Laurent J. Deshaies Inc. v. Minister of National Revenue, [1992] 2 CTC 2815, 92 DTC 2333

Tremblay, T.C.C.J.:—Decision was reserved on this appeal on July 14, 1988. Evidence was heard on May 13,1987 in Montreal, Quebec, and written submissions were filed subsequently. The last information from the parties was received by the Court on July 14, 1988.

1. The Point at Issue

The point at issue is whether the appellant, a company engaged in the construction and sale of residential properties, is correct in considering the profit from the sale of two income properties which it had owned for a very long time to be a capital gain: $87,350 in 1978 and $79,238 in 1979.

The appellant argued that a lack of liquidity and a need to reduce long-term debt compelled it to sell the properties, which it had owned since 1971. It paid the long term debt with the proceeds of the sale. It therefore included in its income half of the profit realized.

The respondent considered that the profit is income from a business and therefore added an amount equal to the amounts already included by the appellant. The respondent argued that from 1969 to 1977 the appellant has always considered the apartment buildings it owned as inventory. Moreover, from 1968 to 1979, the appellant sold 16 apartment buildings that it had built.

According to the respondent, the sales that took place in 1978 and 1979 are therefore not isolated sales, particularly since subsequent to the years in issue two other apartment buildings were built and resold within a short time.

2. The Burden of Proof

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

2.02 In the same judgment, the Court held that the facts assumed by the respondent in support of the assessments or reassessments are also presumed to be true until proved otherwise. In the present case, the facts presumed by the respondent are described in subparagraphs (a) to (n) of paragraph 11 of the respondent's reply to the notice of appeal. That paragraph reads as follows:

11. In assessing the appellant as he did for the 1978 and 1979 taxation years, the respondent relied on the following facts, inter alia:

(a) during the 1978 and 1979 taxation years, the appellant had operated a business in the fields of residential property construction and sales [denied by the appellant];

(b) between 1968 and 1970, the appellant acquired several lots with the aim of constructing apartment buildings thereon, which were to be sold subsequently [admitted by the appellant];

(c) between 1968 and 1971, the appellant constructed nineteen apartment buildings, which were sold over the years [denied by the appellant];

(d) with respect to the taxation years prior to the years in issue, that is, the years from 1969 to 1977, the appellant always considered the apartment buildings it owned as inventory, and even reported the profits realized upon the sales of apartment buildings which occurred during 1973 and 1974 as income from a business [denied by the appellant];

(e) prior to 1978, the appellant also participated in constructing and selling numerous single-family or duplex houses [denied by the appellant as formulated];

(f) from 1968 to 1979, the appellant sold 16 apartment buildings which it had constructed, as indicated in Table A [not reproduced], attached to this reply as an integral part hereof [denied by the appellant as formulated];

(g) during the 1978 taxation year, the appellant disposed of two buildings, identified as being at the following addresses:

110-120-130 Sirois St., Trois-Rivières

140-150 Sirois St., Trois-Rivières

[admitted by the appellant];

(h) in disposing of these two properties, the appellant realized the following profits:

	110-130 Sirois	140-150 Sirois TOTAL
Sale price	$304,322	$210,000	$514,322
LESS
Adjusted cost base	187,810	128,155	315,965
Outlays and expenses			23,696
TOTAL PROFIT REALIZED			$174,661
[denied by the appellant as formulated];

(i) during the 1979 taxation year, the appellant disposed of an apartment building known and designated as being situated at 4405 to 4425 Ste-Marguerite Rd in Trois-Rivières, and realized the following profit on that disposition:

Sale price	$345,000
LESS	186,425
Adjusted cost base
Outlays and expenses	100
Total profit realized	$158.475

[denied by the appellant as formulated];

(j) the transactions carried out during the 1978 and 1979 taxation years do not constitute isolated transactions [denied by the appellant];

(k) subsequent to the years in issue, the appellant constructed two other apartment buildings, being the buildings situated at 5720 to 5750 Marion St. in Trois-Rivières West and at 1055 to 1085 Côte Richelieu also in Trois-Rivières West, which it sold during the year in which they were constructed: in 1981, for the building on Marion St., and in 1982, for the building on Côte Richelieu [denied by the appellant];

(l) when the appellant undertook construction of the apartment buildings sold during 1978 and 1979, it was with the primary, or at the very least the secondary intention of selling the buildings at a profit when they were completed [denied by the appellant];

(m) while its apartment buildings were being constructed, during the taxation years from 1968 to 1970, the primary object of the appellant was to work as a contractor constructing apartment buildings and to engage in the business of selling the buildings thus constructed [denied by the appellant as formulated];

(n) all of the profits realized by the appellant on the sale of the buildings in issue during the 1978 and 1979 taxation years constituted income from a business to the appellant and had to be included as such in its income, for each of these years [denied by the appellant];

[Translation.]

