Les Immeubles M.H.T. Ltée v. M.N.R., [1992] 2 CTC 2326, [1992] 2 CTC 2705

P.R. Dussault, T.C.CJ.:—This is an appeal from a notice of reassessment dated July 4, 1988 with respect to the appellants 1985 taxation year. The only issue is the nature of the profit from the sale of a building situated at 141 est, rue Racine, in Chicoutimi, Quebec, and known as the F. W. Woolworth building. The respondent considered the profit to be an income from business while the appellant argued that it was a capital gain.

For the purposes of the assessment, the respondent relied on, inter alia, the assumptions of fact found in paragraphs 6(a) to (w) of the reply to the notice of appeal, which read as follows:

(a) the appellant was incorporated under Part 1A of the Companies Act on November^ 1983;

(b) the sole director and shareholder of the appellant was Mr. GérardTremblay;

(c) on January 24, 1984, Mr. Gérard Tremblay made an offer to purchase a building situated at 141, rue Racine, in Chicoutimi (hereinafter refused [sic] as the F.W. Woolworth building”). This offer was not accepted by the F.W. Woolworth Co;

(d) in February, 1984, an estimate for renovations to the F. W. Woolworth budding was prepared by Regard 2000 for Mr. Gérard Tremblay, who was considering converting the building into a shopping centre;

(e) in March 1984, an accounting firm prepared pro forma financial statements for Mr. Tremblay for the purpose of assessing several possibilities depending on the cost of acquisition, rents per square foot and occupation rate;

(f) between April and June 1984 the shopping centre project was abandoned;

(g) in August 1984, Mr. Gérard Tremblay learned that the CSST was looking for office space. Various attempts were made to obtain an option to purchase the F.W. Woolworth building in order to be able to submit a tender to the CSST;

(h) on August 31, 1984, the appellant obtained an option to purchase on the F.W. Woolworth building. The option was valid for four months ending on January 7, 1985, and included a purchase price of $900,000;

(i) in September 1984, the appellant submitted a tender for rental of the F.W. Woolworth building by the CSST. This tender covered most of the available floor space in the said building;

(j) in October 1984, the appellant learned that the CSST had refused his offer to rent;

(k) on October 22, 1984, the appellant gave a rental mandate to the Société Immobilière Norbec Inc. with respect to the FW. Woolworth building. That mandate contained the following clause, inter alia:

This mandate will be valid and the commission will be payable only if the company Les Immeubles M.H.T. Inc. or its principal representative Mr. Gérard Tremblay, or another company which has been or is to be incorporated by him, purchases the building situated at 141 rue Racine in Chicoutimi, which is the subject of this mandate.

(l) on December 31, 1984, the appellant notified F.W. Woolworth Co. Ltd. that it was exercising its option to purchase;

(m) on January 25, 1985, the appellant purchased the F.W. Woolworth building for the sum of $900,000 by a notarized contract of sale registered on January 29, 1985 under No. 424236;

(n) on March 6, 1985, the appellant sold the F.W. Woolworth building for the sum of $1,120,000 by a notarized contract of sale registered on March 11, 1985 under No. 425593;

(o) the appellant realized a profit of $275,261 from the sale of March 6, 1985, calculated as follows:

Proceeds of disposition	$1,120,000
ACB	844,739
Profit	$ 275,261

(p) on February 29, 1984, the appellant and 113064 Canada Ltee each purchased an equal share in a building situated at 2469 rue Langelier in Jonquitre (hereinafter referred to as "the Langelier building") for the sum of $531,000;

(q) on December 28, 1984, the appellant and 113064 Canada Ltée sold the Langelier building for the sum of $625,000;

(r) the appellant realized a profit of $36,082 from the sale of December 28, 1984, calculated as follows:

1/2 proceeds of disposition	$312,000
1/2 ACB	276,418
Profit	$ 36,082

(s) during the year in issue, the appellant disposed of a third building, situated on rue Massenet, and realized a profit of $5,420;

(t) on October 9, 1980, Mr. Gérard Tremblay had purchased a building called Place de la Loire for the sum of $1,4500. This building was subsequently rolled over into a corporation he owned, Telesag Inc, which sold this building on December 22, 1982, for the sum of $1,700,000;

(u) on June 10,1983 Telesag Inc. acquired two groups of buildings:

Georges Vanier	$800,000
Des Crécerelles	$455,000

which were sold on February 1, 1984 and November 17, 1983, for $950,000 and $600,000, respectively;

(v) the Société Immobilière Norbec Inc, represented by Mr. Denis de Champlain, has always had the mandate to sell the FW. Woolworth building, and during the period of the option referred to above there were several contacts with potential purchasers;

(w) during the audit, the appellant admitted that the income from the disposition of the Langelier building was income from business.

