Gaston Sini v. Minister of National Revenue, [1988] 2 CTC 2063, 88 DTC 1454

Rip, T.C.J. [Translation]:—The appellant, Gaston Sini, has appealed from the notices of assessment issued for the 1981 and 1983 taxation years by the respondent, the Minister of National Revenue. The respondent issued a reassessment on the ground that income from real estate transactions carried out during the years in question and declared by Mr. Sini as capital gains was in fact income from a business operated by Mr. Sini.

Mr. Sini left school at the age of 15 years and travelled to Montreal to work as a labourer in construction. He began work as a carpenter, and in 1959 he became a partner with a Mr. Réal Bédard in a construction business under the business name Bédard & Sini. This partnership built single-family houses and cottages. In 1969, Mr. Bédard and Mr. Sini incorporated a company, BE-SI Construction Limitée ("BE-SI"), in order to pursue the partnership's activities. They continued in this their business, working through the company, for about seven years, until Mr. Bedard became too ill to work.

In 1974, Mr. Sini established a new company, Construction Mézières Limitée, with a Mr. Pigeon. This company, which did the same kind of work as BE-SI, remained active until 1980, when Mr. Pigeon decided to leave. The company was dissolved and its assets, including its land, were liquidated.

Mr. Sini then formed a new partnership with Mr. Bédard and BE-SI was "reactivated". BE-SI continued its activities, the construction of single-family houses and cottages. The company looked after purchasing the land on which it built the houses.

In about 1965 Mr. Sini had decided to supplement his income by investing in rental properties. He also wanted to build up an investment portfolio for the future. Accordingly, beginning in 1965, Mr. Sini invested in a number of properties, which we have set out in the following table;

? The record does not indicate the name of the builder.

These two properties were sold in 1982 to Mr. Sini's management company, in accordance with the provisions of section 85 of the Income Tax Act. Before the sales to the management company, Mr. Sini agreed to sell the properties in question to third parties; the sales were transacted by the management company.

The Court is asked to determine whether the purchase and sale of the properties situated at 535 Ampère and 360 rue De Noirmoutier resulted in a capital gain or income. These properties are located in Laval, Quebec, across from Montreal, on the other side of the Rivière des Prairies.

When the buildings in question and the other properties were purchased, Mr. Sini paid ten per cent of the purchase price in cash, and the balance was financed through loans from the bank or from a caisse populaire. Mr. Sini explained that the portion paid in cash was his own money, or came from advances paid by the companies in which he had interests. He added that before purchasing a property his accountant and Mr. Pigeon did all the calculations to ensure that it would finance itself, taking into consideration the interest and principal payments to be made, property taxes and other operating expenses.

On examination-in-chief and cross-examination, Mr. Sini stated that the properties on Ampère and De Noirmoutier Streets were purchased for investment purposes and that at the time of purchase he did not intend to dispose of them. His lawyer asked him why he had resold both these buildings. Mr. Sini replied that one building in particular had been sold because of the high vacancy rate, which had not been foreseen when the original calculations were done, and which was causing operating losses. In addition, the increase in interest rates which began in 1980 and continued in 1982 had an impact on the cost of financing the buildings. He also explained that there was not a great demand for five and a half room apartments in Laval, probably because of their high rental cost.

On December 12, 1981, when the Ampère Street property was sold, most of the appellant's rental buildings were heavily mortgaged. On August 31, 1982, at the end of BE-SI’s 1982 fiscal year, interest rates were at 21.51 per cent. On or about November 15, 1982, the mortgage on the De Noirmoutier Street property was renegotiated, and on March 25, 1983, this property was sold.

The appellant and his accountant, Jean-Claude Deschambault, C.A., both stated that at the time the Ampère and De Noirmoutier Street properties were sold, it had become difficult to keep a rental apartment building fully occupied. These buildings were therefore no longer good investments. This evidence was not really refuted on cross-examination of Mr. Sini or Mr. Deschambault, and in the absence of evidence to the contrary, there is no reason not to accept the witnesses' statements on this point.

Mr. Sini and Mr. Deschambault both testified that despite the high vacancy rate in the Ampère and De Noirmoutier Street buildings, and despite the high interest rates at that time, the sale of the two properties was brought on by BE-SI's lack of liquid assets. Mr. Deschambault expressed this as follows:

[Translation]

Q. What can we conclude from this financial situation [ie for the 1981 and 1982 fiscal years]?

A. Well, if we look simply at the accounts receivable which at the time consisted of the balances of sale prices, which were not immediately bankable, there was not enough in the bank to pay suppliers.

