at as a whole there can be no other conclusion than that they only bought each time in order to resell at a profit, or at least with the secondary intent of doing so.

On the transaction involving the Charny property, she pointed out first that it was Mrs. Delisle who had experience in real estate, not Mr. or Mrs. L’Hérault. Mr. Morin's involvement in both the purchase and resale was also noted. Counsel for the respondent further argued that the firm name declaration mentioned above clearly indicates that the L'Héraults and Mrs. Delisle intended to do business as dealers in real estate, in that the statement that they intended to engage in “the business of purchasing and operating income properties and everything pertaining thereto" necessarily includes selling. In her submission, therefore, the declaration contains a very strong inference that the appellants intended to act as dealers in real estate. It is also necessary, she said, to look at how the purchase was financed. Thus, while an initial investment was made in 1983, a second mortgage was registered against the property in 1984 and no explanation could be given by the appellants of the use of the money borrowed. Finally, she emphasized that the disagreement with Mrs. Delisle could have been settled by some means other than the sale of the property. Thus, as it was a good property which provided a return, the L'Hér- aults could have bought back Mrs. Delisle’s share and so kept the property if they had intended to do so. The appellants’ actions therefore indicated, she said, the existence of a secondary intent to resell at the time of purchase.

As regards the transaction involving Habitations Charlesbourg in 1987, in which the appellant Mrs. Girard L’Hérault participated, counsel for the respondent again noted Mr. Morin's involvement as intermediary and his interest not only in making as many purchases and sales possible, but also in earning fees for the management of the three properties. She said Mr. Morin formed a separate group that included himself and another broker (Group A) only to allow Mr. Bélanger and his own group (Group B) to initially acquire a 50 per cent interest in the three properties, on the understanding that he would have the option to eventually purchase the rest of Group A at the same price as that offered by a third party. She noted in this regard the short initial length of the partnership contract, namely 30 months, and also clause XVIII of that contract, which she said provided for resale to Mr. Bélanger at the time the partnership was formed. To this argument, counsel for the appellant replied that the only purpose was to give Mr. Bélanger and his group a right of pre-emption in the event of an offer by a third party. Counsel for the respondent also noted the short length of the management contract for Habitations Charlesbourg, which was set at one year, and the tacit reconduction which only applied thereafter from month to month. She further emphasized the fact that the feasibility study made by Mr. Morin was, in the circumstances, not realistic. Lastly, she noted that several jobs which had to be done and required additional investment could or should have been foreseen at the outset, both by Mr. Morin who did the feasibility study and by the appellant, who said she visited the premises herself. Accordingly, she submitted that these facts showed that the purchase was not made with a view to earning a profit, but really for resale to Mr. Bélanger and his group, who, in her opinion, were the only true investors.

Accordingly, she said, the partnership was only formed to allow Mr. Bélanger and his group to eventually purchase all the interest in the three properties making up the Habitations Charlesbourg. The short length of the partnership contract and of the management contract indicated, she said, that the members of Group A did not wish to make a long-term commitment, but actually intended to arrange for the resale of their interests to Mr. Bélanger and his group within a short period of time. Accordingly, the appellant's purchase was made for the purpose of resale at a profit, or at least with the secondary intent of doing so.

Counsel for the respondent based her arguments in particular on the decisions in the following cases:

Homes Development Ltd. v. Canada, [1990] 2 C.T.C. 496, 90 D.T.C. 6654 (F.C.T.D.);

Leonard Reeves Inc. v. M.N.R., supra;

Sardo v. The Queen, supra;

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

Mohawk Horning Ltd. v. The Queen, supra.

The Court observed to counsel for the respondent that her argument was largely based on the existence of a secondary intent to resell at a profit in the two situations concerned in the appeals, and that this secondary intent was not a fact on which the Minister relied in making the assessment and which was alleged in the reply to the notice of appeal. To this counsel for the respondent answered that the Minister had concluded that the transactions had produced business income and not a capital gain, and that this conclusion did not have to be altered if the Court was persuaded that the evidence clearly indicated the existence of the secondary intent, even if this fact was not mentioned in the reply to the notice of appeal. Referring to the judgment by the Federal Court of Appeal in Riendeau v. Canada, [1991] 2 C.T.C. 64, 91 D.T.C. 5416, counsel for the respondent thus argued that the subject-matter of the appeal is the assessment itself, not the reasons given by the Minister for making it.