[Translation.]

Summary of the facts

The Court heard two witnesses: Mr. Denis De Champlain, the representative of La Société Immobilière Norbec Inc ("Norbec"), a real estate broker, and Mr. Gérard Tremblay, an engineer and sole shareholder and director of the appellant corporation, Les Immeubles M.H.T. Ltée ("M.H.T.").

Mr. De Champlain testified that the Woolworth building had been vacant and for sale for about a year when, on November 17, 1983 Norbec obtained the non-exclusive mandate from the F.W. Woolworth Co. Ltd. (“the Woolworth Company") to sell or to rent it. Mr. De Champlain explained that the building was located downtown in an area that had been particularly affected by the recession, since there were then several vacant buildings there and the area itself was at some distance from the shopping centres around which development was then taking place. The asking sale price for this building, which consisted of 60,000 square feet on one floor, plus the basement, was then about $1,000,000. For these reasons, and also the fact that the fixed expenses for the Woolworth building were quite high, Mr. De Champlain stated that he considered the “case” somewhat difficult. He testified that after he placed advertisements in the newspapers and made personal contacts, several potential purchasers indicated some interest but no serious offer was made. Mr. De Champlain said that it was in the context of these efforts that he first met Mr. Gérard Tremblay, whom he knew by reputation as a businessman and investor in the Chicoutimi region. Mr. Tremblay's interest in the Woolworth building was then put into concrete terms when he made an offer to purchase for $650,000 on January 24, 1984. However, on February 8 next, this offer was refused by the Woolworth Company, which was still asking $1,000,000 for the building. Mr. De Champlain explained that after the offer was refused Mr. Tremblay was still interested in developing the building and transforming it into a shopping centre or a" mini-mall” type of centre for various services, and that he, like Mr. Tremblay, who had started to have concept and profitability studies done, was concerned about finding major tenants who would be well patronized so as to likely generate interest among other smaller tenants and make it possible to convert and develop the Woolworth building. Mr. De Champlain further testified that both Mr. Tremblay and himself tried for several months to find major tenants. Mr. De Champlain stated that during that entire period he was in regular contact with the Woolworth Company with whom discussions were continuing. Moreover, on July 20, 1984 Mr. Tremblay sent to Mr. De Champlain, who was representing Norbec, a letter providing an outline of a new proposal which he asked Norbec to kindly transmit to the Woolworth Company. This letter, filed as Exhibit A-6, reads as follows:

I am interested in purchasing the Woolco building located on rue Racine in Chicoutimi, and I am hereby submitting to you an outline of my purchase proposal, as well as the reasons underlying these terms.

As you know, the risk presented by the Woolco building is difficult for an investor to calculate because of several constraints: the general business situation in the downtown area, the high number of vacant premises which puts downward pressure on rents, competition from buildings recently constructed along the boulevard Talbot, the large area of the building, the costs of renovation, which are difficult to assess at the time of purchase

Like any other potential purchaser, I place great importance on these factors, although I am very familiar with the real estate field in Chicoutimi; at present I own several commercial buildings and I am very active in this market.

In view of the foregoing, the essence of my proposal is as follows: I offer to the present owner to seek out serious tenants and sign my own leases with them, on condition that Woolco sublets to me the floor area required by my potential tenants and grants me a one-year option to purchase its building for cash. I would not charge anything for locating tenants. I would receive my profit from the rents

— that is, the sublease that would be granted to me would be on the same terms as those I would require from my tenants. I would undertake to assign my leases to Woolco, without compensation, in the event that I did not purchase the building at the end of one year. As well, the terms of any lease to be signed with any potential tenant would be previously submitted to Woolco for their approval.

At present, I can tell you that I have an opportunity to offer a serious tenant floor space of 20,000 to 24,000 square feet and I am in a position to make offers to two other prestigious tenants. However, you will understand that given the constraints referred to above and the fact that none of these potential rentals have been closed, I can commit myself on the terms set out in this letter only.

