A. Hansen & Sons Construction Ltd. v. Minister of National Revenue, [1986] 1 CTC 2576, 86 DTC 1425

Sarchuk, T.C.J.:—This is an appeal by A. Hansen & Sons Construction Ltd. (Hansen Construction) with respect to its 1979 taxation year. The issue is whether certain profits realized from the sale of real property located in Camrose, Alberta were properly included by the respondent in computing the appellant’s income for that taxation year on the basis that such profit was income from a business or from an adventure in the nature of trade.

The events leading up to the disposition were related by Mr. Neil Hansen (Hansen), the appellant’s general manager. Hansen and his two brothers own all of the issued shares of the appellant which carries on business in Camrose as a building contractor. It tenders for its work and, according to Hansen, is never involved as an owner of such contracts. His evidence as to the appellant’s trading history can be summarized as follows:

1. 1976 — The appellant purchased the Schnell & Barrie Building. It was renovated and divided into five rental units which were then leased.

2. 1977 — It acquired rental property in Camrose known as the White Fish House.

Both properties are still held by the appellant as income-producing assets.

3. 1979 — The appellant purchased a parcel of raw land which subsequently was leased to a masonry company as a storage area. After an office warehouse was built on other property in 1981 (infra #6) the appellant considered building a rental warehouse/office on this site but these plans were not pursued.

4. 1981 — A residential dwelling was acquired on 50th Street in Camrose. It was rented until 1983 when it was sold to Alberta Public Works as part of a land assembly for senior citizens’ apartments. A capital loss was realized on this disposition.

5. In 1981 the appellant became the owner of a rental residence on 51st Avenue in Camrose.

The evidence is unclear as to whether the latter two properties formed part of an inventory of homes for sale the appellant had in those years.

6. 1981 — A lot was acquired in Camrose and an office warehouse was constructed on the site. It is comprised of seven rental units, six which are leased, while one was retained by the appellant for its own use.

7. 1983 — The appellant purchased a quarter section of farm land in the County of Camrose for an unstated purpose. A tenant currently occupies the land.

In his cross-examination of Hansen counsel for the respondent elicited the fact that the appellant, for some period of time including the taxation year in issue, was involved in the acquisition of raw land for residential development. It built both single-family homes and duplexes and carried such properties on its books as inventory. These house-building activities are relevant and should have been included in Hansen's summary of the appellant’s trading activities.

The acquisition of the Schnell & Barrie building had been a profitable exercise. It was fully occupied and Mr. Darrell Roseland (Roseland), a realtor who acted as the appellant’s rental agent appeared to have no difficulty in maintaining full occupancy. This experience led Hansen to ask Roseland whether his agency had any similar property listed. He learned that the Lamb Ford Sales Ltd. (Lamb Ford) property (an automobile dealership), which had been on the market for well over a year was still available. Notwithstanding the lack of interest which had been shown in this property Hansen felt that it had a good location with more than adequate parking and concluded that it had potential as a rental property. Hansen determined its market value by calculating a probable rental based on the square foot size of the building and the going rental rates. He sought no independent appraisal or evaluation of the property. Roseland was not consulted as to price. On July 24, 1978, the appellant made an offer to purchase the Lamb Ford property for $225,000. The offer was promptly accepted by the vendor without any further negotiations. The date of possession was January 31, 1979, and in addition Lamb Ford was given the right to lease the premises for a further three months at a rental of $2,000 per month. This amount was well below the average rental figures utilized by Hansen in calculating the purchase price.

The acquisition was financed by way of a cash payment equal to 25 per cent of the purchase price with the balance being borrowed from the Bank of Montreal by way of a demand loan secured by a collateral mortgage.

Evidence was elicited from Hansen that tenders for the construction of a new building were called by Lamb Ford in July/August 1978. Shortly after the appellant's offer for the Lamb Ford property was accepted the appellant was declared to be the successful bidder on the contract. Hansen asserted that there was no connection between the two events.

Hansen testified that the only reason the appellant purchased the Lamb Ford property was its rental potential. He was aware that it had been listed for sale for more than a year without success but in his view that was not a deterrent. It was the only property of its type in Camrose and he felt that with the necessary renovations it could be made attractive to tenants. Hansen maintained that resale had never been discussed nor considered as an option at the time of acquisition. It was Hansen's recollection that at the time of purchase Roseland had several prospective tenants in mind for the property. Aside from the information provided by Roseland no other investigation was carried out by the appellant prior to acquisition with respect to the availability of tenants.

Roseland testified that he conducted a tenant search both before and after the purchase. In 1977 when the property was initially listed by Lamb Ford, he called several prospects including a sales manager employed by Canadian Tire who was approached twice in that year. The calls appear to have been intended principally to bring the existence and availability of the property to the attention of the prospects. The discussions between Roseland and Canadian Tire appear to have been superficial. There is no evidence that price, size, or renovations were considered or discussed. In fairness it should be noted that such an approach was consistent with the fact that Lamb Ford was intent on selling the property and had no desire to become a landlord.

Roseland’s recollections were scant, but from his evidence it is fair to conclude that substantially the same approach was made by Roseland to several other individuals. The property was rarely shown to prospective tenants and what representations were made were generally by way of a telephone call and consisted of nothing more than information that commercial land was available in Camrose.