3. The Facts

3.01 The appellant's first witness, Laurent Deshaies, testified as follows:

3.01.1 The witness, who was born in 1934 and whose father was a man who had a general contracting business in construction in Trois-Rivières, Quebec, started working with him at a young age. After the death of his father in 1956, the witness continued his business, specializing in bricklaying, and moved into constructing small ten-unit apartment buildings with the aim of reselling them.

3.01.2 The appellant company was formed in 1966. The witness owned 98 per cent of the shares. The letters patent (Exhibit 1-2) provided that the company had the power, inter alia/' to carry on the business of general contractors and also . . . in general to carry on business . . . in all sorts of construction materials” [Translation].

On the first page of its T-2 returns for the 1970 to 1977 taxation years, the appellant reported under the item “type of business” that it was a "general contractor” or "construction contractor" [Translation].

For 1978, 1979, 1980 and 1981, we find the following:

Construction and rental of buildings. (Exhibit 1-1)

[Translation.]

3.01.3 The appellant continues with the construction of small 10-unit apartment buildings. It then reduces the size to eight units. Thereafter, in about 1969, it also constructed 16- and 24-unit buildings as well as another building of 32-units. Up to 1971, in fact, it constructed twelve eight-unit apartment buildings, two 16-unit buildings, five 24-unit buildings and one 32-unit building. In 1971, it constructed buildings bearing municipal numbers 165-175 (No. 14 on the respondent's Table A, cited in paragraph 2.02) on Garceau Street in Trois- Rivières ("T.-R."). The first was sold in 1974. After 1971, the appellant stopped constructing this kind of building, demand for it having fallen off considerably.

3.01.4 Starting in 1972, the appellant decided to move into building singlefamily houses for resale. To that end, it purchased a large piece of property. In 1987, the appellant was again building single-family houses. From 1978 to 1982, because of problems in selling them, it had to rent out some ten single-family houses and seven or eight duplexes with the aim of waiting for the right time to sell them (transcript, pages 151-53).

3.01.5 In about 1982, after having purchased a lot from the appellant, the witness had it construct two 32-unit apartment buildings at cost price plus ten per cent. By thus taking advantage of Class 31 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act"), he wished to provide himself with some security, a pension fund. These two buildings (one on Marion St. (T.-R.) and the other on Côte Richelieu (T.-R.)) appear as numbers 20 and 21 on the respondent's Table A, cited at the end of paragraph 2.02. Two loan certificates issued by the Central Mortgage and Housing Corporation in the name of the witness personally, relating to these lots, are filed en liasse as Exhibit A-1. They are dated March 13, 1981 and October 16, 1981. The agreements between the appellant and Mr. Deshaies were filed as Exhibits A-2 and A-4, along with a photocopy of the minutes, as Exhibits A-3 and A-5 (transcript, pages 23-34).

3.01.6 The 16-unit buildings are more cost effective than two eight-unit buildings: the cost of constructing 4 1/2 room apartment buildings is, in fact, lower because only one concrete wall is required between two eight-unit buildings instead of two insulated walls. Moreover, only one furnace room is needed. The same is true for a 24-unit building. In fact, it is three blocks of eight apartments stuck together [translation] "you save four insulated walls with two cement block walls. . ." and so on. He also constructed a 32-unit building (transcript, pages 39-42).

3.01.7 When the appellant started constructing 16-, 24- and 32-unit apartment buildings, the idea was [Translation] "to keep them for security later on”. That is, first, with the equity accumulating over the years it would be a base asset for obtaining credit from financial institutions. Second, [translation]" . . . we also have the advantage of profiting from inflation” the value of the properties went up two per cent and then three per cent, and now four per cent per year (transcript, pages 42-43).

3.01.8 During the period when it was constructing its buildings, the appellant had no difficulty in renting the apartments. People were even reserving units before construction was finished (transcript, page 48). The business was managed by the witness himself and by his family members (his wife, his brothers, and so on) (transcript, page 49).

3.01.9 The buildings which are the subject of this appeal were never listed for sale. The appellant never needed real estate agents. Agents, like investors, would telephone him to know whether the buildings were for sale. On this point, the witness states:

. . . I never wanted to sell my apartment blocks. Particularly those large ones. The ten-units, fine, it was built to be sold, but the 16-units, 24-units, 32-units, I always considered them as housing . . . an investment for the long haul, security for later, to live with it, without knowing today . . . with the possibility of branching off on both sides to have other businesses elsewhere. It was fundamentally on that.