If the owner is interested in a proposal of this nature, I am prepared to meet him to clarify and discuss the details of these terms within a short period of time, since the offer to rent 20,000 to 24,000 square feet of floor space must be submitted at the beginning of August 1984.

Yours truly. . ...

[Translation.]

Although Mr. Tremblay's proposition was not accepted by the Woolworth Company, it helped to intensify the negotiations which culminated at the end of August 1984 in a visit by Mr. De Champlain, Mr. Tremblay and his accountant to Woolworth’s Company head office in Toronto. On August 31, 1984, following four days of intense negotiations, Woolworth granted M.H.T. an option, valid until January 7, 1985 at 4:00 p.m., to purchase the Woolworth building for a price of $900,000. The agreement provided for four monthly payments of $6,000, payable on the first days of the months of September, October, November and December 1984, to preserve the right of option throughout that entire period. A sum of $90,000 less the monthly payments already made was to be paid when the option would be exercised. Finally, if the option was exercised, the sale price of $900,000 was to be paid as follows: $250,000 to be paid in cash on signing the deed of sale, this sum to be reduced, however, of an amount of $90,000 paid when the option was exercised. The balance, $650,000, was to be paid at the end of a five-year period, and only the interests at 12 per cent, are to be paid by monthly payments of $6,500 before expiry of the term.

Mr. De Champlain testified that he and Mr. Tremblay then set about interesting two major tenants in the Woolworth building: the Commission de santé et sécurité au travail ("CSST") and the City of Chicoutimi, for the purpose of housing the municipal library there. Moreover, M.H.T. made a detailed tender to the CSST on September 4, 1984 for the rental of an area of 23,000 square feet. However, this tender was refused on October 1, 1984.

On October 22, 1984, Norbec officially received a mandate from M.H.T. to rent the spaces in the Woolworth building which were to be developed, under the name "Les Galeries Racine”. Mr. De Champlain also testified that development of the concept of the commercial centre was then quite advanced, since he was in possession of the architect's plans and had an advertising folder containing the complete information on the planned development, including a detailed draft lease, and so he began to advertise it in a more important way in the newspapers. The plans, the mandate, the sample offer to lease and the sample lease, as well as the advertisements published in the newspapers, were introduced in support of Mr. De Champlain's testimony. The rental mandate given by M.H.T. provided that space would be available for rental at the end of April 1985 and that the commercial centre would open on June 15 of that same year at the latest. We would also note that at that time M.H.T. was committed to carry Out the project only if rental offers covering at least 75 per cent of the floor space were received by December 15, 1984 at the latest. Mr. De Champlain went on to testify as to the efforts he made to rent space, in particular of is meetings with various interested people and the signing of four or five offers to lease, for total floor space of about 15,000 square feet.

On October 30, 1984, after rental advertisements had appeared in the newspapers, a Mr. Bendwell appeared on the scene for the first time. According to Mr. De Champlain, he was at that moment interested in renting, and then quite quickly in purchasing the building. A first proposal to M.H.T., which was considered unacceptable, may have been made by Mr. Bendwell in December 1984, and it was ultimately in January 1985 only that a more serious offer to purchase by Mr. Bendwell was accepted by M.H.T., which had decided at the end of December, 1984 to exercise its option to purchase. The contract of sale of the Woolworth building by M.H.T. to a company controlled by Mr. Bendwell was signed on March 6, 1985.

Mr. Gérard Tremblay testified after Mr. De Champlain. He explained how he had come to be interested in the Woolworth building after being contacted by Mr. De Champlain. He described his negotiations, the initial offers and, finally, the option obtained from the Woolworth Company, the studies and other steps taken with respect to converting and developing the building as a commercial centre, and the efforts made to attract major tenants, in particular the CSST and the municipal library. He explained how, after the CSST's refusal of the tender at the beginning of October, 1984, he officially gave a mandate to Mr De Champlain to rent the premises, while still pursuing his personal efforts at City Hall to rent space to house the municipal library. He also described the studies, the architect's plans, the advertising folders and the advertisements prepared at his request with the ultimate aim of developing and operating the building. With respect to the circumstances surrounding the exercise of the option, and the purchase and resale of the building to a company controlled by Mr. Bendwell in March 1985, Mr. Tremblay explained that from the moment he acquired the option from the Woolworth Company at the end of August 1984, the building had never been put up for sale, that on the contrary he was pursuing his primary intention of turning it into a commercial centre in trying, as many other local businessmen, to revitalize this disadvantaged sector of the rue Racine. His view was that this development was part of his plans to operate commercial buildings; companies which he controlled already owned three other buildings of this nature in a more successful area of the same street.