In my opinion the principle stated in Riendeau, supra, is not in any way at issue here. The question is actually as to the adequacy of the statement of facts in the reply to the notice of appeal on which the Minister relied in making the assessment, or of the additional facts alleged alternatively in that oral argument in support of the assessment. [1] As to the facts on which the Minister relied in making the assessment, it is well established since the Supreme Court of Canada's judgment in Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182, that it is for the taxpayer to show, on a balance of probabilities, that they are not correct. Further, if additional or different facts are alleged in the reply to the notice of appeal in support of the assessment, it will then be the Minister's duty to present evidence at the same level of credibility. This principle seems to me to be clearly apparent in the following passage from the judgment of Cattanach, J. of the Exchequer Court in M.N.R. v. Pillsbury Holdings Ltd., [1964] C.T.C. 294, 64 D.T.C. 5184 (Exch. Ct.), when he said at page 302 (D.T.C. 5188):

The Minister could, of course, as an alternative to relying on the facts he found or assumed in assessing the respondent, have alleged by his notice of appeal further or other facts that would support or help in supporting the assessment. /f he had alleged such further or other facts, the onus would presumably have been on him to establish them.

[Emphasis added.]

Reference may also be made in this regard to the judgment of Cattanach, J. in Tobias v. The Queen, [1978] C.T.C. 113, 78 D.T.C. 6028 (F.C.T.D.), where at page 6031 he refers to the decision of Gibson, J. in Brewster v. The Queen, [1976] C.T.C. 107, 76 D.T.C. 6046 (F.C.T.D.), which he said was the basis for the last sentence in the passage just cited, taken from his decision in Pillsbury Holdings, supra. Further, it seems to me to follow clearly from the decision in Kit-Win Holdings (1973) Ltd. v. The Queen, [1981] C.T.C. 43, 81 D.T.C. 5030 (F.C.T.D.), that a taxpayer does not have the burden of showing the nonexistence of a fact which does not appear to have clearly been the basis of the assessment and which is also not specifically alleged in the reply to the notice of appeal.

In this connection, there is the following comment by Cattanach, J. at page 56 (D.T.C. 5039-40) of this decision:

If the Minister has failed to allege as a fact an essential ingredient to the validity of the assessment under the applicable statutory provision there is no onus on the taxpayer to disprove that fact for the assumptions which were made do not of themselves support the assessment.

Additionally, in view of the Federal Court of Appeal's judgment in Hiwako Investments Ltd. v. The Queen, [1978] C.T.C. 378, 78 D.T.C. 6281, it may properly be asked whether certain statements made in the second part of a reply to a notice of appeal titled "Statutory Provisions on which the Respondent Relies and the Reasons which he Intends to Submit” may constitute genuine allegations which the appellant must refute. At pages 382-83 (D.T.C. 6284) of that judgment, Jackett, C.J. said the following on this point:

However, it may be, although I doubt it, that it is at least arguable that the allegation in the Statement of Defence of the assumption of the Minister of National Revenue should be read with certain allegations in Part B of the Statement of Defence, which is entitled “STATUTORY PROVISIONS UPON WHICH THE DEFENDANT RELIES AND THE REASONS WHICH HE INTENDS TO SUBMIT", viz:

13. The Deputy Attorney General of Canada states that the plaintiff purchased the said Flemingdon Park property speculatively and for the purpose of trading and turning the same to account at a profit and the plaintiff’s conduct amounted to the carrying on of a business in real property.

15. In the alternative the Deputy Attorney General of Canada states that if the plaintiff purchased the said property with the intention of retaining it as investment property, the plaintiff also had the alternative intention of selling and turning the same to account at a profit in the event that the primary intention did not prove profitable so that in selling the said property the plaintiff realized its alternative intention of deriving profit from the said property and thus the said profit was property included in the plaintiff's income as profit from a business within the meaning of Section 139(1)(e) of the Income Tax Act.