Q. And so had you already tried to sell or have them sold?

A. Absolutely not, absolutely not. My company sold because I decided to myself, 110, 120, 130 and 140-150 Sirois St. were because I was approached many times and then it was the attraction of the profit, to come out with a nice bundle, a nice amount of money in hand to invest in the trucking business, Trois-Rivières White Truck (transcript, pages 51-52).

[Translation.]

3.01.10 In 1978, two individuals, Messrs Canuel and Bernier, made an offer to purchase 110-120-130 Sirois St., a 24-unit building. Mr. Bernier himself also offered to purchase the 16-unit building situated at 140-150 Sirois St. These two buildings were located in Trois-Rivières West.

In 1979, an offer was made on the 24-unit building situated on Ste- Marguerite Rd in Trois-Rivières. The offer was made by Georges Vourvoulakis, who had ” been twisting my arm for a long time to buy it” (transcript, page 54). [Translation].

3.01.11 The offers were accepted. The sale price was used to pay the mortgages and income tax owing, and the balance was invested in the company Ventes de Camions White de Trois-Rivières Ltée. The name of this company was changed to Camions Western Star de Trois-Rivières Ltée, and is still operating under that name.

3.01.12 The financial statements of Ventes de Camions White de Trois-Rivières Ltée for the 1978, 1979 and 1980 taxation years were filed as Exhibits A-6, A-7 and A-8. It appears from these financial statements that the appellant company had been affiliated with Ventes de Camions White de Trois-Rivières Ltée since 1976 and that it was making advances to it.

3.01.13 The witness Laurent Deshaies is the president of the company Ventes de Camions White de Trois-Rivières Ltée since he acquired the shares in 1975. The object of that company is the sale of trucks, repairs, sale of parts, and so on. In 1979 and 1980, a truck of this type sold for $40,000 and in 1987 it sold for 100,000.

3.01.14 When the buildings in issue were sold, the aim of investing in the company was to increase the inventory of trucks and parts, in order to offer greater choice to customers and so bring in more sales.

3.01.15 In 1979, the company Ventes de Camions White de Trois-Rivières Ltée had 20 employees. It now has 25.

3.01.16 In 1979, the appellants investment was in the form of a long-term loan at the market rate, which was then 16 per cent, as is indicated in note 8 of the financial statements in Exhibits A-7 and A-8 (transcript, pages 66-67).

3.01.17 Returning to the buildings sold in 1978 and 1979, the witness asserted that the two buildings sold in 1978 formed a plan unit development. They were connected by a joint use entrance, leading to the parking lot and the backyard. When they were constructed, there was not enough land to make an entrance for each one. Essentially, so as not to have any problems, there had to be a single owner for the two buildings, or a group of people purchasing jointly or almost. Messrs Bernier and Canuel were in agreement.

3.01.18 After the sale to Mr. Vourvoulakis in 1979, there remained the buildings that the appellant still owned in 1987.

3.02 On cross-examination, the witness substantially confirmed his examination-in-chief. He further added the following points:

3.02.1 During the years from 1964 to 1966, before the appellant company was incorporated, he had constructed three ten-unit apartment buildings, with six 41/2 room units and four 2 1/2 room units.

3.02.2 The incorporation of the appellant company was granted on November 15, 1966 (Exhibit 1-4) and registered on December 5, 1966 (Exhibit 1-2). Supplementary letters patent were requested and issued on August 25, 1975, adding to the objects of the appellant the right to do general transport (Exhibit 3). The practical aim of this amendment was to use the trucks that the appellant already owned for transport. The witness states that this amendment had no relationship with the company Ventes de Camions White de Trois-Rivières Ltée.

3.02.3 With respect to the latter company, the witness personally, not the appellant, is the owner of the shares.

3.02.4 At the appellant's shareholders’ meeting held on March 15, 1968, it was unanimously resolved that Laurent J. Deshaies be authorized to purchase the land required for carrying out the plans” (Exhibit 1-5) [translation]. The text of the resolution read as follows:

Whereas the company wishes to operate as a general contractor in constructing apartment buildings and to engage in the business of selling the buildings so constructed.

Whereas as well the solvency of the company itself is not sufficient for negotiating the necessary loans for that purpose, and whereas Laurent J. Deshaies's personal solvency is sufficient to obtain easily the necessary financing for carrying out the plans; on motion duly seconded it is unanimously resolved to authorize Laurent J. Deshaies to

(a) purchase the land required for carrying out the plans

(b) negotiate the necessary loans in his name

(c) do the necessary work

(d) carry out the sale transactions at the opportune time.