Mr. Tremblay further testified that the contact with Mr. Bendwell was established through Mr. De Champlain, as a result of the advertising in the newspapers for the rental of space in the building. While admitting that Mr. Bendwell had appeared on the scene before he had himself decided to exercise the option at the end of December, 1984, Mr. Tremblay stated that no acceptable proposal had been made before January, 1985, and that Mr. Bendwell had also not appeared to him to be very serious at the outset.

Mr. Tremblay explained the fact that he had exercised the option on December 31, 1984 by saying that it expired on the following January 7 and that he then had to make a decision despite the fact that rentals had not progressed as anticipated. At that moment, four future tenants had made a deposit and there were negotiations with some 15 others whom Mr. Tremblay described as "serious" for the rental of small areas of floor space. He testified that at that time it seemed possible to rent 40 per cent to 50 per cent of the floor space in the building. As well, the negotiations with the City of Chicoutimi concerning the municipal library were progressing, since the Council had just retained an architect to do a preliminary study in relation to locating the library in the Woolworth building. Thus, while 75 per cent of the floor space had not been rented at that moment, Mr. Tremblay believed that the condition as to M.H.T.'s commitment to carry out the plan and to provide rental spaces was only a protection against potential tenants and in no way prevented him from making a decision to carry it out in any event. Mr. Tremblay also noted that $20,000 had been expended at that point on legal and accounting fees, including fees relating to the preparation of the tender to rent to the CSST, and that $24,000 had also been paid to preserve the option right until it was exercised. He said that the fees for the preparation of the renovation and architectural plans were ultimately assumed by the new purchaser who went ahead with the development of the building as planned.

Mr. Tremblay also testified as to his experience and his track record in the real estate field., His first investments, made through companies which he controlled, were made in 1980 when he purchased some residential unit buildings which were resold in 1982, when they were 25 per cent vacant. An unsolicited offer from a promoter of a limited partnership provided him with an opportunity to make a significant profit, and so he was in a way happy to get rid of it. Other residential buildings were also resold to the same promoter after being owned for a short period in 1983 and 1984, and without any offers being solicited; the explanation provided as to the motives for reselling was the same: the significant profit realized. Mr. Tremblay also admitted that M.H.T. had acquired a 50 per cent interest in an apartment building on rue Langelier in Jonquière with the express purpose of immediately putting it back up for sale at a much higher price. If that price had not been obtained within 11 months it was agreed that M.H.T.'s interest would be purchased on the same terms by the other corporation which also owned a 50 per cent interest in the building. Mr. Tremblay's explanation on this point was that this was a residential unit building which the National Bank had repossessed and in which M.H.T. had acquired a 50 per cent interest in order only to assist temporarily to finance the other corporation whose principal shareholder was interested in forming a limited partnership in order to repurchase the building shortly thereafter. Mr. Tremblay stated that he was at that time no longer interested in investing in residential buildings, since the ones he had purchased before had all been resold by then. He testified that he was at that moment interested rather in developing and operating commercial buildings and that the corporations he controlled owned at that time three other buildings of this nature on rue Racine. One of those buildings is still owned by a corporation controlled by Mr. Tremblay, while the two others were kept for five and seven years, respectively. Mr. Tremblay also stated that he had never solicited offers for the buildings sold, but that, like any other businessman, he did not hesitate to sell them when it seemed to him to be advantageous to do so.