Q. Okay. Did Mr. Sini make advances, directly or indirectly? Did he pay monies to facilitate the corporation's activities during that time?

A. Yes, because if we look at the shareholders' assets . . . the shareholders' loans, on June 30, '82, which were at $52,000, and on June 20, '83, they had risen to $294,000.

Q. Was that made up entirely of advances by Mr. Sini.

A. At least fifty per cent.

Q. Okay. Would the corporation have had problems in operating if Mr Sini had not provided these injections of funds?

A. If would definitely have lacked liquidity.

Mr. Deschambault told the Court that he had been the accountant in charge of auditing Mr. Sini's accounts since 1975. He audited Mr. Sini’s companies' accounts and acted generally as his tax and financial adviser. He was involved in every aspect of Mr. Sini’s businesses.

Mr. Deschambault stated that on August 31, 1978, Mr. Sini had a net worth of $192,000. This amount included $8,000 in cash in the bank and $25,000 in term deposits. On August 31, 1981, Mr. Sini had only $5,957 in the bank and had no term deposits.

On June 30, 1981, BE-SI had a bank overdraft of $111,000; on June 30, 1982, this overdraft had been reduced to $19,000.

During the fiscal year ending on June 30, 1981, Mr. Sini advanced $65,000 to BE-SI. During the fiscal year ending on June 30, 1982, he advanced $57,000 to the company.

On June 30, 1983, BE-SI had $65,000 in the bank. It owed $400,000 to its suppliers and had accounts receivable of $255,000 and work in progress of $396,000. Mr. Deschambault stated that BE-SI did not have enough money to pay its suppliers, even after the earlier advances.

The two properties were sold as a result of unsolicited offers. With respect to the Ampère Street property, a real estate agent contacted Mr. Sini to tell him that he had a client interested in purchasing the property. Because of the high interest rates at the time and BE-SI’s need for liquid assets, he decided to sell the property and to put the proceeds of the sale into the assets of BE-SI, which was building houses at that time. Similarly, the sale of the De Noirmoutier Street property occurred at the initiative of a real estate agent and the proceeds of the sale were put into BE-SI's assets.

The sale prices of the two properties were determined by the real estate agent who had contacted Mr. Sini. Mr. Sini indicated that he had not tried to negotiate a higher price. Mr. Sini demonstrated by his demeanour at the trial that he was a builder of single-family houses and that he was not up to date on the value of apartment buildings. He stated that the rental properties were not rented at full capacity because in his opinion five and a half room apartments were too large and too expensive at that time for the city of Laval. Families in Laval wanted smaller apartments. He stated that he had not foreseen the problems that were caused by five and a half room apartments when he built them.

On cross-examination, Mr. Sini acknowledged that during the 1970s building projects in the city of Laval had mushroomed. The areas around De Noirmoutier and Ampère Streets were handy to the urban transit system and were situated close to shopping and recreation centres.

The properties at 1030 Tricentenaire and 12681 De Montigny were finished around the end of the spring or beginning of the summer of 1981. Mr. Sini stated that his intention was to keep these properties as investments and accordingly that he conveyed them to a company. This company had to have its own assets "to keep its business separate". The properties were conveyed as planned to what he called a management company, in accordance with the provisions of section 85 of the Income Tax Act (the "Act"). Before conveying these properties to the company, Mr. Sini entered into an agreement of purchase and sale with a third party. He explained that he had changed his mind and decided to sell because BE-SI needed money. The properties were conveyed to the company, even though they were to be sold subsequently, because, he stated, his intention was that the company remain the owner.

Mr. Deschambault confirmed that as Mr. Sini's financial adviser, with a general mandate, he advised Mr. Sini in 1982 to concentrate his money in one single company. He advised him to put together the investments that were supposed to be his pension fund, in the form of three buildings. He needed the most profitable buildings with the lowest mortgage interest rates. The De Montigny and Tricentenaire Street properties were to be part of this group, and to be conveyed to the company. All the properties acquired by Mr. Sini in future as investments were to be held by this company.

On cross-examination, Mr. Deschambault acknowledged that the De Noirmoutier and Ampère Street buildings were sold not at fire sale prices, and that it was not terribly urgent that Mr. Sini sell them. Mr. Deschambault noted that Mr. Sini had advanced money to BE-SI before the sale of one of the properties. After the sale, further money was advanced to the company. Mr. Deschambault noted that after Construction Mézières Limitée ceased operations, Mr. Sini had sold various pieces of land through a company named APGS, and that the proceeds of the sale of these properties had been used to pay salaries and dividends to the shareholders, and Mr. Sini used these to reinvest in BE-SI.