As a result of the fact that all these transactions are definitely on behalf of the company, the company shall repay to L. J. Deshaies all expenses he will incur and

L. J: Deshaies shall remit to the company the total sale price. In other words, it is agreed that any profit shall belong to the company which shall also absorb any losses.

[Translation.]

3.02.5 Starting in 1968, the appellant constructed six eight-unit buildings. The last three were sold before 1971, while the first three were kept longer because it was an experimental type of construction. It was better to keep them in order ”. . .to have the experience and so get experience with this type of construction. They were ten-unit brick buildings with a new type of insulation which was supposed to be more efficient, greater savings on heating, and, in fact, that was the case" (transcript, pages 86-87) [translation].

The buildings in question were 3655, 3675 and 3705 Ste-Marguerite Rd in Trois-Rivières. Although Table A, attached to the reply to the notice of appeal, indicates that the construction of these buildings ended in 1971 and the buildings were sold in 1973, Laurent Deshaies testified that construction began in September 1967 and ended in 1968, and the buildings were sold in 1971.

3.02.6 The financing for the buildings was arranged in the form of two mortgages (transcript, page 90).

3.02.7 In note 2 of the 1971 financial statements (Exhibit 1-1, tab 3), on the balance sheet, we note that the apartment buildings are classified as buildings in inventory. We even note that the buildings at 3655, 3675 and 3705 Ste- Marguerite Rd in Trois-Rivières are still owned by the appellant, independently of Laurent Deshaies's testimony in paragraph 3.02.5.

3.02.8 Most of the buildings constructed in 1968, 1969 and 1979 (the ten-units) were sold during the year following construction. They were 100 per cent occupied. As well, the intention in constructing them was to resell them (transcript, page 96).

3.02.9 In 1971, the appellant started to construct single-family houses, because the demand for apartments had fallen off. “it would have been dangerous to build others and maybe not get any profits from them" [translation]. In this field, “ there are cycles” (transcript, page 99).

3.02.10 On the 1971 financial statements, depreciation was taken on the buildings in issue, inter alia (Exhibit 1-1, tab 3, annex 2: jobs 14, 15 and 16).

On the 1972 financial statements, no depreciation was taken on the buildings in issue for the reason that "the present value is obviously higher than the book value” (Exhibit 1-1, tab 4, annex 1 and transcript, page 103) [translation].

As well, the 1973 financial statements (Exhibit 1-1, tab 5, annex 2) list“ "buildings in inventory” [translation]: seven apartment buildings, including the buildings in issue, the cost of which is $1,228,915.92, the buildings being $1,176,275.92. Although they are listed in inventory, annex 1A shows that $25,453.72 was taken in depreciation.

Making due allowance for these figures, the buildings in issue are part of the buildings in inventory and depreciation is taken in 1974, 1975, 1976 and 1977 (Exhibit 1-1, tabs 5, 6, 7 and 8).

3.02.11 According to Mr. Deshaies, with respect to the circumstances of the sale of the buildings on Sirois St. in 1978, a broker was after him. he made me an offer which was very attractive” [translation]. Mr. Deshaies sold them (transcript, page 136).

Q. “I sold them”. This morning you said that the reason for the sale was not necessarily that, it was more because there were financial needs.

A. Although I was in fact never really tight for money, because I could have put a third mortgage on a block, on my old blocks, my big apartment blocks, and likewise putting a second on, because definitely I had a 24-unit and a 32-unit, I think I didn't have a second mortgage. I would have to check that. But it was not a problem to get financing.

Q. And you said that the associated company had needs.

A. Well actually it is not a need, it is more of an investment to expand the business, to support. . . to have more inventory and make it easier to sell more products for . . . (transcript, page 137).

[Translation.]

3.03 According to Mr. Gilles Hamel, the bookkeeper and controller for the appellant and for the company Ventes de Camions White de Trois-Rivières Ltée, the sale price of the buildings sold and the appellant's investment in “White”, in the form of a loan (Exhibit A-9), broke down as follows:

INVESTMENT MADE BY LAURENT J. DESHAIES INC. IN “TROIS-RIVIERES WHITE LTÉE"

IN THE FORM OF AN INTEREST-BEARING LOAN

INCREASE

RESULTING

FROM INVESTMENTS

IN L.J. DESHAIES INC.

Loan by L. I. Deshaies Inc. to Trois-Rivières

White Ltée

at December 31, 1975	Nil
at December 31, 1976	$ 70,000
at December 31, 1977	$ 70,000
at December 31, 1978	$ 70,000

	$154,870 increase
at December 31, 1979	$224,870
	$119,268 increase
at December 31, 1980	$344,138

Adances have continually increased since this time and reached nearly one million in 1986.