Some 19 exhibits, many submitted en Haïsse, were filed in support of the testimony given by Mr. De Champlain and Mr. Tremblay; they included, inter alia, offers, contracts, renovation plans and rental advertisements. Exhibit A-18, which was filed in support of Mr. Tremblay's testimony, is a list showing a summary of the cost of the rental buildings and the gross income of the corporations controlled by him from August 31, 1982 to August 31, 1991. This list indicates the following changes in the two factors in question:

The appellant's position

The appellant's position is essentially that the sale of the Woolworth building by M.H.T. in 1985 to a company controlled by Mr. Bendwell gave rise to a capital gain and not to business income. Counsel argued that in this type of transaction we must primarily examine the subjective intention of the taxpayer at the moment of acquisition. We must then study the facts, both before and after the acquisition, in order to determine whether they are compatible with that intention. Counsel for the appellant submitted that in a situation involving an option to purchase, the intention of the taxpayer must be determined at the moment the option was acquired, and not the moment it was exercised, since the taxpayer acquires a right with respect to the building at the moment when an irrevocable option is granted to him. Thus, according to counsel, it appears to be clear in this case that M.H.T. did not, on August 31, 1984, the date of the option, have any intention of acquiring the Woolworth building in order to resell it at a profit, and that there could have been no such intention even on December 31, 1984, when the option was exercised. The primary intention, he argued, was to acquire a right in the building with the aim of redeveloping it and operating it as a rental commercial building. In support of his position, that the taxpayer's intention must be considered as of the moment when an option is acquired and not when it is exercised, counsel for the appellant referred to the following decisions:

Thom and Thom v. The Queen, [1979] C.T.C. 403, 79 D.T.C. 5324; Grenier et Frères Ltée v. M.N.R., [1979] C.T.C. 2021, 79 D.T.C. 5;

The Queen v. Ginakes Brothers Ltd., [1977] C.T.C. 18, 77 D.T.C. 5023;

Westcon Engineering Contractors Ltd. v. The Queen, [1977] C.T.C. 567, 77 D.T.C. 5398;

Snell Farms Ltd. v. The Queen, [1991] 1 C.T.C. 5, 90 D.T.C. 6693.

Counsel for the appellant acknowledged that the facts are particularly important in this type of case, and emphasized the fact that the actions of Mr. Tremblay, acting on behalf of the appellant, were those of an experienced investor in the circumstances, and that his conduct was essentially dictated by prudence, since the acquisition of the Woolworth building was a risky investment in an area of the city which was rather abandoned at that time. He submitted that the fact that the Woolworth building had been vacant for a long time and that there had been no serious offers before the one made by M.H.T. showed that resale at a profit could not have been seriously contemplated as a motive for the acquisition. The other facts that counsel for the appellant considered to be important in the circumstances were that from the moment when M.H.T. acquired the option, no offer for resale was solicited, that the payment made by M.H.T. represented a substantial portion of the acquisition price and that financing the balance over five years was prudent in the circumstances. Counsel also emphasized the fact that while some residential buildings had been acquired and resold after M.H.T. had owned them for a relatively short period, the approach adopted by Mr. Tremblay and the companies he controlled, including the appellant, was to divest himself of the residential buildings and to invest rather in commercial buildings which were then held for relatively long periods of time. Counsel for the appellant further noted that Mr. Tremblay or the companies he controlled never solicited offers for the purpose of reselling the buildings acquired, but that Mr. Tremblay, like any other investor, did not hesitate to decide to resell when an at active offer was made, providing him with a significant profit. Counsel for the appellant also recalled that it has been recognized on many occasions that a taxpayer may have two different approaches to real estate transactions, and thus, while he may be looking for a quick profit in some transactions, this in no way prevents him from behaving like a true investor concerning other transactions. Counsel submitted that in this case Mr. Tremblay's overall conduct in relation to the commercial buildings acquired by the various companies he controlled was definitely the conduct of an experienced and prudent investor seeking to make his investments profitable, and that this was the course of conduct he adopted in relation to the transaction involving the Woolworth building.

Finally, counsel for the appellant noted that the respondent did not allege the secondary intention of reselling at a profit as a determinative factor which motivated the appellant to acquire the Woolworth building, and accordingly that the appellant did not have to prove that such intention did not exist.

Counsel for the appellant referred to the following decisions in support of his argument:

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

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

Woodbine Developments Ltd. v. The Queen, [1984] C.T.C. 616, 84 D.T.C.