In this context it is important to note that Roseland was the rental agent responsible for all of the rental properties owned by the appellant. In addition he and Hansen are good friends. As a result it is reasonable to infer that any information available to Roseland was available to the appellant as well including the nature and extent of the inquiries made by Roseland and the lack of interest demonstrated by the few people solicited.

Following the appellant’s acquisition of the property Roseland again telephoned some of these “prospects". He advised them that the property was under new ownership, was available for leasing and could be remodelled to suit their particular needs. The evidence is that once again Roseland’s efforts produced no results.

In February 1979, the local newspaper publisher Mr. McLean (McLean) spoke to Hansen about the availability of this property. McLean was not interested in leasing but expressed an interest in acquiring the site. Hansen instructed Roseland to investigate the possibility of a sale. Roseland spoke to McLean, satisfied himself that the interest was genuine, then met with Hansen to set the price. Roseland distinctly recalled that he calculated the sale price and that it was accepted by Hansen without question. The property was listed with Central Agencies at $278,500 and on April 28, 1979 McLean offered $278,000 which was accepted.

When called upon to explain the $50,000 price increase Roseland suggested that land values were changing quite quickly and that the value of this property had increased that much in the nine-month period from July 24, 1978 to April 28, 1979.

To properly assess the appellant’s intentions at the time it acquired the Lamb Ford property reference must also be made to a letter dated August 1, 1978, written by Mr. N. Mayer, (Mayer), the president of Central Agencies Camrose Ltd. to the appellant (Ex. A-4). The letter reads, in part:

RE: Lots 1.2.3. and 5, Block 36,

Plan XXVIIC

Camrose, Alberta

Purchase — LAMB FORD SALES LTD.

.. . Further to our discussions in respect to the above, we are enclosing herewith two copies of the Offer to Purchase and Addendum #1 duly executed by both yourself and Mr. Lamb for completion of your records.

In accordance with our discussions once the construction of the new premises has been finalized, we feel it would be a good idea to relist this and see what progress can be made in turning the property over prior to the January 31, 1979 completion date at a price suitable to you.

The new premises referred to were those being constructed by the appellant for Lamb Ford.

Hansen testified that he did not recall the discussions and that in fact he did not become aware of this letter until 1984. He stated that the appellant did not take the advice offered by Mayer. Hansen went on to say that his dealings in their entirety had been with Roseland and that he had no recollection that he discussed the subject property with Mayer.

In cross-examination Hansen conceded that he has known Mayer for a number of years. When it was drawn to his attention that the offer to purchase (Ex. A-2) had been executed by him in Mayer's presence Hansen countered by saying that Mayer had simply delivered the offer for acceptance. When asked whether he and Mayer discussed resale at that time Hansen responded “1 don't recall".

Roseland’s recollection was somewhat different. With respect to the Mayer letter Roseland was vague and uncertain but conceded that he might have been involved in some discussions between Hansen and Mayer. He stated that he did not recall exactly when such discussions took place other than they probably occurred after the offer to purchase was made.

I find Hansen's evidence with respect to the Mayer letter unacceptable. The language of the letter is clear and unambiguous. Hansen says that he has no recollection of any such discussion. Roseland's evidence although imprecise on balance tends to support the conclusion that such a discussion took place. Mayer was not called. All evidence is, in the normal course, weighed according to the proof which it was in the power of a party to have produced. In the face of the language of this letter and Hansen's inability to recall whether such discussions took place the failure of the appellant to call Mayer permits the Court to draw an inference negative to the appellant. Although the appellant was portrayed by its principal officer as a “contract builder" having no financial interest in the projects, it is a fact that buying and selling of land was an integral part of its business in the relevant years. Some properties were retained, but others were treated as inventory. Such being the case when this appellant asserts that Lamb Ford was acquired as an investment such an assertion must be supported by clear and compelling evidence of that intention.

The evidence before the Court falls short of meeting that test.

On balance the evidence as to the appellant’s intention is not satisfactory. The bald statement made by Hansen that resale was not a motivating factor in the acquisition is not supported by any of the other evidence adduced. The appellant is a sound commercial enterprise, no doubt due in good part to Hansen's business acumen. I formed the opinion that he was a careful and prudent businessman and was not given to making snap decisions or acting without a careful review and consideration of all known facts. His assertion that a property which had been listed for a year with no takers was a prime rental site is suspect. To make that assertion absent an in-depth analysis of its rental potential and in the face of the tepid response to Roseland's earlier efforts to find tenants (which must have been known to the appellant) is remarkable to say the least. His assertion that the purchase of the Lamb Ford property and the construction of the new premises for Lamb Ford were not connected is improbable.

I do not accept Hansen's evidence. It is inconsistent in several respects with the evidence of Roseland and with the documents filed, particuarly the Mayer letter.

There is no evidence that any rental plans were frustrated. In my view no real effort to find tenants was made. While the offer from McLean on the face of it was unsolicited that does little to support the appellant’s contentions in the case at bar. Its swift acceptance by the appellant is equally consistent with the fact that one of the principal factors motivating the appellant to purchase the land was to sell it at any time it was financially favourable to do so.

The appeal is dismissed.

Appeal dismissed.