So read, it might be argued that the statement of defence alleges, in the alternative, that the assessments were based on the assumption

(a) that the appellant purchased the property in question "speculatively and for

the purpose of trading and turning the same to account at a profit”, or

(b) if the appellant purchased the property with the intention of retaining it as investment property, the appellant also had the alternative intention of selling and turning the same to account at a profit in the event that the primary intention did not prove profitable.

With reference to the first of these alternatives, it seems clear that the learned trial judge was satisfied on the evidence that the appellant acquired the property to hold it as an investment because he said that he was not persuaded that, when the appellant acquired the property, “its only intention was to hold it as an investment" and also said that “it is most likely that the potential for capital appreciation as well as income was very much in Koch's mind when he bought. . .” [emphasis added]. In my view, the evidence shows, and the learned Trial Judge so holds, that the purchase and sale was not a simple venture in the nature of trade transaction but was, at least in part, an investment in profit producing properties. The onus if any, on the first alternative, was therefore rebutted.

[Alternate plea]

With reference to the alternative plea in the statement of defence, if it may be considered as an allegation of an "assumption". . .

[Emphasis added.]

In the instant case, the specific allegation concerning the intent connected with the Charny property is contained in paragraph (5.1) of Part A of the respondent's reply to the appellant's notice of appeal and reads as follows:

The appellant and the other co-owners purchased the Charny property to resell it at a profit and with the intention of carrying on a business.

[Translation.]

In Part B titled “STATUTORY PROVISIONS ON WHICH THE RESPONDENT RELIES AND THE REASONS WHICH HE INTENDS TO SUBMIT”, the following is contained in paragraph 7:

He submits that the appellant and the other co-owners of the Charny property purchased and sold the said property in the course of an adventure or concern in the nature of trade and that the profit derived from the sale of the Charny property is business income within the meaning of sections 9 and 248 of the Act.

[Translation; emphasis added.]

The respondent's reply to the appellant's notice of appeal regarding the same property is worded in identical language.

As to Habitations Charlesbourg, the specific allegation in Part A of the reply to the notice of appeal is contained in paragraph (5.2) and reads:

The appellant and the other partners purchased the three properties to resell them at a profit and with the intention of carrying on a business.

[Translation.]

In Part B, paragraph 8 reads:

He submits that the appellant and the other partners in the partnership purchased and sold the three properties in the course of an adventure or concern in the nature of trade and that the profit derived from the sale of these three properties is business income within the meaning of ss. 9 and 248 of the Act.

[Translation.]

As we know, a concern in the nature of trade is a "business" within the meaning given to that word in s. 248(1) of the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). First, a taxpayer may purchase property for the purpose of using it in a business or even making it the subject of the operation of a business in the traditional sense. Additionally, he may purchase it for resale in the more limited context of what is described as a "concern in the nature of trade". Taylor v. M.N.R., [1956] C.T.C 189, 56 D.T.C. 1125, is a classic example of this. Secondly, a taxpayer can purchase an income producing property for the primary purpose of making an investment, but also with a secondary intent of reselling at a profit in mind. If that is the case, the conclusion will also be that this is a concern in the nature of trade giving rise to business income. What is referred to as a secondary intent expresses the idea that, at the time of purchasing the property, the taxpayer has in mind the possibility of reselling at a profit and that this possibility is the decisive reason for making the purchase. Of course, several other factors are relevant in determining whether there is a concern in the nature of trade.

In Racine, Demers et Nolin v. M.N.R., [1965] C.T.C. 150, 65 D.T.C. 5098, Noël, A.C.J. of the Exchequer Court described this secondary intent as follows at page 159 (D.T.C. 5103) of the judgment:

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the

purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital.

[Translation; emphasis added.]

This description of secondary intent has been followed in a number of decisions, and in particular in those of the Federal Court of Appeal in Hiwako Investments Ltd., supra, and Crystal Glass Canada Ltd. v. Canada, [1989] 1 C.T.C. 330, 89 D.T.C. 5143. From the foregoing, I consider that the statements in paragraphs 7 and 8 of the reply to the notice of appeal are only arguments or conclusions of law and not allegations of fact, and in particular, allegations of a secondary intent that might have been the basis for the assessments.