6556;

Les Placements Richard Martineau Ltée v. M.N.R., 91 D.T.C. 1212;

Sorokin, M. v. Canada, [1991] 1 C.T.C. 139, 91 D.T.C. 5041;

Crystal Glass Canada Ltd. v. Canada, [1989] 1 C.T.C. 330, 89 D.T.C. 5143;

Bead Realties Ltd. v. M.N.R., [1971] C.T.C. 774, 71 D.T.C. 5453;

Sharon Mills Developments Ltd. v. The Queen, [1983] C.T.C. 384, 83 D.T.C.

5420;

Cappucitti et al. v. The Queen, [1986] 2 C.T.C. 184, 86 D.T.C. 6403;

Grouchy v. Canada, [1990] 1 C.T.C. 375, 90 D.T.C. 6267;

Lampard v. M.N.R., [1986] 1 C.T.C. 2562, 86 D.T.C. 1422;

Radiant Properties Inc. v. M.N.R., [1992] 2 C.T.C. 2135, 91 D.T.C. 1005;

The Queen v. Bassani, [1985] 1 C.T.C. 314, 85 D.T.C. 5232;

Hillsdale Shopping Centre Ltd. v. M.N.R., [1981] C.T.C. 322, 81 D.T.C. 5261;

Kit-Win Holdings (1973) Ltd. v. The Queen, [1981] C.T.C. 43, 81 D.T.C. 5030;

Hiwako Investments Ltd. v. The Queen, [1978] C.T.C. 378, 78 D.T.C. 6281;

Racine, Demers and Nolin v. The Queen, [1965] C.T.C. 150, 65 D.T.C. 5098;

Dubroskay v. M.N.R., [1973] C.T.C. 2085, 73 D.T.C. 74;

The Queen v. Stan fold Investment Corp., [1974] C.T.C. 19, 74 D.T.C. 6035;

Choice Realty Corp. v. The Queen, [1978] C.T.C. 613, 78 D.T.C. 6415;

Dobrovsky v. M.N.R., [1970] C.T.C. 403, 70 D.T.C. 6278.

The respondent's position

Counsel for the respondent noted first that the issue of whether a transaction gives rise to a capital gain or to business income is essentially a question of fact, and that it is important to examine a whole set of tests, none of which has been recognized as determinative in the voluminous case law on the subject. Among the factors to be considered, he referred to the taxpayer's intention at the moment of acquisition, the reasonableness of that intention, the change of intention, the taxpayer's experience, the financing of the acquisition, the length of time it was held, the reason for the sale and the nature and quality of the property acquired.

Counsel for the respondent suggested, with respect to the moment when the taxpayer's intention is to be examined, that the decisions to which counsel for the appellant referred do not establish the principle that the intention must be examined at the moment the option was acquired, rather than at the moment it is exercised. He argued that these decisions must be distinguished in that in several of the situations in issue, the taxpayer obtained an option to purchase solely in order to protect an existing business or, if you will, its source of income, which was not the case herein.

Counsel for the respondent then reviewed each of the tests referred to, arguing that Mr. Tremblay's intention and thus the intention of the appellant was to purchase and resell at a profit, and that this intention was obvious at the time of the first offer made to the Woolworth Company in January 1984. Counsel for the respondent then argued that the history of the sales of residential buildings in the preceding years by Mr. Tremblay or by the companies he controlled establish a course of conduct, for a person of his experience, which was continued in relation to the transaction in respect of the Woolworth building. Counsel argued that this intention did not change, and that all the steps taken were done for the sole perspective of resale. The financing of a significant portion of the purchase price by the vendor, the Woolworth Company, over a five-year period with repayment of the capital at the end of that period, as well as the very short period of ownership, also confirm that this was a short-term venture by an experienced person. The fact that the option was exercised in December 1984 at a time when the redevelopment plan had not progressed very far, and that M.H.T. had assurances of only a few minor tenants, also indicated, in his view, that the project was speculative in nature from the outset. With respect to the fact that the municipal library might have become a major tenant, counsel for the respondent submitted that M.H.T. was no farther ahead in December than in August 1984, since the only development that had occurred was that the council of the city of Chicoutimi had agreed in December to have a preliminary study done on the possible redevelopment of the Woolworth building, and a limited mandate had been given to an architect for that purpose.

