Ivan J. Smith v. Minister of National Revenue, [1987] 2 CTC 2296

Brulé, T.CJ.:—The present appeals heard in Halifax, Nova Scotia on July 13, 1987, are from reassessments in respect of the 1978 and 1981 taxation years, by which the Minister of National Revenue included as income profits from the sale of real estate previously reported as capital gains by the appellant.

Facts

During the years under appeal, the appellant entered into some profitable land transactions. Among these transactions was the sale at a profit of two apartment buildings and that of a vacant lot in Dartmouth, Nova Scotia. The appellant claimed the gain from these transactions as capital gain on his income tax returns. The Minister reassessed the taxpayer on the grounds that the profits received by the appellant from the sale of property was income from a business or an adventure in the nature of trade.

Analysis

The relevant portions of the Income Tax Act S.C. 1970-71-72, c. 63 read as follows:

9. (1) Subject to this Part, a taxpayer's income for a taxation year from a business or property is the profit therefrom for the year.

248. (1) In this Act,

“business” includes . . . an adventure or concern in the nature of trade . . .

It is well settled law that a taxpayer's intention at the time he purchases property is paramount in determining whether profit from a subsequent sale constitutes capital gain or business income. For the profit to be considered business income it is not necessary that the sole aim of the taxpayer in purchasing the property be to resell at a profit. Pursuant to the doctrine of "secondary intention” it is sufficient that the possibility of reselling be, in the words of Noël, J. in the case of Racine et al v. M.N.R., [1965] C.T.C. 150; 65 D.T.C. 5098, "an operating motivation for the acquisition". In Fraser v. M.N.R., [1963] C.T.C. 130 at 139; 63 D.T.C. 1083 at 1088, Cameron, J. explained the doctrine in this manner:

It is now settled law that even if the primary intention of the promoters of a scheme for buying land and developing it is for the construction of buildings to be leased by the promoters (i.e., an intention to create a revenue producing investment), there may in certain circumstances be also an alternative intention to sell at a profit if the promoters are unable to carry out their primary aim. If, in fact, the alternative intention is carried out, the profits arising on the sale may be of a revenue character as profits from a business or an adventure or concern in the nature of trade.

With regards to the vacant property on Parkstone Road, Dartmouth, Nova Scotia, purchased for $138,633 in February 1979 and sold in October 1981 for $234,630, the evidence has revealed the following. The property was originally held by Viva Construction Limited a corporation of which the appellant was a 49 per cent shareholder. At the time the land had been purchased by Viva the appellant had personally provided guarantees to the bank for the repayment of the purchase price. In 1979 it was decided that Viva would cease its business activities and that the appellant would sell his shares in the company to the remaining shareholder. It was agreed that before he sold his shares, the property would be transferred from Viva to the appellant and the remaining shareholder for the sum of $138,633. The appellant afterwards purchased his partner's interest and became sole owner of the piece of land. At the time he acquired the property, the appellant was knowledgeable in real estate matters, having previously entered into a number of successful real estate transactions. He sold the property at a profit two and a half years after it was acquired.

The facts surrounding the purchase and sale of the property may serve as indications to the taxpayer's intention. In Roy M. Power v. The Queen, [1975] C.T.C. 580; 75 D.T.C. 5388, Addy, J. states at page 585 (D.T.C. 5391):

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.

The appellant's own testimony however, remains a key element in the determination of intention. In the same case, Addy, J. states at page 584 (D.T.C. 5391):

The only direct evidence of what a person has in mind at any given time must necessarily come from a statement by that person either at the trial or orally or in writing to another person and any such expression of intention is most relevant and important, especially when given under oath at the trial by the person whose intention is at issue and after the statement of such intention has been thoroughly tested by cross-examination in the light of his actions both before and after the event in question. Conversely, it would be most difficult for me to find in favour of a taxpayer, whatever the surrounding circumstances might be, who, without any justifiable excuse, failed to testify personally at the trial as to what his intention actually was.

In the present case, the appellant testified as to the circumstances surrounding the purchase of the property. He explained that, because of his commitments to the bank regarding the property and the sale of his shares of Viva he was, in his words “forced” for financial reasons, to purchase the property. He at no time stated that the property was purchased with the intention that it be used in the operation of a business. It is clear from the facts in this case, and was not denied by the appellant's testimony, that the possibility of resale at a profit was an operating motivation for the acquisition. The fact that, by acquiring the property, the appellant was protecting himself against financial liability arising from the guarantees he had given the bank cannot alter the conclusion that the appellant purchased the property with the intention of resale at a profit. This can be distinguished from the case of Farmer Construction Ltd. v. The Queen, [1984] C.T.C. 370; 84 D.T.C. 6331, cited by the appellant, in which the purchase was made with no intention of resale at a profit. For these reasons the appeal must fail on this point.