Mr. Deschambault stated that Mr. Sini had consulted him and Mr. Pigeon before acquiring the Ampère Street property. He acknowledged that both of them had reviewed the project, and that Mr. Pigeon had done the calculations and prepared the forecasts that were used to determine the viability of the project.

I am convinced that Mr. Sini acquired the Ampère and De Noirmoutier Street properties for investment purposes. Nevertheless, the fact that he was actively and substantially involved in companies operating in the field of residential construction really did lead the Court to wonder whether one of the reasons underlying the acquisition of the properties was the possibility of reselling them at a profit.

In observing Mr. Sini at the trial, I noted on several occasions that he had some difficulty, not only in answering questions asked by counsel for the respondent, but also in answering the questions of his own lawyer. I do not believe that his hesitation was caused by his desire to evade the questions, and I believe rather that the explanation is that he has little education or that he was intimidated by the Court. Despite the close questioning to which he submitted at the hands of counsel for the respondent, Mr. Sini’s testimony was consistent. He did not appear to be keeping information to himself or attempting to mislead the Court.

The evidence available to us clearly indicates that Mr. Sini wished to acquire an investment portfolio in the form of properties that would be distinct and separate from his activities and interests in the area of house sales. It is not unusual for an individual or corporation to have both stock and investments in the form of real estate. In the case at bar, it was established that except for the point at which Mr. Sini branched out in his activities, the real estate stock was not held personally by him but was held rather by companies; the rental properties set out in the table above were all purchased in his own name, which he did not do later for the properties intended for resale. The fact that some of these properties were multi-unit residential buildings which would benefit from favourable treatment with respect to depreciation does not, in my opinion, mean that these properties which were held as investments became properties held for resale, contrary to what was suggested by counsel for the respondent.

The sales of residential properties by BE-SI and other companies in which Mr. Sini had interests were not the same as the transactions affecting the Ampère and De Noirmoutier Street properties. The appellant's area of expertise was the construction of single-family houses and cottages intended for resale, and not the construction of apartment buildings.

The probative value of the evidence before the Court confirms our opinion that the sale of the Ampère and De Noirmoutier Street properties was intended to provide the liquid assets needed by BE-SI in order to pursue its activités. The judgment of Rouleau, J. of the Federal Court (Trial Division) in G. Hébert v. The Queen, [1986] 2 C.T.C. 123; 86 D.T.C. 6543, is particularly interesting on this point. I shall quote the headnote preceding the reasons for judgment in this case, at [C.T.C.] page 123:

The plaintiff, a carpenter, bought land and built residential buildings on it working as his own contractor. He claimed his object to be the accumulation of enough property to enable him and his family to live on the rentals from it. In attaining this end, he found it necessary to sell some less remunerative buildings to provide funds to construct better ones. This action concerned two transactions completed over a three-year period involving seven properties he had held for three to five years. Since those sales no properties had been sold and the plaintiff considered that he had now fulfilled his intention. He claimed the profits from the sales as capital gains.

The Minister disagreed. In his view the plaintiff was in the construction business and had always had an intention, primary or secondary, to sell. Therefore the profits were, in the Minister’s view, income. The Tax Review Board agreed with the Minister.

It was argued that it was primarily the taxpayer's construction company's need for liquid assets that led to the sale of the properties that were the subject of that appeal. At page 127, Rouleau, J. stated:

[Translation]

Now, the taxpayer relied on a number of the circumstances surrounding the disposition of the buildings. We would note simply the poor “quality” of the tenants, that is, they were not working or were on social assistance, which therefore made it difficult to collect rents, the relative unsuitability of the neighbourhood for residential buildings, the fact that the rents were too low and particularly his lack of capital for financing the Séguin Street project.

He concluded, at p. 132:

In the case at bar, Mr. Hébert's activities were concerned solely with the construction and rental of buildings, and the sale of seven buildings, which was brought about by circumstances beyond his control, was not the means he relied on in attaining his objective of financial self-sufficiency.

The facts in the Hébert case, cited above, are not on all fours with those before this Court. Nonetheless, there are significant similarities, particularly the fact that the sale of the properties was necessary to finance the construction of a new project. I do not see any fundamental difference between the sale of property to finance construction of a building and the sale of property to finance a company; in both cases, the investor is investing a sum of money to earn income.

In the circumstances, both appeals are allowed with costs.

Appeals allowed.