With respect to the legal and accounting fees incurred by M.H.T., counsel argued that they were incurred primarily for the purposes of the rental tender to the CSST in September, 1984, and that the other costs incurred in relation to the conversion and redevelopment of the building, including costs incurred for architectural and renovation plans, were transferred to the new purchaser. Counsel also believed that in reality no significant funds were invested by M.H.T. Finally, counsel submitted that if the option to purchase was exercised by M.H.T. at the end of December, 1984 it was not because the company had any assurance of major tenants, but because an agreement had probably already been made with the future purchaser before that moment.

Analysis

If there is one constant element in the voluminous case law concerning the distinction between a capital gain and a business income, it is the fact that each case must be examined in the light of its own circumstances. On this point, it has often been said that the jurisprudence established on the basis of different situations was therefore of quite limited scope.

It has also been clearly established that an appellant does not have the burden of proving that a fact on which the Minister did not rely in making his assessment, and further not alleged in the pleadings, does not exist. On this point, we may refer to the decisions cited by counsel for the appellant, in Kit Win Holdings, supra, Hillsdale Shopping Centre, supra, and Bassani, supra. In this present case, since the secondary intention of reselling at a profit was not alleged by the respondent in his reply to the notice of appeal as a determinative factor which motivated the appellant to purchase the Wool- worth building, the appellant did not have to lead evidence that there was no such intention. This being said, the appellant nonetheless has the burden of showing, on a balance of probabilities, that its primary intention or true intention was to acquire the Woolworth building in order to redevelop and operate it as a commercial centre, and not in order to resell it at a profit. As we know, numerous tests have been proposed by the courts over the years as guides in examining the facts submitted in evidence, in order to reach a conclusion in respect of this distinction, which appears clear enough but which is difficult to apply, since it rests primarily on the subjective element of the taxpayer's intention at the moment a property is acquired. In examining all of the facts of a given situation which appears to be at the limit of the distinction, the taxpayer's true intention is often difficult to determine, and the extent to which his or her testimony is found to be credible on this point takes on great significance. Moreover, by examining a taxpayer's overall conduct, not only in this given situation but also in a more general way, we may verify whether this conduct is compatible with what the taxpayer maintained in his or her testimony, and thus determine the probability that there was a specific intention in respect of a particular transaction.

Counsel for the appellant argued that in a situation in which a taxpayer obtains an option to acquire a property, we must examine his or her intention at the moment when the option is acquired, and not at the moment when the property itself is acquired, that is, when the option is exercised. On this point, he referred to the decisions in Thom and Thom, supra, Grenier et Freres Ltée, supra, Westcon Engineering and Contractors Ltd., supra, and Snell Farms Ltd., supra. However, no reference was made to the decision of the Supreme Court of Canada in Hill-Clark-Francis Ltd. v. M.N.R., [1963] C.T.C. 337, 63 D.T.C. 1211, which dealt with the sale of shares acquired after an option was exercised, and from which it clearly appears that the crucial moment is when the property subsequently resold is acquired. That moment is when the option is exercised. While this aspect has no impact on my decision, in that in my opinion the evidence established that the intention was to acquire the Woolworth building in order to transform it and operate it, both at the moment the option was acquired and at the moment it was exercised, I consider it useful to note that this decision was accepted as being authoritative on this point by Judge Bonner of this Court in Airway Acceptance Corp. v. M.N.R., [1986] 1 C.T.C. 2259, 86 D.T.C. 1212, which dealt with a similar problem and where he concluded, at page 2262 (D.T.C. 1214):

The“ moment of purchase” of the land to which reference is made in the jurisprudence is the moment when the taxpayer becomes legally bound to buy. In this case it was the moment when the option was exercised. The appellant did not at that moment bind itself to buy in order to carry out an intention to acquire the land for use as a site for its business. The decision of the Supreme Court of Canada in Hill-Clark-Francis Ltd. v. M.N.R. ([1963] C.T.C. 337, 63 D.T.C. 1211) affirming the decision of the Exchequer Court ([1960] C.T.C. 303, 60 D.T.C. 1245) is determinative.

Moreover, the same principle was stated in the decision of the Federal Court-Trial Division in Western Wholesale Drug Ltd. v. The Queen, [1977] C.T.C. 1, 77 D.T.C. 5021, this time in circumstances dealing not with an option, but rather with an offer to purchase, Mahoney, J. nonetheless held, at page 3 (D.T.C. 5023):

It is the intention of the purchaser of an asset when he acquires it that is crucial to the question whether that asset is an investment or stock in trade. The time of acquisition cannot antedate the moment that the purchaser becomes firmly committed to the essential terms of the purchase.