Before the transactions concerning the above property, the appellant had purchased and sold three multi-unit residential buildings. The appellant acquired a 12-unit building in October 1975, an 11-unit building in June 1976 and a 24-unit building in July 1976. These were sold respectively in October 1978, July 1978 and August 1977. The nature of the profit from the sale from the 11 and 12-unit buildings is at issue in the present appeal.

The conclusion reached by the Court on the first issue does not bind the Court as to the nature of the profits received on the sale of the apartment buildings. It is entirely conceivable that a taxpayer may at one point in time be using a type of property in the operation of a business and at a later time become a trader in the same type of property. Indeed in S. & S. Properties Ltd. v. The Queen, [1978] C.T.C. 412; 78 D.T.C. 6294, it was determined that a taxpayer may simultaneously be a trader and an investor in the same type of property. At page 421 (D.T.C. 6300) of the report, Walsh, J. states:

While profits from some of his other real estate dealings were therefore quite properly declared by him and taxed as profits resulting from adventures in the nature of trade, the profits arising from the sale of the subject property should be considered as resulting from the sale of an investment and be considered as capital gains.

In Montfort Lakes Estates Inc. v. The Queen, [1980] C.T.C. 27; 79 D.T.C. 5467, Dubé, J. came to the conclusion that the taxpayer could be a trader as to part of a piece of land and an investor as to another part of the same property. Mr. Justice Dubé states at page 30 (D.T.C. 5470):

That the same taxpayer can be at one time a trader in some aspects of its sales and at other times a non-trader with respect to other sales has been well established in the recent decision of my brother Walsh in Clemow Realty Ltd. v. The Queen, [1976] C.T.C. 129; 76 D.T.C. 6094. . . . In my view, while the plaintiff in the instant case was a trader with reference to the sub-divided lots which it sold throughout the years, and on which it paid business income tax, it was not a trader with reference to the sale of the remainder of the undeveloped estate.

As previously mentioned, the appellant's testimony is an essential element in determining intention at time of purchase. With regards to the purchase of the residential buildings, the appellant's conditions of employment did not include retirement benefits. In order to provide himself with an income on retirement he chose to purchase the above-mentioned rental buildings. These were to be managed by the appellant's wife and she did in fact manage them for a time. In 1977 the appellant's wife became unable to manage the apartments for health reasons. Because of the relatively small size of the buildings and the fact that they were situated some distance apart, the appellant ascertained that it was not practical to find a professional manager to look after the building at a reasonable cost. The buildings were sold and a 48-unit apartment was purchased.

The appellant's testimony must of course be viewed in the light of all relevant facts, both preceding and following the purchase of the property.

In Rosenblat v. M.N.R., [1955] C.T.C. 323; 55 D.T.C. 1205, the Court, in determining whether the taxpayer was a trader or an investor, stated at page 330 (D.T.C. 1209):

The reassessment was made having regard to the information available to the Minister at that date. To determine whether an assessment or a reassessment is justified evidence can be heard in respect to all the facts on which the assessment or reassessment is based and in respect to matters arising subsequent to the assessment or reassessment, provided such matters are relevant.

In the case of Canada Permanent Mortgage Corp. v. M.N.R., [1971] C.T.C. 694; 71 D.T.C. 5409, the Court did not hesitate to examine evidence dating back over 60 years in order to determine if the gains realized from the sale of shares constituted capital gains.

In the present case, it was established that the appellant's employment benefits did not include any retirement provisions. The Court accepts the uncontradicted and unchallenged testimony given by the appellant's wife's physician as to her state of health.

It was established that all three apartment buildings were put up for sale at the same time, shortly after the appellant's wife’s health problem had begun to manifest itself. The evidence indicates that, shortly after the sale of the third building, the appellant purchased a 48-unit dwelling apartment and has held it ever since. This circumstantial evidence in no way contradicts the appellant’s testimony as to his intention in purchasing the property.

The circumstances of the present case may in many aspects be likened to those of Roy M. Power v. The Queen, (supra). The following observation of Addy, J. at page 585 (D.T.C. 5392) could be applied to the case at bar:

All of the circumstantial evidence surrounding the purchases . . . was either completely consistent with a lack of a secondary intention to purchase for possible future resale at a profit or as equally consistent with the existence as with the nonexistence of such intention.

The evidence indicates the sale of the buildings was due to the frustrated intention of the appellant, resulting from circumstances beyond his control. The Court is satisfied on a balance of probabilities that the possibility of selling the property was not an operating motivation of the appellant in the purchase of the buildings at issue. The Court therefore allows the appeals on this point.

The appeal respecting the sales of property in the 1978 taxation year is allowed. Accordingly the reserve for the 1979 year as originally reported is allowed while the other matters objected to in 1979 and 1980 as assessed were not pursued by the Minister in both his reply to notice of appeal and at trial. Thus the appeals respecting the 1979 and 1980 years are allowed. The appeal respecting the sale of property in 1981 is dismissed. The matter is referred back to the Minister for reconsideration and reassessment for the years affected by this decision.

The appellant, who has been substantially successful, is entitled to party and party costs.

Appeal allowed in part.