Jessie McCullough, David R. Garrett, Sylvia Bell and Kenji Makino v. Minister of National Revenue, [1988] 1 CTC 2130, 88 DTC 1096

Rip, T.C.J.:—The appellants, Sylvia Bell, David R. Garrett, Kenji Makino and Jessie McCullough have appealed their assessments for their 1981 taxation years on the basis that a gain arising from the sale of land and building situated on Aimco Boulevard ("Aimco"), Mississauga, in Metropolitan Toronto, is on account of capital and not income, as assessed by the respondent, the Minister of National Revenue.

The appeals of the four appellants were heard together on application of the appellants consented to by the respondent; the evidence adduced during trial applied to all four appellants. The appellants, Jessie McCullough and Sylvia Bell were not witnesses at trial. Their respective husbands, Frederick Thomas McCullough and William George Bell, testified that the actions of their wives and their motives in the acquisition of the Aimco property were those of Messrs. McCullough and Bell.

At the time of purchase of the Aimco property in 1980 the appellants David R. Garrett, Kenji Makino and the spouses of Mrs. McCullough and Mrs. Bell, were employed by A.E. Lepage (Ontario) Limited ("Lepage"), a real estate broker in Mississauga. Messrs. McCullough and Makino were real estate salesmen specializing in industrial real estate; Messrs. Garrett and Bell worked in the Office Leasing Division of the agency.

The building on the Aimco property was originally built for Apeco,* [1] a distributor and manufacturer of photocopy machines, who in 1981, was in bankruptcy. The building had unique characteristics in that two-thirds was dedicated to office space and one-third was used as a warehouse. Evidence indicated most buildings containing an office and warehouse in Mississauga had office space comprising only 10 per cent to 15 per cent of the floor area. The building had a floor area of 26,500 square feet of which approximately 3,000 feet was described as "prestige area" and was not usable. The property was located in an industrial area of Mississauga, one of Canada's fastest growing regions.

In 1976 the Aimco property was listed with another broker for sublease after the demise of Apeco. Later in the same year the Aimco property was listed with Mr. Bell for sale or lease. He ultimately sold the property at the end of June or July 1978 for $750,000; the purchase was negotiated in March and April 1978. In the meantime Mr. Bell got to know the principal of the purchaser of the property, Warren Publishing Ltd., and in 1979 the purchaser asked him to list the property for lease, either wholly or partially, since it was only using approximately 4,000 square feet. Eventually the listing for lease evolved into listing for sale at an asking price of $950,000, the highest price Mr. Bell thought was possible for this property.

Mr. Bell had problems trying to lease and to sell the Aimco property because of the peculiar nature of the building. Only one signed offer was received — in May 1980 — but was not concluded; there were discussions with two or three other interested parties. Mr. Bell blamed his difficulty in leasing or selling the building to the proportions used for office and warehouse.

Mr. Bell was assisted by Mr. McCullough in attempting to lease the Aimco property.

Meanwhile Mr. Garrett was engaged by Savin Canada Inc. (“Savin”), a distributor of photocopying machines, to find an office and warehouse location in the Toronto area. He had already leased office space to Savin in a building in the City of Toronto owned by The Cadillac Fairview Corporation. Savin was now looking for a location which would combine office area with industrial area. Mr. Garrett went to Mr. Makino for help in finding such a property and eventually found the Aimco property.

Savin was in the business of selling photocopy machines. It entered the Canadian market in late 1979. Savin was a wholly-owned subsidiary of a United States corporation whose shares were listed on the New York Stock Exchange.

According to Mr. Garrett, Savin did not wish to purchase the Aimco building; it only wanted to be a tenant. Negotiations with Savin led to discussions between Mr. McCullough and the officials of Savin whereby Mr. McCullough and his associates would purchase the building and lease it to Savin. Savin, according to Mr. McCullough, was enthusiastic about this idea and on June 11, 1980, agreed to become a tenant of the appellants. An agreement of purchase and sale between the appellants and the vendor was executed on June 25, 1980.

The lease agreement with Savin contemplated improvements to the building having an average cost of $200,000. These improvements would include additional landscaping, lead walls for the boardrooms and the president's office, wallpaper and high quality rugs. Also the washrooms were moved to different locations. The actual cost of the improvements was $235,000. This amount was to be recovered by an increase to the rent, amortized over five years at the rate of 15 per cent per year.

Shortly after moving into the building Savin inquired about expanding the building. Mr. McCullough contacted a contractor for a quote on an addition and renovations to the building. Savin did not follow up on this request and, according to Mr. McCullough, pleaded ignorance about its enquiry.

In mid-autumn 1980 Mr. McCullough attended a meeting of the Society of Industrial Realtors of Toronto where he had an occasion to discuss real estate matters with a Mr. Marc Beard who worked for Lehndorff Corporation ("Lehndorff"). Lehndorff was in the business of purchasing and managing real estate in Canada for European investors, primarily West German and Swiss residents. Lehndorff had acquired approximately 250 properties in Canada for these purposes. Mr. Beard's duties in 1980 and 1981 were to seek out opportunities for investments, to analyze these opportunities, to negotiate terms of transactions and to close the transactions, in other words, according to Mr. Beard, to put together a package for foreign investors.