	1978	1979
Net sale price of the buildings sold		$490,626	$345,000
Mortgage to be paid	$270,000	185,000
Liquidity generated by the sales,
before tax	220,626 [1]	160,000
			$380,626
Money reinvested in White Trucks		154,870	189,268
			$344,138
		[Translation.]

3.04 Mr. Hamel stated that the sale of the buildings in issue was a result of exceptional offers and the financial needs of the White company.

3.05 The accountant, Mr. P. Bettez, filed an expert report the conclusion of which was to the effect that the sales in issue resulted in a capital gain. Because it is the duty of the Court to make the decision, and the facts reported are no different from the facts in the general evidence (financial statements), the Court must ignore this report.

4. Law—Cases at Law—Analysis

4.01 Law

In a case of this nature in which the issue is whether the profit is a capital gain or income from a business, the sections of the Income Tax Act which are involved are the general sections 3, 9 and subsection 248(1). The latter section defines the word "business" as follows:

248(1) In this Act,

“business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), an adventure or concern in the nature of trade but does not include an office or employment;

4.02 Cases at law

Counsel for the parties cited the following cases at law:

Prior assessments

1. Admiral Investments Ltd, v. M.N.R., [1967] 2 Ex. C.R. 308, [1967] C.T.C. Construction contractor

7. Harmony Investments Ltd. v. M.N.R., [1965] C.T.C. 14, 65 D.T.C. 5009;

8. W. Rudolph Construction Ltd. v. The Queen, [1984] C.T.C. 457, 84 D.T.C. 6454 (F.C.T.D.);

9. Welton v. M.N.R., [1978] C.T.C. 3153, 78 D.T.C. 1848 (T.R.B.);

Ordinary business

10. Canadian Kodak Sales Ltd. v. M.N.R., [1955] Ex. C.R. 40, [1954] C.T.C. 375, 54 D.T.C. 1194;

11. Diamond Developments Ltd. v. M.N.R., [1984] C.T.C. 2992, 84 D.T.C. 1811 (T.C.C.);

Aims and objects of a corporation

12. Canadian Marconi Co. v. The Queen, [1986] 2 C.T.C. 465, 86 D.T.C. 6526 (S.C.C.);

13. Anderson Logging Co. v. The King, [1925] S.C.R. 45, [1917-27] C.T.C. 198, 52 D.T.C. 1209;

14. Placements Bourget Inc. v. The Queen, [1988] 1 C.T.C. 35, 87 D.T.C. 5427 (F.C.T.D.);

15. Sutton Lumber & Trading Co. v. M.N.R., [1953] 2 S.C.R. 77, [1953] C.T.C. 237,53 D.T.C. 1158;

16. Wellington Hotel Holdings Ltd. v. M.N.R., [1973] C.T.C. 473, 73 D.T.C. 5391;

17. Valley Vu Realty (Ottawa) Ltd. v. M.N.R., [1983] C.T.C. 2238, 83 D.T.C. 217;

Time of possession

18. The Queen v. Edmund Peachey Ltd., [1978] C.T.C. 606, 78 D.T.C. 6411 (F.C.T.D.);

19. Fredericton Housing Ltd. v. The Queen, [1975] C.T.C. 537, 75 D.T.C. 5367 (F.C.A.);

20. Syrico Corp. v. M.N.R., [1988] 1 C.T.C. 2026, 88 D.T.C. 1001 (T.C.C.);

A company acts through its shareholders and directors

21. Commissioners of Inland Revenue v. Fishers Executors, [1926] A.C. 392, 42T.L.R. 340;

22. Regal Heights Ltd. v. M.N.R., [1960] S.C.R. 902, [1960] C.T.C. 46, 60 D.T.C. 1401;

23. Danalan Investments Ltd. v. M.N.R., [1973] C.T.C. 251, 73 D.T.C. 5209;

Miscellaneous

24. Irrigation Industries Ltd. v. M.N.R., [1962] S.C.R. 346, [1962] C.T.C. 215, 62 D.T.C. 1131;

25. Kit-Win Holdings (1973) Ltd. v. The Queen, [1981] C.T.C. 42, 81 D.T.C. 5030 (F.C.T.D.);

26. The Queen v. Jachimowicz, [1977] C.T.C. 162, 77 D.T.C. 5148 (F.C.T.D.);

27. Hébert v. The Queen, [1987] 1 C.T.C. 6, 86 D.T.C. 6543 (F.C.T.D.);

28. Williams v. M.N.R., [1983] C.T.C. 2207, 83 D.T.C. 186 (T.R.B.);

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

4.03 Analysis

4.03.1 In Power (paragraph 4.02(4)), Addy, J. described the manner in which all the direct and circumstantial evidence must be analyzed as follows:

All issues must be determined by a careful consideration of all of the relevant evidence both direct and circumstantial. In any particular case, a specific piece of evidence might, by reason of the surrounding circumstances of that case, necessarily possess great probative value while, in another case, evidence to the same effect might carry little or no weight. The Court must also bear in mind that facts often speak louder than words and that free acts are very good indication of what a person really intends and overt acts and their results constitute an excellent means of deciding what the intention actually was.