As no secondary intent to resell at a profit was alleged, the appellants did not have the burden of showing that it did not exist. Having said that, I have to admit that the foregoing observations are directed more at the reply given by counsel for the respondent to the comment I made at the hearing than at the solution of the issue itself, since I have come to the conclusion that neither of the two transactions is an adventure or concern in the nature of trade. Accord ingly, although I regard the allegations contained in the replies to the notice of appeal as inadequate, I am of the view that the evidence as a whole as presented establishes, on a balance of probabilities, that the appellants did not have the primary purpose of purchasing to resell or the intent to carry on a business. I am also of the view that the appellants have in the same way shown, even though I do not think they had the burden of doing so, that they did not purchase with the secondary intent of reselling at a profit. The question of secondary intent was in fact raised by counsel for the appellant during the examination and by counsel for the respondent in the cross-examination. I see no reason to doubt the veracity of the replies given by the appellants in this regard. Moreover, the circumstances surrounding the purchase and the disposal of the properties in the two cases at issue were explained and the explanations given seem to me quite credible. These circumstances have been described at length above.

However, further comments on some aspects of the evidence should be made regarding the two transactions. I will deal first with that involving the Charny property. As to this transaction, I do not agree with counsel for the respondent about the interpretation that should be given to the firm name declaration registered by the appellants and Gaétane Delisle. Personally, I do not find in it any inference of the existence of an intent to resell at a profit at the time of the purchase or to engage in the business of buying and selling properties. Buying properties to operate them with everything pertaining thereto is a completely different commercial activity from that of buying them for resale. Although this was not the appellants’ first transaction, I still think that they did not purchase with a view to resale. Further, I do not believe that one can attribute to the appellants the intent of another person, who in any case did not testify, simply assuming a particular intent, that to resell at a profit, from the fact that that person was the common law wife of the broker who acted in the purchase and resale of the property and of other properties acquired by the appellants.

As regards the appellant's sale of her interest in Habitations Charlesbourg, there is no question that the wording of the clause in the partnership contract giving Group B a right of pre-emption is not of the best. However, I consider that its purpose was only to give Group B protection in the event of an offer from a third party which 75 per cent of the partners were prepared to accept. Trying to give this clause a literal interpretation would lead to an absurd result. Furthermore, the initial length of the partnership contract, in the context of an association of two groups of investors, does not seem to me to connote carrying on a business. I see this as a means of ensuring stability for the groups of investors for a minimum period, with subsequent reconduction from year to year. Additionally, the discrepancies noted regarding the feasibility study, as well as other aspects stressed by counsel for the respondent such as the poor valuation of the condition of the properties and the need to make costly repairs, are factors affecting all the investors in the two groups. I fail to see how one can infer from this a specific intent to resell at a profit on the part of the appellant or only of Group A, to which she belonged. As to the length of the management contract, this factor is in my opinion simply not relevant. A great deal of emphasis was also placed on the intent of Mr. Bélanger, who was not called to testify. Where it is felt that the true intent of a person who was more active or more concerned than others with a given transaction or project is not clearly expressed in the documents entered in evidence, or that there may be doubts as to certain points of evidence, that person would ordinarily have to testify himself before any suggestion could be made of associating other persons with his true intent. However, in the instant case the argument put forward by counsel for the respondent in her argument is that Mr. Bélanger and his group (Group B) were the true investors and that the appellant and the members of her group (Group A) only purchased with a view to resale. As each group held 50 per cent of the interest in the partnership and as the decision to sell required a 75 per cent majority, it is hard to see how, even on the facts, it would be possible to separate what happened to the two groups. Further, the evidence showed that it was Mr. Bélanger who first took the decision to sell and that the offer was then presented to the other three members of the board of directors, including the appellant, who then concurred in the decision. What is more, this argument by counsel for the respondent contradicts the allegations contained in paragraph (5.2) of the reply to the notice of appeal, that “the appellant and the other partners purchased the three properties to resell them at a profit and with the intention of carrying on a business” [translation]. In view of this allegation and the fact that counsel for the respondent admitted Mr. Bélanger was the leading partner and his intent really was to invest in Habitations Charlesbourg, she cannot now argue that the intent of the other partners, and in particular of the appellant, was different.

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

Appeals allowed.