Lehndorff had previously purchased a property through Mr. McCullough and it was through this transaction that Mr. McCullough and Mr. Beard knew each other. At the meeting of the Society of Industrial Realtors Mr. McCullough mentioned to Mr. Beard the various properties he was concerned with during the past several months, including the Aimco property. Mr. Beard stated that he was looking for investment opportunities and expressed an interest in the Aimco property. Mr. McCullough said that neither he nor his associates was interested in selling the property. However Mr. Beard asked Mr. McCullough to let him visit the property as a courtesy and Mr. McCullough permitted this to be done. Eventually Lehndorff made an offer for the Aimco property which was not accepted by Mr. McCullough and his associates.

After the offer was turned down sometime at the end of 1980 the appellants began to get a little bit nervous about their investment. A friend of Mr. Bell, Mr. J. W. Collinson, had told Mr. Bell that it was only a question of time before Savin would cease to be in the Canadian market. During 1980 and 1981 Mr. Collinson was employed by Intelterm Canada Ltd. ("Intelterm") as vice-president, sales and marketing. Intelterm was a subsidiary of the telephone companies of Canada concerned with the possible marketing of word processors, electronic typewriters, photocopiers and facsimile machines. At time of trial he was vice-president and general manager of Olympia Business Machines Canada Limited. In 1980 Savin was competing with Xerox as well as IBM which was scheduled to enter the market with a photocopying machine. In addition, according to Mr. Collinson, who also testified at trial, Savin had a product line which was inferior to Xerox as well as to products various Japanese companies were planning to put on the American market. The Savin photocopying machine was based on a liquid toner while the other manufacturers were producing machines with a dry toner; the superior machines were using dry toner. As well Ricoh, a manufacturer of photocopying machines in Japan, who supplied Savin with the machines for distribution in Canada, was not happy with the way Savin was merchandising its product and was contemplating distribution of machines on its own.

At the same time a friend of Mr. Garrett, Mr. Gilles Ouellette, who in 1980, and at time of trial, was employed by the brokerage house of Burns, Fry in Toronto advised Mr. Garrett that Savin’s parent was having problems: it had losses for three consecutive quarters and there was nothing he could see that would reverse this trend in the near future.

The information conveyed to Messrs. Bell and Garrett was transmitted to the other owners who became quite nervous. The design of the building was meant to be used by a company in the same business as Apeco or Savin. Mr. Bell had had difficulty in attempting both to sell and lease the building: he had tried for approximately two and one-half years to sell the building. Savin had cooled to possible expansion of the building, after initiating the possibility.

The appellants paid 30 per cent of the purchase price on closing and assumed a $750,000 mortgage, of which $710,000 was still payable. In addition the appellants spent $235,000 in improvements specifically for the use of Savin which would be of no use to any other tenant. The appellants, when they acquired their building, had faith in the future of Savin because of its product, and since it was owned by a company listed on the New York Stock Exchange, was approved as a tenant by The Cadillac Fairview Corporation.

In the meantime Mr. Beard persisted in his efforts to purchase the building. He made a second offer, having the same price as the original, which was accepted. The purchase price was $1,840,000. The purchaser assumed the mortgage of $710,000 and the balance was paid on closing. The appellants accepted the offer because of their fear that Savin would not be in a position to continue their lease obligations for the balance of the five-year term and that they would have an empty building which, in Mr. McCullough's words, "would be tough to rent".

Mr. McCullough stated that when the second offer was made he was against its acceptance simply because he was in a better financial situation than the others. However he ultimately concurred with his wife to sell the property.

The Aimco property was not the only property acquired by Mr. McCullough. He had previously owned a building in London where he had carried on a business prior to becoming a realtor. This property was sold when he ceased carrying on the business. He also acquired properties together with Mr. Bell on Evans Avenue, Oxford Street and Birdhill Street in the Toronto area which he and Mr. Bell still own. He also purchased a property known as the Kingsway property one month after the sale of the Aimco property. Mr. Bell, Mr. and Mrs. Makino and another person joined him in the acquisition of this property. When this building was acquired it was vacant. The building had no unusual characteristics. The building was purchased in the expectation that it would be leased within a reasonable time. In any event the building was not leased and was sold.* [2]

Each of Messrs. Makino, Bell, Garrett and McCullough testified. In no way was any of the evidence of one contradictory of the evidence of the others. In fact the evidence of a subsequent witness corroborated the evidence of an earlier witness. The evidence of the appellants Garrett and Makino and the spouses of the appellants McCullough and Bell were corroborated where necessary, by Mr. Beard, Mr. Ouellette and Mr. Collinson. Messrs. Beard, Ouellette and Collinson testified as to the relationship between each of them and the appellants and as to what transpired between them and the appellants.

The credibility of the appellants was not put into question. I therefore accept the evidence of Messrs. Makino, Garrett, Bell and McCullough as to their intent when the Aimco property was purchased and the reason for the sale. The inferences flowing from the circumstances surrounding the transaction show no motivation by the appellants to sell at time of purchase. That the Aimco building was a special purpose building and that Mr. Bell had difficulty in leasing and selling the building indicate that at moment of the purchase, the possibility of reselling was not an operating motivation for the acquisition: Racine, Demers and Nolin v. M.N.R., [1965] C.T.C. 150 at 159; 65 D.T.C. 5098 at 5103. When the appellants thought their tenant might be unable to honour its obligations under the lease, they panicked and sold the property to an eager purchaser. This does not in my view make them traders in respect of the Aimco property. In the circumstances of this case, based on the facts as revealed by the evidence, the purchase and sale of the Aimco property was on account of capital.

The appeals are allowed with costs.

Appeals allowed.