Similarly, the decision of Jackett, J. in Warnford Court (Canada) Ltd. v. M.N.R., [1964] C.T.C. 175, 64 D.T.C. 5103, established that the intention of a purchaser becomes significant at the moment when the contract becomes legally binding on him or her, and not when title to the property acquired passes. In my opinion, the option granted to M.H.T. in this case must not be confused with the actual acquisition of the property. The option merely confers an irrevocable right to acquire property in the future, and it is the exercise of the option which constitutes the acquisition, since it is only at that moment that there is a legally binding obligation on the taxpayer.

As I have already indicated, I find that the true intention of Mr. Tremblay, and accordingly of the appellant, at the moment the option was exercised on December 31, 1984, was to acquire the Woolworth building in order to transform it and operate a commercial centre. Mr. Tremblay’s testimony, which was supported by Mr. De Champlain's testimony, was unquestionably to that effect. The decision to exercise the option at that point, when it was expiring several days later, appears to me to be compatible with the steps taken and studies done up to that point, and with the efforts made to rent the space. The decision which was finally made on December 17, 1984 by the City of Chicoutimi, to have a preliminary evaluation done concerning the possibility of housing the municipal library in the Woolworth building, also confirms the steps taken in that sense. The expenditures of about $20,000 already incurred for legal and accounting fees, inter alia, for studies of costs and preparation of the tender to the CSST, as well as the $24,000 paid for the option, in my opinion fully justified pursuing the plan and putting it into concrete effect by exercising the option, despite the fact that the level of assurance in terms of rentals had not yet attained the objective which Mr. Tremblay had at first set for himself. The actual location of the building in what was at the time a rather disadvantaged area, the fact that it had been vacant for a relatively long period of time without having received really serious offers, and finally, the condition of the building, which required major renovations, appear to me to be additional factors which make the suggestion that this was from the outset a concern in the nature of trade or a speculative concern unlikely.

The unexpected arrival of Mr. Bendwell and his interest in acquiring the building before the appellant had exercised the option might perhaps have given him the additional idea that he might resell the building if the development plan did not turn out as planned. However, what I would see as having been nothing more than a mere possibility at the moment the option was exercised did not take on the determinative character which must characterize the secondary intention, as that concept has been explained by our courts, particularly since the decision in Racine, Demers and Nolin, supra. Moreover, as I have noted, such intention was not even alleged by the respondent.

Finally, I come to the consideration of the other real estate transactions as indicative of a taxpayer's course of conduct. While in prior years and on one other occasion during the year in question Mr. Tremblay and the appellant bad divested themselves of unit residential buildings after owning them for a short period, the approach they elected to take, to invest in commercial buildings which appeared to be more profitable, must be noted. The summary of investments submitted in support of Mr. Tremblay's testimony, and to which reference was made earlier, speaks volumes on this point. While we find the increase of the cost of the buildings acquired between August 31, 1982 and August 31, 1984, to have nearly doubled, and a slight decrease between August 31, 1984 and August 31, 1985, nonetheless we find a constant increase in gross rental income despite this decrease in the cost of the buildings between August 31, 1984 and August 31, 1985. These figures, and the figures for subsequent years, show not only an intention to increase assets overall, but also an intention to improve the profits substantially. In this context, the decision by any investor to sell certain assets in order to acquire more productive ones does not transform a transaction which consists in liquidating an asset into a concern in the nature of trade.

Moreover, I would add that it has been clearly established, inter alia, in Lampard, supra, and Radiant Properties Inc., supra, that a taxpayer may have two different approaches to the ownership of assets consisting in real property, and that the fact that he or she previously acquired a property in order to resell it at a profit does not mean that all subsequent transactions by the taxpayer must be considered as giving rise to a business income rather than to a capital gain.

In my opinion, the testimony and documents submitted in evidence, as a whole, establish on the balance of the probabilities that when he acquired the Woolworth building the appellant had the intention of redeveloping it and operating it as a commercial centre, and not the intention of reselling it at a profit.

Accordingly, the appeal is allowed and the assessment is referred back to the respondent for reconsideration and reassessment, the whole with costs.

Appeal allowed.