In this appeal, as counsel for the parties noted in argument, there are numerous factors in the evidence which must be considered in relation to the conduct of a taxpayer distinguishing business income from a capital receipt, as established by the Courts:

1. The intention of the taxpayer at the time of purchase; The objects of the corporation if the taxpayer is a corporation;

2. The relationship between the transaction and the taxpayer's business;

3. The nature of the transaction and the property to which it relates;

4. The number and repetitions of the transactions;

5. The length of time the property was held;

6. The circumstances surrounding the sale.

What does the evidence indicate in this respect?

4.03.2 The intention of the taxpayer at the time of purchase

This factor in intention is by far the most important, if not the only one, because at bottom, as has often been pointed out by the Courts, the other factors are of use only in trying to determine the actual intention of the taxpayer at the time of the purchase. But we must still distinguish between primary and secondary intention.

4.03.2(1) Primary intention

Because the taxpayer in this appeal is a corporation, we should first consider its objects.

The objects set out in the letters patent, like the objects reported on the T-2 form, are clear. It is a construction and general contracting business. There is nothing in the objects in the letters patent to provide that the sale of real estate is an object. On the other hand, what is important is not what is set out in the letters patent, but the undertaking carried on in reality by the corporation, as the courts have held in, inter alia, Sutton Lumber & Trading Co. Ltd. at page 244 (D.T.C. 1161) (4.02(15)), Wellington Hotel Holdings Ltd. at page 480 (D.T.C. 5396) (4.02(16)) and Valley Vu Realty (Ottawa) Ltd. at page 2241 (D.T.C. 220) (4.02(17)), even if there is a presumption in the case of a company that it is carrying on a business, as in Anderson Logging Co. (4.02(13)).

In this appeal, the evidence was that since it was incorporated in 1966 the appellant has constructed and sold some twenty apartment buildings of 8-, 10-, 16-, 24- and 32- units, as well as dozens of single-family houses (3.01.3, 3.01.4, 3.01.5).

Even if the profits from almost all these sales were reported as income from a business, could there not be an exception for the buildings in issue? We must look more closely at the intention of the people who made the decision to construct them.

The real intentions of a company are the intentions of its shareholders and officers (Commissioners of Inland Revenue (4.02(21)) and Regal Heights Ltd. (4.02(22)).

What were the intentions of Mr. Deshaies at the time the buildings in issue were constructed?

He did explain his intention in his testimony, to the effect that he wished to keep them for security” [Translation], relying on the equity to obtain credit and on inflation to increase the capital value (3.01.7).

The buildings in issue, which were built in 1971, were built as part of the large group of 19 8-, 16- and 24- unit apartment buildings (2.02(c) and 3.01.3) constructed between 1969 and 1971 pursuant to the resolution of the appellant dated March 15, 1968 (Exhibit 1-5).

That resolution, which was quoted in full in paragraph 3.02.4, sets out the general intention of the appellant at the beginning, as follows:

Whereas the company wishes to operate as a general contractor in constructing apartment buildings and to engage in the business of selling the buildings so constructed.

[Emphasis added.]

On the one hand, the Court cannot ignore the clarity of this intention, which was laid down in 1968. On the other hand, it is possible that, for the buildings in issue, the appellant may have made an exception and had other intentions, even though the resolution was general in scope. Thus, we should consider the other factors.

4.03.2(2) Secondary intention

With respect to secondary intention, we should quote Mr. Justice Noël in Racine, Demers, Nolin (paragraph 4.02(6)), at page 159 (D.T.C. 5103)):

In examining this question whether the appellants had, at the time of the purchase, what has sometimes been called a "secondary intention” of reselling the commercial enterprise if circumstances made that desirable, it is important to consider what this idea involves. It is not, in fact, sufficient to find merely that if a purchaser had stopped to think at the moment of the purchase, he would be obliged to admit that if at the conclusion of the purchase an attractive offer were made to him he would resell it, for every person buying a house for his family, a painting for his house, machinery for his business or a building for his factory would be obliged to admit, if this person were honest and if the transaction were not based exclusively on a sentimental attachment, that if he were offered a sufficiently high price a moment after the purchase, he would resell. Thus, it appears that the fact alone that a person buying a property with the aim of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade. In fact, this is not what must be understood by "secondary intention” if one wants to utilize this term.

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. 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.

[Translation.]

The appellant's argument is, as Mr. Justice Noël pointed out, that an exceptional opportunity to sell must not be taken as a secondary intention, which we shall consider later (4.06) under the factor "the reasons advanced for the sale”.

4.03.3 The relationship between the transaction and the taxpayer's business

Because the appellant was engaged in building construction and the vast majority of the buildings constructed were resold and the profits reported as income from a business, it is pointless to examine the facts in relation to this factor more closely. They tend to support the respondent's position, which on this point confirms the intention set out in the resolution of March, 1988.

4.03.4 The nature of the transaction and the property to which it relates

An apartment building is considered rather to be an investment, the sale of which results in a capital gain, on condition that the taxpayer is not in this business. The sale of a consumer good, on the other hand, results in income.

In general, property which is retained in inventory is considered to have been acquired for resale. The proceeds of the sale are therefore income. Ordinarily, however, such buildings are entered for accounting purposes under the heading "inventory" and no capital cost allowance (depreciation) is taken.

For a general contractor who constructs buildings for resale, it is obvious that the result of the sale is income from a business. On the other hand, the same general contractor may decide to construct buildings with the aim of retaining and renting them. Certain elements may be considered which confirm or negate the contractor's assertion as to its original intention. These elements may be rental of the buildings, financing, care of and interest taken in the buildings in question, capital cost allowance claimed, and whether they are placed in inventory.

4.03.4(1) Rental of the buildings

On the one hand, the fact that an apartment building is rented out immediately after it is constructed may demonstrate the original intention of the builder to retain it for investment purposes.

In the case of the buildings in issue, they were rented out for seven or eight years.

On the other hand, most of the apartment buildings sold by the appellant were rented out first for several years. Mr. Deshaies explained that he had to wait for the right moment to sell them (transcript, pages 151-53).

Moreover, a building in which the apartments are fully rented is much easier to sell.

Finally, did the resolution in Exhibit 1-5 (3.02.4) not authorize Mr. Deshaies to "carry out the sale transaction at the opportune time" ? [Translation.]

Even single-family houses had to be rented out for a certain period, because the right moment to sell them had not arrived (3.01.4). The fact that the buildings in question were used for financing other buildings for a certain period does not in itself show that at the time they were constructed the intention was necessarily to retain them (3.01.7).

In my opinion, the fact that the buildings were rented out is not necessarily in the appellant's favour, if we consider that all the appellant's other buildings, the profits from which were reported as business income, had gone through a rental phase.

4.03.4(2) Financing of the buildings

In its notice of appeal, the appellant made the following argument:

. . «these buildings also had long term financing themselves which was in no way of a speculative nature and which therefore does not fall within the definition in the case law of a business;

[Translation.]

It is often the case that the method of financing a building is a good indication of the intention of the owner. In this case, all the apartment build- ings constructed by the appellant were financed in the same way, by a first and second mortgage. The element of financing is therefore neutral, on the whole, in relation to the positions taken by the parties.

4.03.4(3) Care of and interest taken in the buildings

In his testimony, Mr. Deshaies spoke of the buildings he rented out in the following terms (transcript, page 49):

I maintained them, as you say in a notarized contract, like a "bon père de famille”. This is what is very important to our customers that it be clean, that it be impeccable, and that also gets us a group of tenants which are clean.

[Translation.]

All the buildings that were rented out were maintained in this way. Because a majority of the buildings constructed were sold, this argument cannot be advanced in support of the appellant's position. Accordingly, this evidence must rather be considered as neutral.

4.03.4(4) Capital cost allowance claimed and placing of the buildings in inventory

The appellant's argument on this point was described well in the notice of appeal, as follows:

. . «these income properties were never considered by the company as property in inventory but rather as an investment, like the deposit certificates the company might hold, and which were always used for financing the company's short term debts;

[Translation.]

While capital cost allowance is ordinarily calculated on buildings that are to be retained, and while, in theory, buildings that are to be resold are placed in inventory without taking capital cost allowance, the evidence in this appeal is that the buildings in issue were placed in inventory, but that capital cost allowance was taken nonetheless. The same was true for the buildings that were constructed for resale (3.02.11).

At first glance, it seems that the evidence is neutral. However, ordinarily, when a contractor decides to retain buildings in the sense of an investment, the accounting system for these buildings is completely separate from the system used for buildings constructed for resale. This is not the case.

Considering, inter alia, the resolution (Exhibit 1-5) of March 15, 1968 (paragraph 3.02.4), I am of the opinion that these buildings were constructed with the aim of selling them, but only at the right moment.

4.04 The number and repetitions of transactions

This factor was noted earlier (4.03.2(1)), to the effect that the appellant, which was engaged in building construction, sold more than twenty apartment buildings. In fact, from 1968 to 1979, the appellant disposed of 17 apartment buildings, 16 of them by sale and one by expropriation.

The only comment that I wish to make is that in a case of this nature, the evidence that the appellant must present with respect to the buildings in issue is more difficult. It must be stronger if the appellant is to discharge the burden of proof that rests on him.

4.05 The length of time held

This factor is of less significance in a case of this nature, where the taxpayer is engaged in building construction: a building may take several years to be sold. For example, the evidence indicated that the buildings at 3655, 3675 and 3705 Ste-Marguerite Rd in Trois-Rivières, which were constructed in 1968, were sold only in 1973. The profits were reported as income from a business.

Single-family houses which were constructed for resale in 1978 were sold in 1982 and 1983. They were even rented in the interim.

Whether the buildings in issue were held seven or eight years, the length of time they were held should not be taken as evidence in support of the appellant. At bottom, was the appellant not awaiting "the opportune time to sell”, in accordance with the resolution of March 15, 1968 (3.02.4)?

4.06 The circumstances surrounding the sale

4.06.1 It is possible that because of the particular circumstances (illness, a wonderful offer, financial problems, and so on) a taxpayer might decide to sell a building that it originally wished to retain as an investment. In Racine (paragraph 4.02(6)), cited above, Mr. Justice Noël noted one such circumstance (paragraph 4.03.2(2)).

What motives for the sale were advanced by the appellant in this case?

In the notice of appeal, the appellant gives the following reason:

. . .the only reason which required that the appellant dispose of this income property was a need for liquidity and a need to reduce the long term debt, as will be demonstrated at the hearing;

[Translation.]

4.06.2 Exceptional offers

Let us examine the sales in issue.

In 1978, the two buildings on Sirois St., consisting of 40 apartments, were sold for $514,322, or $12,858 per apartment.

In 1979, the sale price for the buildings on Ste-Marguerite Rd, consisting of 24 apartments, was $345,000, or $14,375 per apartment.

According to Mr. Deshaies's testimony, [Translation]". . .in ’ ’78 it must have been about 16, 17, 18 thousand dollars per unit to build” (transcript, page 173).

Since we know that the return on these buildings was very good, I do not see how prices of $12,858 and $14,375 per apartment were exceptional prices.

Moreover, according to the evidence, in 1974 the expropriation price for the building also situated on Ste-Marguerite Rd was $12,125 ($291,000 divided by 24) per apartment (transcript, page 170).

If these offers were really exceptional, the appellant did not convince the Court of this. On the other hand, perhaps it was nonetheless the "nice bundle” that Mr. Deshaies talked about in order to meet the appellants need for liquidity and the financial needs of the White company, the associated company (paragraph 3.01.9).

4.06.3 The appellant's need for liquidity—the financial needs of the associated company

On this point, Mr. Deshaies stated that it was not a financing problem, and that he could have borrowed on the 24- and 32-unit apartment buildings, which did not have second mortgages (3.01.9 and 3.02.11). That is confirmed by the following facts:

In 1979, the appellant borrowed at the rate of 12 /4 per cent (Exhibit 1-2, tab 14). The associated company could undoubtedly have done the same rather than borrow from the appellant at 16 per cent.

Did the associated company really need to be financed by the appellant? When we examine the financial statements of the appellant and of the associated company, we might doubt this. We find that the associated company was in better financial health than the appellant (Exhibits 1-1, A-6 and A-7):

Net pre-tax

operating profit

(excluding sale of

buildings in issue)

	1978	1979
Camions White	$128,818	$113,371
de Trois-Rivières
Ltée
Appellant	$ 47,659	$ 46,112

The need for liquidity, on the part of both the appellant and the associated company, did not, on the balance of evidence, impose the necessity of selling the buildings in issue to meet those needs.

4.07 The appellant had the burden of proof. I noted earlier that this burden was difficult to meet, considering, inter alia, the nature of the appellant's objects and the nature of the property in issue.

In my opinion, this burden has not been discharged. The balance of evidence on all of the various points raised by the parties favours the respondent's position overall. The reassessments must therefore be upheld.

5. Conclusion

For the foregoing reasons for judgment, the appeal is dismissed.

Appeal dismissed.